The leading Tory and ex-FSA man talks about shining a light on the City, tax and the corridors of Whitehall
Yes yes, Stephen Barclay once worked for Barclays. But there is much more to the North East Cambridgeshire MP.
He’s spent his gap year in the army (Sandhurst-trained and then off with the Royal Fusiliers), qualified as a solicitor and then worked for the Financial Services Authority.
He didn’t go off to the FSA on work experience either; he was positively drowning in the nitty-gritty. When catching up with Barclay, he reels off his credentials with ease. Dealing with MFID (marketing and financial instruments directive for those not in the know), and papers like ‘discussion paper 19 on stakeholder products’, he fortunately is someone who can talk about it all without sounding like a dry political wonk.
Amid all the debate about financial services and regulation, he’s well placed to cut through it all and offer some real insight.
The ways to clean up the City can be broadly split into two: add more regulation in order to ban wrongdoing or strive for “better” regulation. Where does Barclay stand?
“There’s a mistake on both sides”, he responds. For him, it’s all about enforcement and making sure the rules are enforced on an individual basis. “It’s a cultural issue, it’s not about having extra rules”, he says.
How does he judge that? Easy. The FSA handbook was already 6,000 pages. “They don’t realise that the 11 principles are catch-all and actually have legal force as rules. I’d have liked the FSA to have been ore aggressive in enforcing them”.
“Until you have effective deterrents against individuals, you’ll not change the culture in firms. You won’t change the culture in firms until people seriously fear consequences at an individual level
“Why were the rules not effectively enforced? I asked exactly that question of the FSA and they said it was a lack of legal certainty”.
Barclay waxes lyrical about the US system of financial regulation for its heavier fines, more aggressive regulation and a “more evident willingness to use criminal sanctions”. So this would be a model to take note of?
It seems so, as Barclay criticises the current system of financial regulation for levying too small a rate of fines. As Barclay puts it, “the FSA’s focus for fining firms isn’t effective particularly since the quantum of the fines isn’t big enough”.
The regulation is itself to blame for the misdeeds of the City, in Barclay’s argument. “If you have a city full of risk-takers, predominantly youngish aggressive men, and you say to them your bonus for the preceding year is likely to be bigger than any fine… it’s not surprising that they take risks!”
One thing is already clear with Barclay; he is very cautious and understated with the way he speaks. No rabble-rousing headline-grabbing stuff here.
Nevertheless, Barclay is refreshingly lucid and insightful. He’s actually able to take apart the system of financial regulation without spouting political talking points and the latest party lines.
He zeroes in on an institutional problem, that of blindness at the very top of boards.
“What’ll happen in firms is if something goes wrong, they’ll sack the middle tier and then they’ll go to the fsa and settle early to get a 30% discount, the board level will say we didn’t know…
“You have a system that encourages the chief executive to be blind and have little come back to them. They’ve got to have skin in the game. If you go back 30 years, they had real skin in the game and serious reputational risk. We have a system at the moment where people can get significant benefits with limited downside risks.”
One of the criticisms of the FSA has been that its hotshot regulators can often get poached by banks and so the gamekeeper becomes a poacher. Given Barclay’s career move from the FSA to Barclays, he seems uniquely placed to comment. On putting this question to him, he can’t resist a laugh.
“It’s certainly the case that talent within the FSA is attractive to firms. Does that happen? Yes, clearly, to some extent that is always going to happen. It’ll be difficult to fully mitigate against that.”
Barclay isn’t too worried, telling me that banks would “want people who know where the bodies are buried”.
“The FSA needs to be able to attract people who have done the job within firms, who have credibility within the firms,” he adds.
With his experience as head of anti money-laundering at Barclays, it seemed all too fitting to ask Barclay about a recent case of money laundering in the press – that of HSBC being implicated in a multi-billion money-laundering affair after investigation by the US. Foreign office minister Stephen Green has the awkward link of being a former executive chairman of the bank. So would Barclay say that Green has questons to answer?
On this point, Barclay shifts from scrupulous investigator to something more moderate.
“The senior management of a firm that has breached rules in a serious way have to explain their involvement they had in that, the assurances they received, what risk management they put in place.”
So he is saying that Stephen Green needs to explain himself? Barclay gets oddly coy.
“I think that applies to anyone in a serious management of a firm that breaches the rules”
Without prompting, Barclay suddenly attacks the question, adding: “does that then lead to a quote that ‘Tory MP says Stephen Green has questions to answer, no it doesn’t!” After that he repeats his previous “explain himself” answer an extra time for good measure.
“Stephen Green would have have to explain what his role was, clarify what his position was, his understanding of why he feels this has happened and his lessons to be learnt from it.”
Despite Barclay’s coyness about Stephen Green, he has blazed a trail in Parliament as a tireless investigator of public and private sector inefficiency. It’s all in his work on the Public Accounts Committee, whose most recent scalps of note include business execs at the top of Amazon, Starbucks and Google.
PAC chair Margaret Hodge has led the charge against the “immoral” tax avoidance, would Barclay share the same concern?
One thing’s for sure, he’s not nearly so strident against the morality of their tax arrangements, insisting: “We need to look at it in a more nuanced way”.
There has been “confusion between tax planning, avoidance, evasion and morality”, he says, comparing it to “the way people talk about immigration as a catch-all issue”.
Barclay talks understandably of Starbucks’ arrangement in buying coffee through Switzerland, before drawing the line in the sand on, in fluent HMRC speak, “the question whether companies are pushing tax planning to the point of artificial arrangements or illegality”.
Barclay muses that company boards will in the future need to wise up to tax arrangements. “Boards will need to consider more how their tax position is viewed as part of those sorts of corporate responsibility and in planned discussions,” he says.
He’s naturally aware that they’d feel a “legal requirement to maximise profit”, but is steadfast on tax propriety for companies – especially naughty tykes like Starbucks.
“Is it credible to say that a company trading for 14/15 years, would want to expand by a third?
“That doesn’t look like it’s in line with what the rules are. It looks like the UK operation is not trading as an independent would, which looks artificial.”
The dangers in international companies being able to arrange their tax affairs conveniently are all too apparent for Barclay. He warns of “market distortion” as internationals benefit at the expense of the smaller firms who are “playing in the same market and being undercut by multinationals that, it seems, get preferential tax treatment”.
“With a very small number of companies paying the majority of corporation tax, that is market distortion,” he adds emphatically.
When others like LibDem peer Lord Oakeshott have compared the efforts of tax inspectors at catching out dodgy accounts as like a “fat policeman chasing after a speeding Ferrari”, Barclay places the blame on tax inspectors on an international level, saying “international law needs updating”.
That’s not to say Barclay is saving HMRC from a good roasting, as he recalls with bemusement a grilling he gave to former HMRC boss Dave Hartnett.
“I was quite surprised when we had our earlier hearing with Dave Hartnett to hear that he was the only qualified tax person among the tax commissioners!”
He scoffs at the “transparency problem” in the HMRC as tax inspectors were accused of doing “sweetheart deals” with firms like Goldman Sachs, with the implication of being “let off” a stonking tax bill to save the government expensive legal wrangling.
“I can understand for policy reasons why ministers would want to do deals but the difficulty is that’;s not what their role says, however the position presented to the committee by Mr Hartnett was we dont do deals , and all the evidence suggests they do do deals!”
You’d imagine that Barclay and his colleagues get tired on the Public Accounts Committee get tired of having to question bungling official after official, whether from the private or public sector.
He ruefully complains at “how poor the basic management of information appears to be in government, when it is awash with information”.
Barclay balances himself as he insists that he’s “keen we do things with people in Whitehall who are keen to change, there is a very real danger for the committee to be in a position of them and us”.
A danger of them and us? Barclay won’t let on. “The important thing for the PAC is to be allies of Whitehall rather than coming in with the benefit of hindsight”.
Many civil servants will no doubt be quaking in their boots and hoping for mercy next time they get hauled up before Barclay and co. in the PAC’s next grilling.
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