My Lords, I welcome the opportunity provided by the right reverend Prelate to take stock of progress since the Parliamentary Commission on Banking Standards first reported over six years ago. I also join other noble Lords in welcoming the noble Lord, Lord Bethell, to the Government Front Bench, and I look forward to his debut at the Dispatch Box.
Since the PCBS made its recommendations, progress is perceived to have been slow, as the Banking Standards Board itself has noted. There also remain gaps in holding banks to account, especially in the redress process for SME customers. However, it would be wrong to conclude that significant change is not under way. The Financial Stability Board has commended the UK for its successful transition to a new regulatory regime, and the IMF has welcomed the UK’s more resilient system. However, it is fair to say that individual banks, and the financial system as a whole, have thus far benefited more from structural safeguards, such as strengthened capital ratios and better resolution processes, than from behavioural change. Those involved in major organisational transformation will appreciate the huge forces of inertia that need to be overcome.
It is not surprising, therefore, that the process of internalising externally imposed regulation is proving slow. This also serves to highlight that, in addressing “too big to fail”, we are uncovering the associated challenges of “too big to manage” and “too big to regulate”. The real litmus tests of the reforms undertaken since the global financial crisis are whether our financial system is genuinely safer from contagion, whether our regulators are fit for purpose and, ultimately, whether consumers are better off. The noble Baroness, Lady Coussins, provided a powerful reminder of the key consumer issues.
As well as testing the outcomes, we need to monitor the implementation of the new rules and regulations—for example, the number of senior managers being held to account under the new certification regime, the number of staff disciplined for breach of conduct rules, or the number of cases where banks exercise their right to claw back remuneration. It would also be helpful to demonstrate, in a transparent fashion, how banks and regulators are using their new powers. So far, the most visible aspect of regulatory enforcement has come in the form of fines. While these are necessary we must guard against the unintended consequences of creating a culture that accepts such penalties as a cost of doing business, so it is encouraging that shareholders of financial institutions—especially those that take a longer-term investment perspective—have come to appreciate the impact of culture and the financial, reputational and existential risks of poor conduct on the value of their holdings.
In addition, there is a case for reviewing how the various strands of reform and the setting of standards interact with each other and whether they should be streamlined. For example, we have a voluntary Lending Standards Board for consumer and commercial banking and, more recently, a Fixed Income, Currencies and Commodities Markets Standards Board for wholesale banking. While both have different functions from the Banking Standards Board, which focuses on behaviour and competence, it is ultimately difficult to separate the how from the what. Moreover, none of these bodies has any statutory force or enforcement teeth—something which members of the Treasury Select Committee have rightly highlighted and its new chair may wish to examine. We should also not lose sight of the quest for better regulation that is proportionate and effective, rather than simply more regulation through increasingly proscriptive rules. I would much rather we have fewer rules rigorously enforced than the current situation, where many firms believe they are swimming in overlapping regulations but few are perceived to be held properly to account.
We also need to be conscious of trying to solve the last crisis but failing to spot the next one. The Financial Policy Committee now exists to help manage macroprudential risks, but we must also consider the changing shape of finance. I commend the recent report Future of Finance, commissioned by Mark Carney and authored by Huw van Steenis. It highlights the rapid shift towards digitally enabled services and firms. This innovation will bring new risks, as well as new sources of competition. Indeed, the PCBS recognised the vital role of more competitive and better-functioning markets as part of its core recommendations.
This leads to my final point: some advice for our new Chancellor. Once tomorrow’s spending review is out of the way, the other big decision occupying his in-tray is the choice of Bank of England Governor and renewal of the annual remit letters. I urge him to use the opportunity of a new incumbent in Threadneedle Street with a fresh start to set a triple mandate: price stability remaining as the primary objective, but with secondary objectives of economic growth and competitiveness of the financial sector. I use this latter phrase deliberately, as distinct from competition, to reinforce the need for choice and innovation in meeting the needs of customers. With such an explicit mandate, the new governor would be well placed to complete the unfinished business of the 2013 parliamentary commission and address the challenges of the future, as well as the past.