Skip to main content

Lords Chamber

Volume 748: debated on Tuesday 15 October 2013

House of Lords

Tuesday, 15 October 2013.

Prayers—read by the Lord Bishop of Leicester.

Introduction: Baroness Lawrence of Clarendon

Doreen Delceita Lawrence, OBE, having been created Baroness Lawrence of Clarendon, of Clarendon in the Commonwealth Realm of Jamaica, was introduced and took the oath, supported by Baroness Benjamin and Lord Boateng, and signed an undertaking to abide by the Code of Conduct.

Introduction: Baroness Bakewell of Hardington Mandeville

Catherine Mary Bakewell, MBE, having been created Baroness Bakewell of Hardington Mandeville, of Hardington Mandeville in the County of Somerset, was introduced and took the oath, supported by Lord Ashdown of Norton-sub-Hamdon and Baroness Brinton, and signed an undertaking to abide by the Code of Conduct.

Syria: Peace Initiative

Question

Asked by

To ask Her Majesty’s Government whether they consider that the recent Russian-led Syrian peace initiative provides a model for defusing other international crises, for example relating to Iran.

My Lords, we welcome UN Security Council Resolution 2118, which determines how Syria’s chemical weapons must be eliminated. However, the conflict continues—this is not a broader peace initiative. Syria’s use of chemical weapons presents different security challenges to Iran’s nuclear programme but there has been a similar international response. The UN Security Council has agreed six UN resolutions on Iran’s nuclear programme, all of which Iran remains in breach of. We hope that Iran will engage substantively with the UNSC mandated E3+3 to resolve the nuclear issue.

I thank the Minister for that reply and I declare an interest as Vladimir Putin’s biographer. Many people would argue that the Russian-led Syrian peace plan is the most significant peace initiative this year. To recognise this and to encourage Russia in its peace-making endeavours, a few hours ago I nominated President Putin for the Nobel Peace Prize. Will Her Majesty’s Government do the same?

My Lords, this has been a joint US-Russian peace initiative, it is not purely a Russian-led one. We welcome the constructive response that the Russian Government are now making on Syria and we hope and expect that the Russians will ensure that President Assad and his regime are represented at the Geneva II peace conference when it meets at the end of November. We hope and expect, but we do not yet know.

Will the Minister correct the noble Lord who spoke before and remind him that the idea of getting Syria to surrender its chemical weapons was raised in this House rather before President Putin raised it? More seriously, will he state that in the event of Syria transgressing the Security Council resolution, the Government would not necessarily be bound by the vote that took place in the other place at the end of August?

My Lords, we have to recognise—and I say this as a Liberal who believes in international order and is very reluctant to condone the use of force—that without the threat of force we might not have reached the position we have so far reached in Syria. Just as with the opening to Iran, without the very extensive sanctions against it we might not be having the discussions that we are now having with the Iranian Government. One has to use diplomacy as far as one can, but the big stick behind it sometimes helps.

Does my noble friend agree that in conflict resolution it is not so much a model that brings about change but the facts on the ground? In Iran there has been limited but nevertheless very welcome regime change, in Syria there has not. Can my noble friend tell the House whether Her Majesty’s Government are now receptive to Iranians participating in the Geneva II conference?

My Lords, we would welcome Iranian participation in the Geneva II peace conference. However, as UN Resolution 2118 spells out, the Geneva II peace conference is based on acceptance of the Geneva I communiqué, and Iran has not yet signalled that it accepts the basis of that communiqué.

My Lords, during the Recess, at the beginning of September, there were UPI international press reports from a reputable source that the Russians were accusing the Syrian opposition of using chemical weapons. There seemed to be almost a conspiracy of silence in the western press about these accusations. What actually happened in the Foreign Office? Was that information followed up, and if it was, what was the conclusion of any inquiry?

My Lords, Russian allegations were made. There have been investigations, in so far as it is possible to pursue investigations on the ground within Syria at present, and all the evidence to which I have had access suggests that the opposition did not have access to chemical weapons and certainly did not have the capacity to use chemical weapons on the scale on which they were used on 21 September.

My Lords, does the Minister agree that this shift in fortunes in Syria is very largely due to the relationship of trust that the United States Secretary of State and the Russian Foreign Minister have developed in recent months, and that similar levels of trust will be vital to resolving other pressing international crises, not least with Iran?

My Lords, I agree. I should also say that the British Foreign Secretary has worked extremely hard over the past nine months and more to come to terms with the Russians and to develop a relationship with the Russian Foreign Minister. The European Union high representative, the noble Baroness, Lady Ashton, has also done a great deal of work with the Russians on Syria and as part of the E3+3 on Iran.

My Lords, I welcome very much the first steps in restoring diplomatic relations with Iran and the Foreign Secretary’s meeting with his Iranian counterpart. Does the Minister agree that Iran can be enormously helpful in Syria, Lebanon and Afghanistan, as well as in the other country mentioned by the right reverend Prelate? If there is progress on these fronts, would that not justify further steps in normalising our relations?

Of course it would. However, we are proceeding slowly and cautiously. There was an Iranian invasion of the British embassy compound only two years ago and we are conscious, as the Foreign Secretary said in his Statement to the Commons the other day, that the Iranian political system is a complex structure and that to be President of Iran is not necessarily to command all power in Iran. When President Rouhani returned most recently he was cheered in the streets of Tehran, but he was booed and his car was apparently pelted by members of the Basij militia.

My Lords, I probably should start by making it clear that it is no part of the Official Opposition’s policy to nominate President Putin for the Nobel Peace Prize. The initiatives on Syria, particularly in relation to chemical weapons, are plainly welcome, although there is much more to do on Geneva II. I understand that the Foreign Secretary has done some months’ work on deepening the relationship with Russia, but it does not seem to have deepened enough for it to be a reliable way of achieving the objective in the effort to defuse crises. What positive steps will the Government take, perhaps with the United States and France, to deepen that relationship so that it is more reliable?

As noble Lords will know, the Russians are not easy companions. Foreign Minister Lavrov is giving a big speech in Brussels today, I understand, on the relationship between Russia and Europe as a whole. Although we welcome the more constructive relationship that we are having at present on a number of Middle Eastern problems, we are also moving towards the EU summit at the end of November on the Eastern Partnership, and Russian behaviour towards Ukraine, Armenia, Moldova and Georgia regarding the possibility of those states signing association agreements with the European Union is, to say the least, not particularly constructive, nor is the effort that it is making to interrupt Lithuanian exports to Russia.

Financial Conduct Authority

Question

Asked by

To ask Her Majesty’s Government whether the Financial Conduct Authority has the authority to assess and monitor consumer finance products and anticipate their compliance with the law and the likelihood of their mis-selling.

My Lords, the Government have granted the Financial Conduct Authority a product intervention power to protect consumers. This power allows the regulator to mandate, restrict or ban certain features of a financial product, restrict a product’s sale to certain groups of consumers or ban a product outright. This power will extend to consumer finance products when the Financial Conduct Authority takes on responsibility for regulating consumer credit next April.

My Lords, that announcement is very welcome, although the delay to next April is one that I do not particularly welcome. Does the Minister recall that the FSA under its watch allowed PPI to happen, costing the banks that mis-sold it well over £1 billion and allowed CPP to sell credit card identity insurance, costing millions of pounds? Although this new body is set up, is it not worrying that the Consumer Panel has yet to meet? Can we have an assurance that practitioners of retail financial services will be on that panel, not least because the retail distribution review is now in force and there will be increasing numbers—millions of our citizens—investing in financial products without taking third party advice?

My Lords, I am sure that the FCA is well aware of the need to have a Consumer Panel that is as broadly based as possible. It is important to recognise that the FCA now has significant new powers: the product intervention power, the ability to ban products and powers to disclose details of warning notices, for example, as well as a power to take formal action against misleading financial promotions and disclose the fact that it has done so. It has more teeth, and all the evidence so far shows that it intends to use them.

My Lords, the case of a man who defaulted on a payday loan of £120 and ended up owing £1,800 was raised by Chris Evans MP, my successor in the other place. The payday loan company in question made 330 attempts to take money from his bank account and charged him £5 on each occasion. They further demanded £178 in interest charges. Some of the tactics employed by the payday loan companies would shame the mafia. Is it not time that we treated them like the mafia, as criminals?

My Lords, last week the Financial Conduct Authority published its first attempt to deal with the problem that the noble Lord raises. It is proposing that it should be possible only to roll over a loan twice and that if a consumer has a CPA with a loan shark—sorry, if it is a loan shark, it probably does not have any CPA—or an entirely reputable company, the number of payments that will be able to be taken under such an authority will be reduced to two. This will therefore deal pretty comprehensively with the specific type of issue raised by the noble Lord.

My Lords, I have seen the suggestions put forward by the FCA on payday loans in an attempt to protect consumers. May I respectfully say that whoever drafted them is a little naïve? Needless to say, those devious people alluded to here will work around them in a few moments. Does the Minister recognise that the only way to solve the issue is to cap the exorbitant interest rates charged and, more importantly, impose strict advertising guidelines where the advertisers are forced to devote as much prominence to warnings as they do to the sales pitch? By that, I do not mean some micro-printing in jargon that is not understood by the average consumer.

My Lords, the FCA has made proposals on advertising, which the noble Lord may have seen. As for a cap on interest chargeable, the view at the moment is that the FCA does not believe that that is the most effective way of capping the total charge made. I am sure the noble Lord will have seen the Which? report in recent days, showing that borrowers from high street banks are sometimes paying as high, if not higher, effective rates of interest on their loans because of other charges. The key thing is to have a cap on the total cost of credit, rather than simply go for a cap on the rate, which payday loan operators certainly can get around by imposing a whole raft of other charges surrounding the conditions of the loans.

Perhaps I may raise a point that I have raised on previous occasions. That is to say that the debtor is not entirely without protection in our law. As the Minister will know, a judge of the High Court, or indeed a circuit judge, always has the power in dealing with these matters to ask himself the question whether the creditor has acted unfairly or whether there are conditions in the contract that are unfair. If he finds that to be the case, he can do one of two things: he can either rewrite the contract completely or he can refuse all redress to the creditor.

I am sure that that is the case, but we want to try to ensure that contracts do not have those unsatisfactory features in the first place and that, if they are unsatisfactory, either they are banned, which the FCA will be able to do, or the rules will be set in such a way that they do not become widespread in the first place.

My Lords, the Opposition are of course pleased to endorse changes to the law that are being effected by the Government at present, although we still doubt whether they are going far enough. However, is there any evidence that changes in the law are effecting the necessary change in culture in the City and elsewhere to ensure that higher standards prevail and that the grievous abuses of the past will not continue?

My Lords, two things have to happen. First, we have to make sure that the regulatory and legal framework is fit for purpose so that people do not adopt unacceptable methods of behaviour in the first place, and if they do, they can be caught and dealt with properly. Secondly, there is a big issue around the culture in the City, which the Parliamentary Commission on Banking Standards discussed at great length and which your Lordships’ House has discussed. The two have to go hand in hand. The pressure that this House and Parliament can put on the banking sector regarding culture should not be underestimated. Debates here are taken seriously by the banks. We need to keep pressure on them whenever we have dealings with them. This must be underpinned by law and by better regulation, but we need both.

Education: Foreign Languages

Question

Asked by

To ask Her Majesty’s Government what steps are being taken to arrest the decline in the number of foreign languages students in schools and universities.

My Lords, learning a language brings intellectual, cultural and economic benefits to individuals, employers, communities and, indeed, nations. The Government are committed to the teaching and learning of languages in schools. Indeed, from September 2014, primary schools will have to teach a foreign language at key stage 2. Thanks to the English baccalaureate, modern language GCSE entries have also reached their highest level this year, increasing by about 16%. We have also prioritised higher education funding for modern languages courses to ensure the continued availability of language study in higher education institutions.

I thank the Minister for that Answer. Before I press him further, perhaps I may offer my personal congratulations to the noble Baroness, Lady Bakewell of Hardington Mandeville. I look forward to receiving her post, and I hope she enjoys mine.

I very much welcome the move to have young children taught languages—I am sure that a great many of us do—but I wonder what will happen in the light of the present situation. The number of universities offering language degrees has fallen by 40% since 1998. With such a fall, what will happen to those young students when they grow up and find that there are not enough available language courses for them to study?

Of course, the noble Baroness comes to this with a great deal of expertise from her position as president of Birkbeck. The Government have continued through the Higher Education Funding Council for England to treat modern foreign languages as strategically important and vulnerable, and have provided additional funding to ensure that adequate levels of provision remain. To give an example, £3.1 million of further funding for a new three-year student demand-raising programme has already been allocated. We are also encouraged by the recent figures on the Erasmus programme, which show that more than 14,000 students from the UK are now participating in programmes at other institutions across Europe.

My Lords, I declare an interest as Chair of the All-Party Parliamentary Group on Modern Languages. Is the Minister aware that there is now very robust evidence to show that languages at GSCE and A-level are subject to unfair, harsh and erratic marking? This deters schools from encouraging students to choose languages, in case their position in the league tables is damaged. It also deters students from choosing languages, because they know that their chances of getting top grades and university offers might be reduced. Will the Minister undertake to meet urgently with Ofqual and the examination boards, in order to ensure that an equitable marking system can be guaranteed before the 2014 exams?

I can certainly say to the noble Baroness that I will take back her suggestion to the department. It is important for all of us across the House to underline the importance of languages. The new national curriculum, which has now been published, includes a statutory foreign language at key stage 2. We believe that this will encourage students to take up modern languages, and indeed encourage schools to offer them. As I said earlier, the English baccalaureate is already encouraging more young people to take a language at GCSE level. Let us not forget that it was in 2004 that a statutory undertaking to provide languages at schools was removed. We are trying to restore that, and ensure that this medium to long-term process is long lasting.

Does my noble friend not agree with me that one very welcome development is that many universities now offer joint degrees? They teach modern languages alongside engineering or business studies, for example. This is exactly what employers tell us they want.

My noble friend makes a very important point. We need to understand the issue of languages at universities. Many universities offer languages as an addition to other disciplines, and people benefit from that. I come from the business community, and when I was on the board of a company we recognised that such degree courses provide a particular technical training alongside a language. Language training has changed—languages such as Chinese are much in demand by employers, and are being encouraged across the board.

I return to the noble Lord’s point about the requirement for primary school students to now be taught modern languages. Where will the teachers who will deliver languages in primary schools come from, and what qualifications will they be expected to have?

Again, the issue of teachers arises—you need teachers to teach languages in the first place. I am pleased to say that the Government are encouraging teacher supply on this level. We are making available an increasing level of bursaries for those students wishing to undertake teacher training in languages. Bursaries have been increased for up to 20,000 available candidates with first-class honours degrees who wish to pursue language training.

My Lords, does the noble Lord not agree that it would be a pity for efforts to teach foreign languages to be motivated by purely commercial interests? Trying to get people to be better business representatives abroad is surely not the only reason. Many of the people who are learning foreign languages find that in other countries they speak English anyway, and put us to shame. Would it not be a great shame if future generations did not at least have the ability to read some of the world’s great literature in its original language?

I agree with the noble Lord’s final point. As someone whose origins lie in the Indian subcontinent, I assure noble Lords that at home mother knew best, and we were taught languages appropriately to understand literature from across the world. While English remains the language of the modern business world, I referred in my opening Answer to the importance of education to understanding cultures across the world. Indeed, looking at the example of the Chancellor and the Mayor of London, we see that both their daughters are currently undertaking courses in Chinese. Anyone who has done business in China will know that without understanding Chinese in China you will not be able to expand your business.

Tobacco Products Directive

Question

Asked by

To ask Her Majesty’s Government, in the light of the recent vote in the European Parliament, what are their current intentions with regard to the proposed revision of the tobacco products directive.

My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In doing so, I refer noble Lords to my health interests in the register.

My Lords, we are very pleased to see the move towards tougher action on tobacco, with Europe-wide controls banning flavoured cigarettes and the introduction of stricter rules on front-of-pack health warnings. However, we are disappointed that the Commission’s proposal to regulate nicotine-containing products, including e-cigarettes, as medicines was not supported by the European Parliament. We believe that these products need to be regulated as medicines and we will continue to argue for this during further negotiations.

My Lords, I am grateful to the noble Earl, but is he particularly disappointed that it was Conservative MEPs who voted to weaken tobacco packaging warnings and blocked a ban on slim cigarettes, which are targeted at young women? Will the Government make amends by agreeing to amendments to the Children and Families Bill which would mandate the introduction of standardised packaging in this country?

My Lords, the tobacco products directive, as the noble Lord will know, does not seek to introduce standardised packaging. As he will also know, the Government have decided to wait before making a final decision on that issue but we want member states to have the flexibility to make further progress on domestic tobacco control measures in certain key areas that go beyond the new directive. We have been helping to shape the final text of article 24 to achieve that objective.

Is my noble friend aware that in this country people who have suffered even major amputations are still so addicted to tobacco that they will ask the doctor to hold up the cigarette to their mouth? I have had this report from doctors. Does he not think that what we really have to aim at is stopping smoking among the young? Is he aware that in Australia it is no longer cool to smoke if you are young? Apparently, that is more effective than any of the health warnings.

My noble friend, as ever, makes some very wise comments. The good news is that the most recent figures on smoking prevalence are going in the right direction. It is undoubtedly true that we can never do enough to raise our game on smoking cessation measures, one of them being nicotine-containing products. That is of course a major focus for Public Health England.

Does my noble friend agree that if children are being driven in a car where adults, perhaps their parents, are smoking it is extremely dangerous for those children? Does he not think that the Children and Families Bill is an opportunity to put this right?

I certainly look forward to the debate on that issue during proceedings on the Children and Families Bill and I agree with my noble friend that we have to do all we can to discourage smokers from lighting up when children are in a vehicle. We believe that that can be done without resorting to legislation at present.

Is the Minister able to confirm that there is nothing in the tobacco products directive to prevent the Government introducing standard packaging for cigarettes and implementing a ban on smoking in cars when children are present?

Yes, my Lords. So far there is nothing in the directive to prevent that, which is why article 24 is the most important issue for the Government. We want member states, as I have said, to have the flexibility to make further progress on domestic tobacco control measures in key areas.

Despite the EU’s lack of interest in regulating for e-cigarettes, is it the Government’s intention to regulate against them in the United Kingdom?

My Lords, our position is clear: e-cigarettes should be regulated as medicines. These products need to be regulated for safety and quality, one of the reasons being that, as medicines, we can more effectively control their sale to children and the way that they are advertised and promoted. We need to take an approach that is future proof, being applicable to new technology nicotine products in whatever form might be brought forward in the future.

Can the Minister tell us what action the Government intend to take over slim cigarettes, which were not affected in the recent EU directive but which are particularly appealing to young girls and are often a route to introducing them to becoming addicted to tobacco?

The noble Baroness makes a very good point. While some in the public health community are concerned about slim cigarettes, and understandably so, both the European Parliament and the Council decided that slims should not be banned under this directive. However, she is right that slims are known to be more attractive to women than men. It may be something that remains on the agenda for future consideration at a European level.

My Lords, is the Minister aware of evidence from New Zealand that e-cigarettes are extremely effective in getting people off tobacco cigarettes and that they are more effective than tobacco patches? Is it not important that in regulating e-cigarettes we do not discourage them from taking a considerable market share from tobacco products, given that vaping is clearly much safer than smoking?

My noble friend is right. E-cigarettes certainly have the potential for being a force for good in helping smokers to quit. At the same time, we do not want them to become a gateway into smoking. The aim is to have licensed products that have demonstrated safety, quality and efficacy, and for such products to be available as widely as possible.

Will the Minister take note of the fact that people have moved from heroin to methadone, which is less dangerous to them than heroin? In fact, we now have hundreds of thousands of people parked on methadone and there is no way in which we can get them off it. That is extraordinarily expensive for the country and bad for their health.

I recognise the issue that the noble Lord raises, but perhaps that is a debate for another time.

Financial Services (Banking Reform) Bill

Committee (2nd Day)

Relevant documents: 8th and 10th Reports from the Delegated Powers Committee.

Amendment 43

Moved by

43: After Clause 8, insert the following new Clause—

“Competition and diversity

The Secretary of State must bring before Parliament within 6 months of the passing of this Act proposals to increase competition and diversity in banking by imposing upon any bank in which Her Majesty’s Government is a majority shareholder a duty to apply the following principles—(a) the principle of regionality whereby each branch of the bank is permitted to take on new deposits, open new accounts and make loans to companies or individuals only when the registered addresses of these companies or individuals is within the defined geographical area of operation of that branch;(b) the network principle whereby regional groups of local branches are autonomous in terms of governance, publish separate reports and accounts, collaborate with other branches to share central services such as the provision of systems, marketing, specialist financial products, liquidity management and wholesale funding while also maintaining appropriate mutual guarantees and self-regulation within the group to ensure that failing local management and branches are dealt with within the group with no recourse to the taxpayer;(c) the stakeholder principle whereby the governance of regional groupings of local branches explicitly includes stakeholder representation, comprising local businesses, customers, suppliers and employer and elected employee representatives;(d) the social purpose principle whereby a broader social purpose is embodied either in the banking licence of the bank or other statute so that the directors do not have a duty to maximise profit, but to ensure the profitability and financially sustainability of their local operations in supporting the economy of their regions of operations and financial inclusion in those regions, and nothing in this social purpose principle requires making loans that could not reasonably be expected to be repaid.”

My Lords, this is a probing amendment. It is designed to allow us to consider what progress we are making in generating competition and diversity in our financial system, and what steps we might take to accelerate this process.

From the start, the Government have recognised that there is a problem with the levels of diversity and competition in the financial system. The coalition agreement of May 2010 commits the Government to,

“bring forward detailed proposals to foster diversity, promote mutuals and create a more competitive banking industry”.

A year later, the Commons Treasury Committee published a report entitled Competition and Choice in Retail Banking. This report showed competition to have declined. Part of the evidence for this decline was in the simple increase in concentration of financial services; part of the evidence was in the decline in customer satisfaction. The report notes:

“Competition policy should maximise the benefit to the consumer. Our evidence suggests that this is not happening. The large banks perform poorly on many consumer satisfaction surveys relative to other providers. Survey evidence consistently shows customers are dissatisfied by service quality and the lack of real choice on offer in the marketplace. In a genuinely competitive market we would expect firms which provide superior service, choice or prices to gain significant market share from rival firms, but we see little evidence that this is happening”.

The committee is there describing in restrained and measured language a cartel-like situation. In other words, there are too few banks, and those are too big and too similar. The banks themselves did not agree with that view. The committee noted:

“The large banks have told us that ultimately consumers will benefit from lower prices resulting from the economies of scale and synergies provided by larger more diversified banks. We agree that there are economies of scale/minimum efficient scale in retail banking which will ultimately limit the total number of firms in the market. However, we question whether the need for economies of scale justifies banks having a 30% share of the market or whether such benefits, if they exist, will be passed onto consumers in a market where competition is deficient. Indeed, such economies of scale benefits are likely to be outweighed by the negative impact on competition by those providers who are perceived to be ‘too big to fail’”.

In addition, there are two other factors. First, as Andy Haldane has noted, there is a case for concluding that over $100 billion in assets, banks actually become less efficient. They are too big. Secondly, the evidently corrupt culture we have seen in some of our banks is a clear symptom of a lack of real competitiveness and is probably chiefly caused by this lack. It is competitiveness—real competitiveness—that keeps companies honest, or at least very much more honest than some of our banks have been. I rehearsed all their recent and shocking failings at Second Reading, and I will not do so again now, but I will again point out that the PPI scandal is the clearest possible indication of non-competitive, cartel-like disregard for the interest of consumers. Banks sold policies which they knew did not serve the ends they were supposed to serve, and they did it on a gigantic scale. This would not happen in a truly competitive market.

This is the situation today: there is a lack of real competition and of real diversity. A study by the University of Oxford published in April this year by the Building Societies Association shows that across both the savings and mortgage markets diversity has dropped by about 20% since 2004. The report acknowledges some hopeful signs and says that in recent years the decline appears to have levelled off, but it concludes:

“If the Government is to fulfil its commitment to foster diversity it will need to do more to ensure that a variety of organisations are able to operate in financial services markets in the future, with the aim of reversing the decline in diversity... since 2004”.

It also says, bluntly:

“Consumers are likely to benefit less from competition than a decade ago and if another crisis were to hit, the system is more vulnerable than it was”.

The Government are clearly alive to the problems of competition and diversity and to their importance. Many initiatives, legislative or otherwise, have been aimed at bringing about improvements in both, but there is nothing in place which will produce any significant improvements in any near future, and there may be nothing in place at all that will really transform the competitive landscape. Divestment of branches and regulation of P2P and crowdfunding are welcome, and easing of the difficulties in acquiring a banking licence is very welcome indeed, but the plain fact is that we start from a position where the large banks have 80% or so of the market in the UK and have behaved in a cartel-like manner. The measures in place or in progress will surely not reduce this figure by much in the next 10 years. In fact, I would be very interested to hear if the Treasury has a medium-term forecast of market share of the big banks. Perhaps the Minister could help with that in his reply.

This 80% dominance of our big banks is the cause of the lack of diversity in our financial system, which is now very much less diverse than it was 50 years ago. The German savings bank association pointed out in May this year that 70% of German banks are mutually owned or not for profit. It also noted that in the UK just 3% of banks are local, compared to 34% in the USA, 33% in Germany and 44% in Japan.

The question is, of course: what can be done to speed up the progress of competitiveness and diversity? I do not think the answer to this question should be “Nothing”, or “We do not need to”, or “We can wait for some technological change to eventually produce the results we look for”.

I have spent almost my entire commercial life working with very large multidivisional and multinational corporations. They are fiercely competitive because they are committed to securing even the smallest possible profitable increase in market share. They are committed to doing this by being dedicated to serving the interests of their customers because they feel, no matter how big they are, the relentless threat posed by very much smaller, more agile and more innovative competitors. We need all these things, especially the last, to be true of our banking system.

I think any really substantive answer to the question of the lack of competition and diversity will have to address directly the lack of the true regional or local banking and the absolute dominance of one type of banking. This amendment sets out a proposal to do just that. We can do more and do it more easily with banks we own than with the other banks. We have an opportunity to use our ownership to begin to bring about the transformative changes we need.

The amendment proposes that the Secretary of State must bring before Parliament a plan to increase competition and diversity by imposing on banks we own a duty to apply the principles of regionality, networking, stakeholder involvement and social purpose. The principle of regionality is to restore real localism to banking, so that banks really know their areas and their customers in a way which is emphatically not the case right now. The network principle is to give regional groupings of branches a degree of real autonomy and some real identity. The stakeholder principle is to give representation in the banks’ activities to local businesses, customers, suppliers, and employees as well as employers. The social purpose principle is to explicitly give banks a local social purpose and responsibility. It is these principles that we need to see in operation if we are to introduce any real competitiveness, any real innovation, and any real diversity into our banking system.

As the noble Lord, Lord Eatwell, said at Second Reading, the Bill before us introduces no fundamental change in the competition regime. That is a pity. I look forward to hearing Lord Eatwell speak in a moment to the next amendment in this group. I say again that this is a probing amendment. It would be disappointing if the Government were to respond only by saying that it would be undesirable or impossibly difficult to regionalise banks. That would be to miss at least some of the point. I hope the Government will respond to this probing amendment with, at the very least, an account of how they intend to accelerate progress towards real competition and diversity and a reasonably detailed description of how they would like to see the banking landscape in the medium-term future. I beg to move.

It would probably be helpful if I spoke now, and also introduced the amendment which is grouped with this one. I am grateful to the noble Lord, Lord Sharkey, for mentioning the comments that I made at Second Reading, but I feel that his amendment, while it raises a series of valuable issues, conflates some of them in a way which is not entirely helpful.

The first point is the one that he also made, which is that there has been no fundamental thinking at all about the structure of banking in this country. The whole discussion about ring-fencing which occupied us last week is a modification of the existing structures of ownership, rather than encouragement to develop an entirely different and more competitive banking structure. That is a key issue which underlies the amendment in the name of the noble Lord, Lord Sharkey, and the one that is in my name and that of my noble friend Lord Tunnicliffe. Where the issue has been conflated is that regional banking, to which he referred, should be separated from the issue of competition. Either or both can be promoted, but they have to be seen as separate entities. For example, the chief executive of Santander has recently written in the Financial Times that she would like to see a significant increase in regionalisation in its activities. That, of course, is not necessarily an increase in competition, but is a more regional focus of the single entity.

It is, however, encouraging, with respect to the regional issue, that the Governor of the Bank of England argued in Leeds a couple of weeks ago that he was very much in favour of an increase in regionalism in British banking, and I wonder whether the Government agree with him in this respect. The key issue underlying this is not regionalism so much. After all, if we look across Europe, it was the small regional banks which failed in their dozens, particularly of course in Germany. The issue is of relationship banking, and the return to a close relationship between the lending entity—which used to be the manager of the bank—and the community in which he or she is located. For example, that was an important force in the development of the science park in Cambridge. At that time, Barclays Bank played an important role in the funding of the science park. The manager, who took something of a punt in this respect, was of course then promptly moved on, because it was felt that he had overstretched his remit. I am very sympathetic to the idea of regionalism, but we have to see it in the context of a secure structure, without creating the rather weak structures which collapsed in other countries. We have to focus especially on the issue of relationship banking.

I now turn to the amendment in my name and the name of my noble friend Lord Tunnicliffe. This amendment seeks to look in particular at competition, with which the noble Lord, Lord Sharkey, began his discussion. As he pointed out, while at the beginning of the financial crisis it was argued that banks were too big to fail, they are now much bigger than they were then as a proportion of the overall UK market. The “too big to fail” issue is even more important today than it has been in the past.

There is no doubt whatever that the regulatory system itself—as well as various other aspects of banks’ activity, including the payments system, to which we will return later—has been a very effective barrier to entry. Only one significant deposit-taking bank—Metro Bank—has been introduced into the UK system over the last five or six years. We need to tackle this issue of competition. It was striking that the banking commission argued in the second volume of its report that,

“a market study of the retail and SME banking sector, with a full public consultation on the extent of competition and its impact on consumers”,

should be commenced immediately. It continued:

“We make this recommendation to ensure that the market study is completed on a timetable consistent with making a market investigation reference”,

to the competition authority,

“should it so decide, before the end of 2015”.

The Government’s response to the parliamentary commission on this point does not state that they reject this recommendation. Instead, they imply that they will fulfil it. However, what has happened? Nothing; absolutely nothing. They are bringing forward the OFT market review of small business banking, but this was not talking about small business banking. They are not putting in place a market review of the retail banking sector as a whole. Why on earth not? That is what is necessary, and what this amendment calls for.

The Government say that they are in discussions and that they are engaging with the problem. We would like to see some evidence of that. It is just not enough; it is too piecemeal, and not transparent. A proper review of competition in the banking sector is required. This amendment would secure that review in the manner which the commission recommended.

My Lords, I declare an interest as a director of Metro Bank. I support Amendment 102, in the name of the noble Lord, Lord Eatwell. The Government are now well aware of the competition issue, but no particular policy has been formulated for how to deal with it. This legislation offers the opportunity to require that that should be prescribed. I will say more about competition in a minute.

While I support the principle behind the amendment in the name of the noble Lord, Lord Sharkey, I have strong reservations about regional banks. I remind noble Lords that, going back to the second half of the 19th century, when an industry got into trouble the regional bank failed and the whole region became depressed, often for a decade or more. The principle at that time, led by individuals such as Walter Bagehot, was to create national banks to spread the risk. Therefore, I am not sure that regional banks are particularly the answer.

Government policy has been anti-competition going back to at least Barings. I remember more than 10 years ago having an extensive debate with the late Sir Eddy George when he was Governor of the Bank of England, because it was stated policy that lender of last resort facilities would apply only to banks that were too big to fail. It seemed to me completely the wrong way round in that it gave smaller banks a disadvantage in terms of what they had to pay for deposits. Lots of them, such as Hambros, closed down. It created the great risk, for which we subsequently paid the price with the banking crisis. Elements of uncompetitive measures have been the big—very much higher—capital ratios that smaller banks have been obliged to have in relation to mortgage lending; the costs of the payment system; and the difficulty of getting a banking licence. If I may boast, I think that Metro Bank is the first new high street bank to have been set up in 120 years.

However, I therefore have some sympathy with the second part of the amendment of the noble Lord, Lord Sharkey. What he is saying, in my language, is that we want high street banks that will get dug into their communities and will naturally get involved with sponsoring activities in those communities. That is exactly what Metro Bank is doing. It is very good business to do it and very popular. When we open branches, there are queues of people waiting to come in and open accounts because they are so fed up with the appalling service that they have had from the banking oligopoly for the past few years. It was, indeed, very much an oligopoly. I think it was Lloyds that first decided that you could cut all service and just leave people with telephone numbers to dial. The other banks all followed, with a very substantial boost to profits as a result. For customers, however, it has been one of the biggest factors in making the large banks so unpopular.

I think the outlook is encouraging. Metro Bank plans to have something like 6% of the nation’s deposit base by 2020, which is not that far away. There are other new banks coming up. I believe that the face of the banking scene, even if the Government do not do much about it, will look very different in some 10 years’ time. One of the issues is that the big banks are simply too big to manage. The have archaic silo systems, which are an enormous problem to them. Their activities are simply too large. The requirement for increases in capital will lead to them shrinking their balance sheets and, rather like the old-fashioned huge department stores in the US, it is inevitable that business pressures will lead to their decline.

I attended an interesting meeting that was addressed by Andrew Bailey, the head of the PRA, this morning. He made the point that perhaps the regulator had been wrong to require small new banks to have much higher capital ratios against certain forms of lending. The logic for that was that new banks were more risky—fair dice—but its net effect simply increased the oligopoly strength of the existing large banks. The PRA is looking constructively at making capital ratios, as far as possible, the same across the board, whether banks are large or small. So the PRA is very much on to the need for more banking competition and for it to be supportive and helpful to new banks, as opposed to having rules that hinder them.

The Government, too, have seen the point and are keen on more banking competition. It seems to me, however, that they have not thought about it adequately and have not made up their mind about what more should be done, other than expressing a wish for more competition. That is why a requirement to look into the subject would be no bad thing. However, as I said, while I fully support the principle of more high street banks doing the things that high street banks always did, I am less comfortable with the amendment of the noble Lord, Lord Sharkey, which I think is overprescriptive.

My Lords, I should like to speak in favour of the amendment moved by the noble Lord, Lord Sharkey. It is very important that we recognise the severity of the situation relating to the banks and precisely what happened in 2008. I commend the localism agenda of the Government in terms of politics, but I wait to see how the localism agenda applies to banking institutions and their restructuring. It is very important to see the four root causes of the crash.

The first is that it is not only the state that centralises power; it is also capital that centralises. There is a consistent tendency to oligopoly and then to monopoly, unless there are constraints on that. What we have seen, and what we continue to see, is that 80% of our banking still goes through the same failed institutions, and what we have is more of the same, rather than something distinctly different. What we have is a collapse of regional business investment, which is extremely harmful and manifests itself in two ways: in constraints on productivity on one side and, on the other, the extraordinary growth of payday lenders, as the banks cannot deal with local needs. So centralisation is one aspect of the crash, and a lack of accountability in the structures of the bank is the other. This is where I am very much in favour of what my noble friend Lord Eatwell says, with one proviso.

Relationality is crucial and, when there is representation of interests in the corporate governance of banks, you have a greater degree of honesty. If you look at the story with the Spanish banks and the German local banks, you find that the constraints on them were eased and they were, in fact, acting like normal profit-maximising banks. They had lost their regional commitment and got themselves involved in series of overextended loans, very similar to ours. I say to the noble Lord, Lord Flight, that that is not a condemnation of regional banks; it is a condemnation of the fact that they ceased to be regional.

One anecdote that crystallises the problem is the example of Northern Counties Permanent Building Society, which was established in 1850 and flourished through 150 years. It went through four depressions, grew and merged as a mutual in 1965—noble Lords will see where this story is going—with the Rock Building Society. It then became the Northern Rock Building Society, which did well until 1997, when it was demutualised. It became the fourth largest mortgage lender in the country and sponsored Newcastle United but it also, by the maximisation of returns, completely lost its asset. We do not need any symbolism here; Newcastle United Football Club used to be sponsored by Northern Rock and now it is sponsored by Wonga. That is the reality of the circumstance that you confront, and there is no virtue in that; it is of no benefit to anybody. There is centralisation, lack of accountability, recklessness and deceit. They are all part of the same story of being unable to hold anybody to account. Without incentives to virtue, unfortunately, you get incentives to vice. That was the system, and it is the system that we still have.

I want to speak for the logic and the virtue of the amendments proposed here. The first element is regionality. As I say, all the cases that my noble friend Lord Eatwell and the noble Lord, Lord Flight, referred to, concerning Germany and Spain and their regional banks, were due to those banks no longer being regional. When there is a constraint on the bank to lend within a prescribed geographic area, banks will flourish. We can see how effective that has been from the Sparkassen in Germany. I remember the noble Lord, Lord Flight, a while ago referring to the stability of the German system being based on its currency, but it is also based on the fact that there is a regional banking system that sustains business through ups and downs, and where there is a genuine local knowledge of what is going on in those businesses as well as a vocational work scheme.

The third part of this is the most important—that is, the representation of the skills and knowledge of the workforce and stakeholders in the corporate governance of the firm. This leads to a balance of interests that holds people accountable. I completely agree with my noble friend Lord Eatwell about the stress on regionality and relationships in the second part of the amendment; relational banking is absolutely essential. However, that implies local knowledge and the restoration of what we have lost, which is trust. So this is not a quick fix. I commend the work of the most reverend Primate the Archbishop of Canterbury in talking about a 10 to 15-year structure of reconstituting credit and trust in the nation. There will have to be a coalition between different stakeholders in doing so. But it is a terrible missed opportunity when we have an asset that has not been regionalised and has not been subject to proper balance of power in corporate governance, with no regional accountability in it to look at bad practice and correct it before it reaches the taxpayer. Above all, as the story of Northern Rock teaches time and again, if you maximise immediate returns on investment, you will lose the asset. There have to be constraints on that which allow capital to maintain its presence in areas and be a partner to business and families. In terms of regionality, relationships, stakeholder accountability and non-maximisation, this amendment holds the key to the establishment of the banking system that must come now.

My Lords, I apologise to the Committee that I was not able to speak in the Second Reading debate, but I have followed the debate on this legislation very closely. I support my noble friend Lord Eatwell’s amendment but also wish to speak in support of some of the things discussed by the noble Lord, Lord Sharkey.

Airdrie Savings Bank is unique in Britain as it is the last mutual trustee savings bank in the country. I declare an interest as I have had an account there since I was six and my father also had an account there from the age of six. The difference between Airdrie Savings Bank and other banks is that it cannot offer the gizmos offered by the big high street banks. However, it offers a localised service that is completely trustworthy. There are no two ways about it: it has had its difficulties throughout the crisis, as has every part of the financial services industry. However, because it is unique, sometimes there is a risk that its needs are forgotten about. I ask the Minister to ask officials to look specifically at how an institution such as Airdrie Savings Bank can be protected. It is, indeed, a very venerable bank; my noble friend Lord McFall addressed an event at its 150th anniversary some eight or nine years ago. The bank is completely rooted in its community. The only perk its directors get is a fish supper once a month. There is no question of any extreme expenditure or remuneration being given to the bank’s directors.

I say to the noble Lord, Lord Flight, whose passion for financial literacy is well known in this House, that having a bank that is so extremely local means that financial literacy is not something we necessarily have to worry about. Indeed, it is located in a community that is largely financially excluded. Without Airdrie Savings Bank, many people would not have a bank account.

I have known the bank for many years. When I was Economic Secretary to the Treasury and Airdrie Savings Bank staff came down for a fiduciary interview with staff at the Bank of England, which was then in charge of regulation, there was a threat of a bribe being offered as Airdrie staff brought with them tins of shortbread. I can be extremely proud of Airdrie Savings Bank. As someone who, in various guises, has had to promote financial services in this country, there are not many other banks that I can be proud of. It would be a pity if, through this legislation and, for example, capital adequacy requirements, difficulties were put in the way of this superb institution. It is an old-fashioned institution but, frankly, would it not be a good idea if banking became boring and old-fashioned again?

My Lords, both these amendments have much to commend them. The point that I would like to pick up regarding Amendment 43 is the position of the banks in which the taxpayer has a large holding. Having bailed out a number of banks, it is extraordinary that the Government have stood back completely from any involvement at all in what those banks are doing. In the context of competition, which we are now discussing, there is a strong case for them to set an example. This would enable at least a degree of competition to be introduced at this stage without much delay.

Amendment 102 also has much to commend it. It suggests that the inquiry should look into a series of aspects with regard to banks such as the level of competition, the obstacles to it, other actions and so on. One should add to that a careful study of what the economies of scale in banking actually are, because I suspect the reality is that they do not exist to anywhere near the extent that the size of the banks at present would suggest. On the other hand, we would find that there were major diseconomies of scale, not least the enormous risks to which we have been exposed as a result of banks being the size that they are. We frequently say that they are not only too big to fail but too big to manage. It is clear that they are too big to manage, and that is a major diseconomy of scale.

If we are going to set up the kind of inquiry that the Opposition are advocating, which I would support, it needs to look at economies of scale in this context and consider whether—given that the banks seem to have been motivated as much by megalomania as by anything else—they are of an appropriate size or whether some consideration ought to be given to whether competition would be increased if they were broken up. It is curious that competition in this area has been, as far as I can see, in no way affected by this or any previous Government’s overall competition policy, which has simply not been applied here. If, as the noble Lord said just now, the major banks have probably 80% of the market—given that normally anything over 30% would be appropriate for an investigation—we need to look at that carefully.

The lack of competition is affecting two things: the supply of loans to consumers and small businesses in particular, and the price. It is clear that there is a serious lack of supply for businesses that are trying to get finance for expansion. Despite all the Government’s efforts, of which there have been a number, to increase the supply of loans to small businesses and others, the loans do not seem to be getting through to the people whom the Government would like to help.

As for the price, one has only to look at the cost of capital to banks and then at the amount that they are charging consumers to realise that the situation is lunatic. I wish my noble friend Lord Flight well because there must surely be scope for something to be done on that issue. The difference between the cost and the amount being charged is totally disproportionate. This came up earlier in Question Time, when my noble friend on the Front Bench replied that there is concern about the amount being charged by banks when compared with what is charged on payday loans and so on. A helpful and illuminating article in the press in the past few days brought out this point. I hope that one can get something done about that.

We have some way to go and noble Lords will no doubt wish to return to this matter on Report. I hope that we will then take a definite decision or, even more, that the Government will respond to the proposal for a study. However, this is only a study, and a number of other measures to which I have referred go wider than this. These measures could be taken now and have some effect on the appalling oligopolistic situation in the market at the moment.

My Lords, I, too, broadly support these two amendments. It is encouraging that every speaker so far has taken that broad point of view. As my noble friend Lord Sharkey said in opening this debate, the amendment in his name and that of the noble Lord, Lord Glasman, is a probing amendment. I hope that the noble Lord, Lord Eatwell, was advancing Amendment 102 in the same spirit. I very much hope that the Minister will say that he will take away the contributions made, so that we can come back together on Report with an amendment that answers some of these concerns.

Perhaps the most striking statistic that we have had was that given by the noble Lord, Lord Eatwell, who said that in Germany 80% of banking is provided by local regional banks whereas here the figure is only 3%. I think that was said by the noble Lord, Lord Eatwell, or perhaps it was the noble Lord, Lord Glasman.

I am sorry, it was my noble friend. That is a stunning statistic. The fact that some of the small German banks failed in the great crisis seems to reflect a strength and virtue as compared with the situation in this country where, but for the injection of in excess of £80 billion of taxpayers’ funds, as far as I can see the whole banking system would have failed. The big clearers would have gone to the wall—that is the truth. We do not even have a market banking system that complies with the supposed basic virtues of a capitalist system: when they were tested, they could be held up only by immense government input.

I suggest that Amendment 102 might well have called upon the reviewer to look at more extensive issues. I would hope that we could also have a long, cool and deep look at the problems of entry into the banking system. I do not think that “competitive” is the right word to describe the current difficulties. Also, we should look hard at how we could bring in regional banks, along the lines of Amendment 43. I have difficulty with some of the proposals there—for example, that there should be statutory constraints on how a regional bank can accept deposits, being unable to accept deposits from individuals or companies outside its region. I cannot see that that is a workable proposition. There are several detailed issues such as that which need careful review.

I also suggest to the Minister and to the Committee that we should look at the prospect of some of the smaller building societies being able to convert into retail banks much more easily than is currently the case. In my small town of Sudbury in Suffolk we have the Ipswich Building Society. It is excellent and is rather like the old clearing banks used to be when I was a young man: they were close to their patch, knew their customers and had stable staff and a manager who was known and knew his customers—in fact, they were pillars of the community. Today, all that has gone from the clearing system with a vengeance and, I believe, at great cost to our society and to the effectiveness and, indeed, security of the banking system.

A return to relationship banking is not something that one can conjure out of thin air, least of all through legislation. Indeed, the restoration of trust in the banking system is a bedrock of and essential for a revival of banking that we can be proud of. As I said, I hope that the Minister, in consultation with those who have tabled these amendments, will be able to come back on Report with something that we can all get our teeth into.

My Lords, I, too, am grateful to the noble Lord, Lord Sharkey, for giving us the opportunity to debate this issue, although, as I will make clear shortly, I have come to a slightly different conclusion. When we get to Amendment 103 next week, we will be talking about the RBS good bank/bad bank issue. The Parliamentary Commission on Banking Standards, which more or less in the same paragraph talked about that issue, also recommended that the Government should examine the scope for the disposal of any RBS good bank as a multiple entity. I think that these studies were called for by the end of September. We have now gone beyond that point and I hope that the Minister will be able to tell us when we can expect those reports. To some extent, the amendment in the name of the noble Lord, Lord Sharkey, seeks to pre-empt the conclusion. I should like to wait to see what the Government have to say on this and then take the matter on from there.

There are also other concerns. As well as trying to increase competition faster than would be achieved under RBS’s current plans, we should always be seeking to return RBS to its position as a fully effective lender, particularly to SMEs. We are asking it to reconstruct itself so that it gets back into the private sector and becomes a ring-fenced bank and a non-ring-fenced bank. My concern is that if we also ask it to start work on a regional agenda now, that will simply overload the system and not get it to the point of becoming an effective lender, which is the main priority in the short term.

It is not clear to me that the regional agenda will necessarily be an effective model, particularly when it is created by taking clones of existing bank networks—by simply breaking up the existing banks into smaller bits and trying to run them on the same lines, with much of the same culture and same technology. I wonder whether that will work and whether the future doe not lie in a more disruptive technology that will grow up from below. I wonder why, for example, we are keen on switching. Why will people want to switch from one kind of a bank to another kind of bank if it is just a smaller version of the same kind of bank? I am beginning to think that the real future lies not so much in the break-up of the existing model but in a disruptive technology, with someone doing to banking what Amazon has done to retailing.

It is inevitable that there will be a full market investigation reference to the Competition Commission. Again, I would not start that now, while so much else is going on, but begin somet ime after 2015. My preference would be to fold this regional debate into that, rather than pursue it now.

My Lords, the noble Lords, Lord Eatwell and Lord Sharkey, have done the Committee a service by raising this issue. Four years on from 2010, when the Government came into office, we have much less competition: banks are bigger; the cost of capital, as the noble Lord, Lord Higgins, said, is more expensive; and SMEs’ credit is still drying up. The problem is that British banking lacks a “spare tyre”, as Adam Posen of the Monetary Policy Committee said. I remember a conversation that I had with Stephen Hester when he was chief executive of the Royal Bank of Scotland. He said, “If you have new entrants into the banks, all they will do is replicate the business model that already exists. You need a Google, a Yahoo or a Facebook to have that disruptive technology”, as the noble Lord, Lord Turnbull, described.

I was of the opinion that, as a commission, we should have a referral to the Competition and Markets Authority straight away because this is an area in which, when talking about change, we are talking about years and possibly decades. If we do not get on to this straight away then we will see very little improvement at all in five or 10 years’ time. As the noble Lord, Lord Eatwell, said, if we are talking about establishing regional banks—an aspiration which the most reverend Primate the Archbishop of Canterbury articulated—we need a secure structure. We have to understand how small banks failed. People say, “Well, small banks are just the same as large banks”. I have a quote here from February 2006 in which an individual said,

“we are now in the midst of another wave of innovation in finance. The changes now underway are most dramatic in the rapid growth in instruments for risk transfer and risk management ... These developments provide substantial benefits to the financial system. Financial institutions are able to measure and manage risk much more effectively. Risks are spread more widely, across a more diverse group of financial intermediaries, within and across countries”.

So, the system is safer. The individual who said that was a certain Tim Geithner, whom the President of the United States then appointed as the United States Treasury Secretary. Mr Geithner had a great knowledge of individual institutions but Mr Geithner, like the IMF and others, was clueless about the interconnectedness of the banks, which is why the banks went down. Whether we are talking about large investment banks or small regional banks we must turn our attention to that area of risk if we want a better system.

My noble friend Lady Liddell mentioned the Airdrie Savings Bank. I was privileged to give the 150th anniversary address there. To re-emphasise what she said, the non-executive directors there were local and unpaid. The Airdrie Savings Bank was a fly on the back of the elephant that was the Royal Bank of Scotland. However, the Airdrie Savings Bank prospered and the Royal Bank of Scotland went under. The Chancellor at that time, Alistair Darling, said that he got a call in the morning from Tom McKillop, the chairman of the Royal Bank of Scotland, saying that it would be out of business in the afternoon if the Government did not step in. Surely there are lessons to be learnt there from the small banks.

I do not accept the proposition that small and regional banks are not on. A chief executive of a very large bank said to me in private that we should look at retail banking in the United Kingdom as utilities—as predictable and boring activities. That is the way we should be looking at our banks. I think a referral to the Competition and Markets Authority would be wise at the moment because we will be talking about this issue for 10 or 15 years to come. If we do not look at the structure of retail banking in the United Kingdom, we are simply going to replicate what we have at present. There is an opportunity for innovative thinking. These amendments offer the Government that opportunity and I hope that the Minister in replying will indicate that this is a fertile area and we can get on to looking at a new structure for our banking.

My Lords, I support the amendment in the name of my noble friend Lord Eatwell and want to comment a little on the amendment from the noble Lord, Lord Sharkey, and my noble friend Lord Glasman. The key is what the noble Lord, Lord Higgins, said. Where are the economies of scale in banking from? Why are large banks more successful in surviving and, as it were, swallowing up smaller banks here than they are elsewhere? We had smaller regional banks for a number of years in the 19th century and later. Then we had the concentration of only five large clearing banks left and then even fewer. One question that the competition authority ought to ask is, “Are the economies of scale technological, or is it just that larger banks can borrow money on the money market at a more favourable rate than small banks can? Or are we as authorities putting serious restrictions in the path of small banks to stop them starting and prospering? Are we imposing extra costs on the small banks so that the large banks get away with lower costs than small banks?”. Those are the questions that we ought to examine.

I do not particularly mind whether these are regional banks—what we need is more diversity in banking. Regional and local banks may have failed not because there is something wrong with being local or regional but because there was a storm of cheap credit available and people decided that even if you were a local bank you could still get into the American subprime mortgage market to make money. That is what ruined people; it was not being regional. In a globalised market you have access to buying and selling assets all over the world. German local banks got into subprime mortgage markets in America and lost out.

We really ought to nail down where the economies of scale are and encourage and increase diversity by removing the non-competitive restrictions that currently help large banks to dominate, rather than creating small banks that would have special competitive advantage—as it were, some kind of subsidy—which may be desirable in some larger sense but is not economically efficient. We have to ask whether large banks are surviving because of a competitive advantage and whether they will fail again, costing us a lot of money. Should we look for diversity and a level playing field among large and small banks?

My Lords, it is a great pleasure to respond to this fascinating debate. I should say at the outset that the Government are committed to greater competition and diversity in the UK banking sector, both locally and nationally. Effective competition is essential for ensuring that customers get suitable and affordable products.

It is not true to say that there has been no fundamental thinking by the Government on the structure of banking and the need for greater competition. That is why we asked the Independent Commission on Banking to investigate competition issues in the UK as a key part of its work. Half of its report covered competition issues. It identified a number of issues and areas which needed action and we are taking forward its recommendations for dealing with these. For example, we are removing the competitive advantage big banks get from being seen by the market as too big to fail through the ring-fence. We have secured a new seven-day switching service, delivered by industry to tackle inertia in the personal current account and SME business account market. This service was launched on 16 September. We have introduced a strong competition regulator by giving the FCA an objective to promote effective competition.

The new regulators have already brought forward big changes on the regulatory side through their barriers to entry work. I commend the report that they produced earlier in the year to the noble Lord, Lord Phillips, in particular. This will make it easier for new banks to enter the market, to grow and to compete with the large incumbent banks. These changes have been greatly welcomed by the industry and will make a big difference going forward for those who want to start a new bank, be it to serve the local community or to compete nationally.

I should highlight here the PRA’s consultation on an initial capital exemption for some small specialist banks. The proposed exemption would allow some banks to gain authorisation with minimum capital of as little as £1 million, and to do so much more quickly than has ever been the case in the past. These are not small changes. Within the narrow world of bank authorisation, these are revolutionary changes which will make it much easier for new entrants to come forward. There have been some extremely successful new entrants. Metro Bank is one of the most successful and I suspect that its competitors consider that it is being disruptive by making a number of changes in the way it does banking which will affect the whole system, in many cases for the better.

The actions that we have already taken will be supplemented by what we are doing in the Bill. We are creating a new payments regulator to ensure fair and transparent access for new and smaller banks to the payment systems. We shall discuss that later today. The Government have announced that they will ask the new payments systems regulator to look at the case for and against introducing full account portability as an early priority, as well as the case for requiring the big banks to give up, in whole or part, ownership of the payments systems.

We are giving the PRA a secondary competition objective to strengthen its role in ensuring that we have competitive banking markets. We will provide the FCA with further competition powers so that it has even more appropriate tools in that area.

As to the OFT, it has brought forward its investigation into SME banking and the competition issues affecting these markets. This is arguably the most contentious area in terms of the lack of appropriate products and volume for that market. The study is part of its ongoing programme of work to investigate concerns over competition in banking and to inform the decision on whether key banking markets should be referred to the Competition Commission for a formal market investigation. In January it reported on its review of the personal current account market, so it is not true to say that no work is being done on looking at competition on current accounts.

The review raised significant concerns over concentration levels. However, it concluded that the important changes being implemented, such as the ring-fence and the new account switching service, meant that market referral was not appropriate at this time.

The OFT aims to conclude its programme of work by 2015 and will make a decision then as to whether a market referral to the Competition Commission is needed. In consideration of the significant measures currently being implemented to improve competition, along with the importance of allowing the OFT to complete its current investigations, I hope that the noble Lord, Lord Eatwell, will feel that his Amendment 102 is not necessary and will not seek to press it.

Turning now to Amendment 43, I have already detailed the extensive action the Government are taking to improve competition.

I wonder whether the Minister will allow me to comment on the series of measures he just outlined. All are worthy in their little way, but will he acknowledge that the Government have actually rejected the commission’s recommendation that there be,

“a full public consultation on the extent of competition and its impact on consumers”.?

This is what the Government are not giving.

The Government are saying that the OFT is in the process of undertaking a series of pieces of work. We believe that the appropriate way forward is for it to complete that work and to decide whether it wishes to make a referral. We think that that is a sensible approach; it is already in train and we think it should reach its logical conclusion.

To help increase diversity in business lending, the Government have introduced several important schemes, which include the business finance partnership and the introduction of the business bank. The Government are promoting alternative finance to boost overall lending through investments and various innovative non-bank channels, including two peer-to-peer firms, Funding Circle and Zopa, as part of a small business programme. Peer-to-peer platforms enable people to lend money directly to businesses and consumers; they can therefore offer a more effective way for businesses to access finance. They are certainly disrupted in terms of the way in which finance is going directly into many small businesses.

The business bank is drawing together existing government initiatives under one roof and deploying £1 billion of capital to address gaps in the supply of finance to SMEs. So far, £75 million is being invested in venture capital and £300 million in new sources of lending. The Government are also taking action to support local banking—for example, through a credit union expansion project which includes a £38 million funding package from the Department for Work and Pensions.

Community development finance institutions are also providing loans in support of those struggling to access finance from the commercial banks. The regional growth fund is supporting their work through £60 million of wholesale funding and the Government also provide tax relief worth up to 25% on investments. Both credit unions and CDFIs typically operate in quite a tightly defined geographic area and have that special focus.

At national level, both RBS and Lloyds are already in the process of divesting part of their UK banking businesses as a requirement of EU state aid rules, creating new challenger banks. The divestments are part of a package designed to improve competition in the banking sector. The Government have taken the first step to return Lloyds to the private sector and are actively considering options for further share sales. The reintroduction of the TSB brand on the high street is a major step forward for retail competition. This action is further evidence of the Government’s stated aim not to be a permanent investor in the UK banking sector. This is an important step in further normalising the sector and continuing the process of removing government from the extraordinary measures taken during the crisis.

For RBS, the Government are already investigating the case for creating a so-called “good bank/bad bank” split. We will report the findings of this review shortly, later in the autumn. We do not believe that the case for breaking the core operations of any bank in which the Government have a stake into regional entities meets the objectives of maximising the bank’s ability to support the British economy, getting the best value for the taxpayer while facilitating a return to private ownership. The cost of any reorganisation would be attributable to the banks, and, as a result, to the taxpayer. In addition, the time required to execute such a reorganisation would be lengthy, further delaying the Government’s ability to return the banks to private ownership. As a result, the amendment would run directly contrary to the Government’s stated objectives.

This does not, however, mean that we do not see a role for regionally or subregionally focused banks. I have been impressed, for example, by the work of the Cambridge & Counties Bank, which is based in Leicester and is using its local expertise to support SMEs in Leicester and the broader East Midlands region. Its capital comes from a combination of a Cambridge college and a local authority pension fund, which seems to me a model that could with benefit be replicated elsewhere.

I was extremely interested to hear from the noble Baroness, Lady Liddell, about the success of the Airdrie Savings Bank. I am happy to work with officials to see how that bank is faring and whether anything that the Government are doing is making its life unnecessarily difficult.

The challenge, however—looking at that model on the one hand, and on the other saying that in Germany there are a lot of regionally successful banks—is that that is not where we are starting from now. It is very difficult for government to change a culture single-handedly. If banks such as Cambridge & Counties are successful and other people see that they are, we will see more regional banks, but I do not think that government either can or should try to impose a new overall structure on the banking sector against competitive forces and what people in the banking sector want to do.

I do, however, welcome the news that Santander wants to regionalise decision-making. RBS has for some time been trying to re-educate its SME bank managers about the virtues of relationship banking. It is amazing that that was lost, but the penny has dropped, and I very much hope that the statement by Santander is part of a broader process to push down decision-making to regional and local levels.

I hope that I have been able to persuade my noble friend that the Government have considerable sympathy with his amendment, but that much is already happening to bring greater diversity into the banking sector. Frankly, the pace of change—the number of new entrants, the change in the way that the system is operating and the way that people are doing banking—is quicker than at any previous point in our lifetime. I hope that, on that basis, he will feel able to withdraw his amendment.

My Lords, my noble friend seems to be implying that the study by the OFT is in some sense a substitute for the amendment. In that context, one is bound to ask what the OFT has been doing on this for the past 25 years. Is that what he is saying and, if so, when are we likely to have a decision on whether there should be a referral? Is there any possibility that the OFT report would give us the kind of information asked for in the amendment?

My Lords, as I said, the OFT is undertaking its work and expects to have formed a view by 2015 about whether to have a broader referral. I think that at one level everybody finds it easy to criticise the failures of virtually every regulatory body in the past. It is unfair to suggest that the OFT has learnt no lessons from the past 25 years in the way that it undertakes its work. The Government have considerable confidence in the work that it is now doing.

My Lords, the noble Lord, Lord Higgins, has a real point here. If we look at the timeline with PPI, consumer groups were complaining about it in the late 1990s. There was a supercomplaint in 2005. The Treasury Committee highlighted it in 2003. The OFT and the Competition Commission looked into it. It was 2012-13 before something was sorted out. That is a generation. We are making these points against the background of a sclerotic system and we really need a commitment from the Government that they are considering the matter. Otherwise, we will be back here in 10 or 15 years’ time and nothing whatever will have moved.

My Lords, everybody would have a great deal of sympathy with the general point that the system has worked very slowly in the past. The FSA was extremely slow in many ways, but one of the features of the way the new system works is that a greater degree of urgency is injected. I give as an example the document on consumer credit published by the FCA last week. The FCA does not take responsibility for consumer credit until next April, but well in advance of that date it has produced a comprehensive plan of how it wants to proceed. This is much more rigorous than anything we have seen in that area in the past. To a considerable extent, the regulators have learnt lessons about the need to move with all due deliberation, yet also with due speed.

My Lords, I ask the noble Lord to look at the other side of the balance sheet. I could not find the extract, but it is from a key government website and says that most organisations within the public sector are obliged to bank with either RBS or Citibank. This means that new banks cannot solicit their business. I am not clear how that came about or whether it is even in accordance with EU requirements, but a large part of the economy in the public sector is simply being dictated to on who it can bank with.

My Lords, my noble friend says that people have been very slow in the past, but he is now telling us that the OFT will decide whether to make a referral—not actually do anything, just make a referral—by 2015. Does it really take from now to 2015 to decide whether the banks need to be referred?

My Lords, if I may, I would add that my noble friend talked of being too slow, but in this debate several noble Lords have made the point that it is not slowness which has afflicted the large clearing banks but immorality. Whether you are talking about trying to manipulate the LIBOR rate or PPI or identity insurance—you can go on and on—there is the sheer scale, impersonality and lack of relationship or any sort of customer allegiance. I fear that these have rotted the foundations of so many of these colossal banks. Does he not therefore understand that the gist of these amendments is to try to replace that state of affairs?

My Lords, as far as immorality is concerned, later we will deal with amendments on the reversal of the burden of proof and on the new criminal offence which will be available should banks behave in a grossly immoral way. That is the way to deal with the narrow point my noble friend makes. The whole question of the culture of the banks is addressed only partially in the legislation because it is by definition a cultural issue. We are taking very significant steps to regulate individual senior managers and hold them to account for what they do in a way that has never been the case in the past. Again, that is quite a revolutionary change. Regarding the specific point raised by the noble Lord, Lord Flight, I believe that local authorities at least can bank wherever they choose, but I will look into the point and write to him. I simply do not know what the position is.

My Lords, I will be brief because I see that I am holding back an avalanche of 158 government amendments. There have been a lot of strong, very well argued and diverse views, but there have also been some general themes. For example, there was a feeling that getting close to the customer is absolutely critical. I entirely agree with that. In fact, I fear that without this there is little chance of reforming the banking culture at all. There also seems to have been a general desire in the Chamber to discuss again the issues raised and to see whether on Report there could be a way of advancing some of the arguments put forward today. In the mean time, I beg leave to withdraw the amendment.

Amendment 43 withdrawn.

Clauses 9 to 12 agreed.

Amendment 44

Moved by

44: After Clause 12, insert the following new Clause—

“Part 3Bail-in stabilisation optionBail-in stabilisation option

(1) Schedule (Bail-in stabilisation option) (which contains amendments relating to a new stabilisation option in Part 1 of the Banking Act 2009) has effect.

(2) The Treasury may by order make any provision they consider appropriate in consequence of the application to building societies of the amendments made by this Part.

(3) An order may, in particular, amend section 84 of the Banking Act 2009, or amend or modify the effect of any other enactment to which this subsection applies.

(4) Subsection (3) applies to any enactment (including a fiscal enactment) passed or made—

(a) before the passing of this Act, or(b) on or before the last day of the Session in which this Act is passed.(5) In this section “building society” has the same meaning as in section 84 of the Banking Act 2009.”

My Lords, this clause and the new schedule to the Bill in Amendment 105 have the effect of amending the Banking Act 2009 to provide the Bank of England with a new stabilisation option—the bail-in option. Bail-in involves shareholders of a failing bank being divested of their shares or having their holdings severely diluted and creditors of the bank having their claims cancelled, reduced or deferred to the extent necessary to restore the bank to financial viability. During the financial crisis it was not possible simply to allow banks which failed to enter insolvency, as other companies do when they fail. This is because of how interconnected the banking system is and because of the need to protect the banks’ customers by ensuring that they could continue to access essential banking services. This protection came at a very high cost to the taxpayer. These new powers will provide one solution to that problem by offering an alternative to insolvency which exposes shareholders and creditors to the losses of the bank, while enabling the bank to continue to operate as a going concern. This will help to ensure that taxpayers are never again required to bear all the costs of resolving failing banks.

It has long been the Government’s policy to develop such bail-in powers. This was an important strand of the Government’s response to the recommendations of the Independent Commission on Banking. The UK has also been at the forefront of the international development of bail-in. Along with other G20 countries, we endorsed the Financial Stability Board’s recommendation on bail-in in November 2011. We have also worked hard at ensuring that the EU would agree a feasible and credible bail-in tool, and have made substantial progress recently in this area. We believe that EU agreement on a common resolution recovery directive is near and, for this reason, the Government are now confident enough about the content of the directive to be able to bring forward bail-in powers through this Bill.

On the details of the amendments, paragraph 1 of the schedule introduces the bail-in option as an additional stabilisation option in the Banking Act 2009. When the bail-in option is deployed, the Bank of England can cancel, reduce or defer liabilities of the bank for the purposes of recapitalising it and restoring it to viability. It may also transfer some or all of the bank’s securities to a bail-in administrator to hold securities of the bank, or to perform other tasks as specified by the Bank of England, on a temporary basis. In any event, shares held by the original shareholders would be expected to be transferred or severely diluted in the course of resolution.

Paragraph 3 of the schedule sets out the conditions for use of the bail-in option. These are that the bank is failing or is likely to fail to satisfy the conditions for authorisation, that no action is likely to be taken to restore the bank to compliance and that the exercise of the power is necessary having regard to the public interest in: the stability of financial systems in the UK; the maintenance of public confidence in the stability of those systems; the protection of depositors; or the protection of any client assets that may be affected.

Paragraph 4 defines the power to make a special bail-in provision cancelling, modifying or changing the form of a liability of the bank in resolution. This power can be exercised only for the purpose of or in connection with cancelling, reducing or deferring a liability of the bank in question. Proposed new Section 48B also specifies a set of liabilities that are excluded from the power to make special bail-in provision. These liabilities are excluded for one of two main reasons: either because they would not have been exposed to losses in insolvency or because exercising the bail-in powers on them would be likely to impede the resolution of the firm or create wider market instability. This includes deposits protected by the Financial Services Compensation Scheme or similar overseas deposit guarantee schemes, liabilities to the extent that they are secured, client assets, short-term liabilities owed to certain financial institutions outside the affected firm’s group, certain liabilities arising in respect of central counterparties and settlement systems, and certain debts owed to employees and trade creditors. The Treasury has the power to amend this list by order.

When the Bank of England exercises its special powers to bail in liabilities of a failing bank, it must make a report to the Chancellor explaining why it has done so. A bail-in should in general be done in a way that respects the treatment that creditors would have received if the bank had been allowed to fail and enter insolvency. In terms of economic effects, this means that the failing bank’s shareholders would be divested of their shares, or otherwise have their claims severely diluted, and subordinated debt holders would be exposed to losses. Senior debt holders would generally be exposed to losses only after subordinated debt holders. It would also generally be the case that creditors in the same class would bear losses on an equal footing.

In common with the existing stabilisation options in the Banking Act, the Bank of England may depart from these general principles where appropriate. If the Bank of England does so in exercising the special bail-in powers, this report could explain the reasons for doing so. The Chancellor will lay a copy of any such report before Parliament.

New Section 48H gives the Bank of England the power to require a bail-in administrator or one or more of the directors of the bank to draw up a business plan that includes an assessment of the factors that led to the failure of the firm and outlines a plan for addressing these problems. The plan must be approved by the Bank of England after consulting the PRA and the FCA and may require changes to be made before approving it.

New Section 48L specifies further powers available to the Bank of England, including powers to modify and convert securities that fall within the scope of the bail-in powers. New Section 48N enables the Bank of England to remove a director from a bank in resolution, or to terminate or vary a director’s contract. It also allows the bank to appoint new directors. New Section 48O enables the Bank of England to issue directions to directors of the bank.

New Section 48P gives the Treasury the power to make an order relating to the treatment of protected financial arrangements in a bail-in. Protected arrangements are defined as security interests, title-transfer collateral arrangements, and set-off and netting arrangements. These arrangements are entered into by the counterparties in order to minimise the risks associated with the financial instruments. Therefore it is right that these arrangements are respected to the extent possible while pursuing the special resolution objectives. This is analogous to the existing power for the Treasury under the Banking Act 2009 to specify protections in the case of transfers of some but not all of the business of the bank under resolution.

The Treasury will be required to put in place compensation arrangements for affected shareholders and creditors following an application of the bail-in powers. These will include a no-creditor-worse-off safeguard that broadly provides that no shareholder or creditor should be left worse off as a result of the exercise of the bail-in powers than they would have if the bank had simply failed and entered insolvency. In addition, the Bank of England may exercise the bail-in option in respect of a banking group company if certain conditions are met.

First, the authorities must be satisfied that a bank in the same group meets the conditions for resolution. Secondly, the authorities must be satisfied that acting only in respect of the bank itself is not sufficient to achieve the special resolution objectives. The actions should seek to minimise the effects of the exercise of the power in relation to group companies on other undertakings in the group. It should only be to the extent necessary in order to achieve the resolution objectives.

I apologise for setting out the details of these provisions in some detail, but they are relatively new to your Lordships’ House and one of the essential components of the menu of provisions contained in the Bill to give a safer and more secure banking system. I commend the amendments to the House.

My Lords, we can forgive the noble Lord, Lord Newby, for taking some time to introduce the amendment and schedule; I believe that they are by themselves longer than the original Bill. It has been one of the significant matters that those of us who wish to comment on this legislation have had to digest.

An issue that the noble Lord did not address, which has been a major concern in the academic literature that has been looking at the issue of bail-ins and resolution regimes, is that the bail-in regime may in itself create contagion and systemic risk. One has to consider that well over 50% of the liabilities of a typical large bank consist of some form of interbank loans and investments. Therefore, by bailing in one particular bank you are spreading the contagion to the banks that will consequently be bailed in. Could the Minister brief us on the Government’s thinking on that issue?

I have a number of questions on particular points about the bail-in schedule, and I will try to address them in a reasonably logical direction. The first point is that there seems to be no satisfactory transition arrangements for those who might be bailed in. In other words, people who have purchased financial instruments or made investments in advance of this legislation will, as I understand it, subsequently be at risk from the legislation even though, at the time then they made the investment, that risk did not exist. That seems unreasonable. Would it not be appropriate for them to have some grandfathering that would allow them to escape this risk if they had acquired the instrument in advance?

On the other hand, so to speak—of course, economists always like to be two-handed in these respects; I believe it was President Truman who asked to have one-armed economists—the principle of no less favourable treatment is equally unreasonable. If an individual purchases a financial instrument knowing the nature of the risk to which he or she is exposed, why should they then be protected by the principle of no less favourable treatment from bail-in or insolvency? They are aware of the risk and should surely take responsibility for it.

On the theme of the conditions for bail-in, the Minister noted that liabilities representing protected deposits were excluded liabilities. That means that ordinary people with bank accounts with sums in them that are below the Financial Services Compensation Scheme limit are appropriately protected. However, now and again ordinary people will typically go way over that limit, even people who usually have quite modest accounts. For example, in the process of property purchase and sale one sometimes has peculiar large deposits in one’s bank account for a short period, or when receiving a lump sum in connection with a pension scheme you typically have a peculiarly large deposit for a short period. Will these people be at risk? The schedule suggests that they would be. What measures are available to ensure that they would not?

The next point I wish to turn to was raised by the Minister with respect to banking groups. The bail-in option refers to a stabilisation power in respect of a “banking group company”. That suggests that they might be companies outside the ring-fence. Why is this necessary outwith the ring-fence if the ring-fence is deemed to work? If the ring-fence is protecting depositors and the maintenance of financial services in the way that the Government have argued, why are these measures necessary outside the ring-fence? Perhaps the Minister will enlighten us.

To move on to a couple of issues that are less serious but might become important, the schedule reads:

“A deposit is ‘protected’ so far as it is covered by a scheme which … operates outside the United Kingdom, and … is comparable to the Financial Services Compensation Scheme”.

What does “comparable” mean? Does it mean that it is of the same ilk or that it is of the same scale? There is a variety of such schemes operating around the European Union and in other jurisdictions closely associated with this country that, for example, are quite different in scale even though they may be of the same ilk. So what does “comparable” actually mean?

As the noble Lord pointed out, the Treasury has the ability to amend by order the crucial terms in Sections 48C and 48D. I asked the noble Lord, Lord Deighton, when we considered the earlier part of the ring-fence legislation, what position the Government were going to take on the recommendation from the Delegated Powers and Regulatory Reform Committee for the enhanced scrutiny of certain affirmative procedure orders. The Delegated Powers and Regulatory Reform Committee proposed an amendment; I asked Lord Deighton what the Government’s attitude was to it, and I was promised an answer. I hope that the noble Lord can give us an answer today.

My Lords, these clauses exemplify the maxim, “be careful what you wish for”. The commission recommended that the UK Government should prepare a UK version of the bail-in scheme being negotiated in the EU as a precaution against the possibility that the EU scheme could be delayed. One only has to look at the Solvency II directive to know how long these things can take. We have a slightly different explanation today, which is that we are sufficiently close to finalising the EU scheme that it is safe to proceed to legislate for it. In other words, that implies that this is a substantive scheme, not an interim scheme that might in due course be replaced by an EU scheme. I wonder if the Minister could clarify this.

My only other remark is to say that I very much support the remarks that the noble Lord, Lord Eatwell, has made about people who, once or twice in a lifetime, have a very large sum in their accounts. The other example that could have been quoted is people who sell a business before they retire.

My Lords, I can see something like a bail-in scheme working satisfactorily with regard to a bank the size of the Co-op Bank, for example, and indeed the proposals to bondholders are effectively a do-it-yourself bail-in scheme. However, in the unlikely event that it was necessary, if a bank as large as Lloyds Bank were in trouble, I find it difficult to believe that the situation could be resolved by a bail-in scheme. This is in part for the reasons that others have given, that the knock-on effects to the rest of the banking system are too large. So while the bail-in system makes great sense, I do not think it can be a sort of universal solvent to the possible need for taxpayer money to be used when huge banks are in trouble, or for so long as we have huge banks.

My Lords, in asking Parliament to approve these powers, I wonder if my noble friend could set out what protection he believes is built into this legislation for the inappropriate use of these powers. I understand why having a regime in place that allows a speedy resolution to be enacted is desirable. If that is to come about, it needs to happen very quickly and efficiently when the circumstances call for it. The draft legislation sets out the conditions under which those powers might be exercised. The new Section 8A of Schedule 2 talks about appropriate conditions protecting,

“the stability of the financial systems … the maintenance of public confidence … the protection of depositors … the protection of client assets”,

but those conditions are obviously subject to judgment and interpretation, and it would be helpful to understand those parties who might be affected by the exercise of those powers, not least of course shareholders and bondholders, and whether there is any protection for them against the inappropriate use of those powers without getting into some lengthy and time-delaying process of judicial review.

My Lords, these clauses give the Bank of England very considerable powers and responsibilities, which we will need to consider very carefully; we are going somewhat into uncharted waters. At a purely quantitative level, will my noble friend, if not today then on some other occasion, indicate how the system would have worked if it had been applicable in the recent financial crisis? That is to say, in the case of the bailed-out banks, would it have been sufficient to mean that there would have been no charge on the taxpayer, or is it likely that there would still have been a charge?

We will consider in particular the question of the hierarchy of debts. The briefs that we have had from the Treasury have been very helpful, but it might be helpful if my noble friend could in some way or another give us some idea of how the new hierarchy is now likely to work or, to avoid any doubt, perhaps to write the hierarchy into the legislation.

Other points give me some cause for concern, some of which have been made by the noble Lord on the opposition Front Bench. It seems that there is still a considerable risk of contagion if one suddenly bails in a particular bank, but the people who are its creditors will have repercussions elsewhere in the banking system. I am not entirely clear to what extent the Government have taken that particular risk of contagion into consideration. These are quite complicated matters, and we look forward with interest to the Minister’s reply.

My Lords, I thank the noble Lords who have spoken on these extremely technical points. A number of the questions were themselves extremely technical, so if I do not answer them fully now I will of course write to noble Lords.

The first question the noble Lord, Lord Eatwell, raised, was the question of contagion. My first point here is a general one. The markets now expect the bail-in powers to be one of the options available if banks get into difficulty. They seem generally to accept this as an option, and they are adjusting their own activities to the extent that they feel that is necessary in recognition that this will now be part of the environment in which they work. However, in an individual case, if the Bank felt that there was a risk to financial stability by exercising the full bail-in option, which covers all the assets or liabilities of the bank, it could decide not to bail in all of them but to be selective in a manner that would reduce the possibility of contagion.

In addition, in circumstances where a bank is going under, if you do not go down this other route, virtually whatever else you do with it, there is a risk of contagion. That is one of the considerations that will be in the mind of the Bank of England. Of course, if the Bank felt that there was a risk to the whole system if a particular bank went down, it has the powers under the Banking Act to nationalise it, which is another way of protecting the system and the stability of the system. This is another possible approach, but under the Banking Act it is now one of only four possible ways of dealing with the problem of a failing bank.

I am sorry if my answers are slightly out of order, but the noble Lord asked what the word “comparable” meant when we talked about other countries’ depositor protection. As he knows, all EU member states have depositor guarantee schemes with a common limit, and all those schemes will be considered comparable. Therefore it covers any schemes that will ensure small depositors in the event that the bank becomes insolvent and unable to pay its debts, in the same way as our FCA.

I had not realised that the noble Lord, Lord Eatwell, was thinking of the Crown Dependencies. I will write to him about that.

The noble Lord asked whether the concept of no less favourable treatment was appropriate. This concept relates only to the insolvency counterfactual. It is reasonable that an investor should be no worse off due to an action of the authorities than in an insolvency. That is the option that might be facing investors if the bail-in was not taking place.

The noble Lord asked about temporarily high balances. This is an issue that we have debated over the years. As far as bail-in is concerned, the bank will have discretion not to bail in certain liabilities. In terms of the general issue about temporarily high balances, this is being pursued within the context of the EU. There is a very widespread recognition that it would be desirable to get protection for people who have such temporary high balances.

The noble Lord asked about transitional arrangements. The issue of bail-in has been debated at international level for some time. Markets know that bail-in is now an acceptable, and indeed a leading, tool for dealing with large banks in the European fora. We have agreed that there should be no transitional agreements, especially as the counterfactual would be insolvency.

The noble Lord asked about our response to the Select Committee. My noble friend Lord Deighton, as the noble Lord knows, is in China this week, so he will be replying formally when he returns. But the approach that the Treasury has taken so far in terms of working with parliamentarians who have a close interest in these matters has been to circulate draft secondary legislation at the point at which it has gone out for wider consultation. The current consultation exercise on the big draft statutory instruments under this Bill has, I think, now closed. We are drawing up a response to all the stakeholders who have made comments and the intention is that at that point the Treasury will directly contact noble Lords who have expressed an interest so that we can discuss where we have got to and consider any suggestions that noble Lords might have on the secondary legislation.

My view, having looked at it, is that this is highly technical legislation and the best way of getting an input is to have a conversation around it. The Treasury is very open at this point to any suggestions from your Lordships, or indeed Members of another place, in terms of the details of the secondary legislation. They are not set in stone. We are trying to get the best outcome. We think that that more discursive approach in the context of these highly technical instruments is the best way of getting the maximum positive involvement with parliamentarians in the process. As I said, my noble friend Lord Deighton will be writing to the noble Baroness, Lady Thomas of Winchester, about that.

The noble Lord, Lord Higgins, asked whether bail-in would mean that taxpayers would not have had to make any contribution. It is difficult, if not impossible, to say definitively since we do not know how much could have been bailed in. What is clear is that we would have substantially reduced any government contribution. Loss-absorbing capacity provisions in the Bill will further strengthen that concept. The ICB said that the 17% PLAC proposals would have been sufficient to deal with the problem last time in all but the most extreme cases.

The noble Lord, Lord Higgins, asked about the creditor hierarchy and whether it will be stated in the Bill. We have not stated it in the Bill, but we will be working on the statutory code of practice under the Act when it is enacted. The aim is that it will be set out more fully there.

The noble Lord, Lord Blackwell, asked what protection there was against inappropriate use of the powers by the Bank of England. The conditions before which the Bank can intervene are pretty stringent; they are that the bank is failing or likely to fail and that it is in the public interest to do so. If the Bank operated vexatiously or against the public interest, that would be an inappropriate use of its powers—but so it would if it acted in that manner under any other of its powers. Our view is that the conditions are clear enough and give the Bank sufficiently clear steer that we are reasonably confident that the problem that the noble Lord anticipated would not arise in practice.

The noble Lord, Lord Flight, asked whether the bail-in could work for big international banks. We believe that it could; the UK authorities are working with international counterparts to put in place resolution plans for large banks to ensure that the tool can be applied effectively. We see bail-in as being the leading tool for such banks.

The noble Lord, Lord Eatwell, asked whether bail-in was necessary for all banks, including those outside the ring-fence. The truth is, obviously, that all banks can encounter difficulties, not just retail banks. We believe it appropriate that the Bank of England has the tool available for dealing with non-retail banks as well as retail banks, which this provision would do.

I am not sure that I have answered every last question that I have been asked. To the extent that I have not, I will write to noble Lords.

I just take up the Minister on that last point. Surely one of the key arguments about the ring-fence is that there is an implicit guarantee from the public authorities not to allow institutions within the ring-fence to fail. That implicit guarantee is worth a lot of money to those banks that have been too big to fail. Surely the whole point about the ring-fence is that those outwith it would not benefit from that form of public continuity guarantee. But is the noble Lord saying that the Government wish to retain such measures, which would allow them to implement such continuity guarantees?

I come in on the same point, if I may, because my reaction was the same as the noble Lord who has just spoken. Am I right in thinking that all these bail-in provisions apply only to ring-fenced banks? Is that the case, or not, or are they extended to banks that are not within the ring-fence? Perhaps the Minister could make absolutely clear what the position is, because it was not clear earlier.

The noble Lord, Lord Eatwell, said something which I think is profoundly wrong, but I can understand why he said it. Will my noble friend the Minister make it absolutely clear that it is not the position of Her Majesty’s Government, and it is not the purpose of this Bill, to ensure that no ring-fenced bank will ever be allowed to fail? That is not the position; it must not be the position and I do not believe that it is the Government’s intention.

My Lords, I can confirm what the noble Lord, Lord Lawson says. It is not the intention to have a situation where it is impossible for a ring-fenced bank to fail. What we are doing, particularly through the guarantee scheme, is ensuring that ordinary depositors are protected in those circumstances. Through these potential provisions we hope to ensure that there will be continuity of activity, which might not be the case without them.

In terms of the scope of these provisions, they are the fourth of what are now four options in the Banking Act for dealing with a bank that is in danger of failing. One is sale to another bank; one is the bridge bank and the other is nationalisation. Those measures apply to all banks covered by that legislation. I believe that that extends the measures beyond the ring-fenced banks.

I am sorry but I am still not clear. Could bail-in provisions be applied by the Bank of England to banks which are not within the ring-fence?

Amendment 44 agreed.

Amendment 45

Moved by

45: After Clause 12, insert the following new Clause—

“Part 4Conduct of persons working in financial services sectorFunctions for which approval is required

(1) Section 59 of FSMA 2000 (approval for particular arrangements) is amended as follows.

(2) Omit subsection (5).

(3) For subsection (6) substitute—

“(6) The PRA may specify a description of function under subsection (3)(a) only if, in relation to the carrying on of a regulated activity by a PRA-authorised person, it is satisfied that the function is a senior management function as defined in section 59ZA.”

(4) After subsection (6A) (inserted by section 5 above) insert—

“(6B) If—

(a) a function of a description specified in rules made by the FCA under subsection (3)(a) or (b) is a controlled function in relation to the carrying on of a regulated activity by a bank, and (b) the FCA is satisfied that, in relation to the carrying on of a regulated activity by a bank, the function is a senior management function as defined in section 59ZA,the FCA must designate the function in the rules as a senior management function.(6C) If a function of a description specified in rules made by the PRA under subsection (3)(a) is a controlled function in relation to the carrying on of a regulated activity by a bank, the PRA must designate the function in the rules as a senior management function.”

(5) Omit subsections (7) to (7B) and (11).”

My Lords, we now turn to the government amendments which implement another important part of the recommendations of the Parliamentary Commission on Banking Standards on senior persons and banking standards rules. This group also contains a number of amendments to the amendments the Government have tabled. I begin by explaining how the government amendments will deliver the goal of improving standards of conduct in banking.

The Parliamentary Commission on Banking Standards concluded that the current system for approving those in senior positions in banks—the approved persons regime—had failed. It saw it as overly complex and unable to ensure that individual responsibilities were adequately defined or that clear expectations were set for those holding key roles. The commission’s central recommendation in this area is for the creation of a senior persons regime applying to senior bankers. The regime for senior managers in banks will have the following features. It will reverse the burden of proof so that senior bankers will have to show that they did what was reasonable when a bank fails to comply with regulatory requirements in their area of responsibility, or face regulatory action for misconduct. It will have mandatory statements of responsibility, so that whenever someone is a candidate to be a senior manager in a bank, the bank will have to set out clearly what aspects of the bank’s business they will be responsible for. There will be powers for the regulators to make conduct rules for senior managers in banks instead of the old system of statements of principles supported by codes of practice. There will be a requirement that the register kept by the FCA must state who is a senior manager in a bank and give details of regulatory action taken against them.

The new regime for senior managers will also retain the tools which the regulators have under the existing approved persons regime. The regulators will also retain their tough powers under FSMA to impose unlimited fines on, or publish notices of censure about, senior managers in banks. It may sometimes still be appropriate for the regulators to approve people to perform functions that are not senior management functions but which still involve important responsibilities. The Government have therefore chosen to retain the power for the regulator to pre-approve individuals to perform functions outside the senior managers regime. It is for the regulators to determine what functions, if any, should be subject to pre-approval outside the senior managers regime. I am confident that noble Lords will agree that retaining this power is a sensible safeguard at a time when concerns about individual standards in financial services remain acute.

In addition to the regime for bank senior managers, the commission also recommended the introduction of a standards regime that would apply to a wider class of individuals who work in banks. The Government have therefore provided the regulators with a new power to make conduct rules for anyone who is employed by a bank, even if they are not a senior manager or other approved person. This is an extension of regulatory power in relation to individuals, and gives the regulators the power to impose a single set of banking standards rules for all who work in banks. Employees of banks could face disciplinary action if they breach these standards rules or if they are knowingly concerned in regulatory breaches by the bank. The regulators will not be compelled to make conduct rules. They will be able, quite properly, to exercise their supervisory judgment to determine who in a bank should be subject to rules, and what standards to impose.

Finally, the commission also recommended including provision for time-limited and conditional approvals of senior bankers, and longer time limits for the regulators to take disciplinary action against individuals. The Government also accepted these recommendations. Accordingly, the Bill will allow the regulator to grant approval to perform senior management functions in banks subject to conditions, as well as to take steps to vary an approval it has already given, for example by imposing new conditions.

Perhaps I may respond to the amendments tabled by the noble Lords, Lord Brennan, Lord McFall and Lord Watson. Amendments 46A, 46B and 47A seek to ensure that responsibility for preventing money laundering and other financial crime is also a senior management function. The Government agree with concerns that underpin these amendments. UK banks should uphold the highest standards in preventing criminal activity, and not facilitate it. Where there is evidence that banks have not lived up to those standards, the people at the top should be held to account. I reassure noble Lords that the new regime for senior managers will deliver precisely that accountability in relation to financial crime. Therefore, while we can all support the result that the noble Lords want to achieve, I can assure them that these amendments are unnecessary and there are no loopholes when it comes to such matters.

I shall try to explain why. The definition of “senior” is quite comprehensive. It encompasses all aspects of the bank’s operations and would therefore include responsibility for aspects of a bank’s operations that are concerned with the prevention of financial crime, where those aspects could involve serious consequences for the bank, for business or other interests in the United Kingdom. The amendments could in fact have the unintended effect of requiring junior staff with specific duties in relation to financial crime to be treated as senior managers. That would run in the opposite direction to what the parliamentary commission intended, which was to focus on senior persons in charge of all aspects of the bank’s activities.

Amendment 53A has two limbs. The first seeks to ensure the operational objectives that the FCA must consider when making rules of conduct for approved persons or bank employees. I can assure your Lordships that this part of that amendment is unnecessary. The reference to the operational objectives in new Section 64A(1) attracts all aspects of these objectives as defined in Sections 1B, 1C, 1D and 1E of FiSMA, without any additional words.

The second limb of Amendment 53A, and Amendment 53B, would require both regulators to use their new powers to make rules of conduct specifically about the conduct of individuals responsible for preventing money laundering or other financial crime. I am not sure what these changes would add. The Fraud Act 2006, the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007 already bite on bank senior managers. Adding regulatory rules mandating compliance with statutory requirements would add little. Further, the regulators already have a power to make conduct rules applying to persons in banks who have responsibility for compliance with money laundering regulations and other laws creating financial crimes. We certainly expect the regulators to use this power to make rules about aspects of conduct that include ensuring that firms comply with their obligations relating to money laundering and preventing financial crime. However, to single these areas out in primary legislation adds little bite to the existing regime and is, we believe, unnecessary. I hope, therefore, that noble Lords will agree not to press those amendments.

I also assure the noble Lords, Lord Brennan, Lord McFall and Lord Watson, that Amendment 54A is unnecessary. The reference to an application for approval in a context which refers to a person approved under Section 59 of FiSMA already always means an application under Section 60. There is no other section under which such an application can be made. I hope, therefore, that the noble Lords will agree not to press their amendment.

Finally, I turn to Amendment 100, tabled by the noble Lords, Lord Eatwell and Lord Tunnicliffe. This amendment is the same as an amendment brought forward on Report in another place. The government amendments, which implement the commission’s key recommendations, go much further than the noble Lords’ amendment, which would really just rename the existing approved persons regime as a “licensed persons regime”, and that is all. It would not deliver the real improvements sought by the parliamentary commission. I hope therefore that the noble Lords will agree not to press this amendment. I beg to move Amendment 45.

My Lords, an important finding of the commission was that the existing approved persons regime was flawed. After a debacle wiping billions of pounds off the value of shareholdings, requiring the state to inject billions of pounds into the industry and take huge financial exposures, and after several serious lapses of conduct, according to my researches one person has been fined and another person has negotiated an agreement not to practise.

Our conclusion was that the APR operates mostly as an initial gateway to taking up a post, rather than serving as a system through which regulators can ensure the continuing exercise of responsibility at the most senior levels within banks. A major cause of this flaw was that responsibilities were ill defined and were not joined up, so that those at the top could claim they “didn’t know” or, “It wasn’t me”.

We proposed a two-tier system: a senior persons regime, now called a senior managers regime, covering a meaningful chain of accountabilities, which we wanted to apply to all banks and holding companies operating in the UK; and, below that, a licensing regime, where no prior approval from the regulator would be required to employ anyone but banks would have to take responsibility for ensuring that those they did employ were properly qualified and trained and that they observed a code of conduct. This would apply to those who could seriously damage the bank or the bank’s reputation or harm a customer’s reputation.

The commission welcomes many of the Government’s proposals: defining the functions of senior management; requiring senior managers to have a statement of responsibilities; extending the limitation period for regulators to take enforcement action from three years to six; recording information on a person’s regulatory history so that a new employer can find out important details about whom they are recruiting; and the reversal of the burden of proof on whether a person is fit and proper.

However, serious issues are left unresolved. Amendment 55 provides a definition of a bank to which the regime applies. I found it impossible to discover what the definition means. Does it meet the commission’s objective of covering all banks and holding companies operating in the UK? Would the Minister clarify what he means by “bank”? Could it be a ring-fenced bank, a non-ring-fenced entity conducting investment activities within a group, a whole group or a freestanding investment bank? In our view, the new senior managers regime should apply to all such entities. It would make a mockery of the scheme if, as I suspect may be the case, it applied only to banks taking deposits from the general public—that is, ring-fenced banks. It would be completely unacceptable if the regime did not apply, for example, to the senior managers overseeing the LIBOR traders, to those overseeing rogue traders such as the “London Whale”, to those overseeing the marketing of highly dubious packages of sliced and diced mortgages or to those engaged in the mis-selling of interest rate swaps. I very much hope that the Minister will be able to give us an answer today or address this between now and Report.

There is no mention of the licensing regime, which the commission recommended. The Government said that they would ensure that regulators had the ability to take regulatory action against persons who were not senior persons—senior managers—or who were not subject to prior regulatory approval. There is no mention of the licensing regime in the government amendment. They have come up with something rather different in Amendment 53 on the rules of conduct. It states:

“If it appears … necessary or expedient for … advancing one or more of its operational objectives, the FCA may make rules about the conduct of the following persons”,

and those persons could be any employee of the bank.

I question whether that is the right answer. It is “may” rather than “must”, but I should have thought it essential that the FCA made rules. Is it right that it should apply to all employees from purely backroom or administrative staff? In some ways, the government scheme goes wider but it is possibly too permissive.

The final omission to highlight is that we propose that as well as an initial statement of responsibilities for each manager, there should be a handover note when people change jobs. We think that that is crucial because without it the chain of accountability breaks down, and when someone changes jobs we are back to, “I didn’t know”, or, “It wasn’t me”.

I intervene to ask the Minister to comment on some concerns that I have about this new “approved persons” or senior managers’ regime. First, I am worried that it will place British banks at a considerable disadvantage when they try to recruit the most talented managers available, not just from the United Kingdom but from around the world. Everybody agrees that bank management failed, so it is clear that the supervision of senior mangers needs to be enhanced and improved. For example, someone may be offered a job to work in Hong Kong, where he would probably pay less tax anyway, and he is unlikely to run the risk of being individually liable or culpable in that jurisdiction. I am not sure which other jurisdictions intend to introduce some kind of senior managers’ regime such as this.

My second concern is that it seems to me that it is up to the manager to prove that he was not negligent in the exercise of his responsibilities. It is wrong that a senior manager should be deemed to be guilty unless he can prove his innocence. My third concern is that to increase the individual responsibilities of senior managers will have the unintended consequence of diminishing the responsibility of the board of directors as a whole, or the executive committee, risk committee, or whichever committee it may be. I have sat on an executive committee of a bank and often the business being discussed was not my responsibility, but I felt that I should understand what was going on and what the discussion was about because I was collectively responsible as a member of that committee. What worries me is that if it is very clear that the individual manager is going to be responsible, that effectively diminishes the responsibilities of the other members of the committee. It also diminishes the ability of the chief executive to change the responsibilities of his senior team based on his judgment, because it would be too complicated as each department or division would effectively be under the supervision of people outside the chief executive’s control. Can the Minister comment on these points as well?

My Lords, I support the points made by the noble Viscount, Lord Trenchard. It is entirely understandable that people in this country are furious when they see individuals whom they blame for the system blowing up getting off scot free. On that front there are two points. First, if monetary policy is too lax for a long time, it will almost inevitably lead to bad lending by banks because, in some sense, banks are an automatic conduit of money. That really is what happened in the UK—because of the 2% inflation target, the Bank of England did not acknowledge that there was much higher inflation here off-set by imported deflation. We had easy money for far too long that filtered its way through into bad lending by banks. I remind the House that it was not investment banks but one or other form of bad lending—old-fashioned bad lending such as HBOS or buying CDO instruments from the US. It is not just individuals when a banking system blows up but the background as well.

Secondly, I blame greatly the useless and negligent regulators as well. Why did they not spot the problem? Why should they get off scot free as well? They have a job. Their task is to keep an eye on and make sure that the banking system is safe. If they fail completely in the discharging of that, to some extent they are as guilty as reckless people running banks badly. There is certainly an argument for saying that it would be desirable to bring in draconian powers against the executives of banks, harmonised internationally. I would be more comfortable if the same sort of measures applied in the US, Hong Kong and continental Europe.

I want also to raise a slightly quirky point relating to anti money-laundering since anti money-laundering amendments have arisen. It seems to me that in some ways anti money-laundering has gone slightly over the top. Noble Lords may be aware that, following the large fine given by the US authorities to HSBC, HSBC has simply fired all its US clients in the UK. It has closed their accounts. It has said it no longer wants the risk of dealing with Americans. This has caused huge inconvenience to lots of Americans living in London. Going forward, I can see if other dangers present themselves to other banks, they may decide that it is not worth having a particular category of client.

FATF, which as far as I can see is an unaccountable body laying down anti money-laundering rules, decided to blacklist a number of countries it felt were not practising anti money-laundering measures adequately. This led to some 30 embassies in the UK finding their bank accounts were likewise closed by HSBC. Some of the embassies found it virtually impossible to obtain a new bank account. If there was a branch of a bank from their country in this country they could go there but most other banks would not take them on as a client because they had been blacklisted by FATF. That again seemed slightly to fly in the face of embassies being approved by the Foreign and Commonwealth Office. Its reaction to this matter, I gather, was to express regret but not to do anything. I raised this with Andrew Bailey from the PRA. He felt it was extremely wrong and was quite surprised it had happened. This is a slightly different issue from where we are in the Bill but I would just say to the Minister that the Treasury needs to keep a little watch on what is going on in the anti money-laundering territory and its knock-on effects. I certainly think it is time that FATF, which is the top body laying down all this, were accountable to somebody. Both the Treasury and the Foreign and Commonwealth Office effectively said to me that they could not interfere with FATF—whatever it says goes.

My Lords, I speak to the amendments in my name and in those of the noble Lords, Lord McFall and Lord Watson. I declare an interest as chairman of Global Financial Integrity. It is a Washington-based think tank whose purpose is to promote measures designed to limit and eventually eradicate illicit financial flows around the world, in particular those from developing countries, which presently run into hundreds of millions of dollars. It is thought that they exceed the amount of aid that developed countries contribute to the countries out of which that money comes. I have experience as non-executive director of a banking operation and have advised banks professionally.

Money-laundering, the proceeds of crime and the results of fraud represent a composite picture of international dishonesty, which has been and will continue to be practised wherever those responsible can find a banking system through which to channel the money. This is a fact of life. Many of our banks have such an international scope that they are a ready target for people wanting to use them for these illicit activities.

I invite the noble Lord, Lord Flight, if he has not already read it, to look at the congressional report on HSBC. The chairman of HSBC described it as a very sobering read and concluded that bankers had lost the right to self-determination on such issues. When we come to the part of the Bill that controls how and what people in banks do so that this kind of dishonesty is not furthered, we should err on the side of authority. I invite those advising the Minister to avoid the legislative naivety I dealt with at Second Reading, or in months to come the Bill will result in many hours of detailed inquiry and comment by lawyers advising banks. The first rule the lawyers will pick up is that that which is not stated in this Bill was neither meant nor intended. The Bill, if it is to restore public trust and avoid the kind of risks I have described in dishonest money transfers, should err on the side of authority.

The amendments I am about to speak to were produced by independent counsel, invited to produce amendments that sought to meet the concerns I and my noble friends have. We played no part in the drafting of these amendments, so let us have a care. If a professional advising us as to the amendments produces this level of authority as being required, what do you think those seeking to protect themselves against it will do in terms of legal expense and inquiry?

My final point before I turn to the amendments in detail is by way of introduction. The noble Lord, Lord Flight, in his usual reserved manner, said, “What about the reckless disregard of regulators in the past of their responsibilities?”. I do not think that we are entitled to repose into the hands of future regulators a degree of confidence that past experience shows would be misplaced. They should be told the scope of how they are to do things and what they are to do because we are talking about bank involvement in criminality.

Amendments 46A and 46B go to the question of strengthening the senior management function—the senior person’s regime—so as to include, with precision and clarity, an obligation on the banking system specifically to deal with the risk of money-laundering and of dealing with the proceeds of crime or the results of fraud. There should be no legislative fault in precision and clarity when dealing with criminality.

The amendments seek to ensure that the definition of “senior management function” should be seen to include those areas that I have just mentioned in terms of compliance. Those in banking must comply and must avoid the risk of non-compliance. The FCA, in specifying senior management functions, will require them to do things, including a minimum threshold for sums to be regulated. Is this too much? It was not thought to be too much in the United States, which has a far bigger banking system than ours. Would it run a risk of damaging our banks? It has not in the United States. It is ours that have suffered the penalties, not theirs. These amendments seek to establish a norm—not some Anglo-Saxon aberration—for proper cross-border behaviour in the banking world.

Your Lordships will note that Amendment 46A uses the words, in proposed new paragraph (b)(iii),

“related to or resulting from”.

In other words, it gives a broad reach to responsibility. Amendment 46B makes specific reference to the statutes that have to be borne in mind. It is hardly a criticism to be met to say that people must obey the criminal law—of course they must. This statute—the Bill and the amendment—remind people in statutory wording of their civic obligation, as well as their professional obligation, to obey the law. It is designed to stop the defence of, “Nobody told me. It was not my job”. The two amendments are straightforward and build on the Government’s well deserved intention to improve the law.

Turning to the issue of senior persons, I was surprised that the Minister stated that Amendment 47A might result in the unintended consequence of drawing into the line of fire junior staff when a senior should be responsible. In fact, the risk we asked counsel to deal with was exactly the opposite—the risk of senior people using juniors as an escape route by a system they devised. That is exactly the opposite of the interpretation put upon it by the Minister.

The amendment is designed to avoid the money-laundering reporting officer being the only one to carry the can: it includes his superiors as well, hence the words in the amendment,

“all persons responsible for management of persons”.

We do not want the courts littered with trials about superior orders and tuppeny-ha’penny defences based on statutorily loose language.

I turn, finally, to the question of standards of behaviour and rules of conduct. The amendments concerned are Amendments 53A, 53B and 54A. The point I wish to make by way of introduction—again meeting something that was said by the noble Viscount, Lord Trenchard, and the noble Lord, Lord Flight—is that in London we are dealing with international banking. We are inviting rules to be observed by not only British citizens but foreign workers in our banks, who are expected to observe and apply our laws. Under these amendments the FCA and the PRA must make appropriate rules in relation to statutory responsibilities. The rules must be designed to avoid the risk of participation in such crime.

I have taken some time on this because out there, despite all the technical stuff we talk about in certain debates, the one thing the public will expect out of the Bill is that it will contain provisions designed to restore trust, domestically and internationally, in our banking system. To suggest that these amendments are unnecessary is naivety. They are necessary. There is no loss to their intent by inclusion but there is much to be gained. I ask the Committee to look at these amendments with favour.

My Lords, it is a pleasure to follow the noble Lord, Lord Brennan, and to have my name on these amendments. At Second Reading, I mentioned that the Parliamentary Commission on Banking Standards was charged with looking at culture and standards. We found a culture that was rotten and standards that were abysmally low. That applies particularly in the area of senior management and we need to ensure that the individuals, the organisations and the regulator do something about it.

My concern is that these amendments might not fully deal with the anti money-laundering failings that we have seen. I looked to the Economist, courtesy of the December 2012 issue, to recap on what we have seen in terms of egregious examples. The biggest money-laundering settlement with the US authorities was made by HSBC, which settled for $1,921,000,000—about $2 billion. Its money-laundering activities involved countries such as Cuba, Iran, Libya, Mexico, Myanmar and Sudan. Standard Chartered’s settlement was $667 million and the countries with which it was involved were Iran, Libya, Myanmar and Sudan. RBS had a $500 million settlement and it was involved with Iran and Libya. Lloyds Banking Group’s was $350 million and was involved with Iran and Sudan. The settlement for Barclays was $298 million and the countries were Cuba, Iran, Myanmar and Sudan. These were all UK-based companies, so our integrity as a financial centre in London is at risk as a result of the failings that we have seen.

The issue of HSBC is important because it took over a bank in Mexico. The group chief executive, Stuart Gulliver, and the group chairman, Douglas Flint, came before the Parliamentary Commission on Banking Standards. I asked Stuart Gulliver question 3777:

“Mr Gulliver, after acquiring the Mexican bank, it was known right up to board level that the bank had few, if any, money laundering controls, and that the affiliate did not meet group standards. So why was it allowed to continue correspondent banking, when it was known that it didn’t meet group standards? Was it wilful ignorance or were the systems not in place for that?”.

Stuart Gulliver said:

“I think the answer lies—I think the Commission has seen this in a number of instances—with culture. The culture failures were at two levels. We bought a bank in Mexico that we bought cheaply because it was in distress. That bank, as you can see from the documentation, clearly had inadequate anti-money laundering systems. We ourselves were too slow to put in place anti-money laundering systems that would be up to the standards we would all expect.”

I intervened and said:

“But you knew from day one of acquiring the bank that there were problems”.

Stuart Gulliver replied that, yes, he knew from day one; so a global bank with a reputation in London acquired a bank in Mexico, knowing from day one that it did not have adequate anti money-laundering facilities.

Then I quoted the head of group compliance, David Bagley, who had said that his,

“‘mandate was limited to advising, recommending, and reporting. My job was not—and I did not have the authority, resources, support or infrastructure—to ensure that all of these global affiliates followed the Group’s compliance standards. Rather, final authority and decision-making rested with local line management in each affiliate’”.

I continued my questioning:

“In October 2002, a month before HSBC acquired the bank in Mexico, David Bagley said in an e-mail: ‘There is no recognisable compliance or money laundering function’. Is that not amazing?”.

Was that not amazing for a global bank with the reputation it had? My point to the Minister is that he should not accept the words of the banks, because one of the things that the Parliamentary Commission on Banking Standards was tired of hearing was executives saying: “These were the problems that existed in the past. We have sorted them out. There are new people in place; ergo the problem will not exist”. However, at the Parliamentary Commission on Banking Standards, we were seeing examples every month of these egregious behaviours, so we have to ensure that both the regulator and the companies have the necessary authority and that the regulator enforces that.

On the issue of HSBC and the Mexican drugs, these are not victimless crimes. To put it into context, more than 35,000 people died at the hands of Mexican drug gangs at the time HSBC was involved in this money-laundering operation. The chair of the Senate Investigations Subcommittee, when referring to the widespread anti money-laundering failures of HSBC, described its culture as “perversely polluted”.

The Financial Conduct Authority itself confirmed how widespread the problem was. In 2011, it published a review into how banks deal with situations of high money risks. It found that 75% of banks were not taking adequate measures to ensure that they met their legal obligations and that more than a third were willing to accept business with a high degree of money-laundering risk if they thought they could get away with it. Based on that 2011 review and other findings, the FCA concluded that for UK banks,

“the level of anti-money laundering compliance is a serious concern … the weaknesses we see in firms’ dealings with high-risk customers is a serious and persistent problem”.

As the Parliamentary Commission on Banking Standards noted in its final report, by failing to prevent criminals from abusing our financial system, the banks are compromising the integrity of this sector and our economy as a whole. By failing to prevent money- laundering, banks are making the UK vulnerable to tax evaders, drug smugglers, arms traffickers and corrupt politicians laundering their ill gotten gains. The potential for a major British bank losing its licence in a major market would have huge ramifications for the UK economy. HSBC came perilously close to losing its licence. The Justice Department was of a mind to take its licence away and we all know that there was involvement from the Foreign Office and elsewhere to ensure that that licence was not indeed taken away. This issue is hugely serious for the integrity of our banks and for the economy.

The Parliamentary Commission on Banking Standards highlighted a number of general causes for the abysmal standards in the UK banking sector. Two of the most important ones were the lack of personal responsibility for senior bankers and poor enforcement of legal obligations by the regulators. I well remember that when Tracey McDermott, the director of enforcement, came before the commission we had another egregious example—one of the star traders of UBS losing billions of pounds. When we asked her what went wrong, she said, “We investigated the bank and the trail went cold”. The trail went cold because there was no list of individuals responsible for particular issues in the bank.

One of the things we would like to see is the responsibility flipped to individual bankers. Time and time again, as was mentioned earlier, we had senior bankers with PPI issues coming before us and saying, “We knew nothing about it”. It was a no-see, no-tell policy. They were evading the responsibility and they were evading being honest with the Parliamentary Commission on Banking Standards because if they had been honest with us, they would have been culpable.

Since we have had the Parliamentary Commission on Banking Standards, I have had a number of communications from one or two of the executives who came before us, asking whether I would meet them so they could explain how they went about their business and tell me about the restrictions placed on them within the organisations themselves. They wanted to demonstrate that they had personal integrity, notwithstanding the fact that everything—the whole ship—went down in terms of the organisation. I did see them.

This issue of a no-see, no-tell policy is really important. The noble Lord, Lord Turnbull, made the point about a handover note. It would seem to be a minor point, but this is hugely important. The Government must ensure that they get that right by allowing the regulator to lay down—“may lay down” are the words in the legislation—elements of the conduct of business. There has to be a real attempt here to ensure that full responsibility is taken by the senior executives.

It was clear that even when personal liability could be established the regulator rarely took up the case and when it did the punishment for individuals was non-existent or weak. I mentioned that the regulator was captured, cowed and conned by the industry. We need to ensure that the regulator has a spine in future to ensure that the organisations take individual responsibility and, if they do not, if it knows who is responsible, make its enforcement division very strict on the matter.

I suggest that, given the poor record of regulation, it is incumbent on us in Parliament to give the clearest steer possible, so that the commission’s recommendations are not diluted during the second, regulator-led stage of implementation. There needs to be firmness from both the regulator and Parliament. I hope that the amendments indicate to the Government that the anti money-laundering area is one that they should look at again and that they should come back before Report stage with something meaningful for us to address.

My Lords, I do not want to go into the issue of money-laundering; we have had a good debate on it and I am sure that my noble friend may have some further observations to make in the light of what has been said.

I endorse very strongly what the noble Lord, Lord Turnbull, had to say when speaking to this group of amendments. The Government are indeed to be commended on this series of amendments. However, as the noble Lord, Lord Turnbull, pointed out, in certain important ways, they do not go far enough. There is also the critical question of the definition of a bank in government Amendment 55. We would like to hear very clearly what is the definition of a bank and we would like the Government to look again at the points that the noble Lord, Lord Turnbull, my fellow commissioner on the banking commission, made. Although the Government have made a huge advance, there are still important areas where they have not gone far enough.

I should also like to address what lies behind this and what my noble friends Lord Trenchard and Lord Flight said in casting doubt on the whole drift of the provision. We have sought to say that there must be personal responsibility on members of the senior management in banks. It is not good enough for there simply to be fines on banks when things have gone wrong and there has been culpability. What happens if there are fines on banks? Who bears the burden? It is the owners of the banks, the shareholders. The shareholders are the innocent victims here. There must be individual responsibility on the management where such behaviour can be demonstrated or where the management neglectfully failed to exercise responsibility.

As the noble Lords, Lord Turnbull and Lord McFall, said, in hearing evidence, the commission heard one of two things: either, “It wasn’t me; it was a collective board decision, so no individual is responsible”; or, “It wasn’t me; I had no idea what the traders in my bank were doing; it was all them”. Of course, we strongly suspected that the reason that they had no idea what the traders were doing was that they took great care not to know. The point is simple: if they did not know what the traders were doing, they were culpable. It is their business to know what their traders are doing. That will not wash either.

Then we have heard the excuse: “What about the regulators? The regulators were at fault”. So they were; that is beyond dispute. The Government have introduced a new system of regulation and supervision which they hope will be better than the one that preceded it. We will come to this later, but we have suggested ways in which that, in our judgment, needs to be further strengthened. That does not exculpate the bankers.

It has also been suggested that the Bank of England was pursuing an inappropriately cheap money policy and, therefore: “What were the bankers meant to do? It is the Bank of England’s fault”. I shall not detain the House by going into this now, but it is arguable whether the cheap money policy was wrong or right at the time. I think that you could make a very good case that it was appropriate at the time, but anyhow, whether it was wrong or right, it is no good a banker saying, “I couldn’t help making a bad loan. I couldn’t help taking excessive risks. I couldn’t help being reckless”. That is absurd and pathetic.

Of course, others were culpable. The auditors were culpable. They never raised a finger to warn the boards of the banks of the risks that they were running. Again, we all know that the ratings agencies were culpable. The ratings agencies made mistakes in calling rubbish derivatives triple-A. But at the end of the day, the buck stops with the bankers. It is their responsibility. That is what they are paid to do. It is their judgment that they are meant to exercise.

Finally, we were told, “Oh, there may be other jurisdictions, such as Hong Kong”, or wherever, “where standards are lower, so we cannot afford to have higher standards and more direct responsibility than in Hong Kong”. That is no good at all. The standards in the City of London should be the highest in the world. The whole thinking behind the commission on banking standards was that we wanted to clean up banking, not to destroy it, so that British banking can be even stronger and make an even greater contribution to the British economy than it has in the past. That is what we were about.

Personal responsibility is not the whole of the solution, but personal responsibility of the senior management is a vital and necessary element. Therefore, as I said, I commend the Government for having moved a long way in that direction, but a little more needs to be done, as the noble Lord, Lord Turnbull, pointed out.

My Lords, I am proud to have my name associated with that of my noble friends Lord Brennan and Lord McFall in this group of amendments.

I certainly agree with much of what was said by the noble Lord, Lord Lawson, not least when he said that we have covered the question of money-laundering in some detail. Indeed we have, but I shall not apologise for reinforcing some of the points made and, I hope, finding one or two that have not been made. At its mildest, it is disappointing to hear the Minister say that the amendments are unnecessary and that what they are intended to achieve is largely covered in the Bill or in the government amendments

My noble friend Lord Brennan called that naivety. Yes it is; I would say that it is also complacent in the extreme. The examples given by my noble friend Lord McFall show that the current system for British banking is not working. The huge fines levied on HSBC and Standard Chartered by the US authorities showed that the US authorities do not think that British banking standards are high enough. I absolutely concur with the view of the noble Lord, Lord Lawson, that the standards of British banking should be the highest in the world. If that puts off some people from working in this country, so much the better.

It should be stressed that money-laundering regulations in the UK are designed to protect our financial system. That is primarily why they are there. Money-laundering is more widely defined in the UK than in several other jurisdictions, notably the USA and much of Europe. UK money-laundering offences are not limited to the proceeds of serious crimes, nor are there any monetary limits. Financial transactions need no money-laundering design or purpose for our laws to consider them a money-laundering offence. A money-laundering offence under existing legislation need not even involve money, since the money-laundering legislation covers assets of any description. The law applies to a person who by criminal conduct evades a liability such as a taxation liability, and that individual is deemed to have obtained a sum of money equal in value to the liability evaded. That is a very important point. Just a week ago HMRC announced that every year some £35 billion of taxes due in this country is not collected.

With that in mind, we should be careful about setting aside the idea that money-laundering is an issue. I suggest that it is very much an issue. My noble friends have rightly outlined a number of reasons why we really cannot afford to miss the opportunity the Bill provides to deal with failures in anti money-laundering compliance. Not only would that compromise the outstanding work and considerable efforts of the Parliamentary Commission on Banking Standards, it could have a tragic human cost. Some of the most vulnerable people in poor countries around the world suffer in many ways as a result of the effects of money-laundering.

I want to stress the matter of our own economy. The parliamentary commission rightly argued that good standards in the banking industry are important for not only the health of that sector, but the wider UK economy as a whole. Correspondingly, failures in standards jeopardise the health of our economy. That may seem self-evident, but surely the banking sector in this country has been responsible for enough damage to our economy in recent years.

It is vital that we take the opportunity to ensure that failures to comply with anti money-laundering laws and other financial regulations do not lead to any further damage. I suggest that there is a real risk of that, notwithstanding that, as was highlighted by the noble Lord, Lord Flight, HSBC has taken rather stringent measures as a result of being hauled over the coals in the US. If as a result some individuals have lost out or been inconvenienced, as he seemed to be suggesting, then that is regrettable. However, it is really pretty small beer compared to some of the issues involved in and the amounts affected by money-laundering throughout the world, often with the involvement of parts of the British banking sector.

When dealing with this issue it is important that we do not easily say that it is all right, that the legislation covers everything we need, and that there is no need for amendments such as these. In preparing for this part of our discussions this afternoon, I looked at the Bill in detail. I was able to find a total of eight separate pieces of legislation mentioned in the Bill, as it was originally published. Not once in the Bill did I find any mention of the words “anti money-laundering”, for a start. Nor did I find any mention at all of the three pieces of legislation—the Proceeds of Crime Act 2002, the Fraud Act 2006, or the Money Laundering Regulations 2007—in some of the amendments we are discussing. Apparently the Government do not think that there is any need to link, at least explicitly, those pieces of legislation with the Bill. That is a grave mistake.

My noble friend Lord Glasman came up with a phrase that struck a chord, certainly with me and I suspect also with other noble Lords: without incentives to virtue, you get incentives to vice. That is absolutely the case, and I very much hope that the Minister will reconsider what I believe to be his rather complacent position on these amendments.

My Lords, for various reasons I have not yet had an opportunity to speak to the Bill. As this is my first appearance, I declare an interest as recorded in the register as a non-executive director of the Royal Bank of Scotland Group plc. I emphasise that what I am about to say represents my personal views, and in no way represents anything that I have been asked or encouraged to say by the Royal Bank of Scotland.

I want to comment on the group of amendments that the noble Lord, Lord Brennan, introduced when he raised the extremely important issue of anti money-laundering and the legislative provisions that he referred to, and on my noble friend Lord Newby’s comments about seeking to import specific references into this group of amendments. I should say that I support the intention of the amendments which the Government have brought forward to have a much enhanced set of standards and supervision for those taking management responsibilities within banks.

My concern about the amendments introduced by the noble Lord, Lord Brennan, is that by singling out one group of activities, however important, we might give the impression that a lot of other things are not as important. The schema at the moment is drafted quite generically. It will eventually leave a lot to the discretion of the regulators—which I think is right—so that they can operate it in an effective manner. However, by singling out the particular legislation that the noble Lord, Lord Watson of Invergowrie, referred to—the Fraud Act, the Proceeds of Crime Act and the Money Laundering Regulations—it seems to me that a lot of things are not said.

The noble Lord referred to lawyers immediately looking at what is said and what is not said in legislation. I therefore put it to him that after his amendments a number of important things would not be said in this legislation, which might lead people to think that they were not intended to be covered. For example, issues which are similar to money-laundering but which were not mentioned by the noble Lord’s amendments are terrorism financing offences and sanctions offences. These are very similar, and the banks operate very similar systems to deal with money-laundering and to stop unauthorised financial transactions with terrorists and those on sanctions lists. However, the noble Lord’s amendments do not cover these.

Stepping away from that, other potentially criminal activities would not be mentioned by the legislation after the noble Lord’s amendments. I single out the new offence which was introduced post-LIBOR, the offence of rate manipulation, for which I cannot remember the exact term. This would be another criminal activity which would not be mentioned by the Bill. Beyond that, there would be a lot of very important compliance and conduct issues that are managed by banks which would not be caught by any specific criminality, but nevertheless would have devastating consequences for individuals. Within the definition these could involve a serious risk of consequences to the authorised person or business interest of the United Kingdom, and therefore should be caught.

Banks must responsibly manage a whole range of conduct and compliance issues. My point is not that I am against trying to ensure that money-laundering is within the legislation. I am sure that money-laundering offences will be fully taken into account by the PRA when it implements the new regimes. My problem is that by mentioning them we have omitted to mention some other really important things which should definitely be covered.

My Lords, I found that to be a very interesting speech from the noble Baroness, Lady Noakes. She took up a point that I had been thinking about, but we come at the prevention of terrorism from a different point of view. I believe that with this legislation the prevention of terrorism interface would be through money-laundering. Certainly it could be wider than that in relation to sanctions regimes and so on, but the specific area of prevention of terrorism relates quite directly to the ability of organisations such as al-Qaeda to put money through the system, apparently cleanly. They hope—and are able to be fairly confident—that there would not be the rigorous review and analysis that there should be by sufficiently senior people within the banking system.

I do not have the knowledge and expertise of some of the excellent speeches that we have heard this afternoon, but I have an interest in legislating to prevent terrorism. It is a critical part of our banking system, and I am grateful to the noble Baroness for raising that. I hope that this is something that the Minister will look at.

The noble Viscount, Lord Trenchard, who I regret is not in his place, said something which I must admit prompted me to speak in support of the amendments of my noble friends. He spoke about the fact that we would seek to attract the best bankers, because they would be lured to places such as Singapore and Hong Kong and even increasingly to Shanghai. If a banker is sufficiently venal that he or she would chase the biggest pound, when bankers are not exactly paid the national minimum wage, rather than seeking to operate in an environment of the utmost integrity, then frankly I am not all that sure that we would want them in the British banking system. We have the ability through this legislation to underline our position as the greatest financial services centre in the world. It is specifically because of the venal attitude that we have seen that this economy and economies around the world were almost brought down.

I hope that in looking at the anti money-laundering aspects which my noble friends have raised in their amendments, the Government will think again about this. I do not think that there is a vast chasm here, and I do not take the view of the noble Lord, Lord Flight, who I often agree with, that there is far too much anti money-laundering legislation. Yes, that legislation can be profoundly irritating when you come up against it. There are an awful lot of things in life now that are profoundly irritating, such as having to put your toothpaste into a plastic bag at the airport. However, we live with them because we know why we have to.

I clearly did not make my point correctly. I was simply trying to say that I have seen reactions to anti money-laundering arrangements, namely HSBC sacking all its US clients and 26 embassies in the UK being blacklisted by the FATF and having problems getting bank accounts. By the way, 10 of those embassies belonged to members of the EU. It is right to focus on anti money-laundering for the reasons which noble Lords correctly pointed to, but people do not take account of the other side of the coin. What is happening, as I described—and it will increasingly happen—is that people who come from countries that have been FATF-blacklisted will find it impossible to get a bank account, although they may be completely innocent.

My Lords, I have an amendment in this group and it may be for the convenience of the Committee if I speak to it now. Before doing so, I would like to make two comments about the discussion that has gone on so far. First, Amendment 55 in the name of the noble Lord, Lord Deighton, which includes the meaning of what is a bank, requires very careful exposition by the Minister, because if it says what it appears to say then it seriously undermines the whole discussion about the senior persons regime that we have been having up until now.

Secondly, on the amendments tabled by my noble friend Lord Brennan and his colleagues, it seems that it is incumbent on the Treasury between now and Report to produce a written report demonstrating the noble Lord’s claim that these amendments are unnecessary; showing that the current regime is fully in accord with the latest FATF principles; and therefore providing the comfort which my noble friend might seek if his amendments are indeed unnecessary. Perhaps the noble Lord could also take in some of the points made by the noble Baroness, Lady Noakes, as there are areas that the noble Baroness wants to be sure are equally well covered. Particularly with respect to the issues raised about anti money-laundering and prevention of terrorism principles, it is crucial, as those principles are conveyed into legislation, that we are absolutely clear—and the legislation is clear and explicit—on this matter.

Amendment 100, which is in my name and that of my noble friend Lord Tunnicliffe, proposes to introduce a licensing regime to apply to all approved persons. The noble Lord, Lord Newby, made the extraordinary remark that this would weaken what was elsewhere in the regime as set out in the Government’s amendments. However, I was heartened to hear the noble Lord, Lord Turnbull, use the word licence as I did, and to hear him quote almost word for word the specification of,

“minimum thresholds of competence … integrity, professional qualifications, continuous professional development”,

and so on, which is included in our amendment.

Amendment 100 would significantly strengthen the requirement for approved persons to be suitably qualified in this country, to be licensed and to face the possibility of having the licence removed. Doctors, teachers and lawyers all require some form of professional licence, so why not approved persons in banking? If the noble Lord really undertook to understand this amendment he would realise that it fits precisely with the goals of the commission and would significantly strengthen the quality of regulation and approval of those working in the banking sector in this country.

My Lords, I support what my noble friend Lord Eatwell said and speak in relation to what the noble Lord, Lord Lawson, said. People who are supposed to be responsible for the conduct of, as it were, their inferiors in the bank sometimes do not understand what is happening below them. Certainly, in the case of Baring Brothers the management did not understand what Nick Leeson was doing. This is a matter of competence. I very strongly support this amendment because we ought to have periodic examinations of people in charge of banks, and see whether they pass those examinations, because the profession is changing and they are way behind a changing business.

My Lords, I support very much what the noble Lord, Lord Eatwell, has just said. We need a clear and authoritative report from my noble friend the Minister as to who is right between the noble Lord, Lord Brennan, who is a highly distinguished lawyer, and those who are advising my noble friend. If there is any doubt about the matter, I see virtue in the amendments put down in the names of the noble Lords, Lord Brennan, Lord McFall and Lord Watson of Invergowrie. I commend the organisations that have helped to craft those important amendments. There again, the noble Baroness, Lady Noakes, seems to make a strong point. If on second thoughts the Minister cannot assure us that the amendment of the noble Lord, Lord Brennan, is superfluous, one would want him to assure the House that the noble Baroness’s concern is superfluous.

My Lords, perhaps I may start by dealing with the three points on which the noble Lord, Lord Turnbull, sought clarification. The first was on the definition of “bank” for the purposes of these amendments. The regime will apply to all UK institutions that have permission to take deposits. That covers ring-fenced banks, other banks, building societies, credit unions and some wholesale deposit takers, but it does not cover things which in popular parlance are called banks but which do not take deposits.

If a bank divides itself under the new regime into a ring-fenced bank which takes deposits and puts its investment activities—derivatives, underwriting and proprietary trading—into a non-ring-fenced bank which does not take deposits, does it mean that that mass of activity will not be covered by the regime? Much of the malefaction took place in that area.

My Lords, I repeat: it is limited to banks that take deposits, because the view is that they are of a different order of significance in the system. I think that we have a difference of view.

The question then becomes, “Should it be those areas?”, and a question of whether the Minister will take this back to the Treasury and come up with a scheme that includes them. I do not think it will be understood that the people supervising some of the activities that I mentioned are not covered by it. We are actually weakening the regime.

I will take it back to the Treasury, but I want the noble Lord to be in no doubt as to what the Government are currently proposing.

May I reinforce what others have said? I am horrified by the Minister’s explanation. He must take it back to the Treasury and get the Treasury to think again. I refresh his memory, for example, about the evidence that we took from UBS. Not only was it culpable to an extraordinary degree in the LIBOR scandal but its top management also said that it knew nothing about what its traders were doing. This was in spite of the fact that when it had its capital-raising exercise, it presented to all the funds that its great profit centre was trading in LIBOR derivatives. Then it said, “We know nothing about it”. This made it immensely culpable. The Minister is saying that if you had a bank that was not taking retail deposits but was doing just that, there would be no individual responsibility at all under this Bill. I am afraid that he must look at that again.

I would like to reinforce the position of the official Opposition on this. We are totally behind what the noble Lords, Lord Lawson and Lord Turnbull, have said. It is disgraceful to suggest that investment banks that are not deposit-taking but offer a wide range of financial services should not come under this senior persons regime.

Was the Minister talking about retail deposits, as I believe my noble friend Lord Lawson has interpreted him saying, or, as the legislation seems to me to say, about deposit-taking more widely? Deposit-taking is not confined to retail banking on ring-fenced operations. Deposit-taking occurs across the whole range of banking activities, as far as I am aware. Will he clarify to what kinds of activity he intend this to apply?

Could I add my support? It seems to me that it is in investment banking territory where there is the greatest scope and where there has been the most inappropriate behaviour. It was Lehmans that nearly brought the whole system down. Part of the intent of the ring-fence is that what is in it is much simpler banking. The whole argument does not stand up unless investment banks are very much covered by the new regime.

As clarification, given what the Minister has said about wholesale deposits, if there was an organisation providing banking services on a fee-based basis, would it be alone? Would it be exempt?

My Lords, unless it was taking deposits it would be exempt under the amendments as they stand. It is fair to say that I have heard what the House has said and I will relay it with all force to my colleagues in the Treasury, who will not have had the privilege to hear it directly.

It would be easy to put a note in the Library about which institutions will be affected and which will not, so that we can see for ourselves and there is no misinterpretation when we look at this further on Report.

I am not sure that I can undertake to give a comprehensive list, but I am sure that I can undertake that we would explain which named organisations fall on both sides of that definition.

The next point made by the noble Lord, Lord Turnbull, was about the licensing regime. He made a common point about “may” as opposed to “must”, something that we debate at huge length. There is no doubt that there will be not a licensing regime in his terms, but there will be rules of conduct that will cover all employees for whom they are relevant. The intention is not for the cleaners to be covered by these rules. It is perfectly well understood with the PRA that it will not only produce the rules but set out the scope of which employees will be covered by them.

The noble Lord asked about the handover note. Our view is that we do not need primary legislation to require handover notes. The regulators can require that in their rules, and I am sure that they plan to. When senior managers take on a new job, new statements of responsibilities are required so that there is absolute clarity on what the senior manager is responsible for. We see these as fulfilling the purpose that he had in mind, and which other people might colloquially think of as a handover note.

The noble Viscount, Lord Trenchard, raised the question about whether British banks would be at a disadvantage. I cannot really add to the comments of my noble friend Lord Lawson and others, other than to say that the Government believe that it is in the long-term interest not only of bank customers but of the City of London that the highest possible standards are followed here. If individual bankers feel that they do not want to operate to the highest possible standards, they should go somewhere else.

The noble Viscount, Lord Trenchard, and the noble Lord, Lord Flight, asked whether the senior management regime undermines collective responsibility. We do not think that it does. It ensures that individuals are held to account when things go wrong. It will not change the way in which decisions are taken in a collective manner.

The noble Lord, Lord Flight, raised a point that has been made a number of times: why did the regulatory system get away with it, and why has no action been taken? The answer is that the restructuring of the system was undertaken to try to ensure that we did not have the same problems again. The Government believe that that is how you stop the laxity of the past, and that we begin to instil a new culture by having different organisations, objectives and rules. The regulatory regime has not gone through this process unamended.

Moving on to the amendments introduced by the noble Lord, Lord Brennan, I assure him that there is no difference of view between him and other noble Lords who supported this amendment about the significance of money-laundering and the need for it to be tackled effectively, nor of the scale of it. The scale of money-laundering is very large, and the Government and the regulators are determined to cut it down.

I would like to make some points against the amendments and in response to some of the things that have been said. The most important point was that raised by the noble Baroness, Lady Noakes. The requirements for senior managers to stay within the law on money-laundering are no different from those to keep to the law in every other area where there is law. The noble Lord has a laudable interest in money-laundering while the noble Baroness is interested in anti-terrorism legislation. There may be an overlap, but they are distinct. Other noble Lords are interested in other things, where bankers have a legal responsibility to keep within the law. Singling out money-laundering, at a point where it is not required in order to be covered by the legislation, serves no useful purpose and can be positively unhelpful. However, I am happy to take up the sensible suggestion from the noble Lord, Lord Eatwell, that we provide a letter of comfort, as it were, between now and Report to confirm that the regulator takes this extremely seriously, and that we begin to explain how the obligation under the law will be undertaken.

The noble Lord, Lord McFall, repeated that in the past the trail could go cold. The great thing about these provisions is that they deal explicitly with that. To say that the trail goes cold will no longer be a defence.

The reason I said that is that Tracey McDermott, the present FCA director of enforcement, came before the committee and answered that question in all honesty. She said that what is needed is a chart of organisations to determine who is responsible for what and a handover document. That is at the start at the moment; it has not been fleshed out. That is the reason why I brought that point to the Minister.

When this amendment is enacted, it will ensure that a senior manager will have his or her areas of responsibility explicitly set out on appointment and that he or she will be held responsible for everything that happens on their watch in that area. It will no longer be a defence to say, “The trail ran cold” or “Nobody told me about it”, as long as they might reasonably be expected to know about it. That is a killer point in respect of this amendment.

The noble Lord, Lord Watson, said that the Government are complacent, as HSBC has shown. It is in part because of the HSBC experience that this series of amendments has been introduced. We are confident that they will stop that happening again.

The noble Lord, Lord Eatwell, set out the arguments for a licensing regime. The Government believe that the code of conduct we are proposing, which will cover all those involved in banking activities, is a proportionate response to the need for the kind of principles followed by people on a day-to-day basis in the banking sector that the noble Lord wants covered by the licensing regime. We are confident that the Government will achieve that.

I hope that I have dealt with most of the points that were raised. I commend the amendment to the Committee.

Amendment 45 agreed.

Amendment 46

Moved by

46: After Clause 12, insert the following new Clause—

“Senior management functions

After section 59 of FSMA 2000 insert—“59ZA Senior management functions

(1) This section has effect for determining whether a function is for the purposes of section 59(6) and (6B) a senior management function.

(2) A function is a “senior management function”, in relation to the carrying on of a regulated activity by an authorised person, if—

(a) the function will require the person performing it to be responsible for managing one or more aspects of the authorised person’s affairs, so far as relating to the activity, and(b) those aspects involve, or might involve, a risk of serious consequences—(i) for the authorised person, or(ii) for business or other interests in the United Kingdom.(3) In subsection (2)(a) the reference to managing one or more aspects of an authorised person’s affairs includes a reference to taking decisions, or participating in the taking of decisions, about how one or more aspects of those affairs should be carried on.””

Tabled by

46A: After Clause 12, line 13, leave out paragraph (b) and insert—

“(b) those aspects involve, or might involve, a risk of—(i) serious consequences for the authorised person, or(ii) serious consequences for business or other interests in the United Kingdom, or(iii) conduct or omissions by or on behalf of an authorised person related to or resulting from the authorised person transacting with criminal property for its benefit or for the benefit on behalf of other persons.”

My Lords, I am grateful to the Minister for telling us that he will write in due course about the matters that I raised. If the Committee will forgive me for using a graceless Americanism, we are not talking about legislative refinement—this is hardball. It is serious stuff out there in the commercial world.

I reassure the noble Baroness, Lady Noakes, that I have assumed that money-laundering has its technical meaning, which is using a bank to convert illicit money into a licit flow, which would include tourism and so on, but if necessary that can be dealt with by way of a bigger list in due course.

Amendment 46A (to Amendment 46) not moved.

Amendment 46B (to Amendment 46) not moved.

Amendment 46 agreed.

Amendment 47

Moved by

47: After Clause 12, insert the following new Clause—

“Statements of responsibilities

(1) Section 60 of FSMA 2000 (applications for approval) is amended as follows.

(2) After subsection (2) insert—

“(2A) If—

(a) the application is for the approval of a person to perform a designated senior management function, and(b) the authorised person concerned is a bank,the appropriate regulator must require the application to contain, or be accompanied by, a statement setting out the aspects of the affairs of the authorised person concerned which it is intended that the person will be responsible for managing in performing the function.(a)The administrator must obtain the approval of the Bank of England to any proposals under sub-para. (1).(b)Treat the reference in sub-para. (2)(b) to the objective mentioned in para. 3(1)(a) or (b) as a reference to the objective in section (Objective of FMI administration) of this Act.(c)Ignore sub-para. (3)(b).(a)Before making an application in reliance on this paragraph the FMI administrator must give notice to the Bank of England, which is to be entitled to participate in the proceedings.(b)In making directions the court must have regard to the objective in section (Objective of FMI administration) of this Act.(a)Ignore sub-paras. (1) and (3).(b)The Bank of England may apply to the court for the variation or revocation of any directions given by the court.()“(2) Where a company is in FMI administration, a creditor or member of the company may apply to the court claiming that the FMI administrator is conducting himself or herself in a manner preventing the achievement of the objective of the FMI administration as quickly and efficiently as is reasonably practicable.”()“(1) On an application made by a person mentioned in sub-paragraph (2), the court may provide for the appointment of an FMI administrator of a company to cease to have effect from a specified time.()(2) The persons who may apply to the court under sub-paragraph (1) are— ()(a) the Bank of England;()(b) with the consent of the Bank, the FMI administrator.”(a) Para. 91(1) applies as if the only person who could make an application were the Bank of England.(b) Ignore para. 91(2).(a) in accordance with directions of the Bank of England, and(b) if the Bank is satisfied that they will not prejudice the objective in section (Objective of FMI administration) of this Act.(a) In considering making an order in reliance on section 241 the court must have regard to the objective in section (Objective of FMI administration) of this Act.(b)Ignore subsections (2A)(a) and (3) to (3C).(2B) A statement provided under subsection (2A) is known as a “statement of responsibilities”.

(2C) In subsection (2A) “designated senior management function” means a function designated as a senior management function under section 59(6B) or (6C).”

(3) After subsection (6) insert—

“(6A) Subsection (6) applies to references to a bank as it applies to references to the authorised person concerned.””

Amendment 47A (to Amendment 47) not moved.

Amendment 47 agreed.

Amendments 48 to 52

Moved by

48: After Clause 12, insert the following new Clause—

“Power to give approval subject to conditions or for limited period

(1) Section 61 of FSMA 2000 (determination of applications) is amended as follows.

(2) For subsection (1) substitute—

“(1) The regulator to which an application for approval is made under section 60 may grant the application only if—

(a) it is satisfied that the person in respect of whom the application is made (“the candidate”) is a fit and proper person to perform the function to which the application relates, or(b) in a case where the application is for approval to perform a designated senior management function in relation to the carrying on of a regulated activity by a bank (a “bank-related senior management application”), it is satisfied that the condition in paragraph (a) will be met if the application is granted subject to one or more conditions (as to which, see subsection (2B)).”(3) In subsection (2), for “deciding that question” substitute “determining the application”.

(4) After subsection (2A) insert—

“(2B) The regulator to which a bank-related senior management application is made under section 60 may in particular—

(a) grant the application subject to any conditions that the regulator considers appropriate, and(b) grant the application so as to give approval only for a limited period.(2C) A regulator may exercise the power under paragraph (a) or (b) of subsection (2B) only if—

(a) where the regulator is the FCA, it appears to the FCA that it is desirable to do so in order to advance one or more of its operational objectives, and (b) where the regulator is the PRA, it appears to the PRA that it is desirable to do so in order to advance any of its objectives.(2D) Consent given by the FCA for the granting of the application may be conditional on the manner in which the PRA exercises its power under subsection (2B).”

(5) After subsection (3) insert—

“(3ZA) In the case of a bank-related senior management application, the reference in subsection (3)(a) to granting the application is a reference to granting it without imposing conditions or limiting the period for which the approval has effect.”

(6) After subsection (5) insert—

“(6) In this section—

(a) “designated senior management function” means a function designated as a senior management function under section 59(6B) or (6C);(b) any reference to a bank includes a reference to a person who has applied for permission under Part 4A and will be a bank if permission is given.”(7) In section 62 of FSMA 2000 (applications for approval: procedure and right to refer to Tribunal)—

(a) in subsection (2), after “the application” insert “, or to grant the application subject to conditions or for a limited period (or both)”;(b) in subsection (3), after “the application” insert “, or to grant the application subject to conditions or for a limited period (or both)”;(c) in subsection (4), after “the application” insert “, or to grant the application subject to conditions or for a limited period (or both)”.”

49: After Clause 12, insert the following new Clause—

“Changes in responsibilities of senior managers

After section 62 of FSMA 2000 insert—“62A Changes in responsibilities of senior managers

(1) This section applies where—

(a) an authorised person has made an application to the appropriate regulator for approval under section 59 for a person to perform a designated senior management function,(b) the application contained, or was accompanied by, a statement of responsibilities under section 60(2A), and(c) the application has been granted.(2) If, since the granting of the application, there has been any significant change in the aspects of the authorised person’s affairs which the person is responsible for managing in performing the function, the authorised person must provide the appropriate regulator with a revised statement of responsibilities.

(3) The appropriate regulator may require the authorised person—

(a) to provide information which the person is required to give under this section in such form as the appropriate regulator may direct, or(b) to verify such information in such a way as the appropriate regulator may direct.(4) In this section—

“the appropriate regulator” has the same meaning as in section 60;

“designated senior management function” means a function designated as a senior management function under section 59(6B) or (6C).””

50: After Clause 12, insert the following new Clause—

“Variation of approval

After section 63 of FSMA 2000 insert—“63ZA Variation of senior manager’s approval at request of bank

(1) Where an application for approval under section 59 is granted subject to conditions, the authorised person concerned may apply to the appropriate regulator to vary the approval by—

(a) varying a condition,(b) removing a condition, or(c) imposing a new condition.(2) “The appropriate regulator”—

(a) in the case of an application for variation of an approval in a way described in subsection (1)(a) or (b), means whichever of the FCA or the PRA imposed the condition concerned;(b) in the case of an application for variation of an approval in the way described in subsection (1)(c), means the regulator who gave the approval.(3) The PRA must consult the FCA before determining an application under this section, unless the application relates to the variation or removal of a condition which was imposed by the PRA in exercise of its power under section 63ZB.

(4) The regulator to which an application is made under this section must, before the end of the period for consideration, determine whether—

(a) to grant the application; or(b) to give a warning notice under section 62(2).(5) “The period for consideration” means the period of 3 months beginning with the date on which the regulator receives the application.

(6) The FCA may refuse an application under this section if it appears to the FCA that it is desirable to do so in order to advance one or more of its operational objectives.

(7) The PRA may refuse an application under this section if it appears to the PRA that it is desirable to do so in order to advance any of its objectives.

(8) The following provisions apply to an application made under this section for variation of an approval as they apply to an application for approval made under section 60—

(none) section 60(2) to (8),(none) section 61(4) and (5),(none) section 62.63ZB Variation of senior manager’s approval on initiative of regulator

(1) The FCA may vary an approval under section 59 given by the FCA or the PRA for the performance of a designated senior management function in relation to the carrying on of a regulated activity by a bank if the FCA considers that it is desirable to do so in order to advance one or more of its operational objectives.

(2) The PRA may vary an approval under section 59 for the performance of a designated senior management function in relation to the carrying on of a regulated activity by a bank if—

(a) either—(i) the PRA gave the approval, or(ii) the FCA gave the approval and the bank is a PRA-authorised person, and(b) the PRA considers that it is desirable to do so in order to advance any of its objectives.(3) A regulator may vary an approval by—

(a) imposing a condition,(b) varying a condition,(c) removing a condition, or(d) limiting the period for which the approval is to have effect.(4) Before one regulator varies an approval given by the other regulator, it must consult the other regulator.

(5) In this section “designated senior management function” means a function designated as a senior management function under section 59(6B) or (6C).

63ZC Exercise of power under section 63ZB: procedure

(1) This section applies to an exercise, by either regulator, of the power to vary an approval under section 63ZB.

(2) A variation takes effect—

(a) immediately, if the notice given under subsection (4) states that that is the case,(b) on such date as is specified in the notice, or(c) if no date is specified in the notice, when the matter to which the notice relates is no longer open to review.(3) A variation may be expressed to take effect immediately (or on a specified date) only if the regulator concerned, having regard to the ground on which it is exercising the power to vary, reasonably considers that it is necessary for the variation to take effect immediately (or on that date).

(4) If either regulator proposes to vary an approval or varies an approval with immediate effect, it must give each of the interested parties written notice.

(5) The notice must—

(a) give details of the variation,(b) state the regulator’s reasons for the variation,(c) inform the interested parties that each of them may make representations to the regulator within such period as may be specified in the notice (whether or not any of the interested parties has referred the matter to the Tribunal),(d) inform the interested parties of when the variation takes effect, and(e) inform the interested parties of the right of each of them to refer the matter to the Tribunal.(6) “The interested parties”, in relation to an approval, are—

(a) the person on whose application it was given (“A”),(b) the person in respect of whom it was given (“B”), and(c) the person by whom B’s services are retained, if not A.(7) The regulator giving the notice may extend the period allowed under the notice for making representations.

(8) If having considered the representations made by the interested parties, the regulator decides—

(a) to vary the approval, or(b) if the variation has taken effect, not to rescind it,it must give each of the interested parties written notice.(a) The administrator must obtain the approval of the Bank of England to any proposals under sub-para. (1).(b) Treat the reference in sub-para. (2)(b) to the objective mentioned in para. 3(1)(a) or (b) as a reference to the objective in section (Objective of FMI administration) of this Act.(c) Ignore sub-para. (3)(b).(a) Before making an application in reliance on this paragraph the FMI administrator must give notice to the Bank of England, which is to be entitled to participate in the proceedings.(b) In making directions the court must have regard to the objective in section (Objective of FMI administration) of this Act.(a) Ignore sub-paras. (1) and (3).(b) The Bank of England may apply to the court for the variation or revocation of any directions given by the court.()“(2) Where a company is in FMI administration, a creditor or member of the company may apply to the court claiming that the FMI administrator is conducting himself or herself in a manner preventing the achievement of the objective of the FMI administration as quickly and efficiently as is reasonably practicable.” ()“(1) On an application made by a person mentioned in sub-paragraph (2), the court may provide for the appointment of an FMI administrator of a company to cease to have effect from a specified time.()(2) The persons who may apply to the court under sub-paragraph (1) are—()(a) the Bank of England;()(b) with the consent of the Bank, the FMI administrator.”(a) Para. 91(1) applies as if the only person who could make an application were the Bank of England.(b) Ignore para. 91(2).(a) in accordance with directions of the Bank of England, and(b) if the Bank is satisfied that they will not prejudice the objective in section (Objective of FMI administration) of this Act.(a) In considering making an order in reliance on section 241 the court must have regard to the objective in section (Objective of FMI administration) of this Act.(b) Ignore subsections (2A)(a) and (3) to (3C).(9) If having considered the representations made by the interested parties, the regulator decides—

(a) not to vary the approval, (b) to vary the approval in a different way, or(c) if the variation has taken effect, to rescind it,it must give each of the interested parties written notice.(a) The administrator must obtain the approval of the Bank of England to any proposals under sub-para. (1).(b) Treat the reference in sub-para. (2)(b) to the objective mentioned in para. 3(1)(a) or (b) as a reference to the objective in section (Objective of FMI administration) of this Act.(c) Ignore sub-para. (3)(b).(a) Before making an application in reliance on this paragraph the FMI administrator must give notice to the Bank of England, which is to be entitled to participate in the proceedings.(b) In making directions the court must have regard to the objective in section (Objective of FMI administration) of this Act.(a) Ignore sub-paras. (1) and (3).(b) The Bank of England may apply to the court for the variation or revocation of any directions given by the court.()“(2) Where a company is in FMI administration, a creditor or member of the company may apply to the court claiming that the FMI administrator is conducting himself or herself in a manner preventing the achievement of the objective of the FMI administration as quickly and efficiently as is reasonably practicable.”()“(1) On an application made by a person mentioned in sub-paragraph (2), the court may provide for the appointment of an FMI administrator of a company to cease to have effect from a specified time.()(2) The persons who may apply to the court under sub-paragraph (1) are—()(a) the Bank of England;()(b) with the consent of the Bank, the FMI administrator.”(a) Para. 91(1) applies as if the only person who could make an application were the Bank of England. (b) Ignore para. 91(2).(a) in accordance with directions of the Bank of England, and(b) if the Bank is satisfied that they will not prejudice the objective in section (Objective of FMI administration) of this Act.(a) In considering making an order in reliance on section 241 the court must have regard to the objective in section (Objective of FMI administration) of this Act.(b) Ignore subsections (2A)(a) and (3) to (3C).(10) A notice under subsection (8) must inform the interested parties of the right of each of them to refer the matter to the Tribunal.

(11) A notice under subsection (9)(b) must comply with subsection (5).

(12) If a notice informs the interested parties of the right to refer a matter to the Tribunal, it must give an indication of the procedure on such a reference.

(13) For the purposes of subsection (2)(c), whether a matter is open to review is to be determined in accordance with section 391(8).

(14) “Approval” means an approval under section 59.””

51: After Clause 12, insert the following new Clause—

“Statement of policy

After section 63ZC of FSMA 2000 (inserted by section (Variation of approval) above) insert—“63ZD  Statement of policy relating to conditional approval and variation

(1) Each regulator must prepare and issue a statement of its policy with respect to—

(a) its giving of approval under section 59 subject to conditions or for a limited period only, and(b) its variation under section 63ZA or 63ZB of an approval given under section 59.(2) A regulator may at any time alter or replace a statement issued by it under this section.

(3) If a statement issued under this section is altered or replaced by a regulator, the regulator must issue the altered or replacement statement.

(4) A statement issued under this section must be published by the regulator concerned in the way appearing to the regulator to be best calculated to bring it to the attention of the public.

(5) A regulator may charge a reasonable fee for providing a person with a copy of a statement published under this section.

(6) A regulator must, without delay, give the Treasury a copy of any statement which it publishes under this section.

63ZE Statement of policy: procedure

(1) Before issuing a statement of policy under section 63ZD, a regulator (“the issuing regulator”) must—

(a) consult the other regulator, and (b) publish a draft of the proposed statement in the way appearing to the issuing regulator to be best calculated to bring it to the attention of the public.(2) The duty of the FCA to consult the PRA under subsection (1)(a) applies only in so far as the statement of policy applies to persons whose approval under section 59 relates to the performance of a function designated by the FCA as a senior management function under section 59(6B) in relation to the carrying on by PRA-authorised persons of regulated activities.

(3) The draft must be accompanied by notice that representations about the proposal may be made to the issuing regulator within a specified time.

(4) Before issuing the proposed statement, the issuing regulator must have regard to any representations made to it in accordance with subsection (3).

(5) If the issuing regulator issues the proposed statement it must publish an account, in general terms, of—

(a) the representations made to it in accordance with subsection (3), and(b) its response to them.(6) If the statement differs from the draft published under subsection (1) in a way which is in the opinion of the issuing regulator significant, the issuing regulator—

(a) must before issuing it carry out any consultation required by subsection (1)(a), and(b) must (in addition to complying with subsection (5)) publish details of the difference. (7) The issuing regulator may charge a reasonable fee for providing a person with a draft published under subsection (1)(b).

(8) This section also applies to a proposal to alter or replace a statement.””

52: After Clause 12, insert the following new Clause—

“Extension of limitation periods for imposing sanctions

(1) Section 63A of FSMA 2000 (power to impose penalties) is amended as follows.

(2) In subsection (4), for “period of three years” substitute “relevant period”.

(3) After subsection (5A) insert—

“(5B) “The relevant period” is—

(a) in relation to the performance of a controlled function without approval before the day on which this subsection comes into force, the period of 3 years, and(b) in relation to the performance of a controlled function without approval on or after that day, the period of 6 years.”(4) Section 66 of FSMA 2000 (disciplinary powers) is amended as follows.

(5) In subsection (4), for “period of three years” substitute “relevant period”.

(6) After subsection (5) insert—

“(5ZA) “The relevant period” is—

(a) in relation to misconduct which occurs before the day on which this subsection comes into force, the period of 3 years, and(b) in relation to misconduct which occurs on or after that day, the period of 6 years.””

Amendments 48 to 52 agreed.

Amendment 53

Moved by

53: After Clause 12, insert the following new Clause—

“Rules of conduct

(1) Part 5 of FSMA 2000 (performance of regulated activities) is amended as follows.

(2) Omit sections 64 and 65 (and the italic cross-heading preceding them).

(3) Before section 66 insert—

“Conduct of approved persons and others64A Rules of conduct

(1) If it appears to the FCA to be necessary or expedient for the purpose of advancing one or more of its operational objectives, the FCA may make rules about the conduct of the following persons—

(a) persons in relation to whom either regulator has given its approval under section 59;(b) persons who are employees of banks. (2) If it appears to the PRA to be necessary or expedient for the purpose of advancing any of its objectives, the PRA may make rules about the conduct of the following persons—

(a) persons in relation to whom it has given its approval under section 59;(b) persons in relation to whom the FCA has given its approval under section 59 in respect of the performance by them of a relevant senior management function in relation to the carrying on by a PRA-authorised person of a regulated activity;(c) persons who are employees of PRA-authorised banks.(3) In subsection (2)—

“PRA-authorised bank” means a bank that is a PRA-authorised person, and

“relevant senior management function” means a function which the PRA is satisfied is a senior management function as defined in section 59ZA (whether or not the function has been designated as such by the FCA).

(4) Rules made under this section must relate to the conduct of persons in relation to the performance by them of qualifying functions.

(5) In subsection (4) “qualifying function”, in relation to a person, means a function relating to the carrying on of activities (whether or not regulated activities) by—

(a) in the case of an approved person, the person on whose application approval was given, and(b) in any other case, the person’s employer.(6) In this section any reference to an employee of a person (“P”) includes a reference to a person who—

(a) personally provides, or is under an obligation personally to provide, services to P under an arrangement made between P and the person providing the services or another person, and(b) is subject to (or to the right of) supervision, direction or control by P as to the manner in which those services are provided,and “employer” is to be read accordingly.””(a)The administrator must obtain the approval of the Bank of England to any proposals under sub-para. (1).(b)Treat the reference in sub-para. (2)(b) to the objective mentioned in para. 3(1)(a) or (b) as a reference to the objective in section (Objective of FMI administration) of this Act.(c)Ignore sub-para. (3)(b).(a)Before making an application in reliance on this paragraph the FMI administrator must give notice to the Bank of England, which is to be entitled to participate in the proceedings.(b)In making directions the court must have regard to the objective in section (Objective of FMI administration) of this Act.(a)Ignore sub-paras. (1) and (3).(b)The Bank of England may apply to the court for the variation or revocation of any directions given by the court.()“(2) Where a company is in FMI administration, a creditor or member of the company may apply to the court claiming that the FMI administrator is conducting himself or herself in a manner preventing the achievement of the objective of the FMI administration as quickly and efficiently as is reasonably practicable.”()“(1) On an application made by a person mentioned in sub-paragraph (2), the court may provide for the appointment of an FMI administrator of a company to cease to have effect from a specified time. ()(2) The persons who may apply to the court under sub-paragraph (1) are—()(a) the Bank of England;()(b) with the consent of the Bank, the FMI administrator.”(a) Para. 91(1) applies as if the only person who could make an application were the Bank of England.(b) Ignore para. 91(2).(a) in accordance with directions of the Bank of England, and(b) if the Bank is satisfied that they will not prejudice the objective in section (Objective of FMI administration) of this Act.(a) In considering making an order in reliance on section 241 the court must have regard to the objective in section (Objective of FMI administration) of this Act.(b) Ignore subsections (2A)(a) and (3) to (3C).

Amendments 53A and 53B (to Amendment 53) not moved.

Amendment 53 agreed.

Amendment 54

Moved by

54: After Clause 12, insert the following new Clause—

“Definition of “misconduct”

(1) In section 66 of FSMA 2000 (disciplinary powers)—

(a) after subsection (1) insert—“(1A) For provision about when a person is guilty of misconduct for the purposes of action by a regulator—

(a) see section 66A, in the case of action by the FCA, and(b) see section 66B, in the case of action by the PRA.”;(b) omit subsections (2), (2A), (6) and (7).(2) After that section insert—

“66A Misconduct: action by the FCA

(1) For the purposes of action by the FCA under section 66, a person is guilty of misconduct if any of conditions A to C is met in relation to the person.

(2) Condition A is that—

(a) the person has at any time failed to comply with rules made by the FCA under section 64A, and(b) at that time the person was—(i) an approved person, or(ii) an employee of a bank.(3) Condition B is that—

(a) the person has at any time been knowingly concerned in a contravention of a relevant requirement by an authorised person, and(b) at that time the person was—(i) an approved person in relation to the authorised person, or(ii) in the case of an authorised person that is a bank, an employee of the bank.(4) In this section “relevant requirement” means a requirement—

(a) imposed by or under this Act, or(b) imposed by any qualifying EU provision specified, or of a description specified, for the purposes of this subsection by the Treasury by order. (5) Condition C is that—

(a) the person has at any time been a senior manager in relation to an authorised person that is a bank,(b) there has at that time been (or continued to be) a contravention of a relevant requirement by the bank, and(c) the senior manager was at that time responsible for the management of any of the bank’s activities in relation to which the contravention occurred.(6) But a person (“P”) is not guilty of misconduct by virtue of subsection (5) if P satisfies the FCA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).

(7) For the purposes of subsection (5)—

“senior manager”, in relation to an authorised person that is a bank, means a person who has approval under section 59 to perform a designated senior management function in relation to the carrying on by the bank of a regulated activity;

“designated senior management function” means a function designated as a senior management function under section 59(6B) or (6C).

(8) In this section—

“approved person”—

(a) means a person in relation to whom an approval is given under section 59, and(b) in relation to an authorised person, means a person in relation to whom such approval is given on the application of the authorised person;“employee”, in relation to a person, has the same meaning as in section 64A.

“66B Misconduct: action by the PRA

(1) For the purposes of action by the PRA under section 66, a person is guilty of misconduct if any of conditions A to C is met in relation to the person.

(2) Condition A is that—

(a) the person has at any time failed to comply with rules made by the PRA under section 64A, and(b) at that time the person was—(i) an approved person, or(ii) an employee of a PRA-authorised bank.(3) Condition B is that—

(a) the person has at any time been knowingly concerned in a contravention of a relevant requirement by a PRA-authorised person, and(b) at that time the person was—(i) an approved person in respect of the performance of a relevant senior management function in relation to the carrying on by the PRA-authorised person of a regulated activity, or(ii) in the case of an authorised person that is a bank, an employee of the bank.(4) In this section “relevant requirement” means a requirement—

(a) imposed by or under this Act, or(b) imposed by any qualifying EU provision specified, or of a description specified, for the purposes of this subsection by the Treasury by order.(5) Condition C is that—

(a) the person has at any time been a senior manager in relation to a PRA-authorised bank,(b) there has at that time been (or continued to be) a contravention of a relevant requirement by the bank, and(c) the senior manager was at that time responsible for the management of any of the bank’s activities in relation to which the contravention occurred. (6) But a person (“P”) is not guilty of misconduct by virtue of subsection (5) if P satisfies the PRA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).

(7) For the purposes of subsection (5)—

“senior manager”, in relation to an authorised person that is a bank, means a person who has approval under section 59 to perform a designated senior management function in relation to the carrying on by the bank of a regulated activity;

“designated senior management function” means a function designated as a senior management function under section 59(6B) or (6C).

(8) In this section—

“approved person”—

(a) means a person in relation to whom—(a) the PRA has given its approval under section 59, or(b) the FCA has given its approval under section 59 in respect of the performance by the person of a relevant senior management function in relation to the carrying on by a PRA-authorised person of a regulated activity, and(b) in relation to an authorised person, means a person in relation to whom approval under section 59 is given on the application of the authorised person;“employee”, in relation to a person, has the same meaning as in section 64A;

“PRA-authorised bank” means a bank that is a PRA-authorised person;

“relevant senior management function” means a function which the PRA is satisfied is a senior management function as defined in section 59ZA (whether or not the function has been designated as such by the FCA).””

Amendment 54A (to Amendment 54) not moved.

Amendment 54 agreed.

Amendments 55 to 57

Moved by

55: After Clause 12, insert the following new Clause—

“Meaning of “bank”

(none) In Part 5 of FSMA 2000 (performance of regulated activities), after section 71 insert—

““Bank”71A Meaning of “bank”

(1) In this Part “bank” means a UK institution which has permission under Part 4A to carry on the regulated activity of accepting deposits.

(2) But “bank” does not include an insurer.

(3) In this section—

(a) “UK institution” means an institution which is incorporated in, or formed under the law of any part of, the United Kingdom;(b) “insurer” means an institution which is authorised under this Act to carry on the regulated activity of effecting or carrying out contracts of insurance as principal.(4) Subsections (1) and (3)(b) are to be read in accordance with section 22, taken with Schedule 2 and any order under section 22.””

56: After Clause 12, insert the following new Clause—

“Recording information about senior managers

(1) Section 347 of FSMA 2000 (the record of authorised persons etc.) is amended as follows.

(2) In subsection (2)—

(a) in paragraph (g), after sub-paragraph (iii) insert—“(iv) in a case where the relevant authorised person is a bank, whether or not the person is a senior manager;”;(b) after that paragraph insert—“(h) in the case of an approved person who is a senior manager in relation to an authorised person that is a bank—(i) whether a final notice has been given to the person under section 390; and(ii) if so, any information about the matter to which the notice relates which has been published under section 391(4).”(3) After subsection (8) insert—

“(8A) In this section—

“senior manager”, in relation to an authorised person that is a bank, means a person who has approval under section 59 to perform a designated senior management function in relation to the carrying on by the bank of a regulated activity,

“bank” has the same meaning as in Part 5 (see section 71A), and

“designated senior management function” means a function designated as a senior management function under section 59(6B) or (6C).””

57: After Clause 12, insert the following new Clause—

“Consequential amendments relating to Part 4

(none) Schedule (Consequential amendments relating to Part 4) (which contains further amendments relating to the provisions of this Part) has effect.”

Amendments 55 to 57 agreed.

Amendment 58

Moved by

58: After Clause 12, insert the following new Clause—

“Offence relating to decision that results in bank failure

(1) A person (“S”) commits an offence if—

(a) at a time when S is a senior manager in relation to a bank (“B”), S—(i) takes, or agrees to the taking of, a decision by or on behalf of B as to the way in which the business of a group bank is to be carried on, or(ii) fails to take steps that S could take to prevent such a decision being taken,(b) at the time of the decision, S is aware of a risk that the implementation of the decision may cause the failure of the group bank,(c) in all the circumstances, S’s conduct in relation to the taking of the decision falls far below what could reasonably be expected of a person in S’s position, and(d) the implementation of the decision causes the failure of the group bank.(2) A “group bank”, in relation to a bank (“B”), means B or any other bank that is a member of B’s group for the purpose of FSMA 2000 (see section 421 of that Act).

(3) Subsections (1) and (2) are to be read with the interpretative provisions in section (Interpretation of terms used in offence).

(4) A person guilty of an offence under this section is liable—

(a) on summary conviction—(i) in England and Wales, to imprisonment for a term not exceeding 12 months (or 6 months, if the offence was committed before the commencement of section 154(1) of the Criminal Justice Act 2003) or a fine, or both; (ii) in Scotland, to imprisonment for a term not exceeding 12 months or a fine not exceeding the statutory maximum, or both;(iii) in Northern Ireland, to imprisonment for a term not exceeding 6 months or a fine not exceeding the statutory maximum, or both;(b) on conviction on indictment, to imprisonment for a term not exceeding 7 years or a fine, or both.”

My Lords, we now turn to one of the key recommendations of the PCBS: the introduction of a new criminal offence of reckless misconduct in the management of a bank. The commission argued convincingly that existing sanctions for financial crime,

“do not cover the apparent mismanagement and failure of control by senior bankers”,

and that the risk of a criminal conviction and a prison sentence would give senior officers of UK banks pause for thought. As the Government made clear in our response to the commission, we believe that there is a strong case for the introduction of such an offence. Serious bank failure results in severe economic disruption and considerable losses for taxpayers.

In line with the commission’s recommendations, the new offence will be applicable only to individuals who are covered by the new senior managers regime. Senior managers could be liable if they take a decision which leads to the failure of the bank or fail to take steps available to them to prevent such a decision being taken. The offence will apply only to behaviour that falls far below the standard that could reasonably be expected of a person in their position, which is a similar test to that for corporate manslaughter. In addition, at the time when the decision was taken the senior manager must have been aware of a risk that its implementation may cause the failure of the bank. Limiting the application of the offence to individuals who are covered by the senior managers regime, and the precise definition of when a bank has failed for the purposes of the offence, mean that those affected should be in no doubt as to their potential criminal liability.

The maximum sentence for the new offence will be seven years in prison and/or an unlimited fine on indictment. This is in line with the recommendation of the commission, which argued that the offence must carry the possibility of a prison sentence to be effective, as with other offences of similar gravity under FiSMA, such as misleadingly manipulating benchmarks such as LIBOR. The commission said that it,

“would expect this offence to be pursued in cases involving only the most serious of failings ... and not predominantly against smaller operators where proving responsibility is easier, but the harm is much lower”.

The Government endorse this position, and the offence will therefore apply to banks and building societies but not to credit unions.

One area where we do not agree with the commission is on its proposal that there should be a time limit of one year within which criminal charges could be brought following successful civil enforcement action. I have considerable sympathy with its arguments that laws forbidding disclosure of information with regard to criminal proceedings could mean that the publication of information around a bank failure—information that it would be in the public interest to release—would be suppressed until court proceedings had concluded. However, it is very unusual to have a time limit on bringing charges relating to serious criminal offences such as this and, given the likely complexities of many of the cases that will be tried under this offence, such a time limit may seriously limit the regulators’ ability to prosecute. The offence introduced by this amendment will be a vital tool in ensuring that those at the top of our banks are focused on taking prudent and measured decisions and in holding them to account for reckless behaviour that falls short of that standard.

I now address the amendments in this group. On Amendment 58, the PCBS recommended an offence of reckless misconduct. In order for a person’s behaviour to be reckless, they must be aware of the risks that they are taking. The insertion of the text proposed by Amendment 58A would allow for the possibility that a manager acting without knowledge of the possible effects of their actions could also be guilty of the offence. A key aspect of making an offence prosecutable is that the person concerned must know that they are at risk of committing the crime. There are other, civil, sanctions, which FSMA provides for, which can apply if a senior manager has acted incompetently rather than criminally recklessly. For example, if a senior manager in a bank fails to comply with binding statements of principle issued by the regulator, they can be penalised. These penalties can be heavy, including up to an unlimited fine. In light of this, I hope that the noble Lord will withdraw his amendment.

On Amendment 58B, we have thought very carefully about the wording of this offence, and have built upon robust precedent where possible. Referring to conduct that is “far below” that which would be expected has precedents in the Law Commission’s proposal for a statutory offence of killing by gross carelessness, and in legislation creating the offence of corporate manslaughter. So we have used this particular phrase knowing that it works and can be effectively interpreted by the courts. The offence must be precise enough to comply with principles of legal certainty and fairness. There is no precedent in UK criminal law for criminalising behaviour that is merely unreasonable. To do so would amount to an indiscriminate diffusion of criminal liability in a way that would make it hard for individuals to know with sufficient certainty when they might be committing an offence.

We also need to be very aware of the incentives that the offence creates. There would be a considerable risk that a broader, vaguer offence would put talented executives off taking on senior management positions, and the Government are keen to get the balance right between punishing genuine recklessness and supporting appropriate risk-taking. This would be a particular risk when people consider whether to take on a senior role in a troubled bank just when it was most important for it to have highly capable leadership.

I understand that the intention of Amendment 58C is to make the offence more objective. First, the reasonableness test as currently drafted gives a clear, objective test of when the crime has been committed by a senior manager. It will enable the jury to consider whether the defendant’s behaviour was reasonable, taking into account the position they were actually in. To be precise, it requires the jury to consider what conduct could, in all the circumstances, reasonably be expected of a person holding the position in the bank which that individual senior manager held.

This amendment would, arguably, remove this clarity and ask the jury to consider whether the person’s behaviour was reasonable in a more general way. Such a test would be likely to be harder to apply to particular cases, and in some cases could be inappropriate. It is important to note that there can be no one clear definition of what could be expected of a person in a senior management position in a bank. Such drafting fails to take account of, for example, which particular senior management role the defendant was undertaking, in what kind of banking institution and what the institution’s business model was. This amendment would change the current reasonableness test to one that it would be extremely difficult for a jury to apply in any meaningful way, making the offence less certain and prosecution more problematic.

On Amendment 59A, the Government are introducing this offence to close a gap in financial crime legislation. There are currently no criminal powers available to sanction senior managers who have recklessly caused their banks to fail. This is a clear shortcoming, which we are now remedying. As we have already debated, though, offences already exist for failing to comply with the Fraud Act, the Proceeds of Crime Act or the Money Laundering Regulations. Individuals can be prosecuted under these Acts, and any sentencing following the successful prosecution of these offences would take into account how serious these breaches were, so it is difficult to see what benefit this amendment would add. Further, if a bank is found to have committed an offence under the Fraud Act 2006 or under the Money Laundering Regulations 2007, senior managers of the bank could also be found guilty if they have consented to or connived in the commission of the offence by the bank. As previously noted, the new senior managers regime will also provide enhanced accountability in these areas. So there is no lack of individual accountability in cases where banks fail to comply with the requirements of the 2006 Act or the 2007 Regulations.

We believe that we have introduced a sensible definition and an important piece in the jigsaw of improved accountability for individuals by our amendments, and I commend them to the House.

Amendment 58A*

Moved by

58A*: After Clause 12, line 10, after “aware” insert “or should have been aware”

My Lords, I will deal briefly with these amendments concerning the creation of an offence in relation to a decision that results in bank failure. The amendments are designed to test the definitional value of the present clause, and work on the realistic expectation that once this becomes statute there will be a very much reduced prospect of people committing such an offence, particularly if they face up to seven years in prison on indictment. So the purpose of this section is more of a deterrent, although it has a punitive value if there is a transgression. It is with that in mind that these amendments were put forward.

I shall address Amendments 58A, B and C in turn. My reading of this draft offence does not include any use of the words “reckless” or “recklessness”. It would be unwise in legal terms to equate its contents with some broad description to be used as a synonym, or understood synonym, of “recklessness”, which is a term of art in the law.

Amendment 58A deals with the following risk. It is likely that there will be more cases of one or more people being involved—two, three, four, five, whatever it might be—than a singleton defendant in a bank failure. If the bank is operating properly, it is almost inconceivable that one person could engineer its failure without the knowledge of others. Therefore I predict that if they are brought to trial, one or more of them will say, “I did not know; it was that man, not me.” This particular amendment is designed to cover that situation. “Should have been aware” implies “should have been aware by reason of competent and honest practice of appropriate banking standards”. It is an entirely reasonable test, and it gets over the point that the noble Lord, Lord Lawson, was telling us about earlier, of elective ignorance: “I don’t want to know”; or wilful blindness: “I don’t want to know because I’m never going to ask”. Many would think that both of those situations involve culpability. You cannot get away with it by shutting your mind to that which you should have known by professional standards and proper competence. So the time between now and Report should involve a consideration of how this clause is to be used if it becomes an offence where there is more than one defendant. Even if there is only one, he can blame someone who is not before the court.

I now turn to Amendment 58B. Corporate manslaughter is rarely brought to court. It is normally brought to court in respect of a flagrant breach of health and safety standards, usually in the construction industry, energy, or whatever it might be that causes a terrible accident. In other words, the incident speaks for itself. The word “far” in that context adds nothing to the impact of the event, and I suspect that most juries will not pay any attention to the word “far” when they are directing—they will look at the event. Between now and Report I want the Government to consider this question: how on earth will a judge directing a jury interpret the word “far” in respect of refined banking practices that may cause a concatenation of events that lead to a failure? It is an extremely loose word to use in this context, and I invite reconsideration of it or its omission.

Amendment 58C is directed, as was suggested, at creating an objective test. The wording that is used,

“a senior management position in relation to a bank”,

makes it an entirely objective test. It prevents a person who is charged claiming that in his particular context, looking at it from his particular point of view, he did his best. That is simply not enough. The greater the responsibility, the more objective the test should be in this banking context.

I turn to Amendment 59A. I will not repeat the point about the statutes, although they are referred to. However, I invite the House to note that there is an intention here to deal with something where there has been a serious or systematic failure, not just in respect of those statutes but in respect of such other financial compliance obligations as may be specified in rules made by the FCA. In other words, the matter arises in respect of people who seriously fail in their duty to comply with the appropriate standards and competences envisaged by this section. It is not likely, but it is conceivable, that there will be situations in which a failure occurs because of a system collapse in which particular people were responsible, which system had been carried on systematically or involved a serious breach of compliance requirements by the FCA.

I close with the following thought. One wants to have on the statute book an offence that makes people think when they are in their job, “I’m not going to jail for this; I won’t take the risk”. I beg to move.

My Lords, my noble friend Lord Brennan has made some powerful points. I draw the attention of the House to the fact that, as in the previous group of amendments we were discussing, these offences will apply only to institutions that accept deposits. It therefore leaves out a whole series of institutions that I believe the noble Lords, Lord Turnbull and Lord Lawson, would also feel should be included under these offences.

My Lords, I commend the Government on bringing forward Amendment 58. It has been a source of great public disaffection that over the past few years the number of people in the City responsible for some really gross acts of criminality who have been brought to book could be measured on the fingers of two hands; indeed, the noble Lord, Lord Turnbull, referred earlier to the pathetic enforcement statistics. This provision is therefore vital. However, I have two thoughts regarding the way in which this is framed: first, that it is too severe, and secondly, that it is too light, or slight.

The title of the clause is:

“Offences relating to decision”—

I suppose they mean “a decision”—

“that results in bank failure”.

I note that in two places in the clause itself it talks about a decision that “causes” a bank failure. There is a difference in the meaning of the words, “resulting” in a bank failure and “causing” it. The word “causing” is absolutely direct in a way that “resulting” is not. Perhaps the Minister might like to look at that.

The other point that strikes me about the wording of this clause is in Amendment 58(1)(c) and (d). Paragraph (c) says,

“in all the circumstances, S’s conduct in relation to the taking of the decision falls far below what could reasonably be expected of a person in S’s position”.

The noble Lord, Lord Brennan, has already made points on this. That is unsatisfactory in another sense. However, if we are—as we are—making criminal offences out of the conduct defined in this new clause, there should be a clear indication that no one can be convicted unless there is a want of integrity or honesty on the part of the person convicted. That is a fundamental principle of British criminal law. However concerned we are, and I certainly am, to bring to book the many malefactors who have ruined the reputation of the City in recent years, one cannot do it at the cost of changing or undermining that fundamental test of criminality, intent, bad faith, dishonesty or want of integrity—call it what you like. The language here does not clearly require that intent and want of integrity. There are cases that would fall within Amendment 58 that would not satisfy the normal test of mens rea in criminal offences.

I will refer briefly to Amendment 60 in this group, which is about the institution of proceedings. Subsection (4) says:

“In exercising its power to institute proceedings for an offence, the FCA or the PRA must comply with any conditions or restrictions imposed in writing by the Treasury”.

Those are the words. I cannot see anywhere, in this amendment or elsewhere, a requirement for the conditions or restrictions imposed in writing by the Treasury to be made public. Surely it is a fundamental requirement of restrictions or conditions that will potentially lead firms and individuals into the criminal courts that those conditions or restrictions be made public.

My Lords, my first thought on seeing this new offence relating to bank failure was to be mildly appalled at something that might possibly impinge on one’s personal life, but I have tried to put that to one side and to look at this clause dispassionately. What concerns me is a point raised by the noble Lord, Lord Phillips of Sudbury, which relates to causation. That is mentioned several times in this clause, but one of the conditions in subsection (1)(d) of the new clause proposed by Amendment 58 is that,

“the implementation of the decision causes the failure of the group”.

Is it clear that single decisions cause failures of the nature that we are talking about? I ask him to think, in the context of the failures that existed in the wake of the 2008 financial crisis, whether any one of those, had they occurred today and been dealt with under existing legislation, could have technically satisfied the wording in this offence. Even in the simplest case of failure, which was probably Northern Rock, it was not as simple as one decision or even one group of decisions. There were multiple points of decision which contributed. Certainly, when one gets to something as complicated as the failure of Lehman Brothers, I would be absolutely astonished if anybody could have pointed to one decision causing one failure.

My Lords, I will try to sum up some of those points. One of the big challenges that we faced in producing the exact terms of this amendment was to produce a sanction which is a credible offence and could be successfully prosecuted. Setting the conditions to include that in all the circumstances the individual’s conduct fell far below what could reasonably be expected of them and that they were aware of the risk that a decision could cause the bank to fail gives us the clarity that we need. This will capture behaviour which in normal parlance or in normal view would be considered reckless.

The noble Lord, Lord Brennan, said that he was keen that this new offence should make people think. It will make people think, but equally it must have within it a degree of certainty that means that an offence could be prosecutable. This necessarily circumscribes the way in which we define it.

I can confirm to the noble Lord, Lord Eatwell, that his interpretation of the provisions in the Bill is correct.

May I ask my noble friend one question? The commission’s recommendations refer to this as reckless misconduct. The word “reckless” is very important. Speaking to this, the Minister used the word “reckless”, but I do not see it in the amendment. Can he explain why?

Yes, I hope I can. As I was just saying, we had to put in the Bill a form of words that would create a credible offence that could be successfully prosecuted. The two requirements that an individual’s conduct had to fall far below what could reasonably be expected of them and that they were aware of the risk they were taking, would, in the view of the lawyers, capture recklessness. It is a definition of recklessness without the use of the word. The wording gives a greater chance of having a credible offence than using the word “reckless”. It is an attempt to make sure that we have got something that we could use, while capturing the concept.

The noble Lord, Lord Phillips, asked about the difference between the heading and the text. My understanding is that headings of sections of the Bill do not constitute part of the Bill for legal reasons. It may be possible to improve the heading, but the noble Lord should not worry about it. The noble Lord asked whether any restrictions on conditions which were imposed might be made public. At first sight, I cannot see any reason why that should not be the case, but I will write to him to confirm the position.

We have had a good debate on these amendments. I commend the government amendments to the House.

I do not think the Minister has adequately dealt with the point made by my noble friend Lady Noakes and partly by myself. Surely it is an inescapable point that if you say that someone has to cause the failure of a bank, that is a direct and hugely demanding test. If it had said instead that the decision significantly contributed to the failure of a bank then I think my noble friend and I would be content because it satisfies justice as well as practicality. Is he not concerned that this will undermine the whole purpose of this amendment?

I do not think it undermines the whole purpose of the amendment. It obviously reduces the scope of cases which can be brought under this amendment, but the challenge that the lawyers have had is to make sure, as far as possible, that there is the certainty of what constitutes an offence, which is required under human rights legislation. That has been one of the principle drivers for the particular form of words that we have got. I accept the noble Baroness’s point that in some cases there will be a whole raft of contributory decisions which over a period lead to a bank failing. It will be, I accept, more difficult to bring a prosecution in those cases. It is not inconceivable, however, to argue, without having any particular case in mind, that if a senior executive of a bank persuaded the board to make an acquisition knowing that it was a very risky acquisition which if it went wrong could bring the bank down, that decision would fall squarely, as I understand it, within the scope of the Government’s proposals. I do not think it is outside the realms of possibility that a senior manager in the bank might take such a decision.

My Lords, I raise the question briefly about recklessness for the Government to consider. Let us suppose a senior manager reports to a chief executive officer saying, “I want to tell you about the following risks that would arise if decision A,B or C is taken”. The CEO is of the imperial kind and tells him not to waste his time, that he is not interested in risk, and to get on with it and make the decision. In those circumstances, the present legislation as it is drafted would justify a decision to prosecute the manager because he went ahead despite the risk, but not the CEO because he never actually knew what the risk was; he just ordered the junior to go ahead and do it.

The point about recklessness, which the lawyers advising Ministers should consider again, is what you do in the more likely scenario in banking, not of a round table where people are all carefully considering risks but of high speed commercial dynamics in which somebody forces a decision to be taken, not caring what the risk consequence is. How do you deal with that?

In the mean time, I beg leave to withdraw my amendment.

Amendment 58A, as an amendment to Amendment 58, withdrawn.

Amendments 58B and 58C, as amendments to Amendment 58, not moved..

Amendment 58 agreed.

Amendment 59

Moved by

59: After Clause 12, insert the following new Clause—

“Interpretation of terms used in offence

(1) This section has effect for the interpretation of section (Offence relating to decision that results in bank failure).

(2) “Bank” means a UK institution which has permission under Part 4A of FSMA 2000 to carry on the regulated activity of accepting deposits.

(3) But “bank” does not include—

(a) an insurer, or(b) a credit union. (4) In subsections (2) and (3)—

(a) “UK institution” means an institution which is incorporated in, or formed under the law of any part of, the United Kingdom;(b) “insurer” means an institution which is authorised under FSMA 2000 to carry on the regulated activity of effecting or carrying out contracts of insurance as principal;(c) “credit union” means a credit union as defined by section 31 of the Credit Unions Act 1979 or a credit union as defined by Article 2(2) of the Credit Unions (Northern Ireland) Order 1985.(5) Subsections (2) and (4)(b) are to be read in accordance with section 22 of FSMA 2000, taken with Schedule 2 to that Act and any order under that section.

(6) A person is a “senior manager” in relation to a bank if, under an arrangement entered into by the bank, or by a contractor of the bank, in relation to the carrying on by the bank of a regulated activity, the person performs a function that is designated as a senior management function—

(a) by the FCA under subsection (6B) of section 59 of FSMA 2000 (approval for particular arrangements), or(b) by the PRA under subsection (6C) of that section.(7) A bank (“B”) is to be regarded as failing where—

(a) B enters insolvency,(b) any of the stabilisation options in Part 1 of the Banking Act 2009 is achieved in relation to B, or(c) B is taken for the purposes of the Financial Services Compensation Scheme to be unable, or likely to be unable, to satisfy claims against B.(8) In subsection (7)(a) “insolvency” includes—

(a) bankruptcy,(b) liquidation,(c) bank insolvency,(d) administration,(e) bank administration,(f) receivership,(g) a composition between B and B’s creditors, and(h) a scheme of arrangement of B’s affairs.”

Amendment 59A, as an amendment to Amendment 59, not moved

Amendment 59 agreed.

Amendment 60

Moved by

60: After Clause 12, insert the following new Clause—

“Institution of proceedings

(1) In this section “an offence” means an offence under section (Offence relating to decision that results in bank failure).

(2) Proceedings for an offence may be instituted in England and Wales only—

(a) by the FCA, the PRA or the Secretary of State, or(b) by or with the consent of the Director of Public Prosecutions.(3) Proceedings for an offence may be instituted in Northern Ireland only—

(a) by the FCA, the PRA or the Secretary of State, or(b) by or with the consent of the Director of Public Prosecutions for Northern Ireland.(4) In exercising its power to institute proceedings for an offence, the FCA or the PRA must comply with any conditions or restrictions imposed in writing by the Treasury.

(5) Conditions or restrictions may be imposed under subsection (4) in relation to—

(a) proceedings generally, or(b) such proceedings, or categories of proceedings, as the Treasury may direct.”

Amendment 60 agreed.

Amendment 60A

Moved by

60A: After Clause 12, insert the following new Clause—

“Part 5Regulation of payment systemsOverview

(1) This Part contains provision for the establishment of a new body (the “Payment Systems Regulator”) to exercise functions in relation to payment systems.

(2) Section (The Payment Systems Regulator) provides for the establishment of the Payment Systems Regulator.

(3) Sections (Meaning of “payment system”) and (Participants in payment systems etc) contain definitions of “payment system” and related terms.

(4) Sections (Designation orders) to (Revocation of designation orders) make provision about designating a payment system as a regulated payment system.

(5) Sections (Regulator’s general duties in relation to payment systems) to (Regulatory principles) contain provision about the general duties of the Payment Systems Regulator under this Part.

(6) Sections (Directions) to (Amendments relating to Regulator’s competition powers) confer various regulatory and competition functions on the Payment Systems Regulator.

(7) Sections (Complaints by representative bodies) to (Complaints: guidance) contain provision about the making of complaints to the Payment Systems Regulator.

(8) Sections (Meaning of “compliance failure”) to (Enforcement of requirement to dispose of interest in payment system) contain provision about enforcement and appeals.

(9) Sections (Power to obtain information or documents) to (Reports) contain supplementary powers.

(10) Sections (Duty of regulators to ensure co-ordinated exercise of functions) to (Power of PRA to require Regulator to refrain from specified action) contain provision about the Payment Systems Regulator’s relationship with other regulators.

(11) Sections (Regulator’s general duty to consult) to (Competition scrutiny) contain provision about consultation, accountability and oversight.

(12) Sections (Relationship with Part 8 of the Payment Services Regulations 2009) to (Interpretation) contain miscellaneous and supplemental provision.”

My Lords, these amendments will create a new competition-focused utility-style regulator equipped with the full range of powers to tackle the deeply rooted issues in the market for payment system. The Government have serious concerns about the structure of the payment systems market, which sees problems in three main areas: competition, innovation and responsiveness to consumer needs.

Under the existing self-regulatory framework, there is no systematic oversight holding the big banks, payment scheme companies and infrastructure providers to account. Large banks jointly own the payment system companies and the infrastructure provider, and they dominate the Payments Council, the pseudo-regulatory body responsible for setting industry strategy. This allows the incumbent players to erect barriers to entry, preventing challenger banks from competing on a level playing field. It also limits incentives for the systems to innovate and respond to consumer needs, as there is no competitive advantage to any bank in doing so. There are also competition concerns in the international card schemes, as highlighted by the European Commission’s proposed regulation capping multilateral interchange fees. The card schemes have an incentive to increase interchange fees to encourage banks to issue their cards, but merchants have little opportunity to influence this process, and have no real option but to accept the major payment cards.

The first objective of the regulator will be to address the problems arising from imperfect competition. To tackle barriers to entry in banking arising from access conditions for the payment schemes, the payment systems regulator will have powers to tackle anti-competitive fees, terms and conditions, and to mandate access to the core systems. If deemed necessary, it will be able to break up the current ownership structures to create a landscape where fair competition can thrive. Secondly, the regulator will examine issues relating to innovation. Payment systems are characterised by strong network effects. Just as owning a telephone brings little benefit if no one else has one, each user gains added value from a payment system with the addition of further users. The shared ownership of the interbank payment systems by the banks reinforces this, because no single bank stands to gain an advantage over the others by investing in and developing the systems. This tendency to underinvest means that, while there have been some important innovations in recent years, they have too often required the Government’s or the OFT’s intervention to drive change, and the industry has taken too long to realise their full benefits.

The Government want to challenge underinvestment and lack of innovation in the co-owned systems. They want a payments industry that rewards entrepreneurial behaviour and develops systems that are innovative, efficient and effective. Therefore, the regulator will have an objective to promote the development of, and innovation in, payment systems.

The third problem identified in the market is the failure of the industry to respond to end-user needs. This, too, stems from the market’s network characteristics and ownership structures, which mean that failing to respond to end-user needs incurs no competitive disadvantage to any of the banks. This makes it possible for the banks to take decisions about the provision of services, even if this is directly against the interests of the wider public, as we saw in 2009 when the industry attempted to abolish cheques. The Government want to see a market where payment systems work for end-users, rather than one that serves only the self-interest of the big established banks.

Successive Governments and UK regulatory authorities have been trying to find a viable solution for these problems for more than a decade, dating back to Sir Don Cruickshank’s report to the Treasury in 2000 recommending that the Government create a utility-style regulator for payment systems. Instead, however, the process resulted in the creation of the industry-dominated Payments Council. In February, the Chancellor announced that the Government would introduce a new regulator to open up payment systems. Over the summer, the Parliamentary Commission on Banking Standards endorsed the Government’s commitment to bring payment systems into formal regulation. In their response to the final report of the PCBS, the Government confirmed that they will ask the payments regulator, once established, to urgently examine account portability.

I turn to the details of these amendments. They establish the payment systems regulator as a separate legal entity established by the FCA. This provides bespoke objectives and powers to address the distinctive problems in the market for payment systems, and allows for the benefits of close co-ordination with the FCA. The objectives of the regulator will be to promote competition, innovation and the interests of service users. The payment systems regulator will oversee all domestic payment systems brought into scope by being designated by HM Treasury. Initially, it is expected that the main interbank schemes and international card schemes will be designated. Once a system is designated, the regulator will have powers over that system’s operators, infrastructure providers and payment service providers that provide payment services using the system. This new regime will not affect the existing role of the Bank of England under the Banking Act 2009 in overseeing recognised interbank systems for stability purposes. The Bank will be excluded from the scope of regulation in its current capacity as a payments system participant. There will also be a duty for the co-ordinated exercise of functions between the PSR, FCA, Bank and PRA, and a memorandum of understanding setting out how this will happen.

The payment systems regulator will be equipped with a toolkit of regulatory powers enabling it to address the deep, structural issues causing problems in the market for payment systems. To open up access and encourage greater competition, the regulator will be able to intervene and require changes to any anti-competitive fees, or terms and conditions of an agreement for access to a regulated system. It will have powers to require the provision of both direct and indirect access to payment systems. It will also have competition powers to enforce Competition Act 1998 prohibitions against anti-competitive agreements and abuse of dominance, and to make market investigation references to the Competition and Markets Authority. These competition functions will be exercisable concurrently with the CMA. Ultimately, if the payment systems regulator determines that the current ownership structures need to be broken up to achieve adequate competition, it will have the power to require disposals of interests in operators of regulated systems.

In furthering access and competition, the regulator will also address underinvestment by the industry and the slow pace of innovation. There is no shortage of players who want to be able to innovate in this space, and with greater access to the core systems and infrastructure, inventive, entrepreneurial players will be able to bring propositions to market when they have previously been blocked from doing so. Greater competitive pressure on industry participants can be expected to drive up standards and force payment system owners, operators and payment service providers to deliver improvements in the payment systems space. However, in cases where market forces are still unable to play out, if the big incumbent banks resist, the regulator will have powers to drive through improvements as it sees fit, by issuing directions that require or prohibit action by participants in regulated systems, and this includes requiring specific developments to be pursued.

In advancing its service-user objectives, the regulator will be able to require or prohibit the taking of action in the operation, management and development of payment systems. This means that it can prevent the industry ignoring the legitimate needs of consumers—for instance, by trying to abolish cheques. The payment systems regulator will be able to publish details of a compliance failure and to impose financial penalties; if deemed necessary, it will be able to require owners of payment systems to dispose of their interests in them, subject to Treasury approval.

Taken together, these amendments create a strong, competition-focused regulator, which will have the right objectives, functions and powers to ensure that conditions in the payment systems market are such that challenger banks and innovative non-bank players are given a level playing field to challenge the big incumbent banks; innovation takes place to facilitate useful new services for businesses and consumers; and decisions on the provision of payment options are taken in the interests of all users of payment systems, not just the interests of the big banks. I commend these amendments to the Committee.

My Lords, I have a number of queries about another set of amendments that are longer than the original Bill. First, I support entirely the notion of establishing a payments regulator, but why is it being established as yet another independent regulator? Surely, covering the activities that it refers to—the nature of markets and settlement systems, which are akin to clearing and settlement in business and financial services in general—is the clear role of the FCA. Why are we establishing an extra organisation? After all, one thing that we have learnt through the financial crisis is that communication between organisations is less than perfect, even in the best of all possible worlds. Surely it would be better if this was simply a division of the FCA rather than an organisation having, as the schedule makes clear, an entirely separate board and chairman. This seems to be a proliferation of institutions with no purpose when we already have the FCA there to do the job.

Secondly, I want to explore the competition objective a little more. It is very clear that enhancing competition by giving access to payment systems is highly desirable. It is also clear that users might benefit from competition. What is not terribly clear is whether we want to have very diverse structures in the fundamental architecture of the payments system, which is absolutely core to the banking system. It recalls to me the early days of the railways when there were more than a dozen railways from London to Brighton, as they all competed with one another. This was not conducive either to the effective development of the railway companies or the provision eventually of a proper service to passengers. Therefore, I am a little puzzled, given the essential role of the payments architecture as being absolutely fundamental to the operation of the banking system, as to whether we want to see diverse structures and how they might be related to one another. I wonder what the Government’s thoughts are on this.

My third point also refers to the nature of fundamental market infrastructure. Within these new clauses it is the responsibility of the regulator to assure maintenance of service. However, another part of the Bill, which we will look at next, is labelled “fundamental market infrastructure” and is also devoted to the maintenance of market service more generally. The responsible authority for maintaining market service is different in the two cases. In one it is the Treasury; in the other it is the Bank of England. Why do we have two different authorities responsible for the maintenance of fundamental market infrastructure when the payments system is undoubtedly part of fundamental market infrastructure? It seems to me that, in inserting this desirable measure into the Bill, the fact that it has created some ambiguities and inconsistencies has not been noticed.

My Lords, this is another example of where we should be careful what we wish for. The Treasury committee and the parliamentary commission both welcomed the Government’s damascene conversion —that was what it was called in our report—announced in the Budget last year to create a payments regulator. However, this has been done in a quite extraordinary way with some 40 pages of amendments having been produced only two or three days before we were due to examine them. Although the new clauses were published following a process of consultation, there does not seem to be time for anyone in Parliament or anyone affected by them to scrutinise them. How can we tell whether what has been drafted is workable, reflects the views expressed in the consultation or will deliver what the Government want? From a procedure point of view, the usual channels might consider whether the gap between Committee and Report might be rather longer than normal so that we get a chance to look at not just this but also at the bail-in provisions as we have only had a small amount of time to consider them.

Through much of the consideration in Committee my view has been pretty close to that of the noble Lord, Lord Eatwell. However, as regards whether this body should be independent or part of the FCA, I am in the other camp. One of the key features here is that there is doubt about whether competition comes high enough up the FCA’s priorities. We shall come to later amendments whereby the parliamentary commission wanted to push competition higher up the FCA’s priorities. The proposal before us serves the interests of competition better than by making the body under discussion another department within the FCA, so there is another side to the case.

I support these amendments. The biggest part of the Bill is concerned with creating competition in the banking industry. The thought had crossed my mind that we are proliferating yet another regulator but I am persuaded by the argument advanced by the noble Lord, Lord Turnbull, that it might get lost within the FCA which has many other things to focus than competition. However, I make the small point that in the past year the Payments Council has done a good job in bringing in the ability to transfer a bank account within seven days. Although the new body will be more representative, the Payments Council should not be overcriticised for what it has achieved while it has existed.

Those of us who have been through many legislative processes may be a little appalled to find that it takes 40 pages of amendments to establish a payments regulator. I wish to ask one or two simple questions. On whom will the cost of this regulation fall? Have we an estimate of what it is likely to be? The Minister referred to what I believe was the lamentable attempt to get rid of the cheque system. Will this proposal stand up if the cheque system is changed? As far as international transactions are concerned, will the regulator be concerned with payments which are made internationally?

My Lords, my initial reaction to these new clauses was that they constituted a sledgehammer to crack a nut. It seems to me that creating another regulator in a territory which is well occupied by regulators is unnecessary in this case. To that extent I support the noble Lord, Lord Eatwell. One has only to look at government Amendment 60YYH to see that the new regulator will have to co-ordinate with the Bank of England, the FCA and the PRA. These bodies already have to co-ordinate among themselves for different purposes in any event. I think that the world is slightly going mad on this. My noble friend Lord Higgins asks who will pay for the regulator. Obviously, the people who will operate the payment systems will pay for the regulator. I suspect that this arrangement will be more expensive than the existing Payments Council system. I do not know how much more expensive it will be. I believe that we should be told what the costs are because they will inevitably end up being paid for by the businesses and individuals who use payments systems. There is no one else.

I have one question with two parts for my noble friend which relates to the powers in government Amendments 60S and 60T. One part relates to the power to require access to payment systems. I completely understand that. If you are to promote competition, you need powers to require access. The other relates to the variation of agreements relating to payment systems to take out anti-competitive elements in arrangements that have already been made. Both those measures could have financial consequences for those who operate payment systems. I do not object to the principle involved, but where in these 40 pages of amendments can I find the principles that the payments regulator has to use in deciding how he approaches those decisions? I assume that he cannot have unlimited discretion to decide who will pay for what and on what terms. However, there appear to be no basic financial principles underpinning this arrangement in the 40 pages of amendments, which seems to me a lacuna.

My Lords, for the record, these amendments cover exactly 52 pages. The only other point I wish to make—I agree with the noble Lord, Lord Eatwell, here—is that, despite the payment system having its own regulator, new subsection (3) of government Amendment 60B states:

“The FCA must take such steps as are necessary to ensure that the Payment Systems Regulator is, at all times, capable of exercising”,

its functions. It has the job of overseeing the regulator, so why on earth does it not do the job itself?

My Lords, I have two simple questions. One is to do with the innovation objective. Government Amendment 60M states:

“The innovation objective is to promote the development of, and innovation in, payment systems”.

It just occurred to me to ask whether there is any example of a regulator successfully promoting innovation. I would be interested to hear the Minister’s reply to that.

Government Amendment 60U is headed, “Power to require disposal of interest in payment system”. New subsection (2) states:

“The power conferred … may be exercised only if the Payment Systems Regulator is satisfied that, if the power is not exercised, there is likely to be a restriction or distortion of competition in—

(a) the market for payment systems, or

(b) a market for services provided by payment systems”.

How is that a remedy for anything? When it comes to divestment or disposal, is it the Government’s notion that someone will pick up the shares that have been disposed of; and, if so, who will it be? What would be the incentive for anyone to pick them up?