My Lords, I regret to say that I, too, have reservations about this legislation. First, with regard to the restructuring of the Bank of England and the PRA, I agree with much of what the noble Lord, Lord Eatwell, said. It also, to some extent, came across to me like shuffling the deckchairs—I will not say on the “Titanic”—and I wonder really whether there will be much or any effect. Power will stay with the governor. The Bill is full of contradictions in that it says it is aimed at integrating the PRA and microprudential policy more fully into the Bank—not, by the way, why or how—but then makes the PRA responsible to the Bank’s Prudential Regulation Committee and at the same time counters this by moves to protect the PRA’s operational independence. What does it want? To be candid, I think the PRA needs to be an independent regulator. It should obviously liaise with the Bank of England on its other functions, but I would have thought that that would be pretty automatic.
I did not like the abolition of the oversight committee and agree with the comments made by other noble Lords. There are also measures that are described as strengthening governance, but to my mind what is missing is something comparable to the senior managers and certification regime which banks are going to have. At present there is no laying down of responsibility or accountability by regulatory staff in the PRA, the Bank or the FCA, and yet I think we all know that the FSA had significant involvement in causing the banking crisis through wholly inadequate and inappropriate regulation.
There is a code of practice for all Bank committees on handling conflicts of interest. That is excellent, but I am surprised to discover that, at least at present, the Bank is banning anyone joining the court who is either an executive or non-executive director of a bank. It seems to me that NEDs, in particular, are very much the eyes and ears of regulators and the court should have people on it who can actually report on what is going on in the real commercial banking world. I agree with what the previous noble Lord said about the National Audit Office. Again, it seems that the Bank wants to have its cake and eat it, in that, while the National Audit Office has power to launch value-for-money searches, the Bank is there to define what is policy and to exclude the NAO from anything it chooses to define as policy. That undermines the independence.
Back in 2012, as noble Lords will know, the Act set clear rules for the Bank’s operational responsibility and the Treasury’s responsibility in the light of the banking crisis, the Treasury having the whip hand as being responsible for any decision involving public funds. We now have a detailed MoU of how the two are to interact. Personally, I think it is inappropriate and unnecessary and could actually be cluttersome in a crisis, when speed is of the essence, but there seems to be an obsession everywhere nowadays with writing every last micromanagement detail down.
As for the senior managers and certification regime, the objective of raising standards of conduct—not just of senior managers but of the next layer of management also—and of identifying responsibilities is clearly excellent. However, I was disappointed to find no mention of the fundamental principle of integrity and honesty. In that context, I declare my interest both in the register and, in particular, as a director of Metro Bank. I am seeing the other end of this coming in at Metro Bank. By the way, I think that “guilty until proven innocent” had to go. As Andrew Bailey pointed out, the courts would throw it out in due course anyway, as being contrary to the very fundamentals of British law.
At the other end of the new regime, again, there is an awful lot of paper. I chair the nomination and remuneration committee and at our first session looking at it there were 40 pages of detail and 26 different areas of responsibility to be worked out and gone through. To me, it has come across as somewhat overprescriptive, but, I repeat, without the all-important requirement of principles.
There is also a strange requirement for senior managers to notify the regulator every year if they think the regulator would have grounds for withdrawing approval from any particular senior manager. I think that a rather strange requirement; I certainly would not want to be the manager or director responsible for that.
The time limit for disciplinary action is raised from three to six years. I can understand the reason for that. I am slightly more critical of making a criminal liability for alleged reckless decisions leading to bank failure. It is fine after the event, but something viewed as reckless subsequently may not have been viewed as such at the time, so there are definitional problems there.
With the next layer certification regime—that is, internal management to certify annually the next layer of management’s fitness and propriety—there is a complication of three material risk areas: European Banking Authority criteria, PRA and FCA criteria. It also covers staff with the ability to take independent decisions to commit the bank and to affect the bank’s risk profile, and all staff giving any form of advice. I think the certification regime is rather sensible and ought to be capable of being managed well by the banking industry. My main criticism is that I think it is wrong to include NEDs who chair one of the main committees within the management grouping, in that, first, NEDs are increasingly the agents of regulators on a bank board anyway—their duties are very much in the area of making sure that the bank is run properly. Secondly, they are not actually involved in the day-to-day management of banks, so I have yet to have anyone explain to me or particularly convince me as to the appropriateness of the chairman of the various committees being within the management regime.
Furthermore, I may be overly concerned, but extending the regime to all the financial services industry beyond banks seems strange, in that banks are quite different from fund management or insurance businesses. How they are run requires an appropriate oversight regime. I also make the point that the investment management industry came through the crisis perfectly well, and I do not really see that there is a huge need to impose new layers of management monitoring on it—it is quite a well-managed industry. But it is not yet clear what extending the regime across the whole sector actually means.
I have a few final points. When looking at the consultation document, it seemed to me that those who participated were nowhere near a representative sample of the City or the financial services industry generally. I would have thought that whoever organised the consultation should have roped in some other more suitable parties. I remain concerned at the mounting costs of regulation, ultimately borne by clients, pension funds and the public, and raised by the noble Lords, Lord Lawson, and Lord McFall. Yes, indeed, the volume of fines paid since 2010 by the top five US banks and top 20 European banks is equivalent to $300 billion. As pointed out, that is shareholders’ money and, frequently, pension funds’ money; more seriously, it limits the ability of the banking system to lend. If there is one thing staring you in the eye that was wrong with the banking system, it was that it was under-capitalised, and it still is under-capitalised. I believe that banks should have a capital ratio of towards 8%; that is what one was taught when learning economics 50 years ago. So you are just taking away the capital—and I should like to see some attempt to address the ability of regulatory authorities to fine institutions in this way. It would probably at least need UK and US co-operation; it has got out of control and is completely damaging.