What steps they are taking regarding the procedures for referring cases for scrutiny and assessment by the Financial Services Authority.

My Lords, I am grateful for this opportunity to seek clarification of the preconditions that might justify FSA scrutiny and review, particularly following the experiences of my earlier career. On three occasions, I have placed before the FSA details of cases that seemed to me to be serious breaches of market regulatory practice and control, and on each occasion I have been refused. On two of those occasions, I have proceeded to take independent action; usually, I hasten to add, with the support of the noble Lord, Lord Dear, who now sits in your Lordships’ House and was then the head of the West Midlands Police. On each occasion, I secured custodial sentences for the company chairmen whom I was replacing; one for six years and one for two years.

The third case is even more concerning, as it represented a serious security hazard for the country. It unearthed a practice of the IRA, which targeted British listed public companies and used them to raise fictitious invoices that could be satisfied by the proceeds of criminal activity by the IRA, thus ramping up the profits of these companies, and with them their stock exchange values, for the benefit of the friends and allies of the IRA, who had been given prior warning to invest in those companies. Each of those three companies collapsed completely, with an aggregate market value of £2 billion. Unlike at the present time, there was no recession, but it was serious enough in its own terms.

I had to spend £10 million of my shareholders’ funds to pursue the first two cases. In each case, that was an unreasonable burden for the official investigating authorities to pass back to the shareholders. There should be some better willingness to pursue investigation on such cases. I got it back, because I managed to sue my auditors for £24 million—but I was lucky. As regards security, their attitude was that it was a financial issue and not one that they could cope with. So we now know at least that James Bond, whatever he is licensed for, is not licensed as an auditor. The FSA’s response was that it was a security issue, so I was caught completely between two stools, and nobody wanted to know.

As things stand from that point of view, I regret very bitterly the old days of the DTI. In the inimitable words of my noble friend Lady Gardner of Parkes, with her Australian twang, “you need a go-to person”. The DTI used to have a room full of go-to people to whom you could apply for advice and guidance on such issues. We do not have anything like that now; please give us back a go-to room.

In each of these cases, a huge amount of investors’ money was lost and there was massive, deliberate manipulation of the London stock market to the detriment of investors. Apart from those cases that I have noted, in both of which I acted as chairman, I have no interest to declare. I confirm that I have no participation in the past or present affairs of the principal concern which I wish to place before your Lordships tonight. My immediate and present concern is with another case in which the FSA has declined to become involved, which raises for me the question that if it does not become involved in such cases what is it for?

The issue here is this: Merrill Lynch and its subsidiaries organised a bid for the equity of a company named Greycoat PLC, and that bid was successful. Merrill Lynch then proceeded to suck out the equity from the company without setting aside sufficient cash to repay the company’s bonds, which ranked in priority to the equity. In order to get round the asset covenants in the bond conditions, intercompany loans were put in the Greycoat balance sheet at full value when, in fact, the money had been paid up to Merrill Lynch to repay part of the purchase loans. As the intercompany loan could, thus, never be repaid this treatment was, at best, questionable.

When the bonds matured there were, as a result of the Merrill Lynch scheme, insufficient assets to repay more than part of the bonds’ face value, in spite of the fact that such bonds had been covered over five times by real assets before the Merrill Lynch takeover. The liquidator, on the instructions of the liquidation committee, commenced legal action against the directors but, due to their lack of resources, these together with the remaining assets in the company and allowing for several years of unpaid interest since the default still leave today a loss to bondholders in excess of £35 million when the interest is included. Where is that money today? One must assume that it is in the hands of Merrill Lynch.

Many of the bonds are held by tens of thousands of smallholders through bond funds, and they will suffer loss as well as the larger holders. As a result, the only way in which compensation can be obtained from Merrill Lynch is through action by the FSA against Merrill Lynch on the grounds of, first, market abuse—leaving the quoted bonds outstanding when bidding for the equity and not putting cash aside for the redemption of the bonds before removing the equity; and, secondly, the FSA’s duty to protect investors, particular small ones, against such manipulation. I am informed that when MEPC was acquired in a similar manner to Greycoat, the purchasers ensured that funds were set aside to repay the bonds in full, before the purchasers took out cash. The FSA, which was initially sympathetic when the case was first presented to it, became progressively less interested and finally stopped answering letters and phone calls.

The FSA’s remit in relation to Greycoat must surely relate to the period when it had listed securities and covered only the company’s compliance with listing rules and whether there had been market abuse in relation to the securities. As I have said previously, such matters, whether illegal or not, fall within the FSA remit as they were in effect a device to suck resources from Greycoat via the equity in priority to repayment of the bonds which ranked ahead. Surely, that is market and regulatory abuse in any language. A responsible purchaser of Greycoat would have purchased the bonds at the same time as the equity or ensured that there were sufficient funds left in the company to meet repayment obligations.

At the time of the purchase by Merrill Lynch companies, the Greycoat bonds were covered five times by real property assets, yet the holders received nothing. Sir Callum McCarthy, then chairman of the FSA, wrote to me on 20 December 2007 defending the FSA’s position on the grounds that Greycoat had not been a listed company at the time of the alleged offence. I believe his letter contained a crucial error, in that the Greycoat bonds in question were still quoted until 1 October 2003, and payments up to Merrill Lynch companies, which may well have been illegal, were made from September 1999 to May 2003, so they fall directly under the FSA by its own definition. That was during a period when the present FSA’s chairman, the noble Lord, Lord Turner of Ecchinswell, was vice-chairman of Merrill Lynch Europe. That does not cause me any concern, and I am sure that it will not concern the noble Lord, Lord Turner, because we have a reputation in this country of very skilled and knowledgeable people rotating between senior positions, and as such they take with them their integrity, commitment and experience. I know that the noble Lord, in his avowed intention to review the terms of the FSA at this moment, would not be in any way influenced by his past association and would ring-fence himself from any investigation that took place.

Callum McCarthy replied to me further on 12 March 2008, stating that the FSA’s remit in relation to Greycoat is limited to its compliance with the listing rules and whether market abuse has been committed in relation to the securities. I can see no reason to doubt that the purchase of the equity in the market, and then the denuding of the company of its assets to the detriment of the quoted bonds left outstanding, is an appalling case of market abuse judged by Callum McCarthy’s own criteria, in that Greycoat remained a listed vehicle throughout the key period.

This issue is not less outrageous for being a fairly simple matter. Legally, the bondholders ranked ahead of the equity and were protected by the assets. However, over the period, those assets changed from being tangible properties to being an intercompany loan, given a parent that itself had no assets. Subsequently, after a majority of the assets had been sucked out of the company, Greycoat defaulted on its bonds. The intercompany loans proved worthless, because the parent had used those funds to repay the initial loan to Merrill Lynch together with a substantial profit, which is presumably where the funds remain today.

By Callum McCarthy’s own definition, I submit that the FSA rules were severely breached by Merrill Lynch as, I also contend, was the case in examples I quoted earlier, which were refused. I now call on Her Majesty's Government to give clear guidance as to the due process and preconditions required to trigger a proper FSA scrutiny and review in such cases. It could hardly look for a better case on which to start than the one of Merrill Lynch and Greycoat.

Given the present state of our national economy, it is now time to seek a clear signal that can be shown to the market in general as to what an FSA is for and what it will do to regulate matters in future. I suggest that a good starting point would be to demonstrate this by initiating the long-overdue scrutiny of the Greycoat-Merrill Lynch bondholder scandal, and initiating the required legal process to obtain compensation for the bondholders from the Merrill Lynch companies.

This is the first time that I have ever introduced a quick, short debate. I had assumed that I had a minute at the end in which to wind up. However, as I see I do not, I shall give my last minute now, if I may. I thank all noble Lords who intend to speak in this debate this evening. I hope that we will now receive prompt consideration by Her Majesty's Government of the outstanding issues regarding clarification of FSA reference terms and particularly moving for the FSA to initiate the appropriate legal process for the Greycoat-Merrill Lynch case.

My Lords, I congratulate the noble Lord, Lord James of Blackheath, on initiating this highly topical debate. I found the specific experiences that he described most illuminating. Regulation of the financial services sector must become much more effective in the future, as I am sure the noble Lord, Lord James, will agree. The current crisis has clearly revealed the weaknesses shared by the Treasury, the Bank of England and the FSA to monitor and supervise the activities of the City of London. But, as I have remarked previously in the House, that does not absolve in the slightest degree those bankers and other financiers from their responsibility in bringing about the crisis in the first place—not that they, for their part, seem to recognise their culpability and publicly fully and unequivocally apologise for that. In that regard, it is good to see in today’s Evening Standard that Mr Stephen Green, chairman of HSBC, has apologised for the unwarranted, out-of-control bonus system that has occurred in the City.

The noble Lord, Lord Turner, the chairman of the FSA, trailed last week that there is to be a “regulation revolution” in how the authority will work in future. He was also frank enough to admit that he would not have predicted the crisis in which we are all now engulfed, and that the FSA's past record was unsatisfactory. We eagerly await the imminent publication of the FSA's plan for its future mode of operation.

As has been remarked by Robert Peston and other authoritative commentators, the future UK economy will be very different from that which obtained during the previous three decades. Privatisation, and the self-centred greed culture that was its inevitable concomitant, dictated public policy during that era. All that, perforce, will now have to change given the unprecedented increase in state intervention and investment of public money deemed necessary to prop up those institutions previously regarded as the quintessence of capitalism. How times are changing. As I have remarked before in your Lordships' House, it gives a quite different complexion to the term “private/public partnership”. In their original manifestation, PFIs were a rip-off in terms both of public accountability and value for money; now, the new types of PFI—the bail-outs to the banks and other industries—will be a total drain on the taxpayer.

It is clear from the continuing arrogance and stubbornness of the bankers themselves and other financiers in hedge funds and the like that there will have to be much closer regulation by way of scrutiny and assessment; the public's universal anger demands no less. It is imperative that the FSA and other regulatory bodies take the strongest action if public outrage is to be contained. Two rigorous policies must now be pursued. First, there must be a step increase in the criminal prosecution of those directors and senior managers whose conduct has flouted the provisions of the Companies Act 2006. My Oral Question last week to the noble Lord, Lord Myners, sought to elicit how many such prosecutions are in train and I await his promised response. In yesterday's Observer, Andrew Rawnsley's column was entitled,

“These bankers are lucky that they are not going to jail”.

Along with Sir Ken Macdonald, the former DPP, I fervently hope that the guilty ones will soon be sentenced to serve long terms of incarceration. The FSA, the serious fraud squad and the Serious Fraud Office have not shown the zeal that is needed to root out the perpetrators. The authorities in the USA, France and Ireland have shown much greater energy in this regard. Will the Minister say whether the relevant UK agencies are showing enough determination? I echo the sentiments expressed by the noble Lord, Lord James, in that regard.

Secondly, the FSA must be vigorous in policing excessive remuneration packages by enforcing its code of practice. Since entering your Lordships' House in 1997, I, together with the noble Lord, Lord Lea of Crondall, and the late Lord Dormand of Easington, have regularly asked Questions about “fat cat” pay. Until very recently, there were no critics from the Tory Benches; they kept very quiet for fear of upsetting their financial backers. Successive Ministers—at least five, I recall—parroted the same complacent reply that it was up to shareholders to deal with such enormities. It was rather worrying that in answer to a question today on bonus payments for the directors of Network Rail, the Transport Minister, the noble Lord, Lord Adonis, said that it was not for him to interfere in those bonuses, even though Network Rail is a wholly government-owned body. I was going to congratulate the noble Lord, Lord Myners, on being the first Minister to condemn such rewards until it was reported over the weekend that the thinking behind his rhetoric had not influenced his initial endorsement of Sir Fred Goodwin's pension package.

It is not an easy task for the FSA and other regulators to devise smart policies that achieve effective supervision and policing of the recidivists in the City while at the same time avoiding the over-reaction of a Sarbanes-Oxley type that occurred in the USA following the Enron debacle. We must hope that the noble Lord, Lord Turner, and his colleagues are up to that formidable task.

My Lords, I do not intend to follow the remarks of my noble friend Lord James or the noble Lord, Lord Smith of Clifton. I have never had any reason to initiate procedures aiming to involve the FSA in following up a problem. Indeed, I rather think that I never would have done because my indirect impression is that the FSA is of little account. It has not managed to establish itself with a personality and a track record and has made a bad start to its seven years’ existence.

What steps are being taken? A major management change has occurred. The new chairman, the noble Lord, Lord Turner, has been in place for not quite six months and the new chief executive, Hector Sants, has been in place for some 18 months. As your Lordships will know, last week they appeared before the Treasury Select Committee down the other end of the Corridor. As I think has already been said, the chairman promised fundamental change amounting to a revolution. Whenever I hear about revolutions, my mind turns to Edmund Burke and I become suspicious. Like him, I do not really believe in revolutions. Institutions have a life of their own. They make a start, which may be a good or bad one, but, above all they operate—as does the FSA—under a long and complicated Act of Parliament. Although we have had much discussion in your Lordships' House recently of financial stability, interestingly it is not mentioned in the Act which sets out the FSA’s four objectives: market confidence; public awareness; protection of consumers; and reduction in crime. They are expanded in the next section in what I can only describe as very imprecise language. Indeed, it is a feature of the FSA’s language that it is in general imprecise and even woolly.

I think that it is fair to compare a regulator with a policeman. The Act tempted the FSA to become Dixon of Dock Green and not the CID, and the FSA fell for that temptation. But it gets worse than that. The objectives are qualified. The FSA is to be careful because others running institutions also have responsibilities. It is to be proportionate and it is to work out whether any of the costs incurred as a result of its regulation exceed the benefits. It is to be wary about competition. It is to encourage competition, not to reduce it, and to remember that London is very important internationally. Finally, it is to encourage innovation. Of course, we all know where innovation has led us. You can imagine the dialogue between the FSA and one of the larger financial institutions in which the FSA makes its points and the larger institution says, “But I thought you were supposed to be the gentlemen of the light touch and to keep your hands off us”. I think that the FSA accepted that and became PC Plod interested in relatively small fines and not Inspector Morse. It is no wonder that the FSA says:

“There are many situations where our statutory objectives are potentially at odds with each other”.

That is a bureaucratic euphemism for saying “We have been given a muddle and we don’t quite know how to solve it”.

Last week, the noble Lord, Lord Turner, was for driving through the middle of these problems with the “revolution” and the “fundamental change”. At the heart of what he was saying was that there should be less process and less bureaucracy. Or was he really saying that in addition to the process and the bureaucracy there was a need to have an understanding of the system as a whole, a detailed evaluation of the position of large financial institutions and a willingness to reach judgments about impending risks and the likely pattern of events? If he is to be as bold as that, he does not have a particularly good inheritance. What he inherits are 2,500 inward-looking people who have been trained to see the trees rather than the wood. A massive cultural shift would be needed to achieve what the noble Lord, Lord Turner, promised the Select Committee last week. Of course, many staff would find that massive cultural change very uncomfortable and quite possibly unacceptable.

In the discussion in the Treasury Committee as to whether or not the evidence given by the chairman and the chief executive meant that the FSA was or was not fit for purpose, the chief executive almost wondered aloud as to whether his chairman’s vision was within the statutory remit as it existed in the 2000 Act. That is a very good question. The Act is not fit for purpose if the view of noble Lord, Lord Turner, of the FSA role in the tripartite structure is correct. Of course he may try it. Who would object if he tried it anyway? However, the question would then be: how much progress will he make? The FSA’s outstanding need is the interpretation of the highest order of market intelligence. That is unlikely to be available within the FSA. Surely, therefore, it would be a better bet not to increase numbers, as is being suggested, but to spend the money on high-level advice from those closer to the market and to the way in which the operators in the market behave, particularly when under pressure.

The FSA may be able to raise its game. Given its first seven years, it will not do so from within. Its chairman would do better to streamline the organisation and to look for the help that he will need from wherever he can find it.

My Lords, this is an interesting but in some ways slightly awkward debate in the way that it was introduced. I heard the noble Lord, Lord James, say that unfortunately he did not have time to answer, but, as we do not have many speakers, if we had some time at the end, I encourage the Minister to allow the noble Lord, Lord James, to perhaps spend a minute or two winding up. His speech raised some interesting points, but I did not quite get the drift—perhaps I was not concentrating properly—of his suggestion that the regulation or responsibilities of the FSA should change.

I declare an interest as a pension-fund investment manager for the past 32 years, and my firm has been regulated by the FSA since its inception.

If I understood the general proposition of the noble Lord, Lord James, in so far as he made one, he suggested that some responsibility should be removed from the FSA. I was not entirely sure to whom he was suggesting it should be given. If I am right, we on these Benches would not agree with that. Certainly, there have been many failures. We do not believe that these matters have been investigated nearly rigorously enough, but taking that responsibility away would not solve anything. There is a need for much more effective co-operation between the FSA, the other authorities and the police, and a much more vigorous and rigorous attitude to enforcement by the FSA.

On the detailed cases that the noble Lord raised, although I have some idea, it would be helpful to have the names of those companies and events so that we can be fully aware of the matter and look at it—in particular, the names of the target companies in which the IRA was involved. I imagine that one of them might have been Wace; none the less, it would be useful to have a bit more detail, so that we can learn from it.

The noble Lord talked about the Greycoat case in some detail; I know a bit about that as well and it is not a happy story. The noble Lord makes a powerful case that that should be looked at again. I was also aware that the noble Lord, Lord Turner, worked for Merrill Lynch for part of that time and, like him, I am sure that the noble Lord will distance himself from it, but I ask the noble Lord, Lord Myners, if he will bring the things that are being said tonight to the FSA’s attention. I hope that he will undertake to find out from the FSA who is looking into these matters, which would be helpful, since that clearly would not be appropriate for the noble Lord, Lord Turner. I hope that we will have some response. The way that the bondholders, rather like the minority shareholders, were treated requires further examination. If, as the noble Lord, Lord James, said, the FSA’s trail ran cold and the authority did not seem very interested, it was probably taking a very narrow view of its responsibilities.

This is not a general debate on the FSA, but it is very topical, and the way that the FSA carries out its responsibilities was discussed in an interesting and frank way by the noble Lord, Lord Turner, when he was before the Treasury Select Committee last week. What he said, although significant, was somewhat overshadowed by the furore about Sir Fred Goodwin’s pension, which I do not intend to discuss tonight. It is relevant to the debate that the noble Lord said to the Select Committee of Gordon Brown’s watch at the Treasury:

“‘All the pressures on the FSA was not to say: why aren’t you looking at these business models, but why are you being so heavy and intrusive. Can’t you make regulation a bit more light touch? We were supervising people like HBOS within a particular philosophy of the way you do regulation which I think, in retrospect was wrong’”.

That was a quote from the Independent on Sunday. The article continues:

“His views, which no one in Government has had the brass neck to contest, vindicate Paul Moore the HBOS whistleblower, and support the thesis that history will probably conclude that the trail of easy credit and light-touch regulation responsible for the present crisis leads to Gordon Brown’s front door”.

I agree entirely with that fair statement on the legacy of light-touch regulation and the failure over the past few years.

Like, I am sure, the noble Viscount, Lord Eccles, I have also looked at the Act regarding the way that the FSA in my view is not properly complying with paragraph 10 of Schedule 1 to the Financial Services and Markets Act 2000, whereby it is meant to make an annual report to the Treasury on the extent to which, in its opinion, the regulatory objectives have been met. For the first few years, the FSA’s annual reports complied with those requirements, but they have not in recent years. I have been helpfully briefed by an ex-FSA employee who is, in fact, a former member of the Treasury’s original Bill team which, as he puts it,

“is why I am so familiar with the legislation”.

He points out that there is a clear dereliction of the FSA’s statutory duty to give such a report. I ask the noble Lord, Lord Myners, why it has not done so. The noble Lord has not been here for all that time, so perhaps he can look into why the Treasury has not picked it up, if he is not aware of it. The FSA’s public documents—the annual report, business plan and website—even in 2009 almost redefine the aims. The website states that the FSA is a statutory body set up under the Act,

“which sets out four statutory objectives”.

However, the FSA does not say what those objectives are—the noble Lord already listed them—and sets out its aims under three broad headings. I fear that we are almost in a situation whereby the FSA has decided that it knows better than Parliament what its objectives should be and has redefined them in a much vaguer way. In particular, they are: the need for market confidence and public awareness; the protection of consumers; and, specifically, the reduction of financial crime. Obviously, those objectives are very specific and very carefully worked out by Parliament, and they are very relevant to the way in which the noble Lord introduced the debate.

The noble Lord, Lord James, raised one or two interesting examples. I have stood back and thought over the past few years about where we have got to. I do not necessarily think that the noble Lord, Lord Turner, would agree with me, but I should be very interested to know the view of the noble Lord, Lord Myners, who has been actively involved in these matters as a participant and has regulated much more, even more so than as part of his responsibilities over the past few weeks. My view is that the Financial Services Authority has spent far too much time over the past few years making little people tick little boxes. It should have focused much more energy on putting big questions to the big fish and making them give proper answers or change their ways.

My Lords, I am grateful to my noble friend Lord James for introducing this debate. The role of the FSA needs examining, especially in the present turbulent economic climate, and the at times disturbing contribution by my noble friend will be a most useful step in this process.

The more one examines what the FSA does, the more one asks what its real purpose is—or, as my noble friend Lord James put it, what the FSA is for—and how it has benefited the country. How does the Minister, who is an experienced businessman capable of distinguishing success from failure, measure success by the FSA? Can he tell us what the purpose of the FSA is, whether it has succeeded, and what changes he will be discussing with the noble Lord, Lord Turner?

Is the only purpose of the FSA to examine the minutiae of how businesses in the financial services are administered? If so, why is such a huge number of staff needed? At 31 March 2008, the FSA had 2,665 employees. At that time, the Treasury had a mere 1,451 full-time staff. The FSA needs nearly double the number of employees to monitor the City as the Treasury needs to run the finances of the entire country, and I see from the press that the FSA is looking to employ more people. What on earth do they all do? Or is the FSA responsible for drawing attention to banks taking potentially dangerous positions on their own account or through their loan portfolios? If so, given the dismal debacle of recent years, has the system put in place by the Prime Minister been a failure? In general terms, can the Minister tell us the criteria that he sets to judge success when he scrutinises the performance of the FSA? How often, indeed, does he meet the FSA to review progress?

When the Act which created the FSA went through Parliament, my noble friend Lord Saatchi pointed out that the FSA was being made policeman, judge, jury and executioner. Furthermore, the FSA has immunity from damages. As a result of my noble friend’s intervention, at least an appeal procedure was introduced, but this is a cumbersome process and there is little incentive to go through with it, not only on the ground of cost but due to the danger of creating a powerful enemy which could, with ease, destroy a career.

With the benefit of hindsight, does the Minister agree that the result is an organisation with too much power and too little accountability, and, as so often with organisations with these characteristics, the tendency is to avoid difficult problems and go for easy solutions.

The FSA has, in its present existence, issued fines of more than £107 million. A number of these fines were for administrative errors which the culprits themselves had reported to the FSA and where there were no findings of deliberately wrongful conduct or systems failure. Can the noble Lord tell us whether the £14 million of bonuses paid to FSA employees related to fines collected? If so, can he explain how justice can be thought to be fair if those responsible for administering it, like some team of inner-city wheel-clampers, personally benefit from their actions? Goodness knows what the cost to the public has been of the many bureaucratic rules imposed on the industry by the FSA, some of which defy common sense and are all too easy to circumvent by those who wish to do so. Those rules were referred to by the noble Lord, Lord Oakeshott.

However, the FSA also needs to be looked at for what it has not done. Examples were given to us today by my noble friend Lord James of where the FSA refused to take action. Surely these cases would come under the statutory objective of reducing financial crime. More importantly, the FSA appears to have ignored the trouble being stored up by banks overgearing, with flaky finance, to buy dubious assets. It is not rocket science to see that this was a recipe for trouble. There were enough commentators pointing out the dangers—not least the Bank of England, which gave a number of warnings. There is little point in an organisation such as the FSA if it is not able to work this sort of thing out for itself. The quality of assets may have been a challenge but overgearing and excessive reliance on short-term and volatile finance should have been easy to spot.

Certainly the former and the present Prime Ministers asked for banks to be treated with a light touch, but there is a difference between a light touch and turning a blind eye to danger signals. Can the noble Lord categorically deny reports in the media that the Prime Minister suggested the employment of Sir James Crosby, who, when at HBOS, ignored warnings of risks from his own senior staff on the basis that the allegations had been investigated—but by whom? They had been investigated by the very auditors who had given the situation a clean bill of health in the first place. Does not auditing your own audit pose a conflict of interest?

The Prime Minister and his loyal Deputy Leader now say that the pension of Sir Fred Goodwin is unacceptable. His pension may be indefensible but it is not illegal and was agreed by the Treasury. Can the Minister confirm that he personally discussed and agreed to the severance package? Since 1689, this country has been subject to the rule of law. Now Miss Harman, one of Her Majesty’s Executive, says that, although the pension was lawful under the law established by Parliament and approved by government, she must now “step in” to block it in what she calls a “court of public opinion”. Since when were hue and cry and people’s courts part of British justice? Do we exist under the rule of law or the rule of the mob? Sir Fred deserves censure, but the storm being whipped up by Labour serves only the cynical purpose of diverting attention from the culpable policy failures of Ministers.

I ask the noble Lord to tell the House whether it was the duty of the FSA to warn of the impending collapse of our banks—one of the most catastrophic failures of recent times. In pursuit of its statutory objective of maintaining confidence in the financial system, what role did the FSA have in promoting the merger of what Mr Daniels told the Treasury Select Committee in another place was a perfectly viable bank, Lloyds TSB, and the basket case, HBOS?

Did the Prime Minister take advice from the FSA at any stage in his talks with Sir Victor Blank? Did anyone anywhere in the FSA warn the Government at any stage that for Lloyds TSB to take over HBOS was to condemn hundreds of thousands of small shareholders, many of them pensioners, to lose both capital and income? If not, does the noble Lord, Lord Myners, agree that it would be wise to scrutinise that failure by the FSA?

I ask the noble Lord, Lord Myners, specific questions about the deal between the Government and the Royal Bank of Scotland. Can he confirm whether he or his officials were in touch with either the Royal Bank of Scotland or Sir Fred Goodwin about the terms on which Sir Fred Goodwin left the bank's service? Were the Chancellor of the Exchequer and the Prime Minister informed of those discussions, and was their approval sought at any stage? Does he agree with his right honourable friend Ms Harman that for those involved in financial failures to receive pensions is unacceptable? If so, does that doctrine also apply to the FSA, Ministers and other public officials involved in supervising the failures of the financial system?

Will the Minister answer those points as well as the troubling questions put by my noble friend Lord James? If he cannot answer them now, will he undertake to write to me with the answers?

My Lords, I am grateful to the noble Lord, Lord Howard of Rising, for the last sentence of his speech because, otherwise, I was fearful about how I could possible answer what must have been about 40 questions. However, I shall seek to answer the more important ones, but not in a way that detracts from the important message and issues raised by the noble Lord, Lord James.

Before I proceed, I would like to explain briefly the different roles of Government and the FSA and remind noble Lords of the FSA’s independence, which prevents me discussing the specifics of the case raised by the noble Lord, Lord James. The Government are responsible for the legal and institutional framework, as well as for setting the boundaries of FSA regulation. We are also responsible for appointing FSA board members in accordance with public appointment processes, those appointment processes applying to the appointment of the chairman and vice-chairman of the FSA.

The Financial Services and Markets Act 2000 gives the FSA four objectives, one of which is to reduce financial crime. In meeting its objectives, the independence of the FSA is vital to its role as supervisor of financial services firms and as an investigating and enforcing authority. Its credibility, authority and value to consumers would be undermined if it were possible for the Government to intervene in its decision-making processes. It is for that reason that I cannot comment in detail on the case under discussion or direct the FSA to reconsider the case.

The noble Lord, Lord James, asked about the FSA’s decision-making process around taking action on the basis of information that it receives. Like other bodies with investigation and enforcement powers, the FSA needs to have both independence and discretion in deciding which cases to pursue and which of its tools to use. Noble Lords will appreciate that the FSA receives many potential cases for consideration. It takes a risk-based approach in selecting which cases to pursue, considering factors such as consumer detriment; evidence of financial crime; indications of a more widespread problem; and the risk of undermining public confidence. If members of the public feel that their concerns have not been adequately addressed, they have access to the FSA complaints scheme.

It may be worth mentioning that the Financial Services and Markets Act restricts the FSA’s ability to disclose information that it has received from firms, and its freedom to criticise firms, unless it has followed due process. It may be frustrating to complainants, but in the interest of fairness and to reduce the risk of jeopardising any further action, the FSA does not normally disclose the fact that an investigation is ongoing. I hope that the background that I have set out is helpful in explaining how the FSA, as an independent regulator, operates in considering cases brought to its attention.

If I may, I shall make two general observations on the issues raised by the noble Lord, Lord James. The first is that all authorities investigating cases face a choice in deciding which cases to pursue. For example, does the evidence presented suggest that there is a potential case of rule-breaking or even criminal activity? In making that judgment, any investigating authority will do its best to make a proper assessment based on the information that it has been given. That assessment may change if additional information becomes available. Hence the importance of the FSA keeping a record of the cases that it has assessed.

The second observation is more wide-ranging and concerns whether the FSA’s powers are appropriate and whether, for example, the scope of market abuse is widely enough defined. As part of an ongoing review of the regulatory framework, the latter point is one that my officials will be considering, along with the FSA, in the upcoming European Commission review of the market abuse directive from which the UK regime mainly derives. The noble Lord, Lord James, may want to offer his experience in that wider debate during the Commission consultation that is expected to start later this month. I would be happy to alert him to the consultation once it has been published, if he would find that helpful.

I turn to points made by other contributors. The noble Lord, Lord Smith of Clifton, made a cogent and coherent series of observations about financial regulation and behaviour in financial markets, which are consistent with his many comments on those issues to this House. I thoroughly agree with him that there must be a moral basis for people’s behaviour in industries and activities that depend on trust. The noble Lord, Lord Turner of Ecchinswell, the chairman of the Financial Services Authority, will produce his report on 18 March on his conclusions on the FSA and the changes that need to be made. That will address a number of points also made by the noble Lord, Lord Howard of Rising.

From my perspective, I think that there needs to be a zeal and determination in the pursuit of those who have done wrong. There also needs to be a strong set of requirements about behaviour and conduct that are deserving of trust. The issues of remuneration that have been referred to will be at the heart of some of the recommendations made by the noble Lord, Lord Turner. Supervision and the behaviour of individuals must always be the first port of call in stopping poor judgment and bad behaviour. There are limitations to what regulation can achieve, as we have seen in other jurisdictions, which do not operate under our FSMA but under their own particular regulatory processes, which have also been found to have shortcomings in the recent global crisis.

The noble Lords, Lord Smith and Lord Howard, raised questions about Sir Fred Goodwin. I am happy to have the opportunity of saying something on the matter. Noble Lords will remember that I was involved over the weekend of 10, 11 and 12 October in decisions relating to the capitalisation, funding and liquidity of Britain’s banks—discussions which, if they had not been successfully completed, would have made it difficult for us to have seen markets open on the Monday morning with the confidence that emerged as a result of the decisions made.

I understand that the board of the Royal Bank of Scotland agreed with “regret”, in its words, that Sir Fred Goodwin should leave on Friday 10 October. I did not meet with Sir Tom McKillop and the senior independent director, Mr Bob Scott, until the evening of Saturday 11 October. In my meetings with the senior independent director and the chairman of both the Royal Bank of Scotland and HBOS, I was accompanied by a partner at Slaughter and May acting on behalf of the Treasury. In those meetings, I used a standard script. I said that in exchange for support, we would expect there to be no rewards for failure. We would expect the boards to minimise the cost of any severance that would arise and we would expect those departing from the banks to mitigate to the maximum possible amount the cost of their departure.

I also added that I respected legal commitments and the rule of law—here I addressed the point made by the noble Lord, Lord Howard of Rising—and that I would not expect any company to break a legal and contractual agreement to which it was committed. I was assured that the pension arrangement for Sir Fred Goodwin reflected 30 years of service and no mention was made to me of discretion in that respect. No sum was mentioned, although Mr Bob Scott told me that Sir Fred’s pension would be a large sum. However, that would come as no surprise to Members of this House, who have studied the large pension rights that self-appointed chief executives and leaders of our financial institutions have negotiated for themselves with their boards of directors. I believe that I was only advised of the sum of the pension a few days later. I did not seek approval from the Prime Minister or the Chancellor of the Exchequer because I was not being asked to give approval. To pick up the term used by the noble Lord, Lord Smith, I did not endorse the pension of Sir Fred Goodwin; indeed, I have taken action to persuade Sir Fred Goodwin, as a matter of honour and decency, taking into account the huge losses that that bank has now reported and the substantial dependence it has placed on public funds, to make a significant gesture in terms of forgoing his pension or a major part of it. However, that must be a matter for Sir Fred Goodwin.

I repeat that I do not believe that it would be incumbent on a Minister to encourage directors of the board of any company, bank or any other industrial enterprise, to seek to break a legal agreement. That said, UK Financial Investments, the body that holds the investment in Lloyds and RBS, has written to Sir Philip Hampton, the new chairman of the Royal Bank of Scotland, seeking a full explanation of the decision-making process and, in particular, ensuring that all directors of the Royal Bank of Scotland were fully informed. But for the avoidance of doubt, I did not approve Sir Fred’s pension, I was shown no papers, I was given no advice because no decision was sought from me in respect of his pension. I am grateful to the noble Lords, Lord Smith and Lord Howard, for providing me with an opportunity to set the record straight that I did not expect to receive this evening, but at which I have leapt with relish and alacrity.

My Lords, I am grateful to the noble Lord for giving way. I am grateful also for the full explanation he has given, which I think I fully accept. I am sorry that I implied that he had endorsed the pension arrangements of Sir Fred Goodwin. I thank him very much for his explanation.

My Lords, I thank the noble Lord for that. His use of terminology was entirely correct if he had been guided by the media. I have welcomed the opportunity of setting the record straight—as, indeed, will also occur at various meetings in the near future of the Treasury Select Committee.

My Lords, it has obviously been a very difficult few days for the Minister, and it reflects well on him that he took the trouble to set that out in that way. Certainly from this Front Bench I am happy to accept that explanation. He did, though, say that it is not for a Minister to seek to break a legal agreement of this kind. So could he please explain why the Leader of the House of Commons sought to do that yesterday on television, and had she consulted either the Chancellor or the Prime Minister before she did so?

My Lords, I am not in a position to know whether there was any consultation beforehand; nor do I believe that the Leader of the other place said that there should be a breach of the law. I can only repeat my own position, which I made as a very clear statement to the noble Lord, Lord Stevenson, and Sir Tom McKillop in the meetings that I had with them on that long evening of Saturday 11 October.

I have gone on for rather longer than I should have done but I appreciate noble Lords’ indulgence in that respect. I thank the noble Viscount, Lord Eccles, for his wise advice on the scale of the challenge that the noble Lord, Lord Turner, faces, and no doubt the noble Lord, Lord Turner, will take that into account. The Financial Services and Markets Act does give the FSA a financial stability objective in respect of its need to maintain market confidence. On the comments of the noble Lord, Lord Oakeshott of Seagrove Bay, I am advised by the Table that the noble Lord, Lord James of Blackheath, is not able to make a closing comment after I have spoken, but I would be very happy to give way should he wish me to do so. Would that be helpful?

My Lords, that is an invitation that I cannot refuse. I note the noble Lord’s reasons why he cannot give guidance to the FSA on any action which it might now take in the case that I highlighted to it. However, I hope that the noble Lord, Lord Turner, has heard enough this evening to decide that he himself would like to give consideration to the matter, and to feel that the matter is worthy of the FSA's further review.

My Lords, I am aware that the noble Lord, Lord James, has already written to the noble Lord, Lord Turner. I will certainly be drawing the attention of the noble Lord, Lord Turner, to Hansard. I will, to use a phrase used by the noble Lord, Lord Oakeshott, ask him to revisit and consider whether in the past the FSA may have taken too narrow a view of the case to which the noble Lord, Lord James, has drawn the attention of the House. However, I must leave that in the hands of the FSA.

I think that I have answered a fair number of the questions from the noble Lord, Lord Howard of Rising, but I am conscious of the fact that we are about to be time-expired. I can only say in respect of a couple of other points that the FSA was not involved in promoting the HBOS-Lloyds TSB merger. We must remember that those were transactions endorsed by the shareholders and recommended by the board of directors. I have already dealt with the appointment of Sir James Crosby. I would be horrified if bonuses paid at the FSA were in any way related to fines. Wheel-clamping mentality is not the way forward. On the issue of employee numbers, I believe that this is a matter that the noble Lord, Lord Turner, will no doubt consider. However, noble Lords will perhaps reflect on the fact that the cost of any shortcomings in regulation is very expensive. Therefore, we have to weigh resource against risk.

In closing, I congratulate the noble Lord, Lord James, on an extremely good speech raising an important issue and stimulating a rather interesting debate, which I myself have partly hijacked to get certain things off my chest about Sir Fred Goodwin's pension.