My Lords, I support the amendment of the noble Lord, Lord Sharkey. I bring to the attention of the Committee my position as deputy chairman of the Banking Standards Board, but I speak here in a personal capacity.
This measure abandons a key element of the recommendation of the Parliamentary Commission on Banking Standards—a decision that was unanimous among its members, including the most reverend
Primate the Archbishop of Canterbury. We all signed up to the recommendation to hold senior bankers to account. The essence of the recommendation is that, if misconduct or prudential failings take place, in order to avoid sanction senior managers have to demonstrate that they did all they could to prevent them happening.
I remind the Committee why we came to that decision. We sat for two years and asked 10,000 questions. We questioned senior executives of banks, whose response when anything went wrong was, “No see, no tell. Nothing to do with me”. In fact, senior executives were content to come across as incompetent rather than culpable, no doubt advised to do so by their lawyers. We covered examples such as PPI, which went on for 20 years. I questioned the former chief executive of Lloyds. I asked him, “What about PPI? It’s cost you about £12 billion”. He replied, “Oh, we were on the side of the angels as far as PPI was concerned”. This is a group of people divorced from the reality of the situation in society, and that is why the parliamentary commission unanimously made this recommendation.
I shall give your Lordships another example. We had four UBS executives lined up before us. We were told informally that their salary was probably £100 million a year. One of their star traders had lost more than $2 billion in Hong Kong, so naturally we asked, “Did you know?”, to which the answer was “No”. We said, “You didn’t know what your star trader was doing? Fine. So when did you find out?”. The answer was, “Oh, we found out on the Bloomberg wires”. In other words, it took someone outwith the company to tell the most senior managers that one of their star traders had lost $2 billion.
The director of corporate affairs, Tracey McDermott, came before one of the sub-committees in relation to this issue. She is a very competent and professional person. We asked her, “What happened with the UBS situation?”. She said, “We examined it but the trail went cold. In other words, we couldn’t pinpoint anyone in the organisation who was culpable because there wasn’t a sufficient organisational chart”. Her evidence indicated that at that time—this was mentioned by the noble Lord, Lord Sharkey—the FCA was unable to impose sanctions on senior executives, first and foremost due to the evidential standard required to prove their liability. She added:
“The test for taking enforcement action is that we have to be able to establish personal culpability on the part of the individual, which means falling below the standard of reasonableness for someone in their position”.
That entails showing that senior executives failed to reach a reasonable conclusion and, as the Bill stands, that will remain the evidential standard for proving culpability. So we are back to the future here—a future that has failed time and again. That is why the Parliamentary Commission on Banking Standards was very frustrated at the situation and said that something had to be done in civil law. However, the new standard in the Bill will not effect the change that it is supposed to bring about because the evidential standards remains the same and, as a result, we are going back to an old regime.
I remind the Committee of the long list of recent failures, not least IPOs, LIBOR and forex. Those are what are called the three lodestars of the market, and they were all rigged. It was a corrupt market, and the Parliamentary Commission on Banking Standards was very clear, from the evidence it received, that it was a corrupt market. We had evidence from HBOS, UBS and RBS. PPI mis-selling went on for 20 years and cost £40 billion. What does £40 billion mean? It is about 2% of the country’s GDP, so, paradoxically, the PPI fines helped economic growth. I do not want to live in a country with standards like that.
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What did we get from the government response? The noble Lord, Lord Sharkey, met the Minister, Harriet Baldwin, who said that reversing the burden of proof would drive talented people here abroad. That is a canard we have heard for 20 years in the financial services industry, and it is a mentality we have to change. It is quite clear that the Government included the burden of proof because of the unanimous recommendation of the Parliamentary Commission on Banking Standards. They have now taken it out of the legislation because of sustained bank lobbying. Purely and simply, that is the reason. If the Government were honest about that, we would know the direction they were following.
There is a societal dimension to this. I have come from a meeting this morning with people in the City, at which we were talking about this issue. The societal dimension is that, first, no one has ever gone to jail; secondly, no one has ever been held personally culpable, except for one person who got a £500,000 fine; thirdly, the mis-selling scandal, costing more than £40 billion in the UK and more than $200 billion globally, is seen by the financial services industry as a way of doing business because the fines levied do not come out of individuals’ pockets. Until the Government try to change that, public opinion will certainly be against them.
The view has been put forward that taking such action would not be legally sound, and the noble Lord, Lord Sharkey, referred to that. I remind noble Lords of the Sale of Goods Act. If a consumer asks for a product to be repaired or replaced within six months of sale, the retailer has to prove that the goods conformed to the contract in disputed cases. Why cannot the same provisions apply to the financial services industry?