8 Oct 2013 : Column 1

House of Lords

Tuesday, 8 October 2013.

2.30 pm

Prayers—read by the Lord Bishop of Oxford.

Introduction: Lord Horam

2.39 pm

John Rhodes Horam, Esquire, having been created Baron Horam, of Grimsargh in the County of Lancashire, was introduced and took the oath, supported by Lord Boswell of Aynho and Baroness Browning, and signed an undertaking to abide by the Code of Conduct.

Introduction: Baroness Grender

2.45 pm

Rosalind Mary Grender, MBE, having been created Baroness Grender, of Kingston upon Thames in the London Borough of Kingston upon Thames, was introduced and made the solemn affirmation, supported by Baroness Thomas of Winchester and Baroness Parminter, and signed an undertaking to abide by the Code of Conduct.

Lord Judge took the oath.

Message from the Queen

2.50 pm

The Lord Chamberlain (Earl Peel) (CB): My Lords, I have the honour to present to your Lordships a message from Her Majesty the Queen, signed by her own hand. The message is as follows:

“I thank you most sincerely for your loyal and dutiful address and congratulations on the occasion of the birth of my great grandson. The Duke of Edinburgh and I are greatly touched by the good wishes which you have expressed towards my family”.

Message from His Royal Highness the Duke of Cambridge

2.51 pm

The Lord Chamberlain (Earl Peel) (CB): My Lords, I have the honour to present to your Lordships a message from His Royal Highness the Duke of Cambridge, signed by his own hand. The message is as follows:

“The Duchess of Cambridge and I thank you most sincerely for your loyal congratulations on the occasion of the birth of our son. We are greatly touched by your good wishes”.

Death of a Member: Lord Hayhoe


2.52 pm

The Lord Speaker (Baroness D'Souza): My Lords, I regret to inform the House of the death of the noble Lord, Lord Hayhoe, on 7 September. On behalf of the House, I extend our condolences to the noble Lord’s family and friends.

Transport: Road Building


2.52 pm

Asked by Lord Berkeley

To ask Her Majesty’s Government what forecasts for road traffic they used in setting their current road building programme.

Lord Popat (Con): My Lords, in July this year the Government published Investing in Britain’s Future and Action for Roads, which set out a package of investment and reforms for the strategic road network. This work drew on the Department for Transport’s 2013 national traffic forecasts, published alongside, to inform strategy for the network. However, the identification and selection of individual highway schemes

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for the national programme is based on local forecasts and National Trip End Model data, which feed into scheme appraisals.

Lord Berkeley (Lab): I am grateful to the Minister for the reply, but is he aware—he probably is—that the development of accurate transport forecasts for traffic has not been achieved in the past 20 years? In fact, if 1990 forecasts had been met today, we would have 50% more traffic than we do. Therefore, what is the point of building more brand-new roads when existing ones are in such an awful state, when we could have more investment in buses, cycling and walking, and might even be able to fill in some of the potholes that cyclists regularly fall into?

Lord Popat: My Lords, the department produces forecasts on a regular basis. Modelling is rarely, if ever, perfect, as we are predicting the future. However, we are confident that the forecasts are broadly in line with the traffic pattern. We are investing in existing roads. It is vital that Britain has an infrastructure system fit for the global race, which will involve investing in new as well as existing roads, including filling in those potholes. The department has investigated whether traffic has reached its peak and has concluded that it has not: nor is it likely to in the near future. The forecast is for total road traffic to rise by about 43% over the next 30 years.

Lord Mawhinney (Con): My Lords, is it part of the active government policy on roads that motorists should wait for more than half an hour to cross the Black Cat roundabout where the A1 joins the A421? If it is not part of their active roads policy, when are the Government going to take some action to reduce that inordinate delay?

Lord Popat: My Lords, since coming into office in 2010 the Government have completed a number of major road schemes and brought forward 26 new major schemes, so we are taking all the action necessary to repair and maintain our existing roads as well as filling in those potholes mentioned earlier by the noble Lord.

Lord Bradshaw (LD): Although the point about potholes is academic, the structure of our highways network is deteriorating very rapidly. Would it not be better to concentrate our money on putting the existing roads in proper order and then dealing with some of the worst pinch points to which the previous speaker referred?

Lord Popat: My Lords, that is exactly what the department is doing. The Government have made £800 million available for local councils to fill potholes and maintain and repair local roads so that we can see the traffic flow and avoid the congestion that we normally see in the mornings.

Lord Davies of Oldham (Lab): My Lords, I welcome the noble Lord in his enhanced responsibility for transport. I hope that he enjoys Question Time as

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much as his predecessor the noble Earl, Lord Attlee, obviously did. However, perhaps I may emphasise that he has got off to a rather weak start, as the roads programme on which he has commented is slipping drastically. The completion dates of more than half the major schemes that the Government have announced since the general election have slipped by more than a year. Why is the money not being spent, as several noble Lords have already emphasised, on successful maintenance of our existing road network? It is quite clear that the roads are a danger to many users, particularly cyclists, and also to cars when they hit potholes. We need attention and resources given to road maintenance.

Lord Popat: My Lords, the Government are committing to the biggest programme of investment in roads since 1970. We will triple annual investment in major road schemes by 2020. Since coming into office we have completed eight major road schemes, brought forward 26 new major schemes to start during this Parliament and invested £300 million in 123 pinch-point projects on the national network. There is a lot happening and a lot of funding has been made available to make sure that our road infrastructure is well maintained.

Lord Glentoran (Con): My Lords, are the noble Lord and his department aware that the most expensive way of maintaining and repairing roads is to go round filling in potholes? That is well understood by most of the professionals in the industry and I hope that, one day, the department will catch on.

Lord Popat: I agree with the noble Lord that it is expensive to fill potholes. However, it is important that we do it.

Lord Sugar (Lab): My Lords, will the Minister advise whether there could be some common-sense co-ordination between the various utility companies—gas, water, electricity and telecoms—to ensure that when they dig up the road they all get in there and do what they have to do? I have constantly experienced the road being dug up, sealed off and then dug up again by a different utility company. Surely common sense should prevail.

Lord Popat: I agree with the noble Lord. It is a nuisance that roads are dug up quite often and there is a huge traffic hold-up. I will certainly take this matter to the department to see what further action we can take to make sure that we minimise the traffic congestion.



2.59 pm

Asked by Lord Dykes

To ask Her Majesty’s Government what assessment they have made of the prospects for a United Nations-led settlement in Syria supported by the European Union, the United States, Russia and China.

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The Senior Minister of State, Department for Communities and Local Government & Foreign and Commonwealth Office (Baroness Warsi) (Con): My Lords, in September, the UN Security Council unanimously adopted a resolution which endorsed the Geneva communiqué and called on all Syrian parties to engage seriously at the future Geneva II conference. We pushed for, and agreed with other permanent UN Security Council members to aim for, a mid-November start date for the Geneva II process. The UK will work tirelessly with its allies and the Syrian opposition to support the process and the intensive preparation that is being led by the UN special representative, Lakhdar Brahimi.

Lord Dykes (LD): Was my noble friend the Minister not pleased that, for the first time for a long time, the UN Security Council came together with western countries, supporting the suggestions made by other leading members of the UNSC, to reach a collective peaceful settlement promoting the idea of peace, as well as inspections, in the tragic Syrian conflict? With that background now, is she optimistic that that will be built on, avoiding the mistakes made by the UNSC elite in the past, particularly with one member doing excessive vetoes since 1967 about the Middle East? Can we make sure that there will be a genuine move to peace when Geneva II starts? Also, what is the likely date for that conference?

Baroness Warsi: I was, of course, pleased, as were the Government, to see progress on the first resolution that has been adopted on Syria in 17 months at the Security Council. Resolution 2118 requires a full implementation of the decision of the Organisation for the Prohibition of Chemical Weapons. It sets out that Syria’s chemical weapons must be effectively eliminated within the first half of 2014—but, of course, I agree with my noble friend that the political track will run alongside that. At this moment, the P5 has agreed that that meeting is likely to take place in mid-November.

The Lord Bishop of Oxford: It is well known that to have a peace process that works all the relevant parties must be gathered together, not just the moderates. Can the Minister assure us that, at Geneva II, the more extreme nations will be involved, including Iran, Saudi Arabia and so on, as well as the opposition groups, both internal and external? Will they all be there?

Baroness Warsi: The right reverend Prelate may be aware that the Geneva communiqué was for the first time adapted and supported by the UN Security Council as part of this resolution. That effectively means that the opposition and the regime have committed to being part of the Geneva II process. Which other states are part of that process depends very much on what they would be prepared to endorse, and whether they would be prepared to agree to the Geneva communiqué. At this stage, Iran has not done that.

Lord Wright of Richmond (CB): My Lords, can the Minister tell the House who the Government expect to be the single representative of the Syrian opposition at

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Geneva II, given the deep divide between the so-called Syrian national coalition and the increasing number of jihadist groups that are said to include at least 10,000 foreign fighters, including, sadly, some from this country?

Baroness Warsi: The noble Lord is right that the make-up of the opposition is incredibly complex. We have been working with the national coalition, which has now been recognised as the voice for the opposition by a large number of member states—most of our allies, including most of the Arab world and the Arab League. Therefore, it is the national coalition that we are working with and which we expect will represent the opposition at the Geneva II process.

Lord Reid of Cardowan (Lab): My Lords, in view of the developments since this House and the House of Commons last met, would the Minister reflect that perhaps the House of Commons and many in the House of Lords displayed a degree of wisdom that may have been greater than the Government thought at that time? In view of that, will the Minister assure us that there will be no preconditions from the British Government to any talks about a future settlement, particularly when we bear in mind that, however awful the devil we know in Syria, there are a number of devils around that may ultimately be even worse, both locally and of a strategic nature?

Baroness Warsi: The noble Lord raises an important point but I need to be clear on this issue. There are two parts to what has been discussed over recent months, on the political track. The Government have always been clear that the matter will be resolved politically, but the specific incident relating to chemical weapons and on which the will of Parliament was listened to was a separate situation. Noble Lords would accept and agree that the Assad regime’s now voluntary destruction of deadly weapons in the form of chemical weapons is an important step that has vindicated the threat of military action by the United States. We would not be in this position if the Assad regime did not anticipate that some military action would be taken.

Lord Alderdice (LD): My Lords, the position, as I understand it, of Her Majesty’s Government, the American Administration and our ally, Turkey, has been from the start that any settlement would involve the removal of Mr Assad as President. Given the UNSC decision, does the noble Baroness accept that if he proceeds to dismantle chemical weapons and thus obey the one institution that the UN Security Council has agreed, it may be difficult to sustain that position?

Baroness Warsi: The Geneva communiqué clearly says that there should be a transition Government with full executive powers, which, among other things, will reflect the will of the majority of people in Syria. It is not for us to set those preconditions but we cannot anticipate a situation in which Assad remaining would be conducive to a settlement that would be acceptable to the people of Syria.

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Lord Triesman (Lab): My Lords, I think probably all of us welcome the Answer that has been given and the progress that has been made. However, the House will need to understand the process to be followed at the United Nations Security Council rather more clearly. What instructions have been given to our ambassador at the United Nations, what milestones have been set and how will any progress, or indeed the lack of it, be reported to this House?

Baroness Warsi: Security Council Resolution 2118 sets out the timeframe within which the destruction of chemical weapons will take place. Indeed, teams are already on the ground in Damascus and a number of weapons, including armed warheads, have been destroyed, the detail of which I was reading only this morning, so the work has started. The noble Lord will be aware that there is a sense that if that timeframe is not followed, consequences could follow. I will, of course, keep the House updated on this matter, as I have done, and am more than happy to take questions or update the House as and when is necessary.

Baroness Uddin (Non-Afl): My Lords, while the international effort to attain chemical weapon eradication is on the way, is the noble Baroness satisfied with the development of humanitarian help provided to Syrian refugees? In particular, is she deeply concerned about the continuous reports of women being raped in some of the refugee camps? What is her analysis of that?

Baroness Warsi: My Lords, I am incredibly proud of this Government’s record of pledging and providing humanitarian support in this crisis. We are the second largest donor and are now taking our donations up to half a billion pounds. Not only have we given ourselves, we have encouraged the rest of the world to give. It is because of the work of this Government, led by my right honourable friend the International Development Secretary, that a further £1 billion was pledged during the United Nations General Assembly meeting. In relation to specific work around women, the noble Baroness will be aware of the very personal initiative that my right honourable friend the Foreign Secretary has driven on preventing sexual violence in conflict. It is exactly in situations such as this where that kind of work is so essential to send out a very clear message that there will be no impunity for these horrendous crimes.



3.08 pm

Asked by Lord Lee of Trafford

To ask Her Majesty’s Government what is their assessment of the importance of tourism to the United Kingdom economy.

Lord Lee of Trafford (LD): My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In doing so, I declare an interest as chairman of the Association of Leading Visitor Attractions.

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Lord Gardiner of Kimble (Con): My Lords, tourism makes a major contribution to the economy in all parts of the United Kingdom. In 2011, tourism directly contributed £53 billion to the economy and employed 2.7 million people in full or part-time jobs. The Government place great importance on this industry as part of their strategy for growth. That is why we are investing more than £130 million, matched between the public and private sectors, in the GREAT and other marketing campaigns.

Lord Lee of Trafford: My Lords, the reality is that successive Governments have treated tourism as a Cinderella industry. If you look at the rates of air passenger duty and VAT, we are internationally uncompetitive. On visa requirements, France gets six times the number of Chinese visitors that we do. Tourism was not mentioned in the manifestos of any of the parties at the previous election. As a result of the reshuffle, we are now on our ninth tourism Minister in 10 years. Is my noble friend aware that 33 tourism bodies have today come together to form the campaign for tourism to argue that tourism should be much higher up the political agenda, and that they have written to the party leaders and are determined that tourism will be supported to enable it to fulfil its true potential?

Lord Gardiner of Kimble: My Lords, I am, indeed, aware of the campaign and its letters to the party leaders and other interested groups. I have read its letter, which a wide range of organisations has signed. I am sure I shall have nothing to do with the writing of any of the party manifestos, but I encourage the writers and all of us to think very strongly about that important sector, tourism.

Baroness Billingham (Lab): My Lords, I am sure that Members are aware that we have at our disposal, at virtually no cost, an opportunity to increase tourism by at least 10% by introducing a daylight saving scheme in this country. We have tried this—noble Lords groan, but it is even more important now with our economy as it is and given the fact that we have an Olympic legacy, on which it was said that we would produce a new sporting generation. Daylight saving would enable young and older people to partake in sport outside for much longer, it would be much better for all of us and there would be a saving in energy. It is something that I hope the Minister will take back and use his persuasive powers to have reintroduced.

Lord Gardiner of Kimble: I thank the noble Baroness for her observations on daylight saving, which has come before your Lordships before. I think it is fair to say that everyone has sought a consensus across all parts of the United Kingdom. This has always been a problem, particularly for our friends in the northern part of the kingdom. That has been the worry and it is traditionally why we have felt that there should be a consensus. I am also particularly struck by the successes of sports tourism, and of course we very much look forward to the Tour de France in Yorkshire next year.

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Lord Lamont of Lerwick (Con): Will the Minister agree that London is an extremely important part of the tourism industry and will he therefore pay attention to the point raised earlier by the noble Lord, Lord Sugar, about the appalling level of roadworks in London, which makes it extremely difficult for tourists to get around, increases pollution and is extremely unsightly? Will he consult the Mayor of London about doing something to ease this problem? We were promised before the Olympics that once the Olympics were out of the way everything would be much better. Will he please talk to the mayor about this?

Lord Gardiner of Kimble: My Lords, I would, of course, be delighted to speak to colleagues. We all suffer from the inconveniences of roadworks. Obviously, they are intended to improve the passage of us all once they have been achieved, but I understand entirely the point that my noble friend has made.

Lord Berkeley of Knighton (CB): My Lords, I am sure that the Minister will agree with me that the arts play an incredibly important role in tourism, and the arts are very much under threat at the moment, as he knows. However, given that the BBC, in the form of the promenade concerts, is a boilerplate for tourism in this country, perhaps this is a good moment to welcome the return to Reithian ethics—education, entertainment and information—as stated by the new director-general this morning, with more emphasis on the arts in future. Will he welcome that?

Lord Gardiner of Kimble: My Lords, I certainly welcome what the noble Lord has said about the importance of the arts, not only to the domestic market but to many visitors from abroad. Museums and galleries are already doing a lot of work, as part of their China Ready programme, preparing for speakers of Mandarin and making sure that guides are in Chinese. So there is a lot going on in the arts sector.

Lord McConnell of Glenscorrodale (Lab): In relation to tourism and sports, I am sure that the Government will be aware of the fact that tomorrow at Buckingham Palace the Queen’s baton relay for the Glasgow 2014 Commonwealth Games begins its trail round all the countries of the Commonwealth and back to Glasgow next summer. Will the Minister not only congratulate those involved in reaching this important juncture but commit the UK Government to supporting the Scottish Government and Glasgow City Council in making the most of that event next summer for tourism for Scotland and the whole of the UK?

Lord Gardiner of Kimble: My Lords, I could not endorse more strongly what the noble Lord has said. Not only will Buckingham Palace be a great venue for that but the venue for football yesterday shows that royal palaces get involved too, which is excellent. I think that all your Lordships would want to strongly support the success of the Commonwealth Games. They speak not only for the Commonwealth but for the sporting traditions of all those countries. I certainly wish the Games extremely well.

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Lord Addington (LD): My Lords, does my noble friend not agree that with events such as the Rugby League World Cup, which is occurring this month, we have a golden opportunity to bring all these supporting bodies together in a coherent structure? If we cannot learn from the Olympics how to get the best out of something, we really are in a very sad state.

Lord Gardiner of Kimble: My noble friend again is correct. Tourism and sport help so much with dialogue between nations. Not only is that the case with rugby league but in 2015 VisitEngland will be actively supporting the organisers of the Rugby World Cup. Across the piece, many sports are very important to tourism.

Syria: Humanitarian Assistance


3.16 pm

Asked by Lord Roberts of Llandudno

To ask Her Majesty’s Government what steps they propose to take with fellow European Union member states to establish evacuation, reconnection and resettlement programmes, in the light of the humanitarian situation in Syria.

The Senior Minister of State, Department for Communities and Local Government & Foreign and Commonwealth Office (Baroness Warsi) (Con): My Lords, the UK is leading international efforts to alleviate human suffering in Syria. Our total for humanitarian funding for Syria is now £0.5 billion—the largest total sum that the UK has ever committed to a single crisis. We have no plans to resettle or provide temporary protections to Syrians within the UK; however, we support the EU plan to establish a regional development and protection programme that ensures that support is given to the neighbouring countries that need additional help.

Lord Roberts of Llandudno (LD): I am sure that I speak on behalf of the whole House in welcoming the support given to those who have suffered so much—2.1 million of them refugees, including 1 million children—in Syria. What is happening with those held up at Calais who until now have been refused admission to the United Kingdom? As this problem cannot be dealt with on an individual national basis, will the Minister make sure that we have the utmost co-operation with others in the European Union in tackling these sorts of crises, possibly even a continuous element in preparation for crises that will occur, so that the European nations can act together as one?

Baroness Warsi: My noble friend is right; the Syrian people have suffered terribly in the current crisis and millions have been displaced, both internally and externally. It is for that reason that the United Kingdom takes its convention obligations to refugees and asylum seekers incredibly seriously. But my noble friend will be aware that France is also obliged under the same convention obligations. France is a safe country and we would expect asylum seekers to make their applications there.

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Baroness Symons of Vernham Dean (Lab): My Lords, can the noble Baroness tell the House what aid is being given directly to Jordan, which is a country with little energy, scarce water and few natural resources, but which has extended extraordinary humanitarian aid to those fleeing from the violence in Syria? Jordan has been a good friend to this country in many ways and many of us would hope that Her Majesty’s Government are supporting the efforts of the Jordanian Government to give the support that is so needed.

Baroness Warsi: We take our obligations to all the regional countries incredibly seriously and, indeed, as far as Jordan is concerned, the latest figure is that we have provided £87 million in aid. Jordan has about 500,000 refugees at the moment—about 25% of the people who have been externally displaced. That support is in the form of humanitarian assistance and support, but also support to the Jordanians to cope with the wider infrastructure challenges that are being posed by such a large influx of people arriving.

Lord Jopling (Con): My Lords, I endorse the question just asked by the noble Baroness, Lady Symons; will the Government give particular attention to the plight of Jordan? It has already absorbed 550,000 refugees and is preparing for a future influx. While our Government have been particularly generous towards Jordan, will they spend some time stirring up some of our European colleagues, such as France, who have been much, much less generous?

Baroness Warsi: I completely take the point that my noble friend makes but we understand that the biggest percentage of refugees are currently in Lebanon. It was for that reason that at the UN General Assembly meeting, the P5 Foreign Ministers created a new international support group for Lebanon. It may be that we will continue to monitor the refugee situation and to respond accordingly. However, I assure noble Lords that we are incredibly aware and responsive to the pressures that have been placed on the region because of this crisis.

Lord Anderson of Swansea (Lab): On UNHCR figures, there is an alarming underfunding crisis. For example, 53% of the US$1 billion in the 2013 regional response plan for Syrian refugees remains unfunded and 72% of the US$249 million in the 2013 IDP response budget remains underfunded. Clearly, the British Government have responded well. Other countries have not. What are we doing to urge the laggards to respond adequately to the situation, including naming and shaming?

Baroness Warsi: The noble Lord makes an incredibly important point. For that reason, not only have we given ourselves but we have encouraged other countries to give and to pledge, and then to make good their pledges. That is why during the G20 at St Petersburg, my right honourable friend the Prime Minister started this campaign. It was led across the world by our embassies. At the UN General Assembly in New York, a further US$1 billion was pledged. However, the

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appeal is still short. It is an ever increasing appeal because the situation continues to get worse. I assure noble Lords that we are doing our fair share in giving and that we are punching above our weight in asking others to give.

Baroness Williams of Crosby (LD): My Lords, perhaps I may say how grateful many of us are to the generosity of the Government and their far-sightedness on the Syrian issue. I have a much more immediate question. As the discussion and the investigation of chemical weapons continues in Syria, the inspectors are moving into more and more dangerous territory, which is controlled by the opposition in its many forms. Will the Minister tell us whether there is any discussion between Her Majesty’s Government and this country’s allies about ways to provide protection, which means essentially using highly experienced military people, for the inspectors as they proceed with their work? We cannot ask them to lay down their lives because of what we are asking them to do.

Baroness Warsi: The inspectors are working in incredibly dangerous circumstances. My noble friend raises an important point. The United Nations Security Council resolution has required Syria to co-operate. Of course, there are situations where opposition forces hold that territory and, therefore, inspectors potentially could be working in areas which are not controlled by the regime. This is a long process which will take possibly until the middle of next year to complete. It has started and we will keep it under review. The fact that all parties to the negotiations are saying that they will co-operate with this sets a good first standard.

Care Bill

Order of Consideration Motion

3.22 pm

Moved by Lord Newby

That the amendments for the Report stage be marshalled and considered in the following order:

Clauses 1 to 39, Schedule 1, Clauses 40 to 43, Schedule 2, Clauses 44 to 70, Schedule 3, Clause 71, Schedule 4, Clauses 72 to 86, Schedule 5, Clauses 87 to 94, Schedule 6, Clauses 95 to 99, Schedule 7, Clauses 100 to 103, Schedule 8, Clauses 104 to 116.

Motion agreed.

Financial Services (Banking Reform) Bill

Committee (1st Day)

3.23 pm

Clauses 1 to 3 agreed.

Clause 4: Ring-fencing of certain activities

Amendment 1

Moved by Lord Blackwell

1: Clause 4, page 8, line 47, at end insert—

“( ) In determining the “specified extent” in subsection (5)(d), the regulator shall have due regard to proportionality where the ring-fenced activities constitute a large majority of the group’s overall activities.”

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Lord Blackwell (Con): My Lords, since I was unable to speak at Second Reading, I should take this opportunity to declare my interests at the start of Committee stage. I am a non-executive director of Lloyds Banking Group and chairman of Scottish Widows group.

Baroness Anelay of St Johns (Con): My Lords, I would be most grateful if colleagues could leave the Chamber quietly, particularly because my noble friend is taking the proper course of declaring an interest which must be correctly entered in Hansard.

Lord Blackwell: My Lords, before moving on to the amendment, and as I did not speak at Second Reading, I want to make it clear that I strongly support the principles of the Bill, and the principle of ring fencing in particular. My amendment is to deal with some of the practical issues of making that work in the financial institutions. The amendment deals with the situation where a financial services group that is primarily operating ring-fenced activities retains a small set of activities that may fall outside the ring-fence.

The consequence of the legislation as it stands is that where a group is primarily operating ring-fenced activities but retains some non-ring-fenced activities which may be excluded activities, it would be required to have a separate board for the ring-fenced subsidiary and a separate set of directors operating in it—that is, separate from the group board.

I can understand why having separate boards for a ring-fenced subsidiary may be seen as desirable where the group contains a large non-ring-fenced activity in investment banking or wholesale market activities in order to police the separation between the ring-fenced and the non-ring-fenced activities. The provisions of ring-fencing under the Bill should of course deal with that situation by specifying the amount of capital and requirements for security in the ring-fenced activity and its resolution, preventing the flow of dividends controlling the financing relationships between the ring-fenced activity in the group, but I can also understand that having an independent board for the ring-fenced activity where there are other significant activities in the group provides an added level of security to deal with potential conflicts of interest.

However, where the non-ring-fenced activities are of a very minor nature compared with those within the ring-fenced bank, it could potentially lead to a situation where the group board with responsibility to shareholders and to the public has virtually no control over the activities of the ring-fenced activity, despite the fact that the vast majority of the assets and capital are within the ring-fenced subsidiary. That would be a nonsensical situation. It would be poor governance and it would be difficult to operate such a group board in that situation.

The type of activities that I am talking about are those where the ring-fenced bank may feel that to serve its customers effectively it needs to retain some element of activities outside the ring-fence not engaging those as a principal part of its business but as part of achieving a proper level of service to its customers.

The amendment would explore that situation where the non-ring-fenced activities are a fairly minor part of the group. There are two ways in which this could

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be resolved in a common-sense way. The first way would be for the regulator to exercise discretion under new Section 142D to the FSMA to allow a small volume of otherwise excluded activities to be carried out within the ring-fence so long as the regulator is satisfied that including those activities within the ring-fenced subsidiary did not put at risk the solvency or ability to resolve the ring-fenced activities if there were situations that used the capital applied to the non-ring- fenced activities. So one solution would be to allow the ring-fenced bank to extend its activities. Of course, the regulator would also need to be assured in that situation that allowing the ring-fenced bank to operate those activities would not distort competition with non-ring-fenced banks operating in those markets without the ability to operate within the ring-fence.

The second way of resolving this, if the regulator does not feel that it can include those excluded activities within the ring-fenced subsidiary, would be for the regulator to use its discretion under new Section 142H(5)(d) to waive the requirement for separate board membership of the group and its subsidiary, again where the regulator is convinced that in so doing it does not put at risk the ability to resolve the ring-fenced bank where there was a threat to its solvency.

The amendment is probing in nature. The legislation as I have described it allows the regulator to exercise discretion, but I invite the Minister to provide clarity that where the legislation says that the separation of the boards should be “to a specified extent”, the regulator would have the freedom and indeed the expectation that it should exercise that discretion with due respect for the proportionality of the activities within the ring-fence and any activities that there may be within the group outside the ring-fence. That seems to me to be a common-sense solution. I beg to move.

3.30 pm

Viscount Trenchard (Con): My Lords, with the leave of the Committee, I, too, would like to participate in these proceedings although, like my noble friend, I was prevented from participating in the Second Reading debate. I strongly support the amendment put forward by my noble friend for the reasons that he has explained very well. I do not think that I can improve on his excellent explanation, but your Lordships should consider that governance would not be improved if there is a situation where the holding company has a completely different membership from the boards of the ring-fenced subsidiaries, and that applies most strongly in the case where the excluded activities comprise only a small part of the activities of the group as a whole. But even in the case where a relatively greater amount of excluded activities are carried out within the group, if the board of the holding company with responsibility to shareholders comprises completely different people from the board of the principal operating subsidiaries, does that provide for effective governance? I therefore would like to hear from the Minister something more about what “to a specified extent” means in new Section 142H(5)(d).

The Commercial Secretary to the Treasury (Lord Deighton) (Con): My Lords, I will consider both Amendments 1 and 2, and I will talk first about Amendment 1, which has been proposed by my noble friend Lord

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Blackwell. I have much sympathy with the intention behind this amendment and I hope that I can provide some of the comfort that my noble friend seeks. Independent governance is of course key to the integrity of the ring fence to ensure that ring-fenced banks do not simply operate in the interests of their group’s investment bank, in this example, or indeed other parts of the bank, but it is important that any governance requirements are proportionate to the threat to the ring-fence. Where a ring-fenced bank makes up the great majority of a group’s business and the investment bank is therefore small, so the risk of the ring-fenced bank being dominated by the interests of the investment bank is also small.

The Independent Commission on Banking recommended that where the vast majority of a group’s assets were in the ring-fenced bank, requirements for independent governance should be relaxed. The Government accepted that recommendation, and in our June 2012 White Paper we supported,

“flexibility in governance arrangements where a ring-fenced bank represents the overwhelming majority of a group’s business”.

Under the Bill, the precise details of ring-fenced bank governance arrangements, along with other ring-fencing rules, are for the regulator to determine. The Bill sets the objectives that rules must achieve; the regulator then decides what exact structures or restrictions are needed to achieve those objectives. This is appropriate because of the highly technical nature of the issue, and in order to allow requirements to keep pace with developments in a fast-moving market. Rule-making will, of course, require the regulator to exercise its judgment, and proportionality will be central to how it does so. In particular, the regulator will be obliged to consider the costs and benefits of any rules it proposes to make, including ring-fencing rules.

In the case of ring-fencing and governance rules, the Bill also specifically gives the regulator flexibility to consider the proportionality of different requirements. The Bill requires the regulator to ensure “as far as reasonably practicable” that a ring-fenced bank is able to take decisions independently of the rest of its group.

The formulation “as far as reasonably practicable” specifically anticipates circumstances in which certain governance requirements might be impractical or have costs that are disproportionate to their benefits. The case where a ring-fenced bank constitutes the overwhelming majority of a group’s business may be one such circumstance. I hope the noble Lord can therefore feel reassured that the intention of his amendment is already reflected in the Bill. I therefore call upon the noble Lord to withdraw his amendment.

Government Amendment 2 corrects a minor and technical point in connection with new Section 142H, which imposes an obligation on the appropriate regulator to make certain rules requiring that a ring-fenced bank be independent of other members of its group. The clause as currently drafted defines the appropriate regulator only in relation to ring-fenced bodies. However, as new Section 142H also imposes an obligation on the appropriate regulator to make rules applying to authorised persons who are members of a ring-fenced body’s group, but are not themselves ring-fenced bodies, the appropriate regulator needs to be defined in relation

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to all authorised persons, not just ring-fenced bodies. This is corrected by this amendment, and I commend it to the House.

Lord Eatwell (Lab): My Lords, I wonder whether, in his assessment of the amendment of the noble Lord, Lord Blackwell, the Minister might take into account the fact that it was exactly this sort of procedure that led to the steady erosion of Glass-Steagall over the years. There was a tendency continuously to say, “Well, if we have a particular subsidiary, then perhaps we don’t need to have the separation in this smaller subsidiary”. These steady erosions built up over the years, until by the early part of this century, before its repeal, the effectiveness of Glass-Steagall had been completely eroded. Perhaps the Government should take that into account. There is also the point that, if the investment banking services required by a ring-fenced bank are relatively small, they could, of course, always be purchased from another provider.

Finally, the Minister mentioned that the precise definition of the rules of extent and so on will be defined by the regulators and in secondary legislation. I wonder whether it would be appropriate at this moment to take into account the latest report of the Delegated Powers and Regulatory Reform Committee, which has expressed considerable concern about the scrutiny of secondary legislation that will follow from new Sections 142A, 142B and so forth as we are discussing in this particular context. Are the Government likely to accept the enhanced scrutiny proposed by that committee with respect to these particular sections?

Lord Blackwell: I am grateful for my noble friend’s comments on Amendment 1 and for his explanation that the flexibility allowed for in this Bill will be flexibility that the regulator will be expected to interpret. I note the comments of the noble Lord, Lord Eatwell, but clearly the regulator’s role will be to ensure that creep does not occur on the way and that the protection of the ring-fenced bank is the requirement as set out in this legislation. Therefore, with those assurances from my noble friend, I am pleased to withdraw the amendment.

Lord Deighton: With respect to the specific question, we have not had the chance to review the delegated powers yet, but of course we will in formulating where we go from here.

Amendment 1 withdrawn.

Amendment 2

Moved by Lord Deighton

2: Clause 4, page 9, leave out lines 7 to 9 and insert—

“(a) in relation to a PRA-authorised person, the PRA,

(b) in relation to any other authorised person, the FCA.”

Amendment 2 agreed.

Amendment 3

Moved by Lord Turnbull

3: Clause 4, page 9, leave out lines 26 to 39 and insert—


142J Reviews of ring-fencing

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(1) The Treasury must make arrangements for the carrying out of reviews of the effects of the operation of the provision made by or under this Part in relation to ring-fenced bodies, including ring-fencing rules made by the PRA and the FCA and any rules made by the PRA and the FCA under section 192JA (rules applying to parent undertakings of ring-fenced bodies).

(2) The first review must be completed before the end of the period of 4 years beginning with the date on which section 4 of the Financial Services (Banking Reform) Act 2013, so far as it inserts this section, comes into force.

(3) Subsequent reviews must be completed before the end of the period of 5 years beginning with the date on which the previous review was completed.

(4) Not less than 9 months, nor more than 12 months, before the date on which a review is due to be completed, the PRA and the FCA must publish a joint assessment of the impact of the operation of their ring-fencing rules.

(5) For the purposes of this section, a review is completed when the report of it is published.

142JA Persons by whom reviews are to be conducted

(1) The Treasury shall appoint not fewer than 5 persons to conduct a review of whom one is to chair it.

(2) A person may not be appointed to chair a review unless the chairman of the Treasury Committee of the House of Commons has notified the Treasury that, in the chairman’s opinion, the person is likely to act independently of the Treasury, the PRA and the FCA in carrying out the review.

(3) The persons appointed to conduct a review must include at least one person with substantial experience in central banking or financial regulation at a senior level.

(4) The reference in subsection (2) to the Treasury Committee of the House of Commons—

(a) if the name of that Committee is changed, is to be treated as a reference to that Committee by its new name, and

(b) if the functions of that Committee (or substantially corresponding functions) become functions of a different Committee of the House of Commons, is to be treated as a reference to the Committee by which the functions are exercisable;

and any question arising under paragraph (a) or (b) is to be and any question arising under paragraph (a) or (b) is to be determined by the Speaker of the House of Commons.

142JB Reports of review

(1) The persons appointed to conduct a review must give the Treasury a report of the review.

(2) The report must include an assessment of the extent to which the provision made by or under this Part in relation to ring-fenced bodies, including ring-fencing rules made by the PRA and by the FCA, are facilitating the advancement by the PRA of the objective in section 2B(3)(c) and by the FCA of the continuity objective.

(3) If the report is made before section 4 of the Financial Services (Banking Reform) Act 2013, so far as it inserts section 142JD, has come into force it must also include a recommendation as to whether or not section 4 of that Act should be brought into force to that extent.

(4) The report must include—

(a) recommendations to the Treasury as to the provision that should be included in orders and regulations under this Part, and

(b) recommendations to the PRA and FCA about the provision that should be included in ring-fencing rules.

(5) The Treasury must lay a copy of the report before Parliament and publish it in such manner as it thinks fit.”

Lord Turnbull (CB): I shall speak also to Amendments 10, 14 and 116 in the group. I also express my regret that I was unable to take part in

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debate on Second Reading. All these amendments relate to the so-called first reserve power, under which a ring-fenced bank group which fails to respect the principles of ring-fencing can be required to divest itself of the non-ring-fenced assets.

First, I must congratulate the Minister on surviving the reshuffle, despite the fact that his tenure is rapidly approaching the average for a junior Minister in the Treasury. More importantly, I must record my congratulations to the noble Baroness, Lady Kramer, on her promotion to Minister of State. She has been an excellent colleague to all of us on the Parliamentary Commission on Banking Standards; she will be sorely missed in our deliberations.

Let me say a few words of introduction. It was always inherent in the timetable of the parliamentary standards work and the timetable of the Bill that many of the clauses to implement our recommendations would need to be introduced in the Lords after completion of the Commons work, but we have certainly ended up with more than we bargained for, with total amendments running at 116 pages and government amendments accounting for 95 pages of that: more than three times the length of the original Bill. That tells us something about the process of legislation. We are dealing with amendments to amendments to amendments which are in turn amending statutes that have already been amended more than once.

The Government’s response to the parliamentary commission’s report stated:

“We today set out plans to implement the major recommendations of Changing banking for good”.

The reality, however, is somewhat different. There are recommendations that HMG have faithfully embraced and provided proposals to implement them. There are also recommendations where the Government say that they accept them but the provisions in the Bill dilute them to the point where they may be ineffective or where they say that legislation is not required: I am sure that we will hear that plea quite often. There is also a long list of recommendations which the Government have rejected or simply ignored: recommendations on leverage, proprietary trading, special measures, a new regulatory decisions committee for banking, the strategic objective of the FCA, and so on. Of course, in Committee and at Report, I and my colleagues on the parliamentary commission will seek to work constructively with the Government to bring us closer to our recommendations so that we succeed in achieving the purpose of the title of the report, which was Changing Banking for Good.

We are locked into this unsatisfactory legislative process, and we will therefore need a degree of flexibility. In debate on a previous financial services Bill, the noble Lord, Lord Eatwell, sought and secured some relaxation of the constraints on speaking at Report. I would certainly support him if he seeks similar dispensation this time.

I turn specifically to ring-fencing, which is the subject of the amendments in this group and the background to it. There was a vigorous debate within the commission on whether to endorse the ring-fencing plan of the independent commission, the Vickers commission. By the time we started work, the Government

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had effectively told us that they were minded to accept it. Alternatively, should we continue to press the case for full separation of investment banking activities from commercial and retail banking, in effect adopting a UK version of Glass-Steagall, which the US had operated for many years but which was eroded and finally abandoned? The arguments for this were, first, that investment banking activities are inherently riskier and so imperilled the continuity of regular commercial banking and, secondly, that there was cultural contamination in that there were attitudes to risk and remuneration which were alien to good customer-focused banking.

3.45 pm

The arguments put against this were that there was no clear mapping of the banks that failed against the divide proposed. Some universal banks, such as HSBC and JP Morgan, survived the financial crash better than specialist investment banks, such as Lehmans, Bear Stearns and Merrill Lynch, while some of the most dramatic failures in the UK—HBOS and Northern Rock—conducted very little investment banking. Their failure was attributable simply to bad lending, particularly in retail and commercial property. We also saw signs of poor behaviour and culture across the whole banking spectrum and it was argued that rather than being a source of risk, an investment bank could also be a source of reinforcement.

In the end, we largely endorsed the ICB proposal but felt that if we adopted the ring-fencing regime, we needed to protect it. This became known colloquially as electrification and was rooted in a belief that banks are limitlessly ingenious and remorseless lobbyists, so some safeguards should be put in place. We agreed to this subject to five conditions. First, the ring-fenced bank should have a substantial degree of independence from the group, subject to the caveats raised today by the noble Lord, Lord Blackwell. Secondly, the directors of the ring-fenced bank should have an additional duty to observe the principles of ring-fencing and preserve the stability of that bank. Thirdly, we sought to reduce cultural contamination by tightening up on banking remuneration, with more remuneration being deferred and for longer and the possibility that previously paid benefits could be clawed back—and, in the event of failure and state rescue, reclaimed. Fourthly, there should be a power to require an individual bank that was abusing the ring-fence regime to dispose of its non-ring-fenced assets. Finally, after a review the Government could decide to change the scheme and require full separation across the whole sector.

In the proposals before us, I would say that we have secured about two-thirds or 70% of the conditions that the commission was looking for. The Bill provides a first reserve power to deal with individual banks and provides for the desired governance of the ring-fenced bank. The Government accept the principles on remuneration but are still arguing about whether those should have statutory force. After what I would describe as a stumble in the Commons, the Government have also come round to introducing a workable process for dealing with individual banks which are misbehaving. The scheme as originally proposed in the

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Commons might be called “Five strikes and you might be out in six years’ time”. That new amendment is Amendment 6, which we naturally welcome, and there is also agreement on the kind of behaviours that should trigger separation under new Section 142K. So where do the issues remain?

It is agreed that there should be a periodic review after four or five years; there is an opposition amendment suggesting a shorter period. This scheme is highly innovative and very important. We are ahead of a similar scheme that gets to the same place in a slightly different way and goes under the name of the Liikanenproposals, so it is absolutely right that provision is made to review it.

In the view of the commission, though, the review should be conducted not by the PRA alone but independently, as in proposed new Section 142JA, and it should be required to report on its recommendations, as in proposed new Section 142JB. We have also suggested that where a bank is issued with a preliminary notice, there should be a further independent review of its relations with the regulator. This is to create a safeguard against the regulator getting into a relationship where it is picking on a particular bank. That is in Amendment 10.

In the scheme proposed by the commission, these sanctions could be enforced only after a general review had taken place, but in the Government’s scheme they could be undertaken at any time. So there is quite a lot at issue to resolve between the Government, the Opposition and the survivors of the commission, but I believe that we can achieve reconciliation before we get to Report. The final question, about the differences on the second reserve powers, will come later in the afternoon as it is further down the Order Paper.

Amendment 4 (to Amendment 3)

Moved by Lord Eatwell

4: Clause 4, line 11, leave out first “4” and insert “2”

Lord Eatwell (Lab): My Lords, I am in total agreement with what the noble Lord, Lord Turnbull, has said about the importance of the reviews of this process. We have to realise that we really are breaking new ground here. In a way, this is a leap in the dark and we have no idea whether it will work. Obviously a lot of effort has gone into trying to ensure that it will work, but it is such a novel innovation that we really cannot be sure whether it will, or indeed whether it will have a whole series of unintended consequences.

Accordingly, I feel that it is very important that the process be kept under virtually continuous review. The amendment in the name of myself and my noble friend Lord Tunnicliffe seeks to ensure that the first review and subsequent reviews take place within relatively short time periods of up to two years. The reason for that is that it is only five years ago, almost to the day, that Lehman Brothers collapsed, and let us think what has happened since then. If we were to retain the four-year limit, that would cover almost that whole period, with all the remarkable devastating changes that have occurred.

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I agree with the noble Lord, Lord Turnbull, in his proposed new Section 142JA, that such a virtually standing group should act as an independent arbiter and assessor of these matters. It certainly should not be, as in the Government’s proposal, the PRA inspecting itself. That does not seem to be a very satisfactory structure at all. It is not appropriate in terms of giving confidence in the reviews, and it is not fair to the PRA. The PRA should be able to stand up and do its job, and then accept that it will then be scrutinised by the sort of independent group proposed by the noble Lord, Lord Turnbull. My amendment would simply ensure that that group had a virtually standing role in assessing these major changes to ensure that, once we have taken this leap in the dark, we land on firm ground. On Amendment 5, I shall simply reiterate the arguments that I have just made. I beg to move.

Lord Blackwell: My Lords, I must express some reservations about the arguments put forward by the noble Lord, Lord Turnbull. It is not that I do not understand the significance of having continuous and effective review of these ring-fencing procedures, but it seems to me that we have set up, with a lot of time in this House and the other place, a regulator that has learnt in that legislation and its constitution and objectives many of the lessons of the past, and we have entrusted that regulator with maintaining the stability of the financial sector and enforcing this legislation, if the Bill is passed. I think there is a danger in seeking to replace the regulation of an industry by an independent regulator with what might be in danger of turning into regulation by parliamentary committee. Parliamentary committees have many virtues and values, but they cannot engage dispassionately in the same evaluation of detailed analysis and commercial information that a regulator can, and they are more likely to be swayed by current opinions of the day. I pay tribute to the work of the commission on which the noble Lord, Lord Turnbull, and other noble Lords sat, which did an excellent job. I worry about the possibility of moving away from regulation by independent regulators, which are deliberately made independent of the Executive, towards regulation by parliamentary committees.

Lord Turnbull:The noble Lord, Lord Blackwell, referred to the fact that this might become a parliamentary committee. I think it is very clear that this would not be a parliamentary committee. The person who chairs it should,

“act independently of the Treasury, the PRA and the FCA”.

It would be much more like the Vickers commission.

Lord Blackwell: I thank the noble Lord for that clarification. I was responding to the fact that the amendment suggests that the chair should be approved by the chairman of the Treasury Select Committee. That would certainly alleviate some of my concerns. Nevertheless, the main point is that if we have an independent regulator, we should trust that regulator to do the job we have asked it to do. That does not prevent Parliament, or any Select Committee of Parliament, conducting its own reviews at any time it wishes, or appointing other reviewers if the circumstances require it.

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I must just add that my concerns on that would be even greater if this was required to happen at two-yearly intervals, as suggested by the noble Lord, Lord Eatwell, rather than at five-yearly intervals, because the task of the regulator with a permanent body looking over its shoulder would then become almost untenable.

Lord Higgins (Con): My Lords, I had the opportunity of speaking at Second Reading, which seems rather unusual. I pointed out then, and I remain of the view, that the way that the Bill is drafted, with so much reference to a previous Act, makes it extremely difficult for the House to work out what is happening from moment to moment on an unbelievably complex matter. Having said that, the briefs that have been provided by the Treasury on individual amendments and so on are extremely helpful and do something to ameliorate the problem that I have just mentioned.

It seems to me that we are going very much into uncharted waters here. There is a lot of doubt about ring-fencing, its effectiveness and whether it is a sensible way of proceeding at all. I continue in the view that total separation is a better way of going with it. Certainly, since ring-fencing may cause problems, the case for having a review of it is overwhelming.

With regard to the specific way in which this amendment is drafted, the noble Lord who moved it pointed out that the suggestion is that the people who are appointed to the reviewing body should require the endorsement, effectively, of the Treasury Committee. I think I served as chairman of the Treasury Committee for longer than anyone else has ever served, and I welcome the fact that it is playing an increasing role in these affairs. It also seems to me that the development that has been adopted lately, of saying that it requires a degree of endorsement by the Treasury Committee, is good.

It certainly would be wrong—I think that my noble friend Lord Blackwell has misunderstood the position—to start saying that the review should be carried out by the Treasury Committee. It has, after all, an awful lot of work on its plate anyway. However, having said that, we certainly ought to have this amendment or some variation on it, simply because of the difficulties that the ring-fence system as now proposed is likely to create, assuming that we go ahead with it.

4 pm

Lord Phillips of Sudbury (LD): My Lords, this must be the first time in parliamentary history for the amendments to a Bill to be more than three times the length of the Bill itself. Moreover, as others have said, the complexity of both the Bill and the amendments is quite barbaric. I must admit that when I put all the papers on my dining room table to try to make head or tail of them, they occupied 10 feet of space, including all the so-called explanatory documents. Having said that, I thank my noble friend Lord Deighton, who has at least listened to what was said at Second Reading. He has an open mind, which has undoubtedly led to the introduction of a lot of the measures in the amendments that we are now debating in Committee.

I thoroughly support Amendment 3, largely for the same reasons given by the noble Lord, Lord Higgins. We are groping around in an extraordinarily complex

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area of life and it is abundantly sensible to have these reviews—not just of ring-fencing but a series of reviews—to see how we are coming along and whether the suppositions we are making in the course of this legislation prove to be correct. I disagree with the noble Lords, Lord Eatwell and Lord Tunnicliffe. We need to give time for these new arrangements to bed down and show their paces. Frankly, in each case, four and five years are likely to be better than two years.

I will make a few quick points on the way in which Amendment 3 is put together. We will have an opportunity at the next stage to make changes to what is currently before us. A review panel formed of five persons is unnecessarily large. You might well get by better with three or even two people, so more thought is needed on that. I also note that there is a requirement that the PRA and the FCA carry out their independent reviews but that they publish a joint outcome. Proposed new Section 142J(4) says that they,

“must publish a joint assessment of the impact of the operation of their ring-fencing rules”.

However, they may not agree. You have at least to allow, in this terminology, that that may be the case. You cannot force consensus upon these two august bodies.

The other point is in relation to the appointment of the chair and the endorsement of the Treasury Committee of the House of Commons. It requires that the person appointed,

“is likely to act independently of the Treasury, the PRA and the FCA”.

We should provide that the person is likely to act independently, full stop. It is not only required that they are independent of those three bodies; general independence is required, and so I suggest that those words be excluded.

Finally, proposed new Section 142JA(3) states:

“The persons appointed to conduct a review must include at least one person with substantial experience”.

That is one person out of five. If we are to stick with five people—and I suggest fewer, or at least the prospect of fewer—it is not enough to have only one with experience of all this. This is an extremely complex area of life—there is no area more complex—and experience on the part of more than one person on this panel of reviewers is essential.

That was not quite my final point; I have another quick comment. Proposed new Section 142JB(4) states:

“The report must include … recommendations to the Treasury as to the provision that should be included in orders and regulations”.

It is not inconceivable that there may be no recommendations. Indeed, it is very conceivable that there may be more than one. Therefore the language of proposed new subsection (4) needs amending. I will leave it at that, but I commend the noble Lords who tabled the amendment in this group.

Lord Desai (Lab): My Lords, I apologise for not speaking at Second Reading; I was out of the country. I support the amendment tabled by my noble friend Lord Eatwell. As many noble Lords said, ring-fencing will be a new experience. However, given what happened in the banking industry, and the damage it caused, we have to start the process with extreme care and great

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suspicion. Given time, I know that the banks will innovate ways of avoiding ring-fencing; that is the nature of the market in innovation. Therefore, before anything further happens, we ought to have early scrutiny of ring-fencing arrangements, as proposed by my noble friend. Later, if we wish, we may do the next review after four or five years, but the initial reviews must be done as early as possible and as toughly as possible, because if we are kind to the banking sector and it does the same thing again, the public will never forgive us.

Lord Deighton: My Lords, there have been a number of comments on the length and complexity of the Bill. I am not here to apologise for the Bill, but I know that my officials in the Treasury have worked extraordinarily hard to try to make sense of it and to deliver comprehensive briefs as quickly as the timetable allowed. Therefore, I hope that noble Lords will bear with us as we work our way through this complex process.

At the heart of this group of amendments is the question of the nature of the review and what it is trying to accomplish. The critical point that I want to clarify is that under the Bill the PRA will review the workings of the ring-fence: how well the rules achieve the ring-fence’s objectives and how far the banks are complying. The PRA is not being asked to judge whether the ring-fence is the right policy.

As the Chancellor emphasised in his evidence to the PCBS, the Government have no objection in principle to independent reviews. Indeed, as the House knows well, the ring-fence has its origins in the recommendations of an independent review: that of the Independent Commission on Banking. As I stated, the Bill provides for regular reviews of the operation of the ring-fence. Clause 6 provides for the PRA’s annual report to Parliament to cover the extent of banks’ compliance with the ring-fence—a provision that Amendment 42 will strengthen, as I will discuss in a moment.

Subsection (3) of new Section 142J requires the PRA to carry out a review of ring-fencing rules every five years to assess how well the rules are framed in order to achieve the objectives set for the PRA in the legislation. Should the PRA identify areas where the rules need to be changed, it will have the power—indeed, the responsibility—to do so. Regular reviews of how the mechanics of the ring-fence are working are legitimate and necessary, so it is right that the Bill already provides for them.

On Amendment 42, in response to arguments made in the Commons, we are strengthening the requirement of the PRA to report each year on banks’ compliance with the ring-fence. Amendment 42 requires the PRA to report annually to Parliament on how ring-fenced bodies have used any exemptions to excluded activities or prohibitions. As noble Lords will know, the Bill allows the Government to create exemptions from the exclusion or prohibition of certain activities, as long as the exemptions are not likely to threaten the continuous provision of core services—that is, retail deposit-taking. These exemptions are necessary to allow ring-fenced banks to enter into derivative contracts to manage their own risks. The Government also intend to use this power to permit ring-fenced banks to sell simple derivatives to their customers,

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subject to safeguards to ensure that this does not expose ring-fenced banks to excessive risks or undermine their resolvability.

It is right that any such exemptions should be closely monitored. We have therefore agreed with the suggestion from the Opposition, who in the other place advocated that the regulator should report on the sale of simple derivatives by ring-fenced banks. However, our amendment goes further, requiring the PRA to report on ring-fenced banks’ use of all exemptions created now or in the future. These will include exposures of ring-fenced banks to financial institutions incurred for the purposes of risk management, providing payment services or trade finance services, as well as the sale of simple derivatives. This amendment will ensure that Parliament has sufficient information to make an informed judgment about whether the ring-fence fulfils its objectives and the exemptions remain fit for purpose.

On the other amendments, it is far less clear to us that we should legislate for repeated reviews of the whole policy. Amendment 3 would effectively reconvene the ICB in perpetuity to ask afresh every few years whether we should continue with the ring-fence at all. I have two main objections to this. First, one of the original aims of establishing the ICB was to secure consensus and certainty over the future of the banking industry in this country. The Chancellor has memorably described how, before this Government took office, he heard four different proposals from the then Prime Minister, Chancellor, Governor of the Bank of England and chairman of the regulator. The ICB process brought together all these voices and others to produce recommendations, including for ring-fencing, that commanded wide consensus support. That consensus gave the industry certainty over the future regulatory framework, which is so important to enable businesses to plan and invest. Reopening that consensus every five years, or indeed even earlier, would undermine that certainty.

If I have learnt one thing in my relatively short period in the Treasury as Commercial Secretary, it is that the one consistent request I get from businesses in every industry is, “Please provide us with a stable and certain framework so that we can plan and invest so as to sustain this recovery”. As I have implied here, shortening the gap between reviews—as Amendments 4 and 5 would do—would add further to the uncertainty. I also question whether it would even be possible for a review to judge after only two years whether ring-fencing was working. Given the scale of the changes involved, any verdict arrived at before ring-fencing has had more time to bed down would surely be premature.

My second objection is to this amendment’s prescription that the terms of reference for these repeated reviews must include considering the case for full separation. This seems rather like requiring that reviews continue until they come up with the right answer. I do not believe that that is appropriate. Given this, I also see no case for delaying the commencement of the Government’s provisions for a firm-specific power of separation until after a review, as Amendment 116 would require.

I turn now to the proposal in Amendments 10 and 14. So that noble Lords are clear, this is quite a different issue. It is for an external review to form part

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of the procedure for the firm-specific power to require separation. It is the electrification power. As noble Lords will know, the Government have accepted the case for a firm-specific separation power, and we will shortly debate the government amendments designed to make the separation of power already in the Bill more credible and effective. That is what I promised when we first discussed this Bill. However, the Government do not understand the possible justification for an external review to form part of this power. The PCBS proposed this as a safeguard for banks against arbitrary or unreasonable actions by the regulator, but the right of appeal to the tribunal already protects against this possibility. The tribunal, of course, is independent, so an additional safeguard is unnecessary.

Further, an external review could also serve to undermine the electrification process. The PCBS argued powerfully that regulators should not be subject to self-serving lobbying by banks. An external review could easily become an opportunity for banks to lobby during the electrification process to seek to persuade the reviewer that the regulator was acting unreasonably or treating them unfairly. Any bank required to restructure will have a right of appeal at the end of the process, so why give it another opportunity to challenge the regulator? I am also concerned that, even if the bank’s lobbying efforts did not succeed in blocking a requirement to restructure, they could serve to delay it and slow down the process for the regulator to require separation. This seems contrary to the objective, shared by both the PCBS and the Government, of making the electrification process less lengthy and cumbersome. For these reasons, I cannot agree to these proposals, and I call on the noble Lord to withdraw them.

4.15 pm

Lord Lawson of Blaby (Con): My Lords, I listened very carefully to what my noble friend the Minister said. I am extremely grateful to him for the extent to which he has accommodated the points made by the Parliamentary Commission on Banking Standards, of which I had the honour to be a member and to which the noble Lord, Lord Turnbull, referred—and I entirely endorse his remarks. However, the remarks that the Minister has just made simply do not stack up. Before going into why that is so, let me put a little perspective on what we are doing today. It sounds very dry, arid, tedious and tiresome in many ways. Indeed, it is not a model of how to construct legislation, as my noble friend Lord Higgins pointed out. Nevertheless, it is testimony to the fact that the Government have listened attentively to what the parliamentary commission had to say, and what was said in the other place in response to it.

My noble friend the Minister has already raised matters wider than the amendment that we are discussing. He started to talk about the industry-wide separation power, which we were concerned about but which was not part of this group of amendments. We will come on to that later. In this country, we are suffering, as part of the wider world’s suffering, the after-effect of a most appalling global recession. There were a number of causes of that problem, but it is generally agreed that right at the heart of it was a banking meltdown.

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Nothing is more important, therefore, than to do whatever we can to ensure that a further banking meltdown in future is unlikely to occur and to ensure that, if it does occur, the damage will be much less than that caused in 2008 and thereabouts.

There are few pieces of legislation going through Parliament that are more important than this Bill. I am not saying that you can do everything with legislation—there are a number of wider issues. But you have to do whatever you can. It is a long time since this House has had such an important role in trying to ensure that it is put right. It is clear that the legislation that was introduced in the Commons and went through the other place was wholly inadequate, and as a testimony to that are all the amendments that we are discussing today and all the amendments that the Government have moved. It is up to this House to get the legislation right; that imposes a very great responsibility on us and we should look at the legislation in a non-partisan fashion.

The Minister rested his argument on the fact that the Vickers commission came up with this wheeze of ring-fencing. It was a compromise between full separation of commercial and retail banking and investment banking and just leaving it as universal banking. There are a number of problems with the idea of the ring-fence. As the noble Lord, Lord Eatwell, and others have pointed out, this is new territory and has never been done before. We do not know whether or not it will work. We know that separation can work. There was separation in the United States under the Glass-Steagall legislation from 1933 to 1999 when it was repealed and for most of that time it worked very satisfactorily. It was weakened as time went on as a result of the success of the American banks in lobbying various authorities in the United States to make exceptions here and amendments and changes there. We need to watch out for that. It was also weakened to some extent by the ingenuity of investment bankers in finding ways round it, to which the noble Lord, Lord Turnbull, referred. Nevertheless, separation worked pretty well in the United States and in the United Kingdom.

I speak with some experience. It is now more than half a century since I was the principal writer of the Lex column in the Financial Times and I have been a close observer of the banking scene throughout that period. I recall that for most of that period we had a separation between what were called the joint stock banks, which engaged in retail and commercial banking for small businesses and so on, and the investment banks, which were not called that in those days—they were called merchant banks. They were completely separate and it worked very well, so we know that separation can work, and has worked, in the two major banking centres in the world.

It is true that the continent of Europe has always gone in for universal banking. That is so in Germany in particular but is generally the pattern in continental Europe. However, it is no accident that the two major banking centres of the world, London and New York, had separation. That worked. Whether this halfway house can work or not is very uncertain. Although the remarks of my noble friend Lord Blackwell on this amendment showed that he got completely the wrong

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end of the stick on it, as the noble Lord, Lord Turnbull, pointed out, he was absolutely right to point to one of the problems, although not the only one, with the governance structure. It is a very curious governance structure in which the two subsidiaries of the holding company are together but separate. They are meant to be completely separate even though they both, as boards of directors, have responsibilities to exactly the same group of shareholders. It is a very odd system and we do not know the workings of it.

I say that my noble friend the Minister is unconvincing because his whole point rested on the fact that Vickers said the ring-fence is the right answer and that because Vickers said that we must stick with it and not change it. What we are saying, which is surely much more reasonable, is that we will, of course, give Vickers a chance. Indeed, we will try to reinforce his proposal by means of the so-called “electrification” procedures. However, if it is seen not to be working, we will have to go to separation. One member of the Vickers commission is already convinced that we should go to separation without any intermediate step but I am quite sure that nobody on the Vickers commission wishes to see a failure. Let us give Vickers a chance and see how it works but if it does not work—it has to be kept under review—we should go to full separation. That must be sensible. The fact that the Vickers commission said what it did is really no argument at all.

I am very glad to see the most reverend Primate the Archbishop of Canterbury in his place. He was a most distinguished member of our Parliamentary Commission on Banking Standards and I hope that he will contribute to our debates. One of the things that he has emphasised strongly—I have tried to explain the importance of this—is the problem around the culture of banking. This was accepted by Parliament when it set up the commission and, indeed, my right honourable friend the Prime Minister explicitly said that it was to deal with the culture.

One of the key problems is that retail and high-street banking—commercial banking—and investment banking are two completely separate cultures. It is very difficult, with the best will in the world. I am not against investment bankers, but I do not think they should be bailed out by the taxpayer. We may, from time to time, need to bail out the commercial banks, with their retail depositors and their responsibility for the payment system. They may need that, even though they have enhanced capital funds, but it is wrong, I think, ever to bail out investment banks; they should be like hedge funds, with a fear of failure restraining what they do. They will be imaginative, they will be adventurous, they will be creative, they will be exciting for those who are excited by this kind of thing, and they will have a totally different culture. To assume that you can get two quite separate cultures in the same entity is stretching it a bit. Therefore, we have to see how this will work. It may not work. If we are going to address this cultural problem we have to make sure we address it effectively.

We shall come on to the other amendments in the name of the noble Lord, Lord Turnbull, to which I have added my name, but on this major issue we have to strengthen the Bill in the way that the noble Lord highlighted, endorsed by the noble Lord, Lord Eatwell,

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for the Official Opposition. We have certainly not heard any good reason from the Minister why we should not do that.

Lord Barnett (Lab): My Lords, I have enormous sympathy with the noble Lord, Lord Turnbull, who said in his introduction that he has never seen such a shambles presented to any House. As Chief Secretary to the Treasury, I had the misfortune for five years, as the noble Lord will know, to take two Finance Bills a year through, mainly because the first Bill had to be amended because it had not been properly scrutinised; it had been guillotined by all successive Governments. Yet I have never seen anything remotely like this Bill and I am grateful to the noble Lord, Lord Deighton, and his staff, who have done a tremendous job in trying to present to us what exactly is going on here. It is very difficult when one is working without a group of secretaries, let alone one, to understand what the devil is going on.

It seems to me that every speaker we have heard so far, apart from the noble Lord, Lord Lawson, is stumbling towards the only real solution. We will have to debate fairly soon to settle whether the House agrees to separation—call it Glass-Steagall, call it what you like. However, while we are stumbling in this direction—I am not sure from what my noble friend on the Front Bench was saying whether our Front Bench is stumbling towards it as well—it seems inevitable to me that we have to decide this one, major issue. However many times this is reviewed, ring-fencing can never be the solution to the different cultures that the noble Lord, Lord Lawson, referred to. It is quite impossible.

I do not want to take too much of the Committee’s time on this occasion, but we have to settle, once and for all, whether we agree with this ring-fencing idea. It is so complex that it makes the situation even worse, as we have heard in a number of debates. Until we settle this matter, we will go from amendment to amendment for years on end, and have reviews for years on end, getting nowhere at the end of it. I hope that we can have the major debate as soon as possible so that the House can decide.

4.30 pm

Lord McFall of Alcluith (Lab): My Lords, it was, along with other Members, a privilege to be a member of the Parliamentary Commission on Banking Standards. I want to add a few words to what has been said. As a member of the commission whose view on this matter was for full separation, I signed up to the recommendation in order to have unanimity in the committee and because for the rest of us, with due deference to the most reverend Primate the Archbishop, it was an act of faith. That is what the recommendation from the committee was, because ring-fencing is at the moment theoretical. Without naming the person, I well remember someone on the Vickers commission saying to me, “John, we lost our nerve and advocated ring-fencing”. I do not want us to lose our nerve but I want us to be vigilant on this issue.

I well remember the evidence given to us by Paul Volcker who, noble Lords will remember, said, “I cannot really understand what the situation will be if you are the holding company which has authority over

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the ring-fence. If it comes to making a decision by that holding company’s executives about the future of the company, then the executives of the holding company will win over the decisions at the ring-fence”. At the end of the day, it is the holding company that matters. There is therefore something uneasy and illogical about this issue.

I also well remember another witness, not at the banking standards commission but elsewhere—Willem Buiter, when he was on the Monetary Policy Committee before he went to Citibank to be its chief economist—saying, “Remember that the half-life in the financial services industry is less than three years”. In other words, people will forget what has happened before. Having spent nine or 10 years as chairman of the Treasury Committee, all that I can say is that the banking industry is ever vigilant. If we sit back here for a four or five-year period and then return to the matter to see what has happened, the landscape will have changed completely. All that I would add to noble Lords’ comments is that if this House does not express that it has to be vigilant at all times, we are going to lose out and it could be to the disbenefit of ourselves as a Parliament and of society.

Lord Forsyth of Drumlean (Con): My Lords, I did not speak at Second Reading because I could not stay for the wind-ups, but listened to most of that debate. I should like to press my noble friend on his logic. He says that we cannot have some body to police or check up on the regulator. I am very surprised that my noble friend Lord Blackwell, with whom I am normally absolutely on the same square on most issues, says that we must trust the regulator. There was a reason we got into this mess and, by the way, we still ought to have a proper inquiry into what the regulator was doing and how the crisis happened in the first place. The very last thing I feel like doing is trusting the regulator.

We have also seen the regulators going off to work for the banks at, no doubt very appropriately, very high salaries to help them with their compliance and operation of regulation. Let us face it, I am not sure where I stand on the notion that we should trust the regulator on this matter. Like the noble Lord, I was prepared to go along with ring-fencing but could not see how it could work. But it certainly is not going to work if you have very clever people in the banks and at the regulator, but no one is actually breathing down the regulator’s neck. That seems to be the lesson that we can learn with absolute clarity from the previous experience.

I have to say that my noble friend’s logic was, “We can’t possibly have the regulator being subject to second-guessing all the time. How are they going to be able to carry out the agreed policy?”. As has repeatedly been said in a number of speeches, this is an experiment because it is part of a compromise to try to get the banks reasonably on board and to proceed on the basis of consensus.

In my seven years—perhaps it was nine years—working in an investment bank, I learnt that investment bankers are extremely adept at getting between the wallpaper and the wall. If they can find a way to get around something, they will. That is their job and how they

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make money and resources. The notion that if we have ring-fencing there will not be lots of clever people finding very good schemes to get around the intention of it and that the regulator will stand up to them, especially if we are in a period of prosperity, flies in the face of the experience that we have had.

It is essential to have someone independent of the regulator looking at this relationship and seeing if it is working. They should report to Parliament, with Parliament ready to enforce separation if it is required. It is by putting their feet to the fire in this way that we can be sure that they realise that it is in their interests to make this ring-fence procedure work. Without that, it will not work and we will be back to where we were before you can say “renewed prosperity”.

My noble friend uncharacteristically showed a lack of logic in what he was saying. If he wants the House to commit itself to this policy, he needs to address this basic question of who will guard the guardians.

Lord Phillips of Sudbury: I have a lot of sympathy with what my noble friend has said. However, on my noble friend’s thesis, there is the problem that if you have a regulator of the regulator, you should have a regulator of the regulator of the regulator. At some point you have to put some trust in someone. As he has said, bankers are adept at getting around any set of regulations. Is there not a point at which you have to have trust?

Lord Forsyth of Drumlean: I agree, but all questions can be reduced in that way—reductio ad absurdum. On that basis, we would get rid of Parliament, which ultimately is the regulator of the regulator. The regulator is accountable to Parliament. We are dealing here with day-to-day very complex circumstances. In this great House we have many experienced people. In my view, the banking commission has done a brilliant job, as has the Treasury Select Committee in many respects. I think all of us would agree that that was appropriate and that that job has been done. However, as I understand it, in the particular instance of deciding whether this ring-fencing experiment will work, here we are talking about the need for some kind of process which will scrutinise that and will report on an informed and an in-depth basis. That is why I support the amendment in the name of the noble Lord, Lord Turnbull, which seems a sensible course of action.

In the case of the Bank of England, why did it allow interest rates to remain so low when it could see a housing bubble and an asset bubble being formed? Even the former governor, who is now a Member of this House, has acknowledged that and has said publicly that it is very difficult when everyone is making lots of money and the whole consensus is that we have abolished boom and bust. It is very difficult for a regulator to stand up to that, especially if Ministers are egging them on and in their speeches are saying the same thing.

If the purpose of this exercise is to say, as we always say, “What went wrong? What are lessons that we need to learn?”, this amendment points to one of the clear lessons that we need to learn. I am disappointed that my noble friend does not see that.

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Lord Flight (Con): My Lords, I rise very much in agreement with the noble Lord, Lord Lawson. The particular point that I should like to make is that if we look at events over the past five years, it was not derivatives or standard investment banking activity which got the banks into trouble but unwise forms of large-scale lending. It was the purchase of blind CDO instruments from the US without knowing what was in them and the banking practices in particular of HBOS. These were the areas in which huge amounts of money were lost and which nearly brought down two of the main banks of this country.

Looking at the ring-fence model, it seems rather strange that all that sort of activity will be in the same box as good old-fashioned high-street banking, as I understand it. I repeat my interest as a director of Metro Bank, which is an old-fashioned high-street bank in essence. But if the high-risk areas of banking generally are going to be in the same box as the lower-risk activities of high-street banking, that does not seem to make much sense. The delineation of what is investment banking and what is commercial, high-street banking is not a particularly good one if your objective is to protect the ordinary citizens’ banking activities.

Baroness Cohen of Pimlico (Lab): My Lords, like many in the House I did not manage to speak at Second Reading either, but I have spent a miserable summer concluding that Vickers got it wrong. This is a horrible thing to say to my good friends in the Parliamentary Commission, but they got it wrong too about separation. I come from a long career in merchant banking. I was pulled out of the Civil Service to be a merchant banker and I understand very well how ingenious they are. We had a wonderful concept in my youth called the Chinese wall. All I can say is that ivy grew over that Chinese wall and ear trumpets went through it because we are an ingenious lot.

The very complication of the debate that we are having, the horrible complication of the legislation and the very real difficulty of the amendments all stem from the fact that we are trying to do something impossible. Ring-fencing will not work. It does not matter how many people you place in charge of it, you need institutional separation. As my noble friend Lord Barnett says, we are going to have to come up against this one of these days.

I am also fairly horrified to hear Members of this House describing ring-fencing as an experiment. What are we doing experimenting with the banking system? We have experimented with it before and we should not. We should be sticking to what we actually know will work.

I am in entire sympathy with the points made by the noble Lord, Lord Forsyth. I think that his diagnosis is absolutely accurate, but I differ on the conclusion.

Lord Forsyth of Drumlean: I did not say that I necessarily accepted the Government's conclusion: I was merely testing the Government on the logic of their own position.

Lord Stewartby (Con): My Lords, I came in this afternoon hoping for enlightenment. I received much more and varied judgment expressed from all corners

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of the House. But the one thing that everything leads to is an assumption that the ring-fence will not work and I am afraid to say that I agree. I do not say that with any satisfaction. A lot of time and effort has been put into this by very well-informed people, but it is against the ethos of the institutions and the markets in which they operate.

To say that we are going forward as an experiment is merely an attempt to sum up where we have got to in this afternoon's debate. We cannot just leave it like that. If there is generally—not just in this House but in a more widespread way—fundamental doubt about whether something as important as this will work, we have to assess whether we are bound to follow that structure. All I have heard so far leads me to think that ring-fencing is not workable. We ought to accept that situation as soon as possible. I leave it to others to follow more logically what I have rather stumblingly set out.

4.45 pm

Lord Turnbull: My Lords, in responding to the points that have been made, I want to make it clear that the commission is not seeking to use this Bill to reopen the position we have reached and try to get us back to a policy of separation. What we have is a policy of ring-fencing plus safeguards plus vigilance. I listed some of those safeguards at the start. If that is the policy we are on, we have to make the safeguards and vigilance work. In response to the Minister, I do not think that a process in which the reviewing is done by one of the key players in it, which is the Prudential Regulation Authority, carries any credibility whatever. Its work is important and it should be a contribution to a wider study, and the wider study should be undertaken by someone who is independent of it.

The other argument used by the Minister was that we do not want a state of permanent vigilance. I do not think that it is possible, in an industry which is highly innovative—reference has been made to the term “half-life”—that you can find one system that will last for ever and therefore you need to be able to keep an eye on what you have created and make sure that you are taking steps to keep to that policy until such time—which may be the point of the amendments we shall come to in another group—that you conclude that it is not working. But the search for something which you can just do and then simply routinely maintain is an illusion. If ring-fencing is to be the policy, it is absolutely essential that it is backed by maximum vigilance and some high-powered mechanisms for review. I really do not think that what the Minister has promised us today meets that requirement.

The Minister pointed out that there are of course two reviews here. The other one is much less important and serves a completely different purpose. It is to safeguard a bank that has been threatened with separation against the arbitrary behaviour of its regulator. You could ask why that is needed because there are other safeguards, but if you do not have it, you come to the question of whether the Regulatory Decisions Committee, which is a step on towards the tribunal, should be beefed up. However, that is a recommendation we will come to, which the Government have not accepted. I do not think that the lesser review, the Amendment 10

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review, can be taken off the table. If you do that, you increase the case for Amendment 91, recommending a new RDC. My conclusion is that we have not reached an agreement in this area. The debate is interesting, but what it means is that a lot more work has to be done between the opposition, the commission, other members and the Treasury to get to a point of resolution. However, it is essential that the point we reach has a much more high-powered review mechanism in it than is currently set out in subsection (6). I am content to withdraw the amendment on the basis that further discussions between now and Report will take place and that there will be flexibility on the part of the Government in their consideration.

Lord Eatwell: My Lords, as I have tabled an amendment to the amendment moved by the noble Lord, Lord Turnbull, I believe that it is for me to withdraw my amendment first and for him to follow. The noble Lord, Lord Deighton, has two objections to the process of review, both of which have, I think, been demonstrated to be false. He said that the first was to secure consensus. From the discussion today, he should be effectively disabused of the idea that the ICB has secured consensus. People have settled around the ICB as the best that can be obtained under the current circumstances, but there is a considerable degree of uncertainty about whether the ring-fence is actually a good idea.

The noble Lord also said that he wanted certainty, but he absolutely does not get certainty in this way because we are very uncertain as to whether this system will actually work. That is why his second objection—that time should be given for the system to settle down and work—is a very dangerous one. As we go through the process of implementation—if eventually Parliament agrees to these ring-fence proposals and implements them—we will discover by sheer practice where the lacunae may be, where things simply go wrong with unintended consequences, and so on. Unfortunately, we will be conducting an experiment and under those circumstances, it is very important that the sort of expert committee that the noble Lord, Lord Turnbull, has proposed, focusing on the particular question of whether this works, with growing expertise and experience, should be in place to review what is happening as the process unfolds.

That is why in particular I was very nervous about one aspect of the proposals of the noble Lord, Lord Turnbull, with respect to the review not taking place for four years and then taking place at five-year intervals thereafter. Although it is “up to” four years, I would be willing to bet that the “up to” will turn out to be about two. None the less, my amendments were intended to ensure particularly that we have the expert committee proposed by the noble Lord, Lord Turnbull, virtually in place as a standing committee with the expertise to guide us through what is going to be a very difficult and uncertain process.

Given the debate, and the views expressed around the House, this is a matter to which we certainly must return after significant negotiations have occurred between Committee and Report stages to try to achieve something of a consensus—at least on the issue of the nature of review. In the mean time, I beg leave to withdraw Amendment 4.

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Amendment 4, as an amendment to Amendment 3, withdrawn.

Amendment 5, as an amendment to Amendment 3, not moved.

Amendment 3 withdrawn.

Amendment 6

Moved by Lord Deighton

6: Clause 4, page 9, line 27, at end insert “and of any rules made by it under section 192JA (rules applying to parent undertakings of ring-fenced bodies)”

Lord Deighton: My Lords, Amendments 6 and 81 insert two new sections into the Financial Services and Markets Act 2000 and make a consequential amendment to new Section 142J. The first new section, new Section 192JA, gives the PRA a power to make rules over the parent companies of ring-fenced entities. Ring-fencing will require banking groups to make large structural changes to ensure the independence of the ring-fenced bank from other entities in its group. The PRA may need to make rules to ensure that the groups in which ring-fenced banks sit are structured and governed appropriately. Rules over parent companies may be needed to ensure that this is the case.

It is important that the regulator has the ability and flexibility to tackle parent companies. They can influence subsidiaries in a number of important ways—through their attitude to risk management throughout the group, for example. This obviously has implications for the incentives faced by a ring-fenced bank. This amendment, therefore, further enables the regulator to strengthen the ring-fence.

I also expect the PRA to use this power to require groups containing ring-fenced banks to adopt a so-called “sibling structure”. This means that a non-ring-fenced bank cannot own a ring-fenced bank and vice versa. Both the ring-fenced and the non-ring-fenced bank will sit directly underneath the holding company. In this way, the PRA will be able to supervise banking groups more effectively, by having a clear divide between the ring-fenced and non-ring-fenced parts of a group. As development of the ring-fencing policy has progressed, the PRA has identified additional supervision benefits to a “sibling” arrangement such as this. I also understand that the Bank of England is encouraging banking groups to issue loss-absorbing debt from the holding company level, which is likely to lower the marginal cost to banking groups from adopting the sibling structure.

New Section 192JB will give the PRA and the FCA, as appropriate depending on the nature of the firm, the power to impose rules on qualifying parent undertakings to require them to make arrangements which would facilitate the exercise of resolution powers in relation to the parent or any of its subsidiaries.

Lord Higgins:Can my noble friend explain precisely what is meant by “resolution powers”?

Lord Deighton: The resolution powers all relate to the Bank of England’s powers essentially to step in in advance of a bank’s insolvency so that it can change, for example, the creditor arrangements.

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The PRA and FCA already have powers to require regulated entities to take actions that would facilitate the resolution of a firm in the event of its failure. This may include requiring it to raise additional capital, issue debt to the market or make structural changes to enable the firm to be resolved.

However, banks may be organised in a number of ways. Many have a structure whereby the bank is owned by a financial holding company, which may not be regulated. Banks may also be part of corporate groups which contain non-corporate banking entities. In these cases, the existing powers may be insufficient to deliver some of the changes that the regulator feels are necessary to make a bank resolvable. This is because the regulated entity may not have the level of control required to make the change. This may be the case where, for example, capital and debt are issued out of the parent undertaking before being downstreamed to a bank. It may also be operational in nature; for example, where a service company which is not owned by the bank but sits in another part of the group provides critical services in the bank.

The amendment will address these cases and ensure that the PRA and the FCA have the necessary powers to make banks resolvable for all types of corporate structure. It amends new Section 142J to ensure that any reviews by the PRA of “ring-fencing rules” under that section must also cover rules made under the power given in new Section 192JA in relation to parent undertakings of ring-fenced bodies.

Lord Eatwell: My Lords, I have enormous sympathy with the amendments and the struggle that the Treasury is having in having effectively to provide rules for parent undertakings in relation to the maintenance of the ring-fence. In many ways, the amendments go at least some of the way to achieving that. However, I should like to ask a question which I asked at Second Reading and which was not answered then. The Minister referred to capital and debt being raised at the level of the parent company and then downstreamed into the ring-fenced entity. If it can be downstreamed, can it not be upstreamed? If that were so, the ring-fence would not exist.

Lord Deighton: It is a valve which goes only one way; it cannot be upstreamed—otherwise the noble Lord is right that the ring-fence would not work.

Lord Higgins: My Lords, the clause as I understand it seems to be absolutely essential if the powers involved are to be able to ensure that there is a separation between one part of the bank and the other, in which case it is rather extraordinary that the amendment has suddenly appeared at this stage.

If I understand the clause correctly, it has both national and international implications. My noble friend, in response to my inquiry, referred to the Bank of England, but the clause also apparently refers to any similar powers exercisable by the authority outside the United Kingdom. That gives me cause for concern. It would be very useful if all the actions taken in this country, in the European Union and in the United States worked on the same basis. However, as I understand it, that will not be so. The line will be drawn in rather

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different places in the United States compared with the European Union and in the European Union compared with the United States or this country. How precisely are the FCA and the PRA to set about ensuring that they can separate the two parts of the bank effectively? I am not clear from the amendment how they will do that.

5 pm

Lord Deighton: The simple way to look at the amendments is that they are to ensure that both regulators have the flexibility to address every aspect of the group structure to ensure that the ring-fence works. That is why we are trying to give as much flexibility as possible to address even the non-regulated entities within the group.

Lord Eatwell: My Lords, the noble Lord, Lord Higgins, has raised a very important matter with respect to authorities outside the UK. The proposals under Glass-Steagall and under Liikanen are different from the ring-fence—the divisions appear in different places. In those circumstances, “similar powers” seems to be a very weak description, because they are similar but not the same. With respect to resolution powers, which are crucial in the relationship between the parent body and the ring-fenced entity, that seems to create a degree of uncertainty. Can the Minister clarify exactly what that applies to? Presumably, it applies to the home-host division in regulatory responsibility and therefore subsidiaries of UK institutions in other jurisdictions will be regulated by the home regulator. If the home regulator has different rules with respect to the divisions, it seems to me that there will be a degree of confusion as to what is actually being enforced.

I am grateful for the Minister’s clear answer about the valve that goes one way on the raising of debt and capital. I return to my previous question. Let us suppose that we have a group in which the liability structure of the ring-fenced entity is essentially provided from the parent through the one-way valve and then the parent simply stops providing. In those circumstances, the security and stability of the ring-fenced institution would surely be threatened. The ring-fence would not be working simply because the steady flow of financial support for the ring-fenced institution had been cut off.

Lord Higgins: My Lords, I am a little clearer now than I was a moment or two ago. It would be helpful if my noble friend could say what is the position in each of the countries that I just mentioned. As I understand it, the emerging EU proposals—I am looking at a brief from the Law Society—will,

“require banks to create separate entities (although they will be allowed to stay within the same group) in order to split proprietary trading and market making off from other banking activities”.

On the other hand, the United States scheme will require,

“complete separation of proprietary trading but the bank is allowed to undertake market making”.

Under the amendment, we will apparently have those outside bodies setting the rules for banks in the UK. Consequently, we may find that the ring-fence is being drawn in quite different places—the noble Lord opposite seems to agree—depending on which authority is exercising the powers of resolution.

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Lord Deighton: I shall try to go through those points one by one. Just to be clear with respect to the foreign banks, the power we were talking about relates to the Bank of England’s rule-making power over parent companies. It allows the Bank of England to support a resolution being carried out by a foreign regulator where the bank is in a different country. It just allows the support of that resolution going on elsewhere so that we have the kind of international co-operation which is necessary for these resolutions. On the point about Liikanen and the convergence in how we are looking at this around the world, the general view of the officials who are working on the European legislation is that we are sufficiently in tune with where that is heading for these arrangements to work effectively.

I was not sure that I entirely followed the risk that the noble Lord, Lord Eatwell, was pointing out. However, risk-fenced banks can of course have equity provided by their parent and, once it is given, it need not be repaid, so the flow can still keep going into the ring-fenced bank.

Lord Eatwell: What if it stops?

Lord Deighton: That is part of the resolution process that needs to be sorted out but there is nothing to stop it continuing to go in.

Amendment 6 agreed.

Amendment 7

Moved by Lord Deighton

7: Clause 4, page 12, line 19, leave out from “a” to end of line 24 and insert “notice (a “preliminary notice”).

(1A) The preliminary notice must—

(a) state that it is a preliminary notice,

(b) state that the regulator proposes to exercise the group restructuring powers,

(c) state the action which the regulator proposes to take in the exercise of those powers,

(d) be in writing, and

(e) give reasons for the proposed action (which must include the regulator’s reasons for being satisfied as to the matters mentioned in section 142K(1))”

Lord Deighton: My Lords, these amendments streamline the procedure for the group restructuring powers—the so-called electrification powers. In another place, following the recommendations of the PCBS, the Government introduced amendments adding new Sections 142K to 142V. These sections give the regulator the power to require a banking group to restructure if the regulator believes this necessary to ensure the objectives of the ring-fence. As the PCBS recommended, the regulator will have the power to require the group to divest completely either its ring-fenced bank or its non-ring-fenced bank, or transfer specific business units out of the group. These extensive powers may be exercised if the regulator believes that the group’s ring-fenced bank is insufficiently independent or if the group’s conduct is such as to threaten the regulator’s ability to meet its statutory objectives. The amendments made in the Commons thus provide for the power to

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require the separation of an individual banking group that the PCBS recommended.

However, some concerns were expressed both in the other place and in this House that the procedure for the regulator to exercise its group restructuring powers was too complicated and drawn out. It was argued that the number of steps involved and the length of time required from start to finish created a process that was so cumbersome as to be difficult for the regulator to use in practice, and that this risked undermining the group restructuring powers as a deterrent against attempts by banks to subvert or game the ring-fence.

The Government took these concerns very seriously. As noble Lords will recall, I committed at Second Reading to bringing forward amendments to simplify and streamline the process for exercising the group restructuring powers. These amendments do exactly that. Amendments 7, 9, 11 and 12 replace the requirements for three preliminary notices with just one so that if the regulator is considering exercising its powers it need notify the target group only once, stating its reasons for considering requiring restructuring and the action it is proposing to take.

Amendment 8 removes the requirement for the Treasury to consent to a preliminary notice. Previously, Treasury consent was required for each of the original three preliminary notices. Under this amendment, the regulator need give the Treasury only a copy of a preliminary notice. Treasury consent will be required only later in the process for the issue of a warning notice.

Amendment 15 clarifies that any notice of a decision by the regulator not to exercise its powers must be given in writing. Amendment 16 provides that a copy of such a notice be given to the Treasury.

Amendment 17 shortens the warning notice period from 12 to 18 months to three to six months. This period is intended to give a bank about which the regulator has concerns, and to which it has issued a preliminary notice, an opportunity to address the problems identified by the regulator of its own accord. The Government still believe that it is right to give a bank the chance to tackle any problems, but agree that the period originally provided for was too long.

Amendments 13, 18 to 20 and 38 are consequential on the other amendments being made to these sections. Amendments 21 and 22 remove the requirement that the regulator must allow at least five years for any restructuring or divestment to be completed. Now it will be up to the regulator to set whatever deadline it considers appropriate.

These changes will bring the procedure for using the group restructuring powers into line with that proposed by the PCBS. One point on which we continue to differ from the PCBS is the inclusion in the procedure for requiring the restructuring of an external review, which Amendments 10, 14 and 116 would have inserted, and which we have already debated.

As for the total time involved to require the separation of a group, following the Government’s amendments, the minimum total time will be slightly shorter under the Government’s provisions than under the PCBS’s. Under the Government’s amendments, the minimum

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time from the regulator’s first notice of its intention to require restructuring to the actual imposition of a requirement to separate will be approximately four months, compared to approximately five months under the PCBS’s amendment. These amendments will therefore make the group restructuring powers—the “electrification” powers—an effective reinforcement to the ring-fence.

Some will argue that the Government should have gone further and should also legislate for the option of full separation across the entire UK banking industry. The Government do not agree with this suggestion. To provide for a targeted deterrent against members of an individual banking group that seeks to game or evade the ring-fence is a sensible reinforcement for the ring-fence. To legislate for industry-wide separation, however, would not be a sanction; it would be to abandon that policy. The logic of requiring all banks to separate would have to be that the ring-fence had failed to achieve its objectives of delivering greater financial stability while preserving the legitimate economic benefits of universal banking. It could in no way be described as a deterrent.

Lord Lawson of Blaby: My noble friend has talked about the great advantages of universal banking that need to be preserved. Will he explain to the House what these unique advantages are?

Lord Deighton: The first point that I would make in response is that it was the position of the ICB, which did an enormous amount of work on this, that the ring-fence was not in any sense a compromise but was in fact superior to full separation because of some of the synergies available in the universal bank. The essence of the argument is that the other parts of the bank that may not get into financial trouble actually provide benefits of diversification and scale that can protect the ring-fenced entity from any of the problems that they may have. It is essentially the diversification and scale advantages that universal banking may bring.

I have some sympathy with my noble friend’s underlying suggestion; in much of the discussion so far we have talked about how ingenious bankers are but, given what they have done to their organisations and the industry over the past five years, you have to question exactly how ingenious they are on a consistent basis.

To come back to the point, others are of course perfectly entitled to the view that the ring-fence will fail—we have heard that point of view from many Members here—and a future Government would be entirely within their rights to propose an alternative policy to ring-fencing. However, the only proper way to legislate would be for the Government to conduct research and analysis to match the calibre of the Vickers commission in support of full separation. I note that the PCBS produced no such evidence. Let it build a consensus around its conclusions, and let it come to Parliament with new legislation to be subjected to the full scrutiny and debate that such a step would require.

5.15 pm

Lord Turnbull: I very much welcome this simplified process. It took two steps for the Government to get there, but the prodigal son is welcome at any time. Let

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us pocket that. I said we would look again at this special review that the commission suggested inserting into the process. I noticed that the Minister was drifting on to the next group, and I thought I was going to introduce it, but let us come to that at the appropriate time.

Lord Eatwell: My Lords, I echo the words of the noble Lord, Lord Turnbull. I think this is a significant improvement on the procedures that were previously outlined. I have a number of exploratory questions about this procedure. First, the regulator essentially seems to be judge and jury in this respect. It was the role of the old Regulatory Decisions Committee and, I believe, the ambition of the commission with respect to its development of the Regulatory Decisions Committee to ensure that there was an independent step in any major regulatory enforcement. The main reason why that was introduced into FiSMA was because it was felt that otherwise it would contravene human rights legislation. Are the Government confident that this procedure does not contravene such legislation?

Secondly, with respect to the publication of notices, in the very thorough and welcome briefing that the Minister’s staff provided on these amendments, the Government argued that they would not accept the commission’s proposal that the existence of a preliminary notice or of various stages be publicised. Instead, it was felt that these matters should be kept “secret” until such time as any impact on Stock Exchange listing rules demanded publication that the group was being subjected to such a procedure. It seems to me that this is a slightly dangerous structure. It is a traditional structure of central banks. It has always been strongly opposed by securities regulators which believe much more in transparency in this respect. This lack of transparency is likely to produce rumour and false information in the marketplace. Consequently, if we are going to have this procedure—which I think is well thought out, apart from the one issue that I raised, on which I would like to have assurances—we should make it a transparent procedure because rumours and false information are really damaging to markets. Transparency is always to be preferred, even if that transparency may be extremely uncomfortable for the firm being subjected to this process.

Lord Deighton: On the question of the breach of human rights, we are confident. The RDC still exists, and under this procedure we still have the independent Upper Tribunal. We have looked into that.

On the publication of the initial warning, we are all trying to accomplish the same thing, and it is quite finely balanced as to which way you go. I point out, for the benefit of noble Lords, that of course the regulator has the discretion to publish the initial notice but is not obliged to do so. Therefore, in those circumstances in which it is in the interest of the market to do that, it would do so. One of the principal reasons why we are reluctant to do that is because if you have gone public with the initial warning it may make you reluctant to issue the initial warning and to begin a process because of the consequences of that being out in the public domain. This is a tricky area where the arguments are

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relatively well balanced. We came out with this option for the regulator to disclose it, which we thought was, on balance, the right thing to do. I beg to move.

Amendment 7 agreed.

Amendments 8 and 9

Moved by Lord Deighton

8: Clause 4, page 12, leave out lines 25 to 30 and insert—

“(2) The appropriate regulator must give a copy of the preliminary notice to the Treasury.”

9: Clause 4, page 12, line 31, leave out “first”

Amendments 8 and 9 agreed.

Amendment 10 not moved.

Amendments 11 to 13

Moved by Lord Deighton

11: Clause 4, page 12, line 40, leave out from beginning to end of line 11 on page 13

12: Clause 4, page 13, line 13, leave out “third preliminary notice” and insert “preliminary notice under section 142M”

13: Clause 4, page 13, line 15, after “if” insert “, having considered any representations made by any of the relevant persons,”

Amendments 11 to 13 agreed.

Amendment 14 not moved.

Amendments 15 to 22

Moved by Lord Deighton

15: Clause 4, page 13, line 19, after “a” insert “written”

16: Clause 4, page 13, line 19, at end insert “and give a copy of that notice to the Treasury.”

17: Clause 4, page 13, line 20, leave out from second “period” to end of line 22 and insert—

“(a) beginning 3 months after the end of the period specified under section 142M(3) as that within which any representations must be made, and

(b) ending 6 months after the end of that period.”

18: Clause 4, page 13, line 31, leave out “third”

19: Clause 4, page 13, line 34, leave out “third”

20: Clause 4, page 13, line 38, leave out “third”

21: Clause 4, page 13, line 43, leave out from “must” to end of line 44 and insert “specify the date or dates by which each of the following must be completed—”

22: Clause 4, page 13, line 46, leave out “or”

Amendments 15 to 22 agreed.

Amendment 23

Moved by Lord Turnbull

23: Clause 4, page 17, line 17, at end insert—

“Full separation

142VA General requirement of separation

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(1) Where the members of any group include one or more ring-fenced bodies and one or more other bodies, the members of the group must, before the end of the period of 5 years beginning with the relevant commencement date, take steps to secure that there are no members of the group that are ring-fenced bodies.

(2) If in the case of any group steps to secure that there are no members of the group that are ring-fenced bodies are not taken within the period specified in subsection (1)—

(a) at the end of that period the Part 4A permission of each member of the group that is a ring-fenced body shall be treated as having been cancelled to the extent that it relates to a core activity, and

(b) after the end of that period the appropriate regulator must refuse to give any member of the group a Part 4A permission to carry on a core activity.

(3) At the end of the period specified in subsection (1)—

(a) in section 142H, subsections (1)(b) and (4) to (7) and, in subsection (8), the definition of “specified”, and

(b) sections 142K to 142V,

cease to have effect.

(4) In subsection (1) “the relevant commencement date” means the day appointed for the coming into force of section 4 of the Financial Services (Banking Reform) Act 2013 so far as it inserts this section.”

Lord Turnbull: I referred to the second reserve power, which would allow that where, in the commission’s view, it was felt that not just a single bank but the banking sector as a whole was not respecting the constraints of ring-fencing and the scheme was basically not working, it could move by steps to full separation. Of course, this second reserve power was predicated on the assumption that there will be a fundamental review of the kind that some of us have been arguing for. If all that we have is the PRA-led review of the kind that the Government have been seeking, we would certainly not have a sufficiently strong basis. However, the review we are seeking is based on a view of the world in which, first, there is continuous innovation and, secondly, other jurisdictions are making changes—notably in the EU. At some point that, combined with the behaviour of a banking sector, may lead to the conclusion that there should be a further change. Deciding that this scheme is not working does not necessarily lead you to full separation; it could lead you to something else, such as tightening the regime or some other modification.

We have had this argument about the review. However, then you get to the real crunch, which is that even if there is agreement on the review, and the review says that ring-fencing needs to be changed in some way, this amendment says that the further action that has been identified and recommended by a son of Vickers could be implemented under the powers of this Bill. That is the fundamental disagreement. The Government argue that that means that you are doing something completely different. I argue, first, that getting legislation is not an easy thing to do—you have to compete for time; and, secondly, that not being able to implement the conclusions of such a review reduces the effect of the deterrence and increases the opportunity for lobbying. In any case, the Government would have the last say in the scheme that we have devised. Therefore, if there was a recommendation from a Vickers mark 2, the Government would not be forced to act on it: they could decide that they did not want to act on it and did not have to accept it. Equally, if they wanted to, they

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would be able to. The position is asymmetrical. Since the Government have a veto, they cannot be railroaded into a policy that they do not want. However, if it is a policy that they do want, they have the power to accept it and act accordingly. That is the basis of Amendment 23, which refers to this power, and of Amendment 117, which states that you cannot exercise this power until a fundamental review has taken place.

Lord Blackwell: Could the noble Lord explain the drafting of Amendment 23? As I understood his explanation, it was that this would be a contingent power that the regulator could enforce if necessary. The way the amendment is drafted, proposed new Section 142VA gives the impression that it would be a requirement regardless of any other condition. Perhaps the noble Lord will clarify how it will become contingent on the regulator deciding that it is necessary.

Lord Turnbull: If the drafting does not say that, we will have to amend it. The clear intention is for this to be a power and not a requirement. I beg to move.

Lord Lawson of Blaby: Perhaps I may say something about this. As the noble Lord, Lord Turnbull, mentioned, we retrenched on this in discussions on earlier groups. This is something to which I attach great importance. The noble Baroness, Lady Cohen, said that the commission had got it all wrong, that ring-fencing could not possibly work and that there would have to be complete separation. I agree with her—and this is no surprise. I was speaking out for complete separation long before almost anybody else I can think of, certainly in this country. For five years I have been writing and speaking on this: before the parliamentary commission and before the Vickers report. It remains my view that this is most unlikely to work, partly for reasons that the noble Baroness gave and partly for others.

Of course, as the noble Lord, Lord McFall, pointed out, we on the commission decided that it would be sensible to have a unanimous report. There was no majority on the commission—and certainly not unanimity—for complete separation. Therefore, we proposed what we proposed. One thing we proposed, which is what this group of amendments is about, was a route to complete separation. This is what the amendment is about: a process by which, if it is seen, and events prove, that the noble Baroness and I are correct, along with many others who think the same, this procedure, which the Government at the present time refuse to accept—something I regret—is a way in which we might get there.

When I asked the Minister what the great advantages were of universal banking, from which we should in no way depart, his main argument was that diversity was a form of strength. I am old enough to remember when industrial conglomerates were extremely popular. In the late Lord Hanson’s group, and others, there were a whole lot of disparate industries in the same holding company, and the argument was that this diversity was a form of strength. In fact, of course, it was a disaster and nobody argues the case for industrial conglomerates any more.

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5.30 pm

However, at least with industrial conglomerates there is the discipline of the marketplace and you can allow companies to fail. The problem in banking is that the conglomerates are much more serious. You get the problem of “too big to fail”. Indeed, it is not just too big to fail, but too complex to fail and, as we have seen, too big and too complex to manage. That problem has proved to be right at the heart of this. My noble friend the Minister is saying, “Forget about all that, let us make them even bigger and even more complex”. I am afraid that he has not convinced me. In certain special circumstances there may be some slight advantage in having linkages of this kind, as there were with the conglomerates. However, the balance is overwhelmingly on the other side of the ledger. It is a huge disadvantage and a huge risk for the economy, which we should not entertain.

The Government have also said—I do not know whether the Minister is going to say this now but a government spokesman has said it in the past, and I think that the Treasury said it in its response to our commission’s report—that maybe you are right and we should go this way, although their heart is not in it. It should be new primary legislation and not a power under this Act, which, as the noble Lord, Lord Turnbull said, can be exercised only with the agreement of the Treasury and the Government who are responsible to Parliament. We are not saying that an independent committee can decide any more than the Vickers committee could decide. It had to be accepted by the Government of the day. If you say that this has to be new primary legislation the reality is that it will be too much hassle. There will never be time for the primary legislation and it simply will not happen. It is an integral part of the logic behind this Bill. That is why it should be in this Bill and why the noble Lord, Lord Turnbull, is absolutely right.

There are in a sense two separate issues. There is the issue—which we were all concerned about and to which reference has been made during the debate on earlier groups of amendments—of the intense ingenuity of investment bankers, in particular, who may find ways round it and also the success in lobbying. Maybe we need to introduce something—at a later stage maybe; it is too late to do it today—to implement on the statute book the recommendation of the parliamentary commission about lobbying in paragraph 262 of its summary of conclusions. If you look again at what happened in the United States, intensive lobbying led to a weakening of the Glass-Steagall legislation, and British banks are just as able to do it as American ones.

However, it is not just a question of finding clever ways round or lobbying in this instance by particular banks but also, as has been widely pointed out, that the whole structure may not work. If it does not, we have to go for industry-wide separation and that is what this is about. I am not going to talk now about proprietary trading, because we are going to come to it later, but as the issue has been raised I will just mention it now even though it is not really relevant to this group. Proprietary trading has been separated out in the United States. We made recommendations about that too in an earlier report. The final report was not an attempt to sum up everything: we did it in tranches.

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This comes back to the question of culture. Maybe I am old-fashioned but I regard one of the essential elements of banking culture to be service to clients. As the whole essence of proprietary trading is that there is no client, the culture of service to clients cannot possibly exist. It is totally alien and the banks are literally in it for themselves. That is a separate issue. The important thing now is that there should be a route to complete separation if too much ingenuity is shown, if there is too much successful lobbying or if the whole system is shown to be flawed, which I suspect will be the case for a number of reasons which noble Lords have already mentioned. We will abandon this route at our peril. I fear that if we do, we will deeply regret it in the future.

The Archbishop of Canterbury: My Lords, I apologise that I, too, was not here for Second Reading as I was at the funeral of a close friend. I speak as a member of the PCBS, having had the privilege of a year of lessons from the other members, especially noble Lords here today, and the great pleasure of being rung up by the noble Lord, Lord Lawson, quite frequently at weekends, to explain how I should think about a particular subject, which he has done with great eloquence as well today.

I agree entirely with the speeches made by the noble Lord, Lord Turnbull, twice, and both speeches by the noble Lord, Lord Lawson, which have put the position very clearly. It must be a very long time—and my experience of this House is very limited—since a solution to a major problem was put forward with such a noticeable lack of enthusiasm. Almost everyone who has spoken about the ring-fence has damned it with faint praise, to put it at its most polite. The noble Baroness, Lady Cohen, simply eliminated it quite quickly and very clearly. We are in danger of getting lost in looking at the regulation and forgetting what the regulation is trying to do. This is about a question of a culture and ethics, not detailed rules. We all remember Bob Diamond, the chief executive of Barclays, saying that culture is what happens when no one is looking.

We know what happened when no one was looking in the culture of some parts of the banking industry—they fixed LIBOR, overgeared and gamed any system of regulation going. All of that was dealt with under regulatory processes that did not work. They still fixed LIBOR, gamed the system and did all kinds of other things. The force of culture in those institutions made it hard to challenge and it is very noticeable that over 10 years when this was going on at its worst the number of people who blew whistles on this was almost zero. The culture made it very hard to discern that what you were doing was not right.

The noble Lord, Lord Lawson, referred to the dreadful effect of the meltdown we experienced in 2008—as was said earlier, five years almost to the day. The terrible cost of that catastrophe must not happen again. That is what we are trying to do. It has affected the City of London for a while but the far-flung areas of deprivation and poverty in our country suffered grievous blows of further damage from which they are still in the process not even of looking for recovery. The damage when the culture goes wrong is not localised. It is not just about the City; it is about people far away

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who know very little about what is going on there but find that they cannot raise money, that they cannot do their business and that their banking disappears locally. The vast structures of reform that have been and are being passed through Parliament, including this Bill, and that are passing through the regulators and the industry, show that there is a great failure of trust—and trust will be re-established not by regulation but by culture.

We have already heard the problems expressed very clearly about the ring-fence. The noble Baroness expressed herself very pointedly and precisely. But one thing that we found in discussing this issue in the Parliamentary Commission on Banking Standards is that separation is almost as hard to work out as a ring-fence, because you have to decide which bits get separated into which bits. The next thing that happens is that the brilliant merchant bankers, as it was put a few minutes ago, get between the wall and the wallpaper—that, I think, was the memorable phrase—and start putting other bits into the wrong bit. They game the system just as much with separation as with a ring-fence, so I do not think that that is a simple solution.