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Part of Bank of England and Financial Services Bill [HL] – in the House of Lords at 5:45 pm on 15th December 2015.

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Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy) 5:45 pm, 15th December 2015

My Lords, I am going to speak only briefly on this issue. My noble friend Lord Sharkey, who is sitting beside me, is perhaps the greater master, with particular expertise of the detail, and I do not think that the House needs to hear the same speech twice. Still, I want to make a few remarks because this is such a crucial issue.

To pick up the point made by the noble Lord, Lord Tunnicliffe, I say that the importance of the reversal of the burden of proof is, above all, its cultural impact—the impact that it has on every chief executive and every head of department to understand that if things go wrong, if there is misconduct and bad conduct within their own department, they are essentially on the line. Historically they have not been, and they know that. This reversal of the burden of proof changes that impact. We can tell that from the many conversations that I keep hearing from the Government that, if there is a reversal of the burden of proof, it might be harder to recruit new people to these posts because of the burden that now sits there.

In a world where we are sure that regulation alone cannot ensure that the banking industry behaves properly, and where enforcement is exceedingly difficult, it is very hard to follow a paper trail when lawyers have been very careful to ensure that one does not exist. There might be no electronic trail either; in fact we have just seen an example of such behaviour by Barclays, which explicitly set up a scheme, for which it has since apologised, which was designed to have no electronic trail whatever. Where the trail is so extremely difficult to follow, what matters is that chief executives and heads of department and other key players lead that cultural change; that they appoint people who will challenge them; that they put people in positions where they will blow the whistle when things go wrong; and that they drive through their whole organisation an understanding of the importance of ethical behaviour and proper conduct. That is the best defence that we can have.

Frankly, government arguments for cancelling the reversal of the burden of proof—the sort of argument for a key reason—have constantly shifted over the past few weeks when we have been discussing this issue. To gather from the last set of conversations around this issue, the argument is now primarily that the senior managers regime, which identifies who is responsible for different activities and different tasks, is both much tougher than the existing regime and much tougher without the reverse burden of proof rather than with it.

I will quickly address those two points, which my noble friend Lord Sharkey will address in much more detail. Let us pick up this argument that the new methodology and approach, the senior management regime, is much tougher than the existing regime. It is tougher—at least we have identified figures for who is responsible—but we always knew that the chief executive and heads of department were responsible. This may clarify that process, and that is a good thing, but I argue that it is not the major shift that is being presented to us. Much more importantly, the argument that has been made is that, with this new regime, responsibility becomes the test—not the test of culpability, which was so hard to prove and track.

A very helpful document was produced a week ago by the FCA. It issued its policy statement PS15/29, which included the final rules with regard to the amended senior management regime. It is absolutely clear from that document—I will let my noble friend Lord Sharkey quote to noble Lords from it where relevant—that the standard remains culpability; there is no change in the standard from culpability to responsibility. The dramatic changes that we were being told about, which were brought in by the SMR regime, are good—I have no objection to them and think they are positive. However, they do not achieve that dramatic shift we are asking for so that we never again have a situation where we have PPI, LIBOR, money laundering, interest rate swap mis-selling—events that had many individual victims and that, frankly, had a negative impact on the reputation of our financial services industry in London and its continuation as a viable global centre. Never again should we be in a situation where nobody in a senior position is ever held accountable for what has happened within their own organisation. Since all these transactions looked profitable on the books, they greatly contributed to the very large bonuses which went to those senior heads of department and the chief executives.

The second point—that this SMR is much tougher if we do not have the confusion of the reversal of the burden of proof—first, stretches credulity. However, I suddenly realised that there is a test of whether that is true. If the reversal of the burden of proof makes life easier for senior bankers, would they not be calling me, asking me to hang tough and insisting that we maintain and continue the reversal of the burden of proof? Would they not be calling the Government to say, “Look, Treasury, don’t be so hard on us. Please keep in the reversal of the burden of proof. It’s a protection for us—it gives us much more scope”. I do not believe that any of that has happened; certainly I have not heard it. Therefore the industry itself is making it very clear that the reversal of the burden of proof has a very significant impact on its senior management and its chief executives. Frankly, I argue that that is the level of protection we need, because that is what our country and our economy deserve.