Banking (No. 2) Bill [HL]

My Lords, to follow the intervention of the noble Lord, Lord Selsdon, we have had the economists, the accountants, the lawyers and the bankers, and now I am intervening on behalf of the customers and consumers. I declare my interest as chair of the new organisation Consumer Focus. I support the Bill, but we all have to recognise that although it looks quite chunky—as the noble Lord, Lord James, has just said, it has some pretty far-reaching powers in it, which no doubt we will look at in Committee—it is a limited Bill, which relates to the problems that face us right now. I welcome the references to consumer protection in the Bill, although the aspects of the compensation scheme that were mentioned by my noble friend Lord Lipsey could do with some improvement. These references deal with protection for depositors in the event of a bank failure or when a bank looks to be in danger of failing. Indeed, the bulk of the Bill is about bank failures or, to a lesser extent, reducing the likelihood of a bank failure. It is right and of immediate importance that the Bill should address those issues, but the fact is that, as the average consumer looks at it, we did not have a high street bank failure for 100 years. The noble Lord, Lord Eatwell, reminded us about BCCI, but that was not a high street bank. In the past 18 months, though, the average user of bank services has been completely appalled, as has every citizen, at what has happened here and in the United States. Much of the financial turmoil, as we euphemistically term it, has been on the basis of recklessness and misjudgments in the banking sector here and across the Atlantic. That has caused serious anger and confusion among consumers, whether businesses or individuals. When consumers look at what has happened in the banking sector and its effects, they are not only appalled and dismayed but uncomprehending and baffled, as well as to a large extent unprotected from the knock-on effects of the disaster. As a business, you now find it difficult to get credit. As a mortgage holder, you see the value of your property plummeting. As a home seeker, you are pretty hard put to get a mortgage at all on the terms that you wanted. As a shareholder in a bank, or in almost anything, the value of your shareholding has gone down. As a saver, the return on your life saving is going south towards zero as we speak. As an actual or future pensioner, the value of your pension scheme has plummeted. So there is real cause for concern and anger out there. In the whole of this area, it is really only the depositor who is protected. It is right that a banking Bill should protect the depositor, but you also have to recognise that there is a much wider range of anxiety and loss of confidence in the system. As the noble Lord, Lord Bilimoria, said, that lack of confidence is the main thing that the Government nationally, and Governments internationally, have to address right now. The banks are not victims of this crisis; they are, in large part, the cause. Only this morning, we had the news that some of our most respected banks had invested huge sums of money—$700 million, in one case—with a particular operator in New York, which turns out to be pretty much a one-man operator who does his own financial controls and has an accountant; he appears to be basically a country accountant who does the auditing off his kitchen table in upstate New York. You would have thought that with due diligence the banks could have worked that out. Banks are always urging on us, if we go for a loan or want to change our investment or transfer our savings, that we should observe due diligence. In all the fine print that regulators require and all the banking documents that we receive as consumers and customers of banks, there is a caveat emptor clause. But if banks are urging due diligence on us, where was the due diligence on the part of many aspects of the banks? Most of us do not get a personal touch with a bank any more. If we go for a loan, it is a computer that gives us the answer, and the computer usually says no. But if it says no to us, how come it has not said no to all these traders with the banks’ assets—that is, our assets—in the past 18 months? We are not talking about fly-by-night operators; respected, long-established household names and globally successful companies have brought down the system. They are not spivs or speculators; they are not the gnomes of Zurich; they are not even the private equity companies or the hedge funds. They are organisations that we and most citizens of this country regard—in the United States it is the same—as our friendly local bank. In the real economy, we were probably facing a recession, although a relatively minor one. However, the fact that that recession was preceded and hugely aggravated by this crisis of confidence, and is likely to be prolonged by the collapse of confidence, means that we are probably in the most difficult economic situation that many of us can remember. There is another victim here, which is not the banks and or even the average customer. Because of where this started and because of how we are viewing sub-prime borrowers, there is a real danger that the net result in distribution terms will be that people will stop lending money to relatively poor people and that the sub-prime borrowers will be seen as the cause, rather than those who failed to exercise due diligence in extending sub-prime loans. The public and small businesses that are suffering at this time also see that hardly anybody in the banking sector or among the regulators has suffered as a result of this. I have to say that, on this rare occasion, I have to agree with the remarks made by the leader of the Opposition the other day on this subject. The regulators have failed to prevent this from happening. They were probably never in a position to second-guess the range of decisions that the banks were making, but they could have seen the tendency and could have intervened earlier. Therefore, there are questions to be raised about the long-term role of the regulators in this respect. I have a small personal story to tell about this. I was the chair of the previous consumer organisation when the Northern Rock crisis first came on our television screens and the queues were outside the banking branches. We mildly suggested that the underwriting compensation should extend from 90 per cent to 100 per cent of the first £34,000 in depositors’ accounts. It was, I thought, a rather tentative exercise in that area, but a senior official in the Financial Services Authority rang us and told us that this would prejudice the whole aspect of moral hazard that had to operate within this market. He became very insistent. I happened to be at the Liberal Democrats’ party conference, for my sins, at that point. After the third phone call, in which he tried to persuade us not to send out that press release, which in my view would have taken the majority of the people in the queues back home and off our television screens, thereby reducing the degree to which panic was induced by the Northern Rock crisis, I had to say to that senior gentleman that he was getting so boring with his requests that I was actually going to go in and listen to Ming Campbell. The regulators must seriously face up to some questions. But what do we do now? The reason why this Bill is limited is that it deals with this immediate crisis. It is not exactly emergency legislation, but it deals with an emergency. Most of the provisions in the Bill are important levers and instruments for a Government to have in that kind of emergency situation. I have no doubt that in Committee noble Lords will raise a number of problems about how they are operated and their knock-on effects, but it is vital that in this immediate period we have such provisions. What I find difficult about this immediate period is that the Government, who have taken a shareholding or recapitalised a number of the banks and are therefore in a position of influence and leverage in those banks, are choosing not to exercise that leverage. I go back to the point made by my noble friend Lord Barnett. We have government-appointed directors on the boards of those banks. The Government clearly have a policy in relation to the extension of credit and other banking objectives, but we have taken the self-denying ordinance that those directors and that influence will not be exerted in any way other than in the narrow commercial interests of the bank and that the arm’s-length body that will be set up to invest will quietly stand back and not exercise that influence. In this crisis situation, I do not think that we should operate with that degree of coyness and I do not believe that the punters out there will understand why we are denying ourselves that influence. The Government—that is, the taxpayer—have put in a lot of money in. They have policy objectives that, by and large, the population supports in this context, so surely in this period we should use that leverage to help to secure those objectives. If we are successful—and, one hopes, we will be successful in getting through this difficult period—a whole range of other issues arises. We must distinguish between this Bill’s provisions for the crisis that we must get out of and its steady-state provisions; indeed, noble Lords have made various suggestions about changes to the regulatory framework under which we operate. A number of areas need to be urgently addressed in that context, but they also need a period of serious, in-depth consideration. I welcome the fact that the noble Lord, Lord Turner, as chair of the FSA, has undertaken a review of the role of that agency, which I hope is broadened to the totality of the regulatory framework. A number of steady-state issues exist, to which some noble Lords have referred, including the structure and number of regulators. The tripartite system is well known; it is also a tripartite system for consumers, who, depending on the nature of their ordinary transactions with their banks—whether it is for credit, a mortgage, a loan or a retail banking account—have to deal with the OFT, the Banking Code or the FSA. That is confusing to consumers and quite expensive to the industry and it needs looking at. The issue of due diligence of banks and their internal and external audit provisions also needs looking at, as does the corporate governance of banks, as other noble Lords have said. The governance of banks has a huge, economy-wide implication. The role of banks’ non-executive directors is different from the role of non-executive directors in other sectors. There are wider issues, which the Government have been good at dealing with—for example, their policies on financial exclusion, bringing more people into the banking system and how they are brought in. Mention has been made of regulating credit rating organisations. That, too, is vital. More fundamentally, we should look, as we have done in other sectors, at the unbundling of some of the services that banks provide so that they are no longer both horizontally and vertically integrated organisations. Those are all legitimate areas for review and for this House to debate and they are important areas for the Government, the regulators and the industry to address. However, they are not the business of this Bill. This Bill gives the Government and the regulators the basis to deal with the immediate emergency crisis—as I still call it—which it might take us two years to get out of. Other issues that I and others have raised at Second Reading are probably outside the scope of the subsequent stages of the Bill. That does not mean that there cannot be improvements to the Bill as it stands, but it is important that the House should recognise that distinction in subsequent proceedings.