My Lords, like all noble Lords I very much welcome this debate introduced by the most reverend Primate and indeed look forward to the contribution of the noble Lord, Lord Carrington, with whom I last had an involvement when canvassing for the noble Lord, Lord Liddle, now not in his place, in the famous by-election in Fulham in the early 1980s. I am sure they look forward to renewing their rivalry over the Benches.
As the various reports from the most reverend Primate have indicated, it is clear that 2008 was the culmination of a series of problems within the banking industry. The 2008 crisis exposed problems not just with the regulatory regime but also, as he said, with the culture of the industry. Banks had become unable to manage risk properly, had lost sight of their responsibilities to customers and were seriously over-leveraged. In addition, they had not guarded against other long-term problems in the economy, particularly the housing bubble.
The result is a significant loss of confidence and trust among the public in the banking industry and huge harm being caused to the UK economy. As somebody memorably said, recently we moved from a culture of inky-fingered bankers to a culture of sticky-fingered bankers.
It is interesting that those banks which received bailout money from the taxpayer are often those which have the highest level of customer dissatisfaction. A recent survey by Which? found an overall customer satisfaction rate with RBS of only 50%—and that was before the recent allegations against it—and that Lloyds had a satisfaction rating of 56%. The highest-rated bank, First Direct, had a rating of 85% satisfaction in services provided. A recent YouGov survey asked people which three aspects of British banking, from a list of eight,
“have damaged your view of the UK banking industry the most”,
and found that the top two concerns were excessive bonuses and the LIBOR scandal. Notwithstanding this, the financial rewards handed to the City’s highest paid bankers rose by a third last year, with more than 2,700 of them paid more than €1 million in 2012.
The Government have addressed these issues in a number of ways. The first is through the banking
reform Bill, which will ring-fence the retail banking services of banks away from the high-risk trading that they may also conduct and to which the most reverend Primate referred—he would go further and ban that entirely, but that is not what the legislation says. In addition, in response to a recommendation by the commission, the Government have amended the Bill to allow regulators completely to separate the retail aspects of a particular bank from the rest of the business where that bank seeks to breach or get around the ring-fence. This is known in the jargon as electrification of the ring-fence.
On the regulatory system, the Government have sought to learn the lessons of the financial crisis. They have listened to the banking commission in setting up a new regulatory system via the Financial Services Act 2012. I shall not bore noble Lords with the detail of this, but there are three separate bodies aimed at fixing the regulatory problems: the Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority. The Act also creates clear channels of communication and decision-making in the event of another financial crisis. This is because—and I think that we are all agreed on it—in 2008 there was concern that the powers available to regulators, the Bank of England and the Treasury were not clearly defined, making it hard for any one body to react quickly to events. In addition, the Act ensures that the Treasury is ultimately to act as the “point” in event of a financial crisis and can ensure that others act.
As the most reverend Primate has indicated, trust is the most fundamental issue, which cannot be dealt with by legislation. I make no apology for relying on a lot of the evidence that was given to the commission. The commission indicated:
“The loss of trust in banking has been enormously damaging; there is now a massive opportunity to reform banking standards to strengthen the value of banking in the future and to reinforce the UK’s dominant position within the global financial services industry”.
It further stated:
“It is essential that the risks posed by having a large financial centre do not mean that taxpayers or the wider economy are held to ransom. That is why it is right for the UK to take measures … which not only protect the UK’s position as a global financial sector, but also protect the UK public and economy from the associated risks”.
We have to remember that the overwhelming majority of people working in banks undoubtedly wish to serve their customers well and are as angry as the wider public about the activities of a minority of their colleagues.
The report elsewhere states:
“The mis-selling of IRHP and PPI demonstrate what can happen when banks exploit information asymmetries between them and their customers. However, providing too much small print to customers, effectively drowning them with information, may be as detrimental as not providing enough information to them”.
Peter Vicary-Smith gave the following example to the commission:
“To open an HSBC packaged account, the consumer is expected to read 165 pages of information. No one is going to do that. As long as banks ... provide so much gobbledegook that the real things you need to know are hidden, we will continue to have these problems”.
Many people said that it had been more than 25 years since Tom Wolfe had used the term “master of the universe” to describe a New York bond trader, but that it had never been more apt as a description of bankers than in the past decade. I have often relied in comment on this subject on the wise words of the noble Lord, Lord Turner, who is not in his place. He told the commission that:
“One of the most dismal features of the banking industry to emerge from our evidence was the striking limitation on the sense of personal responsibility and accountability of the leaders within the industry for the widespread failings and abuses over which they presided. Ignorance was offered as the main excuse. It was not always accidental. Those who should have been exercising supervisory or leadership roles benefited from an accountability firewall between themselves and individual misconduct, and demonstrated poor, perhaps deliberately poor, understanding of the front line. Senior executives were aware that they would not be punished for what they could not see and promptly donned the blindfolds. Where they could not claim ignorance, they fell back on the claim that everyone was party to a decision, so that no individual could be held squarely to blame—the Murder on the Orient Express defence. It is imperative that in future senior executives in banks have an incentive to know what is happening on their watch—not an incentive to remain ignorant in case the regulator comes calling”.
I agree with the noble Lord.
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