My Lords, Amendment 92 is in my name and those of the noble Lords, Lord Turnbull and Lord McFall. Grouped with it is Amendment 104D, which I will also speak to, although it has to be said that these two amendments have nothing whatever to do with each other. I will speak first to one and then to the other.
If I may be forgiven, I will go back a little bit in time to when I was Chancellor in the 1980s. As a result of what came to light with the collapse of the Johnson Matthey bank, and the total failure of supervision exercised by the Bank of England, which at that time had that responsibility, I became concerned about the quality of banking supervision in this country. I therefore introduced what became the Banking Act 1987 in order to greatly enhance the quality of bank supervision and bank regulation in the United Kingdom. If I may say, it was not helpful that the Labour Government tore that system up in 1997, but that is another story.
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One of the things that concerned me was the lack of any intercourse between bank supervisors and bank auditors. Indeed, it was prevented because the duty of commercial confidentiality in those days meant that bank auditors could not speak to the regulators or the supervisors. That seemed extremely damaging. A dialogue between the auditors and the supervisors is particularly important, not just because the risks are far greater when things go wrong in banking than in the automobile industry or any other industry—as we know to our cost—but because if the auditors of another kind of company are very concerned, they might well qualify the accounts of the company they are auditing.
Auditors are, for very good reason, extremely reluctant ever to qualify the accounts of a bank—I cannot even remember when it has ever been done—because of course that might lead to a run on the bank and cause a banking collapse, which would have huge repercussions. So it is all the more important that they can talk confidentially to the supervisor and the regulator.
Among the measures in the Banking Act 1987, I broke down the iron curtain of confidentiality between the auditors and the bank supervisors. I did not make it a statutory duty—which I regret—because at that time the Bank of England did not want it to be. But I wrote into the Act the expectation that there would be—because there should be—this dialogue between the auditors and the supervisors. So if the auditors were troubled about something that was going on at a particular bank and the bank did not seem to be remedying it, they could tip off the supervisor. Equally, if the supervisor had reason to be concerned about something that was happening at a particular bank, they could ask the auditor to take a good look at it.
That worked to begin with—but it did not work. This is documented: the meetings between the bank auditors and the bank supervisors became less frequent over the years. In the run-up to the great crisis in 2008 there were virtually no meetings at all, and we all know that the auditors were among the dogs that did not bark. They did not alert anybody to the huge problems there were in a considerable number of our major banks.
When, a few years back, the Economic Affairs Committee of this House looked again at auditing, not simply in the context of the banks but including them, we recommended that this should be put on a statutory basis. There should be a statutory requirement for this dialogue to occur. This was not accepted by the Government, on grounds that I think were totally unconvincing. We repeated this recommendation in the conclusions of the Parliamentary Commission on Banking Standards. We said:
“We would expect that for the dialogue to be effective, both the PRA and the FCA would need to meet a bank’s external auditor regularly, and more than the minimum of once a year which is specified by the Code of Practice governing the relationship between the external auditor and the supervisor. This should be required by statute, as recommended by the House of Lords Select Committee on Economic Affairs”.
That was the firm recommendation of the banking commission and I regret that, so far, it has been rejected by the Government.
The argument that the Government make is that there is a code of practice. Their response states:
“This means that there is an expectation set out in law, that there will be a regular dialogue between the regulator and auditor”.
Expectation is not enough—we have been there before. We had the expectation before, following the 1987 Act. To begin with that expectation was fulfilled but increasingly it was not, and we know what disasters arose from that. I therefore ask the Government—there is no difference between us on the necessity of having this continuous, active dialogue much more than once a year; we probably should have it on a quarterly basis—whether there should be a statutory requirement. Given the lamentable history of the period when it was not a statutory requirement, I urge the Government to think again and make it one.
Amendment 104D concerns the form in which bank accounts are prepared and the requirement—because we felt very strongly that the new accounting system, IFRS, was totally inadequate, certainly so far as banks are concerned; indeed, that proved to be so in the run-up to the crisis—that there should be a requirement
in law for a second set of accounts. Those should not be prepared on the IFRS basis but in a way that the supervisory and regulatory authorities feel is necessary in order to give them the information they require. They should be for the benefit of the regulators and supervisors and should not be published in the first instance. However, if the PRA felt that it was in the public interest that the second set of accounts be published, it could require them to be published.
The difficulties with IFRS are huge. Noble Lords may have seen the interesting article in the Accountant by Emile Woolf—one of the best known chartered accountant—who writes from time to time. I commend the whole article: noble Lords might find it beneficial, although they will be glad to know that I will not read it all out. Woolf writes that:
“The lapse of accounting and auditing rigour that has allowed IFRS compliance to dissemble truth and fairness has brought shame on our profession and begs the question of exactly what is our purpose”.
That is pretty strong wording, but it is well justified. The true and fair have effectively gone and the importance of prudence has given way to box-ticking. I understand why valuation by mark to market has come in. There were different difficulties with the historical cost basis but the result of mark to market has meant that in many cases, purely fictitious paper profits are in the accounts. Not only does that make the bank look stronger than it really is but, of course, these are then distributed in bonuses or whatever. It is a disaster. And there are other defects. The change in the provisioning requirements is totally inadequate.
It is probably true that there is a grudging acceptance of that throughout many of the leaders of the accountancy profession. The problem is that IFRS is enshrined in European Union law. Therefore, it cannot be changed without the agreement of all the members of the European Union. They are talking and talking and talking, and they are producing documents on one aspect or another. Goodness knows when they will reach agreement. Goodness knows if they will ever reach agreement.
The Parliamentary Commission on Banking Standards has said, “Okay, we accept IFRS as it is but for banks there needs to be this second set of accounts for regulatory and supervisory purposes”. What are the Government’s grounds for rejecting this? The Government are saying: Okay, you have made a good point, but,
“this needs to be balanced against the increased costs imposed by introducing a requirement for an additional parallel set of accounts”.
Compared with the massive costs of banks going belly up, the cost of having a second set of accounts which helps the regulators and the supervisors to do their job is peanuts—it is piffling. It is absurd to talk about it in the same breath.
Neither of these amendments is opposed to the Government’s approach to the issue of banking and I hope that the Minister will see fit either to accept these amendments or, if not, to introduce amendments of his own on Report which will achieve precisely this effect.
As for the reports of the inquiry, and as this is the beginning of the last day of the Committee stage, I draw the Committee’s attention to the extraordinary nature of this Bill. When we received it from the House of Commons it consisted of 35 pages. Assuming
that the government amendments which have been passed on previous Committee days and the ones that will be debated later on are added—as I am sure they quite rightly will be; I am not going to vote against them—the Bill will be 189 pages. The Bill has increased already between fivefold and sixfold. There will probably be further amendments on Report and it will be even bigger. It is an extraordinary way to legislate. We need time to absorb all this, and I hope that the Minister will be able to persuade the business managers to give us adequate time to do so before we reach Report on this very important Bill.
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