My Lords, this is a very large group of amendments dealing with another key aspect of the Government’s reform, namely how to drive up standards across the banking system. The Government’s amendments in this group, and in the following group, widen the range of firms covered by the reform. They respond to points made in Committee, and I am grateful to the noble Lord, Lord Eatwell, for his welcome for them, but we will deal with them in more detail when we come to the next group.
I would like first to respond to the concern that the Government’s Committee stage amendments did not implement the commission’s recommendations for what it calls the licensing regime. To be completely clear, the Government are committed to implementing the vast majority of the commission’s recommendations on the regulation of individuals in banking, including its recommendations to introduce a licensing regime. The regulators, in their responses to the commission published in October, confirmed that they would do this.
The Government’s amendments in Committee put in place all the essential features of the commission’s licensing regime proposals in Clauses 22 and 23. These clauses give the regulator power to make rules of conduct imposing binding standards on employees and ensure that the regulators can take action when there is any breach of these rules. The relevant provisions would form part of FiSMA and confer powers on the regulators in the normal way.
However, we recognise that this may not be seen as giving the full weight and impetus to the commission’s proposals, so we are looking to see whether we can
bring forward at Third Reading amendments which will highlight the proposals more and put beyond doubt the determination which we all share to see real change in this area. In the light of this, the Government are looking to introduce amendments at Third Reading to impose obligations on banks and PRA-regulated investment firms, first, to verify before appointing someone as a senior manager, an employee in a role that could do significant harm to the firm or another role requiring regulatory pre-approval, that the person is fit and proper to perform that role in the firm; secondly, to maintain up-to-date lists of such persons which could be made available to the regulators when required; thirdly, to notify the appropriate regulator when they take formal disciplinary action against such persons—formal disciplinary action could include giving a formal written warning, dismissal, suspension or clawing back remuneration; and, fourthly, to notify all such persons of the banking standards rules that apply to them. All these obligations will be regulatory requirements under FiSMA. Failure to comply with the obligations will be a breach of regulatory requirements, and actions could be taken against the bank concerned by the regulators. In addition, deliberately or recklessly submitting a materially false or misleading list of persons to a regulator will be a criminal offence.
The Government will also look at tabling amendments requiring, rather than simply empowering, the regulators to set out those functions for which a bank must do the above. We anticipate that this class will match the category of staff defined in the PCBS report as being those whose actions or behaviour could seriously harm their employer, its reputation or its customers. I hope that when we produce those amendments they will satisfy the concerns addressed by the most reverend Primate.
There are certain detailed respects in which the Government have decided not to follow the recommendations of the commission. These do not change the substance of the impact of the regime, but they will ensure its effectiveness. First, the commission envisages that the licensing regime provisions would entirely replace the regime of regulators, giving pre-approval to people below senior management level. That would mean dropping regulatory pre-approval for all appointments below senior management level, including in areas such as money laundering, with which the noble Lord, Lord Brennan, and others were particularly concerned in Committee.
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The Government thought carefully about that but decided it would not be appropriate to remove entirely the possibility of regulatory pre-approval below senior management level. There may be critical roles in banks at lower levels with important responsibilities in relation to protecting consumers, maintaining market integrity or preventing financial crime where prior regulatory scrutiny of appointments continues to be essential. The FCA will therefore also be able to require prior regulatory approval of appointments of persons who are to perform control functions designated in their rules. Both the Government and the FCA support the philosophy behind the commission’s proposal that regulatory pre-approval should be required only for
senior roles. We expect that for banks the regulators will over time substantially reduce their pre-approval requirements for individuals who are not senior management. Further, I can confirm that the PRA will not be able to designate any functions except senior management functions as requiring regulatory pre-approval.
Finally, I am aware that another concern of the members of the parliamentary commission is the name of the regime. The commission itself has spoken of a licensing regime, and we are happy to use that term as an informal title for the new regime. However, we do not believe that it is the right description for the regime the commission recommended. Anybody coming across the term “licensing regime” would naturally assume it meant that a licence would be granted by a regulator or some other public authority. That is, however, precisely what the parliamentary commission did not want.
I hope that in any case we can all agree that the name given to the regime is not the most important thing. What matters is what it does. The regime we have legislated for cannot be called a licensing regime, but it delivers precisely what the parliamentary commission called for in its report. There will be a regime of regulatory standards for employees encapsulated in enforceable banking standards rules. Firms will inevitably have a role in ensuring their staff comply with those standards and taking action if they do not, while the regulator will be able to take action if needed.