To ask Her Majesty’s Government what assessment they have made of the implementation of the recommendations of the Parliamentary Commission on Banking Standards and the opportunities for further banking reform.
My Lords, I add my welcome to the noble Lord, Lord Bethell, in his new role and I look forward to working with him.
I begin by acknowledging that the banks have an important role in our society today. They do many good things—they employ more than 1 million people and pay more than £60 billion in tax annually—but, despite the many good things they do, we are also aware of the history of recent years. We are now 11 years on from the financial crash and six years on from the publication of the report by the Parliamentary Commission on Banking Standards, and it is almost three years to the day since I last secured a debate on this topic.
As I did then, I approach this subject with a certain reticence. I do not approach it as a banker and I do not pretend to understand all the technical issues; I am going to leave those to others speaking in this debate who have far more knowledge, insight and experience than I do. I sought this debate because I have witnessed first-hand some of the long-term costs of the banking crisis in communities across Bedfordshire and Hertfordshire which lie within my diocese. I have heard more than one banker say, “We’ve moved on from the crisis. We’re in a new era”. Some bankers may think that we have moved on—indeed, they may have moved on—but the effects are still being felt in many of our poorer communities, especially in the north of England and some parts of Scotland and Wales. We owe it to those who are still feeling the effects of the crisis to remember the damning indictment of the banking crisis in Changing Banking for Good:
“Banks in the UK have failed in many respects. They have failed taxpayers, who had to bail out a number of banks including some major institutions, with a cash outlay peaking at £133 billion, equivalent to more than £2,000 for every person in the UK. They have failed many retail customers, with widespread product mis-selling. They have failed their own shareholders, by delivering poor long-term returns and destroying shareholder value. They have failed in their basic function to finance economic growth, with businesses unable to obtain the loans that they need at an acceptable price”.
This was a classic case of an industry which presumed it had the right to privatise profits and nationalise losses. Since the report was published six years ago many of its recommendations have been implemented, but others have been dropped or watered down.
As we stand on the brink of Brexit, I know there are many people who will see it as an opportunity further to weaken regulation of the banking industry. I therefore believe there is an even greater need for us to explore what progress has really been made and, in particular, how we can know whether the necessary changes in culture have really been embedded across the industry. Culture is the last aspect of any organisation to change, and that is particularly true when it comes to the culture around the three most powerful of human motivations, usually summarised as money, sex and power.
My Lords, I thank the right reverend Prelate for securing this debate and I welcome the Minister, the noble Lord, Lord Bethell, to his new post. I pay tribute to his predecessor, the noble Lord, Lord Young.
Improving behaviour and culture in banks is a work in progress, not a work completed. Following the FCA report into GRG, which we debated shortly before the recess, we are left with doubt about whether the tools are available to catch bad behaviour. Notably, that report says:
“We cannot say whether we would have been able to bring successful cases against RBS senior management had the SM&CR been in force”.
Andrew Bailey has said since that he believes the behaviour would be covered by the senior managers regime, but in any event, it would have to fall within the perimeter of what was defined as being under the senior managers’ control. The FCA report emphasised that many more things are going on in financial services than are regulated, and this unregulated activity, which includes corporate lending, is beyond the reach of regulatory discipline unless it strays into other matters or offences, such as fraud.
Some things are deliberately left outside regulation. The argument, which is the gist of what the noble Lord, Lord Young, said when he wrote to me after the GRG debate, is that regulation might reduce availability of the relevant service, such as lending to SMEs. I think it is time, though, to have a longer and better look at that general supposition, in particular with regard to the treatment of SMEs by banks. Right now, we are left with the situation that heavily regulated entities—the banks—carry out unregulated activity but nevertheless benefit from some sense of trust derived from being a regulated entity. After all, one expects a bank to behave better than a loan shark. I went to see the FCA during the recess and Andrew Bailey took pains to state again that because not everything done by banks and financial services firms was within the regulatory perimeter, they had little power. He went further, suggesting that Parliament had not had a debate looking at the regulatory perimeter.
My Lords, I too thank the right reverend Prelate the Bishop of St Albans and congratulate him on securing this debate. I declare my interest as president of the Money Advice Trust—the charity that runs National Debtline and Business Debtline, which between them help hundreds of thousands of people a year to tackle their debt problems.
We last debated this subject three years ago—almost to the day, I think—and it is right that we return periodically to the parliamentary commission’s work and measure the progress that has been made against its recommendations. Most of these recommendations focused on issues of governance, professional standards, structure and regulation. Nevertheless, now, as then, I believe that it is also important to make the point that no debate on banking standards can be complete without reference to the individual consumer and the need to protect the consumer interest. There are two broad aspects to that: first, ensuring that consumers are able to access financial services and, secondly, ensuring that they are treated fairly when they do, no matter what their personal circumstances are. I should like to say a few words on each of those two aspects.
The first is access to services and, more broadly, improving financial inclusion. The parliamentary commission focused its recommendations in this area on the issue of basic bank accounts and was influential in their introduction in 2016, since when they have certainly made a difference. However, challenges remain in ensuring that they fulfil their full potential as a tool to address financial exclusion. For example, it is widely acknowledged that awareness of basic bank accounts among the people whom they are intended to benefit is not high enough. I believe that the banking industry could and should do more to promote basic bank accounts to financially excluded groups. The new Money and Pensions Service should surely have an important role to play here too, and I wonder whether the Minister, whom I welcome to his new role, will comment on that when he replies.
5:06 pm
The Lord Bishop of Birmingham
My Lords, I am grateful to my right reverend friend for leading this debate and I welcome the Minister to his new role. I want to focus on the recommendations in the original report—the references in paragraph 138 of the summary, volume 1—which looked at culture change. The response of the banking industry to that challenge came through a report produced by Sir Richard Lambert, which said that if the banks did not face up to this, there would be further intervention, regulation and direction. As a result, the UK Banking Standards Board was set up in 2015. I declare my interests in that I am a founder member of that board and also part of the ad hoc Financial Exclusion Committee, which has been referred to already.
The aims of the Banking Standards Board are, first, to provide tools and voluntary interventions which are available to members of the board—there are over 31—for assessing different sizes of banks, building societies and other financial institutions, so that they can understand how culture change is going, if it is going at all. Secondly, there are the important elements of supporting regulation responses and how to perform in relation to the regulations. Thirdly, the aim of the board is to strengthen and encourage trustworthiness—a word that has already been referred to—in an industry that sorely lacks it.
My remarks are about soft power rather than the hard power architecture required for the banking industry, which must go alongside the business, legal and ethical demands that frame any healthy operation or organisation. What about the annual assessment? It sounds like box ticking, but that has not been our experience. The nine areas of assessment are very obvious. How would noble Lords feel, in their organisations—just as I would in mine—about being assessed annually, on competence, reliability, responsiveness, personal organisation and resilience, accountability, openness, respect, honesty and shared purpose? In a sophisticated analysis that is kept privately to each bank but then anonymised across the industry, leaders of banks and their staff can see how they are doing in particular areas of the industry that matter in terms of their internal and external organisational culture. It is, if you like, a mirror of honesty put up in front of the organisation.
Then of course there is the need for regulation support. We have already heard from the noble Baroness, Lady Bowles, about the senior management certification regime. The Banking Standards Board has today published its fourth good practice guidance on regulatory references, based on the principles of proportionality, fairness and consistency, in order to try to make real some of the theory and some of the things that we know are needed in an industry that has struggled in these areas. This is to try to help a profession to renew not only its confidence in itself and public confidence in it but also its sense of pride—the sense that it is possible to do well in an industry whose reputation has been ruined by the last few years, particularly 10 years ago.
My Lords, I welcome the opportunity provided by the right reverend Prelate to take stock of progress since the Parliamentary Commission on Banking Standards first reported over six years ago. I also join other noble Lords in welcoming the noble Lord, Lord Bethell, to the Government Front Bench, and I look forward to his debut at the Dispatch Box.
Since the PCBS made its recommendations, progress is perceived to have been slow, as the Banking Standards Board itself has noted. There also remain gaps in holding banks to account, especially in the redress process for SME customers. However, it would be wrong to conclude that significant change is not under way. The Financial Stability Board has commended the UK for its successful transition to a new regulatory regime, and the IMF has welcomed the UK’s more resilient system. However, it is fair to say that individual banks, and the financial system as a whole, have thus far benefited more from structural safeguards, such as strengthened capital ratios and better resolution processes, than from behavioural change. Those involved in major organisational transformation will appreciate the huge forces of inertia that need to be overcome.
It is not surprising, therefore, that the process of internalising externally imposed regulation is proving slow. This also serves to highlight that, in addressing “too big to fail”, we are uncovering the associated challenges of “too big to manage” and “too big to regulate”. The real litmus tests of the reforms undertaken since the global financial crisis are whether our financial system is genuinely safer from contagion, whether our regulators are fit for purpose and, ultimately, whether consumers are better off. The noble Baroness, Lady Coussins, provided a powerful reminder of the key consumer issues.
As well as testing the outcomes, we need to monitor the implementation of the new rules and regulations—for example, the number of senior managers being held to account under the new certification regime, the number of staff disciplined for breach of conduct rules, or the number of cases where banks exercise their right to claw back remuneration. It would also be helpful to demonstrate, in a transparent fashion, how banks and regulators are using their new powers. So far, the most visible aspect of regulatory enforcement has come in the form of fines. While these are necessary, we must guard against the unintended consequences of creating a culture that accepts such penalties as a cost of doing business, so it is encouraging that shareholders of financial institutions—especially those that take a longer-term investment perspective—have come to appreciate the impact of culture and the financial, reputational and existential risks of poor conduct on the value of their holdings.
My Lords, I will speak next because there is an error on the speakers list; the noble Lord, Lord Davies, will speak after me. I do not want to confuse anybody. Let me use this opportunity to welcome the noble Lord, Lord Bethell. I hope he will not mind me saying how much I will miss the noble Lord, Lord Young. He is one of the only people I know who could make a finance debate hilariously funny, as well as making very incisive comments and speeches. The new Minister has quite a challenge to fill those shoes—but I am sure he will, very ably.
I was privileged to be a member of the Parliamentary Commission on Banking Standards, which was chaired by Andrew Tyrie—now the noble Lord, Lord Tyrie. For two years it was an extraordinary experience to walk into evidence sessions where, at the table, a master of the universe would explain quite clearly why they had absolutely no knowledge of the failures in their own institutions, which were clearly far too big and too complex to manage. We all came to the conclusion that they had been advised to plead incompetence as the alternative to pleading guilty. I find it quite extraordinary that most of those we listened to have gone on to further success in their careers. As far as I can see, this is not an industry that has set real demands for competence on its senior management.
The title of the report by the PCBS was Changing Banking for Good. That is incredibly tough to do, but it reflects the critical importance of the dramatic change that we need to achieve, the weaknesses in both the standards and culture that underpinned the crash in 2008, and many of the other abuses within the financial services industry. I think the follow-on from the PCBS report—I have picked this up from many who have spoken today—is rather a curate’s egg; it has been good in places.
I say to the noble Baroness, Lady Coussins, that one of the areas it has handled best has been vulnerable people. We now have caps and other constraints on high-cost credit, a breathing space in debt management and severe restrictions on cold calling. However, I agree with her that the core issue of financial inclusion is no better today than when the report was made. It is frustrating that the banks are required to provide basic accounts but do so with great reluctance and therefore, in effect, quite badly. We had the opportunity to make it a condition of the banking licence that major banks should either provide proper services to the financially excluded or support an institution that could do that—which could target those individuals. That has been neglected and it has to be followed up.
My Lords, I, too, congratulate the right reverend Prelate the Bishop of St Albans on introducing this debate, which he did by emphasising the most challenging aspect of the world of finance that the nation has to face; that is, a culture that the past decade has revealed to be most difficult to defend. I refer not just to the extraordinary issues surrounding the financial crash in 2007-08 but, subsequent to that, to a number of instances where banking behaviour has been far from publicly acceptable.
I welcome the noble Lord, Lord Bethell, to this debate and look forward to his contribution. The number of Ministers that I have had as opposing forces on the Front Bench is almost into double figures. Each one has made a significant contribution, but, like other Members today, I want particularly to thank the noble Lord, Lord Young, for his all-too-brief period as Treasury spokesman. He identified the issues well, defended the Government’s position—often defending the indefensible—and performed with such wit and insight that we all appreciated his contributions.
This is a challenging debate about a very difficult area. The Government have to face up to the failures in the financial system and in the City. That was clearly identified by the noble Baroness, Lady Bowles, who went into considerable detail on just what needs to be corrected. The City of course will be expected by the governing party to provide a fair degree of financial support for the Conservative Party in the general election, whenever that occurs, so we have to assume that nothing is imminent as far as a response to the banking problems is concerned; nor is that possible in the long run without a definitive change in government attitude, which has not been apparent during the past decade. We have all seen those instances where banks have been guilty of conduct which is quite indefensible.
After the great crash and the staggeringly expensive bailout by taxpayers of several of our leading banks, the public clearly expected change in both action and —as both right reverend Prelates drew to our attention—culture in the financial system, but they have lost trust not only in the capacity for effective action in many aspects of the financial system but in its morality, wondering whether it is not devoid of morality altogether, other than that of increasing profits for the few.
My Lords, I join all those who have paid tribute to my noble friend Lord Young, into whose massive shoes I will attempt to step. I cannot promise to be as witty, charming and demure as he is, but I hope I can show some of his stamina on what is promising to be a long day. I also express great thanks to the right reverend Prelate the Bishop of St Albans for bringing this important debate to the House today. He is doing us all a great service by bringing back and reminding us about the recommendations of this important parliamentary commission. He is also doing us a service by reminding us of the spiritual dimension of this debate. We thank him for both of those.
As we all know, the financial crisis was a serious blow to the UK economy and jobs in Britain, and we are living with the consequences. The noble Baroness, Lady Coussins, and the right reverend Prelate have spoken movingly on that. It is quite right that the Government took steps to respond to the problems that caused that crisis and to protect a world-beating industry that contributes a lot to the UK economy, to the Exchequer and to growth. We should not forget that positive contribution.
Some of the most important steps were structural reforms to the regulatory architecture, such as replacing the Financial Services Authority with the Financial Conduct Authority and the Prudential Regulation Authority, but it was rightly recognised that it was important to restore public trust in the sector. Many noble Lords, including the noble Baroness, Lady Coussins, and the right reverend Prelate, have spoken very movingly about that. That is why the Government appointed the Parliamentary Commission on Banking Standards, and it was right that the commission focused on professional standards and the culture of the UK banking sector. The noble Baroness, Lady Kramer, reminded us that the charge was Changing Banking for Good, which even now sounds like a very good mission.
With regard to money, the Christian scriptures are quite clear: the love of money is the root of all evil. In other words, money itself is neutral, but when money becomes the focus of our lives and our aspirations, we are entering dangerous territory. It is not just scripture which testifies to this. The seminal book by Professor Michael Sandel, What MoneyCan’t Buy: The Moral Limits of Markets,should be required reading for all who work in finance. As the most reverend Primate the Archbishop of Canterbury has said, financial services are called that for a reason: they are here to serve. They are here to enable individuals, communities and nations to flourish and thrive, but they are not an end in themselves. This resonates with the social teaching encyclicals from the Roman Catholic Church, which argue that the maximisation of shareholder value should never be the only aim of any company.
It is because money should be a servant not a master that the Church of England has been actively involved in setting up credit unions. One in my city of St Albans visits schools regularly to encourage financial literacy from the very earliest stages. As a church, we run debt advice centres all around the country. At a national and international level, the Church of England’s Ethical Investment Advisory Group has helped the Church Commissioners, the Church of England Pensions Board and the CBF Church of England Funds to engage with large companies on levels of remuneration. Nevertheless, we cannot leave it to all sorts of people and charities to deal with this alone: there is still a vital role for government to play if we are to ensure that we do not have another financial crisis. We need to ensure that we have the right laws and regulations in place to protect the most vulnerable and we should not be complacent. As recently as last January, Mark Carney, Governor of the Bank of England, warned about the high levels of leveraged loans, suggesting that they are at the same level as in 2008.
I want to ask the Minister four questions—I have given him warning of these. First, what evidence do Her Majesty’s Government have to show that the industry has indeed changed and is now regulating itself effectively? Secondly, are the rules around whistleblowing working? Will he give us the number of cases over each of the past five years? Thirdly, how can we be assured that there has, in fact, been a change in the culture of banks? How do we get hold of that most difficult and nebulous of topics? Fourthly and finally, what is the evidence that banking executives and managers are actually being held to account for their decisions? I am aware that a number of noble Lords have huge experience in this area, and I thank them for agreeing to speak in this short debate.
I look forward, as I did three years ago, to learning a great deal. I hope that this debate might be a modest contribution as we think about this vital area for our nation and our economy and look to the future during these turbulent times.
I challenge that to some extent, in that there have been many debates such as this one in your Lordships’ Chamber and others in the Commons. There have also been proposals backed by APPGs, such as that on fair business banking, making specific recommendations and decrying the powerlessness that our regulators have or seem to have.
However, the point I make now is that we need effective generic offences not bound up in specific regulation and flexible enough to catch twists and turns. We previously thought that that was the fit-and-proper regime, but that has failed on GRG, which falls under it, because the relevant event took place before the senior management regime came into force. Now we think that it may be the senior managers regime, but there is doubt. The object of that regime—I quote from the 14 November 2014 statement by some of the parliamentary commissioners—was to,
“make clear where senior individual responsibility lay for each aspect of a firm”.
“Each aspect” should include unregulated activity, but it is extremely likely that the context has been narrowed through rules and definitions.
I understand completely why industry seeks to limit risk, but the more detail that there is in rules, the less a measure is fit to catch new and unknown developments. Risk is the other side of the coin to using conscience, and conscience and judgment are what we need from senior executives—in fact, I think that is what they are really paid for.
I would like to see a legal analysis of how wide the senior managers regime really is, looking at true life examples, including all the rules and assessment of the managers’ responsibilities. Have the Government done anything like that as part of the monitoring of the implementation of banking reforms?
In the previous GRG debate, I referenced the Australian offence of unconscionable conduct in commerce—a useful generic offence, which I still recommend. I also discussed it with the FCA. It told me that in the context of GRG and corporate lending in general, contract law prevailed and, one-sided though contracts admittedly were, our courts would uphold them, so it was not unconscionable conduct to enforce them. With such an approach to contracts, it is hard to see that the senior managers regime would make any difference without specific guidance—I think some might be under way—but, even then, I wonder how much clout it would have.
This leads me to the conclusion that while we allow or, worse, expect commercial contracts to be unfairly one-sided between powerful and supplicant parties, events that look like oppression to the reasonable-minded person will continue. I see no hope in creating the kind of conscience culture that we seek in business and banking until we address the issue of contracts. If heavily one-sided contracts between large and small entities are the business norm “just because they can”, it has already set the tone and lowered the bar for decent behaviour.
I know that English law is considered an asset, including for the predictability of interpreting contracts, but that does not mean that nothing can be done. Why should “fair and reasonable” be only for consumers? We know what happens. Contracts to SMEs are “take it or leave it”, frequently leaving SMEs in the position of accepting terms that leave them vulnerable—for example, it being simply impossible to organise alternative refinancing on the notice timetables included in the contract. In my own business I often chose the “leave it” option but not everybody has the resources to do that.
Some time ago—I think it was in 2002—in Law Commission Consultation Paper No. 166, which is also Scottish Law Commission Discussion Paper No. 119, there were recommended changes to unfair terms in contracts, which I believe have still not been taken up. They included more protections in business-to-business contracts. The paper said that,
“it is our provisional conclusion that even though the changes we suggest would not be major, they would deal with types of unfair term that have caused very real problems to a number of businesses”.
It is time to dust off those proposals and look at them again alongside the other suggestions that have come forward from various think tanks and others in the light of recent banking scandals. English law does not need to guard the bully and the powerful to maintain its success.
Another challenge concerns the identification requirements for opening a basic bank account. These of course are understandable, given the need to protect against fraud, but they have the unintended consequence of presenting a barrier for people who do not have certain means of identification, such as a passport or driving licence. Alternatives can be used, such as letters from government departments, but the option to use these is not well understood and is another area that should be addressed.
Nevertheless, fortunately, the broader financial inclusion agenda has risen in prominence significantly since our last debate three years ago, thanks in very large part to the work of the noble Baroness, Lady Tyler of Enfield, and her colleagues on the House of Lords Financial Exclusion Committee. Their report was influential in the establishment of the Financial Inclusion Policy Forum, which brings together different government departments to examine these issues and now also includes some key external members—among them, I am pleased to say, Joanna Elson, the chief executive of the Money Advice Trust. But we remain some way off the tangible, comprehensive and joined-up approach to financial inclusion across government that is required. Does the Minister agree with that and if so, what plans do Her Majesty’s Government have to improve the situation?
My second main point is on the need to ensure that customers are treated fairly when they access banking services, no matter what their personal circumstances. This is essential if we are to rebuild trust in the banking industry. In our debate three years ago, I noted the significant progress that had by then been made in improving the treatment of people in vulnerable circumstances; I am pleased to say that this has continued in the period since.
The Financial Conduct Authority’s proposed new vulnerability guidance, which is currently out for consultation, is a welcome sign that the regulator is continuing to apply pressure on banks and other financial services firms to improve. There are signs that this continued pressure is delivering results across the industry. The Money Advice Trust has now worked with more than 220 firms and trained more than 19,000 frontline staff to help them identify and support vulnerable customers. The trust has also recently partnered with UK Finance to run a vulnerability academy for senior policymakers in banks and other financial services firms. These are sure signs of the industry’s progress. Discussions within the industry are focused increasingly on product design; that is, making sure that banking products and services are being designed in the first place with the needs and circumstances of vulnerable customers in mind. This is a welcome and critically important development, which needs to be pursued vigorously.
In conclusion, while the work of the parliamentary commission largely focused on the macro level—that is, structural problems it observed in the sector—we must never lose sight of the consumer in our debates on how this industry’s essential services are provided.
The third issue, which has already been mentioned, particularly by the noble Baroness, Lady Coussins, is trustworthiness. This is something that is not legislated for or bought—it is given to an organisation. As was illustrated by my right reverend friend, there is still a long way to go to restore confidence in what is called the banking industry’s social licence to operate; it is still under suspicion. We have moved from a close study of markets that need to work efficiently and effectively for the good of the consumer as well as for business, and we have looked at transparency and ethics, but now there is the heavy work of trustworthiness in relationships, from the biggest picture—we have talked about macroeconomics and the social good of banks—right the way down to the detail of a functioning, profitable and, perhaps we might say today, unsubsidised business.
The values that underpin a healthy society and healthy banks are easily ignored and eroded. The noble Lord, Lord Skidelsky, said very succinctly:
“The capture of culture by the market was made possible by the disappearance of ways of life and habits of thought which had sustained traditional culture. Culture became a market brand dreamt up by entrepreneurs, advertisers and satirists”.
Noble Lords will get the point that the erosion of our ordinary ways of doing things became extreme in the industry, and in some respects it still is.
We have just been discussing the renewal of this building. I am worried that in the refurbishment we might erode our own labels in the Sovereign’s Robing Room that read “Courtesy”, “Religion”, “Generosity”, “Hospitality” and “Mercy”. How often are we able to trip those off our tongue? They were put up there in a vision of a culture that worked for the betterment of others and for the development of an economy that actually worked.
I have some questions for the Minister. Will Her Majesty’s Government affirm and encourage the soft-power work of the Banking Standards Board alongside the important work of regulations and law? Will they also see that this is not only a matter for one industry singled out but for all of us in terms of how we see ourselves, how we operate and how we understand our wider responsibilities beyond the project or responsibility that we actually have?
I would like to ask another question, especially at this time of introspective and very tense political life. When we have calmed down a bit in the weeks ahead, will Her Majesty’s Government support and encourage a wider debate in which we can think of the wider financial context in which the banking industry sits and the wider needs of society, to rebuild trustworthiness in not just the City but our political and social institutions? As we have already heard, this is about joining up bits of our society that are profoundly fragmented. We do this when we take time, like this, to think more widely and see how we personally are responsible for the things that happen. It gives us the potential to join up law, consumers, exclusion and trustworthiness.
Will that also be part of a courageous intervention in how the objectives of businesses and banks are set? Will responsible investment touch the way that banks operate? Can we see a time when, as society is already telling us, it is not just the bottom line that matters but how the industry, through its investments, affects climate change, or takes responsibility for artificial intelligence? These big areas are difficult to legislate but are fundamental to what people in our society care about. Banks have enormous power and influence in those areas.
I will finish with the words of someone who has already been quoted, the current Governor of the Bank of England. He said that banks must recognise that:
“Only exemplary behaviour can confer … social licence”,
to global financial capitalism. He also stated, more fundamentally:
“Integrity cannot be legislated, and it certainly cannot be bought”.
Only a perspective which takes into account the wider implications of actions can guide proper behaviour.
In addition, there is a case for reviewing how the various strands of reform and the setting of standards interact with each other and whether they should be streamlined. For example, we have a voluntary Lending Standards Board for consumer and commercial banking and, more recently, a Fixed Income, Currencies and Commodities Markets Standards Board for wholesale banking. While both have different functions from the Banking Standards Board, which focuses on behaviour and competence, it is ultimately difficult to separate the how from the what. Moreover, none of these bodies has any statutory force or enforcement teeth—something which members of the Treasury Select Committee have rightly highlighted and its new chair may wish to examine. We should also not lose sight of the quest for better regulation that is proportionate and effective, rather than simply more regulation through increasingly proscriptive rules. I would much rather we have fewer rules rigorously enforced than the current situation, where many firms believe they are swimming in overlapping regulations but few are perceived to be held properly to account.
We also need to be conscious of trying to solve the last crisis but failing to spot the next one. The Financial Policy Committee now exists to help manage macroprudential risks, but we must also consider the changing shape of finance. I commend the recent report Future of Finance, commissioned by Mark Carney and authored by Huw van Steenis. It highlights the rapid shift towards digitally enabled services and firms. This innovation will bring new risks, as well as new sources of competition. Indeed, the PCBS recognised the vital role of more competitive and better-functioning markets as part of its core recommendations.
This leads to my final point: some advice for our new Chancellor. Once tomorrow’s spending review is out of the way, the other big decision occupying his in-tray is the choice of Bank of England Governor and renewal of the annual remit letters. I urge him to use the opportunity of a new incumbent in Threadneedle Street with a fresh start to set a triple mandate: price stability remaining as the primary objective, but with secondary objectives of economic growth and competitiveness of the financial sector. I use this latter phrase deliberately, as distinct from competition, to reinforce the need for choice and innovation in meeting the needs of customers. With such an explicit mandate, the new governor would be well placed to complete the unfinished business of the 2013 parliamentary commission and address the challenges of the future, as well as the past.
That is a real failure. The regulator says, “We know there is a huge gap and that no one is providing services to much of this community, but it is not our job to fill it”. Well, somebody needs to take responsibility for that. I do not think that the Treasury is very well placed to focus on it. The role should be handed to the regulator, because banks fear the regulator, as do other institutions that can follow. We have seen the rise of challenger banks, peer to peer lenders and open banking, which is all entirely positive, and a few of those are starting to reach a meaningful size—but, again, they are not tackling that challenging area.
I agree with the noble Lord, Lord Gadhia, that financial stability is an area where we have seen some significant change, thanks to a tough PRA backed by the Bank of England. The ring-fencing of high street banking from investment banking is still a work in progress, but it is happening to stop the contagion of speculation. Capital requirements are much tougher, and there are bail-in bonds and central counterparties to provide clarity within the field of derivatives—although that has risks in and of itself. There will be a test, because at some point we will run into a recession and that will have financial consequences. So we had better get this right. But, like the noble Lord, Lord Gadhia, I think that these structural areas have probably been the greatest success.
Frankly, what worries me most is the underlying problem of culture: the tone from the top, from the senior managers and regulators. This is where we have seen the least change. I hope that the right reverend Prelate the Bishop of Birmingham will not be offended when I say that while the “softly, softly” approach of the Banking Standards Board is built into its DNA, in this industry it is not an adequate response. This industry must be taken by the scruff of the neck; that is the only language it really understands. I was disappointed when the Banking Standards Board decided that it would not publish the annual assessments of banks’ performances. Initially, that was going to go into the public arena; it is now collated and anonymised. It means that civil society can no longer pinpoint a bank and say, “Actually, that’s not right”, or, “You said you’d do this. Why aren’t you doing it within our community?” It is crucial that the information goes into the public arena. I would also like to see that board have genuine teeth.
I also want to see a regulator with some real teeth. No one went to jail for the 2008 financial crisis. There has been no enforcement action against any individual in a big bank for PPI. A few people went to prison for that, but they were members of very small institutions—I think one was the director of the House of Leather—and no individual has paid a significant price. For the failure of HBOS, only the corporate head, Peter Cummings, was fined and banned. He surely was not solely responsible for an outrageous and deliberate mismanagement of a major banking institution.
For the abuse of LIBOR reporting, which corrupted the whole finance industry, four City traders have gone to prison. The senior managers who both knew about it and benefited from it have never had to answer. My noble friend Lady Bowles talked clearly about RBS’s abuse of small businesses by seizing their assets and treating them as a mechanism for creating income for the bank rather than managing them in the responsible way that they should have within a banking relationship.
One of the saddest aspects of this whole process is the way in which the regulator has tackled senior management. The senior managers regime sounds strong and positive. It has been in place for three years, but it has not been used. That is a real failure. We have had the case of Jes Staley, the head of Barclays, who abused the whistleblowing process within the bank, even hiring private investigators to try to find the identity of a whistleblower. He basically got a small fine from the FCA, when most people, including the rest of the industry, thought that he would not only lose his job but be told that he could no longer function within the industry. The senior management regime is a long way from proving itself and now has a reputation for being tick-box. I talk to senior bankers who were very afraid when the regime was first brought in and who now feel very relieved that it will not check the way in which they do business.
The PCBS had a recommendation enacted in law that, when a bank fails, the presumption of guilt is reversed on a civil basis to assume that its senior management knew what was going wrong within the organisation unless they can demonstrate that they did not. It came about because, when regulators go in to try to enforce against these banks, they find that no paper or email trail ever leads to senior management; they have basically been protected. That measure has since been reversed and it has taken away the strongest weapon that regulators had.
I join others in saying that we need to look again at whether the regulators are fit for purpose or should be given greater powers. I agree completely with my colleague that the regulatory perimeter is nonsense. We either regulate an institution or we do not; we cannot just say that we regulate bits of an institution and ignore the rest. No other country does it; we are unique in having this regulatory perimeter that means that organisations are a mix of regulated and unregulated activity, and frankly I do not think that it has served any of us well.
I thank the right reverend Prelate the Bishop of St Albans for bringing this issue once again to our attention. I hope that he will continue to do it, because it will be an ongoing debate.
There has been only disappointment in the decade during which the Conservatives and, before that, the coalition have been in power. The banking commission, which reported in 2013, identified some clear priorities for reform. One substantial demand was for the establishment of a public inquiry, about which we have heard precious little since. The Government have effectively ignored that demand and made only limited responses to the scandal of the Royal Bank of Scotland, which did such damage to small and medium-sized enterprises. Nor was prompt and effective action taken during the HBOS Reading scandal.
Toxic culture is the background to these kinds of activities by major banks. It has persisted and allowed systemic failure to occur. Even Conservative voices in the House of Commons have expressed the view that the City seems to be devoid in many quarters of honour and decency. There is enough evidence for us all to be worried about that. It is of course the backdrop to the shameful episode in British banking which we have seen over the last decade and a half and which the right reverend Prelate the Bishop of Birmingham described so accurately in his opening speech.
It seems that in the past decade, the banking sector has learned little from the 2007-08 financial crash. The noble Baroness, Lady Coussins, identified what it could learn, but there has not been much apparent action on its part. I agree with her that we need to educate our public to improve their defences against action by financial elements which may be seeking on occasion to take advantage of them, but that is quite a long-term problem.
The public have also been shocked by the banks’ reduction of significant services, closing branches and ATMs so that many people in rural areas are many miles from their nearest branch and cannot take advantage of the services which ought to be available to them. On the issue of banking failures, the remedy, as demonstrated by the difficulties of small businesses, is to go to court, but the resources available to the mighty banks seem to triumph over that which a small enterprise can command. There is palpably a need for greater balance in this area.
Today’s debate focuses not only on bank failures but on the wider financial system. One extraordinary thing in recent years has been that the four big accounting firms, which take such a high percentage of the business in finance, are often criticised for failure. It is extraordinary that Deloitte, for instance, having been criticised for its part in inadequate accountancy in crucial areas, is handing out million-pound bonuses to its partners this year—colossal rewards in circumstances where Deloitte has in fact been failing.
One significant proposal of the commission was to set up a public inquiry. My party is fully committed to this proposal and believes the public demand that corruption and immoral practices in the industry should be fully exposed. We have to change the culture which underpins action in the City. This will help to improve not just culture but governance, and will perhaps bring some morality to the levels of remuneration in the industry. We have called on the Government to act and have pledged to do so when we form the next Government, whenever that might be.
I thank the members of the PCBS, some of whom have spoken today, such as the noble Baroness, Lady Kramer, for producing an exceptional report which clearly remains one of the best of its kind. It is clear from this important debate that its detailed and challenging work acted as a catalyst for a significant change in culture since 2013. I will talk a little about that.
The report encouraged both the Government and the industry to make the sector stronger and more resilient. Today I want to convince noble Lords that real progress is still being made, and I will outline some of the biggest steps of many taken to implement the recommendations made by the commission and provide evidence, as asked, about how we are working with the financial regulators, the consumer bodies and the industry to ensure that we have the safest and most prudent industry possible.
I will start with one of the key recommendations made by the PCBS: the need for more senior individual accountability in the sector. A critical measure was, as has been remarked, the new senior managers and certification regime, which was introduced in 2016. The SMCR ensures that individuals at all levels can be held to appropriate standards of conduct. I reassure the noble Baroness, Lady Bowles, in particular that it is changing culture and conduct in the financial services industry, with great impact. I will give three concrete examples, which I hope will not worry my noble friend Lord Gadhia too much as being simply scary. They will also in part satisfy the cry of the noble Baroness, Lady Kramer, for justice and harsh remedies.
Under the SMCR, the FCA and the PRA can levy fines on senior individuals. In 2018, four fines were imposed, totalling £785,000. Reckless misconduct by individuals is now a criminal offence, holding a maximum prison sentence of seven years—a daunting prospect. Thirdly, new whistleblowing rules have led to the FCA preventing wrongdoing in 290 cases in 2018-19. The SMCR is still at an early stage of implementation. Culture takes time to change, but I do not recognise the suggestion that it is in any way failing to make an impact. Instead, we in government are greatly encouraged by the changes we have seen so far. Evidence suggests that firms believe the regime has created a culture of challenge and provided a safe environment for staff to speak up in.
I pay tribute to the work of the Banking Standards Board as part of this programme. The right reverend Prelate the Bishop of Birmingham put it very well: the board has already made a huge difference. It is part of a regime that is recognised internationally as a leading model for culture and conduct reform. I am proud to say that it is being replicated in countries such as Australia and Singapore.
Secondly, following the PCBS’s recommendations, the Government have listened to small and medium-sized enterprises, which are the backbone of the UK economy and were hit hard in the crisis. Let me share some impressive examples with noble Lords. We supported the FCA in extending the remit of the Financial Ombudsman Service to ensure that more than 99% of SMEs could better access protection. Not only will this mean that SMEs will find it easier to obtain redress if they need to; on the point made by the noble Baroness, Lady Bowles, it will also give the FCA far greater visibility into any potential bad behaviour that may arise in future.
With voluntary commitments, such as the standards of lending practice, the Government believe that the industry has changed significantly since the challenges of the financial crisis. We have also worked with regulators in industry to make it easier for firms to access the finance that they need, such as the commercial credit data sharing system, and, in 2016, we launched the bank referral scheme, which has helped 1,700 firms that had been rejected for finance by their main bank. I believe that these measures are clear evidence that SMEs remain at the heart of the Government’s economic plans; we will ensure that they have access to the finance and protections that they need.
In response to the point made by the noble Baroness, Lady Bowles, about RBS’s GRG and the question of the FCA’s tools relating to unregulated activities, particularly SME lending, that is why the Government were supportive of the recent expansion of eligibility for the Financial Ombudsman Service and the banking industry’s commitment to establishing a voluntary dispute resolution service.
Thirdly, the PCBS highlighted that the banking sector was dominated for many years by a small number of very large firms and that there was, therefore, a competition problem. The Government responded to this through the introduction of the current account switch service in 2013; we have made it much easier for consumers to switch banks when they see a better deal. As of January this year, over 5.3 million customers have switched. This fresh competition has helped to contribute to the growth of a new breed of challenger bank, such as Monzo and Starling, which is changing the way that consumers access banking.
The noble Baroness, Lady Coussins, asked what we are doing to promote financial inclusion. The Government believe that financial inclusion is vital and have taken action on this, for example by establishing the Fair4All Finance scheme to deliver £55 million from dormant assets to financial inclusion initiatives. I assure noble Lords that competition and fairness are both firmly at the heart of the regulatory system, with the PRA and the FCA charged with ensuring effective competition in the interests of consumers.
The noble Baroness, Lady Coussins, also raised the issue of basic bank accounts. The noble Baroness, Lady Kramer, reminded us that the nine largest personal bank account providers in the UK are legally required to offer basic bank accounts for those who do not have an account or are not eligible for one, but I am not sure whether it is within the scope of a financial regulator to deliver everything that is necessary in this area. I wonder whether that should be an alternative area of policy for discussion.
Fourthly, we have worked hard to protect the core functions of retail banking that are vital to the ordinary lives of British citizens. The Independent Commission on Banking’s important recommendations in 2011 included the suggestion of ring-fencing. In 2013, the PCBS wanted us to go further to ensure that the ring-fence stands the test of time. That is why we granted the PRA powers to restructure banking groups that do not comply with the essential elements of ring-fencing, known as the electrification powers. This tough regime protects customers and the day-to-day banking services that they rely on from unrelated risks elsewhere. The regime took effect on 1 January 2019 and has, I believe, strengthened the resilience of UK banks significantly.
It is right and proper that Parliament continues to hold the Government to account over the functioning of the financial services sector. Again, I thank the right reverend Prelate for bringing this debate to the House. I look forward to discussing the matter with him again in three years’ time. In the meantime, the Government are keeping a vigilant eye on the regulatory framework for financial services. Improvements could be made. The noble Lord, Lord Davies, mentioned HBOS, RBS and Deloitte—I could mention the London Capital & Finance incident—but I do not recognise the world that he describes. Instead, today’s debate has made it clear that major steps have been taken since the crisis to implement the PCBS’s recommendations, demonstrating its determination to ensure that the sector is better regulated and better serves the needs of consumers.