My Lords, Amendment 120 seeks to strengthen regulation by empowering stakeholders to watch over the conduct of the executive boards of the FCA and the PRA, so that stakeholder interests do not continue to be marginalised.
Throughout the passage of the Bill in this House and the other place, considerable concern has been expressed about regulatory failures. In particular, the noble Baronesses, Lady Bennett of Manor Castle and Lady Bowles of Berkhamsted, and the noble Lord, Lord Davies of Brixton, drew attention to the well-known problem of regulatory capture.
Regulatory bodies such as the FCA and the PRA are too close to the interests of the finance industry, often at the expense of broader social interests. The revolving doors swing both ways as regulators come from the industry and, after a stint, they return to the industry. The regulatory capture has inflicted misery on millions, as shown by numerous scandals. There is no resolution of the HBOS and RBS frauds, there is dithering on mini-bonds, the London Capital & Finance and Connaught scandals testify to regulatory failures, the FCA was absent in the Carillion scandal, puny sanctions for mis-selling numerous financial products have not really changed corporate culture, and there has been little success in curbing tax avoidance, money laundering, and interest rate and exchange rate rigging. Indeed, there is a long history of regulators doing the bidding of the industry; my earlier interventions referred to the regulatory sympathies for HSBC, Standard Chartered bank and BCCI even though they were involved in anti-social and criminal activities.
Regulatory capture is built into the system as individuals close to the industry occupy senior decision-making positions as executive and non-executive directors. Ministers and others often argue that individuals of particular experience are needed. The focus on technical expertise inevitably privileges industry insiders and marginalises the experience of the people who are actually practised upon, who remain relatively invisible. These experienced people rarely blow the whistle on corrupt practices or check the groupthink that has become all too prevalent in regulatory bodies.
In theory, non-executive directors are expected to provide some oversight of executives of regulatory bodies, but they, too, have little independence from the industry. The non-questioning of the regulatory practices inside the regulatory boards only deepens the crisis. Even when whistleblowers give executive and non-executive directors hard evidence, their concerns are often ignored. Who can forget the heroic efforts of the late Paul Moore, who alerted regulators of problems at HBOS before the financial crash? But he was ignored. Corporate grandees at regulatory bodies all too often see the issues through the industry’s lenses. Regulatory bodies have become echo chambers of the vested interests. We are talking here not just about simple regulatory capture but cognitive capture, which standardises subjectivities and has naturalised the interests of the finance industry within the regulatory bodies.
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In previous speeches, Ministers explained that press releases and annual reports hold the regulators to account. These documents are all too often sanitised and are simply full of self-congratulatory statements. They rarely draw attention or refer to the dark side of their practices. They rarely tackle issues about capture and have not prevented the FCA, the PRA and their predecessors being subservient to the interests of the finance industry.
So far in your Lordships’ House, various proposals have been advanced for external scrutiny of the FCA, such as through parliamentary committees, special reviews, standing committees and a variety of other mechanisms. These can help, but regulators also need
to be invigilated from within. After all, the Nelsonian practices are incubated by organisational culture, and it is that culture that needs to be disrupted.
About two years ago, I led a research team which conducted a study of the UK’s regulatory architecture. I had meetings with many regulators, including financial regulators. They were asked to explain what their main purpose was. Without fail, they all claimed to be serving the public interest but, when probed about how they constructed and enacted a particular meaning of the public interest, they had considerable difficulties. They were unable to provide evidence to show that the public was privileged in their organisational architecture. I also remember the words of a former non-executive director of a regulatory body, who said, “The organisational culture makes it very difficult to raise questions about the conduct of senior colleagues. After all, one has to face them again and again.” Again, that ensures that the regulatory bodies are not that effective in checking their capture.
My amendment calls for a two-tier board structure for the FCA and the PRA. One tier, the executive board, is already in place and is responsible for the day-to-day operations of the regulatory bodies. The supervisory board will not interfere with that. The supervisory board will consist of stakeholders, and the amendment provides some information about its composition, appointment and role. Members of the supervisory board can come from civil society organisations, NGOs or trade unions or can be individuals seeking to improve the effectiveness of regulation to ensure that it serves the interests of the people. These outsiders will offer alternative views on environmental development, and thereby check the groupthink and temptation for the executive board to be subservient to the industry.
The independent stakeholders will exercise strategic oversight of the FCA and the PRA. They can offer their own evaluation of the effectiveness of the FCA and PRA executive boards in meeting their statutory objectives. These evaluations can have a bearing on whether executives will retain their jobs or be reappointed. This will act as a disciplining mechanism and as a bulwark against capture by the industry.
The amendment that I have proposed recommends complete sunshine, with meetings of the supervisory board and background papers being available to press and the people. If a supervisory board existed, it could have asked some very important questions. For example, it could have asked—