Professional Standards

(1) The regulator will raise standards of professionalism in financial services by mandating a licensing regime based on training and competence. This must—

(a) apply to all approved persons exercising controlled functions, regardless of financial sector;

(b) specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct;

(c) make provisions in connection with—

(i) the granting of a licence;

(ii) the refusal of a licence;

(iii) the withdrawal of a licence; and

(iv) the revalidation of a licensed person of a prescribed description whenever the appropriate regulator sees fit, either as a condition of the person’s continuing to hold a licence or of the person’s licence being restored.

(d) be evidenced by individuals holding an annual validation of competence.

(2) In the Financial Services and Markets Act 2000, section 59, remove “authorised” and insert “licensed” throughout the section.’. —(Cathy Jamieson.)

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

With this it will be convenient to discuss new clause 4—Code of conduct —

‘After section 64(6) of FSMA 2000 insert—

“(6A) A code issued under subsection (2) shall—

(a) apply to all approved persons exercising controlled functions in the financial sector;

(b) specify a framework of certain permitted and prohibited actions with which approved persons must agree in writing to comply;

(c) mandate individual financial penalties, and the terms of temporary and permanent suspension of persons’ licence to operate, which can be issued by the appropriate regulator if it determines that an approved person has broken the code;

(d) specify the training, including both practical and ethical, which approved persons must undergo before practising controlled functions; and

(e) specify the additional training to be provided by institutions for their staff and set out the system by which institutions will monitor and enforce such a code.”.’.

We are making good progress this morning. We again want to raise important points of principle with these two new clauses. New clause 3 would introduce a licensing regime for all approved persons exercising control functions, to ensure that such persons have the adequate standards of competence and integrity. It is important for people in the real world to understand that we are trying to make reforms that complement the attempts to change the culture of the banking sector, to ensure that such problems are much less likely in the future, and that we are trying to do everything possible to prevent future banking malpractice of the type that sadly has been uncovered in recent years—whether it is LIBOR fixing or the banks’ mis-selling of financial products.

Essentially, the new clause is intended to ensure that a new licensing regime is put in place that would help to restore confidence in the banking system, not only for consumers but on a wider international level.

The reason why we had severe problems in parts of the banking sector was not necessarily because of training, but because of a breakdown of culture and ethics. Under the former FSA people, there were approved persons. We could argue, of course, that the number of individuals involved should have been extended, but is the hon. Lady suggesting that we should have a large body that regulates every single individual who works in banking and the financial services sector?

To be fair, the hon. Gentleman makes a valid point. Many people at the front line—I have spoken about this a number of times in discussions on the Financial Services Act 2012 and in the Chamber—were often the ones who were carrying out instructions and were put under pressure to do certain things to meet targets. We may discuss that further when we come to fiduciary duty and so on. However, the new clause is particularly about approved persons. It is not intended that everyone in the sector would be involved. We believe that that is important, because there are similar—not exactly the same, but similar—scenarios with other professionals who have responsibility, whether they are teachers, lawyers or medical health professionals. Such protections are in place because of the damage that may result without them, which is obvious. The problem is that the consequence of regulatory failure in the banking sector can be equally serious, not only for the health of the banks themselves but for the wider economy, and it can cause damage and problems for individuals.

It is true that controlled functions can now be carried out only by approved persons, and that a fit and proper test must be passed. However, given some scenarios that we have seen, I would argue that that has not been enough in itself. There is an argument that it is about culture and ethics, and that is important, but the protections that have been in place have not been enough to prevent the banks from being run like casinos in some instances.

The hon. Lady rightly makes the point that high-level principles have been in place. The FSA’s principles—I assume that those are effectively being taken over by the FCA now—include “Integrity”, “Skill, care and diligence”, “Management and control” and “Financial prudence”. All those were already in place. What specifically is she suggesting should change in how approved persons are regulated? That goes back to the point about culture—perhaps we should be thinking about a bottom-up approach, with much more focus within firms, rather than an overarching solution such as she is proposing.

We are seeking to link the issue to the culture change that is necessary, but sometimes, in order to create a culture change in an institution or organisation, catalysts are required and checks and balances have to be put in place to ensure that behaviour changes and that people are not simply talking a good game. We have tabled the new clause because in 2012, the total paid out by the big five banks in compensation for mis-selling and regulatory fines was £19.8 billion, which illustrates the failings that have been allowed to happen under the existing approved persons scheme.

I applaud the banks that are attempting to change how they operate and their culture. There is, however, a concern, which is reflected in public opinion and the  feeling that banks have not yet done enough to change the culture, that further problems could arise unless action is taken to ensure that those who are doing the right thing are supported and that their efforts are backed up. It would be better to take preventive action than to have to mop up after banks and reprimand them once the damage is done.

That is why we propose a more detailed licensing regime, setting standards that must be reached and with better enforcement using ongoing evaluation instead of relying on individuals to update relevant information. That would go some way towards rectifying the problem. The new clause represents an important step in the direction of better banking practice and regulation. It would be a licensing regime that would help to boost customer confidence as well as strengthen the regulatory framework, so that banking malpractice would be less likely in future.

Does my hon. Friend believe that creating the sort of environment that the new clause proposes may also be more conducive to whistleblowing by staff of financial service institutions who are conscious of dubious practices and products?

Again, my hon. Friend makes an important point and I hope that we will be able to discuss whistleblowing more generally at a later point. Anything that can create a culture where people are able to see what is the right thing to do in protecting consumers’ money—banks have the moral and ethical responsibility to do that, and not simply to look at what is in their own narrow, short-term interests—would give some support and help to individuals looking to speak out if they felt that they were being asked to do things that put individuals, groups of customers or wider groups at risk.

The hon. Lady is being generous with her time. Will she clarify something for me? She mentioned approved persons, but several of the individuals involved in the LIBOR manipulations were not approved persons. How far is she suggesting extending the definition?

I thank the hon. Gentleman for that intervention. If he looks at the specifics of the new clause, he will see the changes that we seek to make to FSMA 2000 and the professional standards that must be met. I was about to discuss new clause 4, which complements new clause 3 and relates to the code of conduct requirement. It is important, because it would add to the requirements of the code of conduct that are already published under section 64(2) of FSMA. Those codes have to be issued when regulators have made statements of principle. Currently, the only requirement is that codes of conduct

“must be published…in the way…best calculated to bring it to the attention of the public.”

With new clause 4, we seek additional requirements aimed at ensuring that the codes of practice have the widest possible application and specify clearly what is required for compliance and the consequences of failure. Those detailed codes of conduct would be easier to comply with, because approved persons would know precisely what was required of them.

To return to the hon. Gentleman’s point, we are not seeking to extend the definition of “approved person” unnecessarily, but rather to provide added clout to ensure that people are clear about what is expected of them, that the code of conduct is understood externally, that breaches are easier to spot so that enforcement by regulators is improved, and that there are clear penalties for breaches of the code. All that should incentivise compliance.

A code of conduct was recommended by the Future of Banking Commission, which compiled its report in early 2010 and published it later. The commission had some illustrious members, and its report was clear when it stated:

“The Commission recommends the development of a ‘Good Financial Practice Code’. This code should have a similar status amongst the banking profession as similar codes of conduct have in the medical and other professions.”

The report went on to state:

“In addition to the development of a Good Financial Practice Code, the Commission recommends that bankers receive compulsory formal training”— that links back to the comments of the hon. Member for Reading West—

“before they are able to fully practice in their profession. This should include training in the ethical behaviour expected of the members of their profession, including how to resolve conflicts of interest.

The Commission recommends that this Code should be devised and enforced by a new professional standards body along the lines of the General Medical Council, or the Legal Services Board.”

New clauses 3 and 4 represent an important pressure to raise regulatory standards and restore consumer confidence in our banking sector. I hope that the Minister, in the spirit in which he has dealt with things today, will listen to what we have said this morning and respond to our points. If he does not accept that the reforms are necessary, perhaps he could give us some information on an alternative way to deal with those points that would act as the catalyst necessary for further change.

We have had many discussions to date in which the hon. Lady has been the agent, if we can think of it in those terms, of the Parliamentary Commission on Banking Standards by putting forward its recommendations to the Committee. In this case, she is trying to steal a march on the Parliamentary Commission, which is still inquiring into these things. We expect it to report next month, and I think all of us look forward with great interest to hear what it has to say.

It is fair to reflect that professional standards are by no means an incidental matter to the Parliamentary Commission. In fact, its terms of reference specifically state:

“The Commission was established by both houses of Parliament to consider and report on the professional standards and culture of the UK banking sector.”

Professional standards are absolutely core to its work, so the new clauses, which deal with that, are by no means inappropriate to the Bill, but the time for them is after we are informed by the august and considered views of the Parliamentary Commission, which was established to look into precisely these matters. We expect its report to be published before Report. That will give us all an opportunity to consider its recommendations and how  to implement them through amendments to the Bill. My suspicion is that, based on its previous form, the Parliamentary Commission will leave us in no doubt as to how it would like us to reflect its recommendations. It would not surprise me if we saw suggested amendments later in the course of the Bill.

Among the recommendations that the Parliamentary Commission may make—I have no insight into its thinking—are a proposed code of conduct and a requirement to comply with it, along the lines of what is described in the new clauses. The British Bankers Association proposed in evidence to the Parliamentary Commission that there should be an industry-wide code of conduct more or less along those lines. The Parliamentary Commission will also address whether the problems that we have experienced in the financial services industry were principally about a failure to use the currently available powers—or their half-hearted use—and whether new powers are needed.

Although we will have plenty of opportunity to debate these matters in great detail within a few weeks, it is worth saying something about the current regime, to inform the Committee, as I am sure its members will wish to contribute to future debates. The current arrangement under FSMA is that individuals who perform controlled functions in a financial services firm require the regulator’s prior approval before taking up their appointment. That is quite an interesting and perhaps under-appreciated feature of the regime at the moment. The controlled functions relate both to positions of significant influence in financial services firms and to consumer dealing functions, for example the provision of advice.

A firm proposing to appoint a person to a controlled function has to submit in advance an application to the regulator. In some ways, interestingly, the powers currently provided are tighter than in professions where, typically, if people enjoy the approval of a professional body, they are free to practise anywhere, in any firm and in any role. That is not the case under FSMA. FSMA approval is for a specific appointment, individual, function and firm. The powers are quite well designed for what they purport to do. The question arises why they were not used more effectively, and no doubt the Parliamentary Commission is looking at that.

The regulator may not agree to approve a person unless it is satisfied that the individual is a fit and proper person to perform the function to which the application relates. The question of whether a person is fit and proper covers both their competence and integrity. FSMA specifically allows regulators to make rules providing for specific demonstrated training and competence requirements, which are reflected in the new clauses, and to require that any approved person must satisfy those conditions. So far, that requirement been mostly used for customer dealing functions. Hon. Members will know that in the retail distribution review, for example, there is a requirement on independent financial advisers to have gone through training before they can advise their clients. That relates to the current powers on training.

FSMA also allows regulators to issue statements of principle covering the conduct expected of approved persons. It is envisaged that the PRA and FCA will continue to do so. In fact, there are already statements of principles concerning the required standards of integrity  that approved persons by the PRA or FCA will need to conform to. Those are binding on approved persons, not optional.

FSMA also provides for codes of practice to be established. They are non-binding and are meant to be descriptions of conduct that would or would not comply with the mandatory statements of principle. From 1 April, following amendments made in the Financial Services Act 2012, the regulators’ statements of principle can apply to the conduct of approved persons in any function that they undertake, rather than to the controlled function. A person needs to be licensed to perform a particular controlled function, but the requirements on their conduct and integrity can apply to all aspects of their work, whether or not they relate to the particular matter that is approved.

The approved persons regime includes disciplinary arrangements that are well known to the Committee. They include financial penalties, public censure and ultimately the withdrawal of approval, if a person is no longer considered fit and proper. Those sanctions are available for conduct that is in breach of a statement of principle, including in parts of the job that are not in a controlled function. We have in place a regime that is in effect a licensing system for individuals. It covers standards as well as technical aspects, with extensive sanctions that are potentially more intrusive than those in many professional bodies. For example, an accountant can practise anywhere without further authorisation for a proposed job.

The question that arises is: why did that not work? Why did the regime not work in the past? It may have exposed the need to make greater use of such powers, to be clearer about the standards expected, and to be more active in removing authorisation and imposing sanctions, which, I hope, is an area that the Parliamentary Commission will advise on. Indeed, it may be that more powers are needed. That is what the Tyrie Commission is considering in depth and extensively. When the Chancellor appeared before the Commission, he gave an undertaking to include in the Bill any recommendations needed to take forward what is required to improve culture and standards. We will therefore have an extended ability to consider such proposals.

I hope that the hon. Member for Kilmarnock and Loudoun will feel inclined to withdraw the new clause, in anticipation of a lot more debate to come on such matters.

The incoming Governor of the Bank of England, Mark Carney, has said that regulation alone cannot be sufficient, because “virtue cannot be regulated”. Five years since the beginning of the banking crisis, that statement feels all too true.

Two weeks ago, the Salz review blasted Barclays’ culture of greed, saying that bankers

“seemed to lose a sense of proportion and humility” in the pursuit of bonuses. Just two days later, HBOS was slated by the Parliamentary Commission on Banking Standards for its

“incompetent and reckless board strategy” and “toxic” mistakes. Meanwhile, Barclays announced £39.5 million of bonuses on Budget day but 3,700 job losses just four weeks ago.

For far too long, morality has been a relative term in an industry that gives vast rewards to the few at the expense of the many, whether that be the local teller who lost their job in the latest round of cuts, or the man on the street whose savings were put at risk in 2007. If Labour’s amendments to the Bill are taken seriously, there may finally be the chance to bring a little morality back into banking to protect the ordinary customer from the cowboy banker.

In 2012, the respected Professor John Kay produced an independent report on the need to change the culture of investment, which was endorsed by the Business Secretary. He called for a minimum standard of behaviour based on stewardship to ensure that investors act in the long-term and best interests of clients. Saying that the absence of trust in the current system was a

“product of the prevailing culture”,

Professor Kay wrote:

“This erosion is not a result of misplaced public perception, which can be addressed by a public relations campaign; it is based on observation of what has happened.”

Labour’s new clauses would help to shift power back to where it belongs, and begin to build the bridges broken by decades of the excess we have seen just a few miles up the road from here. Through new clauses 3 and 4—and 6 and 7, which we shall consider later—a bankers’ code of conduct could lead to bankers being struck off in the way that doctors are struck off; boards would be answerable to their everyday employees when bonuses are handed out; and shareholders would be able to judge whether executives deserve big pay-outs for poor performances. All those measures and more would go some way to restoring the confidence of the public in the institutions that take their money. Public confidence in Blaenau Gwent is at a very low ebb.

The Parliamentary Commission on Banking Standards concluded that there is a culture of culpable greed not far from here that is far removed from the interests of customers. The new clauses are a helpful way to ensure that banks are accountable to the people they serve.

Like other Members I want to say that it is a pleasure to serve under your chairmanship, Dr McCrea.

I have considerable sympathy with the motivation behind both new clauses, but I am concerned that they may be disproportionate in the context of some financial sectors. New clause 3 would apply to all “regardless of financial sector” and new clause 4 says that the code would

“apply to all approved persons exercising controlled functions in the financial sector”.

The hon. Member for Kilmarnock and Loudoun referred to the Banking Commission, but it applies specifically to the banking industry. When we talk about everyone in the financial sector, we go beyond the banking industry as people understand it.

Dr McCrea, from your constituency experience you will have been familiar with the twilight zone that opened up in relation to the Presbyterian Mutual Society. Any regime introduced by the regulator that is designed to raise standards and ensure there is training, competence  and understanding, should also ensure that professionals—the approved persons—have a clear understanding of the regulatory framework and standards. What was revealed in the context of the Presbyterian Mutual Society was that many people were operating under the misapprehension that what they were doing was entirely proper and was under proper regulatory oversight when it clearly was not. There was a failure on the part of the FSA not to intervene in relation to products that were under its regulatory remit. The Presbyterian Mutual Society was deemed not to be under its remit but many of the products that that institution misadventured into were.

Everyone pleaded ignorance afterwards, including the Northern Ireland Department that was assumed to be providing the regulatory oversight. The FSA did not know. The Presbyterian Mutual Society did not know. The Church did not know or understand. Clearly there is a real case for ensuring that when we say that there are standards that have to be upheld and met, we learn the lessons of previous failures. That can apply across financial sectors.

I notice that new clause 4 refers to a code—singular—and not codes. The Minister made the point that FSMA as it stands allows for codes. They do not necessarily have statutory weight themselves, but differential codes are permitted in the context of different parts of financial sectors.

An area that is close to my heart is the credit union movement. We have had problems because the credit union movement in Northern Ireland was not under FSA regulation. Thankfully, now it has been brought under it, not because there was any malpractice or problems in relation to the credit union movement in Northern Ireland, which is very strong and healthy and has a big membership and big savings base, but because by being outwith FSA regulation, credit union members were denied access to the FSCS. They were covered by their own bonds and arrangements through the Irish League of Credit Unions and other measures. Nevertheless, that created a difference that members would have been uncomfortable with.

However, as you will know, Dr McCrea, the credit union movement in Northern Ireland has been somewhat disconcerted by the fact that the FSA is applying standards that were developed in relation to the credit union movement in Britain, which is at a much lower base than in Northern Ireland. The movement is therefore somewhat uncomfortable because many strong, big and healthy credit unions in Northern Ireland will continue to invest in the sensible and responsible way that they do only if they become version 2 credit unions. Many credit unions in Northern Ireland are not particularly comfortable with the requirements—the regulatory hurdles and standards that they would face—of becoming version 2 bodies.

I would not want new clause 4 to end up making that process even more exacting. It would be disproportionate were a credit union, whether version 1 or version 2, to face a regime that was as exacting as and fully equivalent to what a bank has to face. That would be insensitive and counter-productive to encouraging the development of credit unions anywhere in the UK. I worry that a singular reference to a code and the mandatory aspects referred to in the various subsections of new clause 4  would create a situation that was not only more exacting for version 2 credit unions but equally exacting for version 1 credit unions, which would be disproportionate.

I am worried about the possible unintended consequences, because what motivated the FSA’s creation of the version 1 and version 2 regimes in Britain was the fact that it wanted to ensure that credit unions in Great Britain did not make investments until they reached a level of maturity and a certain level of savings and did not get involved with dubious or risky products. The credit union movement in Northern Ireland is mature and sizeable and has made sensible investments in several areas and wants to continue to do so in the interest of its members. A sensible way of allowing that would be to control the products that credit unions can invest in, rather than saying that they have to contort themselves into becoming version 2 bodies before they can do such things. Only allowing them to invest in certain approved products would be sensible, but the FSA, and now the FCA and PRA, have been unable to take up that sensible and practical point. I am a bit worried that were I to support new clause 4, I would be inviting more of that undiscriminating attitude from regulators.

May I say, Dr McCrea, what a pleasure it is to have you back in the Chair? We missed you at the last of the previous sittings of the Committee.

I speak only to remind hon. Members of my declaration of interest, as I am an authorised person under the FSA and now the FCA. As we may come to a vote, I felt that I should put that on the record.

I start by thanking the hon. Gentleman for putting his declaration of interest on the record, because I do indeed want to test the Committee’s views on new clause 3 and I will briefly explain why.

The Minister suggested that some amendments were somehow stealing a march on the Parliamentary Commission on Banking Standards rather than following on from it. He did, however, acknowledge that the issue at hand is by no means an incidental matter. He suggested that it would be best to await the outcome of further deliberations of the Banking Commission before deciding on how to proceed. I do not want to go back over previous parts of the debate—you would not allow me to do so in any event, Dr McCrea—other than to say that there were some expressions of concern at the outset of the proceedings in Committee that we were being asked to debate and discuss what was essentially the skeleton of the Bill, without a lot of the final detail that would arise as a result of the work of the Banking Commission.

In one way, I understand what the Minister is saying, but equally the timing of this Committee means that we have what we have in front of us and we have a responsibility to consider what we think should be in the Bill to improve it. That is notwithstanding some of the arguments that were made in support of earlier work by the Banking Commission, which has not yet found a lot of favour from the Government in votes.

I do not want to question the Minister’s intent on this issue. I am sure that he is doing what he is with the best of intentions—to ensure that due consideration will be given to the work of the Banking Commission. He  mentioned that he was sure that the Banking Commission would leave us in no doubt as to what its views were, and I too am sure that that will be the case.

The Minister went on to give some technical detail, for which I am sure Committee members will be grateful; I am referring to hon. Members who perhaps have not followed all the technical detail in the way in which the Minister has. He described how the system works at the moment, but he went on to pose questions as to why it has not worked, and he talked about the possible need for greater use of powers, the possible need to be more active and whether further standards and powers were needed. I was grateful to him for the recognition that perhaps more needs to be done.

My hon. Friend the Member for Blaenau Gwent made a passionate contribution that reflected the concerns of his constituents, who once again are not yet persuaded—indeed, many people across the country are not yet persuaded—that the lessons have been learned from what went wrong in the banking sector and its culture, which did not put the interests of the consumers at the heart of the system. As the public see it, certain people at the top of the banking tree looked after their own interests before they looked after the interests of their customers, and they want something done about that.

My hon. Friend mentioned in particular HBOS and Barclays and the very real issue of bonuses. I do not want to continue the notion that this is all about bashing the banks, but we must ensure that the lessons that have to be learned lead to a change in culture. He made the point about the many ordinary front-line staff who lost their jobs as a result of decisions that were taken. It is important to remember that.

I understand the considerable expertise that my hon. Friend the Member for Foyle has in this whole area, particularly in relation to the credit union movement, and the work that he has done in that regard. I listened to him carefully, because I respect his views and opinions on these matters, having seen how he has contributed to previous Bills and his work in the Chamber on these issues. I assure him that, being involved with the credit union movement myself, I would not want to do anything that would put it at risk. I believe that support for the credit union movement is one way in which we can ensure that people have ownership of their financial institutions, whether that is at a localised level or on a larger scale, as in the case that he is aware of from his own area.

My hon. Friend raised real concerns about the situation that he and others have described over the years in relation to the Presbyterian Mutual Society and the problems that arose in that regard. Again, it is important that lessons are learned from that.

I said at the outset that I would want to test the opinion of the Committee on the new clause. I do not for a minute believe that Opposition Members will win the vote, but I think that it is important to test the principle behind the new clause, which is that we want to see as much as possible done to ensure that the people who carry out the controlled functions are fit and proper people. I do not believe that the existing system has worked in the way it should. We hope that pressing the new clause to a vote will send a message to those considering the work of the Banking Commission that we feel that further action is needed.

Question put, That the clause be read a Second time.

The Committee divided: Ayes 7, Noes 10.

Question accordingly negatived.