13: Before Clause 18, insert the following new Clause—

“Financial Conduct Authority

In Chapter 1 of Part 1A of the Financial Services and Markets Act 2000 (the Financial Conduct Authority), after section 1J insert—

15 Dec 2015 : Column 2005


1JA Recommendations by Treasury in connection with general duties

(1) The Treasury may at any time by notice in writing to the FCA make recommendations to the FCA about aspects of the economic policy of Her Majesty’s Government to which the FCA should have regard when considering—

(a) how to act in a way which is compatible with its strategic objective,

(b) how to advance one or more of its operational objectives,

(c) how to discharge the duty in section 1B(4) (duty to promote effective competition in the interests of consumers),

(d) the application of the regulatory principles in section 3B, and

(e) the matter mentioned in section 1B(5)(b) (importance of taking action to minimise the extent to which it is possible for a business to be used for a purpose connected with financial crime).

(2) The Treasury must make recommendations under subsection (1) at least once in each Parliament.

(3) The Treasury must—

(a) publish in such manner as they think fit any notice given under subsection (1), and

(b) lay a copy of it before Parliament.””

Lord Ashton of Hyde (Con): My Lords, this amendment provides for the Treasury to issue remit letters to the FCA, a measure first announced in relation to both the PRA and FCA in the Government’s productivity plan in July. The Bill already makes provision for the Treasury to issue remit letters to the PRC and the amendment will enable Peers to consider provisions for the FCA and PRC remit letters together. As the House will know, the Bank of England and Financial Services Bill generally relates to the governance of the Bank, rather than the FCA. However, we have been considering the best legislative vehicle for the FCA remit letter provision and have decided that it would sit best alongside the PRC remit letter provision. As to the remit letter’s content, the productivity plan outlined that remit letters will provide information on the Government’s economic policy and will make recommendations about aspects of that policy to which the FCA should have regard. The recommendations in the letters will not be binding and will not compromise, modify, or override the FCA statutory objectives in any way; neither will they relate to individual firms or cases.

As to the timing and frequency of the publication of the letters, we are aiming to publish the first FCA remit letters following Royal Assent for the Bank of England and Financial Services Bill, after which they will be published at least once per Parliament. The letters will be used to provide a steer on the Government’s economic strategy over that period, but letters could be sent more frequently if particular issues arise.

Finally, the Treasury must publish its recommendations and lay a copy before Parliament. I beg to move.

Baroness Kramer: My Lords, our one concern with this amendment was that it could in some way compromise the statutory objectives of the FCA as laid down by Parliament. The Government wrote to us with an assurance that that was not their intention. Today, the Minister read into the record the text of the letter.

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He said that the recommendations would not compromise, modify or override the FCA’s statutory objectives in any way. Given that a Minister’s statement in


is a weighty commitment, we are satisfied with the amendment.

Lord Davies of Oldham: My Lords, I was going to make almost exactly the same contribution and my question was exactly along those lines, so I am happy to endorse what the noble Baroness, Lady Kramer, said and look forward to the Minister’s response.

Lord Ashton of Hyde: My Lords, I am very grateful to both the noble Baroness and the noble Lord, Lord Davies. I can only repeat what I said before. I accept the weight and the implications of what I have said.

Amendment 13 agreed.

Amendment 14

Moved by Baroness Kramer

14: Before Clause 18, insert the following new Clause—

“The FCA’s competition objective

In section 1E of the Financial Services and Markets Act 2000 (the competition objective), after subsection (2)(e) insert—

“(f) how far competition is delivering diversity of provision, including diversity of ownership, geography, community and size.

Baroness Kramer: My Lords, once upon a time not so long ago, small local banks and building societies—some of them mutual, some of them not—served our local communities. They knew their local communities, the individuals and the businesses, and were themselves tied to the economic health of that community, thriving only when the community itself thrived. It was not utopia—I think that most of us in this House would not like a loan decision to be made by Captain Mainwaring—but those banks and building societies played an incredibly important role in making sure that we had a sector of banking that supported both the real economy and local development and regeneration. We have lost that layer of banking. The United States and Germany have retained it. During the last, very severe recession, it was notable that that layer of banking provided ongoing funding to individuals but, even more importantly, to small businesses, and a mechanism for the Government to support those small businesses. It also contributed to financial stability. Here in the UK our Government had to go through the most extraordinary contortions to funnel funds to small business.

We need to restore that level of banking. Banking is changing dramatically. Online banking and FinTech are largely disintermediating the big banking sector, which the main high street banks thought belonged to them. Online is very successful. I am delighted to hear that in the third quarter of last year Funding Circle became the third largest lender to small businesses in the UK. That is phenomenal for a company which did not exist five years ago. Although that successful change is coming, there is new competition. For many small businesses, online is not necessarily the answer. They need that partnership which was on offer from a

15 Dec 2015 : Column 2007

community bank, community building society or community mutual, which could help them through the early stages of development and with many of their difficulties. Very few of the online providers take on that role. I can think only of ThinCats, and it is very small. Therefore, I can see no way in which we can restore that missing layer of banking without an effort by both the Government and the regulator. That is the purpose of this amendment.

The Government often talk about diversity, and I very much support Amendment 15, tabled by the noble Lord, Lord Naseby, which is in this group. But when the Government talk about diversity, they focus on making sure that the regulator treats diverse entities appropriately, which is entirely right. It should not attempt to fill the gaps and deal with the current market failure. I have named one significant area: that of local and community banks.

I am not going to press this amendment today, but I want to make sure once again that this matter enters the conversation, because it is a neglected area. In every conversation I have with government, the Treasury or the regulator, diversity is merely a fashion of regulating particular kinds of business. That does not recognise the significance of that gap and market failure. For that reason, I beg to move.

5.15 pm

Lord Davies of Oldham: My Lords, the amendment tabled by the noble Lord, Lord Naseby, which the Government support, is an important step. We welcome the move by the Government to commit to a more diverse financial sector, in which the mutuals are clearly key. However, it is not enough merely to put this into legislation—action is required. What are the Government doing to ensure that this is more than just a gesture? Presumably, the FCA’s remit letter will have to be changed to reflect this new principle. Will the Government therefore commit themselves to introducing an amendment at Third Reading to reflect this obvious fact?

Lord Naseby (Con): My Lords, I shall speak to the new clause which stands in my name as Amendment 15. In doing so, I reflect the privilege of working with the mutual movement for 30 years. In creating this amendment, it was very clear that the Bill as it stood left some gaps of the one-size-fits-all kind. I gave some examples on Second Reading and further examples in Committee. Indeed, I can record this evening in your Lordships’ House that there is one new mutual insurer now trading, for the first time in 20 years. It is a new military mutual, serving our Armed Forces. I cannot think of a better new mutual to stand on the market than one which serves our Armed Forces.

I pay tribute to the Front Bench and in particular to the Minister. I understood that the examples I gave of misunderstandings, or of being left out or not fully understood, have been looked at by Her Majesty’s Treasury. I think that they were found to be quite genuine cases. I recognise that Her Majesty’s Government reserved the right, from the start, to look at the wording of the original new clause that I had tabled. I always had an open mind that those words might have to be amended, if necessary. They have been and are now before us.

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There is still a problem in the world outside in understanding this. Half the population is being served by mutuals, yet very few people in authority really understand the driving force behind the mutual movement and why it is growing today. There is a need for all of us in society, particularly the regulators, to have a better understanding. I question whether the new regulator has anybody senior who has ever worked in a mutual. If not, then I hope there will be some appointments made hurriedly.

As far as the mutual movement is concerned—the building societies, the mutual insurers, the friendly societies and credit unions, and of course the Co-Op—tonight will be a special night if this new clause is accepted. It will recognise that their future needs will have to be considered and be better understood, so I say a huge thank you on their behalf to your Lordships’ House if this new clause is accepted.

Lord Ashton of Hyde: My Lords, I am grateful to both the noble Baroness, Lady Kramer, and my noble friend Lord Naseby for raising this important issue. I will take each of their amendments in turn.

The amendment in the name of the noble Baroness, Lady Kramer, would add diversity of provision, including diversity of ownership, geography, community and size, to the list of factors to which the Financial Conduct Authority may have regard as part of its competition objective. The Government agree that access to suitable and affordable banking services is important for communities across the UK. The Government want to see greater competition in our banking sector, with more banks challenging the large incumbents. If communities or entrepreneurs want to set up a bank, either to serve their local community or to compete nationally, and can do so responsibly, Government and regulators should not be an obstacle to this.

This is exactly why the FCA is already required to promote effective competition in the interests of consumers of regulated financial services. We would expect its consideration of competition already to involve not just the number of competitors but the diversity of approach, including geographical location and community. In advancing its competition objective, the FCA may take account of various factors including barriers to entry for new providers of financial services, the needs of different consumers and the differences of businesses.

Baroness Kramer: Can I just add one point for the Minister? The FCA has recently completed a review of its competition objective, and he may be surprised to find that the word “diverse” does not occur anywhere in that review.

Lord Ashton of Hyde: After this, it will be alert to the need to look at diversity. I will come to how we deal with mutuals in a minute. On the last point about the needs of consumers and the differences of businesses, the statute is also clear that the regulators should recognise the different features of a diverse range of business models when pursuing objectives. This is achieved by the principle of good regulation whereby the regulators must have regard to,

“the desirability where appropriate of each regulator exercising its functions in a way that recognises differences in the nature of, and objectives of, businesses carried on by different persons subject to requirements imposed … under this Act”.

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As part of fulfilling the existing competition objective, the Government have worked with the regulators to lower barriers to entry. That is why the Government created the Payment Systems Regulator to ensure all banks can access the payments systems on fair and equal terms.

These reforms and others have already had a significant impact, which I hope answers, in part, the noble Lord, Lord Davies. Between May 2010 and May 2015, eight completely new UK banks, all of different sizes and locations, were authorised by the regulators, including two new banks during this Parliament, with several more in the pipeline. This compares to just one new authorisation of a UK bank in the preceding five-year period. The PRA and FCA will also launch their new bank start-up unit on 20 January next year.

Furthermore, to encourage banks to provide services across a broad range of geographical locations and improve access to finance for small businesses across the UK, a number of measures have been implemented, which I will briefly go through. There is now the SME appeals process and the Business Banking Insight survey. The Government have also established the British Business Bank. These improvements complement another initiative: the postcode lending policy, which has allowed for these alternative finance providers and challenger banks to target regional lending “black spots” through publishing lending data by geographical region. This makes the British banking industry the most transparent in the world.

Given all the activity already taking place in this field, it is the Government’s view that the amendment in the name of the noble Baroness, Lady Kramer, will not add to the existing work being conducted by the FCA. It is clear the regulators already take these factors into consideration when fulfilling their competition objective, so this amendment is unnecessary. I therefore respectfully ask the noble Baroness to withdraw it in due course.

Turning now to my noble friend Lord Naseby’s amendment, I indicated in Committee that the Government looked favourably on the intention behind his original amendment. I now welcome my noble friend’s current amendment, which we are delighted to accept. I am extremely grateful to him for raising this issue, and acknowledge the work he has undertaken in advancing the cause of mutuality. I hope that introducing the amendment, which puts consideration of mutuality and other types of business organisation into both regulators’ guiding principles, reassures noble Lords, including the noble Lord, Lord Davies, that the Government strongly support a diverse financial services sector and the part that mutuals play in achieving it.

Lastly, the noble Lord, Lord Davies, asked whether an amendment was needed to the FCA remit letter to reflect the amendment that we will accept. We do not agree, and I therefore cannot give that commitment, because the provision for the remit letter already allows the Government to make recommendations about aspects of their economic policy relevant to the application of the regulatory principles, which will apply to the principles as amended.

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Lord Naseby: My Lords, I record my enormous thanks to Her Majesty’s Government, colleagues from across the House and, in particular, the spokesmen from the Liberal Democrats and the Opposition for their help in the early stages of drafting the amendment.

Amendment 14 withdrawn.

Amendment 15

Moved by Lord Naseby

15: Before Clause 18, insert the following new Clause—


(1) Section 3B of the Financial Services and Markets Act 2000 (regulatory principles to be applied by both regulators) is amended as follows.

(2) In subsection (1)(f) after “persons” insert “(including different kinds of person such as mutual societies and other kinds of business organisation)”.

(3) After subsection (3) insert—

“(3A) “Mutual society” has the same meaning as in section 138K.””

Amendment 15 agreed.

Amendment 16

Moved by Baroness Worthington

16: Before Clause 18, insert the following new Clause—


Financial sustainability report

(1) Within twelve months of the coming into force of this Act, the Treasury must prepare and publish a report containing the matters specified in subsections (2) and (3).

(2) The report must contain an assessment of how the following aspects of financial regulation contribute to or hinder the United Kingdom’s long-term sustainable economic growth—

(a) rules governing the admission of securities to recognised growth markets,

(b) rules governing the admission of securities to the Official List, and

(c) the time horizon of the Bank of England’s financial stability monitoring activities.

(3) The report must make recommendations for the development, via the regulation of financial services, of uniform, consistent and clear standards for the disclosure of climate-related financial risk, in order to provide information to lenders, insurers, investors and other financial intermediaries.

(4) In this section—

“long-term sustainable economic growth” means economic growth that is resilient to risks arising from long-term fundamental change, such as climate change, technological change and demographic change;

“recognised growth market” has the meaning under section 99A of the Finance Act 1986;

“Official List” has the meaning under section 74(1) of the Financial Services Markets Act 2000;

“the Bank of England’s financial stability monitoring activities” means activities undertaken by the Bank of England in order to meet the objectives set out in section 2A of the Bank of England Act 1998.”

Baroness Worthington (Lab): My Lords, in Committee we considered three issues relating to the wider sustainability of financial services in the UK and the way they are regulated and overseen partly by the Bank of England, and by other bodies. In tabling this amendment at Report, I have endeavoured to capture

15 Dec 2015 : Column 2011

the three topics that we discussed previously in one overarching obligation or requirement on the Treasury to report back to the House on these important issues.

Since Committee, two very important events have served to illustrate the importance of wider sustainability, and climate change in particular, in relation to our financial services. The first is the appalling flooding throughout the North of England and the impact that has had on our businesses, homes and financial services. The second is the signing into law of the climate change agreement in Paris, which clearly sets the world on a path towards rapid decarbonisation in order that we can stay within the new goal of a limit of well below 2 degrees centigrade, aiming for 1.5 degrees. This has been virtually universally accepted as an historic moment which will have significant ramifications.

On financial services and our economy, it is clear that we will need to adapt to oversee an orderly transition from a relatively carbon-intensive system to one in which we are no longer adding anthropogenic carbon dioxide emissions to the atmosphere. The Treasury and the bodies which report to it can have a significant role in helping to bring about that orderly transition.

I will briefly mention the three issues the amendment touches on, the first of which is that we should consider the way we list various entities on our growth markets. It is clear that the Government intend to encourage investment in growth markets—they have indeed introduced a host of tax benefits to the companies listed in our growth markets—but these are relatively unregulated. The nature of those markets is that they can attract companies with a relatively short outlook—a desire to raise capital in London without thinking more broadly or in the longer term. A number of companies listed in our growth markets, including the AIM market, are in the extractive fossil fuel industries, which I would be hard pressed to classify as growth industries that the Government should be seeking to encourage investment in. We have asked that a report should look at these aspects and consider whether there is more that needs to be done to oversee the way in which these growth markets are attracting capital and rewarding investment.

The other important issue that we would like to be reported on is disclosure. I am grateful to my noble friend Lord McFall and the noble Lord, Lord Deben, who is not in his place, who spoke on this so eloquently in Committee. This topic is gaining in prominence. Indeed, in Paris, the Governor of the Bank of England, Mark Carney, announced that Michael Bloomberg will assist him in the FSB in looking into the whole issue of disclosure at an international level. I have spoken directly with the Minister about this, and I know that the Treasury view is that this should be conducted at an international level. I do not disagree with that, but in the spirit of leadership, which we showed so clearly in Paris, it is appropriate that the UK should lead at home on these issues and not simply rely on international, multilateral processes. We are, of course, one of the largest financial centres in the world; we have a number of extractive and energy industries listed here, raising capital here and operating from here, and it is incumbent on us to work out what more can be done to ensure that we speed this orderly transition to a cleaner economy.

15 Dec 2015 : Column 2012

5.30 pm

Disclosure can have a powerful effect in that regard, but unfortunately, there are around 400 different disclosure regimes and they are not applied clearly and consistently. It is also very important that we make sure the rules are correct, which is another issue the amendment addresses. Overriding all this is the need to adopt a more long-term view in considering regulation of our financial sector. When Defra asked the Bank of England to look into issues related to climate change and climate risk, the FPC simply stated that climate change was beyond its time horizon. Customarily, these issues are viewed only within a three to five-year time horizon. It is clear that many longer term issues need to be taken into account when the Bank and other financial regulators consider sustainable economic growth, and we would like more thought to be given to the timescales used in assessing whether we have a sustainable economy.

This is more of a probing amendment to enable the debate to continue, rather than a legal text that we would expect to see adopted as law. But I would like to hear from the Minister what more the UK plans to do, in the light of events in Cumbria and Paris, to ensure that we are leading the world in getting our capital markets, financial sectors and services to apply themselves to the task of an orderly transition to a cleaner economy. I look forward to the Minister’s response.

Lord Teverson (LD): My Lords, it is a great pleasure to speak to this amendment. Indeed, I had meant to put my name to it, and I apologise to the noble Baroness, Lady Worthington, for not having managed that. It is also a pleasure for me to speak today on the Bank of England Bill, as I managed to visit the Bank for the first time today; the noble Baroness, Lady Wheatcroft, was one of the other people there. For the first time, I actually held a gold bar, which I think was going down in value—nothing to do with me but more to do with world markets. It was worth a mere £250,000, I believe.

The amendment is important. Let us be clear: the world has changed, even over the last week. Climate change and the inherent risks to investment, financial instruments and the sector as a whole have been brought to international and corporate attention. The amendment is not just about climate change, although that is my particular interest; it is about technological and migration changes, and all the other challenges we will face not just as a nation but as a much broader economy over the next few years. That is why a report that looks at these issues is very important. It is the further move forward that we need for our financial stability and for our long-range radar, to see where those risks and challenges come from.

When I first saw the amendment, I assumed that the Bank of England would have to make this report. It is absolutely appropriate that it is in fact the Treasury—and slightly ironic, because I get the impression that, although many parts of government are very positive on the green and climate change agenda, within the Treasury there is perhaps the occasional odd hesitancy. That is why I particularly welcome the amendment, and I hope the Government will consider it extremely seriously.

15 Dec 2015 : Column 2013

Lord Davies of Oldham: My Lords, it is only a short while ago that my noble friend Lady Worthington was speaking from the Front Bench, so it is somewhat otiose for me to seek to surpass her eloquence on the crucial issue of climate change, on which she has spoken in this debate and earlier this afternoon following the Statement on the outcome of Paris. The noble Lord, Lord Bourne, also distinguished himself in that discussion, as he did during his work in Paris. I therefore hope that the Minister, who, as my noble friend hinted, comes from a slightly different quarter—the Treasury—will not be any less enthusiastic in his response to Paris, where 195 countries reached agreement on aspects of what needs to be done. Of course, the Government have a little ground to make up after the past six months, when they seemed to many to be pursuing policies counter to the concept of the green and long-term sustainability agenda—but I am sure the Minister will take full opportunity to show his enthusiasm today.

Lord Bridges of Headley: My Lords, I am sympathetic to the intent of the amendment, and it is important that the Government consider how they can ensure that economic growth is resilient to risks arising from long-term fundamental changes. As the noble Lord, Lord Teverson, said, it is not just about climate change; there are technological and demographic changes, all of which could have significant implications for the global financial system. It is also important for the Government to understand and adopt best practices for the disclosure of climate-related financial risk. I agree with the noble Baroness, Lady Worthington, and she is right to raise this issue. However, as I hope I shall explain, the amendment is unnecessary and I hope noble Lords will agree with me.

The current legislation already provides for the statutory framework for the Financial Policy Committee to consider long-term systemic risks such as those listed in the amendment. Indeed, at its meeting of March 2015, the FPC discussed precisely one of those risks—to financial stability. This is evidence that the FPC considers risks across the breadth of time horizons and will continue to identify long-term as well as more immediate risks. The Bank is also taking action on longer term systemic risks through other channels. The issue of climate change, for instance, has been added to the Bank’s One Bank Research Agenda. Requiring the Treasury to produce an additional report on sustainability would mean unnecessary duplication of work.

On the topic of admission of securities to growth markets, the UK’s financial markets are obviously crucial to the efficient allocation of capital that supports jobs and growth, including to unquoted companies where the Government allow certain tax exemptions to improve access to the finance necessary for companies to expand. AIM, as the biggest SME growth market in the UK, plays an important role in providing funding opportunities beyond bank finance for unquoted SMEs which cannot fulfil the requirements of the main market at this stage of their life cycle.

Turning to the specific issue of disclosing climate-related financial risks, at the Paris climate change conference the Governor of the Bank, in his capacity as chair of the Financial Stability Board, announced that the FSB is establishing a task force on climate-related

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financial disclosures—the point the noble Baroness mentioned. This announcement follows the “Breaking the Tragedy of the Horizon” speech given by Governor Carney at Lloyd’s of London earlier this year. The newly established task force, under the chairmanship of Michael Bloomberg, will develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to lenders, insurers, investors and other stakeholders.

It is our firm belief that climate change as a global phenomenon can be tackled most effectively through co-ordinated international action. As the noble Baroness mentioned, to date a lack of co-ordination on the topic of disclosure initiatives has resulted in an estimated 400 different climate-related disclosure schemes. There is a real risk that this inconsistency makes it challenging for investors and other stakeholders to judge climate-related risks effectively.

The Financial Stability Board, as the authoritative forum for considering potential financial stability risks, provides the ideal international setting in which climate-related financial risk disclosures should be discussed, standards agreed and recommendations made. This Government are therefore fully supportive of the work of the FSB task force and have instructed government officials to engage fully in this international debate to ensure that the long-term financial risks associated with climate change are given full consideration.

This amendment requires the reporting of recommendations on standards for the disclosure of climate-related financial risk within 12 months of the coming into force of the Act. Considering that the task force is scheduled to complete its work within a year, this suggested timetable risks pre-empting the work of the task force already underway.

This is not to say, however, that domestic action does not have a role to play in improving climate-related risk disclosure. In fact, regulations made under the Companies Act 2006 already require all quoted companies to report on their greenhouse gas emissions. I submit that between our considerable spending commitments, our stance in international negotiations and our leadership in mobilising the financial system to help combat climate change, the Government are at the very forefront of efforts to understand and address the full range of financial risks that long-term fundamental change, such as climate change, could pose. I therefore, with respect, as the noble Baroness to withdraw her amendment.

Baroness Worthington: My Lords, I am grateful to the Minister for his response. I am not entirely satisfied that this issue has been looked at in sufficient detail by the Treasury. I am grateful to the Minister for his answer in response to the FSB, but in London now we have some of the brightest and best minds in the financial services sector and we can begin to address this problem ahead of our international efforts.

In particular, I am interested in how we are regulating unlisted companies. The Minister is correct to point to the disclosure requirements on listed companies, but we are giving substantial tax incentives to a fairly unregulated part of the financial sector upon which a large part of our economy relies, and more scrutiny is needed on that sector in particular.

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However, at this stage, I am happy to withdraw the amendment, and I hope that this debate and this topic of conversation will continue in this House and in the other place. I beg leave to withdraw the amendment.

Amendment 16 withdrawn.

Clause 19: Rules about controlled functions: power to make transitional provision

Amendment 17

Moved by Lord Bridges of Headley

17: Clause 19, page 15, line 21, leave out from beginning to “after” and insert—

“( ) The Financial Services and Markets Act 2000 is amended as follows.

( ) ”

Lord Bridges of Headley: My Lords, Amendments 17, 18 and 19 make some small technical changes to the Bill. The purpose of Clause 19 is to enable the regulators to include the full range of transitional provision in their rules when they bring in new senior management functions. The clause also gives the Treasury a wider power to make additional provisions in regulations to deal with complicated cases.

Amendments 17 and 18 implement a recommendation of the Delegated Powers and Regulatory Reform Committee in relation to those regulations. The amendments will ensure that the affirmative resolution procedure applies to any regulations under the new Section 59AB, which make provisions modifying, excluding or applying primary legislation.

Turning to Amendment 19, under the approved persons regime, the regulators have only the power of approval to perform a controlled function or, of course, to reject the application for that approval. The Financial Services (Banking Reform) Act 2013 gives the regulators the power to make senior management approvals subject to conditions or time limits. Clause 20 makes changes to these provisions to allow time limits as well as conditions to be varied after the initial approval has been given. Amendment 19 corrects an anomaly in these new provisions. The amendment will ensure that, where a regulator wishes to vary an approval on its own initiative, it must consult the other regulator if that regulator gave or varied the approval in question. Without this amendment, the other regulator would have to be consulted if it had given the original approval but not if it had only varied an existing approval. I beg to move.

Lord Davies of Oldham: My Lords, as these are technical changes we do nothing but endorse them and comment on the obvious fact that the Minister has not been in post overlong but has shown proper respect for the Delegated Powers and Regulatory Reform Committee and has moved with alacrity to enforce its request.

Amendment 17 agreed.

5.45 pm

Amendment 18

Moved by Lord Bridges of Headley

18: Clause 19, page 16, line 10, at end insert—

15 Dec 2015 : Column 2016

“( ) In section 429(2B) (regulations subject to affirmative procedure) for “contain” substitute “contain—

(a) provision made under section 59AB(2) which modifies, excludes or applies with modifications any provision of primary legislation;

(b) ”.”

Amendment 18 agreed.

Clause 20: Administration of senior managers regime

Amendment 19

Moved by Lord Bridges of Headley

19: Clause 20, page 17, line 17, at end insert—

“( ) after subsection (4) insert—

“(4A) Before one regulator varies an approval which was last varied by the other regulator, it must consult the other regulator.””

Amendment 19 agreed.

Clause 22: Misconduct

Amendment 20

Moved by Lord Tunnicliffe

20: Clause 22, leave out Clause 22

Lord Tunnicliffe (Lab): My Lords, I rise with some trepidation to bring this period of peace to a close. I, too, have been involved in this Bill from the beginning and have worked with my noble friend Lord Davies and the Minister, and I, too, thank him for the enormous amount of time and effort he has put into trying to achieve a consensus on so much of the Bill. The amendments we have already agreed tonight are the product of that work. I also commend the Minister, his team and the members of the Bank, the PRA and so on who put so much effort into trying to persuade us not to move this amendment. It is somewhat sad that they failed, and therefore I rise now to speak to Amendment 20, which is tabled in my name and that of my noble friends Lord Davies and Lord McFall and the noble Baroness, Lady Kramer.

The effect of the amendment is simple. It would ensure that the so-called reverse burden of proof on senior managers comes into force as planned from March 2016. The Government have argued that the Financial Services (Banking Reform) Act 2013 and the senior managers and certification regime—the SMCR—represent a significant improvement to the regulatory system and the regulatory standards that existed before the financial crash. On this, we are in full agreement. Along with the structural reforms that have already been set in motion by the Financial Services Act 2012, the 2013 regulation also had a very important message for senior managers in the financial service sector. From March 2016, the burden of responsibility for failure to prevent regulatory breaches would live solely with them, and whether they were aware of failings or not would be irrelevant. They would have to show that they had taken all reasonable steps necessary to prevent a breach taking place. Quite simply, the buck would stop with them.

Two years on, before the regime has even come into effect, the Government want to back-track on the promises they made to the British public and replace

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the reverse burden of proof with a duty of responsibility. That means that the burden will be on the regulators, rather than the bankers themselves. According to the Government, the introduction of the duty of responsibility in place of the presumption makes little difference to the substance of the new regime. They even suggest that the change is one of process, not substance. We disagree.

We believe that the retention of the reverse burden of proof is crucial. So too does the Parliamentary Committee on Banking Standards and, following intense debate in your Lordships’ House and the other place, so did both Houses of the previous Parliament. Despite a lack of any case history to back up their claims or any examples to draw on, the Government have suggested that the original proposals will create a checklist and tick-box mentality that ultimately will be unhelpful, and that merely presenting evidence that this template had been followed would enable senior managers to meet the burden of proof for defence but leave the regulator to prove that the steps taken were not reasonable.

As I stand here, Major Tim Peake, the first British man in space—whether he is the first British person is somewhat debatable—is safely up there, speeding over us at 175,000 miles an hour. Actually I do not really know where he is; he could be thousands of miles away, but the fact is that he is safely in space. How did he get there? Did a bunch of people wake up this morning in Russia, join together and, to somewhat paraphrase the Minister’s letter, form a responsible management team taking considered and reasoned decisions? No, they did not; they woke up this morning with checklists that they went through and ticked off, and, because those checklists contained hours of thought and lots of experience all moulded together into a process, the take-off was successful and he is safely in space.

In deriding the value of checklists, the Government could not have picked a less appropriate person than myself. I have lived with checklists for over 50 years. Ever since the man said, “If you don’t learn the checks, lad, you can’t fly the aeroplane”, I have been involved in checklists. I was involved with checklists in aviation and in the railway industry, of which I ran a small but important part and we ran a whole series of operations using checklists. We did not call them checklists; we called them manuals and procedures. We would spend millions of pounds on a whole variety of projects because at board level we considered what rules to make, and at executive level we said, “Meet these rules if you want your projects to run”, and that worked well. Then I moved into the nuclear industry, where if you wish to run a nuclear site you will approach a checklist of 36 chapters that forces you to set out how it will be run and be safe and viable. For a period I was chairman of the Rail Safety and Standards Board, which did nothing but create rules that people had to obey to make things safe.

So I am afraid that I believe in checklists. If the present legislation means that banks are spending their time carefully setting out what procedures should be followed in order for them to operate safely and legally, then that is a good thing. Good checklists, good tick-box procedures and good checks on those

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procedures are a good thing. Bad checklists are a bad thing, bad law is bad, bad procedures are bad and bad regulation is bad, but we are not talking about them; we are talking about banks using their resources to ensure that they obey the rules of the future.

I turn to what I believe is the heart of the issue, something that the Government have dismissed over and again: the question of culture—more specifically, what will bring about the much-needed cultural change in the banking sector. There was a time when banks were trusted and respected, part of the local community. The noble Baroness, Lady Kramer, referred to Captain Mainwaring. He was a cartoon figure, but that was how my generation looked at banks. We expected banks to give a service for our interests; we had the sense that we could trust them and did not have to question them. We were probably naïve and maybe we were being ripped off rotten, I do not know, but we trusted them. We are not there any longer. Ask the British public today what they think of banks, and bankers in particular, and they will use words like “greed” and “exploitation”. You certainly cannot blame them for thinking that way; events like the PIP scandal, rate swaps or HBOS give people the impression that these are not the exception but the norm. A change of culture is desperately needed if banks are to regain their reputation as public service institutions. I am certainly not saying that this will be an easy or quick task. It will require sustained effort from all involved, but in the view of the Opposition there is no better starting point for this repair than the implementation of the reverse proof of burden.

Noble Lords: Burden of proof.

Lord Tunnicliffe: Thank you very much—the implementation of the reverse burden of proof. If I go back to my script, I will get it right.

It is important not to underestimate, as the Government seem to be doing, just how significant a departure this would be from the previous regime, not only symbolically but practically too. There could be no denying the intent and commitment to bring about the most rigorous and thorough regulatory regime if the reverse burden of proof were introduced. We believe that knowing that there is nowhere to hide from failure, and that the burden is on you as a senior manager to prove that you took all reasonable and necessary steps, is a more powerful tool to bring about such change. That is why Labour has tabled this amendment to ensure that it comes into force next March, along with the rest of the SMCR.

We have been prepared to listen to the Government’s defence, and accept that they have put forward a very convincing point about why the reverse burden of proof might not be wholly acceptable in its current form. I speak specifically on the issue of proportionality. Given that the Bank of England and Financial Services Bill extends the scope of the SMCR to the entire financial services sector, we fully acknowledge that exemptions from the burden of proof for those not covered by the original proposals would be entirely sensible and necessary, but we do not regard a differentiation in regime as an insurmountable hurdle to overcome.

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Therefore, by way of consensus, if the Government would be willing to indicate their intention to bring forward amendments at Third Reading preserving the reverse burden of proof but making exceptions for smaller firms, we would be open to further discussions. However, if the Government fail to do that, it is our responsibility to stand up for the change that people desperately want to see in the banking sector. It is the difference between reform and the status quo—the difference between the path back to public trust and continued disbelief. It is the difference that we need and deserve.

Baroness Kramer: My Lords, I am going to speak only briefly on this issue. My noble friend Lord Sharkey, who is sitting beside me, is perhaps the greater master, with particular expertise of the detail, and I do not think that the House needs to hear the same speech twice. Still, I want to make a few remarks because this is such a crucial issue.

To pick up the point made by the noble Lord, Lord Tunnicliffe, I say that the importance of the reversal of the burden of proof is, above all, its cultural impact—the impact that it has on every chief executive and every head of department to understand that if things go wrong, if there is misconduct and bad conduct within their own department, they are essentially on the line. Historically they have not been, and they know that. This reversal of the burden of proof changes that impact. We can tell that from the many conversations that I keep hearing from the Government that, if there is a reversal of the burden of proof, it might be harder to recruit new people to these posts because of the burden that now sits there.

In a world where we are sure that regulation alone cannot ensure that the banking industry behaves properly, and where enforcement is exceedingly difficult, it is very hard to follow a paper trail when lawyers have been very careful to ensure that one does not exist. There might be no electronic trail either; in fact we have just seen an example of such behaviour by Barclays, which explicitly set up a scheme, for which it has since apologised, which was designed to have no electronic trail whatever. Where the trail is so extremely difficult to follow, what matters is that chief executives and heads of department and other key players lead that cultural change; that they appoint people who will challenge them; that they put people in positions where they will blow the whistle when things go wrong; and that they drive through their whole organisation an understanding of the importance of ethical behaviour and proper conduct. That is the best defence that we can have.

Frankly, government arguments for cancelling the reversal of the burden of proof—the sort of argument for a key reason—have constantly shifted over the past few weeks when we have been discussing this issue. To gather from the last set of conversations around this issue, the argument is now primarily that the senior managers regime, which identifies who is responsible for different activities and different tasks, is both much tougher than the existing regime and much tougher without the reverse burden of proof rather than with it.

6 pm

I will quickly address those two points, which my noble friend Lord Sharkey will address in much more detail. Let us pick up this argument that the new methodology

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and approach, the senior management regime, is much tougher than the existing regime. It is tougher—at least we have identified figures for who is responsible—but we always knew that the chief executive and heads of department were responsible. This may clarify that process, and that is a good thing, but I argue that it is not the major shift that is being presented to us. Much more importantly, the argument that has been made is that, with this new regime, responsibility becomes the test—not the test of culpability, which was so hard to prove and track.

A very helpful document was produced a week ago by the FCA. It issued its policy statement PS15/29, which included the final rules with regard to the amended senior management regime. It is absolutely clear from that document—I will let my noble friend Lord Sharkey quote to noble Lords from it where relevant—that the standard remains culpability; there is no change in the standard from culpability to responsibility. The dramatic changes that we were being told about, which were brought in by the SMR regime, are good—I have no objection to them and think they are positive. However, they do not achieve that dramatic shift we are asking for so that we never again have a situation where we have PPI, LIBOR, money laundering, interest rate swap mis-selling—events that had many individual victims and that, frankly, had a negative impact on the reputation of our financial services industry in London and its continuation as a viable global centre. Never again should we be in a situation where nobody in a senior position is ever held accountable for what has happened within their own organisation. Since all these transactions looked profitable on the books, they greatly contributed to the very large bonuses which went to those senior heads of department and the chief executives.

The second point—that this SMR is much tougher if we do not have the confusion of the reversal of the burden of proof—first, stretches credulity. However, I suddenly realised that there is a test of whether that is true. If the reversal of the burden of proof makes life easier for senior bankers, would they not be calling me, asking me to hang tough and insisting that we maintain and continue the reversal of the burden of proof? Would they not be calling the Government to say, “Look, Treasury, don’t be so hard on us. Please keep in the reversal of the burden of proof. It’s a protection for us—it gives us much more scope”. I do not believe that any of that has happened; certainly I have not heard it. Therefore the industry itself is making it very clear that the reversal of the burden of proof has a very significant impact on its senior management and its chief executives. Frankly, I argue that that is the level of protection we need, because that is what our country and our economy deserve.

Lord Brown of Eaton-under-Heywood (CB): My Lords, speaking purely as a superannuated judge with no particular expertise in banking, I oppose the amendment. Article 6.2 of the European Convention on Human Rights says:

“Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law”.

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Baroness Kramer: I will just make a point of clarification, because a number of noble Lords have made this comment. The reversal of the burden of proof applies not to a criminal offence but to a civil offence.

Lord Brown of Eaton-under-Heywood: With respect, as I understand it, this is a punishable offence; therefore it is a criminal offence. I certainly understand that it is proposed that this offence should be on the statute book to bring blame on those who commit it and lower them in the estimation of the public so that a conviction or finding of guilt under this provision would be to their considerable disadvantage. I have little doubt that Article 6 would apply to how one proves this breach of the law. There is nothing very new in this either. The golden thread that for centuries has been said to run through our law is that it is for those who accuse to establish a case against those who are accused.

Lord Sharkey (LD): Is the noble and learned Lord aware that the Minister who introduced the Financial Services (Banking Reform) Act 2013 into Parliament certified that it was not in breach of the convention he quoted?

Lord Brown of Eaton-under-Heywood: That is by no means conclusive of the issue. However, for the most part I am not hinging my argument on the convention; it simply represents what I have already indicated is a common thread of our law—it is for those who accuse to prove. Generally, the burden of proving every ingredient, every element of any wrongdoing or offence—including the disproving of any legal defence to it—lies squarely on the prosecution.

Certainly, there are occasions when the law, including the European Convention on Human Rights, accepts a reverse burden of proof. However, in considering whether this is acceptable one must recognise that whenever an accused is required to prove a fact, as here he would be on the balance of probabilities, that permits him to be found guilty, even if the fact-finding tribunal has some reasonable doubt as to his responsibility. That is the whole essence of the burden of proof. Where there is a doubt, it is resolved in favour of he who stands to be criticised and held liable before the public. It is all very well to speak of the cultural impact of a change like this but the consequence is that in a case of doubt, because he has failed to discharge the reverse burden placed upon him, he is found guilty.

There is a great deal of law in all this, which I will not go through, but I will make just one or two points. First, there is all the difference in the world between the legal burden of proof and the evidential burden of proof. Realistically, the latter is of comparatively little importance. In relation to many defences, the evidential burden is said to be on the defence but this burden is found to be discharged whenever there is any evidence—basically, any evidence at all, wherever it comes from—which raises the possibility that such a defence may exist. For example, when somebody is accused of assault, if there is a suggestion that he may very well have acted in self-defence, the legal burden to disprove that immediately shifts back fully on to the prosecution. The fact is that courts—there are many cases to indicate

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this—do not like reverse burdens of proof and prefer this golden thread. It is by no means impossible, and I think it is quite likely, that under the 2013 Act—the one for which the certificate was given under the convention—that would be found to be consistent with the convention because the court would construe the legislation as involving not the legal burden of proof but the evidential burden of proof, in which case it would have precious little effect.

The legal burden of disproving guilt is only very rarely put on the defendant. It generally happens only in the case of statutory offences concerned with the regulation of conduct in the wider public interest, and generally in comparatively minor cases involving—I quote from an earlier judgment—

“no real social disgrace or infamy”.

That approach was applied in a trademark case where a trader in branded goods was required to prove that his sale of the goods did not involve any infringement of the trademark legislation. It was held to be in the nature of a regulatory offence with a minor degree of moral obloquy rather than a truly criminal case. Indeed, that was also the position in a case in this House in 2008 in which I was one of the judges. We held that it was not disproportionate to put the legal burden on employers to conduct their undertaking in such a way as to ensure that people were not exposed to health and safety risks. It was for them to establish on the balance of probabilities that it would not have been reasonably practicable for them to have done more than they had to achieve those requirements.

The effect of this amendment is conveniently and succinctly set out in paragraph 137 of the Explanatory Notes. It says that under the 2013 Act senior managers in the relevant area,

“are guilty of misconduct if there has been a breach of any regulatory requirement in an area for which they are responsible unless they can prove that they have taken reasonable steps to avoid the breach … This will be amended so that no senior manager will be guilty of misconduct unless the regulators can prove that the senior manager did not take reasonable steps to avoid the breach happening”.

I respectfully support the Government’s view that the offence being introduced by this legislation, prospectively from the coming March, should properly be considered to be not just a mere regulatory offence involving negligible obloquy—that is not how I understand that the bulk of those opposite would regard guilt of such an offence—but, rather, as constituting serious misconduct. It is the sort of offence, therefore, which should be fully proved and where any doubt as to whether it was committed should be resolved in favour of he who is accused.

Lord Grabiner (Non-Afl): My Lords, I declare the interests shown under my name in the register. I should also declare that I am an authorised person under the regimes operated by the FCA and the PRA.

This part of the Bill is designed to extend the senior managers and certification regime, which replaces the much reduced—or, I should say, criticised—approved persons regime. It introduces a new statutory duty of responsibility for all senior members across the extended SMCR in place of the reverse burden of proof, which would otherwise have applied to deposit-takers and PRA-regulated investment firms. The new duty obliges

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the responsible senior manager to take reasonable steps to prevent regulatory breaches in her or his area of the business. As a result, if the complaining regulator shows that the senior manager has failed to take appropriate steps, she or he will be guilty of a breach of statutory duty. No doubt the Minister will assist us on this but I think that that will subject the individual to serious penalties, including an unlimited fine and/or a prohibition. These are very serious matters, whether they are offensive to Article 6 or otherwise.

6.15 pm

Firms will now have to set out the various areas of responsibility with conduct rules. These rules will require that any delegation must be to a suitable person and that the person doing the delegating will retain the oversight function. Thus, the task may be delegated but the responsibility for it will be retained.

From the perspective of the regulator and the public interest, I think that that approach has two very valuable features. First, the existence of the new duty means that in future a senior manager will not be able to plead ignorance of the facts and the circumstances giving rise to the resulting damage. Secondly, the regulator will now be able to identify the responsible person, whereas under the old APR system this was often a problem. Regulatory enforcement was regularly frustrated by legalistic deviousness, and one has to imagine the open palms being extended to the accuser and the words being uttered, “It wasn’t me, guv, and now you prove otherwise”. In my view, that plea will not wash under these new proposals.

I also believe that there may be some force in the concern which has been expressed that senior managers will be distracted from doing the job in hand by an excessive focus on devising protection against personal liability. I can imagine that this sort of thinking, which is entirely understandable, would have a reverberating and negative impact on recruitment, including the composition and the quality of boards of banks.

I appreciate that some noble Lords believe that the reverse burden of proof should be applied, at the very least, to part of the market—in particular, to deposit-takers and PRA-regulated investment firms. For a number of reasons, which I promise I will keep short, I would not support that approach.

First, it is not necessary or proportionate to introduce such a draconian provision. The new duty is tough and fair, and I believe that it will be effective. Secondly, a two-tier mechanism would impose different standards on the senior manager of, for example, a building society compared with her or his equivalent in, for example, a major hedge fund. I believe that we should be concerned to achieve consistency rather than differences across the financial services industry.

Thirdly—I am bound to say that I am in complete agreement with the noble and learned Lord, Lord Brown—as a lawyer I find the notion of a presumption of guilt in this very serious context deeply objectionable. It is true that recent history reveals a good deal of irresponsible wrongdoing in a number of financial institutions—we would all agree with that. However, in my view, we need to deal with these matters coolly and not in extravagant anger. I will support the Government on this part of the Bill.

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Lord Sharkey: My Lords, I have a short checklist of points that I would like to make. I start by thanking the noble Lords, Lord Bridges and Lord Ashton, and their team for the very high levels of engagement on the Bill. That applies too to their officials and the officials of the Bank, especially Anthony Habgood and Andrew Bailey. It has all been extremely helpful and it has resolved some, but not all, of the questions that were raised in Committee. Clause 22 is one of the unresolved questions.

As other noble Lords have said, Clause 22 alters the SM and CR that Parliament agreed to in the Financial Services Act (Banking Reform) 2013. This Act put into law the unanimous recommendation of the Parliamentary Commission on Banking Standards. The commission’s report recommended that the PRA and the FCA should be able to impose,

“the full range of civil sanctions, including a ban, on an individual unless that person can demonstrate that he or she took all reasonable steps to prevent or mitigate the effects of a specified failing”.

The reason given for proposing this measure was that it would,

“make sure that those who should have prevented serious prudential and conduct failures would no longer be able to walk away simply because of the difficulty of proving individual culpability in the context of complex organisations”.

This is an issue that was settled by Parliament in 2013.

Mark Taylor, Dean of Warwick University Business School, former FX trader and an adviser to the Bank of England’s Fair and Effective Markets Review, commented on the situation in May. Mr Taylor said that bonuses are too high, there is little threat of jail for wrongdoers and bosses are not held responsible. He said:

“The problem is the incentives for cheating markets is massive. If you can shift a rate fractionally you can make millions and millions of dollars for your bank and then for bonuses”.

He went on to say that:

“Once senior executives feel they are personally at risk if the culture doesn’t change, and individual traders feel they are at risk of being put in prison, then you’ll get a culture change”.

The Parliamentary Commission on Banking Standards recognised all that, which is why it recommended the new regime. Parliament recognised all that, which is why it passed the new regime into law. This new regime was due to come into force at the end of March next year, but Clause 22 stops that. It replaces the new regime with a lighter version.

Over the course of the stages of this Bill and in discussion, the Government have offered a variety of justifications for reverting to a lighter-touch regime. There have been four main arguments to date. The first was that since the Bill extends the supervising regime to all financial services, the tougher regime would bear down disproportionately on the smaller firms being brought under supervision. This is not a convincing or even coherent argument for relaxing the regime for systemically important players. It is an argument for a sensible two-tier regulation system—nothing more.

The second argument was that the prospect of the new, tougher regime was leading to individuals spending more time and resources mitigating the risk of being held personally liable for breaches on their watch. This was the whole purpose of the new, tougher regime.

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The third argument, put forward by Andrew Bailey, was that noise around the tougher regime has been distracting future senior managers from complying with the spirit of other important aspects of the regime. Mandy Rice-Davies would have known how to respond to that.

The fourth argument I have heard made, entirely understandably—I heard it again this afternoon—was that the reverse burden of proof runs counter to our legal traditions. The Government have not pressed this argument strongly, but other noble Lords have at previous stages. I simply point out that there is ample precedent for this in English law and a helpful Law Lords ruling on where such measures are appropriate. The reverse burden of proof has been used in the Road Traffic Act 1988, the Health and Safety at Work etc Act 1974, the Bribery Act, the Terrorism Act, the Misuse of Drugs Act 1971, the Trade Marks Act 1994, the Criminal Justice Act 1988 and the Official Secrets Act, and there are other examples as well.

But in the past few days, the arguments have focused on a different aspect of the proposed change: that the rigorous specification of responsibility will make it easier to identify senior managers who are guilty of misconduct or unreasonably allow misconduct to take place. This argument was advanced forcefully by the noble Lord, Lord Bridges, in response to my Oral Question of 2 December, and by Andrew Bailey at a private meeting last week.

There is a very serious flaw in this argument. It assumes that it was previously impossible to identify senior managers with responsibility for misconduct. That is not the case. At the very least, board members and departmental heads carry, and have always carried, responsibility. That was not the problem. The problem was the evidence trail. This was, in all cases, so defective that all senior managers could say and did say, “I didn’t know”, and that was enough to get them off the hook.

As Tracey McDermott, the then director of enforcement and now acting CEO of the FCA, said in 2013 to the Parliamentary Commission on Banking Standards, the inability to impose sanctions on senior executives was first and foremost due to the evidential standard required to prove their liability. That is why the old regime produced no penalties against senior managers, and that is precisely why the regime proposed in Clause 22 will not do that either. It is absolutely no use having a detailed organisation and responsibility chain if there is no evidence trail. Barclays knew this when it sent some of its people out to buy a safe to keep incriminating documents out of sight and prevent an electronic trail.

Then there is the question of equality of arms. Banks are rich. They employ many very bright people on astonishing amounts of money; they can afford very expensive and extended legal defences; they have absolutely enormous resources. By contrast, the FCA is underresourced, underpaid, overstretched and outgunned. The G30 report of this year, Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform, also noted this inequality of arms. The contest between the FCA and the banks is unequal, made more unequal by Clause 22. It is notable that the Government

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have fielded no one from the FCA to defend their proposed change. They have relied instead on Andrew Bailey, a Bank of England official.

The senior manager regime proposed by the Parliamentary Commission on Banking Standards and enacted by Parliament is there because both the commission and Parliament recognised the extraordinary failure to hold any senior manager to account. What this regime says is simply this: senior managers must show that they have behaved reasonably in doing the right thing. Senior managers must show the FCA the electronic and paper trails that demonstrate that they took reasonable action to do their jobs properly. The Government proposal scraps that. It says that the FCA must extract, if it can, this paper and electronic trail from the banks. Well, it will not be able to do that, for the same reasons that Tracy McDermott gave the Parliamentary Commission on Banking Standards in 2013.

If Clause 22 remains part of the Bill there will be no holding to account, no changes in banking culture for fear of being held to account, and no reason to expect a change in behaviour. We will be back where we started. We should remove Clause 22, and we on these Benches support this amendment.

Lord Turnbull: My Lords, looking back over the discussions on this issue, inside and outside this House, I cannot help feeling that an element of caricature has crept in. We are told that the Government have lost their nerve, caved in to bank lobbying and gone back to the failed status quo ante. At the same time, the debate has been excessively polarised, disguising the fact that there is substantial agreement on what I believe is the primary issue—tackling the problem of personal liability. The difference between us is what I think is a secondary issue: what does the reverse burden of proof add or detract from this proposal? Is this the only way in which the regime can be made to work?

The proposal in the Bill is not retracing these steps but moving forwards by introducing the SM and CR and the new concept of the duty of responsibility, which will fall on the senior managers. It tackles directly the difficulty with establishing personal liability and the Pontius Pilate defence: “It wasn’t me guv, I wasn’t there; I only read about it in the FT a couple of days ago”. That is actually true—that is what someone told the Parliamentary Commission on Banking Standards.

In future, senior managers will have to take responsibility for what goes on in the teams for which they are responsible and for the actions of the people whom they have appointed and thereby given accreditation. The code rule for senior managers says:

“You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively”.

That is absolutely clear and I still fail to see why the reverse burden of proof is the only way to get people to understand that.

6.30 pm

It is not just the Government who have reached the conclusion that what is now proposed is a superior way of getting to the outcome which all participants in

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this debate are agreed on; that is, the guys at the top should not escape scot free. In his evidence to the Treasury Select Committee, Andrew Bailey, CEO of the PRA, made it clear that the PRA itself had lost faith in the reverse burden of proof. His view was that, rather than giving priority to getting a “conviction”, the PRA preferred an outcome which emphasised the positive approach of changing behaviour for the better rather than inducing heavily lawyered responses. He wanted to concentrate efforts on getting responsibilities defined and then checking that they had been embedded in the culture of a firm. In answer to a question from John Mann, he said:

“The change that this Bill introduces says, ‘Let us come up with an alternative way of making sure that we can enforce the substance’. Where I would differ from you is that this is not a watering-down in the sense that it says, ‘Let us change the substance’”.

Some have used the argument that reversing the burden of proof opens up the possibility of human rights challenges. It is certainly true that, in the 2012 Act, the Government stated that they did not believe that this would happen, but that is only an assertion on their part and I believe that it could be challenged in the courts. What we can be certain of is that this issue is bound to arise and will be a distraction.

Let me give an example by which we can judge the effect or otherwise of the reverse burden of proof. It is the recent report by the PRA and the FCA on HBOS—which cost £7 million, incidentally, compared with the £850,000 which the parliamentary commission cost, and it did not really find anything different. What was new, however, was the additional report by Mr Andrew Green QC on why only one person was subject to enforcement action. The main reason given by FSA staff was the difficulty of establishing personal liability. This is precisely the problem addressed by the SMCR and the new concept of duty of responsibility. It did not say that it could have nabbed these guys had the reverse burden of proof been available. It made no mention of that whatever.

Let me go back to the basic principle on reverse burden of proof. The most reverend Primate the Archbishop of Canterbury, who was a member of the Parliamentary Commission on Banking Standards, supported by the right reverend Prelate the Bishop of Southwark, took the view that “innocent until proved guilty” is a fundamental principle of our legal system. There are exceptions—the noble Lord, Lord Sharkey, mentioned some of them—but they should be invoked only in extreme circumstances where there is no alternative. I would therefore put the reverse burden of proof back on the noble Lord. He has to prove that adducing this concept is the only way in which the regime can be made to work and I do not believe that that is the case.

In introducing the reversal of the reverse burden of proof at Second Reading, the Minister put too much weight on the level playing field argument: that if its scope were widened to all financial services where serious failures of conduct can occur and not just banking, it would be too draconian. I am pleased that the case has been better expressed and it is not simply the “scope” argument being used.

I am strongly against having a two-tier system. In the way that major companies are constructed, they often have banking activities with non-banking activities

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under the same ownership, and we have to remember that there are players who can cause a lot of damage to the financial system who are not banks or deposit takers—for example, AIG.

I was a member of the Parliamentary Commission on Banking Standards. I signed up to its proposal, but I believe that the proposal now in the Bill is superior. Many philosophers have said, “Second thoughts are often best”—although I learned from Wikipedia that the noble Lord, Lord Skidelsky, claims that Keynes never actually said his famous dictum, “When the facts change, I change my mind. What do you do, sir?” But many other people have, including Cicero. This is a time to follow that dictum. In this case, second thoughts are best. I hope that the House will reach the same conclusion as I have put forward and not support the amendment.

Baroness Kramer: Perhaps I may ask a question of the noble Lord, Lord Turnbull. The FCA stated just over a week ago:

“The FCA may take disciplinary action against an individual where there is evidence of personal culpability on the part of that individual”.

Where does that differ from the regime before any of this is introduced?

Lord Turnbull: That is not exclusive. Elsewhere, there is still a duty of responsibility. There is still personal culpability where it can be proved, but there are many people to whom it does not apply—senior people—and, there, you will need to have recourse to the duty of responsibility to secure a “conviction”—that is, proof of regulatory breach.

Lord Hunt of Wirral (Con): After the speeches that we have heard, particularly that of the noble Lord, Lord Turnbull, I had hoped that the noble Lord, Lord Tunnicliffe, might rise to the Dispatch Box and say, “In the circumstances, I will no longer press this amendment”. But, sadly, he has not. In declaring my interest, I say to the noble and learned Lord, Lord Brown of Eaton-under-Heywood, and the noble Lord, Lord Grabiner, that not only did I completely agree with every word they said but I thought that they made outstanding speeches.

I strongly support the extension of the senior managers and certification regime to all sectors of the financial services industry. It will create a fairer, more consistent and rigorous regime for all sectors of the financial services, enhancing personal responsibility for senior managers as well as providing a more effective and proportionate means of raising standards of conduct of key staff more broadly, supported by what we have heard during this Bill will be more robust enforcement power for the regulators.

As I have not persuaded the noble Lord, Lord Tunnicliffe, so far, perhaps I may now proceed to declare my interest as chair of the Credit Union Expansion Project and Cornerstone Mutual Services. The noble Lord did not mention credit unions, but credit unions as deposit takers are subject to the senior managers regime. I am delighted that, due to the advocacy of the Association of British Credit Unions and the support of the All-Party Parliamentary Group

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on Credit Unions, both the Prudential Regulation Authority and the Financial Conduct Authority have made special allowances for smaller deposit takers to apply a simplified regime in recognition of the need for proportionality. But not a word of that lies in this amendment. There are no associated amendments helping to deal with the position of credit unions.

If this amendment were to be carried, we would have the reverse burden of proof applying to managers in credit unions. Credit unions in the vast majority of cases have fully non-executive volunteer boards which are democratically elected by and drawn from a credit union’s membership. They already face significant challenges in attracting and retaining skilled and experienced individuals willing to sit on their boards on a voluntary basis. The imposition of the heightened personal responsibility which the noble Lord, Lord Tunnicliffe, would impose by removing this clause would compound and exacerbate these difficulties for many credit unions. Some larger credit unions have already begun to move away from the voluntary board model in order to attract the right people in the light of SMR and, in particular, the prospect that the noble Lord, Lord Tunnicliffe, might succeed in this amendment. There are many other reasons but, please, do not impose this level of responsibility on institutions—admittedly deposit takers—like credit unions.

We have heard all the arguments about presumption of innocence. We have the opportunity of a regime which will be tougher and fairer. Please do not let us complicate it any further by introducing a disparate, varied scheme. Let us impose this new regime, which I believe will be very successful indeed.

Lord Lawson of Blaby (Con): My Lords, like the noble Lord, Lord Turnbull, I was a member of the Parliamentary Commission on Banking Standards. I find myself in much the same place as the noble Lord and I will not repeat, therefore, all the things he has said.

My greatest concern is that there was, sadly, in British banking examples of grotesque incompetence and irresponsibility right at the top, as has been borne out most recently in the report by the Bank of England and the PRA on HBOS. It would be hard to read a more damning indictment although, as the noble Lord, Lord Turnbull, pointed out, it does not say anything further than we said in our own report—that it was an accident about to happen—which was largely written by the noble Lord, Lord Turnbull.

In addition to this grotesque irresponsibility and incompetence, for which the then chairman and senior executives of HBOS have not been adequately penalised, in my opinion and that of the Banking Standards Commission, serious wrongdoing was widespread throughout banking—although, as we all know, not all bankers were guilty of it. What happened? Eventually, after delays, the banks were fined huge amounts of money by the appropriate financial authorities. That is not only counterproductive but is seriously against the national interest. We want banks to be adequately capitalised, both for them to be safe and to be able to lend more, particularly to SMEs. It has meant that something like £1 trillion of bank lending has not happened because of the fines the banks have had to pay.

15 Dec 2015 : Column 2030

It is not the banks that are guilty of wrongdoing but the bankers, and it is important for this change of emphasis to occur. The only people who suffer when the banks are heavily fined—apart from the small businesses which cannot get loans because the capacity is less—are the shareholders, the one group of people who are completely innocent, who have done nothing wrong. It is important to change the way in which we deal with this and get at the individuals in senior management who are responsible.

6.45 pm

That will also have a beneficial incentive effect which the present regime does not have. If senior executives on the board and chairmen—this should not apply to non-executive directors other than chairmen —say, “We did not know this was going on”, they are clearly liable to be found guilty of negligence. One suspects that some of them took great care that they should not know what was going on. This is not a reversal of the burden of proof, any more than a captain in the Royal Navy can escape liability when his ship runs into the rocks by saying to the court martial that the boatswain was at the wheel and he did not know. The captain is responsible and the senior people in an institution are responsible and must be punished.

I hope the Minister can reassure us that, without this amendment, the Bill will do just that; that the responsible authorities will see to it that this sort of regime is carried out; and that no more will we have banks fined enormous sums of money at the expense of dealing with the individuals who are responsible for the wrongdoing.

Lord Brennan (Lab): My Lords, I support the amendment for three reasons, which I shall shortly state. First, there is a genuine and important public interest in the existing statutory system. Two years ago, this House enacted this system. It did so as the result of a government amendment, which was not opposed but agreed unanimously. The Minister speaking to the amendment, the noble Lord, Lord Newby, said that,

“the Government believe that it is in the long-term interest not only of bank customers but of the City of London that the highest possible standards are followed”.

He said that the system he was introducing,

“ensures that individuals are held to account when things go wrong”.—[

Official Report

, 15/10/13; col. 405.]

That is the genuine public interest that the present system protects.

Secondly, the reversal of the burden of proof is a well-recognised feature of our legal framework. It is subject to safeguards and appropriate standards, but it exists and has done for a long time. For example, the Health and Safety at Work Act covers employers large and small—a point was made about the size of credit unions—across the whole country. They have a duty to protect their workers. In fulfilling that duty they are required to show that they did all that was reasonably practicable to satisfy that duty. It is a statute that can send people, after a court hearing, to prison. That is for a crime punishable by jail; this is not that—this deals with misconduct and disciplinary proceedings. The people involved should know the system they are

15 Dec 2015 : Column 2031

trying to justify and explain. The regulator is entitled to be able to run a sensible regime which does not subject his organisation and his staff to undue pressure. That is what the public want. I would ask the House this: are we seriously suggesting that that which we demand of employers for our citizens is too much to ask of bankers; namely, to protect their customers?

I turn to the third reason. Why make this change? Why have the Government, a different Government but with the same Treasury officials, committed a complete volte-face within two years and without any plausible justification, as the noble Lord, Lord Sharkey, pointed out? I suggest that, there being no plausible reason, the first thoughts of the House were the right ones and are what the public expect. We should do our best, on this kind of embarrassing occasion for the Treasury and the Government, to protect them from this intellectual disarray and to make sure that the House itself does not fall into the legislative embarrassment of telling the nation one year, “This is how we will protect you”, and two years later saying exactly the opposite. For these three reasons, this amendment should be carried.

Lord Pannick (CB): My Lords, I think we all agree that to impose a reverse burden of proof on a person to establish their innocence of a disciplinary offence requires a strong justification. It is required not only by elementary fairness; it is also required by law, as the noble and learned Lord, Lord Brown, indicated. This is a criminal matter for Article 6 purposes because a disciplinary offence is regarded, by our courts and by Strasbourg, as a criminal matter if sanctions are imposed. So the question is this: what is the justification?

I have listened carefully to the debate to try to understand the justification being put forward, and it appears to amount to this. It will be difficult to prove a failure to comply with the new duty to take reasonable steps. That is the concern, but I do not understand it. The regulator has considerable investigative powers which enable it to obtain all the relevant evidence on whether a senior manager has complied with the new duty to take reasonable steps. If there is no document trail, which is the concern mentioned by the noble Lord, Lord Sharkey, in his contribution, the regulator will rely precisely on that in establishing a failure to take reasonable steps. The banker, even if he has the assistance of the noble Lord, Lord Grabiner, acting for him, will be found guilty of the disciplinary offence of failing to take reasonable steps, and rightly so. That is the appropriate way to change a culture—a matter to which the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Kramer, rightly referred. You change a culture by ensuring that the regulator brings a proper disciplinary charge; you do not change a culture by introducing an unfair regime.

The noble Lord, Lord Sharkey, said that the battle between the FCA and the bankers is unequal. This is a problem across the legal field in relation to prosecution authorities, but the answer is to ensure that the FCA has adequate resources; the answer is not to introduce an unfair regime. I do not think that the case for a reverse burden has come close to being made out. The strong justification has simply not been established.

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Lord McFall of Alcluith: My Lords, I wish to speak up for the Parliamentary Commission on Banking Standards. Some of my colleagues seem to be disappearing like snow off a dike on a hot July day, but I want to be faithful to the strictures of the parliamentary commission. We took two years over the examination and we asked 10,000 questions. When the Financial Services (Banking Reform) Act was passed in 2013, all of us were satisfied with seeing our measures enshrined in legislation. But now, 18 months later and with no opportunity to test it, the legislation has been filleted, particularly in relation to the reverse burden of proof.

I have just returned from a conference in Washington attended by regulators from the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the Office of Financial Research. They said that progress has been made, but the task ahead in terms of a global resolution for the financial regime is enormous: resolution plans, living wills, leverage ratios, counterparty clearing houses, cross-border co-operation, and not least public resolution mechanisms which do not fit in well with domestic insolvency regimes. Why am I mentioning these? It is because the message also given to me during those conversations was that there is not enough push-back. The momentum goes one way globally, in favour of Wall Street and the banks. In an environment with low interest rates and disappointing returns, it is inevitable that banks will take more risks in the future. So there is a need for vigilance to minimise regulatory arbitrage and change the culture in order to minimise misbehaviour, which was the essence of the parliamentary commission.

We have been talking about the reverse burden of proof, but is it that? Section 32 of the 2013 Act could be interpreted as not a reversal of the burden of proof, because it means that the defendant is considered to be automatically guilty, and she or he has to prove their innocence. That is not going to happen in this case. The present position is that a senior manager will be liable for misconduct if a variety of factors are present, including the absence of reasonableness in breaching a regulatory rule. That does not constitute a reversal of the burden of proof. It means that the regulator must still show that all the factors in Section 66 are present, and then the defendant will be required to demonstrate the defence of having acted reasonably. There is nothing unusual about the regulator having to prove the elements of an offence or misconduct and then the defendant having to prove a statutory defence to that liability. Indeed, the government amendment could have the odd effect of requiring the regulator to prove the defence. But that is for the senior manager to do, and he or she must prove that their work was reasonable.

Perhaps the test of reasonableness is too low because a senior manager need only point to a lack of diligence on the part of other senior managers to demonstrate that they appear to be reasonable as compared with their peers. I would prefer “reasonable diligence”; indeed, I would have preferred the duty of care, which I proposed to the Parliamentary Commission on Banking Standards, saying that it would be simpler and could not be misinterpreted, but it was not taken up, and that is why we find ourselves in this position today.

15 Dec 2015 : Column 2033

The real regulatory challenge is to make sure that senior managers manage their institutions properly from top to bottom so that none of their employees can misbehave. In the intervention made just previously to my own, mention was made of the regulator ensuring the best regulation and that companies undertake it. I can well remember Tracey McDermott, then the director of the FSA, coming before the commission to be questioned about UBS, where one of its clients had misappropriated $2 billion. When we asked the senior managers about it, they said that they did not know the client. When we asked them when they found out, they said, “It was on the Bloomberg news wires”. When we asked Tracey McDermott why she did not pursue it, she said, “The trail went cold”. The trail is going to be cold here, and we will still have to fix this problem.

Is it not ironic that Sports Direct knows when someone steals a pair of socks, but Barclays cannot spot millions of pounds being taken through misquoting LIBOR? That is the situation we are facing. The real issue is the quality of regulation. We have ducked it tonight, but perhaps my fellow commissioners will come back in two years’ time and say, “We have had another thought, and what we have passed tonight was not very good, so let us have another go”. There is a pregnant agenda here and we will have to attend to it.

7 pm

Lord Bridges of Headley: My Lords, this amendment has led to a very interesting debate. I would like to pick up on what the noble Lord, Lord McFall, said, and remind the House of the context. As he so well knows, and everyone here will remember, seven years ago, the world was engulfed by a financial crisis, triggering a deep recession. It was a crisis caused, in part, by the reckless actions of some bankers and it was a crisis which our regulatory system failed to prevent. Today, we are all still paying the price for it and we are still hearing cases of crimes and misdemeanours in our financial services, as my noble friend Lord Lawson mentioned.

Although a number of banks have paid eye-watering fines for their misdemeanours, it is wholly unacceptable that so few bankers have themselves been held to account for their wrongdoings. The current regime, the approved persons regime,

“has created a largely illusory impression of regulatory control over individuals, while meaningful responsibilities were not in practice attributed to anyone. As a result, there was little realistic prospect of effective enforcement action, even in … the most flagrant cases of failure”.

These are not my words but those of the Parliamentary Commission on Banking Standards. The Government are absolutely clear that this has to change.

Our regulatory system needs to be able to hold individuals—I repeat, individuals—and not just banks to account for misconduct or recklessness, a point that the noble Lord, Lord McFall, rightly made in Committee and my noble friend Lord Lawson echoed. More than that, regulation needs to deter misconduct and recklessness in the first place. Good regulation is a spur for good behaviour and, as such, is crucial to driving the cultural change in the industry which we all want.

15 Dec 2015 : Column 2034

What are the characteristics of such a regulatory regime? It is one in which individuals’ responsibilities are crystal clear. It is one where individuals cannot shirk responsibility for their actions or those of their employees. Tasks may be delegated, but never accountability. A good regime is a regime where ignorance is no excuse. It is a regime where there are strong, simple principles that guide people’s conduct. Above all, it is a regime in which all senior managers understand that if something goes wrong in their team—be it a team of 20 or 20,000 —or on their watch, they will be held individually accountable. That is a good regulatory regime. Are these the features of the current approved persons regime? They are not but they are the hallmarks of the new senior managers regime that we will implement. As the noble Lord, Lord Grabiner, eloquently argued, the new regime will be tough and it will help to change the culture across the financial services industry for the better, which is what the noble Lord, Lord Tunnicliffe, desperately wants.

I am aware that there are concerns that the replacement of the reverse burden of proof with a statutory duty of responsibility will leave us in the same position as under the approved persons regime, where it can be very difficult, as I have said, for the regulators to hold senior management to account. I can reassure your Lordships that this is simply not the case. Let me set out exactly how the new regime will deliver a step change in senior manager accountability. First, the clarity of responsibility which has been so desperately lacking under the approved persons regime will be embedded in the system. This will be achieved in a number of ways.

An application by the firm for approval of a senior manager must be accompanied by a statement of responsibilities setting out what the senior manager will be responsible for managing in the firm. This must be updated if the responsibilities of a senior manager change. That ensures that both regulators and the firm will have the necessary clarity about who is responsible for what, and senior managers will take full ownership of their respective areas of responsibility.

This requirement is bolstered by the regulators’ rules, which require each firm to have, and to submit to the regulators, a “responsibilities map” setting out how responsibility for the business of the firm as a whole is allocated amongst its senior managers. This minimises the risk of any responsibilities falling through the cracks between different senior managers. On top of that, under rules of conduct made by the regulators, it is made clear that a senior manager must take all reasonable steps to ensure that any delegation of their responsibility is to an appropriate person, and they must oversee the discharge of any delegated responsibilities effectively.

Secondly, tough rules will apply to the senior managers. A senior manager can now be found guilty of misconduct if a breach of regulations occurs in the area of the firm’s business for which they are responsible and if they did not take such steps as a person in their position could reasonably be expected to take to prevent it. Crucially, it does not matter whether or not the senior manager is aware of the regulatory breach. Ignorance is no defence. What matters is whether they

15 Dec 2015 : Column 2035

have taken reasonable steps to prevent the breach. If they have not, they are guilty of misconduct. They will not be able to avoid liability simply because the email trail has gone cold. The regulator will not—I repeat, not—be completely stymied if all conversations and exchanges take place in an environment where there are no minutes, no emails, no memos and no existing trail.

Indeed, as the noble Lord, Lord Pannick, said, the very fact that there is an absence of such an email trail, and that a senior manager is totally unaware of what is going on in an area of the firm for which they are responsible, may very well suggest that they have been guilty of failing to take reasonable steps to prevent a breach of regulations. This is the new system we are introducing and the Bill before Parliament does not change any of what I have just said. The measures in this Bill do not take us back to the days before the financial crisis.

Noble Lords need not take my word for it. According to Andrew Bailey, deputy governor for Prudential Regulation and chief executive officer of the Prudential Regulation Authority, the introduction of the statutory duty of responsibility, instead of the reverse burden of proof,

“makes little difference to the substance of the new regime. Once introduced, it will be for the regulators (rather than the senior manager) to prove that reasonable steps to prevent regulatory breaches were not taken. This change is one of process, not substance”.

Furthermore, the removal of the reverse burden of proof does not change the penalties which can be applied. If found guilty of misconduct under the statutory duty of responsibility, a senior manager could face an unlimited fine and/or prohibition from working in the industry. All this means that situations where things go wrong because of irresponsible, reckless or negligent management by a senior manager will be less likely to occur in future, because of the strong deterrent effect of the statutory duty of responsibility. If they do occur, the regulators will be much better equipped to take action against senior managers who have mismanaged the firm.

To those who would still like to keep the reverse burden of proof, I would say this. First, Andrew Bailey has highlighted to the Treasury Select Committee in the other place that the way banks are starting to prepare for the introduction of the reverse burden of proof next March is unhelpful. We understand that some of their legal advisers are being asked to prepare checklists, as the noble Lord, Lord Tunnicliffe, said, of “reasonable steps” which their senior managers should follow. I would say to the noble Lord that the point about checklists is this: presenting evidence that a template or checklist had been followed could enable the senior manager to meet the burden of proof for the defence, but would leave the regulator to prove that the steps taken were not reasonable.

In practice, the reverse burden of proof would not give the regulator a significant advantage but could sow the seeds of a new tick-box culture. The reverse burden of proof will add no significant weight to the regulators’ powers of enforcement, but instead risks creating a great deal of lucrative work for City lawyers. Secondly, the Government are expanding, as has been said, the senior managers and certification regime so it covers all authorised financial services firms, the majority

15 Dec 2015 : Column 2036

of which are small. The tick-box culture I have described risks leading to the perverse outcome whereby senior managers in the largest firms are less exposed to legal risk under the reverse burden of proof, thanks to being able to employ the best lawyers and compliance officers.

I have been pressed on why the Government cannot introduce a two-tier system, with the reverse burden of proof applying to deposit takers but not to other firms. First, I have described the potential for detrimental effects on small firms. These issues are also relevant for small deposit-takers—for example, small building societies and credit unions, the latter often relying on volunteers for their staff. This approach would also raise serious issues of cross-sectoral competition. Noble Lords on all sides want a vibrant, innovative financial services industry that offers high-quality, good-value products to consumers. To achieve that, the regulatory system must, as far as possible, deliver a level playing field to support competition.

A reverse burden of proof that applied only to the banking sector would undermine this. For example, both deposit-takers and non-deposit-takers can engage in mortgage advice. A small building society or bank, for which the reverse burden of proof would apply, engaged in direct competition with firms, for which it would not apply, could find it more difficult to attract key members of staff. There could be a particular issue for challenger banks, especially those seeking authorisation for the first time.

Legitimate questions of fairness would also be asked about why senior managers in deposit-takers, particularly small ones, should be subject to the reverse burden of proof while those in firms such as large insurers or investment firms, which may pose greater risks to positive consumer outcomes and market integrity, are not. This approach would also create a great deal of complexity in large groups that contain firms which have deposit-taking permissions and firms that do not.

So, introducing a two-tier regime would introduce unnecessary complexity, when we have a tough, fair and practical alternative—the statutory duty of responsibility —that can be applied consistently to all firms. This is why the Government do not believe it appropriate to retain the reverse burden of proof. Is it needed to prove a senior manager culpable for a misdemeanour? No. Is it needed to clarify responsibilities of individuals in firms? No. Is it needed for the regulator to prosecute a senior manager if the email trail goes cold? No. Is it the silver bullet that will make the individuals who manage our banks responsible for their actions? No.

Instead, as I have explained, the new regime, with its statutory duty of responsibility, is a formidable tool for holding senior managers to account and for changing behaviour and culture in banks and across the entire financial services industry—a change we and the British public so very much want. I therefore ask the noble Lord to withdraw his amendment.

Lord Tunnicliffe: My Lords, I am conscious that there are two possible tests for deciding when to bring a debate to a conclusion. One is when all arguments have been exhausted, the other when there are no minds left to change. I suspect that the second test is the more acute one, therefore I will be brief.

15 Dec 2015 : Column 2037

Many noble Lords have taken part in the debate. In many ways I do not need to answer the points, in that it has been a balanced debate and points have been contested across the House. I am particularly grateful to those noble Lords who agreed with me; I am less enthusiastic about those who disagreed with me. A particular point raised was the matter of human rights. I counter that with the point that the noble Lord, Lord Deighton, affirmed that this part of the Bill is compatible with the regime.

I thank the noble Lord, Lord Sharkey, for speaking in support of my position and, in particular, for bringing out in how many areas the reverse burden of proof is in our law. It is not common, but it is there in particular cases.

I note the point made by the noble Lord, Lord Hunt, on credit unions. In my speech I made the point that we were willing to enter conversations with the Government so that they could come forward at Third Reading with a sensible carve-out from the overall effect. I plead with the noble Lord—he may remember way back when he was in opposition—that we have modest resources. Putting together a series of sensible additions to do the carve-out would not be sensible. We are very happy to agree carve-outs with the Government.

I thank my noble friend Lord Brennan for once again reminding us of the Health and Safety at Work etc. Act 1974. That is one of the most outstanding pieces of legislation in the British system. Its impact on safety in this country has been phenomenal. I and many managers in this country have laboured under the reverse burden of proof that that Act brings. The reverse burden of proof can be the right thing to do and has proved so in safety. We believe that it would prove so here.

The noble Lord, Lord Pannick, said that we have not brought out sufficient justification. He says that it is difficult to prove. No: it has so far proved impossible. I thank my noble friend Lord McFall for reminding him, us and fellow commissioners of how forcefully they supported the reverse burden of proof in their report—I have pulled out extracts but I will not take up the time of the House and read them.

7.15 pm

I listened to the early part of the speech by the noble Lord, Lord Bridges, and for a few little happy moments I thought, “He’s going to agree with me and accept”, but no. There is no difference between us in the acceptance that the new regime is a great deal better. The difference between us is on this issue of the reverse burden of proof and this issue alone, in particular the revision of the reverse burden of proof for the major institutions, which have caused so much chaos in our banking industry.

I will not proceed with any further detailed rebuttals, but simply say that one must remember that law has two objectives. Yes, one is to get convictions, but that is the least important objective. The essential thing about a piece of legislation is that it is an incentive to prevent particular actions. The wonderful thing about the reverse burden of proof, which noble Lords will

15 Dec 2015 : Column 2038

see if they google it and look through headlines and articles, is just how seriously the banking community is taking it and just how it has drawn their attention. I believe that that is, in essence, why it is so powerful and effective.

The Government’s objective, as stated in the letter from the Minister, is,

“for the UK financial services industry to be the best regulated in the world”.

We share that objective, but we would like to have a greater objective, recognising that the financial industry has come from a very dark place. Let us hope that it is heading upwards now and that it aspires to be the best banking industry in the world, the most respected and the one that can be trusted most.

I am afraid that there is no meeting of minds on this issue. Therefore, I intend to test the opinion of the House.

7.17 pm

Division on Amendment 20

Contents 198; Not-Contents 200.

Amendment 20 disagreed.

Division No.  1


Adams of Craigielea, B.

Addington, L.

Alton of Liverpool, L.

Anderson of Swansea, L.

Andrews, B.

Armstrong of Hill Top, B.

Bach, L.

Bakewell of Hardington Mandeville, B.

Barker, B.

Bassam of Brighton, L. [Teller]

Beecham, L.

Beith, L.

Berkeley, L.

Billingham, B.

Blackstone, B.

Blood, B.

Boateng, L.

Bonham-Carter of Yarnbury, B.

Bowles of Berkhamsted, B.

Brennan, L.

Brooke of Alverthorpe, L.

Brookeborough, V.

Brookman, L.

Bruce of Bennachie, L.

Campbell-Savours, L.

Chidgey, L.

Clark of Windermere, L.

Clarke of Hampstead, L.

Clement-Jones, L.

Collins of Highbury, L.

Corston, B.

Cotter, L.

Davies of Oldham, L.

Donaghy, B.

Donoughue, L.

Doocey, B.

Drake, B.

Dubs, L.

Dykes, L.

Elder, L.

Faulkner of Worcester, L.

Fearn, L.

Featherstone, B.

Foster of Bishop Auckland, L.

Foulkes of Cumnock, L.

Gale, B.

Garden of Frognal, B.

German, L.

Giddens, L.

Glasgow, E.

Goddard of Stockport, L.

Golding, B.

Gordon of Strathblane, L.

Gould of Potternewton, B.

Grantchester, L.

Greaves, L.

Grender, B.

Grocott, L.

Hain, L.

Hamwee, B.

Hanworth, V.

Harris of Haringey, L.

Harris of Richmond, B.

Haworth, L.

Hayter of Kentish Town, B.

Healy of Primrose Hill, B.

Hollick, L.

Hollins, B.

Hollis of Heigham, B.

Howarth of Newport, L.

Howells of St Davids, B.

Howie of Troon, L.

Hoyle, L.

Hughes of Woodside, L.

Humphreys, B.

Hunt of Kings Heath, L.

Hussain, L.

Hussein-Ece, B.

Irvine of Lairg, L.

Janke, B.

Jolly, B.

Jones, L.

Jones of Whitchurch, B.

15 Dec 2015 : Column 2039

Jowell, B.

Kennedy of Cradley, B.

Kennedy of Southwark, L.

Kerslake, L.

Kinnock, L.

Kinnock of Holyhead, B.

Kirkhill, L.

Kirkwood of Kirkhope, L.

Kramer, B.

Laird, L.

Lawrence of Clarendon, B.

Lea of Crondall, L.

Lee of Trafford, L.

Levy, L.

Linklater of Butterstone, B.

Lipsey, L.

Lister of Burtersett, B.

Livermore, L.

Loomba, L.

Low of Dalston, L.

Ludford, B.

McAvoy, L.

McFall of Alcluith, L.

McIntosh of Hudnall, B.

MacKenzie of Culkein, L.

McKenzie of Luton, L.

McNally, L.

Maddock, B.

Manzoor, B.

Marks of Henley-on-Thames, L.

Masham of Ilton, B.

Massey of Darwen, B.

Maxton, L.

Miller of Chilthorne Domer, B.

Morgan, L.

Morgan of Ely, B.

Morris of Aberavon, L.

Morris of Handsworth, L.

Morris of Yardley, B.

Murphy of Torfaen, L.

Newby, L. [Teller]

Northover, B.

Oates, L.

O'Neill of Clackmannan, L.

Paddick, L.

Palmer, L.

Palmer of Childs Hill, L.

Parminter, B.

Pinnock, B.

Ponsonby of Shulbrede, L.

Prescott, L.

Prosser, B.

Quin, B.

Radice, L.

Ramsay of Cartvale, B.

Randerson, B.

Razzall, L.

Rea, L.

Redesdale, L.

Rees of Ludlow, L.

Reid of Cardowan, L.

Rennard, L.

Richard, L.

Roberts of Llandudno, L.

Rogan, L.

Rooker, L.

Rowlands, L.

Royall of Blaisdon, B.

Scriven, L.

Sharkey, L.

Sharp of Guildford, B.

Sheehan, B.

Sherlock, B.

Shipley, L.

Shutt of Greetland, L.

Simon, V.

Skidelsky, L.

Smith of Basildon, B.

Smith of Newnham, B.

Snape, L.

Soley, L.

Stephen, L.

Stevenson of Balmacara, L.

Stoddart of Swindon, L.

Stone of Blackheath, L.

Stoneham of Droxford, L.

Storey, L.

Stunell, L.

Suttie, B.

Taylor of Goss Moor, L.

Temple-Morris, L.

Teverson, L.

Thomas of Gresford, L.

Thornton, B.

Tomlinson, L.

Tope, L.

Touhig, L.

Truscott, L.

Tunnicliffe, L.

Tyler, L.

Tyler of Enfield, B.

Wallace of Saltaire, L.

Wallace of Tankerness, L.

Walpole, L.

Warwick of Undercliffe, B.

Watson of Invergowrie, L.

Watts, L.

Wheeler, B.

Whitaker, B.

Wigley, L.

Willis of Knaresborough, L.

Wood of Anfield, L.

Wrigglesworth, L.

Young of Norwood Green, L.

Young of Old Scone, B.


Aberdare, L.

Ahmad of Wimbledon, L.

Altmann, B.

Anelay of St Johns, B.

Arbuthnot of Edrom, L.

Arran, E.

Ashton of Hyde, L.

Astor of Hever, L.

Attlee, E.

Balfe, L.

Barker of Battle, L.

Bates, L.

Berridge, B.

Blackwell, L.

Blencathra, L.

Borwick, L.

Bourne of Aberystwyth, L.

Bowness, L.

Brabazon of Tara, L.

Bridgeman, V.

Bridges of Headley, L.

Brougham and Vaux, L.

Brown of Eaton-under-Heywood, L.

Browning, B.

Burns, L.

Buscombe, B.

Butler of Brockwell, L.

Byford, B.

Callanan, L.

Carrington of Fulham, L.

Cathcart, E.

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Cavendish of Furness, L.

Chisholm of Owlpen, B.

Colwyn, L.

Cooper of Windrush, L.

Cope of Berkeley, L.

Cormack, L.

Courtown, E.

Coussins, B.

Craigavon, V.

Crathorne, L.

De Mauley, L.

Deech, B.

Deighton, L.

Denham, L.

Dixon-Smith, L.

Dobbs, L.

Dunlop, L.

Eaton, B.

Eccles, V.

Eccles of Moulton, B.

Elton, L.

Empey, L.

Evans of Bowes Park, B.

Evans of Weardale, L.

Fairfax of Cameron, L.

Fall, B.

Farmer, L.

Faulks, L.

Feldman of Elstree, L.

Fellowes of West Stafford, L.

Fink, L.

Finkelstein, L.

Finn, B.

Fookes, B.

Forsyth of Drumlean, L.

Fowler, L.

Framlingham, L.

Freeman, L.

Freud, L.

Gardiner of Kimble, L. [Teller]

Gardner of Parkes, B.

Garel-Jones, L.

Geddes, L.

Gilbert of Panteg, L.

Gold, L.

Goodlad, L.

Goschen, V.

Grabiner, L.

Grade of Yarmouth, L.

Greenway, L.

Griffiths of Fforestfach, L.

Hailsham, V.

Hamilton of Epsom, L.

Hannay of Chiswick, L.

Harris of Peckham, L.

Hay of Ballyore, L.

Hayward, L.

Helic, B.

Henley, L.

Heyhoe Flint, B.

Higgins, L.

Hodgson of Abinger, B.

Hodgson of Astley Abbotts, L.

Hogg, B.

Holmes of Richmond, L.

Home, E.

Hooper, B.

Horam, L.

Howard of Rising, L.

Howe, E.

Hunt of Wirral, L.

Inglewood, L.

James of Blackheath, L.

Jenkin of Kennington, B.

Jopling, L.

Keen of Elie, L.

Kerr of Kinlochard, L.

Kilclooney, L.

King of Bridgwater, L.

Kirkham, L.

Knight of Collingtree, B.

Lamont of Lerwick, L.

Lang of Monkton, L.

Lansley, L.

Lawson of Blaby, L.

Leigh of Hurley, L.

Lexden, L.

Lingfield, L.

Lothian, M.

Lupton, L.

Lyell, L.

MacGregor of Pulham Market, L.

McIntosh of Pickering, B.

Mackay of Clashfern, L.

Mancroft, L.

Marlesford, L.

Mobarik, B.

Mone, B.

Montrose, D.

Moore of Lower Marsh, L.

Morris of Bolton, B.

Morrow, L.

Naseby, L.

Nash, L.

Neville-Jones, B.

Neville-Rolfe, B.

Noakes, B.

Northbourne, L.

Northbrook, L.

Norton of Louth, L.

O'Cathain, B.

O'Donnell, L.

O'Neill of Gatley, L.

Oppenheim-Barnes, B.

O'Shaughnessy, L.

Pannick, L.

Patel, L.

Perry of Southwark, B.

Pidding, B.

Popat, L.

Porter of Spalding, L.

Prior of Brampton, L.

Redfern, B.

Ribeiro, L.

Ridley, V.

Risby, L.

Robathan, L.

Rock, B.

Rowe-Beddoe, L.

Russell of Liverpool, L.

Sandwich, E.

Scott of Bybrook, B.

Seccombe, B.

Selborne, E.

Selkirk of Douglas, L.

Selsdon, L.

Sharples, B.

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Sherbourne of Didsbury, L.

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Slim, V.

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Taylor of Holbeach, L. [Teller]

Trees, L.

Trefgarne, L.

Trenchard, V.

True, L.

Turnbull, L.

Ullswater, V.

Verma, B.

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Warsi, B.

Wasserman, L.

Wei, L.

Wellington, D.

Wheatcroft, B.

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Williams of Trafford, B.

Young of Cookham, L.

Younger of Leckie, V.

7.29 pm

Clause 26: Transformer vehicles

Amendment 21

Moved by Lord Ashton of Hyde

21: Clause 26, page 22, line 6, at end insert—

“( ) Regulations under subsection (3) may make the provision mentioned in subsection (6)(c) only with the consent of the Council of Lloyd’s.”

Lord Ashton of Hyde: My Lords, this may not be quite so interesting. Clause 26 will introduce a power into the Financial Services and Markets Act 2000 for the Treasury to make regulations relating to transformer vehicles. Transformer vehicles are used for risk mitigation purposes, particularly in connection with insurance-linked securities business.

Lloyd’s is an important part of the London insurance market. The clause enables the regulatory arrangements of Lloyd’s to be updated, should that be needed to facilitate the Lloyd’s market adapting to insurance-linked securities business and the use of transformer vehicles. If this requires amendments to the Lloyd’s Acts, or makes other provision unique to Lloyd’s, new subsection (10) ensures that the regulations will not be treated as a hybrid instrument, so that amendments are not delayed in Parliament by the hybrid procedure.

During Committee stage, the Delegated Powers Committee considered this clause and reported that the power conferred was,

“adequately explained and justified in the memorandum”.

However, the committee raised a concern about the disapplication of the hybrid procedure, particularly in relation to regulations conferring functions on the Council of Lloyd’s. The committee pointed out that the purpose of the hybrid procedure is to protect private interests and recommended that the clause be amended,

“so that the power in subsection (6)(c) may not be exercised without the consent of the Council of Lloyd’s”.

The Government have considered this recommendation carefully and agree with the committee’s recommendation. Therefore, this amendment qualifies the power in new subsection (6)(c) to make regulations relating to Lloyd’s so that the power can be exercised only with the consent of the Council of Lloyd’s. I beg to move.

Lord Davies of Oldham: My Lords, the Government received good advice from the Delegated Powers Committee. I am surprised that they deliberated for a period before reaching the right conclusion—that is, agreeing with the committee.

15 Dec 2015 : Column 2042

Lord Ashton of Hyde: I am grateful to the noble Lord for those comments.

Amendment 21 agreed.

Clause 27: Pensions guidance

Amendment 22

Moved by Lord Bridges of Headley

22: Clause 27, page 22, line 41, after “(2A)” insert—

“In subsection (2)(a)—

(a) references to a member, or a survivor of a member, of a pension scheme include a member, or a survivor of a member, of a pension scheme for which the PPF has assumed responsibility under Part 2 of the Pensions Act 2004 or Part 3 of the Pensions (Northern Ireland) Order 2005 (S.I. 2005/255 (N.I. 1)), but

(b) in relation to such a member or survivor, the reference to the flexible benefits that may be provided is to be read as a reference to the money purchase benefits (within the meaning of that Act or that Order) that may be provided by the PPF by virtue of sections 161 and 170 of that Act or articles 145 and 154 of that Order.

(2B) ”

Lord Bridges of Headley: My Lords, this group makes several small pensions amendments, which I shall highlight briefly.

The first amendment is technical in nature and closes an unintended gap in guidance provision, ensuring that people in the Pension Protection Fund—the PPF—are able to access Pension Wise guidance. At present, Pension Wise is able to provide guidance only to a member, or the survivor of a member, of a pension scheme. As the PPF is a compensation fund, not a pension scheme, individuals whose schemes have transferred into the PPF are not able to obtain guidance from Pension Wise.

Where a defined benefit scheme transfers to the PPF, usually following the sponsoring employer becoming insolvent, it is possible that any money purchase benefits which a scheme member has built up, most likely as a top-up to their defined benefit scheme, could also transfer in. The amendment will allow these members to receive guidance on options around what to do with their money purchase benefits. Pension Wise should be available to all who wish, and are able, to take advantage of the pension freedom reforms, and it is right that we are taking action now to ensure that all are treated consistently.

Next is a series of amendments that make changes to Clauses 27, 30 and 32. These ensure that powers currently given to the Treasury will be given instead to the Secretary of State. This is so that when oversight of Pension Wise moves to the Department for Work and Pensions, my right honourable friend the Secretary of State for Work and Pensions will be able to exercise this power.

I turn finally to the amendment creating a new clause. This amendment is technical in nature and allows appointed representatives of authorised financial advisers to advise on the conversion and transfer of safeguarded benefits, which are the special valuable features of certain pensions, such as defined benefit

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pensions and pensions with guaranteed annuity rates, for the purposes of the advice safeguard established in Sections 48 and 51 of the Pension Schemes Act 2015.

These amendments to Sections 48 and 51 of the Pension Schemes Act 2015 will amend the definition of “authorised independent adviser” to include appointed representatives. As a result, they will be able to give appropriate independent advice to satisfy the advice safeguard. They will also amend the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001 to the same end. Around two-thirds of financial advisers are appointed representatives who have a special contract to provide services on behalf of their principal, who will be an authorised financial adviser regulated by the FCA. This measure puts the eligibility of appointed representatives to advise on these transactions beyond doubt.

The amendment extends eligibility to advise on these transactions only to the appointed representatives of financial advisers. What this will not do is reduce consumer protections or weaken the accountability of financial advisers, or their appointed representatives. Where an appointed representative advises on these transactions, the directly authorised firm, as the principal, takes full responsibility for the quality of the advice and compliance with FCA rules.

The pension freedoms which came into effect in April have given people real freedom and choice in how they access and spend their income at retirement. This amendment will help to ensure that they operate as intended for customers with safeguarded benefits. I beg to move.

Amendment 22 agreed.

Amendments 23 and 24

Moved by Lord Bridges of Headley

23: Clause 27, page 22, line 41, leave out “Treasury” and insert “Secretary of State”

24: Clause 27, page 23, line 2, at end insert—

“( ) In subsection (3) after the definition of “pension scheme” insert—

““PPF” means the Board of the Pension Protection Fund;”.”

Amendments 23 and 24 agreed.

Amendment 25

Moved by Lord Bridges of Headley

25: After Clause 27, insert the following new Clause—

“Advice about transferring or otherwise dealing with annuity payments

(1) The Financial Services and Markets Act 2000 is amended as follows.

(2) After section 137FB insert—

“137FBA FCA general rules: advice about transferring or otherwise dealing with annuity payments

(1) The FCA must make general rules requiring specified authorised persons to check that an individual—

(a) who has a right to payments under a relevant annuity, and

(b) if the Treasury make regulations under subsection (3), who is not an exempt person by virtue of those regulations,

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has received appropriate advice before transferring or otherwise dealing with the right to those payments.

(2) The reference in subsection (1) to a right to payments under a relevant annuity does not include a contingent right to such payments.

(3) The Treasury may by regulations provide that an individual whose financial circumstances meet criteria specified in the regulations is an exempt person for the purposes of subsection (1)(b).

(4) Regulations made under subsection (3) may (amongst other things) specify criteria based on the proportion of the individual’s financial resources that is represented by the payments under the relevant annuity or the value of that annuity.

(5) The rules made by virtue of subsection (1) may include provision—

(a) about what specified authorised persons must do to check that an individual has received appropriate advice for the purposes of those rules;

(b) about when the check must be carried out.

(6) For the purposes of this section—

(a) “relevant annuity” means an annuity specified (by type, value or otherwise) as a relevant annuity in regulations made by the Treasury;

(b) “appropriate advice” means advice specified (by reference to the person giving the advice or otherwise) as appropriate advice in regulations made by the Treasury;

(c) “specified authorised person” means an authorised person of a description specified in rules made by virtue of subsection (1).

(7) If regulations under subsection (3) or (6)(a) make provision about the value of an annuity, the regulations may also make provision about the basis on which the value of an annuity is to be calculated.”

(3) In section 138F(2) (notification of rules) after “137FB,” insert “137FBA,”.

(4) In section 138I (consultation by the FCA)—

(a) in subsection (6), after paragraph (aa) insert—

“(ab) section 137FBA;”;

(b) in subsection (10)(a) after “137FB,” insert “137FBA,”.”

Lord Bridges of Headley: My Lords, this amendment introduces an advice requirement for some of those consumers who wish to sell their annuity income streams on the secondary market.

We have already debated the extension of Pension Wise, enabling it to offer guidance for consumers in this market. The Government recognise the importance of protecting all who have a right to receive an income under a relevant annuity, not just the primary annuity holder, and this has been a concern raised by noble Lords previously. That is why we can clarify that we will be making the free and impartial Pension Wise guidance service available to anyone with a relevant interest in a relevant annuity.

Today, the Government are introducing a new measure to ensure that consumers are adequately supported when making the complex decision of whether to sell their annuity income streams. A regular income stream from an annuity is a valuable asset and, for the majority of individuals, it will be in their best interests to keep their annuity. Therefore, it is important that annuity holders understand the value of their income stream and are informed about the options available to them.

The Government have consulted on the steps that should be taken to support consumers with this complex decision. In addition to Pension Wise guidance, we asked whether consumers should be required to take

15 Dec 2015 : Column 2045

financial advice in order to receive a tailored recommendation to inform their choices. We also asked whether the safeguards in place should vary depending on the value of an annuity to ensure that consumers with lower value annuities do not have to pay disproportionately high costs in order to sell them. There was broad support from both industry and consumer groups for requiring advice above a threshold. The Government have listened and are putting this measure in place through a government amendment to this Bill today.

This proposed new clause will place an obligation on the Financial Conduct Authority to make rules requiring certain authorised firms to check that advice has been received before annuity holders may sell their annuity income stream. The FCA will determine which businesses will be required to make these checks, what the checks will entail and when they will be carried out. We expect that the FCA will be consulting on its proposed rules during 2016.

The threshold for advice, including how it will be calculated, will be set out by government through secondary legislation. The Government will also lay secondary legislation to specify what type of advice individuals must have received. In specifying appropriate financial advice, the Government’s intention is to require advice to be FCA-authorised and regulated. The Government also intend to legislate that all UK buyers in the secondary market for annuities will be FCA-regulated. This will allow the FCA to design specific rules governing the conduct of both financial advisers and buyers in this market, and the Government will work with the FCA to consider any conflicts of interest that may arise between these parties. The Government are engaging with financial advisers and their representative bodies with the aim of ensuring that there will be enough participating advisers to meet consumer demand when the market opens. Within the financial advice market review, the Government are considering how the availability of financial advice can be improved, particularly for those who do not have significant income or wealth. The review is to publish its recommendations by the time of Budget 2016, and the Government will ensure that the financial advice requirement in the secondary annuities market fully reflects the outcomes of this review.

A further power will allow the Treasury to exempt from this advice requirement those individuals whose financial circumstances meet certain criteria. The Delegated Powers and Regulatory Reform Committee has recently recommended that this power be affirmative rather than negative, and the Government will respond to the House on this recommendation at the earliest opportunity. The Government will consult on the regulations to be made under all powers afforded by this clause in 2016.

Today’s debate coincides with the Government’s publication of their response to the March 2015 call for evidence on the creation of a secondary market for annuities. This sets out the wider set of proposals around, and the next steps for, the implementation of the secondary market. The response gives further detail on how the market will operate, including tax considerations as well as further details on the consumer support framework, part of which the Government are legislating for in

15 Dec 2015 : Column 2046

this Bill. Your Lordships will no doubt be minded to consider the wider policy in today’s discussion, and your views on these proposals are welcomed. I beg to move.

Baroness Drake (Lab): My Lords, I refer to my entry in the register of interests, in particular my membership of the board of the Pensions Advisory Service. I am also on the Delegated Powers Committee.

There is no pre-existing secondary annuity market which can inform an assessment of whether it would be a well-functioning market, what the key risks are or what is an appropriate level of consumer protection. I have had little time to digest the Government’s response to the consultation on this market, published today, but up to 5 million people could participate in this market—although interestingly, the Pensions Minister and the Economic Secretary both advise that for the vast majority of customers, selling an annuity will not be the best decision. There is a real tension in the policy on this secondary market. The Government have to ensure a robust consumer protection regime consistent with their asserted view, which I do not disagree with, that the right decision for most people is to retain their annuity. At the same time, an effective market needs a sufficient level of demand from consumers to sell their annuities and a sufficiently wide range of purchasers. These two requirements do not sit easily with each other.

While it is welcome that the Government are taking further steps through their Amendment 25 to protect the consumer, I have real concerns about the sufficiency of those protections. The Government will now also allow the original issuers to buy back annuities. This will be allowed only indirectly when facilitated through a regulated intermediary, such as a broker or financial adviser—presumably to enhance consumer prospects of a better deal—although annuity providers can still buy back low-value annuities directly. That raises several issues. What will be the threshold at which direct buyback of low-value annuities will be allowed? How will this be measured—by income stream, by income stream in relation to the individual’s financial resources or by the annuity’s value on the secondary market? Indirect buyback through an intermediary will mean an extra layer of costs for consumers, paying in effect for their own protection. How will the Government control those costs?

As individuals will be required to take advice, how will the Government ensure that advisers are willing to provide advice at a reasonable charge, particularly to those with modest value annuities? This is a problem under the required advice regime for individuals transferring defined benefit assets to defined contribution arrangements, so similar problems are certain to arise in a secondary annuity market. Will sufficient brokers enter that market to enable a fair price? Allowing buyback, directly or indirectly, must increase the risk of consumer inertia as individuals choose to stay with their original provider, notwithstanding any advice that they receive, heralding a weak demand size which is already so common in the pensions and annuities market. The Government intend to bring forward legislation to create a further regulated activity for buying back an annuity. What is the timetable for that legislation and will we have time to consider it properly?

15 Dec 2015 : Column 2047

7.45 pm

Companies buying in the secondary annuity market may also be providers of advice. The issuers of annuities may have an inherent interest in keeping pre-existing customers who want to sell their annuities and nudging them in a way that enhances that retention, including selling other products to those with liberated cash. The additional regulatory rules, authorised persons and regulated activities mean that the new secondary annuity market is looking increasingly complex, raising again the problem of an asymmetry of understanding between the consumer and the provider. The consumer will face advice costs, broker costs, underwriting costs, trading costs and complex pricing systems. Selling could be costly and complex: some are speculating that this could take 20% out of the resale value of the annuity.

The different service providers in the market will themselves have commercial relationships. This means that whether considering the broker, the buyer or the adviser, there is significant potential for conflicts between their interests and those of the individual holding the annuity. Indeed, a key reason given by the Government for introducing pensions freedoms was that the annuity market was not working in the consumers’ interests. How much greater is that risk in a secondary annuity market? So I ask the Minister, with serious conviction, just how confident are the Government that they can ensure that those conflicts of interest are controlled and resolved in the interests of consumers?

The amendment refers to,

“an individual … who has a right to payments under a relevant annuity”,

receiving advice, but that does not address the interests of partners of individuals holding a joint life annuity, including any pension-sharing on divorce. The Government have referred this matter to the FCA for consideration but, as a matter of principle, are the Government committed to ensuring that the interests of a potential beneficiary in a joint life annuity will be protected? If this is not satisfactorily resolved, it will disproportionately affect women.

The Government have reversed their previous position in relation to people in receipt of means-tested benefits. From their announcement today, it appears that people in receipt of those benefits or in social care will also be allowed to sell on their annuities, so that an additional estimated 650,000 people will be free to sell. I note that Steven Webb has expressed his concern at this decision, particularly for vulnerable older annuitants, who will need stronger protection. It will be important for people to understand how the income deprivation and capital disregard rules under the benefit system will bite. Why have the Government decided to allow people in receipt of benefits to trade their annuity? Can the Minister also confirm how the benefit rules will apply to individuals selling their annuities, and how will he ensure that such individuals are protected? This issue became quite complicated, rather at the last moment, under the pensions freedoms introduction.

Finally, under their Amendment 25, the Government leave open the if and how of how they would use their powers to set a criterion for exempting certain individuals from taking advice when selling their annuity.

15 Dec 2015 : Column 2048

They identified two possible criteria: the proportion of the individual’s financial resources represented by the payments and the value of the annuity. There is a material difference between the two and, consequently, between who could be exempt. The income stream would be on the face of the annuity, but the value of the annuity on the secondary market could be considerably lower than the purchase price required to buy an annuity giving that level of income stream.

The delegated powers to make regulations under proposed new subsection (3), introduced by this amendment, to exempt persons from the need to take advice and the checking arrangement require only the negative procedure. If exempt, individuals will be outside a key consumer protection in a complex market. In those circumstances, I believe the regulations should be carefully scrutinised and attract the affirmative procedure. The 16th report of the Delegated Powers Committee puts the issue more succinctly than I could, so I conclude by quoting from it:

“The proposed secondary annuities market is novel and as yet untested, and brings with it fresh opportunities for mis-selling, so that effective protection for consumers will be extremely important. We believe that the House will wish to give careful scrutiny to regulations that would in effect reduce the available protection afforded to certain individuals by exempting them from the new checking arrangements”.

I hope the Government will be persuaded by the recommendation in the Delegated Powers Committee report.

Lord McKenzie of Luton: My Lords, I will speak briefly to Amendment 25. I thank the noble Lord, Lord Bridges, for his courtesy in organising a meeting with officials and for his helpful letter of 14 December. Having said that, I am bound to say that it is not helpful to receive the Government’s response to their consultation on the secondary annuity market just this morning, particularly given that the consultation closed on 18 June—six months ago. This is simply not the way to make good legislation and I look to the Minister to undertake that we will have the opportunity to return to this matter at Third Reading, should our further examination of the government response identify issues which raise concerns.

Clause 27, together with Amendment 25, provides a broad framework for aspects of the secondary annuity market, but much is left to regulation: relevant annuities, relevant interests, exempt persons, criteria determining the proportion of a person’s financial resources and appropriate advice. Yet more will be dealt with via FCA rules, although I understand that this will be subject to consultation in 2016. We are clearly not going to be able to see even draft regulations by the time the Bill leaves this House, and although the government consultation response fills in some of the blanks, there is still much that is unknown. My noble friend Lady Drake has pressed the recommendation that at least the regulations concerning exempt persons should require the affirmative procedure, as recommended by the Delegated Powers and Regulatory Reform Committee. Like my noble friend I would press that matter on the Minister and hope that he will respond positively.

If there is to be a secondary market in annuities, we agree that as well as extending Pension Wise to provide free and impartial guidance to those with a relevant

15 Dec 2015 : Column 2049

interest in an annuity there should be a requirement to seek financial advice before such annuities can be sold. A particular bone of contention is the protection of dependants and beneficiaries, an issue which, as my noble friend said, impacts disproportionately on women. Although this is acknowledged in the government response, they are simply asking the FCA to consider whether a requirement could be placed on the annuity provider to ensure the dependant or beneficiary of an annuity has consented to an assignment and to consider further rules for consumers with vulnerable characteristics. The Government are also passing to the FCA consideration of the challenges arising from their being unnamed beneficiaries. It will be important for there to be clarity on these matters by April 2017. What will happen if there is not?

It appears that the Government are not going to prohibit the assignment of an annuity for those on means-tested benefits, as my noble friend said, or for those meeting social care costs, but will look to changing guidance to help people understand the deprivation of income and capital rules. Perhaps the Minister might say more, given the complexity of these issues, about how robust this consumer protection will be.

It would seem that the secondary market will not be without its complications: there will be individual annuity holders; there may be beneficiaries and dependants; there will be purchasers of rights of an annuity under a specific regulated activity; there will be a further regulated activity for providers buying back annuities; there will be regulated intermediaries; there will be IFAs providing mandatory regulated advice; and there will be authorised entities to check that holders of a relevant annuity have received appropriate financial advice. Given this plethora of parties, how confident is the Minister that conflicts of interest can in practice be avoided? Where are the costs of all of this going to fall? Who, in particular, is going to meet the costs of an authorised entity checking to see that appropriate financial advice has been received? These arrangements also of course mean that the annuity providers will be under no obligation to permit assignment of annuity payments in the first place.

The Government appear, again as my noble friend said, to have changed their mind on allowing providers to buy back their annuities through intermediaries. Can the Minister say more about how the originally perceived consumer detriment of this is to be managed? The Government do not seem to have resolved some of the basic operational issues. What is their current position on maintaining a central death register?

The Government will not restrict any entities from purchasing on the tertiary market, nor do they seem minded to place restrictions on buyers’ abilities to reassign annuities once purchased. However, they are looking at preventing UK retail investors from purchasing rights under annuities that are reassigned on the tertiary market, to protect them from a complex financial product. We would agree with that approach. It seems that the prospect of securitisation or unbundling in the tertiary market leaves scope for the tax planners.

The consultation response states that the Government want the secondary market for annuities to be fair, simple to understand, cost effective and operationally

15 Dec 2015 : Column 2050

deliverable. It is clearly a long way from that. There are a host of issues still to settle but none more important than the protection of consumers. All of this is in circumstances where the Government expect that, for most annuity holders, continuing to hold the annuity income will be the right decision. I am not sure where this will all end up but we will not, for the time being, oppose this amendment.

Lord Davies of Oldham: My Lords, I am not here to pile Pelion upon Ossa. I counted that at least 12 questions of considerable complexity have been addressed to the Minister, and all of them are important. My two noble friends have of course reflected the considerable anxieties on this side with regard to the position with pensions, particularly for secondary annuities. I hope the Minister will do his level best to respond to real questions that need to be addressed, which would also minimise the amount of time we will need to spend at Third Reading on the issue.

Lord Bridges of Headley: I start by thanking the noble Baroness, Lady Drake, and the noble Lord, Lord McKenzie, for sparing the time to meet me and officials last week. I will also say now that I apologise for the timing on these things. I will not try to give a “dog ate my homework” excuse—these things are sometimes just unfortunate—and I heed what the noble Lord, Lord McKenzie, has to say about the timing of the report. I make no commitments right now about Third Reading, but I am happy to meet both the noble Lord and the noble Baroness, Lady Drake, and will answer a number of the points that have been raised. As the noble Lord, Lord Davies, said, some were pretty technical, so I hope noble Lords will forgive me if I do not cover them all, in which case I will write as soon as I possibly can with detailed answers.

To start, the noble Baroness, Lady Drake, spoke of the tension in the policy. All I would say in response is that many of the responses to the consultation welcomed the proposal to extend the pension freedoms to those who had already bought an annuity. As the Government have always made clear, for many people, an annuity, which provides a guaranteed income for life, will remain the right choice. However, the Government believe that there is no reason why they should impose barriers that prevent individuals being free to make their own decision about what to do with their annuity rights, purchased with the money they have saved throughout their working life.

8 pm

Turning to the DPRRC recommendations, we will read them with great interest. Again, I make no further commitment, but we will certainly do that.

I was asked: how will the Government ensure that there will be a functioning market for financial advice to support consumers making this decision? To put a bit more flesh on the bones of what I said earlier, the Government are engaging with financial advisers and their representative bodies with a view to ensuring that there will be enough participating advisers to service consumer demand. The Government are keen to look across the financial services sector to improve the availability of financial advice to people, particularly those who do not have significant income or wealth.

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That is why, as noble Lords will know, we launched the FAMR with the FCA, and the review is due to publish its recommendations by Budget 2016. The Government will ensure that the financial advice requirement for the secondary annuities market fully respects the outcome of that review.

Turning to potential conflicts of interest between financial advisers, brokers and buyers in the secondary annuities market, the Government will set out in secondary legislation the definition of appropriate financial advice in relation to the clause. We intend “appropriate financial advice” to be FCA-regulated financial advice, so eligible financial advisers will be authorised and regulated by the FCA. In addition, the Government intend to legislate through secondary legislation to require all UK buyers in the market to be FCA-regulated. As I said, this means that the FCA will be able to design specific rules governing the conduct of both financial advisers and buyers in this market, and the Government are working with the FCA and expect it to consider making rules about potential conflicts of interest. The FCA will consult on its proposed rules for the secondary annuities market next year.

On the issue of the Government protecting the interests of dependants in joint life annuities, which is a very valid point, the Government recognise the importance of protecting all those who have a right to an income under an annuity contract, not just the primary annuity holder. That is why we will be making the free and impartial Pension Wise guidance service available to anyone with a relevant interest in an annuity. In addition, we will ask the FCA to consider additional measures, such as requiring firms to obtain written consent from named dependants and beneficiaries before facilitating the sale of an annuity.

I will leave it at that for now, but I assure the noble Baroness and the noble Lord that I will write them in due course on the other points that arose.

Amendment 25 agreed.

Amendment 26

Moved by Lord Bridges of Headley