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My Lords, this amendment has led to a very interesting debate. I would like to pick up on what the noble Lord, Lord McFall, said, and remind the House of the context. As he so well knows, and everyone here will remember, seven years ago, the world was engulfed by a financial crisis, triggering a deep recession. It was a crisis caused, in part, by the reckless actions of some bankers and it was a crisis which our regulatory system failed to prevent. Today, we are all still paying the price for it and we are still hearing cases of crimes and misdemeanours in our financial services, as my noble friend Lord Lawson mentioned.
Although a number of banks have paid eye-watering fines for their misdemeanours, it is wholly unacceptable that so few bankers have themselves been held to account for their wrongdoings. The current regime, the approved persons regime,
“has created a largely illusory impression of regulatory control over individuals, while meaningful responsibilities were not in practice attributed to anyone. As a result, there was little realistic prospect of effective enforcement action, even in … the most flagrant cases of failure”.
These are not my words but those of the Parliamentary Commission on Banking Standards. The Government are absolutely clear that this has to change.
Our regulatory system needs to be able to hold individuals—I repeat, individuals—and not just banks to account for misconduct or recklessness, a point that the noble Lord, Lord McFall, rightly made in Committee and my noble friend Lord Lawson echoed. More than that, regulation needs to deter misconduct and recklessness in the first place. Good regulation is a spur for good behaviour and, as such, is crucial to driving the cultural change in the industry which we all want.
What are the characteristics of such a regulatory regime? It is one in which individuals’ responsibilities are crystal clear. It is one where individuals cannot shirk responsibility for their actions or those of their employees. Tasks may be delegated, but never accountability. A good regime is a regime where ignorance is no excuse. It is a regime where there are strong, simple principles that guide people’s conduct. Above all, it is a regime in which all senior managers understand that if something goes wrong in their team—be it a team of 20 or 20,000 —or on their watch, they will be held individually accountable. That is a good regulatory regime. Are these the features of the current approved persons regime? They are not but they are the hallmarks of the new senior managers regime that we will implement. As the noble Lord, Lord Grabiner, eloquently argued, the new regime will be tough and it will help to change the culture across the financial services industry for the better, which is what the noble Lord, Lord Tunnicliffe, desperately wants.
I am aware that there are concerns that the replacement of the reverse burden of proof with a statutory duty of responsibility will leave us in the same position as under the approved persons regime, where it can be very difficult, as I have said, for the regulators to hold senior management to account. I can reassure your Lordships that this is simply not the case. Let me set out exactly how the new regime will deliver a step change in senior manager accountability. First, the clarity of responsibility which has been so desperately lacking under the approved persons regime will be embedded in the system. This will be achieved in a number of ways.
An application by the firm for approval of a senior manager must be accompanied by a statement of responsibilities setting out what the senior manager will be responsible for managing in the firm. This must be updated if the responsibilities of a senior manager change. That ensures that both regulators and the firm will have the necessary clarity about who is responsible for what, and senior managers will take full ownership of their respective areas of responsibility.
This requirement is bolstered by the regulators’ rules, which require each firm to have, and to submit to the regulators, a “responsibilities map” setting out how responsibility for the business of the firm as a whole is allocated amongst its senior managers. This minimises the risk of any responsibilities falling through the cracks between different senior managers. On top of that, under rules of conduct made by the regulators, it is made clear that a senior manager must take all reasonable steps to ensure that any delegation of their responsibility is to an appropriate person, and they must oversee the discharge of any delegated responsibilities effectively.
Secondly, tough rules will apply to the senior managers. A senior manager can now be found guilty of misconduct if a breach of regulations occurs in the area of the firm’s business for which they are responsible and if they did not take such steps as a person in their position could reasonably be expected to take to prevent it. Crucially, it does not matter whether or not the senior manager is aware of the regulatory breach. Ignorance is no defence. What matters is whether they have taken reasonable steps to prevent the breach. If they have not, they are guilty of misconduct. They will not be able to avoid liability simply because the email trail has gone cold. The regulator will not—I repeat, not—be completely stymied if all conversations and exchanges take place in an environment where there are no minutes, no emails, no memos and no existing trail.
Indeed, as the noble Lord, Lord Pannick, said, the very fact that there is an absence of such an email trail, and that a senior manager is totally unaware of what is going on in an area of the firm for which they are responsible, may very well suggest that they have been guilty of failing to take reasonable steps to prevent a breach of regulations. This is the new system we are introducing and the Bill before Parliament does not change any of what I have just said. The measures in this Bill do not take us back to the days before the financial crisis.
Noble Lords need not take my word for it. According to Andrew Bailey, deputy governor for Prudential Regulation and chief executive officer of the Prudential Regulation Authority, the introduction of the statutory duty of responsibility, instead of the reverse burden of proof,
“makes little difference to the substance of the new regime. Once introduced, it will be for the regulators (rather than the senior manager) to prove that reasonable steps to prevent regulatory breaches were not taken. This change is one of process, not substance”.
Furthermore, the removal of the reverse burden of proof does not change the penalties which can be applied. If found guilty of misconduct under the statutory duty of responsibility, a senior manager could face an unlimited fine and/or prohibition from working in the industry. All this means that situations where things go wrong because of irresponsible, reckless or negligent management by a senior manager will be less likely to occur in future, because of the strong deterrent effect of the statutory duty of responsibility. If they do occur, the regulators will be much better equipped to take action against senior managers who have mismanaged the firm.
To those who would still like to keep the reverse burden of proof, I would say this. First, Andrew Bailey has highlighted to the Treasury Select Committee in the other place that the way banks are starting to prepare for the introduction of the reverse burden of proof next March is unhelpful. We understand that some of their legal advisers are being asked to prepare checklists, as the noble Lord, Lord Tunnicliffe, said, of “reasonable steps” which their senior managers should follow. I would say to the noble Lord that the point about checklists is this: presenting evidence that a template or checklist had been followed could enable the senior manager to meet the burden of proof for the defence, but would leave the regulator to prove that the steps taken were not reasonable.
In practice, the reverse burden of proof would not give the regulator a significant advantage but could sow the seeds of a new tick-box culture. The reverse burden of proof will add no significant weight to the regulators’ powers of enforcement, but instead risks creating a great deal of lucrative work for City lawyers. Secondly, the Government are expanding, as has been said, the senior managers and certification regime so it covers all authorised financial services firms, the majority of which are small. The tick-box culture I have described risks leading to the perverse outcome whereby senior managers in the largest firms are less exposed to legal risk under the reverse burden of proof, thanks to being able to employ the best lawyers and compliance officers.
I have been pressed on why the Government cannot introduce a two-tier system, with the reverse burden of proof applying to deposit takers but not to other firms. First, I have described the potential for detrimental effects on small firms. These issues are also relevant for small deposit-takers—for example, small building societies and credit unions, the latter often relying on volunteers for their staff. This approach would also raise serious issues of cross-sectoral competition. Noble Lords on all sides want a vibrant, innovative financial services industry that offers high-quality, good-value products to consumers. To achieve that, the regulatory system must, as far as possible, deliver a level playing field to support competition.
A reverse burden of proof that applied only to the banking sector would undermine this. For example, both deposit-takers and non-deposit-takers can engage in mortgage advice. A small building society or bank, for which the reverse burden of proof would apply, engaged in direct competition with firms, for which it would not apply, could find it more difficult to attract key members of staff. There could be a particular issue for challenger banks, especially those seeking authorisation for the first time.
Legitimate questions of fairness would also be asked about why senior managers in deposit-takers, particularly small ones, should be subject to the reverse burden of proof while those in firms such as large insurers or investment firms, which may pose greater risks to positive consumer outcomes and market integrity, are not. This approach would also create a great deal of complexity in large groups that contain firms which have deposit-taking permissions and firms that do not.
So, introducing a two-tier regime would introduce unnecessary complexity, when we have a tough, fair and practical alternative—the statutory duty of responsibility —that can be applied consistently to all firms. This is why the Government do not believe it appropriate to retain the reverse burden of proof. Is it needed to prove a senior manager culpable for a misdemeanour? No. Is it needed to clarify responsibilities of individuals in firms? No. Is it needed for the regulator to prosecute a senior manager if the email trail goes cold? No. Is it the silver bullet that will make the individuals who manage our banks responsible for their actions? No.
Instead, as I have explained, the new regime, with its statutory duty of responsibility, is a formidable tool for holding senior managers to account and for changing behaviour and culture in banks and across the entire financial services industry—a change we and the British public so very much want. I therefore ask the noble Lord to withdraw his amendment.