Q11 Jesse Norman: Of course, it was not just the Lloyds directors; it was also the political context in which they were being bounced into a merger with HBOS that fulfilled a certain desire for them—so there is a degree of political responsibility for that as well. Isn’t the FSA under a duty to impose fines as required, and not—as it were—under a duty to impose fines as it sees fit? Why have you abrogated that duty, if there is one?
Lord Turner: No, I think we are able to decide what the appropriate approach is in a circumstance to achieve the effect that is required, and what we wanted to do was give very clear publicity to the failures that had occurred in the appropriate controls at HBOS. I think that has been very clearly achieved by the issuance of this report. There are some circumstances where a censure is as effective as a fine, and a fine would simply be, as I say, something that at one level would have put us in a favourable light in terms of our economics. I think that to have gone ahead with a fine would have been doing something that made us look good but disadvantaged the taxpayer. That is honestly the point of view that I had.
Q12 Jesse Norman: You do not think it is a political decision as much as an economic one?
Lord Turner: It is a decision as to what is appropriate. I am honestly slightly surprised by this discussion because I think you are asking for an economic hit to be imposed upon your constituents, which I find slightly odd.
Jesse Norman: No. With respect, we are just asking first to understand what the basis in fact of your thinking was, not drawing any conclusions about that.
Lord Turner: I will tell you exactly what the basis of the thinking was. At the time when we decided to bring a case against the firm—as well as some other enforcement proceedings that are still ongoing and that I cannot talk about—we did debate, “What is the point of bringing it against a firm, HBOS, which no longer exists and was rescued by the taxpayer?” We said, “No, it is very important if we think the firm did a set of things wrong and if, in the normal course of events, we would have charged the firm that we do so, and therefore we are going to go ahead and bring a proceeding against the firm, but it will look odd to some people and seem unreasonable if we then, as it were, hit the taxpayer twice. Therefore there is a reasonable balance here, which is to bring a proceeding against the firm, but if it ends up finding that there were problems, to use the sanction of a censure rather than a fine”. That literally was the thinking that we went through.
Q13 Jesse Norman: Thank you, Lord Turner. I have described crony capitalism as a state of affairs where the public interest is separated from the activity of corporates and banks, and business merit is separated from business reward within institutions. Do you think that that is the culture we have in the City at the moment, from your remarks today?
Lord Turner: I just want the precise words you used again, sorry.
Jesse Norman: The first part is that any connection between business activity or financial activity and the wider public purpose is lost, which mirrors comments you have made about socially unproductive activities in the past. The second is that business merit is separated from business reward.
Lord Turner: I think there were problems with that. Those problems were severe before the crisis. Some of them have gone away, and it is important to say that there are many people working in banks and the insurance industry who do a good job and deliver good products and services to the end consumer. But I think there is a particular problem about financial services, because the difficulty that the consumer has in understanding whether this is the product that they want, which is a difficulty that does not exist when they are buying a car or going to a retailer, means that there is a far greater opportunity for precisely the two problems that you have suggested, and therefore, in those circumstances, the desire simply to maximise profit has to be balanced by a sense of responsibility.
Q14 Jesse Norman: I have two quick questions on that. Given the time, I would be grateful if you could answer briefly. Do you think some banks or financial institutions are making products needlessly complex in order to create more revenue?
Lord Turner: Yes, I think they are, sometimes.
Q15 Jesse Norman: Thank you for the boldness of that reply: I agree with you. Do you think that there should be a duty on the boards of financial institutions to review products to ensure that they are not detrimental to consumers?
Lord Turner: What I said in the interview today is that I certainly think that boards should—at least in a moral sense, or whether we turn this into a rule sense—ask searching questions about, particularly where there are big product lines, whether those are in the good interest of consumers.
Let me give you an example. We all know that there has been a very major problem with the effective mis-selling of payment protection insurance. This was a product which produced very high product margins. There must have been situations in the boardrooms of some of our retail banks about three or four years ago where it was obvious, because it was so big, that the retail division was delivering very large profits on that particular line. Very high profits can sometimes mean that you have created something that is really great and valuable but can also be a giveaway that something has gone wrong.
I fear that, if we went through the board room minutes or the management committee minutes of those companies at that time, you will find the retail division being congratulated on those large profit flows, rather than somebody asking the question, “Hang on, we are making such high margins on this product. Can it possibly be to the benefit of the customer? Can we do a “drains up” on that?” This might be difficult to write into rules, although we clearly have to debate that, but—as I am sure you appreciate and would agree—good business conduct is partially driven by rules, but it is also driven by norms of behaviour and values. I think it is important for the industry to have a sense of values that push them to go beyond what the letter of the law says.