With this we may take Lords amendments 42 to 62, 160 and 174.
It is a pleasure to introduce these amendments. Much work has been undertaken in this House and in the other place since my predecessor closed the Second Reading debate in March. That work has improved the Bill. The Bill has expanded greatly in length and content since it left this House. In large part, the variety of new issues that it covers reflects the Government’s acceptance of the vast majority of the recommendations that were made by the Parliamentary Commission on Banking Standards, which published its final report after the Committee stage in the Commons.
I pay tribute to the members of the PCBS and especially those who sit in this House: my hon. Friend Mr Tyrie, Mr McFadden, John Thurso, Mr Love and my hon. Friend Mark Garnier. It was their hard work that led to the reports.
I will speak in support of the amendments that resulted from the work of the parliamentary commission, but ask the House to reject the Opposition amendment that was made in the other place, Lords amendment 41. I will begin by explaining how the former amendments will deliver the goal of improving the standards of conduct in banking.
The Parliamentary Commission on Banking Standards concluded that the current system for approving those who hold senior positions in banks, the approved persons regime, had failed. The commission’s central recommendation was the creation of a senior persons regime that applies to senior bankers. The Government accepted that recommendation. The amendments will deliver on the recommendation by putting in place a senior managers regime with five key features.
First, the regime will reverse the burden of proof so that senior bankers can be held to account for regulatory breaches in their area of responsibility, without the need to prove that they were personally involved in the wrongdoing. Secondly, there will be mandatory statements of responsibility for senior managers. Thirdly, the regulators will be able to make conduct rules for senior managers in banks. Fourthly, there will be provision for time-limited and conditional approvals of senior bankers. Fifthly, the financial services register, which is kept by the Financial Conduct Authority, will state who is a senior manager in a bank and give details of the regulatory action that has been taken against them. The amendments will provide a clear and effective system for raising standards and increasing accountability among the country’s senior bankers.
Lords amendment 53 introduces a certification regime for bank staff. That will apply to all staff below senior management level who have roles in which they could seriously harm the firm or its customers. The Prudential Regulation Authority and the FCA will therefore be given a far-reaching new power to make enforceable rules of conduct for all employees in a bank. Banks will have to verify that employees who have roles in which they could do significant harm to a bank or its customers are fit and proper for those roles. Banks will have to do that on appointment and annually thereafter. They will have to issue certificates, which may be electronic, to those employees, confirming that they are fit and proper for their role.
The Government have always supported the spirit and substance of the commission’s licensing regime recommendations. However, we do not consider it appropriate to call it a licensing regime. That would imply that the individuals concerned had been given licences by a regulator. That is precisely the opposite of what the commission recommended. We therefore cannot use the words “licence” or “licensing”. It is in order to refer to “certificates” and “certification” because certificates will be issued by the banks. Banks will also have to notify employees of the banking standards rules that apply to them and take steps to ensure that they understand them.
I would like to say something about the firms that are covered by the senior managers regime and the new obligations under the certified persons regime. The parliamentary commission naturally focused on banks. However, the definition was extended to include systemically important investment firms that do not take deposits, but that are regulated by the PRA. We have also included a power to extend the senior managers and certified persons regimes to cover UK branches of foreign banks and investment firms if it is considered appropriate to do so. Some large branches of foreign banks and investment firms operate from London, so it is prudent to equip ourselves to bring them into the new regime.
Does the Minister agree that it is essential that companies can trust their banks in order that they can do business? We must get the legislation right so that companies can again trust their banks. Companies must feel able to give banks confidential information in the expectation that it will remain confidential. Companies need to be able to access finance to compete in business and create employment. The banks are holding back our businesses.
I agree wholeheartedly with my hon. Friend, and I hope that he agrees that all the effort that has gone into setting up this new regime—in particular the senior managers regime and the certification regime—is a huge step forward in achieving that aim.
The Government are committed to bringing branches of foreign banks and investment firms that operate in London into the regime. At the same time, such a shift may be disproportionate for some small branches with few real decision makers, and the Government will consider the case for not extending the regime to such branches in due course.
I do not accept Lords amendment 41 because it would do nothing other than rename the existing approved persons regime as a licensed persons regime—that is about all it does. It would not deal with problems with the existing regime identified by the Parliamentary Commission on Banking Standards, or deliver the improvements recommended by that commission. I assure the House that, under the Government’s approach, which is based on the commission’s recommendations, firms will have to certify that people who perform roles through which they could do significant harm to the firm or its customers are fit and proper to perform those functions. That will include ensuring that they have received suitable training and have any relevant qualifications required by the regulator. That will not be a one-off check; it will be done annually.
The Opposition amendment would place all the burden of raising banking standards on the regulator. The PCBS concluded:
“Banks should not be able to offload their duties and responsibilities for monitoring and enforcing individual behaviour on to the regulator or on to professional bodies. The tools at their disposal have the potential to be much more usable, effective and proportionate for the majority of cases than external enforcement,”.
That is the approach the Government have adopted in their amendments. They place clear responsibility on the banks to ensure that anyone who is appointed to a post where they might cause significant harm to the bank or its customers, is fit and proper and able to perform their role. That will require consideration of the person’s qualifications, characteristics, experience and training, and the banks will have to consider each year whether that person is still fit and proper to continue in that job.
The regulator will specify those functions that may cause significant harm to a bank or its customers in rules, and can specify what qualifications must be held by anyone appointed to that role. The bank’s implementation of that regime will be subject to monitoring by the regulators, who will be able to take enforcement action against any bank that does not meet requirements laid down by the regulators.
The Government have worked tirelessly to replace the failed system of financial regulation we inherited from the previous Government. We supported the PCBS in its work and are implementing its recommendations. It seems that all the Labour party can offer at this point is a change of name. I therefore ask the House to reject Lords amendment 41.
Another key recommendation of the PCBS is the introduction of a new criminal offence of reckless misconduct in the management of a bank. The introduction of such an offence means that, in future, those who bring down their bank by making thoroughly unreasonable decisions can be held accountable for their actions, which, as we have seen, can lead to severe economic disruption and considerable losses for taxpayers.
It is possible, although it is difficult to answer that question specifically as it would depend on the legal process, as anticipated in the Bill. As I progress with my remarks, the hon. Lady will see the kind of actions that can lead to prosecution.
Does the Minister agree that a lot of the changes that are coming through as a result of PCBS recommendations should in some respects be treated rather like the nuclear deterrent? It is not necessarily about trying to punish people; it is about trying to drive behaviour that avoids a crisis in the first place. Had these rules been around at the time, it is far more likely that Fred Goodwin would not have led his bank over the cliff, that we would not have had the financial crisis, and that we would have a more stable banking system as a result. That is the intention behind the proposed law.
My hon. Friend has explained well the reasoning behind the recommendation from the PCBS—which, of course, he was part of—and the deterrent effect this change could have should not be underestimated.
I thank the Minister for giving way again; he is helpful in giving me the time because I am genuinely confused about this. If the proposed legislation is to have a deterrent effect and deter the sort of behaviour that was seen before the banking crash, had it been in place at the time, presumably people would have been prosecuted. All I want to know is: which people, and can the Minister give the House some examples?
As I discuss the issue I will provide more information on how the measure could work, and perhaps the hon. Lady will judge for herself, given the situation she has in mind, whether the measure would have acted as a deterrent, and whether a prosecution could have taken place.
First, I think it would be inappropriate to try to assess the impact of the proposed legislation on any specific case that has passed, and secondly, we are trying to devise legislation that will work for the future. I completely endorse what my hon. Friend Mark Garnier has just said. We must emphasise that we expect a change and improvement in behaviour as a consequence of much more considerable risks and responsibilities being placed on those individuals than currently pertain with the approved persons regime and system of regulation.
I thank my hon. Friend for his comments. As Chair of the Parliamentary Commission on Banking Standards, he helps to explain the commission’s reasoning, which the Government share.
The introduction of this offence means that, as we have heard, in future those who bring down their bank by making thoroughly unreasonable decisions can be held accountable for their actions, which, as we saw in the recent financial crisis, can lead to severe economic disruption and considerable loss for taxpayers. In line with the commission’s recommendations, the new offence will be applicable only to individuals who are covered by the senior managers regime I mentioned earlier. Senior managers could be liable if they take a decision that leads to the failure of the bank, or if they fail to take steps available to them to prevent such a decision from being taken.
The offence will apply to behaviour that falls far below the standard that could reasonably be expected of a person in their position—that is similar, for example, to the test applied in corporate manslaughter. Importantly, the offence will apply to senior managers in banks, building societies and investment firms, and be subject to PRA supervision. That reflects concerns expressed by their lordships that the failure of systemic investment firms could lead to similar adverse consequences for financial stability, and that the taxpayer may have to bail out a collapsed retail bank. The maximum sentence for the new offence will be seven years in prison, and/or an unlimited fine. That reflects the seriousness that the Government, and society more broadly, place on ensuring that our financial institutions are managed in a way that does not recklessly endanger the economy or the public purse.
The Minister struck the correct note when he mentioned the seriousness of such situations. Much concern has been expressed that this provision applies only to financial institutions, but the conditions that would have to apply for it to be used—in other words, a serious threat to the systemic nature of our financial system—are such that it is likely the measure will not be used often.
I completely agree with the hon. Gentleman and I think we all hope that the new criminal sanction will not actually have to be used because the offence will act as a genuine deterrent against such recklessness.
If I were a senior banker to whom this law applied, what would affect my decision on whether to behave recklessly? Would it be the thought, “If I do this, there’s a risk my bank and the whole financial system will crash around my ears and I will be seen as personally responsible”, or would it be the possibility of being prosecuted under this new legislation?
Both cases would be a deterrent. A key point of the change to criminal sanctions is that they would apply if a senior manager took part in any reckless action—there is a very strong test, as we have just heard—that led to the failure of a bank. It would not be appropriate to perform a legal analysis of what has happened in the past because we do not have the full facts before us, but if a board full of senior managers makes a decision on, let us say, a potential acquisition and they fail to carry out proper due diligence or they deliberately ignore certain risk factors, and that eventually leads to a failure and collapse of that bank, that will be an example of the situation that the new offence tries to capture. It is reasonable to say that, as those senior managers will be aware of the new criminal sanction, which did not exist before, it will bear on their minds when they make those important decisions. The Government amendments in this group will improve standards and the culture in banking.
I have listened with interest to the Minister. May I first add my thanks to all the members of the Parliamentary Commission on Banking Standards, who have done us a great service in examining the issues in great detail? They include not only Members of this House but Members of the other place—the Archbishop of Canterbury, my noble Friend Lord McFall, Lord Turnbull and Lord Lawson. Other Members in the other place, including my noble Friends Lord Eatwell, Lord Mitchell and Baroness Hayter, have ensured that particular issues have been put on the agenda.
It would be remiss of me not to say a few words about how we have arrived where we are today—considering a vast number of Lords amendments at this stage. The concerns about that have been well rehearsed during discussion of the Bill and how it has been brought forward and considered. The Government commissioned the Parliamentary Commission on Banking Standards to ensure that recommendations could be added to the Bill, but we had a very thin Bill for Second Reading and in Committee. The commission recommended a three-month gap between the publication of the Bill and the commencement of the Committee stage, but the Government rejected that idea. Instead, this House had to consider the partial Bill before the final report on standards and culture had been published. It is pertinent to reflect on that, given some of the comments made by the Minister. Many of the issues that will be taken forward when the legislation is enacted will still depend on judgments being made and on getting the message across that the culture of banking, at whatever level, has to change. That would have been helped by further scrutiny at various points.
We must also remember that the Government’s response to the commission’s report was published only three or four hours before we started considering the Bill on Report. We had 183 amendments tabled during the next stage of the Bill, and I wish to put on record our concerns about that method of legislation. The Bill is now three times bigger than the one that was originally introduced, and consideration of Lords amendments took place only a couple of days after Third Reading—again, without much opportunity to consider matters in detail.
My hon. Friend is detailing, forensically and importantly, the logjam that this process has produced. Does she agree that if we had had longer, organisations and groups outside the House, which feel very strongly on these issues, would have had more opportunity to make representations? The Government’s failure to allow that, by tabling these amendments as they have done, has circumscribed the public process.
My hon. Friend makes an important point. It is vital that the public has confidence in the process. The public need to know that the culture of banking will change; that we have given the Bill thorough scrutiny; and that we have considered and put in place every possible method to limit bad judgments and errors in the future. In the end, however, it will be down to individuals, and from my experience of various pieces of legislation I would always guard against the notion that any individual piece of legislation will guarantee that nothing will go wrong in the future. That always depends on individuals making judgments. It is important that we get the culture right so that individuals within it make judgments not just because they fear that they will be prosecuted and go to jail, but because they believe they are doing the right thing by their customers and by the wider economy.
Before my hon. Friend moves on, does she agree that while we should congratulate Members in the other place on the role that they played in amending the Bill, it would have been correct to delay the Bill so that the House of Commons had proper time to scrutinise the changes recommended by the commission, rather than leaving that to the other place?
My hon. Friend makes a valuable point. It would have stood us in good stead had we had such an opportunity. I have only been a Member of Parliament for a relatively short time, and others will have much more experience, but it seems to me unusual to have so many amendments at this stage of a Bill. External bodies have made significant representations at this stage, which is also unusual and shows the strength of feeling about the issue of banking and its culture. It also shows that people have been thinking about how to future-proof the Bill, not simply to repair damage done in the past, but to ensure that we do all we can for the future. Some people may feel that this has been a tick-box exercise and a part of the process that does not matter as much, and it is rather sad if that has been the case.
We know that we have a huge amount more to do. Only today we have seen the latest news about Lloyds bank being fined again. It is also fair to say that as the weeks and months have unfolded during the Bill’s passage, we have seen various situations emerge. I have written to the Minister on the recent issues on forex, and we have also had the sad events at the Co-operative bank and the outcome of investigations into the LIBOR rigging. Those all show that more issues may arise that will have to be dealt with properly, and we want to ensure that the legislation we put in place is able to do that.
Is my hon. Friend satisfied with the definition of senior bankers as those who would be liable to be prosecuted? Is it sufficiently clear and is it felt that it covers those people who really would be directing proceedings?
My hon. Friend makes another interesting point. She has already raised the likelihood of criminal proceedings, and in that context the Minister made comparisons with other legislation. I was concerned about the comparison with legislation on corporate manslaughter, which my hon. Friend obviously knows a considerable amount about. We have to ensure that definitions are as tight as possible, so that things do not slip through the net at a later stage. I hope the Minister will be able to provide clarity on those concerns.
We wish to ensure that Lords amendment 41, on professional standards, stays in the Bill. Earlier this year, the Government committed to implementing the main recommendations of the Parliamentary Commission on Banking Standards. Those recommendations included the creation of the new criminal offence of reckless misconduct by senior bankers. We want to ensure that that is as tight as possible. As the Minister outlined, the Government also agreed to introduce a new two-tier authorisation process for bank staff.
Our concern is that the Government have consistently failed to go far enough on the professional standards required of bankers. When the Bill was first introduced, Ministers resisted, on three separate occasions, Opposition attempts to put tougher professional standards in the Bill. Introducing the proposal at an early stage would have allowed us the opportunity to debate and finesse it, if required. At that stage, we included proposals for an annual health check on senior bankers. Indeed, Labour first pushed for a licensing regime with an annual validation of competence during the Committee stage of the Financial Services Bill in March 2012, so we have been pressing this case for a lengthy period of time.
Lords amendment 41 states that there needs to be
“minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct.”
The recognised code of conduct is important. The then Minister, Mr Hoban, opposed the amendment, saying:
“I…argue very strongly that the amendment is not necessary. In fact, it could have unintended consequences.”––[Official Report, Financial Services Public Bill Committee,
I cannot recall what those unintended consequences he feared were. Given that the Government have now seen fit to change their view, I am sure they no longer have those concerns.
A similar amendment was tabled again in April 2013 to this Bill and once again it was voted down by the Government. We on this side of the House never give up: if we think something is the right thing to do, we will come back and come back again. We tabled the same amendment again in July 2013, and again the Government failed to support it. We tabled the amendments because we believe that the persons we are talking about must have adequate standards of competence and integrity. The debate on managing the process and legislating for it may seem technical, but it is important for people in the real world to know that we are trying to introduce reforms. There has been a degree of discussion across the House, and I accept that, but people need to know that we are trying to introduce reforms that complement the attempts to change the culture of the banking sector.
I am listening carefully to my hon. Friend as she lists the specific attempts that we on this side of the House have made to bring this into clear sight for the Government. Is it not worrying that the Government seem to have reacted as though we need do something only when the deathwatch beetle in these financial institutions has done its work and we need only press on the institution for it to collapse into powder? Unless we press the Government, there will be no mechanism to examine the process.
My hon. Friend is making a strong case. I, too, served on the Committee and witnessed our efforts on this matter. Why have the Government been on the back foot throughout the process? We are talking about the culture of banking, but I wonder whether there is an issue with a Government culture of continual caution, rather than the challenge that ought to be presented to some of those interests in society that have failed our country.
I thank my hon. Friend for his comments. I do not know what was in the Government’s mind, but in Committee the Bill was very thin. We raised the matter on a number of occasions, but the Government resisted every attempt to amend the Bill in Committee, apart from on one minor detail. In retrospect, that is not the way to produce the best possible legislation. The Bill will undoubtedly have been improved by the end of the process—I do not detract from the work that has been done—but it would have sent a stronger message to the general public and the financial services industry that this place took the matter seriously if the Government had accepted amendments at an early stage.
As a member of an accountancy body that deals with police professional standards and continuing professional development, I understand this issue. I also understand that the financial services industry is diverse, with many different roles. Has the hon. Lady tried to list all those roles and thought about what professional qualifications and standards are appropriate to each and every one?
I understand the hon. Gentleman’s point. Our approach has been to suggest that that responsibility lies, rightly, with the Financial Conduct Authority. It would not be for me, as a shadow Minister, to list those roles. In relation to the definition of a professional, it is important for people to have professional development, with qualifications, on a continuous basis. One fundamental issue for professions is an adherence to a code of conduct. We tabled amendments on that consistently because we believe strongly that that is important. The wider world wants to know that the banking industry culture has changed and that malpractice, which unfortunately is still coming to light, is being dealt with.
As a member of the parliamentary commission, I note that despite our many recommendations, which my hon. Friend has illustrated, six years on from the credit crunch there are continuing difficulties with the culture of the banking system. Is it not the case that we need to do more to change that culture, and that we need to do it now?
My hon. Friend is absolutely right. If we believe the Bill to be the end of the story, we will do a disservice not only to the hard work done already, but to the industry and to the wider public. I hope the Minister and the Government will take that on board. We must always be vigilant and look to the future.
The commission was unable to consider several areas, which no doubt will come before us in the future, concerning the culture of banking—not just in retail banking, but in investment banking and on the trading floors—and other areas on which I am sure there will be more to do. Millions of consumers have fallen victim to the mis-selling of products in the past 15 years, but although many have successfully claimed money back, the general public see only that those who sanctioned the products and oversaw their mis-selling have not necessarily been held to account. That will remain a concern. Despite the huge economic and social importance of the banking industry, there are still no uniform professional standards for bankers. As I pointed out earlier, those with responsibilities in other professions—teachers, lawyers, medical health professionals—must comply with certain professional standards and codes of conduct, which is important.
There is concern that standards have not improved enough in the years since the initial banking crisis—as I said, we still hear of ongoing malpractice in the industry. Recent research from Which? has found that 65% of bank staff with a sales role say there is now more pressure than ever to meet sales targets and that almost half know of colleagues who have mis-sold products in order to meet their targets. It was reported today, in the context of the latest fine on Lloyds, that one bank employee sold products to his family and others in order to meet the incentives and not be demoted. If that is the case, it is exactly the kind of thing that the general public are concerned about.
One in four of those surveyed said that targets drove employees to sell inappropriately. Surely there can be nothing more inappropriate than people feeling under that kind of pressure. The report also found that two thirds of people thought that bankers were unlikely to lose their job if they lied or cheated. Despite the tougher regime and legislation we are putting in place, the general public are not convinced. A similar proportion think that bankers are unlikely to lose their job if they fail to comply with industry codes of conduct and even if they deliver consistently poor service or receive a lot of customer complaints.
Interestingly, given that we tried at various stages to introduce the concept of a fiduciary duty to look after customers, only 6% of people thought that bankers acted in the best interests of consumers. Only one in four felt that bankers were properly trained or qualified. Clearly, then, the industry has a long way to go to regain the public’s confidence. In discussing these issues, however, we need to think about those in the banking industry who are not making the big decisions at the top but are doing the front-facing work with customers. We must protect them and ensure that they are not put under pressure to sell or provide products incorrectly. On a wider issue, of course, we also need to protect the taxpayer from ever again having to bail out the banks.
“My view is that the best thing that could happen is for the Commission to say that it thinks that something like a banking standards board, designed to professionalise banking…be put in place and commend that as an initiative to be undertaken with urgency”.
The chief executive of the Chartered Banker Institute told the commission on
“My predecessors tried to encourage banks and bankers to support professional qualifications and membership of professional bodies… I have tried in the past five years to say, ‘Look, in order to rebuild the banking industry, it’s fine to look at rebuilding regulatory structures and the structure of the industry, but the whole issue of culture and standards is one that is equally important.’”
He said he had been trying to bring attention to that for the past five years and arguing for a re-professionalisation of banking.
If the Minister does not wish to listen to us or those individuals, I should quote the Chancellor, who himself told the commission in February that we should develop the
“kind of professional standards...that you see in the medical profession or the legal profession”.
I thank the hon. Gentleman for that comment. I know that he has done considerable work in his role on the commission, but it is important that these issues be put on the record. It would have been useful to consider them in Committee, and I mention them now to show that significant pressure has been applied to move things forward and bring about change. The Government appeared to resist that and some of the commission’s recommendations until, of course, their recent change of heart following their defeat in the other place on the amendment for the licensing regime. At that point, they felt they had to bring forward their own plans.
The Opposition might have expected the Government to be reasonably gracious and accept the decision of the other place, but today they have tabled an amendment to disagree with and remove Lords amendment 41 from the Bill. To be fair, what they have tabled, under pressure to replace that amendment, is better than nothing, but it does not go anywhere near as far as the amendment they wish to strike out. The main difference essentially concerns the code of conduct. Lords amendment 41 states specifically that the
“licensing regime must…apply to all approved persons exercising controlled functions, regardless of financial sector;…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”.
That is important, given that the Government’s position does not call specifically for a code of conduct. In some ways, their regime legislates for the commission’s recommendations, but by failing specifically to legislate for an open and transparent code of conduct, they risk failing to address some of the ethical issues surrounding so-called casino banking. Their more permissive amendment does not focus specifically on a code of conduct.
Several other hon. Members wish to speak, so I shall conclude with some brief comments about remuneration. As hon. Members might be aware, the Opposition have given considerable thought to the regulation of bankers’ remuneration, and there remain certain issues that the Government must consider before the general public can have confidence in the industry. The public find it difficult to understand, and have concerns about, the culture of high risk, high reward that was evident in the previous system and which contributed to the crisis.
Does the banking industry not make it more difficult for the public to understand, given that, even in these difficult times, it has gone back to the massive bonus culture we have all been complaining about?
Once again, my hon. Friend is absolutely correct. The general public expected the industry to show some humility and make every effort not only to repay the taxpayer, where appropriate, but to reflect on its actions, perhaps take the view that this culture was now outdated and move on and operate differently.
The general public’s concern will not be alleviated by the latest list of scandals. We have had LIBOR, EURIBOR, PPI—payment protection insurance—forex, yen LIBOR—the list seems to go on and on. Almost every day, every week, every month, something else is being put into the public domain. We have recently heard concerns about lending from RBS, with businesses having gone into administration. It is right and proper, of course, that these issues are investigated. We continue to talk about these issues, but however much we will things to change, people are concerned that if the bankers do not accept that their culture has to change, we will just continue to talk and put legislation in place, but without the messages having got through. I believe that the general public are particularly concerned about that.
As I said, we believe that the amendment unsuccessfully launched in the other place should remain in the Bill. I am disappointed that the Government have chosen to disagree with it and want to strike it out. I do not expect the Minister to change his view at this stage. I am sure he will revert to the position held in Committee, which was to disagree with us on this matter.
Before addressing the amendments in the group, I would like to say a few words—this is the only and last opportunity to do so—about the work of the Parliamentary Commission on Banking Standards. The task that Parliament set it was
“to consider and report on: professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the LIBOR rate-setting process” and on
“lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for Government policy…and to make recommendations for legislative and other actions.”
That was a very large canvas. The backdrop was a profound collapse of trust in parts of the banking sector—triggered by, among other things, deep lapses in banking standards.
We should bear it in mind, however, that the banks were only partly responsible for all these problems, and that the commission’s proposals represent only part of the solution. On the first point, responsibility for the problem also lies with regulators, central banks, Governments, auditors, risk-rating agencies and consumers, both retail and wholesale, who over-borrowed. They all need to take their share of the responsibility.
On the second point—finding the solutions—the Banking Commission’s proposals need to be set alongside both reforms to the regulatory structure, such as the creation of the Prudential Regulatory Authority and the Financial Conduct Authority after the abolition of the Financial Services Authority, and the structural reform of the banks, as proposed by Sir John Vickers.
I doubt whether the Government or the man who led the regulatory changes, Sir John Vickers—or indeed any member of the Banking Commission—thinks that, even taking together all the proposals we have put forward, we can solve everything. In any case, many on the commission were sceptical about the extent to which culture can be changed by legislation—a point made from the Front Bench earlier this afternoon. Legislation can, however, play an important role by incentivising good behaviour and penalising bad. Nevertheless, we concluded that, if fully implemented, our proposals should put us in a better place to protect taxpayers and the country from systemic risk and to protect consumers from lapses in standards.
As Cathy Jamieson said a few moments ago, there will continue to be regulatory failures, so only with the exercise of judgment and a good deal of vigilance are even these proposals likely to make a big difference in the long run. Our job today is narrower—to complete the task of making sure that those responsible for exercising that vigilance have the statutory tools to do the job.
The Banking Commission made a number of far-reaching proposals. It has been a massive collaborative effort for and by Parliament and parliamentarians. I would particularly like to thank all the commissioners for their hard work, determination and ideas, without which virtually nothing could have been achieved. I see that two of the five Commons commissioners are in their places with us this afternoon. I would like to thank, too, the staff: the Clerks, those seconded from other work and the specialist advisers, all of whom worked long hours to deliver five reports in under a year. With respect to this specific legislation, I would like to thank our legal team—both former parliamentary counsel—for their professional help over the past few weeks.
A measure of the scale of what we are trying to scrutinise this afternoon is the fact that the Bill went to the House of Lords 35 pages long but has come back to us with an extra 170 pages. I do not think that does much for parliamentary scrutiny of legislation—however important, necessary and urgent it might be. Is it so urgent that we could not have found more time for it?
It was clear on Report that the Government’s commitment to implement our proposals was, frankly, somewhat lukewarm. Our first report was cherry-picked, and of the two other reports that had made recommendations, one, on proprietary trading, was ignored, and the other, the final report, received only a partial commitment for implementation. So I am delighted to report that there has recently been a dramatic change of heart from the Government. Over the past few weeks, this Bill has been transformed.
Broadly, yes. Given that I am already stretching things a little in my opening remarks, I will try to deal with prop trading at the most appropriate parts of my speech—but the short answer is, as I say, broadly yes.
The commissioners met yesterday to discuss progress. We believe that the Government have converted the lion’s share of the Banking Commission’s recommendations into statutory action, where required. It is worth listing what has changed. The following amendments have been made to the Bill in order to implement our recommendations: electrification of the ring fence has been considerably improved since Commons Report stage; an independent review of the ring fence, which can consider the full separation of the banking industry, has been introduced; the Banking Commission’s recommendations on prop trading, which we just discussed, have, for the most part, been implemented; the proposals for the senior managers regime have been improved; a certification or licensing regime has been added to the Bill; a proper definition of a bank—the Bill’s definition was defective when it left this place, and it was a major lacuna—has been added to the Bill; the PRA has acquired a competition objective to complement that of the FCA; and audit requirements have been tightened for systemically important firms.
Furthermore, a good number of undertakings and assurances have been given in response to specific recommendations. Most importantly perhaps, the bank will almost certainly be given the Financial Policy Committee responsibility for the leverage ratio, and the Government have said that they will legislate to that effect after a review. We would otherwise have had to have to wait until 2017-18 to have that considered.
How long does the hon. Gentleman think the handing of control over the leverage ratio to the Bank of England will take? Time is moving on, and we need to get there sooner rather than later.
I have pressed the Bank of England on that issue with my Treasury Select Committee hat on. A subsequent exchange of letters between the Governor and the Chancellor makes it pretty clear that by the end of next year the issue will be resolved and responsibility will lie with the Bank. Indeed, I think that for anything else to happen, given that exchange of letters, would be considered extraordinary, unless the review came up with some major obstacle that no one had previously spotted.
Another important assurance has been given in respect of so-called special measures. We proposed the establishment of an intermediate tool between enforcement at one end of the spectrum and day-to-day supervision at the other, which regulators could use to keep an eye on banks and help to improve standards. The Americans have something of the kind, which is known as a memorandum of understanding. The Government said that the statutory underpinning that we proposed would not be necessary, but the regulators have now announced that they will produce a full and detailed guidance note after consultation, which will set out how the new tool will be created and administered.
I am listening with great interest to the hon. Gentleman. As he may know, the United States operates a regime called the deferred prosecution agreement, under which an institution accepts that it has committed an offence and agrees to pay a large fine on the understanding that it will not be prosecuted. Part of the deal is that the institution must allow auditors in, and must change its behaviour. Is there a similarity between the DPA structure and the structure the hon. Gentleman is describing?
In some cases, the “deal”, as the hon. Lady called it, is accompanied by a memorandum of understanding, in order to achieve exactly the result that we intend by means of special measures. However, the primary purpose of special measures is to provide a tool that need not lead to escalation and full enforcement. That is a step back from the example given by the hon. Lady.
We were also assured that there would be a review of the system of enforcement decision making, which is currently very unsatisfactory. We had proposed that the regulatory decisions committee should be separated further from the enforcement division of the Financial Conduct Authority and given statutory autonomy in relation to its decisions. The Government did not accept that proposal, but they did accept the need for the issue to be re-examined and the need for a fresh and independent pair of eyes to look at each enforcement action before it proceeds, and a review is now to be carried out.
The important issue of remuneration was raised, later in her remarks, by the hon. Member for Kilmarnock and Loudoun. The PRA has committed itself to aligning the maturity of the rewards for bankers with the maturity of the risks that they have incurred. That is crucial. It is the collecting and taking of bonuses in return for the creation and selling of a new financial instrument or tool when, although the full risks will not mature for many years, the individuals concerned have had the money in advance that has created so many misaligned incentives and so much poor behaviour. Those individuals need to know, even several years later, that there may be a clawback, or, better still in most cases, that their bonuses are deferred. They need to know that the product had better be robust enough to survive the test of time before they start selling it.
Let me now mention a few measures that the commission did not succeed in inserting in the Bill. I shall not describe any of them in detail—although I note that I when I have tried to deal briefly with the measures that I have described so far, Members have intervened to ask me about a number of them.
Both the Select Committee and the commission concluded that the governance of the Bank of England was still in a mess, and would have to be sorted out. The Bank of England still has no board worthy of the name, and the cross-cutting lines of responsibility and accountability between various new institutions are, to put it mildly, very confused. One of the most senior people in the Bank told me recently that he thought the situation was like the Schleswig-Holstein question: the former Governor probably understood it, and one other guy had forgotten it—and the third was this person himself, whose name I had better not reveal on the Floor of the House.
We also failed to achieve change with our proposal to abolish United Kingdom Financial Investments Ltd. UKFI has been exposed as a fig leaf: it seems to be of very little practical use. The Labour Government’s intention in introducing it was good, but when the Government want to intervene directly in the activities of institutions they simply do so, and UKFI does not seem to be performing the “buffer” function that was intended for it.
We argued that the regulator should have a duty to compensate whistleblowers who had been disadvantaged by their firms. There are still risks, at least perceived risks, for whistleblowers, which will tend to deter them. It is a remarkable feature of the current crisis that there has been so little whistleblowing, and I am not yet convinced that we have managed to sort the matter out.
I will give way again, but I do want to get on to the amendments.
I think that, in the first instance, it is the job of regulators to advise us—we shall see whether they do—and that it is the job of Parliament to keep an eye on the position. The Treasury Committee will need to be vigilant.
We failed to secure the abolition of the strategic objective of the FCA, although we see no logical reason why it should remain. It seems to serve as a licence to allow the FCA to do whatever it wants, and to override its own operational objectives. We also failed to secure a statutory duty for the Governor to raise the issue of excessive lobbying by banks. It is regrettable that there is to be no statutory duty to require the production of a second set of accounts designed to identify systemic risks in the balance sheets of banks, and we will ask regulators to return to that issue.
Nevertheless, if everything is taken into account, it is clear that the commissioners in the House of Lords won the argument, and secured the lion’s share of the measures proposed by the commission. Although the group has been depleted by the loss of Baroness Kramer to the Government, the remaining four have worked assiduously and very persuasively to improve the Bill, and, on behalf of the commissioners in the House of Commons, I thank them heartily. Let me also record my appreciation of the constructive way in which Treasury Ministers have engaged with me, and with other commissioners, on these subjects in recent weeks. They have been extremely helpful, as have their officials, and that has enabled us to make rapid progress. What is more, and equally important, the Government have made clear their support for a number of measures—some of which I have mentioned—that it will be the duty of regulators to implement. As I have said, the work of the regulators, and the supervision of it, will be at least as important as the statute itself
That brings me to the statute itself, and to the amendments that are before us. The first major change that is proposed is the introduction of a senior managers regime. One of the commission’s central objectives was to make a reality of individual responsibility, particularly at senior levels. I lost count of the number of witnesses from failed institutions who were not prepared to take personal responsibility for what was going on in their firms. In principle this should have been the task of the approved persons regime, but it was a disaster. It failed both at ensuring that competent people were appointed and at checking up on their subsequent performance.
The commission concluded that the APR was a complex and confused mess that did not perform any of its supposed roles adequately. It had become little more than a bureaucratic, box-ticking exercise. Its unsuitability has been illustrated by the fact that it seemed to pass the recently departed chairman of the Co-op bank as fit and proper to run a bank. Another indication of its irrelevance was the fact that most of those responsible for steering our major banks on to the rocks over the past five years were not even reassessed for their suitability after those banks had failed. The APR gave us the worst of all worlds: the appearance of regulatory oversight and the reality of none.
An essential task, therefore, has to be the abolition of the APR. To replace it, we recommended a much more judgment-based and proactive supervisory approach for the most senior people in banks, a much smaller group than under the APR regime. Specific responsibilities should be allocated to named individuals at the very top of firms. Secondly, for the much wider group of all those whose behaviour could seriously harm a bank, its reputation or its customers, we proposed a licensing system that in the legislation is now called certification. I shall return to that.
On the senior persons regime, both the Government and the regulators accepted our proposals for the most part, but for reasons beyond everybody they have not accepted the name. Instead they have replaced the phrase “senior persons” with “senior managers”. I think that is guaranteed to confuse because some at the top of banks who clearly should qualify for supervision of this type will not be managing anybody. A non-executive chairman of a large bank does not have a management responsibility. For much of his time at Barclays, Bob Diamond did not have a direct management responsibility. This scheme should, therefore, have been called the senior persons regime. I have not heard any reason why it cannot be called that. That is a relatively minor nomenclature quibble, however, and we are otherwise delighted that the Government have accepted our proposals.
On certification or licensing, the picture has been somewhat different. Although the Government response to the commission initially promised to implement our recommendations on licensing, there was no sign of it in the Bill until Third Reading in the Lords. I am glad to say that that has now been put right.
The purpose of licensing, or certification, is to ensure that banks themselves have identified those employees—whether traders, senior salespersons, financial managers or whatever— who can do serious harm to the bank or to markets. One of the shocking discoveries of this crisis—including the LIBOR scandal—has been that in many cases the banks did not know who these people were. They certainly should. For them not to do so should constitute a regulatory breach. It should also be a breach to add staff to the certification regime who do not satisfy the harm test—to add staff who cannot do serious harm to an institution. That would defeat the purpose of certification.
It should be the responsibility of banks, using methods that best fit their organisation, to maintain a certification system, and it should be the responsibility of regulators—using periodic checks—to ensure that they do. Just to be clear, it should certainly not be the job of the regulators to try to identify all these staff themselves. That would guarantee the return of the very bureaucratic box-ticking that we want to leave behind with the abolition of the APR. Those in such jobs should know that their bank may withdraw their certificate, and therefore possibly their ability to earn a living performing that function, and inform the regulator, who may in turn inform other regulators in other jurisdictions, should there be misconduct. It can be a great opportunity for many young staff to sit in front of a computer screen and trade LIBOR and earn a considerable amount of money, but that opportunity should also carry with it responsibility. In many cases that sense of responsibility was found to be wholly lacking.
As I expected, the hon. Gentleman is making an incredibly thoughtful and powerful speech. We have used the expression “culture change” a few times in the debate today and he talked a few minutes ago about failures causing serious harm to an organisation. Does he believe the banks now pay due regard to reputational harm as well as purely financial harm?
I think the banks have discovered that the scale of the damage done by the revelations and the scale of the fines that are now being imposed are systemic in implication for their institutions and that has shaken them up a lot. But I do think the culture at the top of our banks is changing. The task of our legislation is to entrench that change for a generation. We have had this crisis. The horse has bolted. What we have got to do now is devise a stable door that can keep the next horse in.
I will this one last time, but I get a sense that Members might want me to draw to a close in a minute.
The hon. Gentleman mentions LIBOR. In respect in particular of fraud, does he agree that if an individual working within an institution is behaving dishonestly for the benefit of that institution, the institution itself should be liable? If the law were to be changed to allow that, there really would be institutional change.
The fact that an individual is found responsible should not in any way exculpate the institution from its own responsibilities. On the other hand, a key recommendation of the Banking Commission was to restore individual responsibility. To return to a situation where it is primarily the institution that carries the can for what had been a series of individual pieces of bad behaviour would be a profound mistake. There is a lot behind the exchange we have just had that I am not going to go into now, but which we thought about quite deeply on the commission. I shall now move on as there are a few more remarks I want to make about this group of amendments.
Everyone now seems to be agreed that the APR adds little or nothing, yet over the past few weeks we have discovered that the discredited APR will survive in legislation. In doing that, the regulators are perpetuating a myth that the APR affords any real protection. It will continue to apply to several groups. First, about 20,000 people in the financial services industry outside banking will still be covered, mainly in fund management and insurance.
This is unfinished business. The Banking Commission had the remit to look only at banking. It would be absurd to retain a system for one part of financial services that has so clearly failed in another. The Government and Parliament both need to encourage the regulator to look at this and do what is necessary to extend the coverage of the new regime and to remove the APR from other parts of financial services. To rely on the APR is asking for trouble.
It is also regrettable that the APR will remain in a few isolated pockets within the banking industry. This is because the APR will continue to apply to firms’ LIBOR submitters and to persons with anti-money laundering responsibilities in banks. This amounts, I gather, to only a few dozen people, but I think it would be far better if we removed what amounts to “triple running”. We will have three layers: the senior persons regime, now called the senior managers regime, licensing, now called certification, and the APR in the case of these people. The extra APR layer confers no extra protection, but adds bureaucracy and creates a business cost. There will be plenty of scope for legal wrangling in the event of a regulatory failure, given the great scope for confusion, and for an equal measure of recrimination by regulators who will say they were asked to do too much by Parliament. Banks will have a point when they complain about that. For all those reasons, I hope that the Government will come back to this issue and remove the APR from banking entirely in due course.
The Banking Commission’s proposals do not guarantee better standards. Much will depend on the judgment of regulators and the common sense of the banks, but identifying responsibility for key roles offers a much better prospect of higher standards than does retaining the APR. The commissioners are delighted that our proposals on this are now going to be put on the statute book.
The hon. Gentleman’s speech is characterised, as always, by a combination of scholarship and erudition. May I just inquire whether we are now nearer to the end of his speech than to the beginning?
I can give you a firm assurance, Mr Speaker, that I am coming very close to the end of my remarks.
Indeed, I am no closer than I would have been before that intervention, unless I had been told to sit down, because I really am almost at the end.
I just want to say a word about the Opposition amendment before I sit down. It draws on a number of the Banking Commission’s proposals and, by seeking to put it on the face of the Bill, the Opposition have contributed something by forcing the Government to think again about their rejection of our proposals on licensing. The amendment was therefore probably worth while. However, the Government have now thought again and are implementing our proposals.
There are two aspects of Lords amendment 41 that would make me cautious about supporting it. The first is it would require regulators to pre-approve all people covered by licensing—or what is now going to be called certification. I fear that would risk recreating many of the problems we had with the APR—the box-ticking bureaucratic culture that we are trying to get rid of.
My other concern with the amendment is that it appears to mix up licensing with the professionalisation of the banking industry. It would be imprudent to link professionalisation to licensing too closely. Licensing needs to happen now. Professionalisation is not a substitute for it. Even if banking is something that could acquire the characteristics of a profession—which many people are not yet convinced of—it would, as the commission reported, take a generation to build that sense of a professional standard.
For those reasons, although I strongly sympathise with the intent of the Opposition amendment, it is not a Banking Commission proposal and I shall not be supporting it. The House could do better by implementing the commission’s proposals, which are now embodied in Government amendments.
Order. I should explain to the House that I have exercised some latitude so that Mr Tyrie could offer a bit of background on the parliamentary investigation. I did that because I thought that it would be genuinely helpful to the House and because there would be no other opportunity for those observations to be made. That said, I would not want it to be thought that that will be the normal rubric on these occasions. The normal rule of thumb, which must continue to apply, is that Members should attend to and focus their remarks exclusively on the amendments and should not engage in what might be called a wider dilation. I hope that that is helpful to the House.
I want to set the matter in context. I volunteered to serve on the Bill Committee. I am told that it is traditional to have to be nudged into serving on Committees for Finance Bills, unless of course they are Ministers or shadow Ministers. I wanted to serve on the Committee perhaps because I am a bit geeky or because I am interested in esoteric things; perhaps it is because of my legal background that I am interested in these matters.
I also had a more serious reason for volunteering. We need to bear in mind that this country’s economy relies heavily on the financial services industry, and that a massive banking and financial crisis occurred in 2008, not only in the UK but in similar economies around the world. We know that the crisis started as a result of the collapse of Lehman Brothers and of the sub-prime mortgage market in the United States, which led to the collapse of many banks around the world. Economies like ours—in the USA, Japan, France and Germany, for example—suffered as well.
It is important to consider these matters in that context, because they inevitably get caught up in the political debate. This Government have often stated that the financial crisis was caused by the Labour party. Indeed, the Minister said earlier that one of the reasons for the crisis was that the Labour Government had not put in place enough rules and regulations. I think it might be helpful if I remind him what his current boss and the Prime Minister have said about those rules and regulations in the past. I refer him to Hansard of
“In an age of greater choice, he offers more overbearing control; in an age of greater freedom, he gives us more interference…in an age of flexibility”.—[Hansard, 27 November 2006; Vol. 453, c. 835.]
The right hon. Gentleman also said in 2006:
“I fear that much of this regulation has been burdensome, complex and makes cross-border market penetration more difficult.”
Mr Cameron said in 2008:
“As a free-marketeer by conviction, it will not surprise you to hear me say that a significant part of Labour’s economic failure has been the excessive bureaucratic interventionism of the past decade…too much regulation…to little understanding of what our businesses need”.
The Minister and other members of his Government often say that it was a lack of regulation by the Labour Government that caused the mess, but they need to realise that the Labour Government were trying to regulate at that time and that the then Opposition, who should have been supporting them, were carping from the sides and saying, “No, don’t do this.” A little trip down memory lane might be helpful for everyone concerned.
I chose to serve on the Committee, and I have chosen to contribute to the debate today because the financial collapse, the LIBOR scandal and other events have shown that the financial sector—an important part of our economy—has not got things right over the years. I will not go into the details of every aspect of the Bill, but my party has been pressing for various changes. The amendment that we won in the House of Lords covers the regulation of people employed in the financial services sector, and I would argue that there is a need for licensing. I am proud of the fact that those on my Front Bench are insisting that the amendment should be accepted and I ask the Government to reconsider their view.
I am a barrister, and I am subject to regulation. I have to have a licence to practise law, as do solicitors. Members of other professions also require a licence to practise, including doctors, dentists and chartered accountants. They are all regulated by independent bodies that oversee cases of misdemeanour or negligence. Why should bankers not be subject to the same rules and regulations? After all, stockbrokers and people who work in commodities and bonds are experts in their field; they are not just pulled in off the street and told to start commodity trading, banking or whatever. They have had professional training and learned their trade.
The Financial Conduct Authority covers every aspect of the financial services sector, so what is wrong with asking for a licensing system? What is wrong with asking these people to take a professional exam? What is wrong with requesting that they should be regulated properly? If they commit an error—negligence, criminality and so on—why should they not be dealt with appropriately? Why should they not have a licence to practise? We have to re-emphasise how big a part of the United Kingdom’s trading is done by the financial sector. Given that, it is surprising that there has been no regulation of the people carrying out that trading. The Government are missing a big trick if they fail to regulate, because this is important. I do not see why people in this sector should be given a exemption. In all other professional walks of life, people are regulated. We could regulate properly and have it supervised by an independent body.
It is not enough just for a company to say, “You are fit to work.” That is just not right. We must have an outside, independent body—somebody removed from the institution—to say whether someone is a fit and proper person, and if they do something wrong they should be struck off. What is wrong with that? As a lawyer, I can be struck off if I make a mistake. Doctors, too, can be struck off, so why cannot bankers? Policemen can be struck off, and other people may be told to leave their job or are struck off and prevented from practising their profession, so why not bankers? Labour’s proposal is perfectly sensible and logical; it would be the right amendment to make.
Mr Tyrie, Chairman of the Treasury Committee, said that this Bill started off 35 pages long and now runs to some 180 pages, after some 192 amendments. That shows that the Government were not thinking things through properly when they were putting the Bill together. One expects some amendments as a Bill passes through both Houses and one expects the number of pages to increase, but the fact that the Bill has increased in size by more than 100 pages shows that it was not thought out properly and things have been happening as we have gone along. Again, that demonstrates that although the Government have done some things, they have failed to address one really important aspect of the whole thing: the regulation of the behaviour of the people involved.
It was individuals, not machines, making the decisions that caused the whole world to collapse, and the ordinary person in the street in my constituency is suffering as a result of the mess caused by a small group of people. We cannot let that happen again, so it is important that the people making these decisions—the people playing with our money—and the organisations they work for are held accountable and need to explain themselves. Proper training, and a proper certification system and licensing system, are a must for our economy.
I will keep my remarks relatively brief. Neither of the two major parties has too much to crow about in this area, because the regulatory system is a product of both their Governments over time. However, at least this is one area where the Leader of the Opposition and the shadow Chancellor have said sorry for something they have left behind.
I am pleased with the work done by the Banking Commission, and I pay tribute to my hon. Friend John Thurso and my colleague Baroness Kramer for the work they have done on it. I am delighted that the Government have, perhaps kicking and screaming, at last agreed to adopt the vast majority of the proposals. I am particularly delighted that the Bill puts in place powerful measures on ring-fencing, as the Liberal Democrats have been arguing for that for years. Not only was it in our 2010 manifesto, but it was on the front page, so I am pleased to see it happening.
The background to this is clear: taxpayers should not be held to ransom by these giant organisations, particularly for high-risk activities—casino banking, as it is sometimes called. We must also remember that a lot of these institutions are highly international, so the UK taxpayer is having to stand behind organisations that have a lot of activities overseas—that, too, does not seem right. So it is good that all these measures are being introduced.
We have seen banks that used to be on the side of customers, both individuals and businesses, increasingly behave very much on the side only of themselves. We have seen scandals involving payment protection insurance, LIBOR, foreign exchange and interest rate swaps, which is the one I particularly wish to highlight. I made a speech on that a few weeks ago in this House. I said that the banks appeared to be moving at a tortoise-like pace when we were not having debates and suddenly acted like hares for a few days when we did have them. I can report that they have become tortoises again since that debate a few weeks ago. Constituents of mine who were expecting repayments in very quick time are still waiting, so I hope the Minister will keep the pressure on, although that is not strictly relevant to today’s debate. We have also seen the Co-op bank scandal and predatory activity by banks in the corporate restructuring area—that is the current scandal and I am sure we have a lot more to hear about it.
The Government have been acting on matters such as transaction levies, and making sure that fines for institutions leave the industry and do not just go around in a magic circle. The current round of fines is being used to help pay for the military covenant, which has to be a great idea. The Secretary of State for Business, Innovation and Skills, my right hon. Friend Vince Cable is trying, although it is sometimes a lonely furrow, to do something about high pay: shareholders are being given binding votes on their company’s pay policy; companies are being forced to publish single figures for executive deals; and companies are being encouraged to inject more diversity by hiring non-executives from a broader pool of academics, public servants and lawyers. So, to a limited extent, the Government are trying to do something about that.
I particularly wish to discuss Lords amendment 41, which deals with professional standards. A joke doing the rounds when the banking crash happened named the four chairs of the big banks and asked which of them and Terry Wogan had a banking qualification. Of course, the answer is Terry Wogan and none of the others. That illustrates that for too long we have had under-qualified people in important positions. Yasmin Qureshi, who is not in her place, was talking about the legal, medical, pharmaceutical and accountancy professions, which have professional standards of the type she would like to see. However, it is important to note that those standards are not set and regulated in this place; they are set by the professions themselves, which have a huge vested interest in ensuring their own high reputation. Those professions also carry out much more specific and autonomous work in terms of knowing whether an individual has transgressed or not. It is much more difficult in large organisations with long decisions chains to say who is actually responsible for each individual activity. However, I urge the banking profession to think a lot more about how it can enhance its reputation, which, let us face it, is pretty much at rock bottom at the moment. It should think, “How can we have professional standards which are enforced? How can we ensure that people are kept up to date with continuing professional development and that people will be struck off?” However, that is increasingly a role for professional bodies such as the Chartered Banker Institute to be thinking about; it is not something for legislation in this place.
I welcome the work of the Banking Commission and the Government’s response to it. I welcome the extra powers that regulators are going to have as a result of this legislation, but the onus is on them to use those powers. I would like the Minister to say, at some point during today’s debate, how we are going to scrutinise the regulators to make sure that they use their new powers to their full extent.
It has been said that one of the great innovations of this Bill is the introduction of the offence of reckless banking. It is not beyond our imagination to think that in 2015 the measure will be promoted on many a doorstep by people who perhaps do not fully understand what it is that is being introduced. It is one of those proposed offences that promises a great deal, but delivers very little indeed. There is nothing like it in existence in English law, and I will go on to explain why that is in a moment.
“we had to put in the Bill a form of words that would create a credible offence that could be successfully prosecuted. The two requirements that an individual’s conduct had to fall far below what could reasonably be expected of them and that they were aware of the risk they were taking”.—[Hansard, House of Lords, 15 October 2013; Vol. 748, c. 427.]
There are many people, myself included, who believe that this is not a credible offence and that it will not be successfully prosecuted. When passing law in this place, especially potential criminal charges, we should be confident that the offence created has a reasonable chance of being prosecuted. If people are doing wrong in the City of London, we should be passing criminal offences that people are afraid of and that they believe they might be charged with. Passing legislation for the sake of gesture is a slippery slope, and we should be careful about it.
The question the hon. Lady should ask herself is that if she were a banker, would she be prepared to take the risk?
There are other things that can be done, and I shall briefly touch on some of them. May I begin with the difficulties that exist in relation to this offence? Under the Bill, it would be an offence for a senior manager recklessly to take a decision. I appreciate that some of the additional 175 pages that have been added to the 35-page Bill have been to backfill exactly what a senior manager is and how they will be defined. That is clearly an improvement, and it is unfortunate that it was even suggested that the Bill would be sufficient in its original form. One must remember that even if a definition of senior manager is now one with which we can all be happy, there have been banks that have been brought down by people other than senior managers. Nick Leeson from Barings bank comes to mind, as does the £2 billion that was lost to UBS by Kweku Adoboli.
The point is that he was not a senior manager and he brought down a bank. This measure will not solve the problem of banks being brought down. An offence of reckless banking that will apply only to senior managers is not by itself sufficient, which is why I want to go on to say what I think should be done instead.
I think the hon. Lady is misunderstanding the intentions of each bit of legislative change. The primary purpose of this measure is to change bankers’ behaviour. It is not primarily to protect banks from being brought down. That task lies with ring-fencing and a range of other proposals, particularly with all the structures being constructed around bail-in and resolution. It does not lie with the criminal offence.
With respect, I am even more confused than before. What is the point of bringing in an offence that will change the behaviour of bankers, but will not, by itself, defend the banks? As I understand it, if the behaviour that we seek to stop is reckless banking, the reason that it should be criminalised is in order to stop banks failing and the financial system crashing.
There are other difficulties with this offence, which include recklessly to take a decision or to fail to prevent the taking of a decision that results in the failure of a bank. That sets a high threshold and, as has already been pointed out, it is not clear who, of those who may have behaved in a reckless way in our banks and who may have brought down the banking system before, would have been prosecuted. The Minister has not been able to assist us as to who might have been prosecuted under the offence. [Interruption.] It is unfortunate that the Minister is distracted at the moment, but the point I am making is important, and I hope that he will be in a position to address it.
It is difficult to prove that aspect of the offence, and prosecuting it would be a risky undertaking for the prosecuting authorities who will be expected to invest public money in prosecuting such matters. There is no point in putting something in legislation that can be discussed on doorsteps but will never be used to prosecute. We have seen the Serious Fraud Office struggle with high-profile, high-risk prosecutions. Too often such prosecutions end in shambles because of the behaviour of the Government, which have cut the SFO’s funding from £53 million in 2008 to £30 million by the end of this Parliament. Differences can be made to the behaviour not only of banks but of businesses generally. May I just add that of course I support Labour’s position on a stringent licensing regime for bankers, the imposition of a fiduciary duty of care on financial-sector staff for clients and customers and its call for a dedicated financial crime unit. In a moment, I will move on to what will work better, but before I do that, I give way.
Let me take the hon. Lady back to her last point on prosecutions. I speak as a former prosecutor of serious fraud work, although not for the SFO. Either there is the 51% test of prima facie evidence at the start of the case, or there is not. How the case then ends up, once the matter has been examined by a jury, is a matter for a jury and occasionally a judge. She is being a little harsh on the SFO, which is doing a fantastic job under very difficult circumstances.
I am more than happy to put it on the record that I am a critical friend of the Serious Fraud Office. Sometimes the emphasis is more on the word critical, especially after what we have seen in the newspapers today, with the crash of yet another serious fraud case because the SFO asked an agent, which clearly had a conflict of duty, to do its investigation. That is yet another mistake that the SFO has made. If we want the SFO to turn a corner, we need to do more than show good will. This Bill provided us with an opportunity to change things. It is unfortunate that more attention was not paid to changing corporate liability.
I listened carefully to what Mr Tyrie said in his contribution, and I undertake to send him, as a Christmas present, Labour’s policy paper in relation to fraud. If we can change corporate liability to ensure that if an individual within an organisation behaves in a way that is dishonest and to the advantage of the larger organisation, we can prosecute the organisation, unless it can show, in the same way that it can under the Bribery Act 2010, that it has in place controls over its staff, it would have an impact on our banking system. If I may say so respectfully, introducing such legislation will have a greater impact than the measures proposed in this Bill. If we were to introduce a different form of corporate liability, we could increase the fines hugely, and that money could be ploughed back into the Serious Fraud Office. Then we would have an organisation of which people in the City of London would be afraid. They would be prepared in most circumstances to come to an agreement with the SFO to have a deferred prosecution agreement.
DPAs will not ever exist under the status quo. The DPA legislation has been passed but, as I understand it, no one has come forward to say that their company has been doing wrong, that they want to admit that, that they will pay a fine, that they will change their ways, that they want auditors to come and see how they are behaving and that they will point out the individuals who have been behaving in a criminal way. I respectfully submit that that is how to change the culture. That is how we ought to be working and I look forward to discussing it with the hon. Member for Chichester once he has read the Christmas present I intend to send him. If elected in 2015, Labour intends to introduce its own economic crime Act, and I hope that we will take the issues further and develop them. Obviously, I would be interested to hear the hon. Gentleman’s reactions.
I intend to talk principally about Lords amendment 41, but before I do so let me echo the comments made by the Chairman of the Parliamentary Commission on Banking Standards, my hon. Friend Mr Tyrie, at the beginning of the debate. He said that he was grateful to the Government for moving such a long way along the road towards the commission’s recommendations. That is a tribute to the organisation that he chaired extraordinarily well for about 18 months and that came up with such sound proposals. It was a great honour for me to be part of that process. It also says a huge amount for the Government that they have taken great heed of what the commission said and have moved a great deal further towards implementing the proposals.
On Lords amendment 41, I suspect that there is not too much of a difference of opinion in the House about what we are trying to achieve through the Bill—that is, a change in the culture of banks. I take slight issue with Emily Thornberry, because it is not just about preventing banks from collapsing. It is about getting better standards and better service for consumers. Many constituents will complain about their treatment by banks and that has nothing to do with criminal matters; it is simply about the culture and how certain people address other people in their everyday lives. We want to drive that out and to ensure that the banking culture is one of which we can be proud and which consumers can trust enormously.
Is the hon. Gentleman not disappointed that, since 2007, when there has been such a focus on the problems and difficulties of banking, no greater progress has been made in creating the type of culture we all want to see?
I do not necessarily agree. I speak not only as a Member of Parliament, a member of the Parliamentary Commission on Banking Standards and a member of the Treasury Committee but as a former investment banker and investment manager. My hon. Friend the Financial Secretary is also a former banker, so to a certain extent we have a private interest in ensuring that banking standards are greater than they have been. There has, however, been an enormous amount of progress. We have a new regulatory regime, there have been a number of changes in the banks and we have seen a complete change of culture at the top of many of the banks. Things are moving in the right direction but it will take a long time and this Bill is part of that process.
Although we are all trying to achieve the same thing, the important question is how we will achieve it and who, ultimately, we should ask to ensure that the licensing regime is upheld and looked after. The Parliamentary Commission on Banking Standards was perfectly clear that we felt that the approved person regime was complete and utter nonsense. One of the Bank of England’s greatest thinkers, Andy Haldane, highlighted why that was the case: if regulation is devolved to a regulator, all that happens is that the individuals at the head of the banks think that they have nothing to worry about. It becomes the regulator’s problem to worry about such things, and not that of those individuals.
When we met a number of the banks—particularly UBS, the Union Bank of Switzerland, the senior directors of which appeared in front of us just after it had been fingered for its share in the LIBOR scandal—we discovered that there was an incentive to be ignorant of what was going on within them. The senior managers of UBS who were running the bank when the LIBOR scandal happened within their organisation knew nothing about it until they read about it in the Financial Times three or four weeks before our hearing. That gave rise to the accusation that there was an accountability firewall between the management of the banks and the individuals working on the front line—that is, those at the coal face on the dealing room floors and servicing our consumers.
We were trying to work out how on earth we could reach a system in which those at the top of the bank took accountability for the work and standards of the individuals in the lower part of the bank. That is crucial in leading me to support the Government in rejecting amendment 41: it does not deal with that accountability but rather gets around the problem. That is why it fails to hit the nail on the head.
The people running the banks must at some point wake up at 3 o’clock in the morning in a muck sweat worrying that some decision or lack of decision that afternoon or that year will result in a serious problem in the organisation. If they think that the regulator will take responsibility, they will not take that personal interest. That is crucial.
Over the three years for which I have been a member of the Treasury Committee, and particularly over the past year for which I have been a member of the Parliamentary Commission on Banking Standards, I have had the opportunity to meet a great number of senior bankers. Most have come on to the scene since the crisis and, in some cases, since I have been elected, and I am convinced of the sincerity of their desire to do the right thing in those organisations. They genuinely want change. They see reputational risk as a commodity that affects them and want to do something about it.
To that end, the banks have got together and employed the wisdom of Sir Richard Lambert, who is looking into setting up a professional standards body for the banks. The banks will run it, pay for it, finance it, ensure that it works and put it in place. We have some good thinkers working on that and it is symptomatic of the fact that the banks want to change their culture.
An organisation such as HSBC has 270,000 people working for it, so no matter how sincere the integrity of the individual at the top, we must work out a mechanism to drive integrity throughout the system. Personal accountability for the senior management of the banks is crucial in that. I keep coming back to this point: if
Douglas Flint is waking up at 3 o’clock in the morning worrying that somebody in Kidderminster is getting something wrong, that is a good thing.
The personal responsibility argument is extremely strong and powerful, but does not the hon. Gentleman see some merit in the fact that Lords amendment 41 talks about a code of conduct? Is not the code of conduct described in the amendment a mechanism that could be used to drive the change in culture throughout the organisation that he describes?
I agree entirely. A number of professional bodies in the banking industry have a code of conduct. I, for example, am a fellow of the Chartered Institute for Securities and Investment, which has a code of conduct. Many people working in investment banks will be fellows of the CISI. Indeed, Sir Richard Lambert’s proposals, about which we shall hear more in the new year, will include a code of conduct. It is also worth bearing in mind that the banks are producing their own code of conduct that is being fed back to the regulator, which will consider what they are saying.
Let me wind up, because I think the Minister would like to speak at some point. I would be the last person to stand in his way, because I know that he will have some intelligent things to say. Suffice it to say that I think amendment 41 will prevent the behavioural changes we desire, and that is why I will reject it.
Thank you, Madam Deputy Speaker. With the leave of the House, I thank the shadow Minister for her comments and all other Members who contributed to the debate. In particular, I thank my hon. Friend Mr Tyrie for the work that he has done in this area, especially in chairing the Parliamentary Commission on Banking Standards. I have listened to all hon. Members with great interest over the past couple of hours, but in particular to my hon. Friend. I thank him for all his efforts and also for his supportive comments, which I take as broad support for the Government’s amendments.
In the time available, I shall deal quickly with some of the key issues that came up. The shadow Minister raised the issue of timing and her understanding that there was not enough time to scrutinise the Bill and the amendments. She will know that the Bill started with the recommendations of the Independent Commission on Banking, which were scrutinised extensively in the House and in the other place, including the recommendations of the PCBS. The Government produced their response as quickly as they reasonably could to the PCBS, which was in July, in advance of the Commons Report stage so that it could inform debate as soon as possible.
The shadow Minister also asked why the Government resisted Opposition suggestions on improving professional standards. Again, she will know that because the PCBS had been set up and had been asked specifically to look into this area, the right thing to do was to listen to the commission and take its views into account when drafting amendments, before anything was settled upon. She asked about minimum standards and competence. She is right to do so, as we all recognise the importance of those. It is worth pointing out that, because of Government amendments that were introduced, banks will be required to check all new applicants to ensure that they are fit and proper, and not just at the point that they start with the bank; annual checks will have to take place and regulators will have important powers to specify any qualifications that they believe are required for the job.
A number of hon. Members raised the issue of a code of conduct. The regulators, both the Financial Conduct Authority and the Prudential Regulation Authority, will have broad powers, including the ability to set up a code of conduct for banks in general or for a particular bank, as they see fit. These are the kind of powers that regulators can use in future. My hon. Friend Ian Swales asked how we could scrutinise regulators. He is not in his place, but he will know that an annual report produced by the regulators about how they discharge their functions will be provided to Parliament, where it can be given proper scrutiny.
There was a discussion about remuneration. Hon. Members will know that the PCBS made recommendations on remuneration which the Government have accepted, particularly on longer deferrals and clawbacks, including a full clawback if a bank ends up receiving state aid. I understand that the PRA will make further recommendations on that next year.
I have time only to touch on Lords amendment 41 which, as I said, the Government oppose. It is worth taking into account the comments of my hon. Friends the Members for Chichester and for Wyre Forest (Mark Garnier) that, although the amendment is well intended, it will lead us back to a box-ticking culture and confuse regulation and professional standards. Both are necessary, but it would be wrong to conflate these—
Two hours having elapsed since the commencement of proceedings on consideration of Lords amendments, the debate was interrupted (Programme Order, this day).