Personally, I oppose retrospective legislation. It was not considered by the commission, which does not make any recommendations on it. I suspect, however, that none of its members would be in favour of addressing these issues in that way.
The other change is the much publicised criminal offence of reckless misconduct in the management of a bank, which normally carries, as has been suggested, a custodial sentence. Importantly, we have laid down preconditions before a charge of that nature can be brought. There must be a cost to the taxpayer—the bank has turned to the taxpayer to bail it out; or there are consequences for the financial system—stability is critical, and anything that destabilises the system should be subject to a criminal sanction; or there is serious harm to customers. We think that we have framed a big change in the law. Bankers continually ask why they are singled out as the only commercial group that can be charged in that way. It is a delicate balance, and I hope that the Government will look seriously at what we are trying to do.
The third area I want to touch on is remuneration and incentives. The reality is that rewards have been huge, and still are huge for a more limited supply of senior bankers. That incentivises excessive risk taking and, occasionally, misconduct. The commission concluded that risk and reward are still misaligned, particularly when making pay awards over a short period. It therefore sees advantages in making a significant portion of remuneration variable, rather than fixed. We do not have much sympathy for the European solution in relation to that, but we think that reform is necessary in this area. More variable pay should be deferred to take into account changing circumstances at the bank at which the banker works, with power for the regulator to extend the period for up to 10 years. To those who say that that is a long time, many banks have a good year, but then some less good years, and the commission wanted to recognise that that can go on for an extended period.
Regulators should be able to limit or prohibit sales-based incentives. We were shocked at the way in which sales-based incentives were used to create the mis-selling scandals of PPI and interest rate swaps. There was a cascading group of incentives from senior management through to the customer-facing end of the bank, and we think that that made a major contribution to the problems that arose. We want to give the regulator much stronger powers. Where a bank requires taxpayer support, the regulator should have discretionary power to cancel all deferred compensation. It is shocking that, as happened in some banks, they were still paying remuneration to employees after the bank had taken on taxpayer funds.
The issues of conduct and remuneration that I have raised lie at the heart of what the commission thinks needs to be done in respect of culture and standards. These recommendations have been much debated and discussed. We have done everything we can to make them practical and realisable, and I hope that, when there is an opportunity to debate them in the other House, or when they come back to this place, the Government will give serious consideration to those recommendations.
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