That is something on which we can usefully take advice from the regulator, but I would have thought that two years would be a reasonable maximum. Five years is ridiculous. It might take less than two years, but we have people down the road who can give us a clear view and the Government should ask them, if necessary publicly.
I have also tabled an amendment that would give effect to the Banking Commission’s proposal for allowing for full separation, as well as trying to improve the Government’s faulty amendment a bit. I recognise that the amendment has been debated in Committee and that the Government said they did not like it, but their reasons for not liking it were frankly not strong. I still find it curious that the amendment was rejected as a starting point for putting in ring-fencing. When the Bill goes to the other place, I hope that that amendment might be seen to be a better starting point than the Government’s. The Government have had several months to get this right. It is regrettable that they have made so
little progress on it, but we are where we are. In any case, even ring-fencing with electrification is no cure-all for the standards problems in banks. To improve them, we all have to move forward on many other fronts.
I would like briefly to refer to the main other areas that are needed. To improve competition, we recommended a range of measures. We asked the Competition and Markets Authority to initiate a market study of the retail and SME banking sectors. I noticed that the Government were so enthusiastic about that recommendation that they announced it as soon as they received the embargoed copy of our report. We asked the Government immediately to establish an independent panel of experts to assess ways of enabling much greater personal bank account portability. The Government appear to have ridden back a little from that in the proposals they published today, although I cannot be sure.
We also took a good deal of evidence on RBS. Competition is weak partly because RBS is weak. Further restructuring may well be needed. In our view, the Government will need to be bold. We recommended that they undertake a detailed analysis of a good bank/bad bank split as part of an examination of the options for the future of RBS. That is vital work. In the field of banking reform, a healthy RBS, with the restoration of normal lending to the SME sector, is probably the biggest tonic that could be given to the British economy.
The way in which banks run themselves also needs reform. An accountability firewall had grown up that allowed senior bankers to deny responsibility for their failings. That wall has to be taken down. To give effect to that, we proposed the introduction of a senior persons regime. This would ensure that the direct personal responsibilities of board members, particularly the chairman, reflected the importance of their roles, so that it was clear to bankers and regulators who should reasonably be accountable when things went wrong, and for what. Our study of HBOS—our fourth report—provided a clear example of exactly the opposite. It guided our thinking on this and a number of other areas. Senior board members at HBOS did not take responsibility for what went wrong.
The crisis of standards was partly caused, and considerably inflamed, by the fact that bankers were rewarded for doing the wrong thing. Bonuses were often paid out well before the risks of the actions that they ostensibly rewarded became apparent. Bankers took huge rewards and when the risks turned sour, taxpayers picked up the tab. That has to stop. The Government and regulators should not set levels of remuneration. However, much more radical steps are needed to incentivise better behaviour among all staff whose actions or behaviour could seriously harm a bank, its reputation or its customers. Deferred remuneration for executives should not be viewed as an entitlement. People should keep their deferred bonuses only when it is clear that they have really been earned. That will mean long deferral, in some cases up to 10 years.
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What really stuck in the gullet of the electorate is the fact that many senior bankers, having received huge pay-outs for doing a bad job and having accumulated huge risks on bank balance sheets, walked away with those bonuses and even their massive pension entitlements. That has to stop, too. We propose that, in future, were a
bank to require direct taxpayer support, the regulator should have the discretionary power to forfeit the remuneration of those responsible and the unvested pension entitlements. That might require changes to employment contracts for senior bankers and possibly legislation, but it is essential.
As for regulation, there is no point in creating a vast regulatory apparatus if it fails when we most need it; and we can now see the full scale of regulatory failure. Consumers have been ripped off in a series of shocking episodes, among them payment protection insurance and interest rate swap mis-selling. Taxpayers have also been ripped off. They have paid—and are still paying—the full price of the bank bail-outs. These were needed not just because banks were irresponsible and undercapitalised, but because regulators were not doing their job. Aspects of the Basel process have been farcically inadequate. In many cases regulators were scarcely even monitoring systemic risk in the run-up to the crisis. Much of their work was frankly a waste of time and money—ultimately, consumers’ money. That is partly why we proposed that, at least for the time being, regulators should operate within existing cash limits, except where they have taken on new responsibilities. We need better regulation, not more regulation.
It is our job in Parliament to watch the watchdogs. It is our job now to make sure that regulators and supervisors are more alert, but we also need to empower them. In theory, they already have a full range of civil sanctions, but we discovered that in practice they felt constrained from using them. The senior persons regime and licensing system that we propose will enable much more effective use of those civil sanctions. Responsibility for specific failures will be much more straightforward to identify once those regimes are in place. A major failing of the approved persons regime was that even where poor standards of behaviour were identified, those responsible were unable in practice to enforce the notionally large powers of civil sanctions.
It is essential that those powers should be proportionately applied. It is partly up to Parliament to ensure that they do not become excessive and are not used in a heavy-handed way: it is up to Parliament to ensure that the regulators do not end up using those considerable powers in an arbitrary fashion. That also applies to a back-stop power that we recommended: a new criminal offence for senior persons of reckless misconduct in the management of a bank, which would carry a custodial sentence. The Government have accepted that proposal. It may never need to be used; but, intelligently implemented, it should change behaviour.
We have been heartened by the initial reception to our final report, as with our previous reports. The big test now lies with the other place to amend the legislation to incorporate our proposals. We have been denied effective scrutiny in the Commons by the Government’s insistence on abiding by what amount to an arbitrary timetable and a rushed end date. Since we have already been hit by the full effects of the crisis, the rush is inexplicable. With a few extra months, the Bill could be immeasurably improved.
What we do not need now is an orgy of further bank bashing; no good has ever come of it. We would all be the losers, but nor should Parliament or the Government wilt in the face of inevitable bank lobbying and water down these proposals. What we need now is to maintain
all party co-operation for reform, and to ensure that these reforms are implemented by banks, regulators and the Government.
If they are implemented, they will complete a three-stage reform process. It began with regulatory structure: twin peaks. It was then taken forward by the Independent Commission on Banking, which gave us reform of bank structure: ring-fencing. In the third stage, the Parliamentary Commission on Banking Standards has sought to provide a fundamental reform and improvement of banking standards, on the basis of which we can create a more settled system of regulation for banks.
All this is a great challenge, but it is also a great opportunity. It is an opportunity for all of us, and in particular the banks, to demonstrate a commitment to improving standards and to putting an end to the rip-off—of both the taxpayer and the consumer—culture that has marked recent years. It is also incumbent upon us here to show a preparedness to help restore trust by supporting banks where they show a willingness constructively to engage in implementing these proposals.