My Lords, I should start by thanking the Minister and her officials for being so generous with their time over the last couple of days. I am extremely grateful for her courtesy and patience. I also want to acknowledge that this is not the ideal timing for debating an issue that has so many complex aspects. We had all expected to have more time to do this.
Amendment 13, which stands in my name and that of the noble Lord, Lord Mendelsohn, sets out to help the FCA. A key part of the FCA’s job is the detection and punishment of misconduct. Another key part of its job is instilling and incentivising a culture of fair treatment of clients and a respect for the regulations in both spirit and letter—in other words, trying to prevent cultures in which financial misconduct is winked at or incentivised. The amendment aims to help with both those tasks.
The FCA has certainly been very busy with the business of the detection and punishment of misconduct since it took on its current form and mandate in 2012. In the four years from 2013 to 2017, it has imposed penalties on 82 occasions. The fines on firms in this short period amounted to over £3 billion. The latest fine was £163 million, imposed in January on Deutsche Bank. In fact, the headline fine was £230 million, but the FCA awarded a discount of 30% for prompt settlement of its action against the bank, and that is an entirely typical arrangement. Sixty-six out of the 82 enforcement actions brought by the FCA were settled at the first stage of the enforcement process and received a 30% discount. Eight were settled at the second stage and received a 20% discount. Eight were contested and received no discount at all. In all, the FCA in four years has given firms early settlement discounts of almost £1 billion and the amendment simply proposes to put this gigantic sum of money to better, or at least additional, use.
When the FCA reaches a settlement, it will impose conditions, some of which may call for internal disciplinary proceedings to be taken against those responsible for the misconduct. The amendment would ensure that those disciplinary proceedings took place. It mandates the withholding of a proportion of the discount until the offending firm has demonstrated conclusively, and to the satisfaction of the FCA, that proper and proportionate disciplinary action has in fact taken place. The substantive burden here lies with the firms
and not with the FCA. This mechanism will free the FCA from the cost and use of resource that any follow-up investigation of non-compliance would require. In any case, it is not clear whether substantive follow-up investigations are routinely undertaken.
The FCA mission statement, published last week, talks about revisiting cases. On page 15, under the heading “Evaluation”, it says that,
“post-implementation analysis is not cost free. Additionally, the dynamism and complexity of the market means it is often difficult to isolate the impact of our actions against other factors”.
It goes on to say:
“Where it is less cost-effective to conduct detailed analysis, we will monitor and publish key indicators that help to demonstrate the impact of our interventions”.
I entirely sympathise with that sensible and realistic approach. I have spoken in this Chamber before about my concerns that the FCA is underresourced, underpaid, undervalued and overburdened, and the amendment helps in that kind of situation. It effectively automates, or nearly automates, the process of compliance with settlement conditions. It removes the need for substantive reinvestigation by the FCA and, instead, places a burden on the offending firm to demonstrate compliance. It offers a powerful financial incentive for doing so at no additional cost to the FCA or to the taxpayer.
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Our amendment has a further advantage. It creates a powerful incentive for real cultural change in offending firms. If you know that your firm has a powerful financial incentive to identify and punish wrongdoers at any level, that is a powerful incentive to proper behaviour by individuals at all levels. If you know that your firm will have to demonstrate to the satisfaction of the FCA that it has in fact identified and punished those responsible for the misconduct, then misconduct and tolerance of misconduct will be less likely. The recent Banking Standards Board report shows why this kind of action is still necessary. Thirteen per cent of sector employees saw it as difficult to get ahead in their careers without flexing ethical standards, and an alarming 18% had seen people in their organisations turning a blind eye to inappropriate behaviour. Financial punishment is frequently used against firms by the FCA, and ultimately shareholders bear most of the cost of this. Disciplinary action and financial punishment against individual wrongdoers are much more likely to change culture than fines effectively on shareholders.
When these issues were discussed in Committee, the Minister set out the argument that the amendment was unnecessary, and I know—because we spoke this morning—that the FCA takes the same view, but I think it is also fair to say that our conversations on the issue are by no means finished and have not reached a resolution that is satisfactory to either side.
The fact is that the FCA has never done what the amendment proposes. The amendment simply requires it to withhold a proportion of the settlement discount for the reasons and with the effects that I have already outlined. I beg to move.