My Lords, this has been a very constructive and timely debate. I felt that I was getting one of my exams marked there, for a minute; that was the feedback I used to get 38 years ago. It is the right time to be talking about this, given where we are with the Financial Services (Banking Reform) Bill, which has been extensively amended in response to the recommendations of the
Parliamentary Commission on Banking Standards. Of course, as a number of noble Lords pointed out, we are moving toward the end of that Bill’s progress through the House. That marks the final stage of the Government’s programme of legislative action to reform banking.
We are all aware of the serious problems that have come to light in recent years. I thought that the noble Lord, Lord Turnbull, gave us the best exposition of all the individual incidents and the questions that we should be asking. We are absolutely right this evening to be focusing on the culture within banking.
Step 1, from the Government’s point of view, was to fix the regulatory system. As well as giving the Bank of England responsibility for financial stability, therefore, the Financial Services Act established the Financial Conduct Authority as a tough new conduct regulator, focused on making sure that conduct issues get the serious attention they need and deserve.
I welcome the insightful comments in the maiden speech of my noble friend Lord Carrington. He enumerated far more concisely than I could the merits of the new judgment-led approach that the regulators will apply to supervision, and the disappointing failure of what we describe as the tick-box approach. I am in tune with that analysis. I was also quite taken by my noble friend’s discussion of Islamic banking, which is values-based. There are probably some lessons for the rest of the banking sector there.
The Government supported the establishment of the PCBS under the chairmanship of the honourable Member for Chichester, Andrew Tyrie, and the work of that commission has played an absolutely vital role in shaping the future approach to conduct and standards in the UK’s financial services sector. Of course, its pre-legislative scrutiny of the draft banking reform Bill, which has been referred to, also led to a strengthening of the ring-fence, with its electrification.
The commission’s impressive final report, Changing Banking for Good, which was published in June, made some key recommendations, ranging across individual accountability, corporate governance, competition and long-term financial stability. In July the Government published our response to those recommendations. We endorsed the main findings of the commission’s report and committed to implementing its principal recommendations, using the Bill where legislation was the right way forward. I would like to think that the Government have delivered on that commitment. The debates we had in this House were extremely helpful to the Government—and, I hope, refined some of the commissioners’ thinking—and we have ended up in what I think is a very good place. I hope that next week, at the next stage, it will all come to fruition.
We tabled amendments to establish the new senior managers regime, which is the critical control system to ensure that the culture is right, and are going to implement the commission’s recommendation to introduce what is in effect a licensing regime to cover more junior banking staff. For the first time, regulators will be able to make conduct rules applying to all employees of a bank, and these changes form the basis of a much more robust focus on conduct and standards within these banks, both by giving the regulators new and
important powers with regard to senior managers, such as time-limited and conditional approvals, and by placing firm obligations on banks themselves to take responsibility for the conduct of more junior staff. The Government have put in place a new offence of criminal recklessness in the management of a bank so that in future those who bring down their bank by making thoroughly unreasonable decisions can go to jail for their actions.
All these changes have improved the Bill significantly, and I thank all noble Lords who have contributed to the debates so far. I particularly express my gratitude to the former members of the commission for their continued constructive engagement throughout, which has enabled the Government to realise their vision comprehensively.
Of course, to a man with a hammer everything looks like a nail, and there is sometimes a risk that to a parliamentarian every problem looks like it needs legislation, but this debate is a timely reminder that legislation is just one weapon in our armoury towards building the highest standards within the industry. As the most reverend Primate said, you cannot solve problems by changing law, and you cannot make people good through law. I absolutely agree with that.
The commission’s recommendations about the regulation of individuals in banks rely heavily on rules that the regulators will make underneath the legislative provisions, and the way in which those rules are applied. We have to work all this through to see how it works in practice.
The Bank of England and the FCA published their responses to the commission’s report in October, and set out their positions on each of the recommendations. They continue to make progress. I hope that the regulators will take note of the points that have been raised this evening—I know many of them are here witnessing this—as they go ahead to implement the commission’s recommendations through their rules. They will be launching public consultations on these rules next year. I urge all those who have spoken this evening to reiterate their views to the regulators through this process.
I return to the issue of creating culture change. One of the most reverend Primate’s questions was, “What will drive this cultural change?”. Regulatory rules are a necessary but not a sufficient condition for creating a profound change in the culture of banking. It is clearly an area where banks themselves must take significant responsibility. They have committed to the establishment of a professional standards body, which represents some progress; but I also hope that the industry’s leaders will take notice of this debate and continue to work to rebuild the fundamental trust which the public need to have in them if this is going to improve over time. That trust will only grow through a relatively long healing process.
Perhaps I may take a couple of minutes to refer to my own experience and what I learnt in the business. I was in the banking business for 27 years. What attracted me to it in the first place resonates with the comments of the noble Lord, Lord Eatwell, about the quality of finance and those of the most reverend Primate about what banks are for and what contribution they make
to local and national economies. The thing that made me want to go into banking was the opportunity to work with so many different businesses; to work with so many other different kind of financial institutions; to work with different countries around the world; and to use finance to make things happen, to build things and to see development. For me, it was the best possible opportunity to make an enormous difference to so many businesses around the world.
I never lost the sense of magic that the position you get at the centre of things gives you. My career divided into two halves. In the first half, my responsibility was to manage and build a group of clients and, frankly, to maximise the market share for my firm from those clients by winning as much business from them as we possibly could. I learnt one very simple thing: the most important rule for success was to put the customer’s interests first. There was nothing worse than an unhappy client. My most profitable long-term client relationships were with those people whom I had initially advised not to do transactions. We have heard a lot of discussion about taking care of the customer and putting the customer first. My own experience tells me not only is this the right thing to do, it is also in the bank’s long-term financial interest to behave in precisely that way too. The essence of effective leadership of a bank is to bring those things together.
In the second half of my career, when I was in much more of a leadership role, I spent an enormous amount of time building and managing the systems of controls and compensation to try to align that kind of long-term profit maximisation with taking care of clients and doing the right thing in a regulatory environment. I understand the enormous challenges of sitting near the top of these big organisations; wanting to do the right thing, yet never quite being sure whether there was a so-called rogue trader out there and whether you had the capacity to spot them and deal with them early enough.
A number of noble Lords have pointed to the importance of competition as a way of keeping everybody honest on a number of respects. I absolutely support competition as a healthy and stimulating part of this dialogue.
My final comment about the culture of banks is that it comes from the top—the tone is set at the top. You absolutely need systems, controls and management structures to ensure that it is effectively deployed throughout the organisation, but, for me, culture is ultimately about leadership. It is about leadership of the financial institutions, in the regulators and in government. That triumvirate needs to continue to display the right kind of leadership if we are effectively to change backing for good, as the commission has recommended.
Finally, I thank noble Lords who have spoken this evening, and thank the most reverend Primate for presenting us with this important opportunity to discuss these matters.
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