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My Lords, I will speak next because there is an error on the Order Paper; the noble Lord, Lord Davies, will speak after me. I do not want to confuse anybody. Let me use this opportunity to welcome the noble Lord, Lord Bethell. I hope he will not mind me saying how much I will miss the noble Lord, Lord Young. He is one of the only people I know who could make a finance debate hilariously funny, as well as making very incisive comments and speeches. The new Minister has quite a challenge to fill those shoes—but I am sure he will, very ably.
I was privileged to be a member of the Parliamentary Commission on Banking Standards, which was chaired by Andrew Tyrie—now the noble Lord, Lord Tyrie. For two years it was an extraordinary experience to walk into evidence sessions where, at the table, a master of the universe would explain quite clearly why they had absolutely no knowledge of the failures in their own institutions, which were clearly far too big and too complex to manage. We all came to the conclusion that they had been advised to plead incompetence as the alternative to pleading guilty. I find it quite extraordinary that most of those we listened to have gone on to further success in their careers. As far as I can see, this is not an industry that has set real demands for competence on its senior management.
The title of the report by the PCBS was Changing Banking for Good. That is incredibly tough to do, but it reflects the critical importance of the dramatic change that we need to achieve, the weaknesses in both the standards and culture that underpinned the crash in 2008, and many of the other abuses within the financial services industry. I think the follow-on from the PCBS report—I have picked this up from many who have spoken today—is rather a curate’s egg; it has been good in places.
I say to the noble Baroness, Lady Coussins, that one of the areas it has handled best has been vulnerable people. We now have caps and other constraints on high-cost credit, a breathing space in debt management and severe restrictions on cold calling. However, I agree with her that the core issue of financial inclusion is no better today than when the report was made. It is frustrating that the banks are required to provide basic accounts but do so with great reluctance and therefore, in effect, quite badly. We had the opportunity to make it a condition of the banking licence that major banks should either provide proper services to the financially excluded or support an institution that could do that—which could target those individuals. That has been neglected and it has to be followed up.
That is a real failure. The regulator says, “We know there is a huge gap and that no one is providing services to much of this community, but it is not our job to fill it”. Well, somebody needs to take responsibility for that. I do not think that the Treasury is very well placed to focus on it. The role should be handed to the regulator, because banks fear the regulator, as do other institutions that can follow. We have seen the rise of challenger banks, peer to peer lenders and open banking, which is all entirely positive, and a few of those are starting to reach meaningful size—but, again, they are not tackling that challenging area.
I agree with the noble Lord, Lord Gadhia, that financial stability is an area where we have seen some significant change, thanks to a tough PRA backed by the Bank of England. The ring-fencing of high street banking from investment banking is still a work in progress, but it is happening to stop the contagion of speculation. Capital requirements are much tougher, and there are bail-in bonds and central counterparties to provide clarity within the field of derivatives—although that has risks in and of itself. There will be a test, because at some point we will run into a recession and that will have financial consequences. So we had better get this right. But, like the noble Lord, Lord Gadhia, I think that these structural areas have probably been the greatest success.
Frankly, what worries me most is the underlying problem of culture: the tone from the top, from the senior managers and regulators. This is where we have seen the least change. I hope that the right reverend Prelate the Bishop of Birmingham will not be offended when I say that while the “softly, softly” approach of the Banking Standards Board is built into its DNA, in this industry it is not an adequate response. This industry must be taken by the scruff of the neck; that is the only language it really understands. I was disappointed when the Banking Standards Board decided that it would not publish the annual assessments of banks’ performances. Initially, that was going to go into the public arena; it is now collated and anonymised. It means that civil society can no longer pinpoint on a bank and say, “Actually, that’s not right”, or, “You said you’d do this. Why aren’t you doing it within our community?” It is crucial that the information goes into the public arena. I would also like to see that board have genuine teeth.
I also want to see a regulator with some real teeth. No one went to jail for the 2008 financial crisis. There has been no enforcement action against any individual in a big bank for PPI. A few people went to prison for that, but they were members of very small institutions—I think one was the director of the House of Leather—and no individual has paid a significant price. For the failure of HBOS, only the corporate head, Peter Cummings, was fined and banned. He surely was not solely responsible for an outrageous and deliberate mismanagement of a major banking institution.
For the abuse of LIBOR reporting, which corrupted the whole finance industry, four City traders have gone to prison. The senior managers who both knew about it and benefited from it have never had to answer. My noble friend Lady Bowles talked clearly about RBS’s abuse of small businesses by seizing their assets and treating them as a mechanism for creating income for the bank rather than managing them in the responsible way that they should have within a banking relationship.
One of the saddest aspects of this whole process is the way in which the regulator has tackled senior management. The senior managers regime sounds strong and positive. It has been in place for three years, but it has not been used. That is a real failure. We have had the case of Jes Staley, the head of Barclays, who abused the whistleblowing process within the bank, even hiring private investigators to try to find the identity of a whistleblower. He basically got a small fine from the FCA, when most people, including the rest of the industry, thought that he would not only lose his job but be told that he could no longer function within the industry. The senior management regime is a long way from proving itself and now has a reputation for being tick-box. I talk to senior bankers who were very afraid when the regime was first brought in and who now feel very relieved that it will not check the way in which they do business.
The PCBS had a recommendation enacted in law that, when a bank fails, the presumption of guilt is reversed on a civil basis to assume that its senior management knew what was going wrong within the organisation unless they can demonstrate that they did not. It came about because, when regulators go in to try to enforce against these banks, they find that no paper or email trail ever leads to senior management; they have basically been protected. That measure has since been reversed and it has taken away the strongest weapon that regulators had.
I join others in saying that we need to look again at whether the regulators are fit for purpose or should be given greater powers. I agree completely with my colleague that the regulatory perimeter is nonsense. We either regulate an institution or we do not; we cannot just say that we regulate bits of an institution and ignore the rest. No other country does it; we are unique in having this regulatory perimeter that means that organisations are a mix of regulated and unregulated activity, and frankly I do not think that it has served any of us well.
I thank the right reverend Prelate the Bishop of St Albans for bringing this issue once again to our attention. I hope that he will continue to do it, because it will be an ongoing debate.