I shall speak also to Amendments 10, 14 and 116 in the group. I also express my regret that I was unable to take part in
debate on Second Reading. All these amendments relate to the so-called first reserve power, under which a ring-fenced bank group which fails to respect the principles of ring-fencing can be required to divest itself of the non-ring-fenced assets.
First, I must congratulate the Minister on surviving the reshuffle, despite the fact that his tenure is rapidly approaching the average for a junior Minister in the Treasury. More importantly, I must record my congratulations to the noble Baroness, Lady Kramer, on her promotion to Minister of State. She has been an excellent colleague to all of us on the Parliamentary Commission on Banking Standards; she will be sorely missed in our deliberations.
Let me say a few words of introduction. It was always inherent in the timetable of the parliamentary standards work and the timetable of the Bill that many of the clauses to implement our recommendations would need to be introduced in the Lords after completion of the Commons work, but we have certainly ended up with more than we bargained for, with total amendments running at 116 pages and government amendments accounting for 95 pages of that: more than three times the length of the original Bill. That tells us something about the process of legislation. We are dealing with amendments to amendments to amendments which are in turn amending statutes that have already been amended more than once.
The Government’s response to the parliamentary commission’s report stated:
“We today set out plans to implement the major recommendations of Changing banking for good”.
The reality, however, is somewhat different. There are recommendations that HMG have faithfully embraced and provided proposals to implement them. There are also recommendations where the Government say that they accept them but the provisions in the Bill dilute them to the point where they may be ineffective or where they say that legislation is not required: I am sure that we will hear that plea quite often. There is also a long list of recommendations which the Government have rejected or simply ignored: recommendations on leverage, proprietary trading, special measures, a new regulatory decisions committee for banking, the strategic objective of the FCA, and so on. Of course, in Committee and at Report, I and my colleagues on the parliamentary commission will seek to work constructively with the Government to bring us closer to our recommendations so that we succeed in achieving the purpose of the title of the report, which was Changing Banking for Good.
We are locked into this unsatisfactory legislative process, and we will therefore need a degree of flexibility. In debate on a previous financial services Bill, the noble Lord, Lord Eatwell, sought and secured some relaxation of the constraints on speaking at Report. I would certainly support him if he seeks similar dispensation this time.
I turn specifically to ring-fencing, which is the subject of the amendments in this group and the background to it. There was a vigorous debate within the commission on whether to endorse the ring-fencing plan of the independent commission, the Vickers commission. By the time we started work, the Government
had effectively told us that they were minded to accept it. Alternatively, should we continue to press the case for full separation of investment banking activities from commercial and retail banking, in effect adopting a UK version of Glass-Steagall, which the US had operated for many years but which was eroded and finally abandoned? The arguments for this were, first, that investment banking activities are inherently riskier and so imperilled the continuity of regular commercial banking and, secondly, that there was cultural contamination in that there were attitudes to risk and remuneration which were alien to good customer-focused banking.
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The arguments put against this were that there was no clear mapping of the banks that failed against the divide proposed. Some universal banks, such as HSBC and JP Morgan, survived the financial crash better than specialist investment banks, such as Lehmans, Bear Stearns and Merrill Lynch, while some of the most dramatic failures in the UK—HBOS and Northern Rock—conducted very little investment banking. Their failure was attributable simply to bad lending, particularly in retail and commercial property. We also saw signs of poor behaviour and culture across the whole banking spectrum and it was argued that rather than being a source of risk, an investment bank could also be a source of reinforcement.
In the end, we largely endorsed the ICB proposal but felt that if we adopted the ring-fencing regime, we needed to protect it. This became known colloquially as electrification and was rooted in a belief that banks are limitlessly ingenious and remorseless lobbyists, so some safeguards should be put in place. We agreed to this subject to five conditions. First, the ring-fenced bank should have a substantial degree of independence from the group, subject to the caveats raised today by the noble Lord, Lord Blackwell. Secondly, the directors of the ring-fenced bank should have an additional duty to observe the principles of ring-fencing and preserve the stability of that bank. Thirdly, we sought to reduce cultural contamination by tightening up on banking remuneration, with more remuneration being deferred and for longer and the possibility that previously paid benefits could be clawed back—and, in the event of failure and state rescue, reclaimed. Fourthly, there should be a power to require an individual bank that was abusing the ring-fence regime to dispose of its non-ring-fenced assets. Finally, after a review the Government could decide to change the scheme and require full separation across the whole sector.
In the proposals before us, I would say that we have secured about two-thirds or 70% of the conditions that the commission was looking for. The Bill provides a first reserve power to deal with individual banks and provides for the desired governance of the ring-fenced bank. The Government accept the principles on remuneration but are still arguing about whether those should have statutory force. After what I would describe as a stumble in the Commons, the Government have also come round to introducing a workable process for dealing with individual banks which are misbehaving. The scheme as originally proposed in the
Commons might be called “Five strikes and you might be out in six years’ time”. That new amendment is Amendment 6, which we naturally welcome, and there is also agreement on the kind of behaviours that should trigger separation under new Section 142K. So where do the issues remain?
It is agreed that there should be a periodic review after four or five years; there is an opposition amendment suggesting a shorter period. This scheme is highly innovative and very important. We are ahead of a similar scheme that gets to the same place in a slightly different way and goes under the name of the Liikanen proposals, so it is absolutely right that provision is made to review it.
In the view of the commission, though, the review should be conducted not by the PRA alone but independently, as in proposed new Section 142JA, and it should be required to report on its recommendations, as in proposed new Section 142JB. We have also suggested that where a bank is issued with a preliminary notice, there should be a further independent review of its relations with the regulator. This is to create a safeguard against the regulator getting into a relationship where it is picking on a particular bank. That is in Amendment 10.
In the scheme proposed by the commission, these sanctions could be enforced only after a general review had taken place, but in the Government’s scheme they could be undertaken at any time. So there is quite a lot at issue to resolve between the Government, the Opposition and the survivors of the commission, but I believe that we can achieve reconciliation before we get to Report. The final question, about the differences on the second reserve powers, will come later in the afternoon as it is further down the Order Paper.
Amendment 4 (to Amendment 3)