In speaking to new clause 2, which I will not press to a vote, I wish to follow the line of argument pursued by my right hon. Friend the Member for Wokingham (Mr Redwood) on new clause 9. He drew attention to the tension created by building up capital while also lending more and used the analogy of driving with one foot on the accelerator and the other on the brake. If I may, I will take a step outside the car. With new clause 2, I wish to draw the House’s attention to a similar, I am sure unintended tension. The Government are taking a positive step forward, because in paragraphs 2.13 and 2.14 of their response to the parliamentary commission’s report, they make the welcome announcement that they accept the premise of reversing the burden of proof. In doing so, however, they will adopt a measure suggested in paragraphs 1170 and 1171 of the commission’s report that will create a potential handicap. A new condition will be attached to using that burden of proof, whereby the regulator must have concluded a successful enforcement action against the firm prior to doing so.
I do not think there can be any doubt about the merits of reversing the burden of proof. It is clear that if the regulator is required to sift through reams of e-mails looking for evidence to incriminate a senior banker, it will be a time-consuming and costly exercise. It is also highly likely that it will fail, because senior executives are not so stupid as to write boastful and wilful e-mails such as we saw from some of the LIBOR traders, who bragged of having their bottles of Bolly. Most senior executives are wise to the risks of e-mails and would not fall into such a trap. It is proportionate and reasonable to argue that senior executives who say that their hands-on leadership is sufficient to justify very high individual bonuses should also, on the other side of the coin, be able to demonstrate that they have personally acted reasonably.
The Government’s announcement that they will reverse the burden of proof is extremely welcome. However, the acceptance of paragraph 1171 of the Commission’s report could lead to a real impediment. If we open the door to personal enforcement, why would a chief executive wish to settle on behalf of their firm? We are trying to make it easier for the regulator to focus in a time-efficient and cost-effective manner on the individuals who should be held responsible, but that will be impeded by the additional requirement for enforcement to be concluded against the firm. The senior leadership whom we want to target will be incentivised to drag out proceedings and impede any settlement with the firm. I do not believe that is the Government’s intention, but I wished
to draw the Minister’s attention to it so that the issue could be discussed in more detail and tackled in the other place.
I do not share the confidence of some colleagues who have spoken about the ability of criminal sanctions to operate effectively. They are a welcome tool to have, and many of our constituents would like the golden handcuffs to be replaced with the prison variety. Indeed, the images on US television of white-collar arrests and convictions have a powerful deterrent effect. My concern, however, is that if we look at the individual fines and enforcement to date, we see that the regulator has struggled to reach the evidential level required to prosecute individuals successfully. Now we are suggesting that it will have to meet a higher standard of proof to secure criminal convictions. It is a bit like asking a hurdler who has just failed at one level to jump over a much higher hurdle.
The reversal of the burden of proof is one aspect of what we need, and the deterrent effect of criminal sanctions is another, because it brings with it the power of the headline. The question is, will we fall into the trap that we so often fall into in this House of passing legislation that sounds tough but proves difficult to use in practice? My fear is that the standard of proof required of the regulator to deliver a criminal prosecution will make it a tool that is rarely used.
We therefore need to consider how we can target individuals, not firms, because that will drive the culture of firms. Currently, where there is wrongdoing, a firm will settle quickly and get a 30% discount. The more junior staff—the heads of the divisions responsible—are quickly exited, and the senior staff wilfully claim blindness, because the most controversial briefings are usually done orally. Reversing the burden of proof will address part of the ill, but through the new clause I wish to draw attention to the limitations of fines on firms, which at the end of the day penalise shareholders and pension funds. Our constituents pay twice—first for the bail-out, and then through the impact on their shareholding.
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That is why I would resist the temptation, however siren the voices, to follow the US model of much higher fines, even though the Government’s change, whereby fines will now go to good causes, is welcome. Under the Labour party, fines bizarrely benefited other banks, so the more banks behaved badly, the more other banks benefited. That was a bizarre incentive in the regulatory model that the current shadow Chancellor put in place, and I welcome the fact that we have fixed it. However, high fines against firms invariably punish the shareholders, not the senior executives responsible.
When the Financial Services and Markets Act 2000 first went through the House and was debated for many hours in the Chamber, it was felt that reputational harm would be a deterrent to firms. Indeed, the Act made specific reference to the fact that firms should be named, as though customers would be so shocked by the bad behaviour of a specific bank that they would take their business elsewhere. I think it is reasonable to conclude that shame has not had the intended effect. Indeed, when an executive can name a horse Fatcatinthehat, it is clear that shame is not a deterrent.
New clause 2 would build on a fix that the Government have already put in place, the reversal of the burden of proof. The objective behind it is more modest than the
aspiration for criminal sanctions, which are attractive but, I fear, limited in their practical application. It is also intended to address a potential flaw in the parliamentary commission’s report, which was otherwise a first-class piece of work, whereby there will be a potential disincentive for executives to settle any enforcement action against their firm if in doing so they leave themselves open to individual fines.
We need not more laws but to address the culture within banks and financial services. We pay senior executives in those institutions to assess risk. If the highest fine associated with the 2008 banking collapse is less than the bonuses of those executives in the preceding year, as is currently the case, it is logical that executives will assess the risk of being caught and of a paltry fine as being a risk worth taking. If the penalty is against the firm and not against them as individuals, that will further embolden them to take risks from which they personally benefit. That is why I seek to draw the Financial Secretary’s attention to the opportunity offered by new clause 2 to reverse the burden of proof without condition, so that we can hit those responsible for future failure personally and where it hurts most—in their pocket.