My Lords, the Bill is a central part of the Government’s response to the financial crisis of 2007-09. Noble Lords will recall the terrible events of those years. Britain saw the first bank run in over a century. Depositors in Northern Rock queued in the streets to take their money out. The biggest bank in the world, the Royal Bank of Scotland, teetered on the brink. RBS and HBOS had to be bailed out and the Government had to inject £65 billion of taxpayers’ money to save the banking system from collapse.
Huge though this direct cost to the taxpayer was, the full costs of the crisis were still greater. Gross domestic product fell, peak to trough, by 7.2% as the supply of credit dried up and tight credit continues to be a problem for many businesses and families. This is why the Government have had to intervene to support credit supply through measures such as Funding for Lending, Help to Buy and the Business Finance Partnership. These will help to address the consequences of the crisis. To tackle its causes and to prevent a repeat, the Government are taking forward a programme of reform built on three pillars.
The first pillar is reform of financial regulation. This was achieved through the Financial Services Act 2012, which received Royal Assent last December and came into force this spring. The second pillar is structural reform of the banking industry. That is the focus of the measures in the Bill before us today. The third pillar is reform of banking standards and culture. The Parliamentary Commission on Banking Standards—the PCBS; I am afraid there will be quite a few abbreviations today—last month made important recommendations in this area. The Government have accepted the PCBS’s principal recommendations and where those require primary legislation they will be incorporated into this Bill through government amendments at Committee stage.
Let me first turn to the measures already in the Bill. The bulk of these implement key recommendations of the Independent Commission on Banking, or ICB, chaired by Sir John Vickers. As noble Lords will know, the Vickers commission was established in 2010 to consider both structural and non-structural reforms to the banking sector. It reported in September 2011 and recommended, first, the ring-fencing of retail from investment banking. The ICB also proposed measures to improve banks’ ability to absorb losses and to ensure that losses can be made to fall on banks’ creditors and not the taxpayer if a bank fails. These measures included higher capital requirements for ring-fenced banks, a bail-in power and preference in insolvency for bank depositors over other creditors. The Government accepted virtually all the ICB’s recommendations.
This Bill will implement the ring-fence as recommended by the ICB. It defines core activities—that is, taking deposits—which must be inside the ring-fence, and it defines excluded activities—that is, trading in investments as principal—which must be outside the ring-fence. As the ICB recommended, activities that are neither core nor excluded may be either in or out. The Bill makes safeguarding the continuity of services connected to deposit-taking a part of the Prudential Regulation Authority’s general objective. It requires the PRA to make rules to ensure the independence of ring-fenced banks from their wider corporate groups. In response to the recommendations of the PCBS, we have amended the Bill in the Commons to electrify the ring-fence. I will come on to the details of that shortly.
The Bill also makes deposits protected by the Financial Services Compensation Scheme preferential debts in the event of insolvency. This will increase the FSCS’s expected recovery in the event that a bank fails and the FSCS has to pay out, reducing the risk of contagion and protecting the taxpayer. The ICB also recommended that if a bank fails the authorities should have the power to bail-in creditors, imposing losses on them rather than letting those losses fall on the taxpayer. The forthcoming EU bank recovery and resolution directive should deliver a bail-in tool at European level and a requirement for national authorities to ensure that their banks have in issue a minimum amount of credibly bail-inable liabilities, necessary to ensure bail-in is effective and credible. This Bill gives the Treasury power to set the framework within which the PRA imposes requirements on banks to have in issue minimum amounts of bail-inable debt.
In addition to the ICB’s recommendations, the Bill also reforms the governance of the Financial Services Compensation Scheme manager to ensure proper oversight and accountability for its use of public funds. It extends to subsidiaries of the Bank of England exemptions from Companies Act accounting requirements given to the Bank itself where the Bank considers that necessary for reasons of financial stability. It also allows for the costs of the Treasury’s participation in international organisations dealing with financial stability to be recovered from the industry.
Before reaching this House, the Bill already received very substantial scrutiny. The Government published the Bill in draft last October for pre-legislative scrutiny by the PCBS, which of course included several Members of this House. In light of the PCBS’s report on the draft Bill, the Government made a number of changes both before the Bill was introduced to Parliament and while it was before the House of Commons. In the Commons, the Bill was scrutinised line by line over the course of eight Committee sittings and had two days of debate on Report. For a Bill of just 35 pages, that was intensive, detailed scrutiny.
Throughout this process the Government have consistently adopted a constructive approach. We have welcomed suggestions from all quarters on how the Bill might be improved. Where we found those suggestions valuable, we have amended the Bill accordingly. For example, in pre-legislative scrutiny the PCBS argued that the regulator’s objective for ring-fencing could be made clearer. We accepted this suggestion and amended the Bill before its introduction and again on Report in the Commons. The PCBS also called for specific requirements for ring-fenced bank independence to be put in the Bill. We agreed and amended the Bill in a way that the PCBS acknowledged arguably went even further than it had suggested. The PCBS proposed that the PRA be required to report on ring-fenced banks’ sale of derivatives to clients. We will amend the Bill to this effect while it is before this House.
On the procedures for exercising delegated powers, the Government not only accepted recommendations made by the House of Lords Delegated Powers Committee, but also accepted a further amendment tabled by the Opposition in Committee in the Commons.
Perhaps most significantly, as I alluded to earlier, in response to the recommendation of the PCBS, the Government amended the Bill in the Commons to provide for a power for the full separation of an individual banking group. This is what the PCBS termed “electrifying” the ring-fence. The power we have added to the Bill will substantially reinforce the ring-fence. It will allow the regulator to require a banking group to separate completely its retail from its wholesale banking operations. This power can be exercised if the regulator believes that a ring-fenced bank is insufficiently independent of the rest of its group, or that the group’s conduct might in some other way threaten the regulator’s ability to safeguard the continuity of core retail banking services. As the PCBS recommended, given the momentous consequences for a banking group of a requirement to separate, the regulator can only use this power with the consent of the Treasury.
As noble Lords will know, when this power was debated in the Commons, questions were raised about the process for exercising it set out in the Government’s amendment. Some argued that the procedure was too complicated or lengthy. The Government have listened to these arguments. We accept that the process for requiring a group to separate could usefully be streamlined. We will therefore bring forward amendments to that effect while the Bill is before this House. And we will listen to the contributions of noble Lords to ensure that the process in the Bill meets the objectives that the PCBS set out, and which the Government share.
The Government remain unpersuaded, however, that a reserve provision for full separation across the entire industry would be appropriate. A firm-specific reserve power will reinforce the ring-fence by deterring banks from seeking to undermine or weaken it. However, to move to industry-wide separation would be to abandon the ring-fence altogether, in favour of an alternative structural reform. Let us be clear: this would not be a sanction, it would be a different policy. That alternative policy was considered in detail by the ICB, which rejected it. As noble Lords will know, the ICB concluded that full separation similar to Glass-Steagall would entail very significant additional costs, for doubtful—or even negative—additional benefits to ring-fencing. The Government have accepted the ICB’s recommendation and are therefore implementing the ring-fence through this Bill.
Like the ICB, the Government believe that the ring-fence will succeed. A future Government would, of course, be within their rights to come to a different conclusion, and to shift to an alternative policy. But if they did, the only proper and democratic way to implement that new policy would be to return to Parliament with new primary legislation which could be properly debated and scrutinised. The proposal made by the PCBS would potentially lead to full separation with no more than a short debate in Parliament and a vote. This would stand in extreme contrast to the extensive consultation and scrutiny that the current policy has gone through.
We have also recently heard proposals from the PCBS on the issue of the leverage ratio. The PCBS has suggested that control over the leverage ratio should be taken out of political hands and given to the regulator. The Government strongly support the principle of a binding minimum leverage ratio, as agreed in the Basel III accord. We believe that it is entirely appropriate for minimum standards to be set in statute. This applies to all the minimum requirements in Basel III, which we continue to push to have implemented through EU legislation.
This does not mean that there is no role for the regulator. Judgment-based regulation means the regulator having the ability to impose additional requirements if it feels that these are necessary to achieve its statutory objectives. Only last month, the PRA required a number of banks to meet higher leverage standards sooner than the Basel III deadline. The PRA thus demonstrated that it already has the power to impose higher requirements on leverage. So beyond minimum requirements set in statute in line with international standards, day-to-day control over the leverage ratio lies in the hands of the PRA.
Structural reform of the banking industry is the second pillar of the Government’s reform programme. The third pillar is reform of banking standards and culture. As noble Lords well know, the Government have welcomed the recent report of the PCBS, one main theme of which was to strengthen individual accountability in financial services. The PCBS argued that the existing approved persons regime has failed in this, and that new measures are needed to replace it. The PCBS also called for criminal sanctions for reckless misconduct in the management of a bank.
The Government have accepted these recommendations. While the Bill is before this House, we will therefore bring forward amendments to introduce a new senior persons regime. We will reverse the burden of proof for senior persons so that they will be accountable for any breaches of regulatory requirements in their areas of responsibility, unless they can prove that they took all reasonable steps to prevent them. We will also amend the Bill to give regulators the power to make rules governing the conduct of anyone employed in financial services, and to extend the time limit for enforcement action from three to six years.
I am most grateful to my noble friend. Perhaps I should declare an interest as a regulated person. This new criminal offence of reckless misconduct is to apply—according to the excellent report which was produced—only to the senior management of banks. Can the Minister explain why, if someone is responsible for major systemic difficulties arising from the collapse of a bank, this new criminal offence should be limited only to the management of the bank and not apply to regulators or Treasury officials?
I thank my noble friend for that interesting observation. The purpose of the Bill is to look at the management of the financial institutions themselves rather than the system. I would welcome that discussion later, in Committee, if my noble friend would like to take it further.
As a further deterrent against misconduct, the Government will table amendments to make reckless misconduct in the management of a bank a criminal offence. Those found guilty will face the possibility of prison sentences. Together, these measures represent an historic overhaul of the system for holding bankers to account for their actions. However, rules and sanctions alone will not guarantee good conduct. The PCBS argued that effective competition between banks is essential to ensuring high standards of behaviour, and the Government agree. We will therefore amend the Bill to give the PRA a secondary competition objective. This will give the PRA a greater role in championing competition in the banking market, to the benefit of consumers.
One key barrier to competition in banking, and in particular to new entrants and smaller firms looking to challenge the big high street banks, is the big banks’ control of payments systems. The Government will therefore introduce amendments establishing utility-style regulation of payments systems. To ensure the safety and stability of payments services, we will also bring forward amendments to provide for a special administration regime for payment and settlement systems. This will require critical payment and settlement services to be continued even in insolvency, until the firm recovers or alternative provision is available.
While the Bill is before this House, the Government will also make some technical amendments to provisions on the pension liabilities of ring-fenced banks and introduce amendments to modernise the rules for building societies, helping to create a level playing field between building societies and banks while preserving the distinct nature of the building society sector.
In the other place, the Government set out our intention to use this Bill to require the Bank of England to produce a resolution strategy for each major UK bank—that is, a plan for how the authorities propose to respond in the event that that bank failed. We still believe that resolution plans are necessary, but given that the European Council of Ministers and the European Parliament have recently published proposals for the EU recovery and resolution directive that include similar provisions, it may be more appropriate for this requirement to be imposed through transposition of the directive than through the Bill. The Government will continue to review this issue in the light of European developments while the Bill is before this House, with a view to bringing forward amendments if necessary.
We can all agree that this is legislation of the highest importance. It is essential that we address the causes of the terrible banking crisis of five years ago, whose consequences remain with us today. The Bill is a vital step towards ensuring that this crisis is never repeated. Its current provisions represent a once in a generation reform of the structure of British banking, while forthcoming amendments will revamp the accountability regime for bankers’ conduct and standards. I look forward to constructive engagement with all sides of this House over the months ahead. To support noble Lords’ consideration of the Bill, last week the Government published drafts of the principal secondary legislation exercising delegated powers under the Bill, and I will ensure that my officials are available to noble Lords to discuss any details of the Bill. I am pleased to present the Bill for the consideration of noble Lords. I beg to move.
My Lords, I am most grateful to the noble Lord, Lord Deighton, for introducing the Bill. In his introduction he acknowledged the work of the Independent Commission on Banking and the Parliamentary Commission on Banking Standards in developing the thinking behind the policies that this Bill is intended to implement. The whole House is grateful to noble Lords who are members of the parliamentary commission for all the hard work they have done to formulate a new banking policy for this country. We look forward to hearing from three of them later today. The right reverend Prelate the Bishop of Birmingham is, I think, standing in for the most reverend Primate the Archbishop of Canterbury, from whom we hope to hear at a later stage. I hope also that we can hear at a later stage from the noble Lord, Lord Turnbull.
This Bill is the outcome of the Treasury’s intermediation, let us say, of the recommendations of the independent commission and, to a more limited extent, of the parliamentary commission. Less kindly observers might suggest that, instead of one of intermediation, the Treasury’s role might be described as watering down those recommendations. Every dilution by the Government increases the risk in the banking sector. It would assist the House enormously if, when the noble Lord, Lord Newby, sums up, he would list precisely those areas in which the Government have significantly toughened up on the recommendations that they have received.
Anyone who read this Bill without having studied the various documents issued by the independent commission, the parliamentary commission and the Treasury over the past two years would have absolutely no idea what the Bill is intended to achieve. The Bill essentially is an enabling Bill, which establishes the powers to do certain things—particularly with respect to the establishment of a ring-fence in the banking sector—without specifying exactly what is to be done. Noble Lords may search in vain for an indication of where the ring-fence might actually lie, how electrified or permeable the ring-fence might be, what would be the equity capital or primary loss-absorbing capital requirements and the leverage ratio—I prefer the British pronunciation—inside and outside the ring-fence, and so on. All those and many other matters are to be determined by order or handed over to the relevant regulator.
Yet those issues are central to any evaluation of the value of this legislation in the reform of one of Britain’s most important industries. The Government published last week a number of draft orders that illustrated how important aspects of the concept of a ring-fence will be made operational. That document illustrates just how fearfully complex those vital orders will be. To ensure that this crucial secondary legislation—and, indeed, what the parliamentary committee refers to as tertiary legislation—is suitably scrutinised, will the Government implement the parliamentary commission’s proposal that a small ad hoc joint committee of both Houses of Parliament be established on an ongoing basis to scrutinise secondary legislation and the proposed use of delegated powers?
It is clear that the Bill before your Lordships’ House today relates to but a fraction of the measures that either the parliamentary commission has recommended be included in it, or the Government have stated they intend to include. By the way, those are not the same thing, given that the Government have already rejected some of the parliamentary commission’s proposals.
We know that from the second report of the parliamentary commission there were 25 draft amendments. Some of those have been accepted but many have not. What is to become of those amendments?
There are then the important proposals on banking standards and culture contained in the remarkably thorough final report of the parliamentary commission. In their reaction to that report, the Government suggested that 13 of the conclusions will require implementation by means of primary legislation. There is a wide range of other matters that might properly be discussed at this Second Reading. So what will be accepted, and what will not? What form will all these amendments take? We do not know because we do not have them before us today. This Second Reading is being conducted largely in the dark. We wait for the Government to reveal their hand. When will this happen? When the Government publish their raft of amendments, will they publish a commentary on their significance to facilitate debate on this vital but complicated matter?
The Government estimate that the private cost of the Bill for the banking industry will lie in the range between £3.5 billion and £8 billion. Much of this cost is the removal of the implicit guarantee enjoyed by financial institutions too big to fail and is thus an economically appropriate reallocation of costs. Risk is being properly priced. In so far as the extra cost falls on ring-fenced banks, we can be sure that under current circumstances it will be passed on to retail customers and SMEs, increasing what is already an unreasonably marked-up cost of credit.
There is a serious need for increased competition in the banking industry to mitigate the impact of these extra costs. Since the crisis, defensive amalgamations and forced mergers have reduced competition from what was already a seriously inadequate level. This legislation introduces no fundamental change to the competition regime in banking. Account portability is a valuable addition to consumer choice, of course, but it is not a game changer in terms of competitive challenge. In addition, prudential regulation in our sensitive post-crisis world is proving an almost impenetrable barrier to entry for those who wish to establish new banks. The PRA will have competition as an objective, but where will that objective come in the hierarchy of objectives when it is considering a particular application? What are the Government going to do to bring about a game-changing shift in competition in retail banking in this country?
There are two major issues that do not seem to me to have been closely examined either by the independent commission or the parliamentary commission: regulatory arbitrage and the impact of banking structures on the performance of the real economy. In the run-up to the crisis, the activity of European banks raising deposits in the US and recycling them into the US shadow banking sector undermined the impact of US leverage regulations. The ICB refers tangentially to the importance of regulatory arbitrage, but I do not find its assertions convincing. Could the same recycling arbitrage happen to the UK’s ring-fence? Surely branches of EEA banks operating in the UK could undermine ring-fencing by providing the universal and potentially cheaper banking services that UK and EEA subsidiaries are no longer able to provide. What steps will the Government take to protect the UK ring-fence against such regulatory arbitrage?
Understandably, the thinking behind this Bill concentrated on the problems of the stability of the banking sector and, in particular, on ensuring that essential banking services are maintained during a crisis. This legislation also provides the opportunity to address a wider question: what structure of banking industry would best serve the needs of British industry as a whole, including manufacturing, the creative industries and internationally traded services aiding them to grow and compete in the global economy? Is the current structure that we are shoring up in this legislation really appropriate to the needs of the rest of UK plc? Is there a need for a British investment bank to supplement the Green Investment Bank and the infrastructure bank? Is there a case for regional banks? If the answer to both these questions is yes, will the Minister tell us how such institutions would fit into the ring-fenced structure proposed in the Bill?
An unfortunate aspect of the Treasury’s analysis has been the continued reliance on risk-weighted assets as the reference point for equity capital and potentially loss-absorbing capital and for the gradation of prospective measures with size. This reliance must be abandoned. As currently formulated, risk-weighted assets are a flawed and discredited measure. Consider, for example, the recent assessment by BaFin, the German banking regulator, on the capital requirements of German banks, as reported in the Financial Times on 28 May.
“Germany’s largest banks were €14bn short of the capital needed to meet incoming Basel III banking rules at the end of last year … BaFin’s estimates suggest that banks have mainly improved their capital ratios by … recalculating the risk weightings attached to some assets … Reducing the quantity of risk-weighted assets on the balance sheet means a bank can report a better capital ratio even if the amount of capital has not changed”.
If you do not like the numbers, just change them.
Three weeks ago, the Basel committee announced a major reconsideration of the role of risk-weighted assets, given that the measure is now so widely discredited. However, the Government’s response to the parliamentary commission’s final report states:
“The Government shares the concerns raised by the Commission and many other experts that flawed risk-weightings played a major role in the last crisis”.
That is all well and good, but after turning a single page, we read:
“Risk-weighted capital requirements should remain the primary measure of prudential capital regulation”.
This Government are deeply confused. A fundamental problem of risk-weighted assets is that they are excessively complex. As everyone knows, complexity is the friend of evasion, whether in taxation or regulation. However, a simpler measure is available: the leverage ratio. The parliamentary commission has recommended a leverage ratio of 4%. The United States has announced that it will be 6% in the US. The Treasury insists on sticking to 3%—why?
A higher leverage ratio of course reduces the return on bank equity—hence, by the way, bank bonuses—but it also significantly reduces risk. Why are the Government postponing handing determination of the leverage ratio to the Financial Policy Committee until 2018, despite the Bank of England repeatedly asking for this power now?
The vagueness of the ring-fence is exacerbated by the need to define various terms. What is an SME? If non-ring-fenced banks can inject capital into ring-fenced banks in times of need—a benefit claimed by the independent commission—cannot capital flow out when needed elsewhere, increasing the possibility of damaging contagion? If banks are also allowed to sell derivatives within the ring-fence, rather than act as agents, does this not reintroduce the fee-based culture that has already done so much damage in retail banking, whether in the form of PPI or selling to SMEs derivative protection that was anything but?
Surely it is not enough to claim that mandated activities do not pose a threat today, since activities that are safe today may prove very dangerous tomorrow. These dangers may even be part of systemic phenomena that are no fault of the individual firm. These and many more issues raise the core question of the permanence and permeability of the ring-fence. It is central to the attainment of the objectives of this Bill that the fence is impermeable; and it is vital for future confidence and investment in the banking industry that the fence’s location is clear, well-known and reasonably permanent.
The PCBS’s proposals on the electrification of the ring-fence are vital to the credibility. The Government have accepted the “first reserve power”, whereby a group containing a ring-fenced bank that is deemed to actively undermine the ring-fence could be forced to divest itself of the ring-fenced bank or the non ring-fenced bank—in other words, splitting them up. However, as we heard from the noble Lord today, the Government have rejected the inclusion of the second reserve power, whereby the ring-fence would be abandoned and full separation of all domestic and commercial banking strictly enforced.
Surely the Government have got the matter the wrong way round.The decision to split up a single group would have severe financial and competitive consequences and would undoubtedly entail a lengthy and expensive legal and political battle. It is such a nuclear deterrent that there will be a high expectation that it will never be used. It is not a credible threat. However, if banking as a whole might be split, there is a powerful incentive for mutual monitoring. Accordingly, the incentives motivating the sharpest minds in the industry, ensuring that their colleagues do not undermine the interests of the banking industry as a whole, would be aligned with the statutory objective. What could be better than that?
There are many more complex issues in this legislation which we will debate in Committee. I totally understand the Government’s desire to have this legislation on the statute book as soon as possible, and we on this side will do everything we reasonably can in support of that endeavour. However, this is the most significant reform of the structure of UK financial services in the past 40 years, and we must get it right. That is why we will scrutinise the legislation line by line and demand the early and comprehensive publication of secondary legislation to better judge the true implications of the Bill.
It is vital that this legislation succeeds. If it is watered down, or if it is too complex and does not succeed, it may well do more harm than good. As the parliamentary commission commented in its final report:
“The banking industry can better serve both its customers and the needs of the real economy, in a way which will also further strengthen the position of the UK as the world's leading financial centre. To enable this to happen, the recommendations of this Commission must be fully implemented in a coherent manner”.
Sadly, the Government’s response to the independent commission and the parliamentary commission has been anything but coherent. This incoherence has grave implications for Britain’s financial services industry. On this side, it is our intention in Committee to restore coherence to the Bill.
My Lords, on a hot day such as today and so near to Recess, my noble friend Lord Sharkey and I, who will be working together on the Bill, have tried somewhat to divide up the issues between ourselves so that noble Lords are spared at least some degree of repetition—although I have to admit that it will not always be completely appropriate.
I will associate myself particularly with three issues that my noble friend Lord Sharkey will focus on in greater detail. The first is competition, perhaps the most significant long-term reform to the banking system and one which the current version of the Bill virtually ignores. While the regulators and the Government are now open to competition in, frankly, a complete reversal of historic attitudes, it will be a generation before new banks will be in a position to seriously challenge the dominance of the big four if we rely on organic growth alone. I was quite shaken to hear some senior members of the banking world describe the future very much in terms of a bar-bell: there will be the big four, a group of little ones down the other end and almost nothing in the middle. That will be a continuation of the uncompetitive situation that we face today. As I have said, my noble friend Lord Sharkey will come forward with some ideas on how we can try to accelerate that change, which everyone now acknowledges is necessary. It is fundamental to our banking system.
I will address two other issues, the first of them very quickly. In the Financial Services Act 2012, this House seriously tackled the issue of payday and high-cost short-term lenders in what we all name the Sassoon-Mitchell amendment, which gave very extensive powers to the FCA to crack down on rollovers, interest rates, fees, duration—indeed, I would argue, all the powers necessary to prevent exploitation by this industry. Some comments by Ministers in this House have suggested that the Government might have somewhat watered down their position, although I have heard denials from other Ministers. However, before we return in October we will see the draft version of the new FCA rules. If they are not satisfactory to this House we will have the opportunity to use the Bill to provide the strength that we all think is appropriate.
The third issue, which is not often addressed in banking, is absolutely fundamental and, I suspect, the biggest threat to our future; my noble friend Lord Sharkey will address it in more detail. That is, that the issue of the central clearing platforms for derivative contracts will be a huge source of concentrated risk. Some recent articles by Bloomberg say that the greatest security or strength of the protection under these contracts is largely through the collateral that companies are required to post. They suggest that the banks are finding some fairly clever ways for junk to be used, going through the alchemy process to provide collateral under these contracts. Therefore, I am not sure what the answer is, but this House must not duck that issue, and the Bill is an opportunity for that debate.
I was privileged to be a member of the Parliamentary Commission on Banking Standards, and our four reports covered a wide range of issues in the banking system. It was always intended that those issues should be addressed in this Bill. I appreciate that the Government have made a commitment to address them, and will present to us an extensive series of amendments, as is outlined in their response to the report. However, we will all want to see the detail, rather than just the generality.
I am concerned that much of the content of the Bill will, essentially, come in the form of secondary and even tertiary legislation. I join the noble Lord, Lord Eatwell, in supporting the proposal from the banking commission, and I am glad that he has done so. However, so much of the core and the heart of what the Bill is attempting to achieve will be in the secondary and tertiary legislation that we must have some special mechanisms to enable Members of this House to understand fully what the content is, and what that content implies, and to raise challenges at a point when the Government can take them on board and we can come to a satisfactory conclusion.
Many questions hang over the whole process of reform. For example, in response to the commission’s report, the Government have given us a commitment to review whether RBS should be broken up. Until we see that review, we will not know whether it will be a substantial piece of work which this House can accept or one that we shall have to challenge.
The Chancellor has announced that there will be a new regulator to deal with the payments system—the plumbing of banking—which has been one of the huge barriers to bringing in new competition. It is quite right that the Government should focus on that issue, but we need to see what powers the regulator will have, and whether those powers will extend to, for example, changing ownership of the payments system, and to dealing with more technical but still critical issues such as full account portability.
I appreciate that the Government have said that they will act on new rules governing the approved persons regime, the new senior persons regime, criminal sanctions for reckless misconduct in the management of a bank, and the deferral, cancellation and clawback of remuneration—but will those new rules be as strong as intended? I suspect that until we see the actual language, this House will want to reserve its judgment.
I am particularly concerned that the amendments we have seen so far to electrify the ring-fence look exceptionally cumbersome and inadequate. I hope that that is not a foretaste of the other amendments that will come before us. To quote Andrew Tyrie on that one amendment,
“the Government’s amendments would render the specific power of electrification virtually useless”.—[Official Report, Commons, 8/7/13; col.75.]
I am glad that the Government are to go away to think about that and come back with a new version. I ask them to really take that seriously, and ensure that future amendments represent their quality thinking, not their first thinking. The work of this House requires a great deal of trust on all sides in order to tackle a challenge as serious as that of banking reform.
Rather like the noble Lord, Lord Eatwell, I feel strongly that we must consider the recommendation from the parliamentary commission, which has been rejected by the Government, not just to provide powers to separate an individual bank that misbehaves around the ring-fence but to look at separating the entire industry. I am not a particular fan of separating the whole industry, but I believe strongly in the ring-fence, and I am certain that the banking industry recognises that if there is widespread abuse, if there are issues on every front, and if the Government and the regulator have to go after every individual bank through the courts, with all the legal powers that will be thrown up on the other side, it will become almost impossible to enforce the ring-fence.
I regard the reserve power to split the entire industry—in fact it would facilitate Parliament’s taking that action, as it is not a power given to the regulator but one that passes to Parliament—as essential to ensure that the industry not only polices itself but recognises that there is a nuclear deterrent. It is crucial that the industry learns to respect both the regulator and the Government. Historically, we have seen such manipulation of the system by the industry that we have to make it very clear that that is not the pattern that will be permitted.
I very much support the commission’s views, and that of the Vickers commission, on higher capital requirements and on using a leverage ratio, although I recognise that there may need to be carve-outs for particular circumstances nationwide—that is one of the obvious examples. The issue that we have to confront is that, if we allow risky big banks, which can crash our entire economy, to continue to play a major role in our system, as they must, we must make sure that steps are taken to limit their ability to fail. We must make sure that they have adequate capital, in effect to make them safe. There is no other way in which we can protect both the taxpayer and the economy.
The banks will say with justice that if there are higher capital requirements, it becomes harder for them to make riskier loans, so they have choices over which businesses they abandon and which business they focus on. I am frustrated that many have chosen not to focus on small business under those circumstances, but I recognise that those choices are difficult. But the response to that has to be to bring in new players to provide that kind of lending and credit, not to allow the banks to be riskier than they should be for a safe economy. So the focus has to be on developing deeper and broader capital markets that can serve small businesses, to bring on the peer-to-peer players in this arena. Last week, this House passed the relevant orders to provide regulation for that industry. We need to bring in smaller, specialised, non-systemic banks, so that reliance on the big banks to provide the riskier end of credit is significantly reduced and we can require of them that they put their houses in order and are adequately capitalised.
My concerns about allowing a more lax capital measure is enhanced by my suspicion of bail-in bonds, which I understand is not shared by others. It is not that I am opposed to the concept of bail-in bonds, but Governments worldwide are relying on them very heavily to provide security to the banking system. Who is going to hold these bonds? We cannot allow other banks to hold them, or we are back to an interconnected system. Pension funds and insurance funds—and I have started to talk to some of them—may be attracted to hold some of these bonds, but only at the cost of cannibalising their shareholdings in banks, so that gets us no farther forward. Given that this is meant to be a solution to cover every systemically important bank across the globe, I would like to hear from the Government about who they think is going to hold these kinds of instruments and whether it will be a sufficient amount for them to play the role expected in providing safety for the banking system and protection for the taxpayer.
There are two other areas which I hope to pursue. The first is community development financial institutions, which I have talked about in this House before. The big banks are increasingly abandoning lending to disadvantaged individuals and to new and micro-businesses. They lack the capacity to be able to analyse these credits in the detailed way that is necessary, to provide handholding—and, frankly, after a look at the risk involved in these portfolios, many decide that this is not a business that they want to pursue. I am willing to accept that they do not play as much in this market, if we can provide an alternative that can. In the United States, it is provided by a completely separate sector, which serves disadvantaged communities and micro-businesses alone—the community development financial institutions. I suggest that we have to build this; it requires a genuine alliance of the Government, perhaps using a business bank, and the big banks—and, in the US, carrots and sticks have been used to make sure that the big banks provide capital and know-how to these little local institutions. Charities and social enterprises, as well as the Church of England, are potential players in this arena.
Particularly pertinent to this Bill, in order to ensure that the big banks can provide capital to these community institutions, the United States has negotiated a carve-out under Basel III for loans from the big banks to community development financial institutions. The UK is in a position to take advantage of the carve-out, but I understand that we have not done so. I consider that this is an opportunity not to be missed and I hope very much that the Government will address the issue.
I am conscious of the time so, finally, I congratulate the Government very much on the announcement made today on the agreement that they have reached with the big banks regarding the disclosure of lending data by postcode. We pressed for that in the debate on the Financial Services Act 2012. The Government promised it and they have delivered. The data will show lending across 10,000 individual postcodes and we will be able to see where the market has failed and where there is unmet need. Dealing with unmet need in regard to banking surely has to be part of banking reform.
We have a great deal of work ahead, but banking reform is crucial to our economy. I suspect that there will be a lot of agreement on these issues across all Benches as they are not particularly party-political. I also suspect that they are issues on which Members of this House will frequently speak with a single voice. The Bill is our chance to make sure that the legislative framework is in place to provide good banking to support our economy in the future.
My Lords, I am grateful to the noble Lord, Lord Eatwell, for his kind remarks about members of the banking commission who sit in this House, not least my friend the most reverend Primate the Archbishop of Canterbury, who, sadly, is not in his place today but fully intends to be so many times in the autumn when the commission’s work will be discussed in this House in more detail. Perhaps I can partially stand in his place as we spent many years in different parts of the oil industry before entering another sort of multinational work.
We appreciate the practical themes in the Financial Services (Banking Reform) Bill and the opportunity that it provides to implement the recommendations of the Vickers report and, more recently, of the Parliamentary Commission on Banking Standards. As the Community Investment Coalition put it, the Bill provides an opportunity,
“for Britain to continue as a leading global financial centre, while at the same time protecting ordinary working people”.
I thought that that conveyed rather well the complexity of the issues with which we are dealing.
As we face up to the essential and urgent reform of a sector that should indeed play a major part in our national well-being and prosperity we are presented not only with proposals for regulation and structural change but with the broader themes of cultural change, including appropriate standards for the industry. Those who have heard the discussions on the Radio 4 programme “The Bishop and the Bankers”—it is available on iPlayer and has two more sessions to go—have been reminded that the capitalist system on which we all depend for our welfare can, in its search for efficiency and other objectives, become dehumanised and disconnected from the needs and culture of individuals. Therefore the structural proposal to ring-fence retail banks is most welcome, but only—as has been noted already today as well as in another place and by the commission—if the electric current in the fence is strong enough to ensure compliance with our intentions.
The proposal to include a competition element in the Prudential Regulation Authority is also attractive, but will it go far enough? I hope that in promoting real alternatives to the present arrangements we will keep our vision precise and technical—as I am sure many speeches today will be—but that we will also keep in view the long-term possibility of a much better arrangement for the country as a whole. As we focus both on the struggle of ordinary people to manage with what little money they have, and on the need for micro, small and medium-sized businesses to stay on their feet in competitive local and export markets, strong arguments are being made not only for a new regional bank but for more support for credit unions and other local arrangements, with the potential, particularly as regards the latter, to put an end to the corrosion of payday lending and the unacceptable effects of the poverty premium.
To get an image of what this might look like we could consider one bank which operates in this country from overseas whose philosophy originally was for the manager of a region to go to the top of a church steeple and from there to survey all that he or she could see. He or she would then be responsible for all the businesses and finance within that area. It not only provided local autonomy but located responsibility for professional decisions where they might best be made. On the retail side, it should also be noted that in Birmingham there are still 100,000 people who do not have a personal bank account. We should also want to endorse the proposals made within these discussions that the accounts of those who have them should be portable. Portability of accounts might be made possible within the industry so that competition and client service can come together for the benefit of those who use those banks.
I have referred to coherence and comprehensiveness. I wish to add at this stage in the debate, perhaps a little earlier than we need to, the important theme which the Minister mentioned regarding the change of culture around our discussions—in the background and sometimes in the foreground—as we emerge from the immediate scandal and crisis in the industry. As noble Lords will know, there is in the industry a growing understanding of and openness towards discussion at all levels, as well as, dare I say it, a little vulnerability on these matters.
In my own area of the West Midlands, senior regional bankers from all the main banks have been prepared to meet regularly under Chatham House rules to ask difficult questions of themselves and their businesses. It is notable that one major player, which has already been mentioned this afternoon, has added to its obvious corporate values of “Client first” and “We must work together” the extraordinary line that, “We must do what is right”. That gets us into a very interesting area of culture: not just our values, behaviours and mission statements but—I would go so far as to say—what it means to be virtuous. Another global leader, in a seminar held within the past six weeks for all its world-wide risk managers, allowed the whole morning to be spent on the question, “What does society want from us?”. These are little signs of openness to a new culture that will undergo and deliver some of the practical measures that your Lordships will be discussing in the Bill and in response to the commissioners. Our own body, the Church Commissioners, is leading a discussion on what it means to have a good bank, which my friend the most reverend Primate described as living,
“with a culture that is self correcting and self learning, a culture that is more like a body than a system, and so develops the conscience, will and direction that enable the common good”.
As we help develop structures that are fit for purpose, and that might look quite different from what we have been used to, I hope they will become ethical structures. I hope that they will not just keep to easy-to-sign-up-to corporate values but go further into the deeply challenging discussions about personal virtue. Alasdair MacIntyre, the philosopher, would say that we must acknowledge robustly the belief that human life is more precious than any possessions and recognise that human solidarity is an integral part of the common good.
It is time to get back to the detail, which I will leave to the speakers who follow me. I and my colleagues on these Benches trust that the industry will wholeheartedly embrace a professional standards process, with independent leadership and all the practical things that we will talk about in the next few minutes and days; and that step by step—with any necessary amendments to the Bill and a full adoption in the autumn of the parliamentary commission’s recommendations—we will all take responsibility for achieving a healthy, vigorous, profitable and accessible but virtuous banking system.
My Lords, I am particularly happy to follow the excellent speech of the right reverend Prelate the Bishop of Birmingham, not least because he stressed the importance of changing the culture of banking. That is accepted across the board. It is certainly accepted in the United States and it is accepted by everybody in this country. Indeed, when the Parliamentary Commission on Banking Standards was set up—like my noble friend Lady Kramer, I was a member of that commission—the Prime Minister said that we needed to address standards and culture. That is a problem that I was concerned about.
Unlike the right reverend Prelate the Bishop of Birmingham, I do not have the ability to preach, so we had to decide how to change the culture by legislation. It was not so easy, but we tried a whole battery of proposals that we hoped would do something to help change the culture. I will mention one or two specific things during the course of my remarks. In speaking about the Parliamentary Commission on Banking Standards, I shall say some things that are slightly critical of my noble friend Lord Deighton. I was sorry that he did not find time to pay tribute to our chairman, our honourable friend the Member of Parliament for Chichester, Andrew Tyrie. It was an extraordinary effort. We produced an enormous number of recommendations in a large number of reports. Incidentally, my noble friend Lord Deighton said that the commission produced some important recommendations in its report last month. We produced five reports and there were important recommendations in most of them. I am sure that that is what he meant to say. We all worked quite hard, including incidentally the most reverend Primate the Archbishop of Canterbury. He, too, worked very hard, despite the fact that he also had a day job. Nobody worked harder than Andrew Tyrie. It has a lot to do with him that, with all parties represented, we managed to secure a unanimous report. That gives it much greater weight than would otherwise be the case.
I shall focus on certain areas, some of which, although not all, have already been discussed in the debate. One of them that has not been discussed explicitly, on which we made a recommendation and which has on the whole been accepted by my right honourable friend the Chancellor of the Exchequer, George Osborne, concerns the split of the Royal Bank of Scotland Group into a good bank and a bad bank. He has agreed to set up an inquiry, which will report very soon. I very much hope that it will come to the right conclusion. That is very important indeed to our economy in its present condition.
The idea of a good bank/bad bank split is not at all new. It was done in the case of Northern Rock recently; and it has been done on other occasions in this country and in other countries overseas. It is the classic answer to the sort of problem we are facing. It is particularly important in the case of the Royal Bank of Scotland Group. It is the biggest bank in our country that supports, or is meant to support, small and medium-sized businesses—SMEs. However, there is a problem with SME lending to which my noble friend Lord Deighton referred. It is one of the reasons why our emergence from the present recession is so slow. There is a real problem with lending to SMEs, which is inhibited by the fact that the banks have a huge amount of bad debts on their books—far more than they would ever admit. They are very nervous of lending because it might increase the amount of their bad debt. They already have more than they say they have and they are exercising what is known in today’s jargon as forbearance. They need to be strong. They will not lend unless they are strong. We hold between 81% and 82% as a taxpayer stake in the Royal Bank of Scotland Group. We should use that power to split the bad assets and put them into a bad bank. Then we would have a good bank with good assets which could help by lending to SMEs in order to help our economy. That is the most important single thing that the Government can do at the present time.
I very much hope that that will be done. I know that my right honourable friend George Osborne wishes that he had done that at the start. It is not too late; better late than never, and we should do it now. Our newest recruit to your Lordships’ House, the noble Lord, Lord King of Lothbury, better known as Mervyn King, former governor of the Bank of England, said:
“Formal accounting conventions should not be allowed to get in the way of what is best for the economy in general and for the SME sector in particular”.
That is the issue here. I very much hope that that will be done. I agree incidentally with my noble friend Lady Kramer and others who have spoken about reforms in the banking system, in the sense of having more banks and more competition, being necessary, but that cannot happen overnight. However, this could be done virtually overnight and it would do enormous good.
I shall now refer to the so-called ring-fence. I was very happy with what my noble friend Lord Deighton said. Let me back-track a bit. I have been arguing for the best part of five years for complete separation between what used to be known as high street banking and investment banking. To call it retail banking is slightly misleading because it is also SME banking. We always used to have that in this country. I have been a close observer of the City of London ever since I wrote the LEX column for the Financial Times more than half a century ago. For most of the time we had the high street banks and the merchant banks. They were completely separate and we did not need legislation to keep them separate; they were separate by custom and practice. I know the people at the top of both kinds of bank. They were different kinds of people with different cultures. The system worked and served this country very well.
The Vickers commission accepted the problem and thought that the ring-fence would be the solution. We on the commission were concerned that the ring-fence would not be robust enough. There are all sorts of problems with the ring-fence. I shall mention three quickly, if I may. One of them, which is perhaps the least of the problems, but which has been put to me by a number of senior bankers, is that the governance structure is impossible. There has to be two totally separate governances of a single entity, which would have an overall holding governance with another governance with responsibility to the same group of shareholders. Many bankers have said that that cannot possibly work. The other problems, which are perhaps more fundamental, are that it is likely to be gamed; there will be a huge incentive to game it if it is in the interests of the bank concerned to find ways around the ring-fence. The third problem goes back to what the right reverend Prelate the Bishop of Birmingham was saying. The cultures of high street banking and the cultures of investment banking are totally different. It is very difficult, with the best will in the world, to see how we can have two totally separate cultures in the same organisation.
We decided that we should give the Vickers ring-fence a chance but make sure that it was fully electrified—that was the jargon we used. So, if it were seen not to be working in one particular bank, it could go to full separation. If it were seen not to work on a wider scale we would have complete separation for the banking sector as a whole. The Chancellor of the Exchequer and the Government said that they would accept the first part of that but not the second. I think they are wrong on that. Moreover, the voltage which they have put into the electrification of the ring-fence is so lamentably low that it will have no effect at all. I was therefore glad to hear my noble friend Lord Deighton say that they would take it away and come forward with an amendment closer to what the commission recommended.
Incidentally, that points to the fact that this House has an unusually important part to play in this legislation. It has passed through the other place and it falls to us to get it into the shape it should be. I hope—this is not a party political issue—that if the Government do not bring forward the requisite amendments there will be a cross-party agreement which will help the Government to do the job that needs to done.
I was very surprised to hear my noble friend Lord Deighton say that we cannot go to full separation in any circumstances because the Vickers commission, the independent commission on banking, said that it wanted the ring-fence. There are two curiosities in that point. First, we are saying that we should go to full separation only if the ring-fence fails. I am quite sure that the Vickers commission does not want a failed ring-fence, it wants a successful one. I hope it is successful, but if it fails we will have to go to full separation.
Secondly, my noble friend implied that the Vickers commission was a holy writ and we must do as it says. However, when it said that 3% leverage is totally inadequate, the Government said that they did not agree and that they were going to stick with 3%. This is the despite the fact, as the noble Lord, Lord Eatwell, pointed out, that the United States has decided to go for 6%, although only for the larger banks. However, that is all that matters because it is only a failure of the larger banks that poses a systemic threat.
The Americans have quite rightly said that leverage set at 3%, to which we are apparently meant to stick, is totally inadequate and that it must be 6%. They have left it to the Fed to decide and impose. We said the same. We did not say that a particular number—whether it was four, five or six—was the right leverage ratio. You have to have a leverage ratio and we have said that that should be for the Financial Policy Committee of the Bank of England to decide. It should not be for politicians to decide. The Government have rejected that and have said that it should be for the politicians to decide. That is profoundly mistaken. The noble Lord, Lord Eatwell, was absolutely right that the risk-weighted assets are as long as a piece of string. Each bank has its own model and puts into it whatever will produce the risk-weighting that it wants. Studies have shown that to be true. It is not a matter of dispute. Although you should look at risk weighting—you should not throw it in the dustbin—because it tells you something, it is not a robust guide.
Another thing has changed from the medieval times when I had responsibility for some of these matters. We all know how much lobbying of the Prime Minister and the Chancellor of the Exchequer by the banks goes on at the present time. It is thoroughly unhealthy. In my day, this did not happen for a very good reason. The convention was not that the banks could not lobby—of course they could, they were bound to—but they had to lobby the Governor of the Bank of England, who would then represent to the Chancellor of the Exchequer of the day the concerns of the banks. That is a much healthier system and we would do well to get back to it.
Another recommendation the Government have not accepted is that we should look at proprietary training—that is, investment banks trading entirely on their own account, a form of hedge fund activity. I have nothing against hedge funds provided that they are hedge funds, but I am concerned when hedge fund-type activities are conducted within a bank. These issues interrelate. It would not be so bad with a pure investment bank but if you do not do complete separation it will threaten the retail and high street banks.
As noble Lords know, the United States, under the so-called Volcker rule, has decided to ban banks completely from undertaking proprietary trading. We said that within three years the Government and the regulator should watch carefully how the implementation of the Volcker rule is working in the United States—it is a practical example of banning proprietary trading—and, in the light of that, come forward with measures, if necessary, to ban proprietary trading. Not to ban it altogether—this is a free country—but it should be left to hedge funds and not be allowed in regulated banks, with all the great responsibilities that they have.
There is also a cultural dimension to this. What is the cultural dimension? As the right reverend Prelate the Bishop of Birmingham pointed out, it is to some extent the moral standards that we all like to think we apply in our daily lives. However, there are two things in particular that the banks need to have: a culture of caution and prudence, which is what we expect from our bankers, and a culture of service to clients. Proprietary trading is no service to clients because there are no longer any clients. It is a form of speculation. I have nothing against speculation in the right place but it does not sit well with the culture of caution and prudence that we need. You cannot do this by leverage ratios or by what you put on the statute book; it is a culture of the people involved. Those people used to be the high street bankers. They may have been rather boring but they were extremely cautious and prudent, and that is what is needed.
Finally, let me say a brief word about something that has not been mentioned—the question of remuneration packages. I am opposed to the cap on bonuses imposed by the European Union—as we said in our report, it will be counterproductive. However, the structure of remuneration is very important. We said that bonuses should be deferred for up to 10 years. That does not mean to say that it should always be for that length of time.
In the old days the merchant banks performed very well. Moreover, during this crisis it was the so-called reputable banks which went belly up but very few hedge funds did. Both the merchant banks and the hedge funds today normally have a partnership structure. The top management and directors have their own wealth invested in the company. They have their own skin in the game. That does not make them any less innovative, but it does make them less reckless, because their own wealth is at stake. It is too easy for bankers to construct a deal that is crazy and will turn lousy a few years hence. They collect the bonuses in year one and year two and then it is the poor shareholders and taxpayers who suffer later on when the whole thing goes south. The idea of deferring the payment of bonuses is to get something that approximates more to the partnership structure, which is much healthier.
I am sorry to have gone on for so long. We have a historic role to play in this House. I am very glad to hear the assurance from the Bishops’ Bench that the most reverend Primate the Archbishop of Canterbury will play a full part in Committee in this place. That is extremely helpful. I know that the noble Lord, Lord Turnbull, from the Cross Benches, will be doing the same. We have a very important part to play and I hope that we will discharge our duty.
My Lords, it is a pleasure to follow my fellow member of the Parliamentary Commission on Banking Standards, the noble Lord, Lord Lawson, who played an invaluable and steadfast role. I also congratulate the noble Baroness, Lady Kramer, the noble Lord, Lord Turnbull, and the most reverend Primate the Archbishop of Canterbury on the work that they have undertaken. As the noble Lord, Lord Lawson, has said, special thanks go to the chairman for keeping it all together and producing a unanimous report for us.
It is exactly a year ago this month that the Parliamentary Commission on Banking Standards was established. With more than170 hours in 80 evidence sessions in public, 74 hours in private, and more than 9,000 questions later, what have we found? Mindful that the remit was to look at culture and standards in the banking industry, we have found an industry where standards are abysmally low and the culture is rotten. Even in the seven months in which we took oral evidence, we saw two more major LIBOR scandals; an interest-rate swap scandal; the PPI mis-selling scandal, the bill for which has risen £15 billion to £17 billion; a major bank guilty of money-laundering in Latin America; and another fined $700 million for sanction-busting in Iran.
The question is: how do we fix such a system where the public trust in these institutions is at rock bottom? Despite the worthy attempts of the Parliamentary Commission on Banking Standards, we have no magic solution. Yes, we provided a profound analysis that illustrated both the structural and organisational fault lines, but I would suggest that we have produced a signpost report which points the way for the Government, the regulator, the industry and also civic society to take things forward. This will not be done overnight; it will take a generation. If we are to change culture, we need that change to be a behavioural change and, for that, individuals need to buy into it. It starts at the top and permeates the organisation, which will take a considerable period of time. We have seen boards, chairmen and chief executives deficient in this regard. The report laid bare the lack of individual responsibility at the top—I would suggest that we witnessed a “no see, no tell” approach, where the collective decision-making was a defused responsibility. The concept that “the buck stops here” was non-existent in the banking system. I have two brief examples of that. From UBS top management, four senior executives came before the commission; a star trader had lost thousands of billions of dollars in the Far East and, when we asked if they knew the star trader, they replied no. We asked when they found out and they said, “When we read it on the Bloomberg wires”. Collectively, they were probably getting about £100 million a year, but they knew neither who the people were within their organisation nor what those people were doing on their behalf.
The payment protection insurance scandal has, as I mentioned, cost £17 billion and is likely to go up to £30 billion. Mindful that the cost of the Olympics was £8.9 billion, we are talking about the cost of four Olympics being put on, with a mis-selling scandal taking place over 18 years. Yes, the standards were abysmally low, because of a lack of ethical principles at the top of the organisation. Why, we may ask, did that situation prevail for so long without adequate challenge from outside? Here we come to the regulator; it is full of worthy people but it was, I would suggest, captured, conned and cowed by the industry. Captured, because there was an incestuous relationship where the views of wider society were rarely heard and never heeded. When I was chairman of the Treasury Select Committee, it took me five or six years to get at least one consumer representative into the Financial Services Authority. With the procession from the Financial Services Authority to the private industry—and with the former chief executive going to Barclays as a compliance officer for 10 times his salary at the FSA—I suggest that we could be seeing a postgraduate institute of the FSA for people to get better jobs in the private sector. If we want to have an even system, where the balance of power is maintained, we are going about it the wrong way, because the regulator will always be weak.
The regulator was cowed, because this is a powerful industry that is used to getting its own way and is impervious to challenge. The PPI scandal illustrated that very well. I also said that the regulator was conned. Why conned? It is because the FSA executives said to me for years that the business model of institutions and organisations was not their responsibility. They did not know, or seemed to care little for, how much risk there was on the balance sheets of banks as a result of complex models. That complexity provided an illusion of control; people felt satisfied but they did not know what was going on. That very much applied to the regulator. They did not wake up to the importance of the selling of PPI, because they did not look at the profit and loss of the balance sheets. One cursory look would have shown that there was a big problem.
I am not advocating for more regulation, we do not need more regulation. What we do need is tougher regulation and change to the commercial law of the land regarding the responsibilities of directors, so that the heads of the banks are answerable for the actions of rogue subordinates. We need to give the regulator both authority and autonomy. I turn to the ring-fence and leverage, because the Parliamentary Commission on Banking Standards did its job adequately in those areas. What have the Government done? To date, I would suggest, they have pulled the rug from under the feet of the regulators. Let us look at ring-fence and what the Government are proposing. In fact, some of us, as the noble Lord, Lord Lawson, said, were advocates of full separation and anyone who listened to the testimony of Paul Volcker when he said to the commission that an executive or director of an holding company is responsible for the ring-fence as well, would know, as the noble Lord said, that it is very hard to have a ring-fence situation. In the name of compromise, however, we sat down and said that if the Government established the Vickers commission and Vickers came out with ring-fencing, we were mindful that the Government would be unsympathetic to anything else. That is why we called for the electrification of the ring-fence. If anyone gamed the system, the regulator could bring them into line quickly and threaten or impose separation.
What have the Government done on paper? They have accepted that, but I suggest that to date they have neutered it. The noble Baroness has already mentioned the remarks of the chairman in the other place. How have they neutered it? They have done so by expecting the regulator to issue three preliminary notices to the offending bank, seeking permission from the Treasury on each occasion. What price the independence of the regulator in a situation such as that? The three permissions from the Treasury are followed by a five-year gap before there is any decision whatever on separation. I say to the Minister that that is an affront to the genuine efforts of the Parliamentary Commission on Banking Standards to seek a unanimous way forward. What we have now is not a ring-fence; I suggest that it is a hammock in which the executives can swing easily above the ground, while all the hassle takes place on the ground with the politicians and the regulators, and the executives look down from above, easy and relaxed. Therefore, the Government have to fundamentally change their opinion on that. I am going to be in the trenches with the noble Lord, Lord Lawson, in ensuring that the Government do the right thing on this issue.
The other area that we looked at was leverage. The noble Lord, Lord Lawson, said that the Bill as it stands remains defective in many key areas. There is no doubt that it is defective in the area of leverage. As the noble Lord said, we were of the opinion that the regulator should be in sole charge. However, the Government have rejected that out of hand. The noble Lord, Lord King, newly ennobled, was unequivocal when he said:
“Leverage is the one issue that matters above all others ... it’s precisely for that reason that the banks will resist most strongly the regulation of leverage and the politicians will compromise on precisely that”.
In the Financial Times today, the Business Secretary talks about those in the Bank of England as the “capital Taliban” because they are not listening. I agree with the leader in the Financial Times headed:
“Let the regulators show their teeth”.
The regulators have not shown their teeth so far, and if we allow the present situation to continue, we will undermine confidence in the entire system.
We all know that excessive leverage has been the trigger in every banking crisis in history. That is why Vickers recommended 4%, limiting gearing to 25:1. That is why we echoed Vickers, and it is why the interim Financial Policy Committee of the Bank of England asked for the power to vary leverage. However, the Government declared “no, no, no” three times, saying that they were wedded to Basel, despite the wise advice to the contrary. Robert Jenkins, a former member of the interim Financial Policy Committee, was very clear on the issue. He is no longer on the FPC because, I suggest, he challenged the Government too much, and he has now been dumped off it. However, he looked at Barclays, which we saw—and still see—as a poster child for excessive leverage.
The balance sheet of Barclays is roughly the size of the UK’s annual GDP. It funds £1.5 trillion of risk-taking, with 97.5% of debt and 2.5% of loss-absorbing equity. The noble Lord, Lord Lawson, mentioned hedge funds. The average hedge fund trades with three times leverage, but Barclays is operating with 45 times leverage—a gearing 15 times the average of any hedge fund. If Barclays’ assets eroded in value by a mere 1.5%, it would be leveraged 100 times over. I ask noble Lords: does that inspire confidence in building a sound, stable and sustainable system for a post-crisis environment? I think that the Government have to look again at that.
One last issue, which I advocated in the report, is the concept of the duty of care. It could be said that, despite all the scandals that there have been in banking, there has been only one big scandal, and that is that customers’ interests have been at the bottom of the pile. I suggest to the Government that if they implement this measure, it will be transformative for the industry because it will ensure that the buck does indeed stop with individuals at the top, and it will permeate the organisation. Therefore, my plea to the Government is that a duty of care needs to be a key element in the new banking standards rules.
During the many hours of questioning, I regularly asked senior bankers whether banks could change on their own. In response, they all said no. That is why the Government cannot stand aside and give the industry a free pass. To transform this industry, which is at such a low, the Government have to be an active participant. The parliamentary commission was the first of its kind for a century. The previous one, exactly 100 years ago, collapsed in a heap of partisan acrimony. This commission did not; it stayed together and was unanimous. At the end of the day, we do not want the Government letting the side down after a cross-party group has sat for a year and come out with a unanimous approach.
We resisted the temptation to be partisan and produced the report, so we have been faithful to the task that the Government gave us. However, if they ride roughshod over our efforts and recommendations, not only will that traduce the role of such a unique commission but it will fail to best serve the interests not only of the financial services sector but of the wider economy and of societal well-being in the long term.
My Lords, it is a great pleasure to follow the noble Lord, Lord McFall, one of my successors as chairman of the Treasury and Civil Service Select Committee in another place. I certainly join my noble friend Lord Lawson in paying tribute to the present chairman of the Treasury Select Committee in another place, Andrew Tyrie, who has also taken on these other extensive responsibilities. He is one of a number of people who have put in an immense amount of hard work behind the scenes to try to achieve a banking system which is safe for everyone and which carries out its duties as far as the economy is concerned.
The reality is that the result of all those labours is an extraordinarily complex, three-dimensional jigsaw puzzle. It is three-dimensional in the sense that some of the pieces are at UK level, some at European level and some at a wider international level. It is going to be very difficult to see how these pieces fit together. That is not particularly helped by the absolute obsession with having initials to describe all the individual organisations. It would be very helpful if, before Committee, the Treasury or the Bill team could produce a list of all these various organisations with their initials and an explanation of the way in which they interlock, otherwise it will be very difficult for us to keep pace with these affairs.
I am rather concerned that a decision has been taken to draft this Bill on to the Financial Services and Markets Act 2000. As far as I know, I have the up-to-date version of that Act from the Vote Office, but I have considerable problems in integrating the first page of this Bill, which refers to the objectives of the Prudential Regulation Authority, whereas of course the Financial Services and Markets Act is concerned with a quite different authority—the Financial Services Authority. I am not at all clear—we can pursue it when we get to Committee—how this drafting actually integrates. It seems to be a very complicated matter.
I have long had a theory that one can always tell in a Bill of this complexity at what point the draftsman actually suffers a complete mental breakdown. It happens very early in this Bill—it happens by the second page, indeed, which states:
“(b) after that subsection insert—
“(3A) For the purposes of this Chapter, the cases in which a person (“P”) other than an authorised person is to be regarded as failing include any case where P enters insolvency”.”
This chap P appears throughout the Bill from time to time and I have serious doubts as to whether this is the best way of drafting these matters. Some of them are very difficult to draft. No doubt we shall have an enjoyable time in Committee trying to sort the thing out, but it is not going to be easy to draft amendments.
I thank my noble friend the Minister for arranging a meeting with officials ahead of this debate; we may need to consult him further. Officials have been very helpful, but drafting the whole thing by reference to a quite different piece of legislation, albeit related, is not, I think, the easiest way of doing it. Similarly, in the Explanatory Notes we have constant references to “new clauses”, when in fact, as I understand it, they have already been approved by the other place. Certainly, the Bill is very unusual in that the other place seems to have given proper attention to it, instead of its being programmed, when it is impossible for them to do their jobs in an orderly way. So we are coming to the Bill when it has already been scrutinised in another place, unlike many other pieces of legislation we get.
The essence of the Bill is, I think, very much concerned with the issue of banks being “too big to fail”. I come increasingly to the view that they are not only too big to fail, many of them are too big to manage. Noble Lords have only to look at the experience of the LIBOR scandal, and so on, to realise the extent to which the people at the top have not the remotest idea of what is happening in some parts of the organisations they are supposed to head. Indeed, it may also be that they are too big to regulate, so we have to ask, at some stage, what the economies of scale in banking really are. I have increasing doubts as to whether they are as big as they seem—I see, rather, an increasing, somewhat megalomaniac approach by those in charge of such organisations to make them bigger and bigger and take over more and more other organisations. At all events, we now have a Bill which is very interesting in that it is ring-fenced, with an electrified ring-fence at that. This, we will need to examine very carefully.
I ask my noble friend who is to wind up one simple question. Are there any circumstances in which the investment bank can get its hands on the assets in the retail bank? It is a simple question. I understand the answer is supposed to be, no, but we need to examine the extent to which the ring-fence is really effective. We also have to consider very carefully the question of timing. My understanding is that some of the proposals will not come into operation until 2019. Are we really sure that we are not going to have another financial crisis—for example, if the eurozone collapses before that time? Are we sure that we are taking account of the possibility of the structure not being properly in place when we need it urgently?
I very much welcome the proposals for depositor preference, although it is very much a Treasury-driven idea. It will limit the extent to which the Treasury is liable if a particular bank runs into problems. In effect, if the ring-fence really is electrified and if it really does work, we are moving closer and closer to complete separation. I share with my noble friend Lord Lawson and others the view that ultimately, we should go for complete separation—a Glass-Steagall solution, if you will. This may take some while and meanwhile, to operate a ring-fence in a way that is satisfactory and protects depositors is a move in the right direction.
I have a final point which is very topical. I received a lot of representations from the Community Investment Coalition which was very anxious that we should make progress in providing more local data on the extent to which banks provide finance to small and medium-sized enterprises, and so on. I read, either on the web or in the news today, that the Government are proposing to publish such regional data. If so, that is something that I am sure the organisation I have just mentioned will welcome—it is generally to be welcomed. That is the present situation concerning these developments. I believe that we are making progress, but it is progress in an incredibly complicated situation. We are going to have to give the Bill the closest possible scrutiny in Committee and at subsequent stages in order to get it right. It may not be easy, but it is a job which is very necessary and urgent.
My Lords, I declare some interests. I started work in a merchant bank in the City in the late 1960s—medieval times, as the noble Lord, Lord Lawson, described them—and then from 1975 to 2000 was chief executive of what grew to become the largest inter-dealer broker in the world, now called ICAP, where I am a shareholder. For the past two years I have been a member of the advisory board of Jefferies, a US investment bank, and a partner in GP Bullhound, a boutique investment bank—in other words, a very small investment bank—which arranges finance for young technology companies.
One of the first things that was drummed into me as a graduate trainee at a merchant bank was that banks had to put their customers first, be they depositors or borrowers. That stands in stark contrast to the infamous occasion when the chairman of Goldman Sachs was asked by a Senate committee whether he put his customers first and, of course, he was unable to answer in the affirmative because he did not: he put his institution first. It is that lack of duty of care that has burdened many of our companies, small and large, many individuals and, indeed, the Government, through many PFI schemes, with the complex and very costly interest rate swaps which extend far beyond the life of the loan. Any institution or body that had a duty of care would immediately draw the attention of those borrowers to that fact.
The Bank of England regulated wholesale markets in those days by applying judgment as well as rules and my experience, as someone appointed to rescue a secondary bank during the 1974-75 secondary banking crisis, gave me the opportunity to see at first hand the effective way in which the Bank of England managed to contain and resolve that crisis.
As chief executive of the inter-dealer broker, I met regularly with the leadership of many of the great banks operating both in London and other major financial centres. I was very struck and, indeed, alarmed by the depth of ignorance that the bank leadership, particularly directors of banks, displayed about the increasingly sophisticated products that were being traded on a proprietary basis in their organisations in different time zones. To be blunt, the attitude appeared to be that if the trading is profitable and we can all benefit from it through the bonus pool, there is no real need to get too much involved in the detail.
One of the great skills of the City is that it is adept at devising business models which can give a highly leveraged reward for success but virtually no penalty for failure. That is called getting other people’s money to work for you. Bank executives were notable beneficiaries of this particular alchemy, and they were not reined in by their boards or shareholders. As we heard, all too often, Governments of all stripes have been dazzled by the great wealth of those City chaps and too ready to take what the City says on trust. The absence of scepticism from the board, directors, shareholders, regulators and auditors allowed the financial services industry to bet the UK economy. Of course, because of the large size of the financial services industry in relation to that economy the cost of that bet is now being borne by every business and household right across the land—and will be for many years to come.
The need for fundamental reform is self-evident. I join other noble Lords in congratulating the parliamentary commission on an outstanding and very important piece of work. It and the independent commission made a compelling case for reform and provided detailed proposals on how that reform should be implemented. Now is indeed the time for fundamental reform of the structure, governance and culture of banking. It is also the time to make banking far more competitive—that will take time—and better able to service the needs of an economy desperate for the investment and funding necessary to achieve sustained growth. The measures proposed by the commissions will not give us zero-risk banking, but they can substantially reduce the overall risk to the economy of the inevitable banking failures.
The test of the Financial Services (Banking Reform) Bill is whether it seizes this historic opportunity or, under pressure from City lobbying, fudges and fumbles it. The Chancellor said that he would implement the main recommendations of the parliamentary commission and, where legislative changes are required, he would amend the banking reform Bill, but the Bill before us has fallen well short of those promises. On the fundamental structural issue of separating retail and investment banking, I entirely agree that they should be completely separate, as they have a completely different culture with completely different risk profiles. I suggest that shareholders will, over time, require them to be separated. The full separation proposed is a complicated process: three yellow cards are required, the regulator has to go to the Treasury and full separation can take place only after five years. That may be long after the problems have reached a scale where another bail-out is necessary. The chairman of the parliamentary commission, Andrew Tyrie, described the Government’s ring-fence proposals as,
“so weak as to be virtually useless”.
Greg Clark, the Cities Minister, said that he would see if the government amendments could be improved. The noble Lord, Lord Deighton, said that efforts will be made to improve them. We wait with interest.
The commission’s proposals to give the Prudential Regulation Authority the powers to inspect a bank’s trading book and ban excessive proprietary trading—to which other noble Lords have referred—and the recommendation that regulators should have the power to insist upon stricter capital leverage ratios, have both been ignored by the Government. This House must table amendments to ensure that these critically important reforms reach the statute book. Relying on the risk-weighted assets test is completely inadequate. If we do not grasp this opportunity, business will go on very much as usual and I fear that the chance to reform the City will be lost. Bank lending to non-financial companies began to contract in 2009 and has continued to do so for the past four years. The absence of certainty on bank regulation makes it difficult for banks to assess with confidence the long-term profitability of additional lending. The Government’s confused response to the parliamentary commission’s principal recommendations prolongs the agony. First they were welcomed, and now they are watered down or ignored. That adds unwanted confusion, as does the Chancellor’s meddling in RBS’s affairs.
The Bill before us today is an empty vessel. It reminds me of the prospectus issued saying that funds would be raised for purposes that “shall hereinafter be revealed”—that was for the South Sea bubble. Only ring-fencing is addressed in detail, and the proposals there are deeply flawed. There is no mention of bank governance, professional standards, duty of care, whistleblower protection, remuneration or competition. All that, we are promised, is to follow. The parliamentary commission has made detailed proposals on all these matters and we look forward to seeing them properly and faithfully reflected in the draft. Frankly, until amendments covering these matters are tabled, it is not possible to have a detailed debate on the merits of the Government’s proposals, and this is the first half—or quarter—of Second Reading. Uncertainty continues, and with it the suspicion that the Government are backsliding on some of the important reforms needed, reforms which would help to avoid another taxpayer bail-out when the next crisis hits, as it will do, and promote a healthier culture in banking. Reforms are long overdue to improve the supply and choice of banking services available to SMEs and the public at large—in particular to the unbanked.
My Lords, when I came into the Chamber this afternoon I was nervous because I would have to make a confession, that I do not really understand large tracts of the Bill. I thought that I had better be honest about that. My noble friend Lord Higgins has put his finger on the spot—this is nothing that can be sorted out by fine words. There is an awful lot of verbiage in the Bill. There are pages and pages of elements designed to go wholesale into the record of other Acts. That is not a workable way of dealing with this sort of technical and difficult material. We have to acknowledge that. A great deal still remains to be done on this legislation. I have no doubt that many amendments will be tabled, but it is easy to lose track of them all. There are so many—so many are fundamental, and so many adjust other ones—that you do not get a clear run at it. My nervousness about coming in this afternoon is somewhat eased by having got that off my chest.
I have looked at banking legislation in some considerable detail for 25 or 30 years. Although I have often found the whole performance difficult to follow, I have never met anything quite as complicated and unmanageable as the present Bill. It is not an advantage to say that the ring-fence issue will be with us perhaps rather more strongly than it has been so far. Personally, I think the two cultures are incompatible. We need a change of culture—that is absolutely fine and other noble Lords have mentioned that. You do not have the same sort of mental processes going on if you run a retail bank as against an investment bank. We kid ourselves if we do not face up to that. The whole scene has become structurally complex with whole new architectures put in place. For obvious reasons, there has not been an opportunity to examine most of them in careful detail—as there needs to be. There is a lot of work ahead on this Bill. Some of that work will be very technical. Again, one has to face up to that. A lot of it will need detailed attention.
I take one particular example: the Prudential Regulation Authority. What is it trying to do? In the literature of this complex subject over the past three or four years, there is an almost continuous confusion between regulation and supervision. They are not separated in the minds of many people—practitioners, commentators and others—so we start from a very difficult and unbalanced situation. Regulation is—funnily enough, because that is what the Latin word means—about making rules and using the structures to construct this new architecture. But it is not just a question of terminology. If you start going at a problem and you are mentally confused between regulation and supervision, you are not going to get to a sensible answer. I fear that this is what has happened with quite a lot of what we were looking at before.
My noble friend Lord Higgins’ comment about a three-dimensional jigsaw was very good, because that is exactly what happens. We almost have to cut the Bill up and lay it in different quarters so that you know to what it is referring. That was a vivid way of describing it.
Many more issues need delving into. Does the FCA, the Financial Conduct Authority, receive supervision charges? Does it do most or all of the supervision and the criteria for that? What is actually meant does not come out of the text. I had assumed that it was a fairly simple issue, but I am not at all sure that it is. This is typical of the sort of thing which brings misunderstanding. After all, if people do not understand the difference between regulation and supervision, they are hardly going to get it right, because a whole lot depends on what is put into the assumptions. I do not think that we have so far had any serious comment on this. There are those who deal with this sort of matter all the time, but they have not come up with any serious reactions about supervision. You have to look through pages and pages of paperwork on this sort of thing before you can even find the word, whereas regulation is lightly talked of, as if it were the answer to all our problems, and yet it is based on an incomplete understanding of the tools.
Are people who have not worked in—or had a full experience of—financial markets, which cover the retail end of business life, likely to be people whose judgment will be satisfactory and reliable when they look at the particular issues which these bodies throw up? It is no great discovery to say that the PRA, the FCA and the FPC added together should cover the whole of the territory that we are addressing, but they do not entirely do so. It leaves me wondering about what happens inside the businesses themselves, because all these changes have undoubtedly created an enhanced role for the audit committees of insurance companies and banks and so on.
The difficulty of finding the right people to operate as private sector employees ends up with a doubt as to whether one was actually getting the right skills to handle these very difficult issues. This throws a greater responsibility on audit committees and auditors, internal and external, but they do not seem to have got their heads together to find out why it was that such appallingly made business was put together by people who were not fully experienced in part of the area where they were meant to operate. After all, how deep should an audit committee dig into the material without getting to the point where it is second-guessing senior management? Those are two different roles. We keep coming up with the fact that there are too many loose ends for it to be easy to understand what is really going on. There are huge discrepancies between published accounts of large companies and the outcome of what has happened once people have recognised the bad debts and what they do to a balance sheet.
That is plenty from me and I am sorry that so much of it was vague and imprecise, but I attribute a little bit of that to the material and not to others here today. My colleagues and other noble Lords have been very patient.
My Lords, I noted that the noble Lord, Lord Deighton, in opening the debate told us again that the Government were committed to all the recommendations of the commission. Forgive me, but it does not seem to me, as far as the ring-fencing side of this Bill is concerned, that the Government have totally accepted what the commission said. The commission did not go as far as separation, which, like the noble Lord, Lord Lawson, I would very much like to have seen, but the Minister has ruled out separation under any description, and the commission did not do that. So they have not totally accepted ring-fencing—I will come in a moment to what I want to say about ring-fencing.
I know that the Minister is new to Parliament, but he talked about there being “full scrutiny” of this Bill in the House of Commons. Anybody with any recent experience, let alone going back to my time in the House of Commons, knows that under successive Governments, all Bills have been guillotined all the way through. They may have spent so many days in debate, but I do not know how many people were seriously looking at the Bill when they did so. They certainly did not look seriously at this one.
The noble Lord, Lord Deighton, called this a Bill of the highest importance. It may be when we have finished with it and when we see the government amendments. He should understand that it is very important, as my noble friend Lord Eatwell said, that we see those amendments at an early stage, because we may wish to amend them. We cannot do that without even seeing them, although we might guess and have a chance at doing so.
I turn to ring-fencing, which is all I wish to speak about this evening. On pages 4, 5 and 6, we are told time after time where the real power lies in this Bill. On page 4, subsection (3) says:
“An order under subsection 2(b) may be made … only if the Treasury are of the opinion that”,
and then, subsection (6) says:
“An order under subsection (2)(b) may provide for the exemption to be subject to conditions”.
Lower down that page, subsection (3) of proposed new Section 142B says:
“An order under subsection (2) may be made only if the Treasury are of the opinion that”,
and then there is a whole list. Lower down again, under proposed new subsection (5), it says:
“The Treasury may by order”,
while subsection (6) refers to,
“An order under subsection (5)”.
The whole way through, everything that has to be done under this section of the Bill can be done only by order of the Treasury, not by Parliament. It does not surprise me too much that the Treasury wants all these powers. In my experience, that is what it wanted and it seems to have got it. That is because a Bill does not really go through the House of Commons as fully as it does here in the House of Lords, so our job on this Bill—to go through it with great care—will be even more important.
We are told by the commission that on ring-fencing, if I read the report correctly, it does not want full separation as the noble Lord, Lord Lawson, and I might like to see. However, it would in certain circumstances be prepared to go to it. As I understand it, that has been ruled out under any circumstances by the noble Lord, Lord Deighton, and by the Government. The whole question of Glass-Steagall is very important and an important article was written by John Authers on it recently, on 15 July. His very interesting article spoke of the amount of bank assets as a percentage of GDP. In the United States in 2010, that amount was 81%, but here in Europe it is ginormous. In Germany, France and Spain respectively, the figures were 294%, 416% and 325% of assets as a percentage of GDP. That is because the banks have grown substantially, which is why they need separating. In the UK, for example, the most recent figures on 19 May showed that we had 492% of GDP as bank assets.
Merger after merger after merger has led to precisely the problem we are now seeing. That is why the banks were led to near failure in some circumstances and almost had to be bailed out in others. However, the Government are not prepared to consider that separation or even to debate it. It should be debated fully. It cannot just be dismissed; the issue is too important for that. I hope that during Committee and certainly later on the Bill, we will have an opportunity to consider it and whether it should remain as it is, with things being able to be done just by Treasury order.
Unlike some, I am not always of a suspicious mind, but on the lobbying question, I cannot help feeling that there might have been just a little lobbying by the banks of the Government. I would be glad if the Minister could tell us whether the banks were responsible in any way for the drafting of parts of the Bill. It would not surprise me if they were—it does happen. It could save a lot of work by giving them drafts. Did they discuss the drafting and were they finally happy with it as it stands? Those banks are a very powerful body. They were even more powerful when Angela Knight did the PR work for them, but we certainly know that they are a powerful group. It would be interesting to know what lobbying the banks did of the Government because it is very important that the banks should not be too happy about what we are proposing here, as the current situation is simply unacceptable.
I am not sure whether the Bill will not still be unacceptable when we finish with it. Of course, we are told that all these amendments will be tabled. I very much hope that we will have them at an early stage but, for now, we are left high and dry. I hope that we will see them quickly and before we get to Committee. We have from now until October, so there is plenty of time for the Government to draft amendments—or get them drafted for them.
The Explanatory Notes are very interesting as well. Paragraphs 11 to 17 make it clear where the real power lies. It lies with the Treasury, as I suppose was always intended. It has the powers to do just about everything and anything. It has given some powers to the Bank of England, and the Bank of England in turn has got the PRA and the FCA, renamed from the FSA—no doubt so they can have a lot of the staff from the FSA doing the job that they were doing before. It does not really help us very much to be told that, from the start, the Government simply do not accept any kind of separation.
It would be helpful—indeed, it might be useful—if the Minister could point out in a list where the Government have disagreed with the commission. I know that there have been various statements by the Treasury but before we start, perhaps we could have a list of where the Government do not quite agree with the commission—certainly on the area of ring-fencing. That is the essential part of the Bill and if we do not get it right, we will be back where we were and we will have failures again before too long. I hope that we will see that list before too long.
Meanwhile, when the Glass-Steagall case was referred to in that article—I did not finish citing it—it talked about “seven decades” of total peace. I know that that was a different era when the banks had not started to merge to the degree they have today, but it was a peaceful era. There were no risks to banks because the banks were totally separated. The Government are not prepared to consider that, but that does not mean to say that we should not be prepared to consider it. I hope that we will have an opportunity to do so. It may sound it, but I am not being party political here, I hasten to add. Indeed, the noble Lord, Lord Lawson, knows that I am not.
I certainly hope that our Committee will be looking at this for as long as we want. We cannot be guillotined like the House of Commons. We can take our time over these matters, although we do not need to rush tonight. I will finish now in the hope that the noble Lord, Lord Deighton, will at least give us those Government’s amendments before we come back in October.
My Lords, I first declare my interests as set out in the register, in particular as a co-founder and director of the new retail bank, Metro Bank. I agree very much with what the noble Lord, Lord Lawson, had to say about the separation of high street and investment banking. It is accepted that the ring-fencing regime is a compromise to see how it goes but it seems to me, above all, that these huge institutions have become unmanageable. They are just too large to manage effectively. I also note that investors, many of them pension funds, are still investing in a mixture of the two businesses, so it really is not much help to them.
The ring-fencing brings a lot of problems in terms of which services can or cannot be sold to retail clients. It is very complex but, to go only slightly in the other direction, one should not forget that it was essentially bad lending that led to the banking disasters. The noble Lord, Lord Lawson, made that point. There was bad lending of all sorts, including the buying of foolish CDO instruments. It was not particularly the derivatives or the investment banking side. It is important to remember that. I hope that a separation of the two sides of banking, should it come about in the future, may leave the banking sector to return to more reliable lending practices. That would go a long way to help address the issue of remuneration. In the past there was never any justification for huge remuneration. It was very much a carry-over from the investment banking world.
I, too, pay tribute to the Parliamentary Commission on Banking Standards and to Andrew Tyrie’s excellent leadership. I support the new senior person responsibility regime, but with the proviso that we should continue to have the principle that one is innocent until proven guilty. Some of the proposals seem to point in the other direction.
I want particularly to talk about competition. I used to think that competition was not so hugely important. The more that I focus on it, however, the more I consider it the one thing that could completely change banking in this country within as short a period as a decade. I will start by commenting on the Payments Council arrangements to enable seven-day current account switching, which come into operation this September, and on the debate about whether bank account number portability will be feasible in the foreseeable future. First, sort code account portability will not be feasible until banks have common sort code number systems. There is a lot of work to be done to standardise sort codes, which will be expensive. My second comment concerns a point that I raised at the time of the Financial Services Bill, to which there has been no reply. The anti-money laundering, or AML, “know your customer” requirement means that another two weeks or so is added to the time that it will take people to move their bank accounts. Banks will not accept a new customer’s account until they have satisfied themselves with an AML check. We all know that that goes on for ever; people have to see lawyers, get passports signed and goodness knows what. I would not mind if it was sensible—if there was a single body that did all AML “know your customer” analysis that was acceptable to all banks and which could be kept up to date. That would save a lot of duplication. With my Metro Bank hat on, we find that just by using a driving licence we can access all the data that we want and open an account within 10 minutes.
On the point about the essence of competition, until the latter part of the 19th century we were like America, with many regional banks. When local banks went down they caused 10-year depressions in parts of the country, which led the great Walter Bagehot to argue that if banks were consolidated, that would spread the risk. Certainly, one could argue that, in the 1930s, a Midland bank that had a very rough time in the north-west was sustained, in part, because of its spread of business all over the country.
Inevitably, things swing too far in the wrong direction. I would argue that in this country the amalgamation to reduce risk spread virtually to a cartelised banking system. When one of the large four banks decided to cut massively the services that it provided to customers, everyone else copied it. By and large, the big four have behaved in a similar way for a long time. When we have a cartel situation we tend to get problems and bad behaviour. Therefore, there is a sound case to be made for a significant revival of new banks in this country, which might take as much as half the total banking business—certainly the high street business—over the next 10 years or so.
Yesterday Metro had its third birthday. We have opened 19 branches, we have a balance sheet of nearly £1.5 billion, and we have about 210,000 account holders. That has all been built from scratch. If we can do it, why cannot everyone else do it? It is not that difficult. I am pleased to say that Vernon Hill, the American backer, considers this to be a more welcoming country than America in which to grow a bank. Although we may have our complaints about regulation, the multitude of American regulation is more exhausting than it is here. He is a great advocate of doing banking business in this country.
However, there are four areas in which we see scope to improve competitiveness. None of them is absolutely huge, but all are important. The first concerns the need to have a level playing field with regard to capital and liquidity requirements. The second concerns the payments system. The Minister commented on that in terms of the Government’s commitment. Thirdly, our antiquated high street planning rules tend to make it difficult for new banks to open up in good retail spots. The final point concerns the guidance to all government departments on doing business with new banks. As everyone knows, not so long ago the advice was to place money where one got the highest interest rate. Then came the Iceland banks crisis and the advice swung the other way: “You mustn’t go to any bank unless it’s got a credit rating”. We have all seen how useful credit ratings are.
On the first point, it is unacceptable that small banks—not even just new banks—often have four to five times the capital ratio requirements for SME and mortgage lending as do large banks. Clearly, a set of common industry standards for both liquidity and capital requirements is needed. I accept that both requirements should be higher in the early years of a new bank. There are high risks in setting up a bank and it is appropriate that there should be protection. However, the regulator should know what is going on and after three or four years it should be able gradually to phase in the capital and liquidity requirements to be broadly the same for all sizes of bank. I am hopeful that the PRA will use the occasion of Basel III and the EU’s CRD IV proposals, which come in at the beginning of next year, to move in that direction. I cannot see why we are where we are today and why the PRA should not get more of a move on.
On the payments system, new and smaller banks are dependent, as everyone knows, on large competitors to provide them with agency banking services, for which they invariably are significantly over-charged. It would be best to remove the payments system completely from banks’ internal mechanisms and to create an independently run licensed payments platform that would provide the service to all banks. The US clearing house inter-bank payments system is effectively that. It services several thousand banks within the United States quite satisfactorily. I cannot think why we might not think of copying the US in that direction.
On planning, we have classes A1 and A2 planning designations where banks are treated as A2 and therefore do not qualify for A1 retail sites. If a bank wants to open an operation in a shopping mall in an area where there is a lot of retail custom, it is not allowed to have that site. If the bank thinks it worth the effort, it has to go through substantial expense and time-consuming activity in seeking to get a change of use from A1 to A2 before it can take on such a site. Needless to say, landlords do not like that much, given that there is a delay in the period in which they are likely to earn their rental. The costs of dealing with planning add about £100,000 per site. The sensible solution might be to amend class orders to reclassify banks that keep retail hours, have retail customers and provide retail services as being suitable for A1 and A2.
Finally, on doing business with local authorities, it is clear that what is needed—whether it is guidance from DCLG or local authorities themselves—is to take a wider view of rating banks. Indeed, it is an insult to the PRA, which is supposed to ensure the creditworthiness, security and liquidity of all size of bank, to assume that credit agencies are better and that the smaller, newer bank is automatically less secure. Quite often it is, in fact, the other way round. The guidelines ought to be amended inviting government bodies to make their own judgments and potentially to place deposits on a more pro rata basis to the capital of different banks.
There are two other issues I shall address briefly which are somewhat indirect. One is that the EFG small business loan guarantee scheme is working poorly in this country, particularly in comparison with the small company loan scheme in the United States. The banks do not like it as it is a nuisance and a hassle. However, in the United States, there is effectively full security cover because the lenders, including the Government as guarantor, take a charge over the entrepreneur’s residence whereas over here that is not permitted. In the United States, that makes such loans more easily on-sellable, so the banks can go on making more.
Finally, as noble Lords will have noticed, UK banks in America have now been fined many billions for breaches of various regulations. I am very mindful that America has reduced its international indebtedness by about $1,000 billion as a result of the mis-selling of CDOs and that has been substantially paid for by our banking system. I wonder whether the Treasury has looked at whether the mis-selling of CDOs is a regulatory offence for which we might look at levying some compensating US fines.
We have a lot of work to do on this Bill. It is very important, but my sit-down message is that I feel that all efforts need to be made to make this country have a much more competitive banking system.
My Lords, I have a particular interest to declare as a director of NBNK, which was one of the two bidders for Lloyds’ 632 branches. It was the unsuccessful bidder; they went to the Co-op, and now to an IPO. I have also advised in the past on derivatives in relation to interest and inflation hedging. I shall speak to the importance of retail banking to our society and competition in that sector, and to the consequent responsibility of Government and this House to reform those areas with great care.
The Government have accepted—in the comments made by the noble Lord, Lord Deighton, in opening—the conclusions of the parliamentary commission. The Lord Chancellor, the Chancellor of the Exchequer and the Secretary of State for Business have accepted the following words: banks in the United Kingdom are not doing enough to carry out their core role of financing economic growth; many of them have also failed taxpayers, their customers and their shareholders; and trust in banking is at a low ebb. A reform designed to deal with such a situation is, as I have said, of great moment.
Why is retail banking of such social importance? The facts: the largest four banks in this country have 77% of the personal account business and 85% of SME business, which, on its face, is a huge concentration of economic power; and those banks administer £6 trillion of assets, which is four times our GDP. It was thought by the Vickers commission that around 20% of that would be the subject of ring-fencing of the retail banking sector—£1.5 trillion—affecting four people out of five in this country. It follows that the size of such giant banking corporations makes them of great significance in our society. Therefore ring-fencing is not an interference with their freedom to do business; it is a step taken to ensure that they do business in a way that reflects their importance to society. So there is a need to act—to restore trust by the steps promised by the commission and, somewhat, in this Bill.
In its present form, the Bill identifies the importance of core services in the retail sector. That gives statutory acknowledgement to the obvious. What is of even greater importance is how to give protection to those core services. “Ring-fencing the retail sector”, “the personal liability of directors and senior persons”, “promoting competition”—none of those words appears in the Long Title of the Bill. Indeed, once you get past Clause 1, as the noble Lord, Lord Higgins, pointed out, and you get past the objectives, the density becomes ever more impenetrable. That is not the programme for reform. Reform should bespeak what, why, how and when. This Bill in its present form does not satisfy those tasks.
I turn to the issues that I wish to concentrate on briefly: ring-fencing, personal liability and competition. I think that I am the only practising lawyer in the speakers list on the Bill. I can guarantee the House that many, many more lawyers will be working on this for a long time to come, at enormous expense. The flurry of paperwork arriving on Ministers’ laps this evening will be as nothing to the amount of paper that this will generate. Why? Because of the power that I have just illustrated to the House. It is inevitable that people with such power will seek to protect, as they think fit, their economic interests.
The noble Lords, Lord Higgins and Lord Flight, and my noble friend Lord McFall were correct to emphasise that these institutions are too big to manage in their present form. They are not too big to manage in the retail sector once that has been ring-fenced and separated. The purpose of ring-fencing is therefore self-evident. There should be, in consequence of its importance, a reserve power—a compulsory power to enforce ring-fencing to the extent thought necessary to protect the public interest. Why? Without that power, the flurry of legal activity will go on for years. The ultimate threat that society will have through a reserve power is, “If you are not reasonable, you will suffer the consequence”. Any commercial negotiation would seek to introduce a long-stop protection, and that is what a reserve power does, creating no injustice and no concern to responsible banking. Ring-fencing should come in.
I turn now to personal liability of directors and senior persons. It is important for the Government and their advisers, as well as this House, to realise how the industry and its lawyers will investigate ring-fencing and personal liability. They will first look to whether there are statutory duties for directors, as in the most recent Companies Act. Secondly, they will look to regulatory rules that require specific behaviour. They will then look to the specific—specific—consequences that will follow from a breach of duty or failure to obey the rules. Duty, regulation, consequences: that will be their analysis. This Bill should reflect that state of reality in terms of enforcing a Bill of this kind.
The role of lawyers that I have described will be followed by potential judicial review, first against the Treasury, secondly against the regulator, thirdly against any other statutory body or decision-making entity created by orders that flow from this Act, and also by attention from the insurance industry to the D&O liability of directors in banking, the premiums for which could become extremely high. All that will flow in any event. We should prepare for that now by making the Bill as clear as we can in Committee.
Lastly, I turn to competition. The Government have said that they want this Bill and other action to promote competition, especially in the retail sector; to create, as Vickers wanted, a challenger bank—I underline challenger—to the existing banking system: not a small bank of moderate size with branches only in the tens or twenties, but hundreds of branches of significant size that will compete with the biggest banks. How do the Government suggest that this Bill, with any ancillary policies, will promote such a challenger bank? If there is no solution to that at this stage, then as the noble Baroness, Lady Kramer, predicted, it could be a generation before a new bank emerges through organic growth—if then.
The European Commission ordered Lloyds to divest itself of 630 branches about four years ago. The time to implement that divestment will run out in three months or so. As far as is known, Lloyds has not yet applied for an extension and it runs out in November or December, I think. So getting into the fifth year from the European requirement, maybe we will have an IPO. Floating an IPO for a bank in the present circumstances is not an easy commercial task. If it does not work, where will the challenger bank come from? If it does work through an IPO, it will be pretty well dependent on the existing Lloyds structure for information technology and systems for a long time to come. If the House will forgive me, a “Son of Lloyds Bank” is not a new challenger bank.
This is serious stuff if with this Bill it appears that we change the law to finish up with the same big four and the same system, except for ring-fencing, with no serious competition. That is not really what the public are entitled to expect.
In conclusion, this Bill is an enormous task for Ministers and all the House. The final Bill requires three particular characteristics. The first is clarity. Everybody will look at what they are required to do and what the consequences are if they do not do it, both in ring-fencing and in personal liability. You cannot avoid clarity and, as the noble Lord, Lord Stewartby, pointed out, with this complexity it is no good hoping that the Minister, doing his best with Treasury help, might at some stage tell us what he thinks an ambiguity in the text really means. The last time I argued in the House of Lords Judicial Committee—now the Supreme Court—this principle of what the Minister said, I was accused by one of the noble and learned Lords of a tedious exercise in what he called legislative archaeology. It is an utter waste of time. The Bill should say what it means and mean what it says. That is our job, especially after such a crisis. Clarity is a high aspiration, but a necessary one.
Secondly, there should be coherence. We have a Bill, statutory orders and the regulatory authority, and will probably have codes of conduct and banking standards—a proliferation of different modes of behaviour. They have to fit in with each other. The absence of interrelation is what the lawyers and bankers will look for. So we need clarity, coherence and finally common sense. Do not those who have £6 trillion in a society have a responsibility to treat themselves as being in a form of societal partnership with their 50 million customers—the 87% and the 85%? If it is a form of social partnership, then common sense suggests that both sides should stick together to make it work. Coherence, clarity, common sense are what we need.
If we pass this Bill in much of its present form, how will anybody know how to find out about this reform? They would have to superimpose the present Bill on at least two other statutes and extract as best they could from the superimposition a notional generic Bill for banking reform, which would be an extremely difficult task. It is not too late and it is not about starting again, but about a revision of presentation. It is not too late to state principles with schedules of consequential amendments to other legislation to inform an understanding of this major legislation.
I finish where I started. The Bill is of such importance. If society cannot trust its banks what on earth can it trust? It is of such importance to the Government and to this House that we have to take real, reasonable and hard-working steps to get this right. On this side of the House I am sure that we will look to co-operate with all others. It seems to be left to us to ensure the protection of the people in banking for the future. Let us get it right.
My Lords, this is indeed a hugely important Bill. It is one to which everyone looks to correct the position in which we found ourselves in 2008, when people genuinely feared that they were going to lose their deposits. They hope that at the end of this Bill they will be in the position that the right reverend Prelate quoted: that the banks in the UK will keep us up there as the world’s financial centre, while protecting the ordinary working person. I fear that the Bill as presented to us will not take us to that situation.
There are two main reasons for that. One has to look at the reasons for the 2008 crisis. The bulk of that crisis was due to a structural banking problem. It was not so much the bankers’ fault; you cannot blame the bankers for doing what legislation or law allows them to do. However, we were all surprised and even glad that the report on HBOS showed that the incompetence of bankers within a structural banking system was also a major problem. We can tackle one of the major structural problems of banks, and not by changing them too dramatically, because they have two main functions. One is the storage and distribution of depositors’ money and the other is the investment of money seeking investment.
The huge figures that the noble Lord, Lord Brennan, gave to us a moment ago underline the problem, which is that the deposit belongs to the bank the moment that you make it. The moment the money is paid into the bank it is no longer yours. Most people in the country believe that when they make a deposit to a bank it is still theirs. Two judicial decisions in 1811 and 1848 changed that, and banking became legalised theft, as I call it. It was a move to take away people’s money. The noble Lord, Lord Hollick, put it well when he said that it is getting other people’s money to work for you. It requires more than a change of culture to change that in banks; to allow people to retain control of their deposits requires a change in the law. If that happens, the banks will, quite rightly, charge for the storage and distribution of that deposit, but it will allow you, as the depositor, to say, “I want that amount on deposit, which will be guaranteed by the bank, and that amount can be used for investment”. If the investment arm fails, that is fine—it will not involve the taxpayer and your deposit is secure.
The way we need to go forward is by changing the structure that banks have used or adopted themselves to use in the past. We seek to change the removal of title from their own money for the depositors; we must get ownership of the deposit back to the depositor. If you merely ring-fence a bank, the money can be moved within the bank because all the money belongs to the bank. We do not know the rules for the ring-fencing, but it will not solve the fundamental problem that the bank owns all the money. Banks should also be allowed to offer equity investments. One of the major problems we face is debt. If all the banks are allowed to do is to make more loans, all you will do is create more debt. As Stephen Cecchetti at the Bank for International Settlements recently said:
“Debt is a two-edged sword. Used wisely and in moderation, it clearly improves welfare. But, when it is used imprudently and in excess, the result can be disaster”.
There is no doubt in my mind that we are heading for another banking disaster. This forthcoming banking disaster will be bigger than the one that I tried to stop in 2008 with my Safety Deposit Current Accounts Bill, which tried to do what I have just explained—namely, to retain ownership of a deposit placed with a banker. However, another, bigger banking crisis is undoubtedly coming.
We have talked a lot about competition, and a number of your Lordships have mentioned it, but what is the right amount of competition? Clearly, we would like more competition than the big four banks that we have here, but there are some 6,000 banks in the eurozone, which is part of its problem. There are too many banks; some have had to close as part of restructuring and no doubt a lot more will do so as the eurozone tries to sort out its problems. I do not know how we, as politicians, decide what the right amount of competition is, but clearly there ought to be more here and less on the continent.
Finally, I turn to regulations. As a number of noble Lords have pointed out, a huge amount of regulations are to be brought forward under the Bill; until we see those we will not know how it is going to work. I therefore ask my noble friend when these orders and regulations will be made available. We have a problem with the Energy Bill at the moment, because now almost at the end of Committee we do not have the regulations and draft statutory instruments before us so that we can look at the meat of what we are discussing in that Bill. There has been an outcry among all Members, from all sides of the Committee, that this is unacceptable. If we go into Committee on this Bill without getting the draft statutory instruments, we will face exactly the same problems in Committee as we currently face in Committee on the Energy Bill.
When I looked at Clause 17 of the Bill I was slightly confused as to exactly what statutory instruments we will look at. The noble Lord, Lord Barnett, talked about orders that may be part of the Bill but which do not seem to be statutory instruments that will come before the House. I hope that my noble friend will be able to clarify exactly what we will be allowed to discuss, whether they will be affirmative or negative resolutions, and when they will be presented.
My Lords, despite the upbeat opening speech of the noble Lord, Lord Deighton, the Government have thus far ducked the radical banking reform required, which the cross-party Parliamentary Commission on Banking Standards called for over the course of five detailed and compelling reports. Perhaps that should not surprise too many, because the Government have failed to stand up to the banks on key issues, including the safety of major institutions, boosting choice for consumers, increasing financial inclusion, the high-risk, high-bonus culture and stimulating economic growth—and at a time when public confidence in banking is at a low ebb.
People have lost confidence in the banking industry; recent research carried out by the Which? organisation shows that just 6% of consumers trust bankers to act in their best interests. However, we continue to hear of the “one rule for us and another rule for the rest of you” mentality that seems to characterise much of banking—or at least the investment banking part of it. Last year, 82% publicly-owned RBS paid £600 million in bonuses despite a £5.2 billion pre-tax loss, but a Downing Street spokesman said:
“I think you are seeing a responsibility and restraint”.
If that is a reflection of what the Prime Minister thinks, I suggest that he is seriously out of touch.
A month ago it was reported that bank bonuses had risen by 64% in a year. The average weekly bonus paid in April was 64% higher than for the same month in 2012 and at the highest level since at least 2000. That was, at least in part, evidence that the City was cashing in on the Government’s cut to the top rate of income tax, which came into force at the start of April. With the top rate cut from 50p to 45p, people who were able to delayed their bonuses until April and enjoyed a big tax cut as a result. Did someone say, “All in it together”? Hardly—that is a different world from that inhabited by the vast majority.
Last week we were informed by the European Banking Authority that more UK bankers were paid in excess of €1 million than in any other EU country in 2011. Not just more—2,436, to be precise, with the next highest figure found in Germany, at a mere 170, or 7% of the UK figure. Perhaps unsurprisingly, of those 2,400, 74% work in investment banking. These figures illustrate the ongoing problem with huge salaries in banking at a time of austerity for most people. The issue is not simply the high levels of pay, but that bonuses are paid out without risks being understood and on the basis of projected results that often fall short of expectations. That, of course, is one of the reasons why the proposals of the PCBS on a remuneration code aimed at aligning risks with rewards is so important.
Yet the Government have determinedly resisted reforming pay by: performing a U-turn on plans for an annual binding company vote on future pay policy; blocking a requirement for staff representatives to sit on board remuneration committees; and fighting in the EU to defend high pay for bankers. Last month the Chancellor was left totally isolated by the 26 other EU Finance Ministers when he resisted setting a limit on bankers’ bonuses of a year’s salary, or two years if shareholders approved.
As many noble Lords have said, the Bill is more notable for what is missing than for what it contains. As it is merely enabling legislation the devil will, of course, be in the detail of the Government’s proposals for secondary legislation. The Bill was intended to implement the recommendations of the Independent Commission on Banking on structure, capital and loss absorbency, with certain exceptions, and the Parliamentary Commission on Banking Standards was established last year, after the Chancellor came under pressure to hold an inquiry into the industry after the LIBOR-rigging scandal. The commission was also asked to conduct pre-legislative scrutiny of the draft Bill, and this led, not surprisingly, to an expectation that the commission’s recommendations would be accepted by the Government. However, we now know that that is not the case.
The need for reform has long been clear, yet the banks have fought change. In January 2011 the then Barclays chief executive Bob Diamond told the Treasury Select Committee, barely two years after the crisis broke:
“There was a period of remorse and apology for banks. I think that period needs to be over”.
Few outside banking agreed with him, and those who took the opposite view were proved right when it emerged that the culpability of the banks, and the recklessness that led to the crisis, were just the tip of the iceberg.
Since then we have seen scandals such as the mis-selling of payment protection insurance, for which, as my noble friend Lord McFall said, banks have put aside some £17 billion to cover the costs of compensation. The final bill may reach as much as £30 billion. Then there were the shameful attempts to rig the LIBOR benchmark, for which US and UK regulators have so far fined the Royal Bank of Scotland, Barclays and Lloyds a total of £1.7 billion.
Unfortunately, the Bill has emerged in an inadequate form for dealing with the abuses that were—and, it has to be said, in some cases still are—rife within the investment banking sector. In the main, the Bill concerns ring-fencing—separating what the noble Lord, Lord Lawson, called high street banking from investment banking operations. What I believe was needed was a reserve power for full separation of the two sectors. The Chancellor was not convinced, although he performed a partial climbdown when he agreed to powers to separate banks on a firm-by-firm basis. This is not sufficient. It is vital for the Treasury to have a backstop reserve power for the whole sector.
As my noble friend Lord Eatwell said, Labour amendments at Report stage in another place would have inserted a requirement for a thorough review, every two years, of the ring-fencing of retail banks, to augment the electrification of the ring-fence. For instance, a proper and independent review of the adequacy of ring-fencing every two years would surely be better than the Government’s reliance on the Prudential Regulation Authority. But that idea was rejected by the Government in another place.
Another Labour amendment proposed sector-wide powers for full separation of banking as a backstop if ring-fencing proved ineffective, based on proposals drafted by the PCBS. Certainly ring-fencing should be given a chance to succeed—but the Bill should contain a backstop of full separation if it is shown not to be working. The Government rejected that idea too, and their own suggestion again at Report stage in another place would take six years if ring-fencing failed. That is much too slow, and could never form an effective backstop power for galvanising and electrifying the ring-fence. Like all other noble Lords, I am sure, I was interested in the promise by the noble Lord, Lord Deighton, about what he termed the streamlining if this process; we wait with interest to see what the detail will reveal—but it is possible that even that may prove to be a backstop power in little more than name only. As I have said before, full separation is the necessary backstop power, as I fear that nothing less will suffice to incentivise the banks to comply with ring-fencing.
Furthermore, the Treasury needs to take powers to set the leverage ratio. At Report stage in another place Labour tabled an amendment to insert an overall leverage target for the UK’s financial system, including the activities of foreign international institutions. It stipulated that after every three-month period, the Financial Policy Committee of the Bank of England would notify HM Treasury of any instances in which the committee had acted to regulate leverage in the financial system to an identified target in a manner consistent with maintaining adequate credit availability and growth in the economy. That amendment sought to take forward the view of the Independent Commission on Banking, which supported the use of leveraged ratios as a backstop. It also advocated a tapering of requirements when a bank crossed a certain threshold, by increasing the minimum leverage ratio from the Basel III 3% to over 4% on a sliding scale.
The Parliamentary Commission on Banking Standards said that it was,
“essential that the ring-fence should be supported by a higher leverage ratio, and would expect the leverage ratio to be set substantially higher than the 3% minimum required under Basel III. Not to do so would reduce the effectiveness of the leverage ratio as a counterweight to the weaknesses of risk weighting”.
The aim of the Labour amendment was that a target should be set for the financial system as a whole, with the regulators empowered to make more sophisticated judgments about firm-by-firm leverage arrangements that could take account of institutions that were too significantly different from one another. The Government rejected that proposal too.
It is well known that the Chancellor has published an 80-page response to the PCBS’s final report, stating that the Government would implement its main recommendations, using the Bill as a vehicle. The commission’s chair, Andrew Tyrie MP, has commented that there is a marked difference between the Government’s initial welcome of proposals to give regulators the power to break up banks if they breached the division between retail and investment banking operations, and the actual amendments put before MPs in another place.
“It would barely give banks pause for thought”,
was Mr Tyrie’s assessment. In fact, he has been even more trenchant, opining that,
“the Government’s amendments would render the specific power of electrification virtually useless”.—[Official Report, Commons, 8/7/13; col. 75.]
Perhaps this has had some effect, as reflected in the words of the noble Lord, Lord Deighton.
Mr Tyrie maintained that standards in banking would improve only if the ring-fence was made more robust, with the additional power of electrification. The risk of the shock of separation would be an essential incentive to improve behaviour. He also said that it was “very disappointing” that the Government would not be giving regulators powers to call for the separation of retail and investment banks, and described their decision to ignore measures to clamp down on banks engaging in risky trading as “inexplicable”. He went on to say that the decision to ignore the proposals of the Parliamentary Commission on Banking Standards on proprietary trading was “very regrettable”.
“Why the Government has rejected these proposals—electrification and proprietary trading—is inexplicable”,
said Mr Tyrie, then adding:
“Nothing substantive has been forthcoming to justify the rejection”.
Perhaps the noble Lord, Lord Newby, will attempt to provide some justification for that this evening.
It should not be forgotten that Mr Tyrie is a Conservative MP—a man who has served on the Tory Front Bench as a shadow Financial Secretary to the Treasury. He is much respected across the party divide for his expertise in financial matters, and is a fitting successor to my noble friend Lord McFall as chair of the Treasury Select Committee. Many people might wonder why the Government find themselves unable to accept in full the unanimous recommendations of the cross-party commission chaired by him. As the noble Lord, Lord Lawson, said in his interesting-as-ever speech, Mr Tyrie appears to be persona non grata in government circles. Could that have anything to do with the fact that he was, in years gone by, the campaign manager for Kenneth Clarke in two party leadership elections? Surely not.
I shall now move on to the question of lending. I, like all noble Lords participating in this debate, have received some useful briefings from organisations with an interest in the Bill. One of these was the Federation of Small Businesses, which called for an increase in the level of data that banks provide on regional lending, to give greater transparency on which areas are lending to which people, and which businesses. This would involve data—data, for example, on deposits, new net lending, products and basic demographics, to protect client confidentiality—being collected and published, on the principle that the more the data are available, the better we can target under-performing areas and groups.
That is an area in which I believe that the Bill might usefully be amended. Indeed, it links very much with the startling report in today’s financial media that bank lending to small businesses has fallen in 98 of the 120 main postcode areas of Britain. It seems that tomorrow will see the announcement of GDP growth of around 0.5% for the second quarter of the year, and that is to be very much welcomed. But it should and could have been higher, and have been achieved earlier, if the banks had properly played their part by lending to small businesses and would-be homeowners.
The figures published today demonstrate that small firms across Britain are still struggling to get access to the finance they need because the banks have cut back on lending to them in all but those 22 postcode districts. That shocking statistic confirms widespread fears that, despite various tranches of quantitative easing and encouragement from the Chancellor, lenders are failing to support a key potential area of economic growth. British Bankers Association data show that, on a regional level, lending has fallen in every area of Britain, in all nine regions of England as well as in Scotland and Wales. But the postcode breakdown was published only reluctantly by the banks, and it is understood that the Government have used the threat of legislation elsewhere to force the future publication of lending data across 10,000 postcodes by the end of the year. That information will include not only loans to small businesses but also mortgage offers to households and unsecured personal loans. That has the potential to be a very positive development, and it might still be worth using this Bill to enshrine such a policy in legislation.
After the global financial crisis and the banking scandals that followed, we need cultural change and radical reform to protect taxpayers, rebuild public confidence in the banks and ensure that, in future, they work to support the wider economy. I and my colleagues will use the Committee stage to seek to achieve at least a measure of success in that vein.
My Lords, there are lots of things about the banking system that need reforming, and I would like to talk about four that do not feature yet, or enough, in this Bill—payday loans, central counter parties, the payments system and the whole area of competition in general.
Let me turn first to payday loans. I think all noble Lords will recognise the justified concerns about payday lending. It is true that the Government are alive to these concerns and that the FCA will take over responsibility for regulating this sector in April next year. But that is eight months away and, in the mean time, the use of payday loans continues to grow alarmingly. In a Written Answer on 1 July, the Government estimated that payday lending had risen from £900 million in 2008-09 to £2.2 billion in 2011-12, with around 8 million new loans. Your Lordships will recall that Wonga recently increased its interest rates from just over 4,000% to just over 5,000%.
This is all pretty depressing, but the real situation may be much worse. The Government have no plans to monitor stock of payday lending until the FCA takes over in April next year, when they will think about it. This seems wrong. I can confirm to the noble Lords, Lord Higgins and Lord Watson of Invergowrie, that the Government have announced today that they have arranged for the banks to publish disaggregated lending figures by postcode quarterly from December this year. Why cannot we do exactly the same for payday lending? We will certainly look to amend the Bill to make this possible.
Perhaps even more worrying than lack of accurate and timely data is the Government’s ambivalence about the whole sector. I understand their concerns about driving borrowers to loan sharks, but the fact is that there is a successful model already well established of imposing strict limitations on payday lenders. In Florida, the state strictly regulates payday loans. There is a maximum borrowing limit of $500 at any one time. You can have only one loan outstanding, and this is tracked and enforced by a state-wide database of all loans taken out. The maximum fee is 10% plus a $5 verification fee, with no rollovers without having paid off the previous loan and a wait of 24 hours before applying for a new one. The software that does all this is available for implementation in the UK right now. I am sure we will want to consider in Committee the merits of having a similar regime in the UK.
The second area of concern is to do with the regulation of central counter parties, the small number of exchanges through which derivatives and derivative-type products must now be traded. Concentration of these trades into a small number of exchanges had the objective of increasing transparency and therefore predictability and therefore stability. It is quite possible that this concentration may have the opposite effect. If our banks are too big to fail, Andy Haldane of the Bank of England has pointed out that CCPs are,
“too big to fail on steroids”.
If the primary purpose of the Bill before us can be seen, as the BBA rather optimistically asserts, as,
“the final step in financial stability orientated measures”,
it is by no means clear how this Bill contributes to the stability or the resolution of CCPs or how it reduces exposure for the taxpayer. Perhaps it was not intended to, but we need to address these issues somewhere.
The third area of concern is the payments system, which essentially means VocaLink. This is the system, owned by the banks, which makes all money and credit transfers happen. It has two products—faster payments and BACS, one very fast, one remarkably slow. There are fundamental problems with this system as it stands. Leaving aside the question of who has the use of your money when it is slow in transit—when it has left your account but has not reached the recipient’s account—there are issues of competition, ownership and innovation here. The large shareholders in VocaLink have typically charged a premium for smaller banks to have access to the system. The Government are doing something about this, but the abuse of power by the large bank shareholders does not stop there.
The big bank owners of VocaLink have no incentive to innovate. Indeed, they have every reason to avoid innovation. VocaLink itself says in its observations on the Bill that,
“there are few incentives (owing to the pricing structures, length of contracts and commercial arrangements in place) for VocaLink, the payment schemes themselves or the end user banks to invest in innovations”.
Here “end user banks” really means big owner banks. You can see why they do not want to innovate. It would probably cost only between £25 million and £50 million to develop new, better, faster, more comprehensive payment systems. But because the banks’ IT systems are essentially clapped out and starved of investment, it would cost each bank hundreds of millions to upgrade its systems to implement new services. Of course, in any really competitive, customer-focused market, at least one bank would do just this, but our big banks are not competitive and certainly not customer- focused and they do not do any of this. They do not even invest in their current IT systems enough to stop them falling over. This is cartel-like behaviour—and I will return to the issue of competition in more detail in a moment. The fact is that the banks should not own or control the payments system, and we need to fix that. I think I heard the Minister say that the Government will bring forward amendments to do just that, which is very welcome. I look forward to discussing those amendments when they appear in Committee.
Before I leave the financial plumbing system, I would like to touch briefly on the issue of account portability. There has been progress on this. The new current account switching service will be available from September and mobile to mobile payments from 2014. This is a good thing as far as it goes. But, again, the fact is that we could do much better without the cartel-like involvement of the big banks. For example, under the proposed account switching arrangements, know your customer checks will still have to be carried out by the new bank, as the noble Lord, Lord Flight, said. This will delay switching for many retail accounts and is virtually certain to delay switching for all SME accounts. It need not be like this. Know your customer checks could be the responsibility of the plumbing system of a newly liberated VocaLink, and so could all the details of direct debits and other payments. How nice it would be if the banks were really forced to compete to service these consumer packages. This is an issue that we will certainly want to return to in Committee.
What many of the previous areas I have mentioned have in common is competition or, rather, the lack of competition. This is the final area that I want to talk about. I strongly agree with what the noble Lord, Lord Eatwell, said on this subject. Our banking system is not even remotely competitive. Four big banks control more than 80% of the market, and it is this problem which is a key driver of many of our other problems with the banks’ behaviour—resistance to change, corruption, criminality and incompetence. It is worth reminding ourselves, very briefly, of the most recent scandals: the collapse of HBOS; the fixing of LIBOR; the involvement of Standard Chartered and HSBC in sanctions-busting and drug money laundering; the failure of the RBS payment systems last summer; and, last week, Barclays being fined half a billion dollars in the United States for allegedly rigging the gas markets. All this is compelling evidence of corruption, criminality and incompetence.
However, these are not the worst things. The very worst scandal, an almost unbelievably bad scandal, is the mis-selling of PPI policies. This scandal was the worst for three reasons. First, it was absolutely huge. The banks are going to have to pay at least £16 billion, and perhaps £30 billion, to settle the claims made against them. Secondly, it was not just one bank; it was lots of banks. But, most of all, it is worst because it was deliberate exploitation of their customers. It is worth quoting what John Lanchester recently said in the LRB about the PPI scandal. He said:
“PPI was about banks breaking trust by exploiting their customers, not accidentally but as a matter of deliberate and sustained policy. They sold policies which they knew did not serve the ends they were supposed to serve and in doing so, treated their customers purely as an extractive source”.
The PPI scandal is the clearest possible indication that the banks do not have their customers’ interests at heart—the opposite seems to be the case. It is precisely the lack of effective competition that has allowed the banks to develop and maintain this corrupt culture.
The Government are alive to all this and so, to an extent, are the banks themselves. The Government would like to see a more diverse and competitive banking landscape and have made important moves to produce this. In particular, it will be easier to set up new banks and this will help. They would like to see the equivalent of the Sparkasse here in the UK. That would help, too. P2P lending may also help, although I should say in passing that I am very alarmed to see Santander muscling in on Funding Circle. It is very hard to see how this would increase diversity in our banking landscape. But all this is very small and very gradual. It would take decades and decades before any of this had any real effect on the big banks’ market share.
The banks themselves offer two sorts of solutions. One is better, more ethical cultures and better, more ethical leadership. However, it is hard to be convinced that this would be sufficient. At the time that HSBC was busting UN sanctions and laundering drug money, it had an Anglican clergyman in charge of it. The other solution is better regulation. The Government agree with this and in this Bill and in the Financial Services Act put enormous faith in the ability of smarter, stricter regulation to help solve the problem. I am convinced that regulation will help a great deal but I am equally convinced that on its own it will not solve the problem. In fact, I do not think the problem with our banks can be solved unless we make them really competitive and really focused on serving their customers. How we might do this, we will want to discuss in detail as the Bill progresses, but we do need to do something radical. At the moment, our banks are too big to fail, too big to jail, too big to trust and too big to manage. We should not believe that they are also too big to break up.
My Lords, it is a pleasure to follow the thoughtful speech of my noble friend Lord Sharkey, which emphasises the fact that whatever type of regulatory system you have for the banks will not necessarily effect an automatic culture change, and this could be a long process.
As the Minister said, the banking Bill will introduce a ring-fence around the deposits of people and small businesses to separate the high street from the dealing floor and protect taxpayers when things go wrong. It will make sure that the new Prudential Regulation Authority can hold banks to account for the way that they separate their retail and investment activities, giving it powers to enforce the full separation of individual banks. It will give depositors protected under the Financial Services Compensation Scheme preference if a bank enters insolvency. Finally, it gives the Government power to ensure that banks are more able to absorb losses.
I fear that I may be in a minority but, overall, I approve of the Bill. A lot of preparation has gone into it. The Government should be commended on taking careful note of the report of the Vickers Independent Commission on Banking as well as the findings of the Parliamentary Commission on Banking Standards—the PCBS—the members of which I praise for all their hard work. However, the Government—correctly, in my view—have not gone overboard in taking on all the suggestions, particularly of the latter report. In this debate the one thing that we seem to have ignored is the fact that banks have to remain competitive internationally. Until Glass-Steagall is reinstated in the US, we will not be on the same playing field as other international banks if we go down the route of total separation. We are right to stick with Basel III although, as other speakers have said, it could be quicker in coming to final solutions.
The banks themselves seemed to accept, although reluctantly, that the Bill represents a workable solution when they gave evidence to the Joint Committee on the Financial Services Bill. Stuart Gulliver, the chief executive of HSBC, said:
“It remains to be seen”—
whether the Government are right in their proposals—
“It is obviously a ‘done deal’. The Government wish to introduce this. It would not be our most preferred way of doing it. To my earlier point, there have been several examples in history of narrow ring-fenced institutions also failing. They are happening in Spain at this moment in time. That is what the UK wishes to do; therefore we will implement it”.
Then Bob Diamond, of sacred memory, said:
“We keep being asked if it was the right decision ... It certainly would not have been my first choice. It will add cost to banking and, therefore, it will increase the cost of borrowing, but we can live with it and we are going to implement it”.
Of course, he will not be able to carry out his wish due to falling on his sword over the LIBOR scandal, but his views were interesting nevertheless. Sir Mervyn King—now the noble Lord, Lord King—said:
“The Government created an outstanding commission of individuals and it would be unwise to go against their recommendations ... the banks have said that they are prepared to accept and implement this”.
In the other place, the Opposition focused on putting to the vote as amendments many of the parliamentary commission’s recommendations which the Government had rejected. I will examine these in a little more detail. The first item was the leverage ratio. Basically, as many speakers have said, the Opposition, like the PCBS, wish this ratio to be larger, at 4%, than the internationally proposed Basel Committee recommendation of 3%. In my view, the Government were right to resist this proposal which, as I said, would put our banks and building societies at a disadvantage compared with their international rivals.
The second amendment moved in Committee was to insert a new clause. Clause 3 would have introduced a licensing regime for all approved persons exercising control functions. Although this clause was defeated, the Minister, Greg Clark, said that the parliamentary commission’s final report on standards and culture would be,
“reflected in amendments to be made in the House of Lords”.—[Official Report, Commons, 8/7/13; col. 90.]
Can I ask the Minister what these amendments may be?
On Report in the other place, the Opposition focused on five separate areas. The first was ring-fencing and electrification. Chris Leslie proposed an amendment which called for sector-wide powers for full separation of banking as a backstop if ring-fencing did not work. The Government opposed this, correctly, while proposing amendments to strengthen the effectiveness of the ring-fence.
The next area discussed was the leverage ratio again, where the Opposition wanted to introduce into the Bill an overall leverage target for the UK’s financial system. The Minister again rightly resisted this, saying that we should not move on this except internationally via Basel III. Next, the Opposition wanted an amendment concerning individual accountability and a duty of care. I understand that amendments on these matters will be introduced here.
The Opposition also wanted a review of competition in the banking sector. The Minister replied that the OFT will bring forward its investigation into small and medium-sized banking as part of an ongoing programme to introduce competition in banking.
Finally, the Opposition moved a new clause stipulating that before the sale of any publicly owned banking assets, HM Treasury would be required to submit a timely report to Parliament. The report would set out how the sale would best serve the interests of the taxpayer; increase competition within the banking sector; restructure the banks concerned, especially with regard to the split between core and investment banking and the retention of some assets by HM Treasury; and set out the impact on regional banking networks. The Minister replied correctly that enough was being done already. There was the availability of £60 million in wholesale funding for community development finance institutions and up to 25% tax relief on investments made by individuals and companies into these CDFIs. More flexible rules for credit unions had been introduced alongside the £38 million made available to them.
I support the amendments to be proposed in this area according to the briefing received today from HM Treasury. These cover the creation of a senior persons regime to replace the approved persons regime as it applies to persons responsible for managing a firm and the key risks it faces. The PCBS has suggested a new criminal offence of reckless misconduct in the management of a bank. The briefing states:
“Further, the Commission recommends that the Government bring forward, after consultation with the regulators and no later than the end of 2013, proposals for additional provisions for civil recovery from individuals who have been found guilty of reckless mismanagement of a bank”.
As the noble Lord, Lord Brennan, has said, I am sure that the lawyers will have a field day on the very difficult definition of “reckless”. The briefing continues:
“There will be a need however to ensure that any planned criminal offence or change to the civil sanction regime is measured and workable”.
I also support the creation of a new payments system regulator and the introduction of a secondary objective to further support competition for the PRA.
The Government have also sensibly made clear that they will support some of the ICB’s key recommendations at a European level because they believe, correctly in my view, that in these areas the UK’s approach should be consistent with progress across Europe. These are higher capital requirements for large ring-fenced banks, beyond the Basel III minimum standards, through powers in the Capital Requirements Directive IV and capital requirements regulation. Also proposed is a bail-in tool as part of the European Commission’s proposed recovery and resolution directive as an essential resolution tool for banks that are “too big to fail”.
I also support the Government’s decision that a number of recommendations to improve competition in the banking sector both by the ICB and the PCBS are to be taken forward through non-legislative channels. In particular, I understand that following a request from the Treasury, the Financial Services Authority published a review of barriers to entry and expansion in UK banking. As a result, the regulators are introducing significant changes to make it easier for new banks to enter the market and grow. Perhaps I may ask the Minister what those are.
The British Bankers’ Association, in its briefing for Second Reading in this House, is generally in favour of the Bill. It says that secondary legislation, as many other speakers have said, will be critical in determining whether a ring-fenced bank can be organised in an orderly and effective manner and whether it will be capable of providing a suite of services to households and businesses consistent with the principles originally set out by the ICB. Notwithstanding the need to ensure that the ring-fence is suitably robust, there is also a need to ensure that banking services in support of business, such as simple hedging and trade finance, can be provided in a cost-effective manner. So far, four statutory instruments have been produced. At first sight these appear to address some of the concerns raised by the industry and others, for instance in terms of the ability of ring-fenced banks to provide hedging services and trade finance to their clients. There appear, however, to be significant gaps in the services that can be provided in support of SMEs’ financial needs, including their export and import finance requirements. These need to be explored as part of the consultation.
Clause 4 has been amended to include group restructuring powers for the regulatory authorities in the event that they consider the ring-fence to be ineffective in procedures relating to the exercise of the powers. While the objective of the group restructuring powers are understood, including the independence of decision-making criteria, it will be important to ensure that this is compatible with the statutory duty of directors under Section 172 of the Companies Act 2006. The structural reorganisation of a banking group to bring about ring-fencing is likely to involve relying on the banking business-transfer regime and the revised Part VII of the Financial Services and Markets Act for the transfer of tens of millions of accounts and contracts. Key to this is ensuring that the revised provisions are suitably scoped and the procedures involved compatible with an orderly transition to ring-fencing within an envisaged 2019 timescale.
Schedule provisions have been added to the Bill that look to help the operability of the ring-fencing transfer process. For instance, the amendments would make statutory provision for the PRA to review ring-fencing transfer schemes in order to provide regulatory consent to transfer plans. There are likely, however, to be some instances in which small drafting amendments will be justified in order to further facilitate the smooth transition towards the ring-fencing arrangements.
As the government consultation indicates, there are outstanding issues in respect of pension scheme liabilities and VAT grouping. It is disappointing that the regulations on these remain outstanding. It is pleasing to see that at least the intention to publish the regulations on pensions for consultation before parliamentary scrutiny has been completed.
In conclusion, I once again express my support for the Bill. Of course, all these measures do not come without significant cost to the banks. According to the Government’s impact assessment, ring-fencing and depositor preference are expected to impose transitional and ongoing costs on UK banks. The Government estimate the ongoing costs to be in the range of no less than between £2 billion and £5 billion per year, with one-off transitional cost of between of £1.5 billion and £2 billion. The individual customer and/or small business will have to bear these costs. However, I hope that the benefit will be increased financial stability. No one should underestimate how close the UK banking system came to collapse in 2008, and this can never be allowed to happen again.
My Lords, it is always interesting to follow the noble Lord, Lord Northbrook, in these financial services debates. I regard him as one of the more articulate and deft defenders of the status quo in the banking system. He may have slightly wrong-footed himself by quoting Bob Diamond at an early stage but the noble Lord nevertheless sets out the case.
I come from an entirely different perspective. I want to introduce in this debate the view of the customers of banking services—whether we are talking about individual deposit-holders, like most of us; those who are seeking a mortgage or a bit more credit; the middling businessman who is looking for a little help in expanding their business or some support for their forward business plan; or, as some noble Lords have mentioned, the roughly 20% of our population who are effectively excluded from the services of the mainstream banking sector. I regret to say that I agree with my noble friend Lord McFall, who is not in his place, that the lesson of the past few years is that consumers, whichever category they fall into, have been at the bottom of the pile.
We are five years on from a very serious financial crisis affecting pretty much all the globe and which was started in the banking sector. In this country and in this House, this is the fourth major piece of financial legislation that we have had to consider since that collapse of the system. At the time of government intervention by introducing a degree of state ownership in the banking sector, I probably had slightly better institutional consumer credentials than I have now because I have retired from that role, but I can recall—not in a partisan way but just to say to the Minister—when my noble friend Lord Mandelson was in his place advocating those emergency powers, that I argued that within 18 months of the state acquisition of two of our largest oligopolies there should be, within that statute, a clear commitment to refer to the competition authorities the whole structure of the UK banking system.
After two Governments, four bits of legislation, the Vickers commission and the Parliamentary Commission on Banking Standards, not all of whose recommendations appear in this Bill, as noble Lords have said, we are left with—and are likely to continue to be left with—a structure of banking that is extraordinarily similar, apart from the public ownership bit, to the structure that was there before the 2008 crash. As for the customers, they are left with a rather less responsive and sensitive service. There is less competition in the banking system than there was then. There is less sensitivity to individual account holders and individual businessmen who go to their local bank managers. More of the risk has been shifted from the banks to the taxpayer and bank customers. We have not moved forward from 2008.
In terms of the assessment of what we should be doing in a banking system, we have moved from an opportunity, in the face of that financial catastrophe, to have a serious, comprehensive reassessment of the banking structure in this country. We have gone from a position that considered total separation of investment banking from commercial and retail banking to the Vickers commission proposal for a strong ring-fenced position and then to one that is a pretty weak ring-fencing proposition with or without the additional electrification that the Minister is proposing, which we have yet to see.
That Chinese wall is frankly a little weak. It is a bit like the Great Wall of China itself; it is a fantastic edifice looked at from afar, indeed from outer space, but when we get close to it, it has always been pretty easy for the barbarians to overrun it. Our fear is that there are quite a few barbarians within the banking sector and the stipulations in this Bill, even if enhanced by further amendments by the Minister, are unlikely to stop them. We have an oligopoly in banking. The banks are too big to fail and too big, as the noble Lord, Lord Higgins, and others, have said, to be managed, so in terms of the totality of the British economy they are too big to succeed, as well.
From the perspective of the three groups of customers to whom I have referred, how does that look? What is the individual deposit holder faced with in the period since 2008? First, there is the lowest rate of interest almost since the Bank of England was created. They face a reduction in personal services from their local bank manager and an increase in charges. That has resulted in the financial ombudsman reporting in the past couple of weeks a 179% annual increase in the number of complaints. Some of those relate to the mega crisis of PPI, but half are general complaints about the banking system. On the ground, there are fewer branches, and likely to be yet fewer still, less effective competition and less personal service than 20 years ago.
From the point of view of small or medium-sized business, my noble friend Lord Watson, who is not in his seat at the moment, has stolen my fire. There is a report in today’s paper that the net increase in lending to small firms in the last available year was negative. There is a £4.5 billion reduction in lending from the banking sector to small firms in a period when the deposits from small firms in those very same banks increased by £7.8 billion. Is that a service to depositors? Is it a service to the small businesses in the economy that are supposed to be providing the dynamics for coming out of the economic recession?
On top of that, we have to consider the Government’s attitude to better regulation of the banking system. The Government, with support from the City and elsewhere in the financial pages, are deeply resistant to Brussels innovation in regulation of the financial sector. From the other end—not the bankers’ but the business customers’ end—does the average small and medium-sized business in Britain get a better service than in Germany? Has that been the position in Germany for the past 60 years, never mind more recently, where small and growing businesses can go to the regional and co-operative banks for a personal service? Their advancements are based on their business plans. That includes not only the smaller companies but the all-important Mittelstand in the German economy, which is always pointed to as being a driving force of German economic growth.
In this country, we have had a decline in relationship management between local banks and businesses. Their requests for credit have been referred up to their central computer, based on nationally determined, or possibly internationally determined algorithms, the net result of which is that whatever the pleadings at the local level with local bank managers, the computer says no. That is what a lot of our business customers face. The right reverend Prelate and others said that there is a disconnection between what we expect and need from the banking service—the experience of SMEs, individuals—and what is actually happening in the banking service that is being provided.
The third group of customers that I have identified—those seriously outside the banking system—is one that the Government, on a different plank, recognised as being outside when they had to accept the amendment of my noble friend Lord Mitchell to the previous Financial Services Bill. Roughly 20% of the population either do not have banking facilities or have such basic banking facilities that they can never acquire credit or sophisticated services from the banking system. So what happens to them? They go to Wonga—the noble Baroness, Lady Kramer, referred to this earlier—or to pay-day lenders, or to the even more nefarious high-street lenders which are springing up around the country, or, even worse, they go to illegal money lenders, leading to serious distress in some of the poorest communities in our country.
In other sectors where we have an oligopoly and a regulator who is supposed to operate in the interests of consumers—whether we are talking about energy, water or telecoms, with all their shortcomings—there is something close to a universal obligation. This is because it is recognised in an oligopoly that they are vital to economic and societal needs. In the banking sector there is no such obligation. That leads to 20%, possibly more, of our population being outside the customer requirements of the banking sector.
My noble friend Lord McFall referred to the previous system of regulation and the FSA, in effect, being client-captured by the industry. We now have a new regulator, the FCA, and we have yet to see how it will behave in these circumstances and whether it will ensure that the banking sector provides a serious service to business and individuals and extends its services to the currently excluded part of the population. We need a more competitive structure, but the Bill as it stands is more likely to consolidate the existing structure than it is to challenge it. We need to ensure that during the Bill’s passage through the House we improve on that situation. I appreciate that there are statutory instruments to come, but I am not holding my breath that they will create a more positive, proactive direction to the banking sector to become more competitive and more sensitive to the needs of our business sector and our population.
Part of the problem is psychological. For a long period, we have regarded the banking sector and the City of London as being the apex of our economy. That is seriously wrong and damaging to our economy. The banking sector should be a service to our economy and to our consumers, both business and domestic. I appreciate and accept that further legislation will deal with the standards issue and that there will be secondary legislation under the Bill. I appreciate also that there is behind the Bill at least a vague notion of a nuclear option.
I appreciate, as the noble Lord, Lord Lawson, said, that we cannot deal with this overnight. However, the reality is that we have had five years since the financial crisis and there is still enormous unmet need in both business and society for effective services by our banking sector. I regret to say that the Bill is unlikely to meet that unmet need or to take us very far down the road of so doing. I hope that in the period of consideration that the House now has before it we will improve its ability, but the framework of the Bill is seriously limiting and I do not have great hope that we will improve it substantially. However, improve it we must. The Government must recognise that there will be a serious problem both for our society and our economy if the banking sector continues to fail us.
My Lords, I thank the Minister for his detailed introduction to the Bill. I also thank the Parliamentary Commission on Banking Standards—particularly Mr Tyrie, its chairman—for its excellent work. I particularly thank the Members of this House who were on the commission—the most reverend Primate the Archbishop of Canterbury, the noble Baroness, Lady Kramer, and the noble Lords, Lord Lawson, Lord McFall and Lord Turnbull, with whom we hope to work constructively to ensure that the Bill is not a missed opportunity. I praise their wise input into this process. It is certainly a good thing that the economic and financial services expertise in your Lordships’ House is so stellar in quality, given that the Government’s timetabling has left all the meat in the Bill to us.
I do not share the pessimism of my noble friend Lord Whitty and I hope that I am proved to be right. The consensus and enthusiasm that I have heard tonight to get into this Bill despite all the barriers and difficulties will mean that it will have an extremely good passage and that we will radically change and improve it. I hope that I am right but I can see the reason for his caution.
When Lehman Brothers filed for bankruptcy in New York in September 2008, it sparked a financial crisis which ricocheted around most of the major economies in the West. We saw reckless banking requiring vast taxpayer bail-outs. The public finances were irreversibly affected and the economy suffered. The Financial Services Act 2012 was part one of this Government’s response to the structural changes that they argued needed to be made. The Act abolished the FSA and established the PRA and FCA. My party supports the move to prudential regulation but continues to warn that there are numerous question marks over the role of the Bank of England as regulator, and its many and varied responsibilities. We wait to see what impact Mark Carney will have on steering this mighty ship.
If the Financial Services Act 2012 was the Government’s response to the regulatory side of the equation, this Bill would appear to be their attempt to offer some solution to the reckless banking side. As for the impact on public finances, social security bills are going up and more and more people are stuck in long-term unemployment. Things are not improving. It is true that all parts of our society have suffered: the citizen, the bank owner and the customer—as my noble friend Lord Whitty has just outlined.
I had not really thought about bank owners until last night, when I realised by accident that some time ago I had £10,000-worth of bank shares, or more precisely, I had a £10,000 Halifax ISA. I now have a £2,000 Lloyds ISA and I think that I am typical of many of the owners of banks, as well as their customers and as well as citizens. I do not want to go into this Government’s policies that have, in our view, exacerbated the crisis and, in their view, sought to mend it. There has been a self-denying ordinance in this debate to avoid party politics and I will stick to that ordinance because I think that the emerging consensus to get to the meat of this Bill is one that we should preserve.
At the end of the day, however, as my noble friend Lord Eatwell said, the impact on the real economy must be the test. The right reverend Prelate the Bishop of Birmingham talked about the need for new institutions to emerge, and the noble Lord, Lord Lawson, spoke about RBS and how a different RBS could come out of this crisis, contributing to the real economy. I hope that all of these aspirations are met.
The Bill is the Government’s response to the Independent Commission on Banking, led by Sir John Vickers, and it is intended to implement Vickers’s recommendations on structure, capital and loss absorbency. It is also meant to be the vehicle for implementing the recommendations of the Parliamentary Commission on Banking Standards, whose five reports—it is interesting that we had different figures, but I think there were five reports—on standards, ring-fencing, structure, proprietary trading, and culture, are a compendium of experience, expertise and advice in this field. This Bill, however, in fact lives up to almost none of these.
As my noble friend Lord Eatwell has made clear, it is a shell of a Bill. It is reliant on order-making powers, many of which we have not yet seen. It is entirely silent on standards, culture, customer choice and competition. I am pleased that so many noble Lords have seen the importance of filling in these spaces. The challenge before the Government is to give us the information to do this. The noble Baroness, Lady Kramer, made the point early on and my noble friend Lord Barnett said that, of course, Governments like order-making powers, but we must see much more substance in the Bill. My noble friend Lord Watson also touched on that. What the Bill does include is deeply flawed. The ring-fence rules must be reviewed and full separation powers included in the Bill as a bare minimum. The Government’s amendments on ring-fencing have been roundly criticised. My colleague in the other place put it rather succinctly:
“Five strikes and you might be out in six years’ time”.—[Official Report, Commons, 8/7/13; col. 73.]
The Minister has promised to offer a much more streamlined version—it has got to be a great deal more streamlined to be convincing.
It is fascinating just how many Peers came forward and said flatly that they were in favour of total separation. I listened to the speech of the noble Lord, Lord Lawson, with rapt attention, in particular when he touched on how the cultures were different. My noble friend Lord McFall said that he was in favour, as did the noble Lord, Lord Higgins, my noble friend Lord Hollick, my noble friend Lord Barnett, and the noble Lord, Lord Flight. My noble friend Lord Brennan painted a wonderful image of a lawyer-fest, if we do not have that backstop of full separation sitting behind that reserve power. These ideas were touched on further by my noble friend Lord Watson.
From this side of the House, we argue strongly—and let us face it, there seems to be absolute consensus on this point—that a fuller Bill is needed in response to the crisis and the banking standards. The Bill needs to address cultural flaws in the industry. I acknowledge that cultural change cannot easily be legislated for, but several legislative steps could make a difference and should be included. We believe that that there needs to be a proper fiduciary duty—a duty of care—on banks to operate prudently and to safeguard deposits. Individual responsibilities need to be clearly defined and appropriate criminal sanctions put in place.
At the macro level, the Government should also bring forward the proposals of the parliamentary commission concerning a new offence of reckless misconduct. We are also keen to see a review on setting up a financial services crime unit in the Serious Fraud Office.
My noble friend Lord Brennan spelt out how the industry will respond to the Bill when it comes into force. It will be about personal responsibility and consequences, and we have to think through how we shape the legislation. For instance, we are going down the difficult route of reverse assumption—in the sense of guilt and the need to create a defence. This is a difficult area but we did it in the Bribery Act and there are one or two other examples in legislation. However, it will have to be carefully structured.
In keeping with addressing the proper focus of the banking industry, it is time to look seriously at remuneration. The giving of grossly inflated bonus settlements while the majority of households and individuals in the middle continue to feel squeezed is not a scenario that we should comfortably see continue. We need to force bankers to think of their customers and of the consequences of their actions. We need a more long-termist approach, which could include powers to require elements of remuneration to be deferred for up to 10 years. To engender responsible behaviour, we need to look at professional standards in the banking industry and at whether bankers should be licensed. We need the confidence in our bankers that professional standards regimes have provided in other sectors.
The Minister said that there was a third pillar to this—the whole issue of culture. Many noble Lords touched on that. The right reverend Prelate the Bishop of Birmingham talked about the human or almost spiritual value in the culture. I cannot quite find the right word but perhaps we could refer to “human standards” in the culture. My noble friend Lord McFall talked about regulatory capture in the culture. In pondering this issue, I asked myself when it was that banking was great. It was great when it was based on trust. What do we mean by trust? We mean a willingness to trade in complete contracts because you know that the counterparty will not let you down. That trust completely disappeared in the crisis, and that is why banks stopped trading with each other almost overnight. Rebuilding a culture that works is a really difficult challenge. What do we have on the table so far? We have incentives through getting the remuneration right; we have regulations, which we know are difficult to get right in a holistic way; and we have fear—the fear of going to jail. We have to talk this over at considerable length, and we have to see what other shots are in our locker.
One issue that I certainly hope that we will look at is whether there can be more transparency. In many ways, transparency is a useful prop for a trusting culture. When people are seen doing things by their counterparties, wider society or regulators with a great deal more clarity and openness than is the case now, they behave differently. We will certainly want to probe whether transparency might be added to the list. It could be transparency in relations, remuneration and trade. Transparency in banking is key, and we need to see proper protection for whistleblowers.
My noble friend Lord Eatwell said that there was a serious need for competition. Virtually everybody who has spoken has said that, including the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, my noble friend Lord Hollick and the noble Lord, Lord Flight. My noble friend Lord Brennan pointed out that, in the face of the big four, building a challenger bank will take a generation.
We welcome the Government’s intention to ask the new regulator to explore the feasibility of account portability. This could be an important contributing factor to bringing greater competitiveness to the sector. Diversity and competition are vital, but they have gone backwards on this Government’s watch. We hope that the Government will heed the PCBS’s proposals that the Competition and Markets Authority immediately begins a full-market study of competition in the retail and SME sector. There are a number of other areas I will not touch on which have already been discussed, but leverage will have to be discussed and, in particular, the issue of proprietary trading.
The Government have suggested some key changes and made some quite good general statements, but we must probe them and find out what they really mean. They must stick to it and we must make sure they do. We will be watching like hawks to make sure that they stick to their promises and, indeed, go further. We will have enormous challenges—I will not call them problems—in handling the Bill. We will work through the usual channels, with the Government and other interested parties, as to how we structure this. Whether we like it or not, many of the debates in Committee will be “Second Reading debates”. That is not wrong: whole new concepts will be introduced and it will be entirely proper for the Minister presenting them to outline them in context and for them to be challenged within that wider context. It will probably be a good idea for us to discuss how to do that away from the Floor of the House, but it will be a big challenge to create the right structure to discuss the very wide areas that have been discussed. There are the real-economy consequences, the new investment vehicles and the points made by the noble Earl, Lord Caithness, which had never crossed my mind until tonight but will be useful. We heard about pay-day loans from the noble Lord, Lord Sharkey, and the issue of PPI.
We also have the point made by the noble Lord, Lord Higgins, and, I think, by my noble friend Lord Brennan, about the sheer density of the material in front of us. The noble Lord rightly said, “When I went to FiSMA and saw how it related, it did not make any sense”. No, it does not make any sense, because FiSMA has been modified ten times over since the copy he got from the Printed Paper Office. We need help from the Government on this. I believe it is called a Keeling schedule—they put one on the web for the Financial Services Act. I urge them to do that early and make sure that we can get a document so that, as the noble Lord said, he can go from the Bill to a document, the cross-references work and he can see what is happening.
This is not a particularly political Bill; but it is an incredibly important Bill. It will impact, frankly, on how we do business in the United Kingdom for decades to come. It is crucial that we get it right. I shall set out briefly where we will be coming from. The noble Lord, Lord Northbrook, set out the Opposition’s position reasonably accurately—I thank him very much for that; it saves me having to do it. The position in many areas of the Bill is a spectrum with a series of strands. The spectrum goes from light-touch regulation at one end to detailed, prescriptive, heavy-handed regulation at the other. Light-touch regulation did not work. It did not work here or in the US and we know that it has to be changed. Let us face it, the vast majority of the western world believed it was the solution. There are some people who can genuinely say that they said, “This is too hazardous”, all the way through, but they are very few. Many of us said, “It is working, it is producing the money, great”.
That is one end of the spectrum. I described the other end of the spectrum. In many ways the Banking Commission tried to be at the consensual centre of the spectrum, where it was optimal. We will bring forward amendments, probably between the Banking Commission recommendations and the more detailed end; we will be at the more intrusive end, probably. We will do that believing that it is a good place to be. We will be a listening Opposition, because there is so much expertise and depth of knowledge in this House on this subject. We want to see how those amendments fare and what counter-amendments come forward. We will look to form consensus with other Members of this House—with the Back-Benchers of other parties and the Cross Benches—and we hope, through the process of debate, to draw the Government into that consensus. At the end of the day, this Bill really needs the support and wisdom of all parts of the House. The Lords will work constructively in a cross-party way to ensure that the Government deliver a good Bill—or, if they do not, that Parliament will.
My Lords, I thank all noble Lords who have spoken in the debate this evening, particularly members of the Parliamentary Commission on Banking Standards—not so much for their contributions tonight, excellent though they were, but for the phenomenal amount of work they did on the commission. For months on end it was impossible to discuss anything with my noble friend Lady Kramer because she was either in a meeting, just going to one or in the middle of reading great piles of stuff. I know they did a huge amount of work. I share the views expressed by my noble friend Lord Lawson and others about the extraordinary leadership that Andrew Tyrie gave in driving that process forward.
I believe the Bill has been marked by a readiness on the Government’s part to listen and respond to a wide range of views. The Government have already made a series of amendments to the Bill in response to the recommendations of the PCBS and have shown willing to keep listening and to fine-tune their provisions as the debate on these issues continued to unfold. We will make further changes to the Bill in this House in response to the constructive debates in another place and here, in particular on the firm-specific electrification power. We will also introduce amendments to implement the recommendations of the PCBS’s final report on culture and standards.
The debate today has confirmed the broad consensus and strength of feeling across the House about the great significance of the measures contained in this Bill and those shortly to be added to it. In the time available now, I cannot deal with every issue that noble Lords raised. Indeed, some issues went significantly further than the Bill itself. Of course, we will return to all these issues in Committee. Many of the principal issues mentioned by a number of noble Lords were first raised by the noble Lord, Lord Eatwell. I will deal with them in the same order that he did.
There has been a lot of discussion about whether this is a watering-down as opposed to an enabling Bill in terms of what it contains. There are many further, detailed provisions to be made to implement the changes and we have taken the view that these are not all most suitably dealt with in primary legislation. That is why there is a lot of material to be done in secondary legislation. A lot of the detailed rules will be made by the PRA. I hope that we are able during the course of debates to explain how we see some of those being implemented in detail but the principle of having much of the regulation done by secondary legislation was agreed by the parliamentary commission.
The noble Lord, Lord Barnett, asked where we disagreed with the commission. I recommend that he looks at our response to its first report, which we issued on 4 February, and our response to its other four reports, which we issued earlier this month. In the second of those, a table at the back lists each of the recommendations and the text earlier on explains our response to it. Both those responses are available on the Treasury website.
I accept in principle that there is a lot which will need to be in secondary legislation. Nevertheless, it would be helpful if the proposed secondary legislation could be provided in draft so that we know exactly what the Government have in mind and can form a view accordingly.
Of course, my Lords. Much of the secondary legislation was published earlier this month. I would like to suggest—both in terms of the secondary legislation and the amendments and how we reconcile the text in the Bill with earlier legislation—that we contact noble Lords between now and the end of the Session explaining our timetable for producing material, if we have not already done so. If we have produced material, we will let noble Lords have it at that point. Specifically, the noble Lords, Lord Higgins and Lord Tunnicliffe, referred to reconciling the Bill with the existing FiSMA. We will make a Keeling schedule available before the end of the Session showing the effects of the amendments in the Bill.
I thank the Minister for giving way. The commission recommended some form of ad hoc committee to try to look at secondary legislation. The problem with secondary legislation is that you vote it up or down, so you cannot actually amend it. Given that it carries so much of the weight of the purpose of this Bill, is there a way in which there could be a more constructive discussion of its contents so that it could come finally and formally in an amended form after that discussion has taken place?
Before the Minister stands up, can I firmly second what the noble Baroness, Lady Kramer, has said? It would be enormously valuable if there were an ad hoc committee which could consider the secondary legislation, write a suitable report and thus inform the House’s debate.
My Lords, there is an issue about the timing of an ad hoc committee which produces a report to inform your Lordships’ debate. Agreement has been reached with the usual channels that we start Committee stage very soon after we come back and I am not sure that such an ad hoc committee would help. I will talk to colleagues in the Treasury and in another place to see how best we can facilitate proper discussion of secondary legislation, because, obviously, as everybody agrees, much of the meat is in the secondary legislation.
Can I reassure the noble Lord, Lord Barnett, that the banks had no part to play in drafting the Bill? It was produced by parliamentary counsel in the normal way. I should have said that draft secondary legislation was published on 17 July.
There was much discussion about standards and culture. The right reverend Prelate the Bishop of Birmingham talked about banks discussing doing what is right and about personal virtue. I agree with him that a wind of change is blowing through the banks and I am not as gloomy as a number of noble Lords have been about the extent to which the culture within banks may change. I would not put it any higher than that. I think there has been a big change in Barclays, and that is not a legislative change, it is because of the change of leadership and a change in culture.
In response to the commission, the Government propose to bring forward a number of amendments which specifically deal with standards and culture. These include a new senior persons regime for senior bank staff; introducing a new criminal offence of reckless misconduct; reversing the burden of proof, so that bank bosses are held accountable for breaches of regulatory requirements within their areas of responsibility; and giving the regulators new powers to make rules to provide enforceable standards of conduct for all bank staff.
Virtually every noble Lord who spoke has talked about the need to increase the degree of competition in the banking sector. I absolutely agree with the noble Lord, Lord Flight, that this is, if anything, the fundamental issue now facing the sector. I congratulate him and Metro Bank on its third birthday, and I congratulate him on the work that he is doing to increase competition in a very practical way.
Clearly, there is no simple way of getting to the state that most noble Lords would like, which is having a plethora of new banks providing effective competition to the existing big banks. What we have done, however, is to make it a lot easier for new banks to enter the market. In July last year, the Chancellor commissioned an FSA review of barriers to entry and expansion in the banking sector and the result of that review, in answer to the noble Lord, Lord Northbrook, is that for new banks we could see capital requirements fall by up to 80% over what was previously required. This is a big change and one of the many components that will be needed to transform the competitive landscape.
The noble Lord, Lord Eatwell, said that he was concerned about whether branches of EEA banks in the UK could arbitrage the ring-fence. EU passporting law makes branches subject to regulation and supervision in the home state, so UK branches of EU banks would not be subject to UK regulation or to ring-fencing, as the noble Lord said. The presence of EEA banks in the UK market at the moment is very small and we believe that domestic banks enjoy a strong home advantage, so there is not likely to be significant arbitrage. However, EU law has within it provisions to ensure that institutions cannot simply move to avoid regulation. We and the regulators will of course be keeping that issue very much under review.
A number of noble Lords talked about leverage—what an appropriate ratio should be, and where the power to set ratios should lie. There is a certain confusion about where powers lie at the moment. Although I am sure that we will discuss this at greater length later on, I would point out that the Government’s proposal, based on the Basel process, is that we would have a statutory minimum leverage level across the piece. However, the regulators already have the power to set a different leverage ratio for individual institutions, as we have already seen in the way that they have looked at Barclays and Nationwide—and completely without any political interference. That power will obviously continue.
The noble Lord, Lord Eatwell, drew a comparison between the 3% leverage ratio here and the 6% ratio in the US. We do not believe that these are even remotely comparable. Indeed, Mark Carney described comparing the two as being like comparing apples and oranges. I am sorry that I do not have time to explain in great detail why we believe that to be the case.
Electrification was possibly the issue that took most of your Lordships’ time. There are two issues here, given that we have agreed that in respect of an individual bank we will take powers in the Bill to enable that bank to be wholly separated. In respect of that, there has been considerable criticism of the provisions in the Bill on the basis that they provide too low a voltage, as the noble Lord, Lord Lawson, possibly said. We will be bringing forward amendments before Committee which seek to provide an appropriately increased level of voltage. I hope that they will commend themselves to your Lordships’ House.
In terms of total separation and a reversion to Glass-Steagall, our view is very straightforward. If ring-fencing were to prove ineffective, the only proper and democratic way to introduce full separation would be to return to Parliament with new primary legislation. However, given that it is a separate policy—not the same policy with a bit tacked on—we do not believe that the proposals in the Bill will be a failure. It would not be sensible to legislate for a failure that we do not think will happen; if we did that with every bit of legislation, the statute book would be many times its current length.
The noble Baroness, Lady Kramer, asked whether the Government had gone further than the PCBS on competition. It is a small thing, but we have recommended that the PRA and FCA review barriers to entry in a shorter time—the commission said two years; we have said 18 months—and that they publish annual statistics on the authorisation process so that we can see how things are going. The noble Baroness asked about game-changers in retail banking. The truth is that there will be no game-changer, but a series of small steps. The one step that will help is the seven-day switching service, which will be introduced in September and to which a number of noble Lords referred.
The noble Baroness also asked who will buy bail-in bonds. The Government have consulted on that; feedback suggested that there should be demand for bail-in debt instruments of the type that the ICB said banks should issue. Therefore we do not share her concern that there will be no effective demand for that.
The noble Lord, Lord Lawson, made a very eloquent argument for breaking up RBS into the good bank and bad bank. He knows that there will be a government response to that suggestion in the near future. He asked also about proprietary trading and believes that that is a bad idea. We believe that the ring-fencing method is superior to the Volcker-type rule in respect of prop trading and do not see a compelling case for a ban on prop trading in addition to the ring-fence. I can confirm that a difficulty in which an investment bank found itself would not threaten a high street bank. In terms of where funds can flow, it is a one-way valve: there would be no possibility of funding going from a ring-fenced bank back to an investment bank.
The noble Lord, Lord Flight, asked about the mis-selling of CDOs where that was being done, as I understand it, by foreign banks in this country. I can confirm that UK regulators could take action against any firm for mis-selling in the UK, including, obviously, foreign firms that were based here.
The noble Earl, Lord Caithness, talked about banks owning your money. He proposed what is essentially the same as full reserve banking and limited reserve banking, as it is known in the trade. The ICB has considered that issue and rejected the approach that he suggested.
The noble Lord, Lord Sharkey, asked whether the Government had gone soft on payday loan regulation: no, they have not. The FCA will be bringing forward proposals about how it intends to regulate the sector early in the autumn, which means that regulators are not waiting until next April to start to have impact. On central counter-parties, the noble Earl said that perhaps this is not the right Bill, and he is correct. The Financial Services Act 2012 extended the resolution powers in the Banking Act 2009 to systemically important investment firms, CCPs or group companies. Those powers will commence when secondary legislation has been laid in the autumn.
The noble Lord, Lord Northbrook, said that the SIs do not allow ring-fenced banks to provide export finance to SMEs. That is not the case. They can support UK businesses trading internationally. Obviously that is a very important issue for many small businesses.
I am extremely grateful to the noble Lord, Lord Tunnicliffe, for the constructive approach he took to the way we deal with this. I completely accept that we are asking noble Lords to work very hard over a relatively short space of time looking at a lot of new material. From the Government’s point of view, we will be making available all amendments and secondary legislation the moment we have them, and we are very keen that the House has the full opportunity to give all the proposals, not just those already in the Bill but those that will be coming forward, the maximum possible considered scrutiny.
I am very happy to give that assurance. Apart from anything else, Ministers will need such documents, so it is only reasonable that everybody else should have them, too.
The strength of this legislation will be due in no small part to the intense degree of scrutiny that it has already undergone and will undergo. It will be an onerous job, but I am confident that we will be able to strengthen the Bill further and look forward to further debates in the constructive spirit we have seen this evening. I look forward to the autumn, and I commend this Bill to the House.
Bill read a second time and committed to a Committee of the Whole House.