My Lords, I start by thanking the noble Lords, Lord Mendelsohn and Lord Sharkey, for the time that they have taken in entering into discussions with me and officials and representatives of the FCA, both today and yesterday. The discussions were very helpful but, as the noble Lord said, we have more to go.
Amendment 13 basically requires the FCA, as the noble Lord has said, to withhold a proportion of the discount to a penalty applied to a financial firm until that firm has completed any internal disciplinary actions agreed in the settlement. I really welcome the noble Lord’s objective of improving compliance and the culture across the financial services sector. The Government
share this objective and we have made significant progress in the area in recent years. We have, for example, introduced the senior managers and certification regime, to which the noble referred. This will, where appropriate, ensure that the FCA can take action against individuals where they are at fault. I know that the culture at firms is also a priority for the FCA, which has observed that it is both a key driver and a potential way of mitigating risk, and therefore plays a role in the achievement of its statutory objectives. The senior managers and certification regime is a key workstream in the FCA’s work programme on culture, as is the FCA’s focus on those aspects of remuneration policy that drive individual behaviour and culture.
Noble Lords spoke about disciplinary action to be taken against individuals working for firms. At the outset, I want to emphasise that if the FCA thinks that a disciplinary action should be taken against individuals, it can and does take action itself, as opposed to leaving it to the companies to do so. The FCA and other enforcement agencies have powers to fine individuals, or to take other action such as prohibiting them from continuing to operate in the financial services industry. This approach can be seen in a number of high-profile cases, including those involving LIBOR manipulation. The FCA settled eight cases with firms totalling £758 million. It is also conducting a number of separate enforcement actions against individuals. There have been seven completed actions against individuals in cases that involved settlements with firms in relation to LIBOR or Euribor, but others are still ongoing. More generally, the FCA issued fines against 64 individuals between 1 April 2013 and 24 March 2017 totalling £15.5 million. They might be the cases that the noble Lord was referring to. Many of these were connected to previously settled cases against firms, although I am afraid that I am unable to provide noble Lords with an exact number.
That said, the FCA also expects firms to consider what action they themselves should take. If a firm has not taken appropriate action by the time the FCA imposes a penalty on it, the FCA can increase the penalty as a result. We went through a lot of that today. I am not saying that for the benefit of the noble Lord, but mainly for the benefit of the House, because we have been through this. Of course, in appropriate circumstances, the FCA can impose a requirement that a firm consider further whether it needs to take any additional action to remedy the breaches identified.
The noble Lord asked me today whether it would be a better arrangement to have an automatic system of withholding a proportion of the discount, so as to make it directly in the interests of the firms to take the action that they are supposed to take, rather than the FCA having to make an assessment later of whether it ought to impose an additional penalty. I commend him on his ingenuity, but having consulted with operational partners and Treasury officials, the Government’s view is that the existing regime gives the FCA the flexibility to apply penalties and impose requirements on a case-by-case basis. It allows it to leverage those requirements wherever needed in order to ensure that the firm acts appropriately. While there might be options to enhance this approach and better achieve the outcomes that we
all seek, we should be clear about the potential benefits before pursuing any such options. That is kind of where we left it today.
I trust that noble Lords will agree that we should not seek to reform or amend without exploring the implications, both the advantages and any unintended or undesirable consequences. For instance, we are concerned that this amendment would weaken the incentives for firms to settle early with the FCA, given that the settlement would not be final, subject to the full discount being granted. As a result, they might instead choose to engage the FCA in costly and protracted action rather than all being involved in focusing on remedying the underlying issues.
Moreover, further detailed consideration would need to be given as to how this amendment would interact with established principles of employment law. In particular, when a firm disciplines an individual, it needs to follow due process rather than agreeing in advance a pre-determined course of action. For the amendment to work effectively, consideration would need to be given as to whether the FCA would need to be given a power to require firms to take such action against their employees; otherwise the amendment would put the FCA at risk of liability when undertaking the duty the amendment creates. Moreover, appropriate amendments would also need to be made to the Employment Rights Act 1996 to ensure that such action does not give rise to unfair dismissal claims by relevant employees against their firms. It is also not clear whether the proposed approach would be the best way of achieving the aim of improving the culture of firms.
In summary, we can all agree that this an extremely complex issue, which only seemed to be made even more complex as discussions went on today. We share the same objectives of improving compliance and the culture in the banking sector. Ultimately, the FCA already has significant powers to address the issues underlying the noble Lords’ amendment, not least the power to sanction relevant employees in appropriate circumstances. I trust that the House will see that it is far from clear that the amendment would deliver the positive outcomes that have been described. That being said, I found the discussions today to be very interesting, as did the relevant officials, and hope this has been an equally insightful discussion to the two noble Lords. There might be ways of enhancing the existing regulatory system; the FCA is, in fact, conducting a review of its penalties policy at present, and I know that it would welcome the opportunity to continue this discussion with both noble Lords.
I can confirm that, subject to the outcome of the election, I expect that the Government will consider how best to facilitate further discussions on this issue, and, as I outlined to the noble Lord, Lord Sharkey, this would be my intention. I am very grateful to the noble Lords for their amendment. However, I ask them to withdraw it so that action not be taken in haste. I hope they feel comfortable to do so following some of the undertakings I have given.
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