Bank of England and Financial Services Bill [ Lords ] (Third sitting)

Rob Marris Excerpts

Thursday 11th February 2016 Public Bill Committees

Financial Conduct Authority

[Rob Marris (Wolverhampton South West) (Lab)]

I beg to move amendment 37, in clause 18, page 16, line 12, leave out paragraph (a) and insert—

“(a) publish any notice under subsection (1) within one month of giving such a notice, and”.

[The Chair]

With this it will be convenient to discuss amendment 38, in clause 18, page 16, line 14, after “before”, insert

“and make a statement to both Houses of”

[Rob Marris]

It is a ray of sunshine to be serving under your chairmanship on this bright day, Mr Brady. Amendments 37 and 38 are straightforward, and I am sure that the Government will accept them, so perhaps we can move on to debate the clause. Proposed new section 1JA(1) gives the Treasury the power to give directions to the Financial Conduct Authority. The rest of the new section deals with how that power shall be exercised at least once in each Parliament, and with the publication of those directions. Our straightforward amendments would tidy that up.

One must recognise that there is a balancing act between the FCA’s independence and the need for public accountability, refracted through the Treasury. That is always difficult, and we accept that, but there is a bit of a problem with the Financial Conduct Authority. Immediately after Second Reading a couple of weeks ago, there was a debate for more than two hours in which I think it would be fair to say that Members from both sides of the House expressed grave concerns about some of the actions or inaction of the Financial Conduct Authority. It is purportedly independent of the Government and the Bank of England, but there is so much cosy overlap.

We have Dr Bailey, who now seems to have all kinds of hats. I stand to be corrected, but I think he is the deputy governor for prudential regulation and has been the chief executive officer of the Prudential Regulation Authority since April 2013. He is therefore also a member of the Bank’s board of directors, the PRA board and the Financial Policy Committee, and now he is going to the Financial Conduct Authority. There are questions not about that gentleman’s integrity, but about perceived conflicts of interests and so on. There is someone on the FCA board, Jane Platt—she also joined in April 2013—who is the chief executive of National Savings and Investments. Sir Brian Pomeroy, CBE, joined the FSA board in November 2009. I think that he may still be on the FCA website.

The FSA was abolished because it was, shall we say, pretty useless. Private Eye, correctly in my mind, used to characterise it as the Fundamentally Supine Authority. If we look at the prosecutions, or the lack thereof, and the steps taken by the FSA after the crash in 2008, or the lack thereof, it did not exactly cover itself in glory as an institution. I make no comments on the individuals within it; I am referring to the institution. The Government recognised that, and therefore we had the Financial Conduct Authority.

It is all a bit cosy. The noun of this Committee thus far seems to be groupthink. That refers to the risk that those who have a cosy relationship will start to be blinkered in the way in which they exercise their regulatory functions. The FSA has been characterised by Professor Alastair Hudson, whom I thank for his assistance in tackling what is quite a technical Bill. He said, “The FSA previously began to think of itself as being in partnership with the financial institutions which it was supposed to regulate.” I think he had a point. So, I suspect, did the Government, which is why we now have the FCA, not the FSA.

However, there is still a big question mark over the FCA’s relationship with the Government, which is to do with how independent it is. The Minister has previously told the House that the FCA’s decision to abandon its investigation into the culture of banking, which had not actually started, had nothing to do with the Treasury. That, of course, touches on questions of groupthink, blinkered thinking and so on. I do not impugn her for saying that, but looking at it from the perspective of Labour Members, that is a surprising situation. It is relevant to what we are discussing, because of course proposed new section 1JA, to be inserted by clause 18, talks about the Treasury giving directions to the FCA in certain circumstances.

The FCA, in its business plan for 2015-16—the year we are in—said that it would do a culture review:

“In 2015/16 we will conduct a new thematic review on whether culture change programmes in retail and wholesale banks are driving the right behaviour, in particular focusing on remuneration, appraisal and promotion decisions of middle management, as well as how concerns are reported and acted on.”

It would have been very useful to have had the fruits of that culture review before us when debating the Bill.

[Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)]

Is the hon. Gentleman aware that there are quite a number of studies that indicate that approximately 70% of major organisational failures can be attributed primarily to cultural problems?

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[Rob Marris]

I was not aware of that statistic, but it does not entirely surprise me. I thank the hon. Gentleman for that.

We have the chair of the FCA’s foreword to its business plan for 2015-16—as I said, the current year. That is John Griffith-Jones, who by the way worked at KPMG from 1975 to 2012; we all know that KPMG has questions to answer about what it was doing in relation to the financial institutions in the lead-up to the meltdown in 2008. I was talking about cosiness; he comes from KPMG, and he said in that foreword:

“In our last Risk Outlook we identified the seven most important forward-looking areas of focus in our view. We do the same again this year. Unsurprisingly, given the long-term nature of these risks and the underlying drivers, the list is largely unchanged. Poor culture and controls continue to concern us, notwithstanding the efforts being made by firms to improve both.”

So there he is, in his foreword to the business plan, less than 12 months ago, stressing again the concerns about “poor culture and controls”. The FCA said in the business plan that would investigate the culture of banking and financial institutions and then, in a whiff of smoke, it was gone—no investigation whatsoever. The Minister says that is nothing to do with the Treasury, but I hope she will recognise that the Opposition are a little concerned about the relationship between the Treasury and the FCA. We are concerned about how much control and direction the Treasury can give the FCA.

The FCA is constitutionally a creature of statute, hence the Bill and previous legislation, but in everyday terms it is somewhat a creature of the Treasury. It would be helpful if, when addressing clause 18 and the minor amendments 37 and 38, the Minister said a little more about the current relationship between Her Majesty’s Government, refracted through the Treasury, and the FCA, and what she foresees that future relationship being in the changed landscape that the Bill introduces.

[Harriett Baldwin]

Clause 18 is effectively about remit letters, which I think is why the hon. Gentleman took the opportunity to bring a lot of fairly extraneous issues into discussion. I will respond to some of them in the course of my remarks.

It is important that regulation takes account of both the implications of the economic environment for the regulators and of the regulators’ own impact on that economic environment. I am sure all members of the Committee agree with that. That is reflected in the statutory remits of the regulators. For example, both regulators have a duty to have regard to the desirability of sustainable economic growth in the medium or long term. The objectives of both regulators recognise the importance of effective competition, and I trust that members of the Committee do not wish to raise any controversy or have any criticism about that.

Clearly, therefore, both regulators need to understand how the Government’s economic policy may affect their work. I want to be absolutely clear that the recommendations in the letters that the Government will be able to send to the regulators will indicate the Government’s economic policy. They will be recommendations and will not be binding. They will certainly not be what the hon. Gentleman termed “direction”. They will not compromise, modify or override the regulators’ statutory objectives in any way, nor, importantly, will they relate to individual firms or cases.

The hon. Gentleman raised one of his favourite topics: the fact that the FCA had a bank culture review in its business plan for the year ahead. Despite my assurances to him in the Chamber that the first the Treasury heard of that was when it was covered in the media over the new year, he does not seem convinced by what we have said. We have replied to numerous written questions with the same response, and I repeat it for his benefit today.

The FCA is clearly operationally independent. It took an operationally independent decision to change what it is going to focus on over the coming year, and that decision was made completely separately from the Government.

[Rob Marris]

I take what the hon. Lady says. Is she comfortable that that was the right decision for the FCA to take? It was made by a body that is so incompetent that it could not even monitor the share dealings of its own staff.

[Harriett Baldwin]

The hon. Gentleman cannot have it both ways. If he thinks that I should have no operational interference in whether the FCA does a cultural review study, obviously I should not have any operational interference in whether it reinstates the study. That is the situation in which operational independence results. Where the Government have a role is through sending these non-binding remit letters and through the power to appoint the chief executive and the board. The hon. Gentleman has described the history of the predecessor organisation, the FSA, and obviously we had to abolish that organisation—that is the power of the Government of the day. His party’s Front Benchers have a range of different and fairly eccentric ideas about the independence of the Bank of England, which are on the public record. I will not entertain the Committee by talking about them.

[Rob Marris]

Not me, guv.

[Harriett Baldwin]

The hon. Gentleman is serving in the team of a shadow Chancellor who wants to end the independence of the Bank of England.

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[Harriett Baldwin]

I think we can all agree that that would be a fascinating study to read, but I will not get involved in directing the FCA to change its business plan. That would be interfering with the operational independence of the FCA, which I am sure Opposition Members do not want me to do.

[Rob Marris]

I thank the hon. Lady for being so generous in giving way. Actually, I never said anything about not interfering in operational matters. She rightly says that, in theory, the Government could abolish the FCA. This clause does not cover a directive to the FCA; it talks about a recommendation. A recommendation from the Treasury, a body that could abolish the FCA, is something akin, in everyday parlance, to a directive. Pursuant to proposed new section 1JA(1)(b) of the Financial Services and Markets Act 2000, such recommendations could be on “how to advance” one or more of its operational directives.

[Harriett Baldwin]

I have outlined some of the things that the Government put in their remit letter, which is not binding on the organisation but provides important context for what the Government, elected by the British people, want to focus on.

Let me now turn to the amendments. Amendment 37 would require the Treasury to publish the recommendations it makes to the FCA within one month, and amendment 38 would require the notice laid before Parliament to be accompanied by a statement to each House. The amendments raise the important issue of transparency, which is at the heart of the Government’s proposals for these remit letters. The remit letters themselves form an important element of transparency, and they provide a transparent and formal means of conveying Government economic policy to the regulators, so it is an important part of the provision that the Treasury must publish its recommendations and lay a copy before both Houses of Parliament.

These probing amendments have been useful to confirm how the process will work. I assure members of the Committee that I cannot foresee any circumstances in which the notification for either regulator would not be published and laid before Parliament within a month. I am happy to commit the Government to that practice. I am not going quite as far as accepting the hon. Gentleman’s amendment, but I am happy to commit the Government on the record to that practice. I hope my assurance will be sufficient.

We need to retain flexibility about the best way of informing the House. For example, the updated recommendations might be issued as part of the Budget statement. In that case, it would be more appropriate and efficient for the House to be informed of the new recommendations in the Budget speech, as has happened when the FPC remit letter is updated at that time.

The hon. Gentleman raised a few other points, and it might be helpful if I respond to them. Without criticising Mr Andrew Bailey in any way, the hon. Gentleman did imply that he thought he was doing too much. However, I can assure the hon. Gentleman that Mr Bailey will stop being the chief executive of the PRA on the day he moves over to be chief executive of the FCA. The hon. Gentleman referred to conflicts. I hope that he is not alluding to any specific conflict of interest, because that would be inappropriate in terms of impugning Mr Bailey’s integrity.

The hon. Gentleman mentioned a “cosy” relationship. There were a lot of allegations relating to the fact that many individuals involved have worked with, and have experience of, other organisations. However, that is where the operational independence, structure and framework of statutory duties and responsibilities, as set out by Parliament, is so important. FSMA, for example, made it clear that the terms of all appointments have to ensure that the appointee cannot be directed by the Treasury or any other person, including the Bank.

When we make appointments, we consider the appointee’s current and previous background—of course we do —including any material conflicts. In our view, it would be entirely appropriate for people who are appointed to these important functions to have extensive experience of a relevant institution. Therefore, I do not think that the hon. Gentleman is right to talk about “cosiness”; he ought to be saying how important it is to have experience and wisdom in the statutory framework that we are discussing.

Without more ado, I hope that my points on the amendment and the clause have been sufficient to satisfy the hon. Gentleman. I am very grateful for his probing amendments. I hope I have been able to address the concerns and that the clause may stand part of the Bill.

[Rob Marris]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 18 ordered to stand part of the Bill.

Clause 19

Diversity

Question proposed, That the clause stand part of the Bill.

[Harriett Baldwin]

The clause shows how valuable it can be for Ministers to have their Bill start in the House of Lords, given that we often find that we benefit from their insights as the Bill proceeds through the other place, particularly on subjects on which their lordships have so much wisdom.

The clause amends the general regulatory principles that apply to both the Financial Conduct Authority and the Prudential Regulation Authority. That is a direct way of ensuring that the regulators fully consider the differences between types of business, including—importantly—mutual institutions, across the breadth of work that they undertake, when it is appropriate to do so. The clause makes it clear that both regulators must take into account the differences between the varying forms of business organisation adopted by firms, including —importantly—mutual societies, where appropriate whenever they are discharging their general functions.

I hope that introducing the clause, which puts consideration of mutuality and other types of business organisation into the regulators’ guiding principles, provides reassurance that the Government strongly support a diverse financial services sector and the part that mutuals play in achieving that. We are building on previous action that the Government have taken to support the sector, including: carving out the building societies from the Independent Commission on Banking ring-fencing regulations; increasing the maximum interest rates that credit unions may charge on loans from 2% to 3% a month; spending £38 million in the credit union sector through the Department for Work and Pensions credit union expansion project; and ensuring that universal credit and pensions payments may be paid into a credit union account.

Moreover, Government support for the Mutuals’ Deferred Shares Act 2015, which received Royal Assent in March 2015, underlined our commitment to fostering growth and competition in the sector by seeking to address mutual insurers’ inability to access external capital without the need to demutualise.

Clause 19 provides a further step to ensure that regulators fully consider the particular issues that relate to mutual institutions and other forms of business across all their work. It highlights the role of mutual financial institutions in the UK’s evolving financial services marketplace and ensures that, where appropriate, the specific challenges that the mutuals sector faces are taken into consideration when the regulators are discharging their general objectives.

[Rob Marris]

We on the Labour Benches—I do not know about colleagues in the Scottish National party—welcome clause 19. I say that as someone who first joined a credit union more than 40 years ago. Diversity is important in the financial sector, as in many sectors. The parallel that some of us may remember from our schooldays is crop rotation, for which we need ecological diversity. If we go for monoculture with crops, it is seriously bad news if a pest comes, because our one and only crop is gone.

There is a parallel with financial institutions. By and large, the mutuals sector, including building societies, fared better than mainstream, privately owned banks in the crisis. Where there were problems, in particular, was with some former building societies that had demutualised. I say that as someone who voted against demutualisation for at least three building societies. Two of those were the Staffordshire and the Cheltenham & Gloucester. We lost both of those, but we won with the Nationwide building society—it is still a mutual, and I still have an account there. It is a very big mutual—a very big financial institution. At the other end of the spectrum are institutions such as the Wolverhampton credit union—I am not sure what it is called now, because it keeps changing its name—of which I have been a member for many years. Compared with the Nationwide building society, it is a very small institution, but that is part of diversity.

I am pleased that this Government and their predecessor, the coalition Government, have embraced diversity. The Minister mentioned some of the things that have been done: the £38 million for credit unions and the £2 million. I salute the work that the coalition Government did, and that I hope this Government will continue to do, in relation to the mutuals sector. For example, the previous Government supported disclosure of lending data by the main high street banks to understand patterns of lending across the UK. There has been the lowering of barriers to entry to the financial services market to help to increase competition—challenger banks and so on. I do not think that the Minister mentioned the good work on schools-based financial literacy programmes, which were brought in. That is not directly about mutuals, but it has to do with that concept of a broader view to financial services than simply the high street banks.

A few more things need to be done, and if you will indulge me briefly, Mr Brady, I will mention one or two of them. I am indebted to the Community Investment Coalition for some of these suggestions. A review of existing affordable financial tools would assist, as would supporting and encouraging FinTech innovation, which the Government are starting to do—it is likely to be a growing sector—but it needs to be done in a way that will also benefit people on lower incomes. Also needed is a clear direction to economic regulators—something we discussed in our debate on the previous clause—to ensure that the financial services market provides easily understandable and appropriate products. There is a constant battle there, because products keep mutating and so on. Broadening and strengthening the existing voluntary framework for disclosure of lending data would take further what the Government have already done.

It would be useful to have stressed by the Government—practising some of their recommendations to the FCA, not directions—the value and importance of community finance. They need to ensure some competition and diversity in the financial services sector, which should benefit all communities if it works properly. A review of community finance provision across the UK would be very helpful to identify where there are strong and sustainable community finance providers, but also where there are gaps in provision. Again, that would be carrying on the work of the previous Government, which this Government, in their nine months, have carried on with clause 19 on diversity.

The final suggestion is about trying, inasmuch as Government can, and they have a role to play—the Minister mentioned the £38 million for the credit union sector given by the previous Government—to scale up the community finance sector. For example, there could be assistance with investment in IT infrastructure—not the FinTech stuff, just IT infrastructure for the community finance sector. Computers are still quite expensive, let alone programming and so on. If the Government could assist with that, with their push towards diversity, as exemplified in the clause, that would be very helpful.

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[Harriett Baldwin]

I fear that the harmony in the Committee might diminish with clause 20, which introduces schedule 4, making provisions to extend the senior managers and certification regime across the financial services industry to all authorised firms, replacing the discredited approved persons regime.

Before setting out the reasoning for that, it is worth outlining the history and development of the senior managers and certification regime. Currently, individuals who work in the financial services industry are regulated through the approved persons regime. Under that regime, authorised financial services firms may not employ a person to perform “controlled functions”, by which is meant functions specified by the Prudential Regulation Authority or the Financial Conduct Authority in their rules, unless that person has been approved by the appropriate regulator following an application by the firm concerned.

The financial crisis in 2007-08 and more recent events have highlighted concerns about the performance and behaviour of many of the individuals working in the financial services industry. It is clear that the approved persons regime has not been a successful way of regulating individuals working in the industry.

As the Parliamentary Commission on Banking Standards argued, the regime is too broad and insufficiently focused on senior management. In fact, it called it a “complex and confused mess”. Specifically, the commission criticised the approved persons regime for being mostly

“an initial gateway to taking up a post, rather than serving as a system through which the regulators can ensure the continuing exercise of individual responsibility at the most senior levels within banks”.

In addition, the commission noted that there was a lack of clarity around the responsibilities of individuals at the senior level, and that institutions did not take enough responsibility for the fitness and propriety of their own staff at more junior levels. It is clear, therefore, that the approved persons regime is not fit for purpose. It is being replaced from March by the senior manager and certification regime for firms in the banking sector.

This regime requires the regulatory pre-approval of individuals at the top of the firm, along with statements of responsibility setting out the areas of the firm’s business for which they are responsible. It also requires certification for other key individuals upon hiring, and thereafter annually.

This new regime represents a significant strengthening of personal accountability among the top senior management in firms. It will improve corporate governance, thereby advancing the safety and soundness of regulated firms. It also provides a more effective and proportionate means to raise the standards of conduct of key staff more broadly, supported by robust enforcement powers for the regulators.

It is important to recognise, however, that the activities of firms outside the banking sector can pose significant risks to market integrity or to good outcomes for consumers, and the Parliamentary Commission on Banking Standards expected that the deficiencies of the approved persons regime would not be confined to the banking sector.

Consequently, the Government have decided to extend the senior managers and certification regime to all authorised financial services firms in all sectors of the financial services industry. This action is also supported by the recommendations of the fair and effective markets review, which argued that misconduct in fixed-income currency and commodity markets had not been limited to banks. Indeed, the review noted that extending the senior managers and certification regime would emphasise the personal responsibility of individuals working in all firms to observe proper standards of market conduct.

The application of the senior managers and certification regime to all authorised financial services firms will bring in a stronger, more comprehensive regime across the financial services industry. It will enable the effective and efficient regulation of groups with a variety of financial services firms within them, and it will support a level playing field for competition. Therefore, extending the senior managers and certification regime to all authorised firms is covered by clause 20.

[Rob Marris]

Mr Brady, I seek your guidance. We on the Labour Benches have no problem with a schedule 4 being added to the Bill, which is what clause 20 would do—we are therefore content with clause 20. However, regarding the exact content of schedule 4 and the attendant linked debates, we wish to have an opportunity —in a moment—to put our views, after the stand part debate on clause 20, I would suggest.

[The Chair]

I can reassure you, Mr Marris, that there will be an opportunity subsequently to do exactly that.

[Rob Marris]

Thank you.

[The Chair]

Do you have any further comments?

[Rob Marris]

Not on clause 20 itself, no.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Schedule 4

Extension of relevant authorised persons regime to all authorised persons

[Rob Marris]

I beg to move amendment 33, in schedule 4, page 58, line 2, leave out paragraph 18.

[The Chair]

With this, it will be convenient to discuss the following:

That the schedule be the Fourth schedule to the Bill.

Clauses 21 to 23 stand part.

Amendment 34, in clause 24, page 19, leave out lines 29 to 34.

Amendment 31, in clause 24, page 19, line 34, at end insert “and insert new subsections (6), (7) and (8)—

‘(6) Where the authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.

(7) If the FCA satisfies itself that a person (P), who is a senior manager in relation to a relevant authorised person, is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).

(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) 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).””

Amendment 35, in clause 24, page 20, leave out lines 1 to 6.

Amendment 32, in clause 24, page 20, line 6, at end insert

“and insert new subsections (6), (7) and (8)—

‘(6) Where the PRA-authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.

(7) If the PRA satisfies itself that a person (P) who is a senior manager in relation to a relevant PRA-authorised person is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).

(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) 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).”

Clause 24 stand part.

[Rob Marris]

The lead amendment in this group, amendment 33, stands in my name and that of my hon. Friend the Member for Leeds East. Unless the Government accepts this amendment—I hope they do—we will seek your permission to divide the Committee, Mr Brady.

I thought that I would start with this group with what may be some of the less contentious material; the contentious material is likely to focus on schedule 4 and particularly on clause 24, the reverse burden of proof, and so on. Starting with the perhaps more straightforward stuff—that does not mean that we should all be friends and agree on this—it would help if the Minister could provide clarification regarding clause 21(3)(a), which states that the Treasury may

“confer functions on the FCA”

by regulations. What kind of “functions” do the Government have in mind that the Treasury might confer?

Much more important and perhaps more contentious is clause 21(3), which says:

“Regulations under subsection (2)”—

that is, made by the Treasury if it so chooses—

“may…modify, exclude or apply (with or without modifications) any primary or subordinate legislation (including any provision of, or made under, this Act).”

So clause 21(3)(b) gives the Treasury regulatory power to modify, exclude or apply primary legislation, as well as other powers. I am uneasy about that as a constitutional way forward. No doubt, the Minister will tell me that that has been done by Governments when I served as a Back Bencher, the previous coalition Government and so on, but I still think that, on a constitutional basis and particularly on something as important as the financial stability of our economy, an explanation from the Minister of why the Government are seeking powers under the Bill by regulation to be able to amend primary legislation would be helpful.

Overall, clause 21, “Rules about controlled functions: power to make transitional provision”, seems fairly sensible. Examples of controlled functions include being a director of a regulated firm, overseeing the firm’s systems and controls, being responsible for compliance with rules and so on. One would expect a Government to ensure that there were proper rules about such controlled functions. However, there is that concern about regulations making primary legislation.

Clause 22 deals with the administration of the senior managers regime, part of the senior managers and certification regime which, as hon. Members know, I prefer to call SMACR, or “smacker”, because it suggests what may on occasions metaphorically need doing to those involved in financial services who step out of line. The clause makes a number of changes to the senior managers regime, and perhaps, because these have been wisely grouped together, that will come out in the wash during the debate on reverse burden of proof.

Clause 23, “Rules of conduct”, is not so controversial, I suspect, but there is a question mark for me. I draw the Committee’s attention to subsection (3)(c) which omits section 64B(5) of the Financial Services and Markets Act 2000. I stand to be corrected, but as I understand it, section 64B(5) imposes a duty to report when a manager or senior person knows or suspects that someone in their firm or organisation has failed to comply with conduct rules, and clause 23 is about rules of conduct. If the rules of conduct clause in the Bill omits what appears to be a strong and central provision of previous legislation, that is prima facie extraordinary. If a duty to report actual or suspected wrongdoing is to be removed, I scratch my head. Perhaps the Minister can reassure me and the Committee either that I have misunderstood what the soon-to-be-omitted section 64B(5) does, or that, although that subsection does what I think it does, other provisions are being brought in that strengthen or are at least equivalent to that provision of the 2000 Act.

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On clause 23, which is about the rules of conduct for directors, I clarify that the Government legislated in the Financial Services (Banking Reform) Act 2013 to enable the regulators to apply the rules of conduct to all senior managers and all employees. That does not necessarily cover all non-executive directors, as some will not be senior managers and they will not normally be employees of the firm concerned. The clause addresses that issue by allowing the regulators to make rules of conduct for all directors.

[Rob Marris]

I wonder whether the Minister has a chance now or in a moment to deal with a concern I expressed about clause 23(3)(c), which is to omit section 64B(5) of the Financial Services and Markets Act 2000, about the duty to report wrongdoing and so on.

[Harriett Baldwin]

I fully intend to address that. The hon. Gentleman will have to bear with me, I am afraid. I am getting a little confused with all my different subsections, as he did in his remarks. I will, however, be addressing that.

On the hon. Gentleman’s earlier question about why we did not simply implement the reverse burden of proof, allow time for it to bed down and see how it worked, my colleague in the other place, Lord Bridges, has pointed out that evidence had already started to emerge that unhelpful effects were becoming apparent as firms prepared for its introduction. We were losing the essence of the purpose of the regime, which is to ensure that everyone knows and understands their responsibilities and what they are for. We therefore felt that there was no need to wait before making the changes.

Clause 23 also removes a provision that requires firms to report all known or suspected breaches of rules of conduct to the regulators. That requirement is unnecessary, because the regulators can use their existing powers to require firms to notify them of matters that they want to know about. The provision, which requires notification of all suspected, as well as confirmed, breaches of rules of conducts, is unnecessary because it goes much further than the principles we want to operate. It would be unnecessarily onerous for firms and regulators.

As the hon. Gentleman can imagine, such a provision could effectively force firms to work out a point at which the possible indications of a breach of rules of conduct might amount to a genuine suspicion. Firms would need systems to ensure that the information is captured and transmitted to the regulators, and having been notified of a suspicion, the regulators would have to decide whether to investigate and, if appropriate, consider what action to take. In many cases there would be nothing more than suspicion, so no action would be taken, but meanwhile the regulators would have to consider and prioritise all notifications received. That would be bound to limit their ability to respond appropriately in real cases, thereby imposing costs and burdens on the regulators and using up their time. Similarly, it can be argued that the suspicious activity reports used in the money laundering regime generate many false positives.

The Government thought hard about the provision and decided that removing the requirement would help to ensure that the regulatory system can work proportionately, without putting potentially costly burdens on firms that are disproportionate to any regulatory gain. Regulators will continue to be able to require firms to notify them of matters that they want to know about. The provisions introduced by the 2013 Act as section 64C of the 2000 Act remain. The requirement that firms must report disciplinary action that they take against employees will therefore remain in force. I hope that reassures the hon. Gentleman.

Amendments 31 and 32 would reinstate the reverse burden of proof for banking sector firms—the banks, building societies, credit unions and systemically important investment firms regulated by the PRA. Amendment 33 would allow the definition of the “relevant authorised persons” to remain in the Financial Services and Markets Act, which would be needed for amendments 31 and 32 to work as intended. Amendments 34 and 35 would apply the reverse burden of proof to all authorised persons across the entire industry. I will address the specific problems that each amendment would cause.

It is important that the Committee understands that the reverse burden of proof is simply not necessary to embed senior manager accountability in the senior managers and certification regime. The Parliamentary Commission on Banking Standards clearly established that the approved persons regime was wholly inadequate. We believe that the senior managers and certification regime clarifies the responsibilities of individual senior managers, which is something that any effective regulatory regime must deliver. Moreover, it will deter senior managers from taking a reckless or negligent approach to managing their responsibilities in the first place. I know that the whole Committee will agree with that. The duty of responsibility is a powerful incentive that encourages senior managers to take effective action to prevent such failings.

I have already set out how the new regime will deliver a step change in senior manager accountability. Regulators and firms will have the necessary clarity about who is responsible for what, and there will be no wriggling off the hook. Senior managers will need to take full ownership of their respective areas of responsibility. Each bank will have to submit to the regulators a responsibilities map, which will set out how responsibility for the business of the firm as a whole is allocated and minimise the risk of any responsibilities falling through the cracks between different senior managers.

The new regime places tough obligations on senior managers to act responsibly, and imposes stringent penalties if they fail to do so. For example, under the duty, a senior manager can be found guilty of misconduct by the regulator if a breach of regulation occurs in the area of the firm’s business for which they are responsible and they did not take reasonable steps to avoid the contravention. It does not matter whether they were aware of the regulatory breach. As in the example that the hon. Gentleman raised earlier, ignorance is not a defence. What matters is whether they took reasonable steps to prevent the breach. If they did not, they are guilty of misconduct. They will not be able to avoid liability simply because the email trail has gone cold.

Removing the reverse burden of proof does not change the penalties that can be applied. If found guilty of misconduct under the statutory duty of responsibility, a senior manager will face an unlimited fine or prohibition from working in the industry. As the chief executive officer of the Prudential Regulation Authority, Andrew Bailey, said, introducing the statutory duty of responsibility instead of the reverse burden of proof

“makes little difference to the substance to the new regime…This change is one of process”.

The Government are rolling out the senior managers regime to all authorised firms, including the fixed-income currency and commodities market. In the light of that extension of the regime, we must consider whether it is appropriate to apply the reverse burden of proof to every single firm in the financial services regulated sector, given how rigorous the regime is.

I sense you are getting slightly restless, Mr Brady, but I am nearing the end of my remarks. Amendments 34 and 35 would apply the reverse burden of proof to all authorised persons, the vast majority of which are small firms. It would be simply disproportionate to apply it to senior managers in all of those firms. I have spoken about the overly legalistic approach. We think it could lead to a perverse outcome, leaving senior managers in the largest firms less exposed to legal risk under the reverse burden of proof than those in small firms.

I have spoken at length about the clauses and set out why I strongly disagree with the Opposition’s amendments. I hope I have convinced everyone of the merits of my argument. I ask the Committee to oppose the amendments and accept the clauses.

Ordered, That the debate be now adjourned.—(Sarah Newton.)