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House of Lords

Tuesday, 15 October 2013.

2.30 pm

Prayers—read by the Lord Bishop of Leicester.

Introduction: Baroness Lawrence of Clarendon

2.40 pm

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

Introduction: Baroness Bakewell of Hardington Mandeville

2.45 pm

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

Syria: Peace Initiative

Question

2.50 pm

Asked by Lord Truscott

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

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

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

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

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

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

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

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

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

Lord Wallace of Saltaire: My Lords, Russian allegations were made. There have been investigations, in so far as it is possible to pursue investigations on the ground within Syria at present, and all the evidence to which I have had access suggests that the opposition did not

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have access to chemical weapons and certainly did not have the capacity to use chemical weapons on the scale on which they were used on 21 September.

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

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

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

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

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

Lord Wallace of Saltaire: As noble Lords will know, the Russians are not easy companions. Foreign Minister Lavrov is giving a big speech in Brussels today,

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I understand, on the relationship between Russia and Europe as a whole. Although we welcome the more constructive relationship that we are having at present on a number of Middle Eastern problems, we are also moving towards the EU summit at the end of November on the Eastern Partnership, and Russian behaviour towards Ukraine, Armenia, Moldova and Georgia regarding the possibility of those states signing association agreements with the European Union is, to say the least, not particularly constructive, nor is the effort that it is making to interrupt Lithuanian exports to Russia.

Financial Conduct Authority

Question

2.59 pm

Asked by Lord Naseby

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

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

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

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

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

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

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

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

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

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

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

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


Education: Foreign Languages

Question

3.07 pm

Asked by Baroness Bakewell

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

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

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

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

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

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

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

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

Lord Ahmad of Wimbledon: My noble friend makes a very important point. We need to understand the issue of languages at universities. Many universities

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offer languages as an addition to other disciplines, and people benefit from that. I come from the business community, and when I was on the board of a company we recognised that such degree courses provide a particular technical training alongside a language. Language training has changed—languages such as Chinese are much in demand by employers, and are being encouraged across the board.

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

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

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

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


Tobacco Products Directive

Question

3.14 pm

Asked by Lord Hunt of Kings Heath

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

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Lord Hunt of Kings Heath (Lab): My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In doing so, I refer noble Lords to my health interests in the register.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Earl Howe: My noble friend is right. E-cigarettes certainly have the potential for being a force for good in helping smokers to quit. At the same time, we do

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not want them to become a gateway into smoking. The aim is to have licensed products that have demonstrated safety, quality and efficacy, and for such products to be available as widely as possible.

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

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


Financial Services (Banking Reform) Bill

inancial Services (Banking Reform) Bill8th Report from the Delegated Powers Committee10th Report from the Delegated Powers Committee

Committee (2nd Day)

3.21 pm

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

Amendment 43

Moved by Lord Sharkey

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

“Competition and diversity

The Secretary of State must bring before Parliament within 6 months of the passing of this Act proposals to increase competition and diversity in banking by imposing upon any bank in which Her Majesty’s Government is a majority shareholder a duty to apply the following principles—

(a) the principle of regionality whereby each branch of the bank is permitted to take on new deposits, open new accounts and make loans to companies or individuals only when the registered addresses of these companies or individuals is within the defined geographical area of operation of that branch;

(b) the network principle whereby regional groups of local branches are autonomous in terms of governance, publish separate reports and accounts, collaborate with other branches to share central services such as the provision of systems, marketing, specialist financial products, liquidity management and wholesale funding while also maintaining appropriate mutual guarantees and self-regulation within the group to ensure that failing local management and branches are dealt with within the group with no recourse to the taxpayer;

(c) the stakeholder principle whereby the governance of regional groupings of local branches explicitly includes stakeholder representation, comprising local businesses, customers, suppliers and employer and elected employee representatives;

(d) the social purpose principle whereby a broader social purpose is embodied either in the banking licence of the bank or other statute so that the directors do not have a duty to maximise profit, but to ensure the profitability and financially sustainability of their local operations in supporting the economy of their regions of operations and financial inclusion in those regions, and nothing in this social purpose principle requires making loans that could not reasonably be expected to be repaid.”

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

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

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

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

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

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

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

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

This is the situation today: there is a lack of real competition and of real diversity. A study by the University of Oxford published in April this year by the Building Societies Association shows that across both the savings and mortgage markets diversity

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has dropped by about 20% since 2004. The report acknowledges some hopeful signs and says that in recent years the decline appears to have levelled off, but it concludes:

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

It also says, bluntly:

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

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

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

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

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

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

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

3.30 pm

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

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

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

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

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

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

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

should be commenced immediately. It continued:

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

to the competition authority,

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

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

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

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

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

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

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

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

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

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

3.45 pm

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

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

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aspect of the crash, and a lack of accountability in the structures of the bank is the other. This is where I am very much in favour of what my noble friend Lord Eatwell says, with one proviso.

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

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

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

The third part of this is the most important—that is, the representation of the skills and knowledge of the workforce and stakeholders in the corporate governance of the firm. This leads to a balance of interests that holds people accountable. I completely agree with my noble friend Lord Eatwell about the stress on regionality and relationships in the second part of the amendment; relational banking is absolutely essential. However, that implies local knowledge and the restoration of what we have lost, which is trust. So

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this is not a quick fix. I commend the work of the most reverend Primate the Archbishop of Canterbury in talking about a 10 to 15-year structure of reconstituting credit and trust in the nation. There will have to be a coalition between different stakeholders in doing so. But it is a terrible missed opportunity when we have an asset that has not been regionalised and has not been subject to proper balance of power in corporate governance, with no regional accountability in it to look at bad practice and correct it before it reaches the taxpayer. Above all, as the story of Northern Rock teaches time and again, if you maximise immediate returns on investment, you will lose the asset. There have to be constraints on that which allow capital to maintain its presence in areas and be a partner to business and families. In terms of regionality, relationships, stakeholder accountability and non-maximisation, this amendment holds the key to the establishment of the banking system that must come now.

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

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

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

I have known the bank for many years. When I was Economic Secretary to the Treasury and Airdrie Savings Bank staff came down for a fiduciary interview with staff at the Bank of England, which was then in charge of regulation, there was a threat of a bribe being offered as Airdrie staff brought with them tins of shortbread. I can be extremely proud of Airdrie Savings Bank. As someone who, in various guises, has

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had to promote financial services in this country, there are not many other banks that I can be proud of. It would be a pity if, through this legislation and, for example, capital adequacy requirements, difficulties were put in the way of this superb institution. It is an old-fashioned institution but, frankly, would it not be a good idea if banking became boring and old-fashioned again?

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

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

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

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

As for the price, one has only to look at the cost of capital to banks and then at the amount that they are charging consumers to realise that the situation is lunatic. I wish my noble friend Lord Flight well because

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there must surely be scope for something to be done on that issue. The difference between the cost and the amount being charged is totally disproportionate. This came up earlier in Question Time, when my noble friend on the Front Bench replied that there is concern about the amount being charged by banks when compared with what is charged on payday loans and so on. A helpful and illuminating article in the press in the past few days brought out this point. I hope that one can get something done about that.

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

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

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

Lord Sharkey: It was me.

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

4 pm

I suggest that Amendment 102 might well have called upon the reviewer to look at more extensive issues. I would hope that we could also have a long, cool and deep look at the problems of entry into the banking system. I do not think that “competitive” is the right word to describe the current difficulties. Also, we should look hard at how we could bring in regional banks, along the lines of Amendment 43. I have difficulty with some of the proposals there—for example, that there should be statutory constraints on how a regional bank can accept deposits, being unable to

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accept deposits from individuals or companies outside its region. I cannot see that that is a workable proposition. There are several detailed issues such as that which need careful review.

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

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

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

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

It is not clear to me that the regional agenda will necessarily be an effective model, particularly when it is created by taking clones of existing bank networks—by simply breaking up the existing banks into smaller bits and trying to run them on the same lines, with much of the same culture and same technology. I wonder whether that will work and whether the future doe not lie in a

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more disruptive technology that will grow up from below. I wonder why, for example, we are keen on switching. Why will people want to switch from one kind of a bank to another kind of bank if it is just a smaller version of the same kind of bank? I am beginning to think that the real future lies not so much in the break-up of the existing model but in a disruptive technology, with someone doing to banking what Amazon has done to retailing.

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

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

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

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

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

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

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

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

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

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

4.15 pm

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

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

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

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

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

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

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

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

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

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

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

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

This is what the Government are not giving.

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

4.30 pm

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

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

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

Lord Newby: My Lords, as far as immorality is concerned, later we will deal with amendments on the reversal of the burden of proof and on the new

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

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

Amendment 43 withdrawn.

Clauses 9 to 12 agreed.

Amendment 44

Moved by Lord Newby

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

“Part 3Bail-in stabilisation option

Bail-in stabilisation option

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

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

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

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

(a) before the passing of this Act, or

(b) on or before the last day of the Session in which this Act is passed.

(5) In this section “building society” has the same meaning as in section 84 of the Banking Act 2009.”

Lord Newby: My Lords, this clause and the new schedule to the Bill in Amendment 105 have the effect of amending the Banking Act 2009 to provide the Bank of England with a new stabilisation option—the bail-in option. Bail-in involves shareholders of a failing bank being divested of their shares or having their holdings severely diluted and creditors of the bank

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having their claims cancelled, reduced or deferred to the extent necessary to restore the bank to financial viability. During the financial crisis it was not possible simply to allow banks which failed to enter insolvency, as other companies do when they fail. This is because of how interconnected the banking system is and because of the need to protect the banks’ customers by ensuring that they could continue to access essential banking services. This protection came at a very high cost to the taxpayer. These new powers will provide one solution to that problem by offering an alternative to insolvency which exposes shareholders and creditors to the losses of the bank, while enabling the bank to continue to operate as a going concern. This will help to ensure that taxpayers are never again required to bear all the costs of resolving failing banks.

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

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

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

Paragraph 4 defines the power to make a special bail-in provision cancelling, modifying or changing the form of a liability of the bank in resolution. This power can be exercised only for the purpose of or in connection with cancelling, reducing or deferring a liability of the bank in question. Proposed new Section 48B also specifies a set of liabilities that are excluded from the power to make special bail-in provision. These liabilities are excluded for one of two main

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reasons: either because they would not have been exposed to losses in insolvency or because exercising the bail-in powers on them would be likely to impede the resolution of the firm or create wider market instability. This includes deposits protected by the Financial Services Compensation Scheme or similar overseas deposit guarantee schemes, liabilities to the extent that they are secured, client assets, short-term liabilities owed to certain financial institutions outside the affected firm’s group, certain liabilities arising in respect of central counterparties and settlement systems, and certain debts owed to employees and trade creditors. The Treasury has the power to amend this list by order.

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

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

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

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

New Section 48P gives the Treasury the power to make an order relating to the treatment of protected financial arrangements in a bail-in. Protected arrangements are defined as security interests, title-transfer collateral arrangements, and set-off and netting arrangements. These arrangements are entered into by the counterparties in order to minimise the risks associated with the financial instruments. Therefore it is right that these arrangements are respected to the extent possible while pursuing the special resolution objectives. This is analogous to the existing power for the Treasury

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under the Banking Act 2009 to specify protections in the case of transfers of some but not all of the business of the bank under resolution.

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

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

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

4.45 pm

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lord Higgins: My Lords, these clauses give the Bank of England very considerable powers and responsibilities, which we will need to consider very carefully; we are going somewhat into uncharted waters.

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At a purely quantitative level, will my noble friend, if not today then on some other occasion, indicate how the system would have worked if it had been applicable in the recent financial crisis? That is to say, in the case of the bailed-out banks, would it have been sufficient to mean that there would have been no charge on the taxpayer, or is it likely that there would still have been a charge?

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

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

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

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

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

I am sorry if my answers are slightly out of order, but the noble Lord asked what the word “comparable” meant when we talked about other countries’ depositor protection. As he knows, all EU member states have depositor guarantee schemes with a common limit, and all those schemes will be considered comparable.

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Therefore it covers any schemes that will ensure small depositors in the event that the bank becomes insolvent and unable to pay its debts, in the same way as our FCA.

5 pm

Lord Eatwell: I was thinking of the Crown Dependencies.

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

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

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

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

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

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

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

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

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

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

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

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

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

Lord Higgins: I come in on the same point, if I may, because my reaction was the same as the noble Lord who has just spoken. Am I right in thinking that all

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these bail-in provisions apply only to ring-fenced banks? Is that the case, or not, or are they extended to banks that are not within the ring-fence? Perhaps the Minister could make absolutely clear what the position is, because it was not clear earlier.

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

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

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

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

Lord Newby: That is what I was attempting unsuccessfully to say.

Amendment 44 agreed.

Amendment 45

Moved by Lord Newby

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

“Part 4Conduct of persons working in financial services sector

Functions for which approval is required

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

(2) Omit subsection (5).

(3) For subsection (6) substitute—

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

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

“(6B) If—

(a) a function of a description specified in rules made by the FCA under subsection (3)(a) or (b) is a controlled function in relation to the carrying on of a regulated activity by a bank, and

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(b) the FCA is satisfied that, in relation to the carrying on of a regulated activity by a bank, the function is a senior management function as defined in section 59ZA,

the FCA must designate the function in the rules as a senior management function.

(6C) If a function of a description specified in rules made by the PRA under subsection (3)(a) is a controlled function in relation to the carrying on of a regulated activity by a bank, the PRA must designate the function in the rules as a senior management function.”

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

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

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

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

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

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

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

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

Amendment 53A has two limbs. The first seeks to ensure the operational objectives that the FCA must consider when making rules of conduct for approved persons or bank employees. I can assure your Lordships that this part of that amendment is unnecessary. The reference to the operational objectives in new

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Section 64A(1) attracts all aspects of these objectives as defined in Sections 1B, 1C, 1D and 1E of FiSMA, without any additional words.

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

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

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

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

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

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

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

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

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

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

and those persons could be any employee of the bank.

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

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

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

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

5.30 pm

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

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other form of bad lending—old-fashioned bad lending such as HBOS or buying CDO instruments from the US. It is not just individuals when a banking system blows up but the background as well.

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

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

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

Lord Brennan (Lab): My Lords, I speak to the amendments in my name and in those of the noble Lords, Lord McFall and Lord Watson. I declare an interest as chairman of Global Financial Integrity. It is a Washington-based think tank whose purpose is to promote measures designed to limit and eventually eradicate illicit financial flows around the world, in particular those from developing countries, which presently run into hundreds of millions of dollars. It is thought

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that they exceed the amount of aid that developed countries contribute to the countries out of which that money comes. I have experience as non-executive director of a banking operation and have advised banks professionally.

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

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

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

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

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

The amendments seek to ensure that the definition of “senior management function” should be seen to include those areas that I have just mentioned in terms of compliance. Those in banking must comply and must avoid the risk of non-compliance. The FCA, in specifying senior management functions, will require them to do things, including a minimum threshold for

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sums to be regulated. Is this too much? It was not thought to be too much in the United States, which has a far bigger banking system than ours. Would it run a risk of damaging our banks? It has not in the United States. It is ours that have suffered the penalties, not theirs. These amendments seek to establish a norm—not some Anglo-Saxon aberration—for proper cross-border behaviour in the banking world.

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

“related to or resulting from”.

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

5.45 pm

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

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

“all persons responsible for management of persons”.

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