My Lords, I cannot in any way better the speeches of my noble friend Lord Sharkey and the noble Lord, Lord McFall, but maybe I could make a few additional comments.
First, there is the argument in favour of a two-tier system. The regulator is already managing the banks and the financial services industry as a two-tier system. There are different rules for systemically important institutions and for the much smaller institutions whose behaviour cannot disturb the financial stability of the country. If the principle is that the banking industry and the financial services industry should be regulated only under a single tier, the Government are, in a sense, demanding that a great deal of regulation be rolled back, which, they are currently arguing, makes us more secure. We have a two-tier system; we are arguing that that two-tier system should encompass this kind of liability.
I want to also talk about the difficulties in pursuing senior managers when their institutions have been involved in outrageous and illegal behaviour. These are not victimless crimes, although they are often treated as though they are. The collapse of the banking system had a huge impact on people up and down the country: people lost their jobs, had to live through a period of suppressed wages and have seen public services cut. The experiences of ordinary people over the last five years have been wretched, and the trigger for that crisis was a financial crisis created by systemic financial institutions—so many people suffered as a consequence of that.
If I look at the misbehaviour inside the banks, I see that those were not victimless crimes. The families that paid for PPI that they did not need and could not use were often families without large resources—the cost mattered. Small businesses were persuaded to enter into interest rate swaps that were completely inappropriate for them, and some went under as a consequence of the problems generated by those swaps. Money laundering, which was on an industrial scale across many of our institutions, supported the drugs trade, prostitution and people trafficking, all of which did extensive damage to our communities. LIBOR mis-selling and mispriced mortgages and loans for individuals over a long period of time came at a significant cost to them, as well as, frankly, bringing the City of London into disrepute and, for a time, putting it at risk as a financial centre. We know that the United States seriously considered whether or not London could continue to be a major player if it could so poorly regulate its financial institutions as to allow manipulation of a core measure such as LIBOR.
There are serious victims of the various behaviours that we have seen in banking institutions. This requires action to ensure that we do not experience it in future. The House might be interested in the reaction of the banking community to the proposal that the reversal of the burden of proof is abandoned. I received a briefing provided by Simon Lewis, OBE, chief executive of the Association for Financial Markets in Europe. He, of course, is in favour of the removal of the reversal of the burden of proof. However, this is the argument he makes:
“The reversal of the burden of proof creates a conflict of interest between the senior manager and the firm of which he/she is a senior manager. Senior managers will be concerned to protect their own positions and less disposed to participate in the collective decisions of their boards and management committees”,
and also, he insists, to listen to challenges to independent control functions. He continues:
“Senior managers will be concerned to protect their own position and less disposed to participate in the collective decisions of their boards and management committees”.
Is that not exactly what we want? We want each individual manager to examine their conscience, to look at the issues, to identify risk—and not to set them aside because the group collectively makes a decision to overlook the underlying issue and the violation.
This is exactly why we must try to break that constant groupthink that has infected bank after bank, particularly those led by charismatic and aggressive chief executives who are able to enforce their personalities on their institutions.
The reverse burden of proof forces on chief executives the strategy of bringing on to their boards individuals who will challenge them; of setting up systems that will challenge; of making sure that compliance and other kinds of risk management processes within their organisations are aggressive, report up and expose. We have said that culture matters, and the reverse burden of proof finally puts on chief executives an imperative to behave in such a way that they de-risk the culture of their own institutions and make sure that wrongdoing is brought to attention rapidly and dealt with.
This was not the culture that prevailed within our banking institutions prior to the banking crisis. The Parliamentary Commission on Banking Standards was shocked that the crisis did not change the culture. It was only as we were taking evidence and the LIBOR scandal was exposed, more money laundering was exposed and the interest rate swap scandal was exposed that banks began to respond and finally, because there was so much light and attention, began to rethink how they should manage their own organisations.
I know from sitting on the sub-committee which took evidence from below the board management that there was still a culture of what was identified as collective responsibility. No one took responsibility individually for the behaviour that happened in their institutions; everyone took cover from the collective. That allowed so much of the misbehaviour that took place.
To give the Committee some further understanding of where the thinking of the banks is going, I would like to quote from an article that was forwarded to me today. It is entitled “Culture and culpability, are we finished with banker bashing?” by Ashley Kovas of Regulatory Intelligence. He captures what I recognise as broadly the thinking within the industry. He says that,
“it is by no means clear to what extent people should be punished for actions done in accordance with their prevailing culture”.
That is very much the message we received from banking institutions. As part of their employment role they absorbed and reflected the culture that was established by senior management. For that reason we have no history of whistleblowing in this industry; there is very little evidence that individuals resist and, if they do, that they manage to remain within the organisations of which they are part. The noble Lord, Lord McFall, and I took evidence from a number of people who, within their own companies, identified various issues around risk and compliance and, essentially, lost their opportunities for promotion or were fired and replaced by more amenable individuals. Changing that culture is not easy.
So, as the noble Lord, Lord McFall, said, we turn to the regulator. The noble Lord, Lord Gold, argued that the regulator needs to be rigorous. Our regulators are highly capable individuals and the fact that they could not in any single instance penetrate through not only one institution but every institution that had been involved in misbehaviour makes it clear how impossible it is for the regulator to act. Senior managers within these organisations are well advised and supported by great legal expertise—and that legal expertise makes sure that there are firewalls in every possible place and that information does not flow up.
We heard about the UBS example and it was extraordinary that senior management, who had received huge bonuses as a consequence of the mispricing of LIBOR, then argued that they did not notice what was happening in their institutions and recognised it only when it was brought to their intention by the media. These firewalls are tough and tight. It is sensible that we should recognise in Parliament that institutions with the kinds of resources that banks have are pretty much impossible to ever penetrate. That was the argument that led the commission to the reverse burden of proof. Given the misbehaviour that was evident, for example, on the trading floor or in the retail bank that was selling PPI, if we had thought there was any mechanism—any reasonable way to proceed upwards through the chain—that would enable us to follow up through to the key decision-makers of the institution, we would have opted for that route. However, no one could present to us a way in which a bank could be required to be structured to enable that trail to be followed.
The noble Lord, Lord McFall, and I were at an event at which John Kay made a remark about senior management which I think was right—“You take the bonus, you take the rap”. That is a fundamental principle which cannot be achieved unless we have a tool such as the reverse burden of proof. These institutions have made sure that they are impenetrable and the regulators in the UK have never found a way of penetrating through.