John McFall on the state of the Banking Reform Bill as it reaches Lords Third Reading
Today is the culmination of 18 months of grinding work by the Parliamentary Banking Standards Commission to remedy what has been described as “a profound loss of trust borne of profound lapses in banking standards”. With the publication of five separate reports from 200 hours of evidence sessions, involving 10,000 questions and a huge amount of twisting of the Chancellor’s arm to accept our proposals we are not yet ready to proclaim that everything has been solved in the banking world. If however, our proposals are fully accepted it will be a big step forward in ensuring a better industry.
We were established specifically to look at culture and standards in banking. We found a culture which was rotten and standards which were abysmally and unacceptable low. Along with my parliamentary colleagues Pat McFadden and Andy Love, Labour was determined to play a committed and constructive part in ensuring a unanimous report in order to send a message to the financial services community that profound change was required from them. Throughout our deliberations, scandal upon scandal surfaced, be it Libor, Payment Protection Insurance (PPI) or interest rate fixing.
The result is that the Banking Reform Bill will become law against a background where cumulative global fines for UK, US and European banks since 2008 total £130bn – an incredibly incomprehensible, mind blowing amount of money. It indicates that legislation alone will not solve the problem – a new culture and ethics from the industry is required. Law and regulation cannot cause people to be good. As the Archbishop of Canterbury (who served so skilfully and enthusiastically on the Commission) stated in the Lords last week, making people good by law has been – to put it mildly – tricky since the day of Moses.
But firm legislative signposts are required if profound change is to be realised. That is why Labour had our own recommendations for higher professional standards and a duty of care to be exercised by banks towards customers. Regarding professional standards, it is important that the industry professionalise the sector in a way similar to the medical and legal professions. This has been pushed insufficiently by government and this is why Labour in the Lords tested the will of the House and won the vote on higher standards. Unlike other industries, the first question banks ask themselves is not ‘What products can we produce that are in the interests of the customers?’ but ‘What will be our Return on Equity?’. So, instead of being first in the queue for consideration the customer is relegated to the last.
Witness the scandal of PPI where despite constant warnings from consumer groups, parliamentarians and the regulator, the banks went on selling these products for 18 years. With profit returns of over 80%, it was a goldmine for them. Time and time again, senior executives at the very top of the banks turned a blind eye to the malpractices of their organisations in this regard.
The respected FT journalist and economist John Kay pointed out to me that if a duty of care was adopted it would be transformative for the industry, elevating the customers’ interests above all others. Ominously, he added that we would have the mother of all battles getting it through with the industry straining every sinew to resist it. Although it was narrowly defeated in the Lords by five votes, it is vital that it is still viewed as work in progress in order that both the industry and government don’t slack in their efforts to ensure fair treatment for the consumer in financial services.
Not so very tongue in cheek, the late JK Galbraith wrote many years ago that the salary of chief executives of large corporations was not a merit award for achievement but in the nature of a warm personal gesture by the person to themselves. By our actions on the Commission and in Parliament let us ensure that in future such awards are made not solely in the personal interests of executives but primarily for society. That way we can restore an industry where trust has been lost to one where their contribution is to the economic interests and common good of society.
Lord John McFall of Alcluith is a backbench Labour Peer and was a member of the Parliamentary Commission on Banking Standards
Published 9th December 2013
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