Extension of relevant authorised persons regime to all authorised persons

Bank of England and Financial Services Bill [Lords] – in a Public Bill Committee at 12:30 pm on 11 February 2016.

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Photo of Rob Marris Rob Marris Shadow Minister (Treasury) 12:30, 11 February 2016

I beg to move amendment 33, in schedule 4, page 58, line 2, leave out paragraph 18.

With this, it will be convenient to discuss the following:

That the schedule be the Fourth schedule to the Bill.

Clauses 21 to 23 stand part.

Amendment 34, in clause 24, page 19, leave out lines 29 to 34.

Amendment 31, in clause 24, page 19, line 34, at end insert “and insert new subsections (6), (7) and (8)—

‘(6) Where the authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.

(7) If the FCA satisfies itself that a person (P), who is a senior manager in relation to a relevant authorised person, is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).

(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) if P satisfies the FCA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).””

Amendment 35, in clause 24, page 20, leave out lines 1 to 6.

Amendment 32, in clause 24, page 20, line 6, at end insert

“and insert new subsections (6), (7) and (8)—

‘(6) Where the PRA-authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.

(7) If the PRA satisfies itself that a person (P) who is a senior manager in relation to a relevant PRA-authorised person is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).

(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) if P satisfies the PRA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).”

Clause 24 stand part.

Photo of Rob Marris Rob Marris Shadow Minister (Treasury)

The lead amendment in this group, amendment 33, stands in my name and that of my hon. Friend the Member for Leeds East. Unless the Government accepts this amendment—I hope they do—we will seek your permission to divide the Committee, Mr Brady.

I thought that I would start this group with what may be some of the less contentious material; the contentious material is likely to focus on schedule 4 and particularly on clause 24, the reverse burden of proof, and so on. Starting with the perhaps more straightforward stuff—that does not mean that we should all be friends and agree on this—it would help if the Minister could provide clarification regarding clause 21(3)(a), which states that the Treasury may

“confer functions on the FCA” by regulations. What kind of “functions” do the Government have in mind that the Treasury might confer?

Much more important and perhaps more contentious is clause 21(3), which says:

“Regulations under subsection (2)”— that is, made by the Treasury if it so chooses—

“may…modify, exclude or apply (with or without modifications) any primary or subordinate legislation (including any provision of, or made under, this Act).”

So clause 21(3)(b) gives the Treasury regulatory power to modify, exclude or apply primary legislation, as well as other powers. I am uneasy about that as a constitutional way forward. No doubt, the Minister will tell me that that has been done by Governments when I served as a Back Bencher, the previous coalition Government and so on, but I still think that, on a constitutional basis and particularly on something as important as the financial stability of our economy, an explanation from the Minister of why the Government are seeking powers under the Bill by regulation to be able to amend primary legislation would be helpful.

Overall, clause 21, “Rules about controlled functions: power to make transitional provision”, seems fairly sensible. Examples of controlled functions include being a director of a regulated firm, overseeing the firm’s systems and controls, being responsible for compliance with rules and so on. One would expect a Government to ensure that there were proper rules about such controlled functions. However, there is that concern about regulations making primary legislation.

Clause 22 deals with the administration of the senior managers regime, part of the senior managers and certification regime which, as hon. Members know, I prefer to call SMACR, or “smacker”, because it suggests what may on occasions metaphorically need doing to those involved in financial services who step out of line. The clause makes a number of changes to the senior managers regime, and perhaps, because these have been wisely grouped together, that will come out in the wash during the debate on reverse burden of proof.

Clause 23, “Rules of conduct”, is not so controversial, I suspect, but there is a question mark for me. I draw the Committee’s attention to subsection (3)(c) which omits section 64B(5) of the Financial Services and Markets Act 2000. I stand to be corrected, but as I understand it, section 64B(5) imposes a duty to report when a manager or senior person knows or suspects that someone in their firm or organisation has failed to comply with conduct rules, and clause 23 is about rules of conduct. If the rules of conduct clause in the Bill omits what appears to be a strong and central provision of previous legislation, that is prima facie extraordinary. If a duty to report actual or suspected wrongdoing is to be removed, I scratch my head. Perhaps the Minister can reassure me and the Committee either that I have misunderstood what the soon-to-be-omitted section 64B(5) does, or that, although that subsection does what I think it does, other provisions are being brought in that strengthen or are at least equivalent to that provision of the 2000 Act.

Clause 20 introduces schedule 4, which will extend the relevant authorised persons regime to all authorised persons. Committee members will be relieved to hear that I do not propose to repeat what I said on Second Reading—namely, that the Labour party’s position is that removing the reverse burden of proof, albeit as part of a suite of changes that the Government are introducing, is a mistake. Our position is in between that of the Government and that set out in the Scottish National party’s amendment. There are two interlinked issues here: whether the reverse burden of proof on senior managers should exist, and, if so, whether it should extend to all managers or, as the acronym SMACR implies, just to senior managers. That is the substance of it. Should we have the reverse burden of proof? If so, to whom should it extend?

As I understand it, and I stand to be corrected—I find it a bit difficult to hold these things in my head, so somebody, perhaps my hon. Friend the Member for Leeds East, can nudge me if I am getting it wrong—the Government are saying, “We will extend this part of the regime to everyone. SMACR will apply to everybody in financial services, but the reverse burden of proof will no longer apply to anybody, senior or junior.” At the other end of the spectrum—again, the hon. Members for East Lothian and for Kirkcaldy and Cowdenbeath can correct me if I am wrong—the Scottish National party is saying, “Extend SMACR to everybody, but retain the reverse burden of proof.” Our position, given that it is harder for smaller organisations to comply with what, frankly, can be labyrinthine regulatory controls, is that the reverse burden of proof should be retained for senior managers, but not for junior managers; extend the regime to junior managers, but not the part of it that pertains to the reverse burden of proof.

The Labour party, as is so often the case, finds itself in tune with the Institute of Directors—not on the particular issue, but on the general background. Paragraph 10 of its helpful written submission states:

“Confidence and trust in banking is at an all-time low. We accept that the behaviour and culture within the banking community contributed to the last financial crisis.”

To be absolutely clear, the Institute of Directors, in paragraph 13 of its written submission, welcomes the Government’s proposals to remove the reverse burden of proof from the legislation. The Government and their coalition partners introduced that legislation recently, but it has never got beyond the statute book and been put into practice, so there is no evidence one way or the other about whether the reverse burden of proof has altered behaviour. As I understand it, it would only have applied—and will only apply, if the Government generously accept our amendments—from 7 March, which is when the SMACR regime comes into force. The Government’s position, although perhaps the Minister will announce a change of heart today, is that the Bill will be close enough to the statute books by 7 March that any investigation into wrongdoing that takes place after that date will be against the backdrop of the normal burden of proof, rather than the reverse burden of proof.

The reverse burden of proof places a higher duty of care on the individual who is accused of engaging in wrongdoing to demonstrate that they did not in fact do so. It is not as strict as what we lawyers—there are several in this room—call strict liability. An example of strict liability in England—I do not know about Scotland; I am a bit rusty on this area of law—is that if a customer under the age of 18 is served alcohol by a member of staff in licensed drinking premises unbeknown to the licensee, which we can imagine happening in many pubs, the licensee is strictly liable for the offence, even though they might have been in a different room or even been on holiday. That is partly to drive managers or licence holders of licensed premises to ensure their staff are aware of the law and apply it. It is called strict liability, and it is very strict. It happens in certain other areas of the law. I venture that most hon. Members have, in their time—I know the Minister has, because she told us earlier that she frequents the Dog and Duck—been to drinking establishments, when over the age of 18 of course, and so will be able to understand that.

The reverse burden of proof is not strict liability. It is a higher threshold that requires a greater level of engagement by the accused—the person it is suggested has engaged, in the scenario of financial services, in wrongdoing. The reasons put forward by the Government in Lord Bridges’ letter were not convincing to Labour Members, and clearly not to SNP Members either. That is why, albeit using different wording, we have tabled a package of amendments, of which amendment 33 is a more minor one, to reverse the reversal of the reverse burden of proof—that is, to maintain the reverse burden of proof—in order to drive higher standards in the banking and financial services sector.

Lord Bridges, the Minister in the other place, was, from reports from my colleagues there who dealt with the Bill, open, flexible and interested in ideas to improve the Bill. The Minister here today has already referred to one such idea: clause 19 on diversity was inserted in the Lords, and clearly the Government found it helpful because they have retained it in the Bill. On the reverse burden of proof, which is a thorny issue, Lord Bridges helpfully explained in a letter the Government’s position and thinking. He said that senior managers were busy organising themselves so that it would be difficult to impose liability on any individual. That is the problem: when things went wrong in the lead-up to 2008, it was very difficult, because of the regulatory regime—much of it introduced by my own party’s Government—to assign individual culpability, let alone criminal culpability, to an individual. An institution may have acted in a very irresponsible way, but drilling down to the level of the individual proved almost impossible. That has an echo in this Bill, because there is widespread agreement—as I always say, that does not mean it is true, but it is a bit of an indication—that were we to have a regime that stressed individual responsibility more highly and ensured that it obtained more widely, conduct would be likely to be better than it was by some individuals leading up to 2008.

We need a system where there are what in other spheres are called accountable officers, so that it is no good just to say, “I didn’t know what was going on.” One ought to say, “You are culpable because you should have known what was going on.” I think the Government agree with that concept. I am not at all sure that the legislation and the amendments to the legislation introduced by the Bill go in the right direction in translating that theory—“You should have known and therefore you are culpable”—into practice in a way that will not lead to loads of people going to prison but will dissuade them from undertaking risky activities that affect us and many of our constituents. That is what we want. Probably no members of the Committee are hangers and floggers. We do not want loads of people caught out; we want them to act responsibly, so that they cannot be caught out and, more importantly, so that the risks are not manifested as meltdowns in the financial system.

The Government have also expressed a fear that were the regime not to be changed as proposed in the Bill, there would be a checklist mentality. I have to say that a lot of people are alive today because of checklists. Where introduced, they have transformed surgery. The surgeon, or whoever is the accountable officer in the operating theatre—it might be the senior nurse—goes through a checklist, for example to check that the spare blood is of the right blood group. We all make mistakes and it can on occasion be too easy to make mistakes; in a team it can be too easy to think that something is someone else’s responsibility. Checklists are not the be all and end all, but they help.

I have in my mind—only some in the room will remember this—the 1974 World cup final, refereed by a man who lived in my constituency, Jack Taylor—a lovely man, whom I have met. He went out on to the pitch just before the World cup final started and he went through a mental checklist. Looking around, he found that there were no corner flags. Jack was arguably the best referee in the world, and he knew that the problem with having no corner flags was that when it was discovered, the game would have to be restarted. It was not simply a matter of 10 minutes in, “Oh, no corner flags. We will just bang one in each corner.” Restarting any top-class game is difficult; restarting the World cup final would be severely embarrassing for everyone concerned, including Jack Taylor. However, he went through a mental checklist and disaster was averted. You will not remember that, Mr Brady, because you are too young, but some of us do. That story demonstrates that checklists can on occasion be helpful as part of a regime. Jack Taylor did not referee that game—in which, from memory, he gave two penalties, one early on—through a checklist. He refereed the game using his judgment, training, wisdom and experience, but part of what he did to ensure that he did so properly was to use a mental checklist.

As I mentioned earlier, the Government wish to change a regime that they introduced little more than two years ago and that has never been brought into force. Some say, “Well, we have never had any prosecutions, so what are we going to do?” Well, of course we have not had any prosecutions; the provision was never brought into force. In the hope, perhaps vain, of evidence-based decision making by legislators in all parts of the House, bringing something into force is often, although not always, helpful. The hon. Member for East Lothian earlier today referred to testing something to destruction—but I am not sure that I want to test banking regulation to destruction, because it could get a bit messy. He was perhaps talking in a slightly different context.

The real point is that we should have adequate regulation. The difficulty with the Bill is not only to do with the removal of the reverse burden of proof—the double reverse ferret, as I called it on Second Reading. The problem is that even after this Bill is enacted, and even if the Government wisely accept our amendments, the regulatory regime, sadly, will still need a big overhaul, because the wrongdoing that led up to and contributed to the meltdown in 2008 has continued since then to the tune of fines of almost £3 billion levied this year, seven and a half years after the big crash, for wrongdoing in the financial services sector in the United Kingdom, or by UK institutions, that took place after the meltdown in 2008.

So the Government are right to recognise in the Bill that the current regulatory regime is not working. However, they are wrong in shying away from a complete overhaul and to some extent tinkering with this authority becoming that committee, and with this reverse burden of proof being removed but more people being brought in. I think we need a bit more of an overhaul. I will not spell out the kind of overhaul that I think we need, Mr Brady, because you would quite properly rule me out of order.

We have the PRA being downgraded in the Bill, which is unfortunate. We have a dilution of individual managers’ responsibility, particularly senior managers, and the reverse burden of proof removed. That measure was part of the Government’s response to the Parliamentary Commission on Banking Standards, which had three main recommendations: the first was the reverse burden of proof; the second was extending the time limit for commencing disciplinary action against senior persons; and the third was giving regulators the power to make approvals of senior persons subject to conditions or time limits. So it was not a big overhaul that was suggested by the Parliamentary Commission on Banking Standards, but one of the three legs of that three-legged table—the reverse burden of proof—is being removed and we therefore fear that the table may fall over, to the cost of us all, particularly our constituents.

My excellent researcher, Imogen Watson, has dug out a series of quotes from 2013 from people such as the Chancellor of the Exchequer. She has dug out quotes—if I may put it this way—from the top all the way down, extolling the virtues of this new regime of the reverse burden of proof. I will not read them all out, but any hon. Member can come to me if they want to see them. There are people still in the Cabinet, besides Mr Osborne, who were extolling the virtues of this kind of regime, and yet it has never been fully brought into force, and now it is going to be undone. That is most regrettable.

Our amendments are very reasonable. As I set out earlier, on the spectrum of the two interlinked issues to which I referred—the reverse burden of proof and the width of the net—we are in between the Scottish National party, which is a bit too far one way, and the Government, who are a bit too far the other. Therefore, as reasonable people—as moderates, no doubt—the Government will think again and accept our excellent amendments, although I appreciate that when they do that, they may say to us, “On Report, we will need to tweak the wording a bit.”

Photo of George Kerevan George Kerevan Scottish National Party, East Lothian 1:00, 11 February 2016

I will be reasonably brief, because the hon. Member for Wolverhampton South West has covered a lot of the points. The burden of our amendments 34 and 35 is to preserve the existing Financial Services (Banking Reform) Act 2013, which has not yet come into force—it comes into force next month—with regard to the reverse burden of proof. I think that at this stage, before the reverse burden of proof has been tried, to take it out of the legislation sends the wrong signal to the financial community. That is the most serious issue. We could argue the rights and wrongs of what is the best possible kind of regulatory regime, but much of this depends on mood, culture and signals.

The senior managers in the financial community in the City of London have been worried about the import of this legislation—there is no doubt about that. I understand that in their circumstances, because I have met many of them and they are not going out of their way to impose regulatory infractions. I think there is a new mood in the City, with people trying to get it right. Some senior managers were fearful of the extent of the legislation, but it would have been better to have tried to talk to them and explain it than, by withdrawing it, to imply that something was wrong and that it was too onerous. The signals were all wrong.

First, given the fragile nature of public opinion about the banking system, one would implore the Minister that withdrawing the legislation is not a good thing to do. What we are engaged in today is not an exercise in bank bashing, but trying to find a regulatory system that not only works, but finds the public confidence we desperately need. We need only look at the fact that since the autumn banking shares across western Europe, including the UK, have collapsed by about 37%. That shows that the markets are jittery about what is going on in the banking system. I press that on the Minister.

Secondly, where did the idea of the so-called reverse burden of proof come from? It has got into the legislation, and it came through the Parliamentary Commission on Banking Standards. We then have to ask: did the commission come up with the idea? Did its members suddenly think, “That would be a good idea”? There was lobbying on behalf of key figures in the regulatory community and the political sphere who said, “This is a good idea and you should look at it.” I gently say to the Minister that some people who raised that idea originally have now run for cover, and I think that sends the wrong signal. It suggests that in the regulatory family and within Government people are unwilling to press legislation home. That is dangerous for clarity in such a regime.

Thirdly, the one argument that has been brought up that one should pay heed to about the reverse burden of proof is proportionality. In widening the senior managers and certification regime through the legislation, which is the correct thing to do, there is a danger that we place onerous burdens on smaller companies or make them fear that such burdens will be put on them. I accept, as the hon. Member for Wolverhampton South West said, that there is a reasonable case for splitting the application of the reverse burden of proof between senior managers in the major systemic institution banks and funds and the smaller companies. How far I am prepared to press my amendments will depend on how emollient the Minister will be, but even if that is to be applied as a blanket rule, it is ultimately up to the PRA and the FCA to decide at what point they use their powers.

I remind the Minister that there has to have been a regulatory infraction before the reverse burden of proof comes into play—something serious has to have been proved to have gone wrong by either the FCA or the PRA, or by both. The senior named managers in their sphere of operation are already culpable for something having gone wrong, so all the legislation says is, “You have to prove why you got it wrong. You were in charge, you were on the deck and something has gone wrong.” It does not pick on that manager randomly. Something has gone wrong in their sphere of operation, so it says, “Why did that happen? You were responsible. Tell us what went wrong.” Even in the sphere of the current legislation and widening the certification regime, it is still up to the FCA or the PRA to say to a senior manager, “Tell us.”

I am willing to say that if that makes things clearer and helps get over the proportionality argument so that we can keep the degree of scrutiny and responsibility for the same managers in the systemic institution, that might be the way to go. So far, the Government have been in wholesale retreat from the original legislation of only two and a half years ago. They are sending the wrong signal in doing that, and the Minister has to explain why, when there are alternatives, she feels the need to take this measure off the statute book.

Photo of Harriett Baldwin Harriett Baldwin The Economic Secretary to the Treasury

It is important that I take this opportunity to send a strong signal on financial services. The financial services sector is vital to the strength and health of the UK economy. We have seen what the opposite looks like, and we know we do not want that to happen again. I emphasise that we are very committed to effective, strong regulation of financial services, to ensure financial stability, market integrity and strong protection for consumers. There can be no more important element of that regulation than the surrounding conduct. Conduct, and responsibility for conduct, are vital to the financial services sector. I welcome this opportunity to send that strong signal.

I also reiterate, for the Committee’s benefit, that we have done a number of other things outside the scope of the Bill. For example, we have introduced a new criminal offence to ensure that criminal penalties, including imprisonment, can be imposed upon people who manipulate key financial benchmarks such as LIBOR. We have brought in the toughest rules of any major financial centre when it comes to clawing back bank bonuses. Bringing in the senior managers and certification regime for the whole financial sector, which I remind the Committee includes a duty of responsibility to cover all financial services firms, is a very important strengthening of the failed and lacklustre approved persons regime. We are also bringing in new criminal offences so that criminal penalties can be imposed on senior managers whose reckless misconduct in managing a bank results in that bank’s failure.

The group of provisions we are considering cover, in a number of clauses and in one schedule, changes to the senior managers and certification regime, as well as amendments tabled to the provisions relating specifically to the replacement of the reverse burden of proof with the statutory duty of responsibility. I will explain briefly the purposes of the provisions in the group before addressing the amendments tabled by Opposition Members and trying to respond to points raised by the hon. Member for Wolverhampton South West.

Schedule 4 makes detailed technical changes to the Financial Services and Markets Act 2000 that are needed to extend the senior managers and certification regime to cover all authorised financial services firms, including removing the definition of a relevant authorised person. It also makes a small number of consequential amendments to the Financial Services (Banking Reform) Act 2013.

Clause 21 gives the regulators expanded powers to include transitional provisions in their rules when they make rules that create new controlled functions or change the definition of an existing controlled function. They will need those powers when they specify the new senior management functions that will form the basis for rolling out the senior managers and certification regime to all authorised persons. Clause 21 also gives the Treasury a power to make any additional provision needed in connection with those rule changes through regulations.

The hon. Member for Wolverhampton South West asked specifically about the conferring of functions. For example, that power could be used when responsibility for certain controlled functions is switched from one regulator to another, or when other changes are needed that effectively alter the boundary between what the PRA, or the PRC as it will be after the Bill becomes law, and FCA regimes do. We do not think it would be appropriate for the regulators themselves to have that power. Another example would be giving the regulators power to make rules allowing for grandfathering new controlled functions, or allowing changes between regulators. That is an example of what the powers might be.

It is not unusual to amend legislation in regulations along these lines. The affirmative resolution procedure is required. The provision was reported to the Delegated Powers and Regulatory Reform Committee in the usual way, and it did not express any concerns about it.

Clause 22 makes a number of technical changes to the detailed legislation underpinning the senior managers regime, including corrections to put right minor errors or omissions in the original legislation in 2013. The hon. Gentleman had some technical questions on subsection (2), which ensures that when statements of responsibilities are changed, both regulators will, where relevant, receive copies. Subsection (3) allows time limits imposed on an approval to subsequently be varied. At present, only the conditions imposed on approvals can be changed, so time limits are an important addition. Subsection (5) makes a technical change to ensure that the PRA can bring disciplinary proceedings for the failure to provide an updated statement of responsibilities. Again, the clause is important yet technical.

Clause 23, which is where all the controversy is today, gives effect to the Government’s reforms of the senior managers and certification regime provisions relating to rules of conduct. Although the hon. Gentleman was restrained in not reading out quotes from various different people on the controversy, I want to highlight the fact that Lord Turnbull, who was on the Parliamentary Commission on Banking Standards, said that the Bill’s proposal

“tackles directly the difficulty with establishing personal liability and the Pontius Pilate defence…In future, senior managers will have to take responsibility for what goes on in the teams for which they are responsible and for the actions of the people whom they have appointed and thereby given accreditation.”

The proposal gives that responsibility to the senior manager. He also said that

“I still fail to see why the reverse burden of proof is the only way to get people to understand that.”—[Official Report, House of Lords, 15 December 2015; Vol. 767, c. 2026.]

The Archbishop of Canterbury also served on the Commission. His representative, the Lord Bishop of Southwark, said in the other place that he was at one with the Archbishop of Canterbury

“in supporting the Government’s intentions on the reverse burden of proof…This goes against the ancient common-law principle of ‘innocent until proven guilty’…It is absolutely right that the individual is obligated to ensure that they take reasonable steps to prevent regulatory breaches in their financial institution but, as with other parts of society, it is right that the burden of proof should sit with the regulator to prove such breaches beyond reasonable doubt.”—[Official Report, House of Lords, 11 November 2015; Vol. 765, c. 2018-19.]

It is also worth reminding the Committee that we had a discussion on clause 19 about the importance of diversity in financial services. By broadening the senior managers and certification regime to include all financial services firms, we get a very consistent regime. It is important to highlight the fact that the credit union movement has welcomed the changes, as has the building society movement. Those important, diverse groups of financial institutions have welcomed the fact that the senior managers and certification regime clearly spells out where responsibility lies and what it is, and does not include a reverse burden of proof, which would make it increasingly hard, in the opinion of the Building Societies Association, to find the right people to take up senior roles in management or on the boards of those organisations.

On clause 23, which is about the rules of conduct for directors, I clarify that the Government legislated in the Financial Services (Banking Reform) Act 2013 to enable the regulators to apply the rules of conduct to all senior managers and all employees. That does not necessarily cover all non-executive directors, as some will not be senior managers and they will not normally be employees of the firm concerned. The clause addresses that issue by allowing the regulators to make rules of conduct for all directors.

Photo of Rob Marris Rob Marris Shadow Minister (Treasury) 1:15, 11 February 2016

I wonder whether the Minister has a chance now or in a moment to deal with a concern I expressed about clause 23(3)(c), which is to omit section 64B(5) of the Financial Services and Markets Act 2000, about the duty to report wrongdoing and so on.

Photo of Harriett Baldwin Harriett Baldwin The Economic Secretary to the Treasury

I fully intend to address that. The hon. Gentleman will have to bear with me, I am afraid. I am getting a little confused with all my different subsections, as he did in his remarks. I will, however, be addressing that.

On the hon. Gentleman’s earlier question about why we did not simply implement the reverse burden of proof, allow time for it to bed down and see how it worked, my colleague in the other place, Lord Bridges, has pointed out that evidence had already started to emerge that unhelpful effects were becoming apparent as firms prepared for its introduction. We were losing the essence of the purpose of the regime, which is to ensure that everyone knows and understands their responsibilities and what they are for. We therefore felt that there was no need to wait before making the changes.

Clause 23 also removes a provision that requires firms to report all known or suspected breaches of rules of conduct to the regulators. That requirement is unnecessary, because the regulators can use their existing powers to require firms to notify them of matters that they want to know about. The provision, which requires notification of all suspected, as well as confirmed, breaches of rules of conducts, is unnecessary because it goes much further than the principles we want to operate. It would be unnecessarily onerous for firms and regulators.

As the hon. Gentleman can imagine, such a provision could effectively force firms to work out a point at which the possible indications of a breach of rules of conduct might amount to a genuine suspicion. Firms would need systems to ensure that the information is captured and transmitted to the regulators, and having been notified of a suspicion, the regulators would have to decide whether to investigate and, if appropriate, consider what action to take. In many cases there would be nothing more than suspicion, so no action would be taken, but meanwhile the regulators would have to consider and prioritise all notifications received. That would be bound to limit their ability to respond appropriately in real cases, thereby imposing costs and burdens on the regulators and using up their time. Similarly, it can be argued that the suspicious activity reports used in the money laundering regime generate many false positives.

The Government thought hard about the provision and decided that removing the requirement would help to ensure that the regulatory system can work proportionately, without putting potentially costly burdens on firms that are disproportionate to any regulatory gain. Regulators will continue to be able to require firms to notify them of matters that they want to know about. The provisions introduced by the 2013 Act as section 64C of the 2000 Act remain. The requirement that firms must report disciplinary action that they take against employees will therefore remain in force. I hope that reassures the hon. Gentleman.

Amendments 31 and 32 would reinstate the reverse burden of proof for banking sector firms—the banks, building societies, credit unions and systemically important investment firms regulated by the PRA. Amendment 33 would allow the definition of the “relevant authorised persons” to remain in the Financial Services and Markets Act, which would be needed for amendments 31 and 32 to work as intended. Amendments 34 and 35 would apply the reverse burden of proof to all authorised persons across the entire industry. I will address the specific problems that each amendment would cause.

It is important that the Committee understands that the reverse burden of proof is simply not necessary to embed senior manager accountability in the senior managers and certification regime. The Parliamentary Commission on Banking Standards clearly established that the approved persons regime was wholly inadequate. We believe that the senior managers and certification regime clarifies the responsibilities of individual senior managers, which is something that any effective regulatory regime must deliver. Moreover, it will deter senior managers from taking a reckless or negligent approach to managing their responsibilities in the first place. I know that the whole Committee will agree with that. The duty of responsibility is a powerful incentive that encourages senior managers to take effective action to prevent such failings.

I have already set out how the new regime will deliver a step change in senior manager accountability. Regulators and firms will have the necessary clarity about who is responsible for what, and there will be no wriggling off the hook. Senior managers will need to take full ownership of their respective areas of responsibility. Each bank will have to submit to the regulators a responsibilities map, which will set out how responsibility for the business of the firm as a whole is allocated and minimise the risk of any responsibilities falling through the cracks between different senior managers.

The new regime places tough obligations on senior managers to act responsibly, and imposes stringent penalties if they fail to do so. For example, under the duty, a senior manager can be found guilty of misconduct by the regulator if a breach of regulation occurs in the area of the firm’s business for which they are responsible and they did not take reasonable steps to avoid the contravention. It does not matter whether they were aware of the regulatory breach. As in the example that the hon. Gentleman raised earlier, ignorance is not a defence. What matters is whether they took reasonable steps to prevent the breach. If they did not, they are guilty of misconduct. They will not be able to avoid liability simply because the email trail has gone cold.

Removing the reverse burden of proof does not change the penalties that can be applied. If found guilty of misconduct under the statutory duty of responsibility, a senior manager will face an unlimited fine or prohibition from working in the industry. As the chief executive officer of the Prudential Regulation Authority, Andrew Bailey, said, introducing the statutory duty of responsibility instead of the reverse burden of proof

“makes little difference to the substance to the new regime…This change is one of process”.

The Government are rolling out the senior managers regime to all authorised firms, including the fixed-income currency and commodities market. In the light of that extension of the regime, we must consider whether it is appropriate to apply the reverse burden of proof to every single firm in the financial services regulated sector, given how rigorous the regime is.

I sense you are getting slightly restless, Mr Brady, but I am nearing the end of my remarks. Amendments 34 and 35 would apply the reverse burden of proof to all authorised persons, the vast majority of which are small firms. It would be simply disproportionate to apply it to senior managers in all of those firms. I have spoken about the overly legalistic approach. We think it could lead to a perverse outcome, leaving senior managers in the largest firms less exposed to legal risk under the reverse burden of proof than those in small firms.

I have spoken at length about the clauses and set out why I strongly disagree with the Opposition’s amendments. I hope I have convinced everyone of the merits of my argument. I ask the Committee to oppose the amendments and accept the clauses.

Ordered, That the debate be now adjourned.—(Sarah Newton.)

Adjourned till this day at Two o’clock.