I think that, in the first instance, it is the job of regulators to advise us—we shall see whether they do—and that it is the job of Parliament to keep an eye on the position. The Treasury Committee will need to be vigilant.
We failed to secure the abolition of the strategic objective of the FCA, although we see no logical reason why it should remain. It seems to serve as a licence to allow the FCA to do whatever it wants, and to override its own operational objectives. We also failed to secure a statutory duty for the Governor to raise the issue of excessive lobbying by banks. It is regrettable that there is to be no statutory duty to require the production of a second set of accounts designed to identify systemic risks in the balance sheets of banks, and we will ask regulators to return to that issue.
Nevertheless, if everything is taken into account, it is clear that the commissioners in the House of Lords won the argument, and secured the lion’s share of the measures proposed by the commission. Although the group has been depleted by the loss of Baroness Kramer to the Government, the remaining four have worked assiduously and very persuasively to improve the Bill, and, on behalf of the commissioners in the House of Commons, I thank them heartily. Let me also record my appreciation of the constructive way in which Treasury Ministers have engaged with me, and with other commissioners, on these subjects in recent weeks. They have been extremely helpful, as have their officials, and that has enabled us
to make rapid progress. What is more, and equally important, the Government have made clear their support for a number of measures—some of which I have mentioned—that it will be the duty of regulators to implement. As I have said, the work of the regulators, and the supervision of it, will be at least as important as the statute itself
That brings me to the statute itself, and to the amendments that are before us. The first major change that is proposed is the introduction of a senior managers regime. One of the commission’s central objectives was to make a reality of individual responsibility, particularly at senior levels. I lost count of the number of witnesses from failed institutions who were not prepared to take personal responsibility for what was going on in their firms. In principle this should have been the task of the approved persons regime, but it was a disaster. It failed both at ensuring that competent people were appointed and at checking up on their subsequent performance.
The commission concluded that the APR was a complex and confused mess that did not perform any of its supposed roles adequately. It had become little more than a bureaucratic, box-ticking exercise. Its unsuitability has been illustrated by the fact that it seemed to pass the recently departed chairman of the Co-op bank as fit and proper to run a bank. Another indication of its irrelevance was the fact that most of those responsible for steering our major banks on to the rocks over the past five years were not even reassessed for their suitability after those banks had failed. The APR gave us the worst of all worlds: the appearance of regulatory oversight and the reality of none.
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An essential task, therefore, has to be the abolition of the APR. To replace it, we recommended a much more judgment-based and proactive supervisory approach for the most senior people in banks, a much smaller group than under the APR regime. Specific responsibilities should be allocated to named individuals at the very top of firms. Secondly, for the much wider group of all those whose behaviour could seriously harm a bank, its reputation or its customers, we proposed a licensing system that in the legislation is now called certification. I shall return to that.
On the senior persons regime, both the Government and the regulators accepted our proposals for the most part, but for reasons beyond everybody they have not accepted the name. Instead they have replaced the phrase “senior persons” with “senior managers”. I think that is guaranteed to confuse because some at the top of banks who clearly should qualify for supervision of this type will not be managing anybody. A non-executive chairman of a large bank does not have a management responsibility. For much of his time at Barclays, Bob Diamond did not have a direct management responsibility. This scheme should, therefore, have been called the senior persons regime. I have not heard any reason why it cannot be called that. That is a relatively minor nomenclature quibble, however, and we are otherwise delighted that the Government have accepted our proposals.
On certification or licensing, the picture has been somewhat different. Although the Government response to the commission initially promised to implement our
recommendations on licensing, there was no sign of it in the Bill until Third Reading in the Lords. I am glad to say that that has now been put right.
The purpose of licensing, or certification, is to ensure that banks themselves have identified those employees—whether traders, senior salespersons, financial managers or whatever— who can do serious harm to the bank or to markets. One of the shocking discoveries of this crisis—including the LIBOR scandal—has been that in many cases the banks did not know who these people were. They certainly should. For them not to do so should constitute a regulatory breach. It should also be a breach to add staff to the certification regime who do not satisfy the harm test—to add staff who cannot do serious harm to an institution. That would defeat the purpose of certification.
It should be the responsibility of banks, using methods that best fit their organisation, to maintain a certification system, and it should be the responsibility of regulators—using periodic checks—to ensure that they do. Just to be clear, it should certainly not be the job of the regulators to try to identify all these staff themselves. That would guarantee the return of the very bureaucratic box-ticking that we want to leave behind with the abolition of the APR. Those in such jobs should know that their bank may withdraw their certificate, and therefore possibly their ability to earn a living performing that function, and inform the regulator, who may in turn inform other regulators in other jurisdictions, should there be misconduct. It can be a great opportunity for many young staff to sit in front of a computer screen and trade LIBOR and earn a considerable amount of money, but that opportunity should also carry with it responsibility. In many cases that sense of responsibility was found to be wholly lacking.