Financial Services (Banking Reform) Bill
Debate between Lord McFall of Alcluith and Lord Phillips of Sudbury(10 years, 6 months ago)
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Lord McFall of Alcluith
We have had the biggest financial crisis ever but not one whistleblower. That is the magnitude of the problem which the Minister does not grasp and that is why we looked at this issue. Goodness gracious, look at the fines: £85 million for Barclays and £13 billion for JP Morgan today. There is a litany we could go through, so what is the problem?
The Government set up a commission to look at culture and standards. What did the Parliamentary Commission on Banking Standards find? It found that the culture was rotten and the standards were abysmally low. This whistleblowing amendment—a modest amendment—is being put forward to ensure that we have a better culture, and that we have legal and compliance teams in companies that might have the nerve and confidence to go the FCA and say, “Look, there is wrongdoing in this company and we do not feel that we can assuage our conscience on this. We need to report it to the FCA to ensure that we have a better organisation here”. This has failed totally. That is the magnitude of the problem facing us and that is why we have this modest amendment.
The USA was mentioned. We had two witnesses before us from the USA who were very clear that we did not scrape the ground with the FSA. My noble friend Lord Brennan has given his wisdom on the situation in the USA tonight. We are asking the Government and the FCA to look at the experience in the USA to see if that aspect can be adapted. As the noble Lord, Lord Phillips, said, his charity did not have one person from the City. That backs up the evidence that we heard and gives the initiative to the FCA. That is the purpose of this amendment.
We received representations from trade unions in a sub-committee evidence session. The trade unions were very clear to us that their members at the grass-roots level felt pressurised but were scared stiff to do anything about it. I have a number of examples but will give the Minister one in particular. An individual I have known in my own town of Dumbarton for years, who worked in one of the banks for 25 years, left to become a care worker at less than half the salary. I asked her why she left. She said, “John, I was being forced every week to sell products that were not only unsuitable for people but were making their lives miserable. I could not partake in that, so I left”. There was someone who had been committed for 25 years being pressured on issues like that. Surely we should have a system to say “That person has given loyal service. That’s a person who wants to serve their bank and their community. Let’s establish an appropriate structure so that we protect that person, and also make the company better”.
I suggest to the Minister that there is a link between the almost £30 billion that we will be paying out in fines for PPI and the conduct of a company. If the proper procedure was in place and that information came up from the bottom, we probably would not have the abysmal situation we have with the £30 billion.
This amendment is about not just changing the culture and standards but helping the safety and soundness of companies. It was a responsibility given to us, the Parliamentary Commission on Banking Standards, by the Government to give recommendations to change the culture. This is a sound way of doing that and I would have expected a more sympathetic and engaging response from the Minister than we received tonight.
Lord Phillips of Sudbury
My Lords, I should quickly make clear that the whistleblowing charity, Public Concern at Work, is not mine; I was merely the lawyer who set it up. However, it does wonderful work. I am delighted to hear that there is a public consultation. I am very anxious indeed that it may not have reached the parts that it should have reached. I ask the Minister if it possible for him to look into that and, if necessary, extend the consultation period for, say, a month.
Lord McFall of Alcluith
My Lords, I will briefly speak in support of this amendment. My noble friend Lord Eatwell spoke of treating customers fairly. I remember, going back to 2002, when the FSA, bless its heart, introduced this to the industry. The FSA told me that it was a hugely uphill struggle. I well remember having a conversation with the chairman of one of the banks, who said to me, “Treating customers fairly? I don’t know what that FSA is up to, because I’ve always treated my customers fairly”. The gap between what the FSA was trying to do and the mentality of some people in the industry was huge. I remember being at a seminar with John Kay, who has written a great article in today’s Financial Times that I have already referred to. He said that a duty of care, if it was imposed on the banks, would be “transformational”. I think he said that for the following reason. There is today an imbalance between the customer and the bank—the term for that is symmetry of knowledge—which has led to many of the scandals.
Time after time on the parliamentary banking standards commission, when we ask chairmen and chief executives exactly why mis-selling occurred or why the grievous omissions took place in their organisation, they say that they did not know anything about it. There is, therefore, a hiatus between the top and below. One of the amusing aspects of my time as chair of the Treasury Committee was speaking informally to senior executives in the banks who came along to the Treasury Committee and said, “What you did to the chairman today was good because it allows us to educate him”—or her, although it is largely him—“about what is happening in the organisation”. A lot of them do not know what is happening. If we had this duty of care, that responsibility would lie at the very top.
During the deliberations of the parliamentary banking standards commission, I suggested that there should be an annual meeting between the chairmen and chief executives of these institutions, and the regulatory authorities, so that there was a sign-off on how they do their duty and how they serve the interests of their institution and their employees in the wider society. That information is not made public, but at least there is that accountability at the top between the regulator and the chief executive. At present, we do not have that. Having the duty of care would make those at the top much more alive to what is going on in their organisation. I have received evidence in the banking commission, particularly from the lawyers who were advising us, that the term “duty of care” has a specific legal meaning in the law of torts, and tests to establish whether a duty of care exists and whether it has been breached are a fundamental tenet of common law. In the context of banks and their customers, it is not clear what a duty of care would look like in practice. I know that there are huge legal hurdles to overcoming that, but there is a basic, common-sense and moral purpose to the concept of duty of care, and I think it is one that we will refer to again on Report.
I would like the Minister seriously to consider this amendment and ensure in some way or other that, as the Parliamentary Commission on Banking Standards stated in paragraph 416:
“Banks need to demonstrate that they are fulfilling a duty of care to their customers, embedded in their approach to designing products, providing understandable information to consumers and dealing with complaints”.
Financial Services (Banking Reform) Bill
Debate between Lord McFall of Alcluith and Lord Phillips of Sudbury(10 years, 6 months ago)
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Lord Phillips of Sudbury
My Lords, I commend the mover of the amendment, the noble Lord, Lord Turnbull. If, as I assume, this matter is brought back at Report, I should like to raise two questions. The first concerns the fact that the code is to be solely the responsibility of the FCA and the PRA. I wonder whether it should have a broader base than that. The City is a real bubble. The two authorities are part of that bubble, as are most of the people working in them. Everybody—particularly the noble Lord, Lord Turnbull, in moving the amendment—has said that we have to break out of this small enclave to understand the wider national, social and cultural impact of what is going on in the square mile. I just throw that idea out.
My second question concerns proposed new subsection (3)(a) in the amendment, which requires that those subject to the code shall,
“receive a proportion of their remuneration in the form of variable remuneration”,
although it does allow specific exceptions. For the life of me, I do not see why that is being insisted upon. Twenty-five years ago, most of the senior bank executives and those on the boards of banks did not receive a variable element in their remuneration at all. The problem that the amendment seeks to address was not present then, or at least not remotely to the degree that it now is. Therefore, again, if this matter is to be brought back at Report, I should be grateful if more thought could be given to the need for subsection (3)(a).
Lord McFall of Alcluith
My Lords, I support the amendment. The most important and admired banker of the 20th century—the late Sir Brian Pitman, the former chairman and CEO of Lloyds—came to the Future of Banking Commission, which I established, and on which David Davis MP, Vince Cable, Roger Bootle and others served. He gave us a lesson that day: he said very clearly that he understood that banks should be run for the long-term benefit of shareholders, and that that was what customers wanted most.
Sir Brian’s synopsis of what mattered to him as a banker was very clear, when he said in evidence to us:
“Nobody is a greater believer in shareholder value than me ... It’s long term shareholder value and everything has to be structured around the long term, particularly the remuneration structure … The minute you move to a huge emphasis on short term big bonuses you're going to change the behaviour. It is perfectly possible, in our case for 17 years when I was there”—
at Lloyds, that is—
“we were doubling the value of the company every three years for 17 years. Nearly everybody had shares in the company; messengers were worth a quarter of a million pounds when I left because we’d been successful as an organisation. But we believed it all had to start with the customer”.
He was very clear that if you had the customer in mind in terms of remuneration, you had to measure it on a 10-year basis. Only that way do you find out about the business cycle, and about whether the money paid in bonuses is money that has really been earned at all. As was said earlier, that money was not really earned in the past, because remuneration was based on expected profits, which did not materialise.
For the senior executives in banks it was upwards all the way: whether the bank went down or up, they had their bonuses. Sir Brian distinguished banks from other organisations as follows: “Banks and insurance companies have the unique ability to engineer increases in profits by pulling a lever that forces their banks to take more risks to lend and invest more relative to their capital resources, unlike other institutions”. That is why, in our report, we wanted a statutory basis, and we wanted the regulator to look at this issue.
When the noble Lord, Lord Lawson, and I were on the Parliamentary Commission on Banking Standards we considered the same issue on our sub-committee. We examined Barclays and its culture, and looked in particular at the structured capital management division —which, incidentally, the noble Lord, Lord Lawson, referred to as tax avoidance on an industrial scale.
We wanted to find out about the business model for that, and we spoke to insiders. When Sir David Walker and Antony Jenkins came to the committee, we had prepared questions, and my question for Sir David was along these lines:
“I would like copies of all management reporting and management performance information provided to Roger Jenkins”—
who established BarCap, along with Bob Diamond—
“and Iain Abrahams to support the bonus pool”—
in other words, to provide the numbers for us. I continued:
“The second one is the information used for the purposes of calculating the bonus pool of the structured capital management division, and the information used for determining the bonuses in particular for”,
three senior executives for the past decade.
The reason why we asked for that information is that the noble Lord, Lord Lawson, said in the evidence session that Roger Jenkins, who established the division, had had more than £40 million in one year. Bob Diamond had £100 million over a 10-year period. We wanted to find out exactly how they had earned that. The insiders told us that in 2008 BarCap was responsible for 110% of the profits of the whole entity. Here we had a tax avoidance unit on a massive scale masquerading as a bank, and responsible for 110% of the profits—and we did not have a clue how they made their money. I said that we wanted the information,
“in sufficient detail in order to identify each of the subcategories of the structured capital management business. In that respect, it will be the year-end management accounts information and quarterly reports information”,
which we received. We went on to ask for more—and we received absolutely zilch information. So, as we take this banking reform Bill through the House, we still do not know exactly what BarCap was up to.
What I—and the noble Lord, Lord Lawson, and others—want to know is that the regulator has the authority, so that it can see exactly how a business is performing and getting its money, and what business model and culture it has, so that the remuneration structure does indeed have a long-term basis and serves the long-term interests of society and of customers. That is not happening to date. That is why the amendment is before the House.
Financial Services Bill
Debate between Lord McFall of Alcluith and Lord Phillips of Sudbury(11 years, 10 months ago)
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Lord Phillips of Sudbury
I hope that my noble friend agrees that the noble Lord, Lord Burns, had quite a point. It harks back to earlier discussions about the complexity of drafting. It is the fact, as I hope my noble friend will confirm, that the definition of Court of Directors in Clause 1 of the Bill includes the four executive directors and “not more than 9” non-executive directors—which makes 13. The interplay of the phrase Court of Directors and the new body that is the subject of the government amendment makes for extraordinary complexity in understanding. One thing that my noble friend might consider for the next stage is that when the Bill and his amendment refer to non-executive directors they say non-executive directors, because there are four executive directors—the governor and three deputy governors. They are directors too.
Lord McFall of Alcluith
I thank noble Lords for their contributions. It has been a very interesting debate. I had more of an idea what things are about at the beginning of my speech than I did at the end and whether it is the oversight committee or the court. Perhaps the Minister could just clarify whether the chair of the court will chair the oversight committee and whether the oversight committee will be composed of non-executives, with no officer of the Bank on the oversight committee. I cannot see that detailed in the Bill.
I agree with noble Lords in asking why we need another committee. The reason why I asked the Minister questions earlier was that the Treasury Committee in another place is very firm that this proposal does not plug the gap. In the light of the debate, there needs to be a review from the Government and they need to come back to us on Report so that we can get some clarity when it goes back to the other House. The core of this is corporate governance. If we get good corporate governance on the court, there will be no need for the oversight committee at all.
The noble Lord, Lord Turnbull, had a very good suggestion. Why do we not combine my amendment with the Government’s amendment and then we can come back to this matter, look at it and, I hope, all agree? I beg leave to withdraw my amendment.
Finance Bill
Debate between Lord McFall of Alcluith and Lord Phillips of Sudbury
Lord McFall of Alcluith
It is a privilege to be speaking in a Second Reading debate so soon after being introduced in this House. I congratulate the noble Lord, Lord Spicer, and the noble Baroness, Lady Browning, on their excellent maiden speeches. They were colleagues in the Commons, and I look forward to healthy exchanges in this Chamber.
The noble Lord, Lord Stern of Brentford, was an excellent and regular witness before the Treasury Committee and a fine ambassador for our country. That came home to me very clearly during the visits I made to Africa where the impact of his climate change report had great ramifications. The noble Lord should be proud of his role in the Treasury and as climate change ambassador as a result of that. He mentioned the Office of Budget Responsibility and the need for transparency, clarity and independence. I offer noble Lords the example of United Kingdom Financial Investments, which came before the Treasury Committee and had a disaster on the first day. It was lodged in the Treasury building, and you could not put a piece of paper between it and the Treasury. The relationship between the OBR and the Treasury seems very similar. My advice to the Government is to get it out of the Treasury very quickly so that it can be independent and have that transparency and clarity of message that has, to date, been missing. It is important that we get that.
I wish this Government well for the sake of the country and for the sake of individuals. We are most definitely living in uncertain times. Last week, Ben Bernanke of the Federal Reserve, in his comments to Congress, said that it is an unusually uncertain environment. Last week, comments were made by Spencer Dale, the chief economist of the Bank of England, and a debate took place in the pages of the Financial Times, with comments from Jeffrey Sachs, Paul Krugman and Martin Wolf, who, incidentally, is on the Government’s independent Banking Commission.
When Sam Brittan, a favourite journalist of mine, wrote about this Budget, he asked: “Are these hardships necessary?”. He pointed out that the real argument should be about whether we need this unparalleled fiscal austerity. Mohamed El-Erian, in his column in the Financial Times, made very clear the global nature of this problem, which we have not spoken about enough. He said:
“The world is facing deep structural challenges”,
yet we are witnessing,
“fruitless discussions … and a troubling lack of global”,
financial “harmonisation”.
The utterances that came out at the G20 in Toronto fill that description aptly. Unless we get on top of this, and look at global imbalances and develop policies for the structural change, we will find ourselves in real problems.
Against that background, what is plan B for this Government? We are living in uncertain times. Therefore, there is no certainty about the proposals being put forward. I followed the deliberations of the Treasury Select Committee in its June 2010 Budget, which was released a few weeks ago. When the Chancellor of the Exchequer was asked about plan B, he said:
“The plan is to have confidence in the British economy and its ability to pay its way in the world”.
That is the sum total of the explanation for plan B, but I would suggest that that is insufficient. The political nature of the debate has made it harder to discuss plan B, but it must be discussed. The noble Lord, Lord Stern, made reference to that in his speech. There is insufficient assurance in these deeply worrying times.
Against that we have had a Budget which has accelerated the fiscal position very tightly. There will be £40 billion of spending cuts and tax decisions, made up of £8 billion in tax and £32 billion in spending cuts by 2014-15, of which £11 billion will be specific measures on welfare. You cannot tell me the implications for poorer people in our society when we have that £11 billion coming directly out of the welfare budget, with suggestions that more is to come. The impact of that will be a massive discretionary tax on £13 billion extra of spending. The Government have 77 per cent of its spending and 23 per cent of its tax rises for their Budget. Martin Wolf, in the Financial Times, said that the adverse impact on the poorest 10 per cent will be harsher than on the most rich groups in 2012-13 and that it will get worse thereafter.
There is a huge gamble at the core of this Budget. Can the Government explain this massive assault and spending cuts adequately to the satisfaction of ordinary people? Can they manage their public relations in this regard? Are these policies being fair on their impact on society? What will they do for long-term unemployment? The ONS June figures show that those who have been unemployed for more than 12 months have increased by 85,000 over the first quarter of this year. Standing at 772,000 that is the highest figure since the first quarter of 1997.
Let us not forget youth unemployment, which, for 18 to 24 year-olds, stands at an unprecedented 17.3 per cent. Since the start of the recession, youth unemployment has risen 5.1 per cent. I remember well as a school teacher meeting former pupils 10 years after they had left school and being introduced to their spouses and children. When I asked them whether they had a job they said that they did not. They were the lost generation of the 1970s and 1980s. Do we want to go back to a lost generation or do something about youth unemployment now, so that when we come out of this recession we will be in a fit and proper position in terms of skills in the economy? That is one issue.
The second issue in the gamble concerns the impact of the fiscal tightening on GDP. The Office of Budget Responsibility has predicted growth in 2010 of 1.2 per cent; in 2011 of 2.3 per cent; and in 2012 of 2.8 per cent. It will need a substantial contribution from business investment and exports in 2012 to achieve that. Indeed, contributions from business investment in that year will have to be 1 per cent and from exports 0.9 per cent if we are to achieve our growth target. That is a big challenge. In order to meet that challenge, the Government will be dependent upon domestic private spending being maintained and spending on UK exports being little affected by the fiscal squeeze which they are presently urging countries around the world to adopt. Something does not add up in that situation. We should remember that the Government’s plans are predicated on a private sector revival, with 2 million new jobs being created over the next five or six years. I have yet to meet an experienced economist who will tell me that that is a feasible outcome. This is a fast adjustment early in the life of the coalition Government and it raises the question of what effect these measures will have on individuals.
That brings me neatly to the Liberals. I held a landmark birthday party at my home on Saturday for one of my offspring. The cake with the candles was brought in and I thought of the coalition Government. Why should I think of the coalition Government when I should have been enjoying myself? It was because I saw the candles as the Liberals and the cake as the Conservatives, the Tories. The candles gave a little glow and a little hope but, as you and I know, they were cruelly blown out by my three year-old granddaughter. We were then left with the Tory cake. The question is whether it is an edible cake; is it succulent? Are we going to ask for second helpings or will it be inedible? I think it will be the latter. That is the issue. It will be hard to digest for many people.
Are the cuts on the cake illiberal? Are they too deep for an economy in the early stages of recovery when some of our trading partners are still very weak? Will the tax changes provide enough private sector investment and job creation after the state withdraws quickly? Will it be fair for all sectors? Is there a coherent ideology? If there is no ideology from the Government then we will have little shape and direction to where we are going. The noise of the cuts will be drowned out by everything else.
However, this is what the Government believe in and demonstrates their aspirations for society, but where is the Liberal influence? Where is the Liberal influence on the acceleration in the fiscal tightening area? Where is the Liberal influence on child poverty? In their manifesto the Liberals agreed with the eradication of child poverty by 2020.
Lord Phillips of Sudbury
My Lords, I am grateful to the noble Lord for giving way but I must reply to his assault upon the sole Liberal Democrat in the Chamber. Does he not agree that a candle at least provides a little light in a naughty world?
Lord McFall of Alcluith
Yes—but it depends for how long the candle exists before it is blown out. That is the issue. I fear that the candles have been blown out already.
In terms of child poverty, the Liberals have signed up for eradication in 2020. The Minister stood at that Dispatch Box last week and said that there are four criteria to the Child Poverty Act 2012. But the Government have given their commitment to one of those criteria only for the next two years and ignored the other three. If I have one criticism of my colleagues on the Treasury Committee for their June 2010 Budget, it is that there was no mention of child poverty. I hope this mild statement here will propel them to ensure that child poverty is taken into account.
I am being followed by the noble Lord, Lord Skidelsky, the expert on Keynes. Keynes did not believe in deficits for the sake of it. Sam Brittan said that the Government’s approach is not like that of households. When households and businesses do not spend, the Government step in. That is why we have had quantitative easing. There is an awful lot in this Budget that we still need to look at. I hope if recovery stalls that the Government will listen and that it will not be too late.
Finally, I note that the Brokeback utterances mentioned at the weekend by my good friend in the Commons, David Davis, took place in the Boot & Flogger pub in London. I would suggest to you that the Liberals will get the boot if they are insufficiently authoritative with their influence and that the Tories, if their PR strategy fails and their narrative is rejected, will be flogging a dead manifesto and will have to live with the consequences. Dealing with those generalities not specific to the Budget, I am delighted to contribute to this debate.