“The amendment—and this is why the element of culture is so important—increases vastly the voltage of the ring-fence. If it has to be used, like much of these forms of regulation, it will have failed to some degree. But it says that, if the industry loses its way in ethics and culture, as it did in the early years of this century, there is catastrophe in regulatory terms.”
On 8th October 2013, the Archbishop of Canterbury, the Most Revd. and Rt Hon. Justin Welby, spoke on the first day of the Committee Stage of the Financial Services (Banking Reform) Bill. He spoke in support of Lord Turnbull’s amendment, based on the recommendation made by the Parliamentary Commission on Banking Standards, which sought to introduce a second reserve power to “implement full separation” of “the [banking] sector as a whole.” The Archbishop described the amendment as a rational extension to existing provisions. He stated that it would reinforce a change of culture and act as a permanent reminder to the banking industry of the danger of slipping back into previous norms of behaviour. The Government argued against the amendment, having previously rejected the Commission’s recommendation in its First Report. The amendment was subsequently withdrawn.
The Archbishop of Canterbury: My Lords, I apologise that I, too, was not here for Second Reading as I was at the funeral of a close friend. I speak as a member of the PCBS [Parliamentary Commission on Banking Standards], having had the privilege of a year of lessons from the other members, especially noble Lords here today, and the great pleasure of being rung up by the noble Lord, Lawson, quite frequently at weekends, to explain how I should think about a particular subject, which he has done with great eloquence as well today.
I agree entirely with the speeches made by the noble Lord, Lord Turnbull, twice, and both speeches by the noble Lord, Lord Lawson, which have put the position very clearly. It must be a very long time—and my experience of this House is very limited—since a solution to a major problem was put forward with such a noticeable lack of enthusiasm. Almost everyone who has spoken about the ring-fence has damned it with faint praise, to put it at its most polite. The noble Baroness, Lady Cohen, simply eliminated it quite quickly and very clearly. We are in danger of getting lost in looking at the regulation and forgetting what the regulation is trying to do. This is about a question of a culture and ethics, not detailed rules. We all remember Bob Diamond, the chief executive of Barclays, saying that culture is what happens when no one is looking.
We know what happened when no one was looking in the culture of some parts of the banking industry—they fixed LIBOR, overgeared and gamed any system of regulation going. All of that was dealt with under regulatory processes that did not work. They still fixed LIBOR, gamed the system and did all kinds of other things. The force of culture in those institutions made it hard to challenge and it is very noticeable that over 10 years when this was going on at its worst the number of people who blew whistles on this was almost zero. The culture made it very hard to discern that what you were doing was not right.
The noble Lord, Lord Lawson, referred to the dreadful effect of the meltdown we experienced in 2008—as was said earlier, five years almost to the day. The terrible cost of that catastrophe must not happen again. That is what we are trying to do. It has affected the City of London for a while but the far-flung areas of deprivation and poverty in our country suffered grievous blows of further damage from which they are still in the process not even of looking for recovery. The damage when the culture goes wrong is not localised. It is not just about the City; it is about people far away who know very little about what is going on there but find that they cannot raise money, that they cannot do their business and that their banking disappears locally. The vast structures of reform that have been and are being passed through Parliament, including this Bill, and that are passing through the regulators and the industry, show that there is a great failure of trust—and trust will be re-established not by regulation but by culture.
We have already heard the problems expressed very clearly about the ring-fence. The noble Baroness expressed herself very pointedly and precisely. But one thing that we found in discussing this issue in the Parliamentary Commission on Banking Standards is that separation is almost as hard to work out as a ring-fence, because you have to decide which bits get separated into which bits. The next thing that happens is that the brilliant merchant bankers, as it was put a few minutes ago, get between the wall and the wallpaper—that, I think, was the memorable phrase—and start putting other bits into the wrong bit. They game the system just as much with separation as with a ring-fence, so I do not think that that is a simple solution.
We have had the prodigal son and elements of faith from the noble Lord, Lord McFall, but we have the Trappist solution here. You live in the same community, but you do not talk; that is how the ring-fence is meant to work. The amendment—and this is why the element of culture is so important—increases vastly the voltage of the ring-fence. If it has to be used, like much of these forms of regulation, it will have failed to some degree. But it says that, if the industry loses its way in ethics and culture, as it did in the early years of this century, there is catastrophe in regulatory terms. Banks will be split up; people will come in and take them apart. The Government have argued that such a drastic step should require further primary legislation, but that argument seems to carry very little weight. The amendment is merely a rational extension to existing provisions and ensures that the banking industry realises that poor culture leads to fatal shocks, not to a little buzz in the fingers, or to lengthy debates in future on primary legislation. It will concentrate minds.
There is no doubt that we are seeing good things happen in the culture of a number of banking institutions. The new leadership in a number of banks is changing the culture very effectively. A professional standards body is being set up. I believe that this is not merely temporary self-interest but, in many cases, a deep sense that there needs to be a change of culture and values. But that is what is happening in this generation, now; it must be reinforced with firm boundaries to the ring fence, with very serious consequences if you walk into it to see what will happen. The amendment will reinforce that change of culture and act as a permanent reminder to the banking industry of the danger of slipping back into the bad old ways. Not to have that reality signalling the boundaries of acceptable ethics and culture is to encourage behaviour that looks first to what is legal, as has happened for a number of years, and never to ask the question, “What is right?”. To have banks ask what is right rather than what is merely legal would be good not only for the bank but for the whole society that it exists to serve, as the noble Lord, Lord Lawson, said.
Lord Deighton: My Lords, we have already discussed many of these issues as it has been extremely difficult to avoid talking about full separation when discussing the other amendments. However, I pause to review the most reverend Primate’s reminder that the most important thing in these institutions is culture and that we can make as many rules as we like but if we do not force a cultural change bankers will find their way around the rules. Separating banks is absolutely not a recipe for ensuring a better culture. If you look, for example, at the experience at HBOS, which was a pure retail player, there was clearly a massive cultural problem there. Culture is quite independent of some of the structural issues that we are talking about…