My Lords, I thank the right reverend Prelate for securing this debate and I welcome the Minister, the noble Lord, Lord Bethell, to his new post. I pay tribute to his predecessor, the noble Lord, Lord Young.
Improving behaviour and culture in banks is a work in progress, not a work completed. Following the FCA report into GRG, which we debated shortly before the recess, we are left with doubt about whether the tools are available to catch bad behaviour. Notably, that report says:
Andrew Bailey has said since that he believes the behaviour would be covered by the senior managers regime, but in any event, it would have to fall within the perimeter of what was defined as being under the senior managers’ control. The FCA report emphasised that many more things are going on in financial services than are regulated, and this unregulated activity, which includes corporate lending, is beyond the reach of regulatory discipline unless it strays into other matters or offences, such as fraud.
Some things are deliberately left outside regulation. The argument, which is the gist of what the noble Lord, Lord Young, said when he wrote to me after the GRG debate, is that regulation might reduce availability of the relevant service, such as lending to SMEs. I think it is time, though, to have a longer and better look at that general supposition, in particular with regard to the treatment of SMEs by banks. Right now, we are left with the situation that heavily regulated entities—the banks—carry out unregulated activity but nevertheless benefit from some sense of trust derived from being a regulated entity. After all, one expects a bank to behave better than a loan shark. I went to see the FCA during the recess and Andrew Bailey took pains to state again that because not everything done by banks and financial services firms was within the regulatory perimeter, they had little power. He went further, suggesting that Parliament had not had a debate looking at the regulatory perimeter.
I challenge that to some extent, in that there have been many debates such as this one in your Lordships’ Chamber and others in the Commons. There have also been proposals backed by APPGs, such as that on fair business banking, making specific recommendations and decrying the powerlessness that our regulators have or seem to have.
However, the point I make now is that we need effective generic offences not bound up in specific regulation and flexible enough to catch twists and turns. We previously thought that that was the fit-and-proper regime, but that has failed on GRG, which falls under it, because the relevant event took place before the senior management regime came into force. Now we think that it may be the senior managers regime, but there is doubt. The object of that regime—I quote from the
“make clear where senior individual responsibility lay for each aspect of a firm”.
“Each aspect” should include unregulated activity, but it is extremely likely that the context has been narrowed through rules and definitions.
I understand completely why industry seeks to limit risk, but the more detail that there is in rules, the less a measure is fit to catch new and unknown developments. Risk is the other side of the coin to using conscience, and conscience and judgment are what we need from senior executives—in fact, I think that is what they are really paid for.
I would like to see a legal analysis of how wide the senior managers regime really is, looking at true life examples, including all the rules and assessment of the managers’ responsibilities. Have the Government done anything like that as part of the monitoring of the implementation of banking reforms?
In the previous GRG debate, I referenced the Australian offence of unconscionable conduct in commerce—a useful generic offence, which I still recommend. I also discussed it with the FCA. It told me that in the context of GRG and corporate lending in general, contract law prevailed and, one-sided though contracts admittedly were, our courts would uphold them, so it was not unconscionable conduct to enforce them. With such an approach to contracts, it is hard to see that the senior managers regime would make any difference without specific guidance—I think some might be under way—but, even then, I wonder how much clout it would have.
This leads me to the conclusion that while we allow or, worse, expect commercial contracts to be unfairly one-sided between powerful and supplicant parties, events that look like oppression to the reasonable-minded person will continue. I see no hope in creating the kind of conscience culture that we seek in business and banking until we address the issue of contracts. If heavily one-sided contracts between large and small entities are the business norm “just because they can”, it has already set the tone and lowered the bar for decent behaviour.
I know that English law is considered an asset, including for the predictability of interpreting contracts, but that does not mean that nothing can be done. Why should “fair and reasonable” be only for consumers? We know what happens. Contracts to SMEs are “take it or leave it”, frequently leaving SMEs in the position of accepting terms that leave them vulnerable—for example, it being simply impossible to organise alternative refinancing on the notice timetables included in the contract. In my own business I often chose the “leave it” option but not everybody has the resources to do that.
Some time ago—I think it was in 2002—in Law Commission Consultation Paper No. 166, which is also Scottish Law Commission Discussion Paper No. 119, there were recommended changes to unfair terms in contracts, which I believe have still not been taken up. They included more protections in business-to-business contracts. The paper said that,
“it is our provisional conclusion that even though the changes we suggest would not be major, they would deal with types of unfair term that have caused very real problems to a number of businesses”.
It is time to dust off those proposals and look at them again alongside the other suggestions that have come forward from various think tanks and others in the light of recent banking scandals. English law does not need to guard the bully and the powerful to maintain its success.