Amendment proposed: 87, in clause 22, page 80, line 2, at end insert—
‘(2A) The FCA may make rules or apply a sanction to authorised persons who offer credit on terms that the FCA judge to cause consumer detriment. This may include rules that determine a maximum total cost for consumers of a product and determine the maximum duration of a supply of a product or service to an individual consumer.’.—(Chris Leslie.)
On a point of order, Mr Leigh. May we have some clarification as to who proposed amendment 87, so that we are clear on whether we should vote aye or no?
Further to that point of order, Mr Leigh. This is one of those anomalies where we debate an amendment and vote on it later. I tabled amendment 87, which is also in the name of my hon. Friend the Member for Kilmarnock and Loudoun, the hon. Member for Foyle and, interestingly, my hon. Friend the Member for Walthamstow (Stella Creasy), who is not a member of the Committee. The amendment, on which we seek to divide the Committee, relates to regulation of high-cost credit.
Further to that point of order, Mr Leigh. I assumed that we had allowed clause 20 to stand part of the Bill and that schedule 6 had stood part of the Bill without debate, but that the question on clause 21 had not been put. I am sure that it is my mistake, and I will take up the Minister’s invitation. It was a minor question.
‘(c) provide for a requirement that an employee representative should be a member of the remuneration committee of a relevant body corporate; and
(d) provide for a requirement that the remuneration consultants advising on remuneration policy shall be appointed by the shareholders of a relevant body corporate.’.
We come to amendments 149 and 150 to clause 22, which relates to rules, guidance and the rule-making powers generally available to the FCA and the PRA. The clause deals with significant provisions under the Bill, and we shall be discussing several of them. I wish to place on record my regret that the Bill has not been drafted in a way that would bring fresh provisions into legislation, but cuts and pastes various arrangements from the Financial Services and Markets Act 2000, thus making it quite difficult for the lay person to discern which elements of FSMA are being transferred into the new arrangements and which elements might be disappearing or are being supplemented.
Amendment 149 relates to the important matter of the legal sanction and regulation of bank board members and senior banking executives in relation to their behaviour in the regulated context. As the Committee will know, the failure of a financial institution, unlike other companies where a failure affects only the shareholders, can cause widespread economic instability and, sadly, detriment to taxpayers. Under the rules of limited liability, shareholders suffer capital loss, but directors’ liability is often limited to the loss of £1 or sometimes not even that.
For non-financial companies the possibilities of failure are widely understood, but when a bank fails and the taxpayer loses significant sums in rescuing that institution, members of the public ask not unreasonably about the directors and senior executives who had legal responsibility for the stewardship of such significant organisations. That takes us into the terrain where we must question whether a bank is merely another company or an institution with an added social, political and economic set of responsibilities to society at large. Clearly, one key lesson that we ought to learn from the global financial crisis is that as a corollary of the broader social utility purpose of banks, the responsibilities that fall on the shoulders of banking executives should be proportionately higher and more strict. As Lord Turner, chairman of the current Financial Services Authority, said only a few months ago:
“The fact that no individual has been found legally responsible for the failure begs the question: if action cannot be taken under existing rules, should not the rules be changed for the future?”
That is the important set of issues that we are discussing under the amendments.
The Committee will remember that the Financial Services Authority published a report on the failure of the Royal Bank of Scotland. Several issues arose from the report, but the FSA suggested two options, one of which was that
“A legal sanction based approach, introducing a currently absent ‘strict liability’ of executives and Board members for the adverse consequences of poor decisions, and making it more likely that a bank failure like RBS would be followed by successful enforcement actions, including fines and bans.”
It also recommended an “automatic incentives based approach”. That is, essentially, the flipside of the coin, and puts the spotlight on the remuneration, incentives and bonus schemes that so many executives have felt compelled to chase over many years, often, sadly, at the cost of neglecting their responsibilities to wider society. The FSA therefore said that it also wanted changes to the incentives-based approach in organisations and that that
“would not rely on bringing enforcement cases which proved personal culpability, but would rather seek to ensure that executives and Boards automatically faced downside consequences from bank failure.”
In recent times, we have seen a welcome change at certain banks, which have clawed back bonus arrangements because of the failure to fulfil obligations. Unusually, and in a novel way, Lloyds Banking Group recently clawed back some of the bonus arrangements of previous directors as a result of the failures in payment protection insurance arrangements. That was an important signal. Other banks—I will not speculate which ones—have thought about that but not gone down the same route, although one has followed suit.
I agree with the overall thrust of the hon. Gentleman’s remarks—that there should be a commensurate liability to match the potential benefits—but does his description of how Lloyds bank has intervened not demonstrate how such things can happen without necessarily being provided for in the Bill?
They can work, but there are extenuating circumstances in relation to Lloyds Banking Group. It is 40% owned by the taxpayer, and I would hope the shareholder with stewardship of the public interest had the normal opportunity assertively to voice that public interest, although I have criticisms of the way in which United Kingdom Financial Investments Ltd has not asserted public concerns in other circumstances. However, where there is no such public stake in banking arrangements, we have not seen the same willingness to claw back from individuals, who made hay when times were good, significant sums when failures have emerged further down the track. Clearly, change needs to be made to remuneration arrangements.
As the hon. Gentleman knows, I take a close interest in them. The FSA has introduced clawbacks, but one reason why they have not been used much yet, although we saw them used for the first time at Lloyds, is that they need to be written into employment contracts, and contracts have started to change only recently, under pressure from the new Government. Does the hon. Gentleman not expect evidence of clawbacks to grow over time, as new employment contracts are struck and old ones come to the end of their lives?
Yes, I hope that would occur, but I am not sure we can leave it entirely to the market. There is a role for the regulator in shaping the arrangements, in cajoling and persuading institutions to go down that route, and, if necessary, in requiring arrangements to be put into contracts. We have an opportunity to take action in the Bill to take forward some of the FSA’s recommendations, and that is the rationale behind amendment 149.
Does my hon. Friend not recognise that, in some of the recent, publicly noted clawbacks, or cases where executives have forfeited bonuses, many people in the industry have argued that it was unfair that such things have had to happen to executives simply because of the ownership conditions. They said that created an unfair situation for executives in one bank, compared with executives in other banks. If there is going to be a level playing field, the regulator should surely have a role.