My Lords, it is a pleasure to follow the thoughtful speech of my noble friend Lord Sharkey, which emphasises the fact that whatever type of regulatory system you have for the banks will not necessarily effect an automatic culture change, and this could be a long process.
As the Minister said, the Banking Bill will introduce a ring-fence around the deposits of people and small businesses to separate the high street from the dealing floor and protect taxpayers when things go wrong. It will make sure that the new Prudential Regulation Authority can hold banks to account for the way that they separate their retail and investment activities, giving it powers to enforce the full separation of individual banks. It will give depositors protected under the Financial Services Compensation Scheme preference if a bank enters insolvency. Finally, it gives the Government power to ensure that banks are more able to absorb losses.
I fear that I may be in a minority but, overall, I approve of the Bill. A lot of preparation has gone into it. The Government should be commended on taking careful note of the report of the Vickers Independent Commission on Banking as well as the findings of the Parliamentary Commission on Banking Standards—the PCBS—the members of which I praise for all their hard work. However, the Government—correctly, in my view—have not gone overboard in taking on all the suggestions, particularly of the latter report. In this debate the one thing that we seem to have ignored is the fact that banks have to remain competitive internationally. Until Glass-Steagall is reinstated in the US, we will not be on the same playing field as other international banks if we go down the route of total separation. We are right to stick with Basel III although, as other speakers have said, it could be quicker in coming to final solutions.
The banks themselves seemed to accept, although reluctantly, that the Bill represents a workable solution when they gave evidence to the Joint Committee on the Financial Services Bill. Stuart Gulliver, the chief executive of HSBC, said:
“It remains to be seen”—
whether the Government are right in their proposals—
“It is obviously a ‘done deal’. The Government wish to introduce this. It would not be our most preferred way of doing it. To my earlier point, there have been several examples in history of narrow ring-fenced institutions also failing. They are happening in Spain at this moment in time. That is what the UK wishes to do; therefore we will implement it”.
Then Bob Diamond, of sacred memory, said:
“We keep being asked if it was the right decision ... It certainly would not have been my first choice. It will add cost to banking and, therefore, it will increase the cost of borrowing, but we can live with it and we are going to implement it”.
Of course, he will not be able to carry out his wish due to falling on his sword over the LIBOR scandal, but his views were interesting nevertheless. Sir Mervyn King—now the noble Lord, Lord King—said:
“The Government created an outstanding commission of individuals and it would be unwise to go against their recommendations ... the banks have said that they are prepared to accept and implement this”.
In the other place, the Opposition focused on putting to the vote as amendments many of the parliamentary commission’s recommendations which the Government had rejected. I will examine these in a little more detail. The first item was the leverage ratio. Basically, as many speakers have said, the Opposition, like the PCBS, wish this ratio to be larger, at 4%, than the internationally proposed Basel Committee recommendation of 3%. In my view, the Government were right to resist this proposal which, as I said, would put our banks and building societies at a disadvantage compared with their international rivals.
The second amendment moved in Committee was to insert a new clause. Clause 3 would have introduced a licensing regime for all approved persons exercising control functions. Although this clause was defeated, the Minister, Greg Clark, said that the parliamentary commission’s final report on standards and culture would be,
“reflected in amendments to be made in the House of Lords”.—[Official Report, Commons, 8/7/13; col. 90.]
Can I ask the Minister what these amendments may be?
On Report in the other place, the Opposition focused on five separate areas. The first was ring-fencing and electrification. Chris Leslie proposed an amendment which called for sector-wide powers for full separation of banking as a backstop if ring-fencing did not work. The Government opposed this, correctly, while proposing amendments to strengthen the effectiveness of the ring-fence.
The next area discussed was the leverage ratio again, where the Opposition wanted to introduce into the Bill an overall leverage target for the UK’s financial system. The Minister again rightly resisted this, saying that we should not move on this except internationally via Basel III. Next, the Opposition wanted an amendment concerning individual accountability and a duty of care. I understand that amendments on these matters will be introduced here.
The Opposition also wanted a review of competition in the banking sector. The Minister replied that the OFT will bring forward its investigation into small and medium-sized banking as part of an ongoing programme to introduce competition in banking.
Finally, the Opposition moved a new clause stipulating that before the sale of any publicly owned banking assets, HM Treasury would be required to submit a timely report to Parliament. The report would set out how the sale would best serve the interests of the taxpayer; increase competition within the banking sector; restructure the banks concerned, especially with regard to the split between core and investment banking and the retention of some assets by HM Treasury; and the impact on regional banking networks. The Minister replied correctly that enough was being done already. There was the availability of £60 million in wholesale funding for community development finance institutions and up to 25% tax relief on investments
made by individuals and companies into these CDFIs. More flexible rules for credit unions had been introduced alongside the £38 million made available to them.
I support the amendments to be proposed in this area according to the briefing received today from HM Treasury. These cover the creation of a senior persons regime to replace the approved persons regime as it applies to persons responsible for managing a firm and the key risks it faces. The PCBS has suggested a new criminal offence of reckless misconduct in the management of a bank. The briefing states:
“Further, the Commission recommends that the Government bring forward, after consultation with the regulators and no later than the end of 2013, proposals for additional provisions for civil recovery from individuals who have been found guilty of reckless mismanagement of a bank”.
As the noble Lord, Lord Brennan, has said, I am sure that the lawyers will have a field day on the very difficult definition of “reckless”. The briefing continues:
“There will be a need however to ensure that any planned criminal offence or change to the civil sanction regime is measured and workable”.
I also support the creation of a new payments system regulator and the introduction of a secondary objective to further support competition for the PRA.
The Government have also sensibly made clear that they will support some of the ICB’s key recommendations at a European level because they believe, correctly in my view, that in these areas the UK’s approach should be consistent with progress across Europe. These are higher capital requirements for large ring-fenced banks, beyond the Basel III minimum standards, through powers in the Capital Requirements Directive IV and capital requirements regulation. Also proposed is a bail-in tool as part of the European Commission’s proposed recovery and resolution directive as an essential resolution tool for banks that are “too big to fail”.
I also support the Government’s decision that a number of recommendations to improve competition in the banking sector both by the ICB and the PCBS are to be taken forward through non-legislative channels. In particular, I understand that following a request from the Treasury, the Financial Services Authority published a review of barriers to entry and expansion in UK banking. As a result, the regulators are introducing significant changes to make it easier for new banks to enter the market and grow. Perhaps I may ask the Minister what those are.
The British Bankers’ Association, in its briefing for Second Reading in this House, is generally in favour of the Bill. It says that secondary legislation, as many other speakers have said, will be critical in determining whether a ring-fenced bank can be organised in an orderly and effective manner and whether it will be capable of providing a suite of services to households and businesses consistent with the principles originally set out by the ICB. Notwithstanding the need to ensure that the ring-fence is suitably robust, there is also a need to ensure that banking services in support of business, such as simple hedging and trade finance, can be provided in a cost-effective manner. So far, four statutory instruments have been produced. At first sight these appear to address some of the concerns raised by the industry and others, for instance in terms of the ability of ring-fenced banks to provide hedging
services and trade finance to their clients. There appear, however, to be significant gaps in the services that can be provided in support of SMEs’ financial needs, including their export and import finance requirements. These need to be explored as part of the consultation.
Clause 4 has been amended to include group restructuring powers for the regulatory authorities in the event that they consider the ring-fence to be ineffective in procedures relating to the exercise of the powers. While the objective of the group restructuring powers are understood, including the independence of decision-making criteria, it will be important to ensure that this is compatible with the statutory duty of directors under Section 172 of the Companies Act 2006. The structural reorganisation of a banking group to bring about ring-fencing is likely to involve relying on the banking business-transfer regime and the revised Part VII of the Financial Services and Markets Act for the transfer of tens of millions of accounts and contracts. Key to this is ensuring that the revised provisions are suitably scoped and the procedures involved compatible with an orderly transition to ring-fencing within an envisaged 2019 timescale.
Schedule provisions have been added to the Bill that look to help the operability of the ring-fencing transfer process. For instance, the amendments would make statutory provision for the PRA to review ring-fencing transfer schemes in order to provide regulatory consent to transfer plans. There are likely, however, to be some instances in which small drafting amendments will be justified in order to further facilitate the smooth transition towards the ring-fencing arrangements.
As the government consultation indicates, there are outstanding issues in respect of pension scheme liabilities and VAT grouping. It is disappointing that the regulations on these remain outstanding. It is pleasing to see that at least the intention to publish the regulations on pensions for consultation before parliamentary scrutiny has been completed.
In conclusion, I once again express my support for the Bill. Of course, all these measures do not come without significant cost to the banks. According to the Government’s impact assessment, ring-fencing and depositor preference are expected to impose transitional and ongoing costs on UK banks. The Government estimate the ongoing costs to be in the range of no less than between £2 billion and £5 billion per year, with one-off transitional cost of between of £1.5 billion and £2 billion. The individual customer and/or small business will have to bear these costs. However, I hope that the benefit will be increased financial stability. No one should underestimate how close the UK banking system came to collapse in 2008, and this can never be allowed to happen again.
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