My Lords, as noble Lords will see on the Marshalled List, Amendment 165 would insert a new clause entitled “Duty of care”. Over the past several months, we have seen a variety of scandals which have, let us say, polluted the relationship between banks and their customers, particularly those holding household accounts or those which are small or medium-sized enterprises. We have had the PPI scandal, the scandal over the mis-selling of interest rate swaps and now newspaper headlines cover the accusations which come from within the Government that RBS has been winding up small firms and seizing their assets to its own advantage. Just yesterday, the Governor of the Bank of England, Mr Carney, referring to RBS, said that this behaviour is a fundamental violation of the integrity of the banking relationship.
The amendment is addressed directly towards the banking relationship. It is in the best interests of the banking industry and, indeed, of the UK economy as a whole, that that relationship is repaired and that trust is restored between the ordinary customer and his or her bank. The amendment is carefully drawn. It proposes first that, with respect to core services, a ring-fenced body will have a fiduciary duty towards its customers. Not being a lawyer, I went to the law library in my college to check that I knew exactly what “a fiduciary duty” actually meant. I quote from a law textbook, which says:
“A fiduciary relationship encompasses the idea of faith and confidence and is generally established only when the confidence given by one person is actually accepted by the other person. Mere respect for another individual’s judgment or general trust in his or her character is ordinarily insufficient for the creation of a fiduciary relationship. The duties of a fiduciary include … reasonable care of the assets within custody. All of the fiduciary’s actions are performed for the advantage of the beneficiary”.
The law textbook which I consulted also went on to describe the way in which the courts have interpreted this relationship, embracing,
“legal relationships such as those between attorney and client, Broker and principal, principal and agent”.
It is striking that the Securities and Exchange Commission in the United States has now passed a regulation which imposes a fiduciary responsibility on those regulated by the SEC.
The fiduciary duty to which I refer in the amendment is with respect to “core services”. I remind the House what that means. The core services are the facilities for the accepting of deposits or other payments into an account which is provided in the course of the core activity of accepting deposits, facilities for withdrawing money or making payments from such an account, and overdraft facilities. It is that relationship of depositing
your money in the bank which then says that the bank has your best interests at heart in looking after your money. That is the case of the fiduciary responsibility.
The amendment goes on to say that, with respect to other financial services provided by a ring-fenced organisation, there should be a “duty of care”. I returned to the law textbook, just to make sure that I knew the difference between fiduciary responsibilities and “duty of care”. I was told that a duty of care is a,
“legal obligation which is imposed on an individual requiring adherence to a standard of reasonable care while performing any acts that could foreseeably harm others. It is the first element that must be established to proceed with an action in negligence”.
It goes on to discuss the case law and common law associated with the notion of duty of care.
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It seems that in restoring trust to our banking system, which has been so seriously eroded by the various scandals to which I referred, nothing could be better than a clear fiduciary duty with respect to the acceptance of deposits and a duty of care with respect to the other activities of a ring-fenced bank. Therefore, for example, if a small or medium-sized enterprise is in trouble, it will be the duty of the bank to help that enterprise wind up if necessary in a way which best safeguards the owner of the small or medium-sized company. It would not be a duty of care if the bank simply forced a small company into receivership in a way which resulted in financial benefit to that bank. This amendment would therefore first impose the fiduciary relationship which I am sure most people thought they had with their bank but did not have, and the duty of care, which has been so sadly neglected over the past few years.
In reply to the discussion of this amendment in Committee, the noble Lord, Lord Deighton, put forward four objections. He said that, first, the main thing the Government were doing to protect customers was to encourage competition. Of course, competition may be helpful and may help to protect customers. However, we are dealing with an industry in which there is severe asymmetric information—that is, the information and the skills that the bank has are not matched on the other side by the skills of the customer. That is why we need to ensure that the bank regards its responsibility as a responsibility of trust with respect to the customer.
The noble Lord then said that surely this was covered by contractual relationships. However, we are not looking at a contractual relationship—a division of rights and responsibilities previously agreed and divided between equal partners to a contract. We are considering simply the deposit of a family’s or of a small firm’s money within a bank, and the bank’s attitude towards its responsibility to that family or small business. Therefore we are not talking about contractual relationships.
The noble Lord, Lord Deighton, then said that if bankers were given a fiduciary responsibility, they would not understand it; they would not understand the range of their responsibilities. First, since other professions are perfectly capable of understanding the notion of fiduciary responsibility, why should bankers not understand it? The alternative he proposed of
listing specific responsibilities always has the problem that once you have a specific list you leave things out at the end. In an industry in which there is so much innovation, specific lists are likely to be inadequate. Finally, the noble Lord said that this is unnecessary because we have FiSMA rules that already cover it. If those rules already cover the situation, why are we having this succession of extraordinary scandals, which are damaging the banking industry so badly?
Therefore, this is a point in the Bill at which we can really address the issue of the culture of banking today, by restoring trust in our banking system with a fiduciary responsibility with respect to deposits, and a duty of care with respect to other elements in financial activities. If we do that, we will have performed a major service for the banking industry, for the British economy, and for ordinary households and small firms throughout this country. I beg to move.