Skip to main content

Parliamentary Commission on Banking Standards

Volume 774: debated on Thursday 8 September 2016

Question for Short Debate

Asked by

To ask Her Majesty’s Government what is their assessment of progress towards implementing the recommendations contained within the report of the Parliamentary Commission on Banking Standards, Changing banking for good.

My Lords, I start this debate by saying how pleased I am to see the Minister responding today in his last time in his present role, although I look forward to working with him when he takes up his new duties at DCMS.

We are now three years on from the publication of the parliamentary commission’s report Changing Banking for Good. Thanks to the decisions made by this and previous Governments, our banking system is taking tentative but important steps along the road to recovery. We must not forget, however, the blunt summary in the report which laid out the scale of the problems with banks over the previous decade:

“Banks in the UK have failed in many respects. They have failed taxpayers, who had to bail out a number of banks including some major institutions, with a cash outlay peaking at £133 billion, equivalent to more than £2,000 for every person in the UK. They have failed many retail customers, with widespread product mis-selling. They have failed their own shareholders, by delivering poor long-term returns and destroying shareholder value. They have failed in their basic function to finance economic growth, with businesses unable to obtain the loans that they need at an acceptable price”.

Some people, not least some bankers, claim that this is now all in the past and that today everything is different. However, even a cursory glance at our newspapers reveals the catalogue of problems that continue to dog some parts of the industry.

I will focus my comments on those recommendations of the commission which sought to shape the corporate culture of our banking institutions. The banking crisis of 2008 was, after all, not primarily a regulatory failure but a moral failure. It was a failure of a corporate culture that came to reward irresponsible and reckless behaviour, eschewed accountability among senior managers and failed to value the interests of its customers, and which refused to acknowledge its duties and responsibilities to wider society.

By the time the commission’s final report was published in 2013, it was clear that the banking industry had become detached from the moral moorings that had helped to shape its activity over past centuries. Gone were the principles of collective endeavour and mutual success, to be replaced by a misalignment of risk and reward which had stripped many parts of the industry of any substantive values besides the pursuit of short-term capital return.

While a tightening of the rules could help bring broken banks into line, the parliamentary commission quite rightly noted that the task of reform would remain incomplete while banks and regulators continued to see those regulations as little more than boxes to be ticked. What was and is still needed is a renewal and a re-embedding of the values by which banking is governed. Only when banks themselves come to take seriously their long-term responsibilities towards customers, employees and the common good will they find themselves in a position in which they can regain trust.

The commission therefore made a number of recommendations aimed at encouraging this renewal of culture and values. Increasing accountability at the top of banks through the new senior managers and certification regimes should help to concentrate the minds of senior management on the importance of embedding good corporate values throughout the bank. The new set of conduct rules and the requirement that banks train staff in their implementation will set a basic standard of values against which all staff can be held to account. Finally, the new rules on remuneration, with a proportion of any bonuses deferred and new facilities for clawback and malus, should strengthen the alignment of individual rewards with long-term risk.

The Government’s willingness to implement these recommendations is welcome, even if there has been some hesitancy to implement them in full—for example, the extent to which remuneration should be deferred. However, the effectiveness of these reforms has yet to be tested, and that will be an important part of the process. Can the Minister inform us what will be done to monitor the implementation of these new rules and regulations? Will Her Majesty’s Government report, for example, on the number of senior managers being held to account by the regulator? Will they keep a public record of the number of staff being disciplined for failing to abide by the conduct rules or on the number of cases of banks exercising their right to claw back remuneration? It is no good banks and regulators being given these new powers if they never actually use them.

These regulatory changes are crucial steps in helping to reshape at senior levels the culture of British banks, but cultural change must go deeper than the top layer. It needs to become embedded within middle management: those individuals who actually drive sales and investments. There is of course a serious question as to how far regulatory changes can successfully embed cultural values into the heart of any organisation —as large, for example, as Barclays or HSBC. Cultural change has to come, at least in part, from within the industry itself.

In this regard the creation of the Banking Standards Board, as recommended by the commission, is an important step towards a sustainable and responsible banking system. The BSB is in a unique position to encourage and facilitate banks to move in a more sustainable direction. It can employ the soft power of public opinion and help to share examples of best practice. It also holds the key to the professionalisation of an industry that has often lacked proper accreditation standards.

I urge the board to act boldly in holding its members to account, but Her Majesty’s Government also have a vital role to play. Crucial to the BSB’s success is a competitive market, but I fear that the recent recommendations from the Competition and Markets Authority do not go far enough in driving transparency and competition, or in levelling the playing field for challenger banks.

Beside the BSB, responsibility for cultural change in banking also requires senior management to ensure that it is rewarding, promoting and embodying those values that are commensurate with the long-term health not just of its organisation but of its customers and the wider economy—the common good. Since the crash, a number of CEOs and senior managers have made cultural transformation a top priority of their tenure. However, it is worth noting that many of them have faced huge problems in maintaining and increasing short-term shareholder returns.

Herein lies a core problem for banking that is noted by the commission but remains unaddressed. While it is clear that long-term thinking over investments, debts and customer care is integral to the sustainability of any bank, there is an inevitable pressure to focus on short-term returns when the average share is held for just six months. Keeping shareholders happy remains the central priority of senior management. As long as that continues, regulations protecting the wider economy will continue to be seen as a hurdle to be cleared and short-term gains will continue to be pursued at the expense of long-term stability.

The parliamentary commission made a number of recommendations on this, including consulting on changes to the Companies Act to remove shareholder primacy in the case of banks that posed a wider economic risk, replacing that with a primary duty to financial safety and soundness. As far as I am aware, this is not something that Her Majesty’s Government have acted upon. Can the Minister comment as to whether this sort of approach might be considered by our new Prime Minister? Can he also inform the Committee what impact the UK’s impending withdrawal from the EU might have on current and future banking reforms?

My Lords, on 19 July the head of HSBC foreign exchange trading was arrested at New York airport. He was charged with making $8 million by abusing a client’s confidence on a foreign exchange deal. Of course, this is but one of a series of foreign exchange abuses that we have heard about in recent years. However, this one was a little bit different: it had been fully investigated by the bank, and its decision was that there had been no wrongdoing. I put it to the Minister that this episode calls into question whether the changes in culture and the stricter controls called for in the banking commission’s report are in fact working. Are we taking the steps to recovery that the right reverend Prelate is so concerned about?

In spite of what has gone on, foreign exchange trading is still more lightly regulated than other sectors of the financial market. This is because of undertakings to treat clients fairly. Are we still seeing exploitation because of this light regulation? The right reverend Prelate is right to raise this report and I congratulate him on his timely Motion. This incident would suggest that it is time to take another good hard look at the incentives given to traders, as he suggested, and whether they are balanced not only by rules but also by the culture called for in Changing Banking for Good.

The predatory attitude in banking affects us all because it rubs off on the rest of business—the current word is “interconnectivity”. As it is, the reputation of business seems to be at an all-time low, with the social contract between business and society coming apart. The Prime Minister has promised a more equal approach to the economy and an industrial strategy but at the end of the day it will be our companies, their boards and the banks that will have to deliver this. It is they who will have to ensure that there is no ambiguity about the social values and behaviour needed to deliver these commercial and financial objectives.

Before coming to your Lordships’ House I spent over 30 years in business. That was a long time ago, but even at that time we knew that our purpose and strategy had to be in line with both our social and commercial values. We did all we could to encourage what we considered to be the right behaviour; we called it stewardship. So this is not new, nor is it rocket science; most people in business know about it. Indeed, it is laid out in guides for corporate governance by organisations such as Tomorrow’s Company, and it is in the senior managers regime and other codes of practice. It is even in the Companies Act, and research has shown that it works in terms of both company performance and public trust. Commentators have been pointing this out for years, and the commission’s report Changing Banking for Good makes many recommendations along the same lines. Much of this is also reflected in the recommendations of the Financial Reporting Council, an organisation that the City itself set up. We all know what is to be done, so let us get on with implementing it and help to stop the growing spread of dissatisfaction with our banks and businesses, which will stand in the way of any industrial strategy.

What brought banking into disrepute is that many innovations clearly breached the golden rule, which may be familiar to other speakers: do not offer your customers a financial deal that you would not accept for yourself. Businesses and investors themselves have to make this assessment as part of their corporate governance.

Earlier today, in reply to an Oral Question, the noble Baroness, Lady Neville-Rolfe, said the Government will issue a paper later this year on governance. I hope this will be a part of the industrial strategy that we have been promised. Indeed, we now have a department to carry out this strategy, even though it will have to involve every government department. I ask the Minister to urge the Government to include in that strategy the governance principles, which are supported by so many, of building strong companies through governance that delivers strategic commercial and financial objectives through values and behaviour welcomed by society. We would thereby avoid the need for bankers to be arrested at New York airport.

My Lords, I will miss the noble Lord, Lord Ashton of Hyde, and it is a privilege to be at his last venture into this portfolio. I know he has an exciting set of portfolios in front of him. I congratulate the right reverend Prelate on obtaining this debate. I was privileged to be a member of the Parliamentary Commission on Banking Standards; the most reverend Primate is also here, and the noble Lord, Lord McFall, is listening to this debate. Members of the PCBS often voiced the fear that their recommendations would make a big splash and appear to be accepted but, as time passed and memories faded, Governments, regulators and the banks would return to business as usual.

Some of those fears have been realised. The FCA last year abruptly scrapped its work to challenge the culture of individual banks, its CEO was undermined and morale collapsed. We shall see now if Andrew Bailey can demonstrate the FCA’s independence and its effectiveness. It is crucial that he does. Then the Bank of England Act last spring absorbed the PRA—the prudential regulator—back into the Bank of England, removing a small but significant opportunity for challenge. The same Act also diluted the capacity of the courts to oversee the Bank’s performance and, most significantly, scrapped the reversal of the burden of proof for civil misconduct—a presumption that senior managers are responsible for the banks they run—greatly to the relief of bank CEOs and senior managers.

I know that the most reverend Primate and I disagree on this issue but I felt that it went right to the heart of the PCBS’s work on identifying the importance of culture and making sure that senior managers could not escape a sense of responsibility for everything that happened within their organisations. We must see if the new senior persons regimes give the regulators enough powers that the big players take on that responsibility, take it seriously and achieve the cultural change that is so essential.

I realise I have lost the argument on reversal but I suggest the Government pursue a “one strike and you’re out” policy: if we have one occasion when yet again the regulators are hampered in exposing wrongdoing and senior management walks scot free, we restore the reversal clause. One could say that the banks have proved themselves very effective at lobbying and, indeed, the pace is gathering. In the world of financial services I scarcely hear a speech that does not first stress the importance of not returning to the world of light-touch regulation and then in the same breath calls for a review of regulation because it is evidently too burdensome for the health of the industry.

I think we can safely say that many banks now facing reduced revenues will be arguing for their capital buffers to be lowered. Some also see Brexit as an opportunity to roll back the very regulation in which the UK was a leading force. I do not deny that these are tough times for the banks, but the British public are still suffering the consequences of the abuse of light regulation and the new rules were not intended just for the easy times. I hope the Government will stand firm, not just on their own actions. The EU brought in the cap on bonuses for senior management, limiting them to only one times salary. The British Government did not like that but it has been extremely effective and I hope we do not see that as a quid pro quo for some of the Brexit measures. We must not repeat the past where, salami slice by salami slice, regulation to curb bank misconduct was subtly and gradually weakened.

There are just a few areas in which I particularly want to raise questions with the Government. The first is the issue of the change in bank culture. Frankly, I am rather underwhelmed by the industry’s efforts to bring about change. Will the Government tell us how effective they think voluntary industry efforts are? To what degree are we seeing new blood on bank boards? Has whistleblowing increased? What evidence do the Government have of a shift in power towards audit and compliance? How have recruitment and training changed?

Ring-fencing was a compromise with the industry to find a way to prevent the cross-contamination of retail and investment banking without total separation. Where are we in that process, especially in establishing a framework for the electrification of ring-fencing? I have always been concerned about the viability of bail-in bonds—a key element, we have always been told, in reducing future risk to taxpayers. What assessment have the Government made of the bail-in bond market and has it been undermined by indifference from many of the sovereign funds?

Perhaps most importantly, is the banking sector now meeting the needs of the real economy? The Government have always rejected my party’s arguments to use RBS to create a backbone of local and community banks to serve SMEs and lower-income people, so they must now demonstrate that the conventional banking system is stepping in. My conversations with SMEs suggest that credit is still hard to obtain, and that fits the findings of the Federation of Small Businesses. Export finance for small companies seems virtually unobtainable from UK banks. Charities working with vulnerable people suggest that their banking options have hardly improved, and the Competition and Market Authority’s timid resistance to capping overdraft fees is, frankly, discouraging.

I know that we are making progress with challenger banks and alternative forms of finance, such as peer-to-peer, but those need time to mature. The PCBS report is now two years old. Here is an opportunity to hear from the Government how its implementation has progressed and for them to reassure us that backsliding is not part of the agenda.

My Lords, I, too, am grateful to the right reverend Prelate the Bishop of St Albans for tabling this debate. I declare my interest as president of the Money Advice Trust, the charity which helps people across the UK to tackle their debts and manage their money with confidence. Among other things, the trust runs the National Debtline, which last year provided free advice to almost 400,000 people over the phone or online.

In this debate about a report which focuses on issues to do with governance, professional standards, structure and regulation, I want to emphasise how important it is that we do not lose sight of the interests of the consumer. An important aspect of the debate on banking standards is, of course, the question of trust in financial services. That was undoubtedly damaged in the wake of the financial crisis and, nearly 10 years on, there is still some way to go before this trust is rebuilt.

Key to rebuilding this relationship is treating customers fairly; in practice, that means on the ground, at the point of service. I offer two observations. The first is the need, as others have already said, to embed the fair treatment of customers into the culture of financial services and to make further improvements to competition as a means to this end. Several steps have been taken in recent years to improve the way in which customers are dealt with by financial service providers, including the FCA’s requirement that all firms must be able to show that consistently fair treatment is at the heart of their business model, as laid out in its “fair treatment of customers” outcomes.

Similarly, the Parliamentary Commission on Banking Standards’ recommendation on the need to improve competition in the retail and SME sectors paved the way for the CMA’s recommendations last month. These included making account switching easier and introducing open banking data sharing, which could unlock huge benefits for consumers by harnessing new technology to help them manage their money. Both these measures are welcome and will improve outcomes for consumers.

However, of even greater concern to many people, and a far bigger barrier to trust in financial services, are the high overdraft fees people find themselves being charged by their bank. The CMA’s announcement that banks will have to place a monthly cap on overdraft charges is welcome, although with customers currently paying £1.2 billion a year, it is debatable whether anything less than an industry-wide cap will make the difference that we need to see. From the consumer’s perspective, getting this right will be a significant part of restoring the trust in the UK banking sector.

My second observation is that improving fairness and trust requires more to be done to focus on one group of customers in particular: those in vulnerable circumstances. For several decades, vulnerable customers have been overlooked, with their treatment by financial service providers varying hugely in the absence of concrete guidance and policy. Whether the vulnerability in question relates to mental health, bereavement, terminal illness or any other factor, the way that these customers are treated by their bank or credit card company can make an enormous difference to their situation, either positively or negatively.

The Money Advice Trust has been closely involved in the work of the Financial Services Vulnerability Taskforce, established by the British Banking Association in early 2015 to address how financial institutions can improve the experience of such customers. The task force brought together major banks, building societies, charities and consumer groups, building on the FCA’s previous work on consumer vulnerability in order to push this issue up the agenda of financial services firms. The good news is that the industry is responding well in addressing the findings of the task force, and vulnerability is now included more comprehensively in the new standards of lending practice, which bring the achievement of improved customer outcomes for vulnerable consumers within the Lending Standards Board’s monitoring regime.

Of course, there is still much more to be done, including better collaboration between different sectors, to make vulnerable customers’ engagement with firms as straightforward as possible. Nevertheless, it is important to recognise that real progress is being made in this regard. I ask the Minister, following on from the task force’s valuable work, what specific lessons Her Majesty’s Government think could be learned by public sector bodies, especially those engaged in debt collection, in respect of their treatment of people in vulnerable circumstances.

In conclusion, I emphasise that improving the treatment of customers—in practice on the ground, not just in the fine words of policy documents—and paying particular attention to vulnerable customers will be key to resolving the lack of trust in banking that the Parliamentary Commission on Banking Standards was set up to address. I hope the Government and regulators will keep up the pressure on this crucial aspect of the agenda.

My Lords, I add my congratulations to those of other noble Lords on the appointment of the noble Lord, Lord Ashton, as the Minister at DCMS. I have no doubt that we will come across each other again as “C”, “M” and “S” all seem to cover the Church in various forms. I should also say that I served on the Parliamentary Commission on Banking Standards and had the very good fortune to do so with the noble Baroness, Lady Kramer, from whom I learned a great deal. I am also chairman of the Church Commissioners, who were involved in seeking to buy some of the spin-off assets of the Royal Bank of Scotland.

I am grateful to the right reverend Prelate for arranging this debate. I agree entirely with his speech and indeed with the other four speakers that have been made before mine. I shall try to avoid repeating what they said. As we know, and as previous speakers have said, the key issue is banking culture. Culture comes from actions and decisions, and actions and decisions feed into culture. There is no doubt that changes introduced by the Government and the Bank of England have been extensive, and in many cases very effective. However, there are four linked areas, all of them around “too big to fail”, leading to what must be the long-term aim of ensuring that the Government do not have a contingent liability with respect to large banks that would result in them needing to provide support in the event of serious problems, as they had to do in 2008 at such cost.

First is the internal measure of capital. After some reluctance from the Government to concede this, banks now have a leverage ratio which is set by the FPC. However, in contrast to the recommendation of the Commission on Banking Standards, it is set at 3% rather than 4%. Obviously there is a balance to be met between a low ratio that leads to insecurity and a high ratio that leads to perverse incentives to take on high-risk assets. It would be interesting to know why there has been resistance to the figure of 4%, which has been the unanimous recommendation of all the external experts who have reviewed this case.

Leverage is one way of measuring capital adequacy, and a crude one. One of the great problems in 2008 was that most of the measures of capital adequacy relied on banks’ internal modelling. Recent reports—for instance, concerning the Royal Bank of Scotland and internal transfers of as much as £70 billion across what would after 2019 be the ring-fence—demonstrate that capital adequacy and movement of assets remain very important aspects of the security and good governance of large and complex banking institutions. It therefore remains a matter of concern that significant weight continues to be put on banks’ internal models for measuring capital which the Commission on Banking Standards’ report showed very clearly were not consistent with each other and in addition have a level of subjectivity which makes them almost entirely unreliable.

So long as there is good capital adequacy, the implied subsidy coming from the government guarantee of banking liabilities and assets, which has been measured by the banks themselves as around £30 billion a year, and by external bodies to be as much as £70 billion a year—just think how that might have helped Tata Steel—remains a severely market-distorting factor. Does the Minister agree that it must be a principal target of bank regulation and governance that the Government may formally withdraw any guarantee beyond the fairly low statutory level set for retail deposits, renewing in doing so a culture of risk and reward—not merely reward—and genuine values of resilience in order to ensure that banks remain in business and protect their customers? That leads me to the question of resolution and the importance of the adequacy of plans for resolution which ensure that, especially for banking activities outside the future ring-fence, contagion is avoided and certainty is provided. What progress is being made and how satisfied are the Government with plans for resolution?

Finally, the issue of competition has been raised by other noble Lords. The spin-off from RBS has of course been greatly delayed, in part owing to difficulties around the setting up of independent information technology and governance systems. Be that as it may, it is clear that there remains a lack of new entrants into the banking market; that figures for transfer of current accounts remain very low; that the illusion of free banking in credit is being maintained and is as market-distorting as ever; and that thus one can talk fairly and with reason about a banking market that simply does not function as a market.

The banks have been very clear about their resistance to increases in the ease of transfer of current accounts. Although we now have the seven-day guarantee, more sophisticated and advanced methods that have been available for some years, such as portable account numbers, do not appear to have come over the horizon in practical terms for implementation. They would be of huge benefit, particularly to the retail consumer. Until there is significant competition both for assets and liabilities as well as the essentially utility aspects of banking in terms of money transfers and movement, there will not be competition which keeps things simple, fair and honest, and embeds values.

We need a definitive change of culture to one that says that banks should be treated in ways that encourage competition and reduce government guarantees, and that banks should not be content with being privileged but should have a service mentality growing ever stronger, and should show self-restraint. For me, one of the most memorable quotes from our evidence was from a banker in a state of great distress, who said, “If I had my time again, I would remember that you can have big, simple banks or small, complicated banks but you cannot have big, complicated banks”. When the banks begin to have that sense of restraint, perhaps we may begin to see a more secure future for our banking industry.

My Lords, I thank the right reverend Prelate for introducing the debate. It is an important issue and he focused on the most important question we have to ask the Minister. We want a report not just on progress thus far, because we can do some of that work ourselves, but on how the Government will monitor their aspirations to success in what we all recognise is an extremely challenging environment, how they will measure their success and how we will get reports on it.

The call, of course, is for a moral dimension to banking. The noble Baroness, Lady Kramer, said that she was underwhelmed by the response thus far. I am a little more disappointed than that. I am pessimistic about it. It seems to me that the City has to a very large extent returned to its prime driver, which is the culture of greed. If we are going to get some moderation of that position and recognition of responsibility to the wider society, the Minister needs to respond to several of the salient points made in this debate.

We all recognise that the financial industry is a very important part of our economy. It is a major earner of overseas earnings and important to our balance of payments. We all therefore want it to be healthy, but that also means hitting higher standards than those which led to the appalling collapse in 2007-08. Since then, we have not had a great deal of evidence of a commitment by the City to improve its level of morality. Its friends in Westminster, of course, blamed the Labour Government of the time—an extremely successful ploy in electoral terms but not much referred to now when we talk about the financial industry, because we all recognise the depths of the issues which bought it low and caused so much pain to our wider society. After all, few in the banking industry have been brought significantly to account. Many have returned to business as usual. Those who were brought to account were on the whole smaller fry than those who had responsibility and took the great rewards.

We want the Minister to give a clear response. The Government have been somewhat selective in the advice which they have taken and implemented. Both the most reverend Primate and the noble Baroness, Lady Kramer, referred to the key proposals first presented to the Government in the Vickers report. Sir John Vickers indicated that he was severely disappointed at the action taken in consequence of the report. The Government have some explaining to do in circumstances where a very clear model of reform was presented but we have had limited action.

Of course, I give credit to the Government for introducing the Bank of England Bill, the fact that the Bank of England has been put firmly at the centre of banking regulation and that there is an improvement in the bodies now authorised to carry out this exercise. We all recognise the virtue of a concept such as ring-fencing, which was recommended in Vickers, but it does not come into effect until 2019. I therefore cannot feel that driving, effective pressure from the Government is under way when they are prepared to subscribe to a timetable to which substantial delay is built in.

I share with the noble Baroness, Lady Kramer—who also referred to this—that the only issue that seems to have given a real shudder of anxiety in the City about its processes and conduct at present and the possibility of government regulating it with some force, was that of the burden of proof. Of course, the Government reversed this so that the regulator has to establish the case, not the person who is being examined on the basis of damage that might have been done. To many of us that looked like a signal to the City that this Government could be and indeed were soft in that instance.

We should also appreciate the extent to which the rewards system in the City seems to have changed very little. The banks can make colossal losses and still pay out very heavy bonuses, which are matched by scarcely any others in society. Surely there must be a recognition, in circumstances where bankers see that they have to pay out for the mistakes of the past, that it cannot possibly be right that significant amounts of money are going to senior staff. One part of the morality of the City is to recognise that its basic unfairness and disregard for the society that it serves are no advantage to it, except in terms of the pockets of those who get the financial bonuses.

What my noble friend Lord Haskel referred to and what also underpins this is that the Government must think about empowering those, in addition to the regulators, who can hold the banks to account. That means changes in shareholder powers. It means a companies Act that gives real responsibility to shareholders rather than to those on the remunerative merry-go-round that they appear to operate at present.

My Lords, I am grateful to the right reverend Prelate for securing this debate here today and to all noble Lords who have spoken, including distinguished members of the commission itself. I am also grateful for the kind words of those who were wishing me godspeed on my way. There is always doubt as to whether they are longing to get rid of me or want to come to see me in another form.

The theme around today’s debate is that we all acknowledge the problems. We realise that they were incredibly serious and that they had an effect on real people’s lives all over the country. Therefore, the issue demands a huge amount of attention, not only when the commission took place but also as it continues, so it is good that we are having a debate such as this today. There is a theme that some progress is being made—or is it illusory?—and that competition is necessary but consumers should be served well and fairly. I hope to be able to convince noble Lords that real progress is being made and to answer a lot of questions.

It is also helpful that the noble Lord, Lord Davies, took the time to mention that this is a very important industry for the country. It employs 1 million people, two-thirds of whom are not in London and the south-east. They raise £60 billion of tax revenue to pay for things that we all want, such as hospitals. It is very important in the context of Brexit, which I will come on to later. It represents 12% of UK exports.

I think we all agree that the report is an exceptional piece of work. It identified fundamental problems within the banking system and clear solutions to them. In the wake of the financial crisis and a succession of scandals, though, public trust in our banks has undoubtedly been dented, so it will take not only legislative and regulatory reform but a long-term shift in culture if the industry is to fully restore that trust. Culture is a theme that came up throughout the debate.

I shall summarise some of the progress that the Government and the regulators have made in response to the commission’s main recommendations. The noble Lord, Lord Davies, asked me to comment on individual responsibility. A key focus of the commission was the so-called accountability firewall that allowed senior individuals and banks to evade responsibility for serious failings in their firms. Criminal sanctions were introduced for senior managers who recklessly cause their banks to fail, and who can now face up to seven years in jail. We have significantly strengthened the regulator’s ability to hold senior managers to account through the new senior management certification regime, as we were reminded by the right reverend Prelate. This ensures that all the senior managers and key decision-makers in the firm have statements of responsibilities setting out clearly what they are accountable for, enabling the regulator to hold these individuals personally to account if things go wrong. This is because there is now a statutory duty on senior managers to take reasonable steps to prevent regulatory failings on their watch.

There are strong incentives to take such steps because the penalties for breaching the duty can run to an unlimited fine, and firms must review the fitness and propriety of key staff on an ongoing basis. In short, we have taken the steps to create a culture of accountability, sending a powerful message to both senior and junior staff that good conduct is their own personal responsibility.

The regime is still young—it came into effect for deposit-takers and large investment firms in March—but we are already seeing evidence that firms are taking it very seriously. I will come on to the monitoring in a minute. From 2018 the regime will start to be applied to all other authorised financial services firms and firms where misconduct that can undermine the integrity of the market and let customers down can be caused by failings similar to those identified by the commission in banks.

So much for the stick. The commission’s report also highlighted the importance of getting the carrot right. The actions of individual bankers are also influenced by the system incentives that are in place, and again the linkage between risks and incentives was a theme in the debate. As the right reverend Prelate said, one of the roots of the financial crisis was the system of incentives and rewards that existed within financial institutions that meant that the long-term risks were poorly aligned with the short-term rewards. In responding to the commission’s recommendations for reforming remuneration practice, we have created the toughest regime for any major financial services centre. All firms must be able to claw back bonuses if it subsequently emerges that an individual has not met robust ethical and professional standards expected of them. For those who are high earners, or who take significant risks for the firm, at least 40% of any reward must be deferred over five years at least, and at least half must be paid in shares. The Bank of England has also laid out proposals that will enable bankers’ bonuses to be revoked after they have moved employer in the event of misconduct.

As a result of these reforms we have seen a big increase in deferral periods and payment in instruments, with the industry clearly moving away from the kind of remuneration system that promotes a culture of short-term gains over long-term profitability and stability. However, the legislation regulation can only go so far. We think it is important that businesses take responsibility for reform in their own culture.

The commission recommended the creation of a professional body to promote high professional standards, and we are seeing progress being made. The Banking Standards Board, established in response to the recommendation, now has 32 members ranging from the largest banks and building societies to some of the smallest, and has begun valuable work to support a strong banking culture. For example, it has run a comprehensive culture assessment of banks and building societies in the UK to show them their scores benchmarked against their peers along with an analysis of key issues facing their firm. In response to a recommendation by the Fair and Effective Markets Review, the FICC Markets Standards Board was established to improve conduct in wholesale fixed income, currencies and commodities markets, which the noble Lord, Lord Haskel, mentioned. It has already taken important action, publishing some draft industry standards. Therefore I, with the right reverend Prelate and other noble Lords, look forward to seeing how the work of these bodies progresses.

In the limited time available I will address specific comments and questions from noble Lords. We agree that competition is important and that it is important to have more of it in banking. However, the CMA report shows that there is more to do. We welcome the report and will be responding within the 90-day deadline; I think it reported in August. We agree that it is not the end of the debate and will continue to keep a firm eye on the actions that may be required to create a more competitive market.

The most reverend Primate talked about the lack of new entrants in banking. There has been progress on that. We saw one new retail banking authorisation up to 2010 and we have seen 11 new retail banking authorisations since then; shortly we will see some of those names filtering through. However, of course, as the CMA report showed, there is more to do.

The right reverend Prelate asked to what extent the remuneration should be deferred, saying that it was inadequate. We have gone some way, deferring it to five years, which was an extension from three. For senior managers the deferral period was seven years in response to the recommendation of 10, so we are not that far apart.

The right reverend Prelate and the noble Lord, Lord Davies, asked how we are monitoring this, which is an important question. The regulators will keep a public register that will show suspensions and restrictions of public enforcement action for individual senior managers and the FCA will publish an annual enforcement performance account. Since the SMCR has become effective for banks, the regulator has been monitoring its impact with a view to conducting a review of its effectiveness.

Based on his last two questions, the right reverend Prelate obviously has a sense of humour: he asked me to opine whether the new Prime Minister would effectively tear up the basis on which joint stock companies have been working for several hundred years and to comment on Brexit. Having been in post for about four weeks, I feel comfortable answering those questions. At the moment we will not change the principal duty but of course we will keep in mind that the regulators have a duty to maintain adequate financial resources and to take reasonable care to organise and control the affairs responsibly and effectively with adequate risk-management systems. On Brexit, we are determined that the industry and government work together to ensure that Britain takes full advantage of the opportunities. We want the best deal for financial services in Europe and outside and are aware of the implications of things such as passporting and equivalence; clearly, that will be part of the negotiations going forward. Work goes on to deliver those goals as we speak. Noble Lords will not be surprised to learn that after the Statement yesterday by the Prime Minister and the Leader, I will not go any further than that today.

The noble Lord, Lord Haskel, says that culture is not embedded. Of course the SMCR came into effect for banks only in March this year. Personally, I think a huge amount depends on the message from the top in organisations, but we are setting up the mechanisms and firms are taking them seriously.

Change will take time. The work of the Banking Standards Board and the FICC Market Standards Board will be key to raising standards. The Bank of International Settlements is making significant progress on a global code for foreign exchange, which is due to be published in May 2017. The noble Baroness, Lady Kramer, acknowledged that industry is responding well to the taskforce’s work on vulnerable people and things like that. I will come on to that in a minute.

The noble Baroness was honest enough to admit that she had lost the argument in this House about the reverse burden of proof. This was removed after long discussions involving some members of the banking commission, and I am not going to go over those again. I believe, as does the majority of Parliament, that the duty of responsibility is a better approach for embedding senior accountability across the financial services industry.

The noble Baroness also talked about the bonus gap. We did not support the bonus gap but for now it is in place and we have withdrawn the challenge to the EU. We want to build a system of pay in the global banking system that encourages rather than undermines responsibility.

The noble Baroness also talked about public sector organisations in helping vulnerable consumers. I agree that that is an important point—I will continue for a couple of minutes because I think we have until the hour. The CMA identified key groups of consumers who are not well served by the banking sector. No doubt the FCA will want to consider this alongside its high-cost short-term credit costs, and separately it is undertaking an extremely important piece of work on the needs of vulnerable customers.

The most reverend Primate talked about the leverage ratio set at 3% rather than 4%. One of the recommendations was to take this decision away from the Government, so we have left it to the FPC. That includes powers to set an additional leverage buffer to be applied to the systemically important firms that will supplement the minimum requirements if they so feel. It is an important point that this be left to the FPC.

There are some more questions that I have not spoken fast enough to get to, so I will write to noble Lords to answer the questions that I have not answered today. To summarise, we believe that huge progress has been made but also that industry is stepping up to the challenge. We know that momentum, once generated, must not be lost. That is why it is crucial that this vital industry learns from the mistakes of the past and moves on from them to earn the trust of the public once again.

Sitting suspended.