My Lords, I declare some interests. I started work in a merchant bank in the City in the late 1960s—medieval times, as the noble Lord, Lord Lawson, described them—and then from 1975 to 2000 was chief executive of what grew to become the largest inter-dealer broker in the world, now called ICAP, where I am a shareholder. For the past two years I have been a member of the advisory board of Jefferies, a US investment bank, and a partner in GP Bullhound, a boutique investment bank—in other words, a very small investment bank—which arranges finance for young technology companies.
One of the first things that was drummed into me as a graduate trainee at a merchant bank was that banks had to put their customers first, be they depositors or borrowers. That stands in stark contrast to the infamous occasion when the chairman of Goldman Sachs was asked by a Senate committee whether he put his customers first and, of course, he was unable to answer in the affirmative because he did not: he put his institution first. It is that lack of duty of care that has burdened many of our companies, small and large, many individuals and, indeed, the Government, through many PFI schemes, with the complex and very costly interest rate swaps which extend far beyond the life of the loan. Any institution or body that had a duty of care would immediately draw the attention of those borrowers to that fact.
The Bank of England regulated wholesale markets in those days by applying judgment as well as rules and my experience, as someone appointed to rescue a secondary bank during the 1974-75 secondary banking crisis, gave me the opportunity to see at first hand the effective way in which the Bank of England managed to contain and resolve that crisis.
As chief executive of the inter-dealer broker, I met regularly with the leadership of many of the great banks operating both in London and other major financial centres. I was very struck and, indeed, alarmed by the depth of ignorance that the bank leadership, particularly directors of banks, displayed about the
increasingly sophisticated products that were being traded on a proprietary basis in their organisations in different time zones. To be blunt, the attitude appeared to be that if the trading is profitable and we can all benefit from it through the bonus pool, there is no real need to get too much involved in the detail.
One of the great skills of the City is that it is adept at devising business models which can give a highly leveraged reward for success but virtually no penalty for failure. That is called getting other people’s money to work for you. Bank executives were notable beneficiaries of this particular alchemy, and they were not reined in by their boards or shareholders. As we heard, all too often, Governments of all stripes have been dazzled by the great wealth of those City chaps and too ready to take what the City says on trust. The absence of scepticism from the board, directors, shareholders, regulators and auditors allowed the financial services industry to bet the UK economy. Of course, because of the large size of the financial services industry in relation to that economy the cost of that bet is now being borne by every business and household right across the land—and will be for many years to come.
The need for fundamental reform is self-evident. I join other noble Lords in congratulating the parliamentary commission on an outstanding and very important piece of work. It and the independent commission made a compelling case for reform and provided detailed proposals on how that reform should be implemented. Now is indeed the time for fundamental reform of the structure, governance and culture of banking. It is also the time to make banking far more competitive—that will take time—and better able to service the needs of an economy desperate for the investment and funding necessary to achieve sustained growth. The measures proposed by the commissions will not give us zero-risk banking, but they can substantially reduce the overall risk to the economy of the inevitable banking failures.
The test of the Financial Services (Banking Reform) Bill is whether it seizes this historic opportunity or, under pressure from City lobbying, fudges and fumbles it. The Chancellor said that he would implement the main recommendations of the parliamentary commission and, where legislative changes are required, he would amend the banking reform Bill, but the Bill before us has fallen well short of those promises. On the fundamental structural issue of separating retail and investment banking, I entirely agree that they should be completely separate, as they have a completely different culture with completely different risk profiles. I suggest that shareholders will, over time, require them to be separated. The full separation proposed is a complicated process: three yellow cards are required, the regulator has to go to the Treasury and full separation can take place only after five years. That may be long after the problems have reached a scale where another bail-out is necessary. The chairman of the parliamentary commission, Andrew Tyrie, described the Government’s ring-fence proposals as,
“so weak as to be virtually useless”.
Greg Clark, the Cities Minister, said that he would see if the government amendments could be improved. The noble Lord, Lord Deighton, said that efforts will be made to improve them. We wait with interest.
The Commission’s proposals to give the Prudential Regulation Authority the powers to inspect a bank’s trading book and ban excessive proprietary trading—to which other noble Lords have referred—and the recommendation that regulators should have the power to insist upon stricter capital leverage ratios, have both been ignored by the Government. This House must table amendments to ensure that these critically important reforms reach the statute book. Relying on the risk-weighted assets test is completely inadequate. If we do not grasp this opportunity, business will go on very much as usual and I fear that the chance to reform the City will be lost. Bank lending to non-financial companies began to contract in 2009 and has continued to do so for the past four years. The absence of certainty on bank regulation makes it difficult for banks to assess with confidence the long-term profitability of additional lending. The Government’s confused response to the parliamentary commission’s principal recommendations prolongs the agony. First they were welcomed, and now they are watered down or ignored. That adds unwanted confusion, as does the Chancellor’s meddling in RBS’s affairs.
The Bill before us today is an empty vessel. It reminds me of the prospectus issued saying that funds would be raised for purposes that “shall hereinafter be revealed”—that was for the South Sea bubble. Only ring-fencing is addressed in detail, and the proposals there are deeply flawed. There is no mention of bank governance, professional standards, duty of care, whistleblower protection, remuneration or competition. All that, we are promised, is to follow. The parliamentary commission has made detailed proposals on all these matters and we look forward to seeing them properly and faithfully reflected in the draft. Frankly, until amendments covering these matters are tabled, it is not possible to have a detailed debate on the merits of the Government’s proposals, and this is the first half—or quarter—of Second Reading. Uncertainty continues, and with it the suspicion that the Government are backsliding on some of the important reforms needed, reforms which would help to avoid another taxpayer bail-out when the next crisis hits, as it will do, and promote a healthier culture in banking. Reforms are long overdue to improve the supply and choice of banking services available to SMEs and the public at large—in particular to the unbanked.
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