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18:18 - Division on Amendment 35AB - Ayes: 197 / Noes: 251 - Amendment 35AB disagreed.
Lord Sassoon
Lord Eatwell
Lord Eatwell
My Lords, the amendment stands in my name and that of my noble friend Lady Hayter of Kentish Town. Members of the Committee will be aware that there has been considerable debate about the relationship between directions of the Financial Policy Committee and the attainment of a satisfactory rate of growth and employment in the economy. The issue at stake has been whether financial stability is achieved at the expense of growth and employment or whether financial stability can enhance the growth performance of the economy.
The amendments in this group—those in my name and that of my noble friend Lady Hayter, as well as those in the name of the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, and the right reverend Prelate the Bishop of Durham and those in the name of the noble Lord, Lord Sassoon—all seek to include growth and employment within the broad remit of the Financial Policy Committee. My amendment would balance a similar requirement on the Monetary Policy Committee to have regard to the general economic policies of the Government and argues that the Financial Policy Committee should have regard to the Government’s growth, employment and other economic objectives.
I suggest that “having regard to” is the appropriate admonition to the Financial Policy Committee at this stage and that the amendments in the names of the noble Baroness, Lady Kramer, and others and of the noble Lord, Lord Sassoon, are defective. They are defective because they are too insistent. The noble Baroness’s amendment, Amendment 35, states,
“in relation to financial policy in a manner designed to contribute to the achievement by the Bank of the Financial Stability Objective; and this shall include promoting … a stable and sustainable supply of finance to the economy, and … subject to that, the economic policy of Her Majesty’s Government, including its objectives for economic growth and employment”.
That of the noble Lord, Lord Sassoon, refers to the Financial Policy Committee “supporting” the economic policy of Her Majesty's Government.
In 2006, the economic policy of Her Majesty's Government resulted in an unsustainable boom. “Supporting” or “promoting” that policy would have been exactly the wrong thing to do. The role of the Financial Policy Committee is to lean against the wind in terms of what is happening in financial markets. When markets are overheated and expanding too fast and when the economy is growing too fast, it is the role of the Financial Policy Committee to use the levers at its disposal to change the supply of credit in the economy and consequently to slow growth down. That is why the careful wording, “having regard to”, embodied in my amendment is superior to “promoting” growth and employment, in the amendment of the noble Baroness, Lady Kramer, and to “supporting” growth and employment, in the amendment of the noble Lord, Lord Sassoon.
I have great respect for the position that the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, and the right reverend Prelate the Bishop of Durham are taking, because their intentions are entirely sound. Especially at a time of recession in Britain we all want to support growth and employment but we have to be careful in assessing the role of the Financial Policy Committee. In the amendments tabled by the noble Lord, Lord Sassoon, which were announced by the Chancellor in the Mansion House speech a few days ago, the emphasis on supporting is again excessive.
I suggest that the noble Baroness, Lady Kramer, and friends and the noble Lord, Lord Sassoon, look to a more careful wording than they have here. I think they have gone over the top in these recessionary times, but good times will return one day and in circumstances where growth is high, perhaps excessive, it will be the role of the Financial Policy Committee not to support the growth and employment policy of the Government of the day. I beg to move.
Baroness Kramer
My Lords, I appreciate the introduction to the topic from the noble Lord, Lord Eatwell, and I hesitate to speak on behalf of all of my noble friends but I think we have become aware in this country and across the globe that shifting the balance of policy in favour of economic growth is a desirable target. Therefore, to use language, as he has, which downgrades that role in the way that it is approached by the Financial Policy Committee frankly strikes me as unfortunate. We are talking to some degree about semantics but we have learnt the hard lesson that promoting is more important than simply paying regard. He could argue that when his own party was in government it chose the wrong policy path and was pushing on a boom. But had it really examined that boom, it would have recognised that underneath it the fundamental necessary structures for economic growth were not being achieved.
We have all heard in a variety of other debates that manufacturing was declining steadily, certainly as a percentage of this country’s GDP and in comparison to competitive economies such as Germany. We know that there was an incredible overreliance on a banking sector that was reporting forced profits because we were hearing an inflated set of reports from the banks that were not based on a genuine economic boom. We know that underlying that whole period, youth unemployment was steadily growing even though it was masked by overall employment figures. We know that that particular boom was being fuelled by consumer debt that led to both intensive borrowing by individuals and therefore a lot of purchasing, which in a sense was a false contribution to the underlying economic growth, and also inflated house prices creating a house-price bubble. Requiring the new FPC to dig beneath what is actually happening in the economy, to recognise what is happening with the fundamentals of economic growth and then to give that a great deal of importance in the way that it shapes its policy is essential.
I am glad in many ways that the whole issue of economic growth does not have much in the way of party characteristics. I hesitate to quote from the BBA at this point but, like a curate’s egg, everybody has good stuff in parts and this is one of the good parts. It talks about the Chancellor’s commitment to an economic growth objective to stand beside the financial stability objective and says:
“This is to be welcomed as we have said on many occasions that there is a risk that insufficient weight will be placed upon the achievement of economic growth and jobs which must be the overarching objective. This we believe feeds through to ensuring that the FPC be set the symmetrical task of using its tools and powers not only to subdue demand at the top of the economic cycle”,
which is the issue of sustainable growth,
“but also to ensure that reserves are used in support of lending capacity at the bottom”.
That strikes me as very important. Mr Sants, before he stepped down from his role at the FSA, said:
“Changing the FPC’s remit is really important. The interaction between regulation and economic growth should be debated at the FPC”.
It seems to me that the language we have used frames that debate.
I wanted to take this opportunity to comment on part of the amendment in my name and those of the noble Lord, Lord Sharkey, and the right reverend prelate the Bishop of Durham, because it contains within it one further element that the noble Lord, Lord Eatwell, at this particular point in time, has not addressed. That is the language that includes within the objective the promotion of,
“a stable and sustainable supply of finance to the economy”.
We see that as important enough to be worth integrating and highlighting. We should not simply assume that it will be part of an economic growth objective without a specific mention.
The reason we have done that is probably evident to many in your Lordships’ House. We have all shared frustrations over Project Merlin, quantitative easing and credit easing, and I fear we may have the same problem as we look at the consequences of the Government’s new “funding for lending” scheme. The Government, or the Bank, effectively push money into the system, which gets as far as the banks but does not emerge the other end. The second quarter report from the Federation of Small Businesses shows that demand for credit among its members was stable but that more small firms than ever were being rejected, with the rejection rate now reaching 41%.
The Bank of England’s credit conditions survey, for that same second quarter, shows that for small businesses, interest rate spreads actually widened, despite the Government’s loan guarantee scheme, which is meant to bring down interest rates for small businesses, and despite a sharp drop in default levels among them. Small businesses are demonstrating that they are less risky than they might have seemed historically, but are being rejected at a greater rate and also found that they were facing wider spreads on interest rates. We have to acknowledge at present that high street banks are the only distribution network of any size to get credit to those who need it on a small scale, but looking at the overall situation, we can easily recognise that the high street banks have many easier ways to generate a higher level of return than lending to small business.
There is a reason why, in our language, we have used the word funding and not just credit. The supply of finance is not just a debt issue but one of equity capital. Capital willing to take risks is hard to find. Angels are fewer than ever and venture capitalists are finding funds harder to raise. Indeed, long-term money of any kind is difficult to find at the moment, as I suspect the Government are finding as they try to look at ways to develop infrastructure projects. Some disintermediation of the banks is, if anything, aggravating the problem.
The UK differs from many other countries because it has very low retail investment in bonds and equities. Retail money is less volatile and tends to stick through the good times and the bad times. Germany is a good example, although there are many others, of a country where businesses, particularly small businesses, have been far less impacted because that retail sector, investing in both bonds and equities, is available to them.
There is another area where it is crucial that we have the attention of the FPC because the regulator can make a difference. We have a system now where the small end of the spectrum is very ill served—the small stockbroker, who often followed the small company, has largely gone. Most of the funding we have is simply fairweather funding. To change this, we have to develop a reliable funding supply. I understand that that is not for the regulator alone, but the regulator has a huge role to play if we are ever going to close those kinds of yawning gaps. This amendment puts it in a position to act. Some will say that there is already a competition objective in this Bill. There is a competition objective for the FCA, but it is very much designed to encourage a multiplicity of products—not to bring in new players or expand the scope of existing players, but to cover access to funding right across the business spectrum. Those are two very different things and we believe that we must capture that second aspect in the language that we use.
The FPC has to be engaged and to be part of making sure that there is capacity for funding the system across the whole spectrum, whether it be small, medium or large businesses. I would argue it also covers disadvantaged individuals and social enterprises, charities and other bodies which play a crucial role in our society today and will play bigger roles in the future. I suspect that other people will have much more to say about that, perhaps around this amendment and others. It is to push those underlying principles that we have put down Amendment 35.
Baroness Valentine
I am grateful to the Government for tabling Amendment 35A. This is a very important and conceptually challenging issue. I hope noble Lords will excuse me if I talk around the subject a little because, while it is certainly a step in the right direction, it is not at the moment clear to me whether, in legal terms, this amendment sets the right framework.
We should, perhaps, first consider that whatever framework we adopt must be flexible enough to operate effectively in three primary sets of economic conditions: first, the healthy state when one would expect the Financial Policy Committee to be scanning the horizon for future shocks at the same time as being conscious of any impact its actions might have on economic growth; secondly, crisis, where stability must be paramount; and, thirdly, the current state where uncertainty, principally from the eurozone, must be expected to continue for some time. This is, of course, a situation over which we have little control.
In the first and third of these scenarios, the issue at stake is the interplay between economic health and financial stability and the difficulty of balancing the two. There is a well-known saying:
“A ship in port is safe, but that’s not what ships are built for”.
In this instance we can see absolute financial stability as a safe port but it would be ironic, given our island’s history as a trading nation, if the port were so secure that our businesses could not put to sea.
At a simple level, this is seen in the tension between capital ratios set by regulators and the demand that the banks increase lending, variously voiced by parts of the Government, some parts of the business lobby and the media. It is sometimes forgotten that the collective interests of the banks are, in fact, aligned with those of the Government in seeking economic health and financial stability, but both sides of the lending equation have curbed their appetite for risk. Just as banks are mindful of their own exposures, small businesses, because of economic conditions, will be both less robust to lend to and less keen to take on debt.
On this point, it is essential to have a common understanding between the Bank of England, BIS and the Treasury, and for the banks and the real economy to have the same understanding of where we sit on the risk spectrum. We also need the Government to be clear whether, and to what extent, they can or want to influence lending in the marketplace through initiatives such as the Business Growth Fund, the green investment bank or, indeed, their shareholdings in certain banks.
The amendment, as proposed, makes it clear that financial stability retains primacy. Some have argued that there is a logic to this because it mirrors the hierarchy of the Monitory Policy Committee’s objectives. The flaw in this argument is that the primary objective of the MPC is clear and measurable. Inflation is X%. Conversely, I know of no indicator as simple as inflation that would provide a proxy for financial stability. The primary objective of the FPC therefore requires judgment. We cannot state that financial stability is 23 whereas last month it was 27. So the point at which the secondary objective comes into play can remain for ever opaque.
I think this argues for one of two approaches: either tightening up the FPC objective to one which is measurable or leaving it as it is but then recognising that the interplay between the primary and secondary objective is necessarily different and therefore that the current drafting may not in fact be fit for purpose.
The challenge for the FPC is that it is unlikely that any Government will be prepared to state explicitly where the axis between stability and growth should sit. As we saw under the previous regulatory culture, the Government’s desire for risk-based regulation, under which banks could and would be allowed to fail, lasted only as long as it took for a bank actually to find itself on the brink of failure. Under the new regime, I suspect that Governments of all political persuasions will wish to champion both goals, leaving it to the FPC to judge how to offset the two. I believe, therefore, that we need a clear mechanism under which the FPC can demonstrate how it has achieved its primary objective while complying with the requirements placed on it by its second one and not hindering the Government’s economic strategy.
Lord Sharkey
I shall speak briefly in support of Amendment 35, in particular the inclusion of the requirement to promote the Government’s objectives for growth and employment. I emphasise the importance of promoting a healthy and flourishing SME sector in achieving those objectives. The report of the noble Lord, Lord Young, last month, Make Business Your Business, noted that 50% of private turnover, excluding financial services, and 60% of private jobs are provided by SMEs, but SMEs still face great difficulty in finding funding.
The Breedon report of March this year estimates that by 2016, there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs for working capital and growth. The Government need to take direct action further to improve the supply of finance to the SME sector, in particular in our deprived communities. SMEs in those communities attract only 4% of all investment in SMEs and are in areas where unemployment, especially youth unemployment, is likely to be high.
There is another urgent reason for providing finance to the SME sector. That is to do directly with job creation. The Kauffmann Foundation, a highly respected United States think tank, published a study in July 2010 entitled, The Importance of Startups in Job Creation and Job Destruction. I will have more to say about the findings of the report later in the debate, but its most striking findings were that in the 28 years it surveyed, all net new jobs came from start-ups and that during recessionary years, job creation in start-ups remained stable while net job losses in existing firms were highly sensitive to the business cycle.
That surely has lessons for the UK. If the Government are to succeed in creating the right number of new jobs, they must strongly and actively promote not just SMEs but the start-up subsector of SMEs. To have the appropriate effect, they must do that particularly in our deprived communities. Without such strong and directed promotion, the growth and employment objective is in danger of remaining just that—an objective.
Lord Blackwell
My Lords, I apologise to the House that I was unable to contribute to the Second Reading debate. The fact that all these amendments recognise the interlinking of financial stability policy and the wider economic objectives is a major step forward. However, the amendment proposed by the noble Lord, Lord Eatwell, is mistaken in its wording. It is a fallacy to believe that monetary policy and financial policy can be conducted orthogonally, independently of general economic and fiscal policy. The two inevitably interact, and it is fallacious to believe that we can have a government Chancellor of the Exchequer in one corner deciding on a fiscal policy and an independent bank deciding on monetary policy in complete isolation—and, if necessary, disagreeing and conducting an alternative economic policy.
We are in this situation only because the previous Government separated monetary policy from the independence of the Bank of England in 1997. Until that point, the assumption was that the Chancellor of the Exchequer and the Government were accountable to Parliament and to the electorate for economic policy in the round. The Governor of the Bank of England certainly had a crucial role in advising the Prime Minister and the Chancellor of the Exchequer on monetary policy.
At the end of the day, however, a common policy was agreed that ensured that monetary policy and fiscal policy were aligned to the same objectives. They might be the right objectives, they might be the wrong objectives, but at the end of day the Government and the Chancellor of the Exchequer were accountable to Parliament and to the electorate for those decisions. The idea, as the noble Lord said, that at times you want a Bank of England or a financial policy committee to pursue a policy that is at odds with government policy is mistaken and misrepresents the way in which these functions ought to work together.
I therefore much prefer the wording of my noble friend’s amendment, Amendment 35A. Although I agree with much of what the noble Baroness, Lady Kramer, has said, my noble friend’s amendment has the great advantage of simplicity, and I support him in that.
Lord Peston
My Lords, I criticise both Amendments 35A and 35 on the grounds that they are both illogical and make no economic sense, to put it as bluntly as I can. I am amazed, however, at the intervention by the noble Lord, Lord Blackwell, just now, because he comes to the wrong conclusion. How can he support Amendment 35A on the basis of his analysis of interlinking?
Let me start with Amendment 35A. If you asked anyone why you would want to achieve what is in paragraph (a), the answer would be, “Because it makes the economy work better”. It is not wanted for its own sake, as far as I can see, because it involves a total confusion of means and ends. Therefore, sensible economics would delete the words—a favourite activity of my noble friend Lord Barnett and me—“subject to that”. All that is required is the word “and”—forget the “subject to that”.
The same applies to the amendment in the name of the noble Baroness, Lady Kramer, et al. What she wants to achieve is desirable; no-one would doubt that. However, if we ask, “Why do you want to have a stable and sustainable supply of finance to the economy?”, the answer is, “Because it makes the economy work better”. We cannot assume that the Government’s economic aim is to make the economy work worse; quite the contrary. My view is therefore that I would be reasonably happy with either of the amendments if “subject to that” was taken out, but in no other circumstances.
If I can, I will go back to the Monetary Policy Committee, which the noble Lord, Lord Barnett, and I have criticised for years now because of the “subject to that” clause. It gets around this dilemma by ignoring “subject to that”. I have said in this House before that in my judgment the MPC breaks the law under which it was set up, because there are now real inflationary dangers. You do not have to be a Friedmanite to say that expanding the quantity of money, which is what monetary easing is, is immensely dangerous when it comes to the future inflation rate of this economy.
Somehow or other, most members of the MPC—I am not certain that they all do—ignore that bit of the subject, go ahead with quantitative easing and forget their inflation objective, even though they are not achieving it. These two amendments might well be equally innocuous. Maybe in practice the whatever it is called—I am still having trouble with the acronyms but I think I am talking about the FPC—will become totally cynical and forget the subject of that bit at certain critical times. It would be better if the three little words “subject to that” were taken out; and then, to be perfectly honest, I do not care which amendment we agree to.
Viscount Trenchard
As other noble Lords have said, all three amendments are well intentioned. I also welcome the Government’s intention to introduce a new objective for economic growth and employment. However, it is a pity that we are not contemplating the introduction of a requirement to have regard to international competitiveness. If you have regard to the international competitiveness of the marketplace, that will certainly serve the Government’s declared objective to support economic growth and employment.
I do not understand why it is believed that the maintenance of international competitiveness is synonymous with the discredited system of light-touch regulation. We should not abandon at this stage any attempt to reintroduce into the Bill, in more places than at present, at least a requirement—if not an objective, which is what ideally I would like to see—always to have regard to the maintenance of the competitiveness of the marketplace, because that is what drives growth, creates employment and has made London what it is today.
I understand that the FSA’s report on the failure of RBS suggests that the FSA’s need to have regard to international competitiveness was one reason for regulatory failure, but I humbly submit that I doubt that. I believe that you can always have regard to competitiveness while at the same time protecting the consumer and ensuring the stability of the marketplace.
On the three amendments, I am afraid that I am unable to support Amendment 35 in the name of my noble friend Lady Kramer because it sounds very much like the command economy. It would give too much of a planning role to the Financial Policy Committee, and I suggest that it would be very difficult to give that committee on the one hand an objective to achieve a stable and sustainable supply of finance, and on the other a duty to remove or reduce systemic risks that include unsustainable levels of leveraged debt or credit growth. To give that body responsibility both to maintain sustainable credit and to prevent unsustainable credit at the same time would mean that it had to decide exactly how much was going to be lent to every business up and down the land. I submit that this command economy-type interventionist role would be inappropriate, and certainly would not lead to maintaining the competitiveness of the marketplace.
As for the other two amendments, I have great sympathy with the amendment of the noble Lord, Lord Eatwell, who treats the growth objective as being equal with the stability objective. Although I am happy to support my noble friend’s objective, which subordinates the growth objective to the stability objective, I ask the Minister to explain in what circumstances he thinks the growth objective would have to be ignored.
Baroness Noakes
My Lords, I support the formulation of the Minister’s amendment. While I understand what the noble Lord, Lord Eatwell, says about having regard to—not simply blindly following—the Government’s policies, which the Financial Policy Committee might think are irresponsible, my noble friend Lord Blackwell answered that point effectively. It would be intolerable to have a government-owned body in effect running a policy contrary to the Government’s own policies. However, he has a point but it is already dealt with by the ability of the FPC to make regular reports. Where it has to report on its view of financial stability, the FPC has ample opportunity, on a regular basis and without any interference by government, to say what is making financial stability difficult to achieve—if achieving that is indeed the Government’s economic policy. Therefore, we do not need to reformulate it as the noble Lord, Lord Eatwell, suggests.
I do not support the amendment tabled by the noble Baroness, Lady Kramer, because I am slightly appalled by the prospect of the FPC going out promoting government policy, let alone going out promoting various forms of finance being available to the City. That goes way beyond what the FPC was set up to do and is probably way beyond the competencies of the kind of people it has attracted.
Lord Davies of Stamford
My Lords, I will comment on the two previous contributions. I very much agree with the noble Baroness, Lady Noakes. It would be quite wrong to put the FPC in a position in which it was simply a mouthpiece for the government policy of the day. It is very important that it is independent. In response to the views of the noble Viscount, Lord Trenchard, on competitiveness—the suggestion that the FPC should pursue competitiveness as an objective in itself—my answer would be that competitiveness is an intermediate objective, not something that one pursues for its own sake. If one has an obligation to have regard to or to pursue—we will come back to the differences in a moment—growth and employment, anyone pursuing or having regard to those objectives is bound to take competitiveness into account because without it we will not get growth or employment. Growth and employment are ends in themselves, unlike competitiveness; that is the distinction.
We have a menu of choices before us this afternoon. All three amendments believe there should be a link between government economic policy, particularly on growth and employment, on the one side and financial stability on the other. No one has contended—nor could they easily do so—that those objectives should be pursued totally in isolation from each other. However, of the three choices before us, the amendment of the noble Baroness, Lady Kramer, and the right reverend Prelate the Bishop of Durham is the most coercive and creates an unqualified statutory obligation to pursue growth and employment. That is very dangerous because it is likely to result in a conflict of objectives. It is a great mistake to place in statute what could be regarded as contradictory objectives. The government amendment in the name of the noble Lord, Lord Sassoon, does not do that because the reference to government economic policy and growth is subsidiary to the obligation to pursue financial stability. The least coercive of the three amendments, and the one that I most incline towards, is that of my noble friend, Lord Eatwell.
It is particularly important that we should discuss this today, because the results of our discussions, deliberations and votes may have a very specific impact on the economy, about which we must all be very concerned. The situation today in relation to the pursuit of financial stability is particularly grim. There are at least a couple of areas where the Government appear, as of this afternoon, to be contradicting themselves very sharply and dangerously—namely, their policies on economic growth on one side and financial stability on the other. I will set out those two examples in the hope of carrying the Committee with me.
One is in relation to quantitative easing. The Government have promoted or encouraged the Bank of England to promote—in all events the 1946 Act makes it clear that the Bank cannot incur liabilities without the Treasury’s agreement, so the Government must be responsible—a policy of quantitative easing that runs into several hundred billion pounds, as we know. That policy was designed to encourage banks to increase their lending by automatically increasing their reserve assets as they received money from the Bank of England in exchange for bills and other instruments that it is purchasing under the quantitative easing programme. It has not worked at all and that has been very marked indeed. The Minister must have noticed the figures that show that the two quantitative easing exercises have not resulted in any increase in bank lending. The bank lending figures do not seem to correlate at all to quantitative easing. The Government need urgently to ask themselves why that is.
One of the extraordinarily perverse and, frankly, foolish aspects of the quantitative easing programme is that the Bank of England is paying the clearing banks or the commercial banks for the deposits that result from the programme. Its whole purpose was to encourage banks to lend and to encourage an increase in the money supply—in M3 or M4. That has not occurred because the banks have been keeping their deposits at the Bank of England. They are not using them under the fractional reserve banking system to leverage out and increase their lending to the rest of the economy, to the private sector. It is extraordinarily foolish to pay interest on deposits at the Bank of England because that reduces the opportunity cost to the banks of not lending—of not responding to the quantitative easing programme by increasing their lending.
When the Minister responds to the debate, can he first tell me the amount of interest—I am not sure whether it is 50 or 75 basis points—paid by the Bank of England on these reserve assets and deposits, which is a completely wrong thing to do? Secondly, why is the Bank acting so perversely? If it did not pay any interest on those deposits, there would be a much greater financial incentive on the banks, given that they would not be earning anything on that aspect of their assets, to lend more to the private sector, which they are noticeably not doing. Had the Bank decided, under the quantitative easing programme, not to buy in instruments from the banking system—the financial institutions—but to go out into the market and buy instruments, such as short-term gilts at the short end or Treasury bills and so on, from the non-financial private sector, it would have automatically increased the money supply. The Bank did not do that, and I do not know why the Government did not decide to do it that way. The way that the Government have done it seems to be somewhat contradictory and it certainly has not produced the desired result.
The Minister will not be surprised to hear my second point because I have made it two or three times already in this Chamber. It is contradictory to pursue a policy of encouraging bank lending to move the economy to greater growth, while at the same time forcing the banks to increase their capital ratios. In an ideal world, it would be a good idea for the banks to increase their capital ratios. It is something that we should have been doing in the good times when banks were running up their assets, perhaps to an excessive level in both quantity, which was too great in relation to their capital resources, and quality, which was subject to the law of diminishing returns as the assets were increased in the boom times. Those were the days when we should have been pursuing such a course. Of course I recognise that the Government of which I was privileged to be a member was in power at that stage, but the Tory party and members of the coalition cannot claim any virtue in this matter, given that, far from urging us at the time to bring in any such measures, they were always urging us to deregulate the banks further. Nevertheless, we are dangerously pressing on the accelerator and the brake at the same time.
The Minister normally replies to me by saying, “It doesn’t matter. These new capital ratios do not have to come into effect until 2018”. That is a somewhat naive approach. Anyone who has sat on the board of a bank, as I have, knows that if you know you have to achieve certain capital ratios in five years’ time, that is the trajectory that you have to pursue from now until the end of that period. In other words, it constrains you in your lending. It means that you have to be much more selective in the loans you take on because you are concerned that otherwise you will not reach the target that has been imposed on you. I recognise it is very difficult, with the present state of the financial markets both here and in the eurozone, to go back on an announced programme of strengthening the capital ratios of banks.
However, it is an almost textbook example—which will probably be cited in business schools and seminars in economics departments for several decades to come—of the Government pursuing two completely contradictory policies and now finding themselves in great difficulty. Even if they want to extricate themselves from this contradiction, they have already engaged in this particular programme and sent instructions to the banks, and it would obviously cause considerable problems in the financial markets if we suddenly announced that we did not want to strengthen the capital ratios of banks.
These are two good illustrations of how easy it is to run into a contradiction between the Government’s main economic policy objectives—which must always be to stabilise the economy, and in bad times, such as we are in now, to increase growth and employment—and the financial stability mechanism. From the menu of the most coercive, the medium and the least coercive amendments before us, I reject, as I have already said, the most coercive. I think that it is a mistake. I am fairly open-minded about the other two. It is very important that the FPC has an obligation to take into account my noble friend’s formulation of “other, wider economic objectives”. It would be very wrong of it to act blindly, as though it were in a watertight compartment. It may be that we can go a little further and place an obligation on it, provided that it is subsidiary to its main obligation in the view of the Government.
This controversy parallels discussions we have had in both this House and the other place. I remember the discussions in the other place 15 years ago, when we made the Bank of England independent, quite well. There were two great examples of successful independent central banks in the world at that time. One was the Federal Reserve system, which had a double objective statutorily imposed on it. Those objectives were price stability and employment, which in the short term can sometimes be in contradiction. It was left to the Federal Reserve board to resolve that contradiction. On the other side was the ECB which, basing itself on the Bundesbank tradition, had a single technical objective of price stability defined by maximum inflation rate of 2%. We had to choose between the two but ended up with something slightly between them, which may also be the right solution on this occasion, in this context.
Lord Hodgson of Astley Abbotts
The noble Lord, Lord Davies of Stamford, has given us a pseudo-economic lecture. I have to tell him that the lesson that will be drawn by future business schools will not be about the economic policy of this Government but about the economic policy of his Government, which led this country to the edge of ruin. That is the case that will be taught in business schools: how not to do it. It was his Government, of which he proudly said he was a part, that led us to the pass that we are now in.
Turning now from the general to the specific, the noble Lord, Lord Eatwell, in his introduction, described—
Lord Davies of Stamford
I realised when the noble Lord said that I had given a pseudo-economic lecture that he was going to disagree with me. He appears to have ignored the point that I made, to which I should like him to respond. Although in retrospect it is true that the previous Government might have taken moves other than those they did on financial regulation and supervision—I regret that we did not but this is very easy with hindsight—at the time, the party that he was and is a member of was urging us to deregulate. It said that we were constraining the competitiveness of the City of London with excess regulations. I have no doubt that he would have been one of the first on his feet to object and protest had we increased capital ratios, supervision and the examination of the quality of the assets in banks in this country.
Lord Hodgson of Astley Abbotts
I am very glad that the noble Lord appreciates that the previous Government got it wrong. The reality is that it was the macroperformance of the Government, which they now seek to blame on sub-prime lending in the United States, that left the country without adequate protection, not having taken adequate financial decisions in time. That is what a Government are supposed to do. It is the prime responsibility of the Government to make sure that the economic security of the country is maintained.
Going back to Amendment 34, in the name of the noble Lord, Lord Eatwell, he used, if I may say—in no patronising way—the attractive phrase, “leaning into the wind”, when he introduced it. Amendment 34 is stated in fairly general terms. It refers to,
“having regard to the Government’s growth, employment and other economic objectives”.
The noble Lord raised the issue of tension between that and the other objectives. Amendment 35A “leans into the wind” rather better than the noble Lord’s amendment. It refers to,
“contributing to the achievement by the Bank of the Financial Stability Objective, and … subject to that, supporting the economic policy of Her Majesty’s Government”.
That is a much more precise way of approaching this than the rather more general way that the noble Lord explained in his amendment. I am comfortable with Amendment 35A. It is more specific and purposive than Amendment 34 and does not contain the coercive elements of Amendment 35, tabled by the noble Baroness, Lady Kramer, with whom I agree on many other things but with whom I do not agree on this occasion.
Lord Phillips of Sudbury
My Lords, one takes one’s life in one’s hands if one tries to interpret the ineffable complexities of the Bill and of these amendments. However, I will try because I think that there has been some misunderstanding of Amendment 35, starting with the noble Lord, Lord Eatwell, and finishing with the noble Lord, Lord Davies of Stamford. If one analyses it closely, one sees that the fears that were expressed are not justified.
First, the promotion bit of Amendment 35 is couched within the purpose of the committee, which is to,
“contribute to the achievement by the Bank of the Financial Stability Objective”.
Therefore, whatever it does by way of promotion must be within that objective. The amendment continues by stating that this shall include promoting, first and crucially,
“a stable and sustainable supply of finance to the economy”.
That is the number one priority. Only then, and subject to that, as the noble Lord, Lord Peston, made clear, is there the inclusion of promoting,
“objectives for economic growth and employment”.
For the life of me, I do not see how the noble Lord, Lord Eatwell, can persevere with his concern, given that the right of promotion is subject and subsidiary to promoting a stable and sustainable supply of finance, and then has to be within the Bank of England’s financial stability objective.
Furthermore, there is no coercion here given that the economic growth objective is third on the list of priorities. Frankly, there is not a straw of difference between “promoting” these things and—in Amendment 35A, tabled by the noble Lord, Lord Sassoon—“supporting” them. Some may say that there is a difference, but as a lawyer I say that there is little or none. I contribute these thoughts in the hope that more light will be cast on Amendment 35.
Lord Flight
My Lords, I support the Government’s amendments. I would like to make two small points to pick up on the point made by my noble friend Lord Trenchard. First, when it comes to the achievement of stability, having adequate competition in the domestic market is crucial. The problem with the banking system is that it became too much of a cartel without enough competition. When cartels exist, they tend to do the same thing at the same time and the resulting problems are often large in scale.
I well remember, following the Barings problem, having many discussions with the then Governor of the Bank of England, the late Sir Eddie George. What happened then was that the lender of last resort principle was deemed to apply only to banks that were too large to fail, so smaller banks such as Hambros were closed down and sold, and we ended up with a moral hazard problem and a cartel problem. I stress that adequate domestic competition is very much part of the stability objective, whereas with economic success it is international competitiveness that is arguably more important, particularly for the role of London.
We will come to this subject later on, but there is an important difference in the interplay between adequate domestic competition and being adequately competitive internationally in terms of the two objectives of stability and economic growth.
Lord O'Donnell
My Lords, I rise to support Amendment 35A and in particular to speak in favour of the phrase “subject to that”. It is important that we understand why this was put there for the MPC. The basic economic principle was that low and stable inflation was the best prerequisite for long-term sustainable growth. Shocks to economies happen, which mean that inflation will move away either above or below. When that happens, the MPC has a choice. It has a choice of which path of its instruments—we thought at the time of just interest rates but obviously QE is part of it—it should choose. The legislation gives a very clear answer to that because it says “subject to that, look to the broad economic objectives”, so it should be choosing that path which best meets those economic objectives while hitting long-term stable inflation.
It works for the symmetry with the FPC because we would all say that financial stability is a necessary and sufficient condition of sustainable economic growth. When you get shocks to financial stability—and boy have we had a shock—you then have choices about how you get back from those shocks. I strongly agree with the noble Lord, Lord Eatwell, that in these circumstances you do not want to have pro-cyclical regulation, which could make matters worse. It is really important that the “subject to that” is there and that that builds in the economic policy.
For those who want to explain economic policy in a lot more detail and put subsectors in, I would say that could be a very long list, so I think you have to rely on economic policy. The amendment is very clear. It refers to the Government’s,
“economic policy … including its objectives for growth and employment”.
I, for one, would ask “What is the economic policy of the Government?”. The Prime Minister made that clear when he said that we do not live by GDP growth alone and that what really matters is maximising well- being. Therefore, I think we have an overall strong objective which allows us to get to the right policies. It is not about a simple mechanistic formula.
The Lord Bishop of Durham
My Lords, I would hesitate to disagree with the strong voices who have accused me of coercion. It is some time since I was last accused of coercion—not since the Church Commissioners sold off my palace with its dungeons. Coercion is much less of an opportunity than it used to be.
The amendment is not coercive and I disagree with the views that have suggested that it is intended to be. It is part of a series of amendments which are meant to open up the market and make it easier to have more stable and sustainable supplies of finance across the market. It refers to a stable and sustainable supply of finance; not to creating it but to enabling it—making it possible. One of the characteristics of many areas of economic stress, such as those in my diocese, is the creation of microeconomies, which may be much weaker or stronger than the national averages may indicate. Many contributions from noble Lords have tended to look at the macro and national picture and have forgotten some of the local and smaller problems that happen but which nevertheless affect many people. Adequacy of finance varies significantly even within one size or sort of company, as I remember from my days in the oil industry during a collapse in the oil price. SMEs in the south of England may find a very different position from what they will find in the north-east. The noble Viscount, Lord Trenchard, called it an amendment for a planned economy, but the word used is not “planned”; rather the intention is reflected in the word “promoting”.
The speeches of many noble Lords seem to assume that the present situation is working. In many parts of the country, it is not. Some areas are virtually demonetised, apart from cash, and this is a significant problem. The reports of the Bank of England agent in the north-east indicate the irregularity of finance. Anyone who has managed the finances of a company and a social enterprise, as I have, will know that that is a more serious problem than a continual supply or even a shortage of supply. You need to know what you are planning for. Moreover, a lack of attention to regulatory barriers to access to finance is likely to result, without attention, in a less competitive and open market that in turn will see a continuation of these inequalities across the country.
It may well be that the language of the amendment to which I have added my name is a little too forceful and coercive—I am rather attracted by coercion—and that seems to be a common view which I would probably be hard put to resist. I hope that the Minister will take note of the issues of closed and inadequately liquid markets in certain areas of our economy and of access to finance being more difficult in less fashionable areas where the need for employment creation is severe.
Lord Barnett
My Lords, I am delighted to follow the right reverend Prelate. I was in his cathedral on Friday and it was a very happy occasion. It is as beautiful as people say.
As my noble friend Lord Peston said, the two amendments are reasonably innocuous. I can certainly accept both of them with the exception of those three little words, and this is the first time that I have heard a real defence of them. Indeed, the noble Lord probably printed them himself. Last week I said that the noble Lord, Lord Sassoon, does not need to reply to most of these debates because we have three noble Lords here in the House who would be even better able to do so. However, as I say, I have not previously heard a proper defence of the words “subject to that”. The noble Lord is the first to do so, and I am sorry to have to disagree with a potential Governor of the Bank of England, if he still thinks that after all our debates.
The words “subject to that” have always seemed to be totally unnecessary because the Government of the day will certainly want to deal with inflation and, not subject to that but always on top of that, to look at economic objectives. I cannot see why that should not be so, and if I may say so, I have still not heard a good defence of it. But the amendments seem harmless enough, subject to the removal of those three words.
The question of QE has been mentioned in this brief debate. I do not wish to extend it, but it so happens—probably luckily for the Government rather than as a result of their policies—that inflation has remained relatively low. My noble friend Lord Peston, who is my professional adviser on these matters, may be right to say that that has nothing to do with the Government. However, what concerns me about both of the amendments is that I am not sure where the objectives of the Government lie on growth. I wish they could explain them, but perhaps on another occasion rather than today. Perhaps the noble Lord, Lord Sassoon, or one of the other defenders of the Government’s policy could also tell us what their policy is on economic growth and employment, because it is not succeeding. However, I will not pursue it any further except to say that I hope that the Government will be able to accept the removal of those three words.
Lord Phillips of Sudbury
I have a great deal of respect for the noble Lord, Lord Barnett, who says that he wants to see the words “subject to that” taken out. Am I quite clear that, in saying that, he is not in favour of a stable and sustainable supply of finance ranking as a higher priority than growth?
Lord Barnett
I am saying that I find the two amendments relatively harmless, and that I would be able to accept them. That is all I was saying.
Lord Stewartby
My Lords, I well remember the debates that we had all those years ago on the Monetary Policy Committee, and how many objectives could be added to the central one. This is a bit of a nostalgic occasion, because we are going through different subject matter but the same basic problems. I start from the point that the more of these extras you have, the more confusing they are likely to become for those who have to identify them and classify them under a heading—for example, “You’ve got a bit of employment here, and perhaps supply of finance. How is that getting on in our calculations?”. Those who attempt to allocate specific ingredients under these headings will fairly quickly find themselves with a lot of practical problems.
That leads me to say that I am probably a bit more cynical than sceptical than most noble Lords here today. There is a tendency to be overexpansive in economic policy-making, because Governments tend to be optimistic, and are therefore more likely to err on the side of overcooking than undercooking. Their focus also tends to be short-term rather than long-term. It is very difficult to feed in long-term assessments of this when it takes a good while for the implications of individual policies to be evident. I am, therefore, at the cautious end of this argument, and we ought to be very careful about not loading the process with too many objectives.
We should definitely say that nothing should conflict with growth or whatever we want, but it is different when one puts it in a negative rather than a positive way. You can add any number of “promoting”, “contributing”, “having regards to” and so forth, but the fact that there are all these different explanations illustrate that it is not a precise science. To treat it as though it were would be a recipe for difficulty and internal conflict. I may, therefore, be in a minority of one about this, but most of what has been said this afternoon comes from a starting point that itself is questionable.
Lord Sassoon
My Lords, the Government have always been clear that the Financial Policy Committee, as the body responsible for ensuring the stability and safety of the financial sector as a whole, must have financial stability as its primary focus. That is our starting point. However, we have been equally clear that the FPC must balance the pursuit of its primary objective for financial stability with the wider impact of its actions.
In our February 2011 consultation document the Government spoke of the need to,
“build the balance between financial stability and sustainable economic growth”,
into the FPC’s objectives. In addition, my right honourable friend the Chancellor made clear, when giving evidence to the Treasury Select Committee almost exactly a year ago, that we do not seek “the stability of the graveyard”. Our first shot at achieving this symmetry within the FPC’s framework was the creation of an economic growth “brake” for the FPC. The provision set out in subsection (4) of new Section 9C prevents the FPC from taking action that would significantly adversely affect the ability of the financial sector to contribute to medium- or long-term economic growth in all cases, regardless of the strength of the financial stability rationale. That is a very strong backstop provision.
However, the Government have listened to calls, both in another place and in our Second Reading debate in this House, for the FPC to be given a positive duty to support economic growth. In response to those calls, government Amendment 35A amends the Bill to give the FPC a secondary objective to support,
“the economic policy of Her Majesty’s Government, including its objectives for growth and employment”.
As many noble Lords are aware, this wording is identical to that used in the MPC’s secondary objective.
The noble Lord, Lord Eatwell, has used similar wording in his Amendment 34, but in the form of “having regard” rather than a secondary objective. I believe that in this case a secondary objective is more appropriate—more purposive, in the words of my noble friend Lord Hodgson of Astley Abbots—than “having regard”. We mean to be purposive here. The Government’s intention is to require the FPC to seek proactively to support economic growth. For this, you need an objective, not simply “having regard”.
Some noble Lords have questioned how such an objective bites in the context of the MPC. I am very glad that the noble Lord, Lord Barnett, is at last starting to get answers to his questions from the noble Lord, Lord O’Donnell, who is much more expert in these things than I am, and long may he continue to keep the noble Lord, Lord Barnett, supplied with explanations. In my inadequate way, I shall attempt to give one or two examples; first, of how the new secondary objective will impact on the FPC’s decision-making. I do not want to get sidetracked too much on the MPC but I will make one or two remarks to suggest that similar wording has impacted on the MPC as well. It is most important to think about the FPC, because that is what we are talking about here.
Let us imagine that the FPC takes action, such as imposing additional capital requirements, during the upturn of the cycle, when systemic risks are building up and financial stability concerns are heightened. If the situation changes—for example, the expansion subsides and the financial stability risks reduce—the secondary objective for economic growth will incentivise the FPC to remove those additional capital requirements in order to free up money for lending to the real economy. This effect will work in tandem with the new requirement for the Bank to review previous actions, which we will discuss in due course.
Lord Davies of Stamford
My Lords, will the noble Lord recognise that what he has just described as being the result of his amendment is precisely what the Government are not doing in the present circumstances? The economy is not reviving and the Government have not reconsidered their policy of imposing additional capital requirements on banks.
Lord Sassoon
My Lords, first, I was talking about different economic conditions, and, secondly, I would have thought that the point made by the noble Lord, Lord Davies of Stamford, would endorse why it would be extremely helpful to have such a secondary objective on the FPC.
Moving on, a second example of how such a secondary objective will operate is where the FPC is choosing between various different courses of action to address a systemic risk. Assuming that the actions under consideration are equally effective in addressing the risk to stability, the secondary objective will require the FPC to select the action that is more compatible with the Government’s economic objectives.
I agree with the noble Lord, Lord Eatwell, that it is the role of the FPC to lean against the wind.
Lord Peston
Before the noble Lord goes on with his agreement, which I am looking forward to, I still have not heard any argument from him about “subject to that”. What he has to say requires the word “and”, not “subject to that”. There is no way that “subject to that” makes any sense. To give him an example, could he imagine the head of the FPC being interviewed on the “Today” programme? The first question is, “What are you doing?”. “I’m contributing to the stability objective.” “Oh, and, incidentally, do you support the Government’s economic policies?” “Oh, no.” Can you imagine him saying, “Oh, no”? I cannot imagine any circumstances in which he would say, “Oh, no”. I cannot even imagine any circumstances—unless he wants to be regarded as insane—in which he would say, “I am unable to answer that question”. His only possible answer to the question “Do you support the Government’s economic policies?” is “Yes”, which is why the word “and” ought to be there and not “subject to that”.
That is why I regard the view that the Treasury took on the MPC as fudging the thing. I am afraid the ex-Treasury people have to recognise that that is what the MPC does. Could you imagine the Governor of the Bank of England saying, “I don’t support the Government’s economic policies”? We are not discussing the MPC. We are discussing the FPC—I always forget its name. Why does the Minister not use the simpler language, rather than “subject to that”, which is totally spurious?
Lord Sassoon
My Lords, as I was coming on to say, I agree with the noble Lord, Lord Eatwell, which is very much to the point of the noble Lord, Lord Peston. The FPC has to, and should, be able to lean against the wind—in appropriate circumstances—which is why the FPC’s primary objective is and should remain financial stability. It is right that it is “subject to that” primary objective that the FPC should seek to support the Government’s economic policy. The wording picks that up in the way that an “and” would not. We will have to disagree on that. I have given examples of where I believe that the FPC will interpret the language we have used appropriately.
Although I do not want to go too far into MPC territory, it is relevant to look at the MPC because there are examples one can draw out from its analysis to suggest that language is used in the MPC context in a very similar way to the way I would expect it to be used in the FPC context. I draw the attention of the noble Lord, Lord Peston, to what deputy governor Charlie Bean said in February 2012: that if the MPC,
“had chosen to run a substantially tighter monetary policy, then that would only have served to depress activity and raise unemployment even further … it would also make the task of fiscal consolidation and de-leveraging even more challenging. And by providing a gloomier climate for business, it would also inhibit investment and slow the necessary re-balancing of our economy towards manufacturing and internationally tradable services”.
Although this is not the time to go into it further, it is possible to argue—and the evidence is very much there—that the MPC is affected by the wording in the same way in which the suggested wording of the Government’s amendments will bite on the FPC. I am grateful to the noble Lord, Lord O’Donnell, for further illuminating some of these issues.
The three situations in which the noble Baroness, Lady Valentine, quite rightly postulated that the new secondary objective needs to work were good times, crisis and uncertainty. I can only say that I completely agree with her and that the wording that the Government propose strikes the right balance and will take account of all those scenarios. Of course, we are not relying solely on the secondary objective for growth, but I am sure that she understands that.
Lord Eatwell
My Lords, I am grateful to all noble Lords who have taken part in this debate. I was going to say “short debate” but it got a bit longer as we went along, as these things tend to do. The reason is because, although it appeared at the beginning to be a debate on semantics, it actually addressed the fundamental issue of giving powers to unelected officials in the form of the Financial Policy Committee, the exercise of which would in the past have typically been associated with elected, accountable politicians. That is a fundamental philosophical issue in the Bill and it is interesting to reflect for a moment on why it has arisen.
First, there is a fundamental difference among many in this House about whether it is more desirable to have a separable economic policy, in which monetary and financial policies are pursued entirely separately from policies on growth and employment, or a collective economic policy conducted with the Bank, the Treasury and all relative institutions collectively deciding on the overall stance that should be taken. That is a fundamental debate in economic analysis. However, it is not the point here, which is why we have been slightly diverted.
The point here is about the role of the Financial Policy Committee, which is an innovation that has arisen because of the change in economic circumstances, involving the speed at which innovation in financial policy can dramatically change the environment of a given government policy. The Government can suddenly find that a particular economic stance is being undermined or distorted by significant innovation in financial markets. The development, for example, of the credit derivatives that underpinned sub-prime mortgages in the United States changed the whole housing finance policy of the United States—an innovation by financial institutions that changed the environment of government policy.
The key role of the Financial Policy Committee is to watch out exactly for those sorts of things. That is what it is there for: to maintain a persistent study of what is happening in financial markets and how that might change the environment for government policy, and of the implications of any particular stance that the Government and/or other economic policy actors, such as the Bank, have taken.
Having said that, this was an interesting debate and we have eventually focused on the issue of “supporting” or “having regard to”. Obviously, since I put the amendment down with my noble friend, I think “having regard to” is a more appropriate relationship given the role of the Financial Policy Committee, but, in light of the debate, I beg leave to withdraw the amendment.
Lord Sassoon
“(a) contributing to the achievement by the Bank of the Financial Stability Objective, and(b) subject to that, supporting the economic policy of Her Majesty’s Government, including its objectives for growth and employment.”
Lord Eatwell
“(1A) The Financial Policy Committee is to exercise its functions with a view to contributing to the achievement by the Bank of the FCA's integrity objectives, including but not limited to those set out in subsection (2)(f) of section 1D and section 1DA of FSMA 2000 as inserted by section 5 of the Financial Services Act 2012.”
Lord Eatwell
My Lords, I rise to move manuscript Amendment 35AB and speak to manuscript Amendment 110ZA, which is associated with it. First, I apologise to the Committee for introducing a manuscript amendment and, indeed, for introducing a manuscript amendment to replace a manuscript amendment. It displays the serious defects in my own drafting abilities and I hope to do better in future. I apologise for that but it is a testimony to the flexibility of your Lordships’ House that we are able to consider these amendments now, which are designed to give the Committee the opportunity to address a very important matter that, as we know, has arisen in the last few days. It would be foolish to pretend that these amendments have not been brought forward as a result of the revelations of the LIBOR scandal in the last few days. However, it is valuable to give the Committee the opportunity to debate these issues in a concrete way and with a concrete proposal on which it can opine.
The consequences of this scandal are so serious and so far-reaching that their implications for this Bill are immediate. Fortunately, we had not reached what might be deemed the relevant part of the Bill that should be amended to take account of what we now know—something that, a week ago, we did not know. We now know that the setting of benchmark prices is a fundamental element in the efficient operation and stability of financial markets as a whole—that is, of the generation of systemic risk as defined in the operating principles of the FPC—and that the process of setting one of the most important benchmark prices in the world, the dollar LIBOR, has been severely compromised.
Lord Kerr of Kinlochard
Given that the noble Lord has explained that the public inquiry he seeks is not an alternative to the Tyrie inquiry, can he confirm that the Opposition will be co-operating in full with the Joint Committee to be set up under Mr Tyrie?
Lord Eatwell
I certainly think that Mr Tyrie and the Treasury Committee can and will pursue their activities in their normal way, including perhaps the pursuit of this particular inquiry. As to the future policy of the Opposition on the organisation of that inquiry, we are trying to achieve the best possible outcome. I see the best possible outcome as a three-dimensional one.
Lord Carlile of Berriew
My Lords, I welcome the opportunity for this short debate on a matter of great public interest. I have to say to the noble Lord on the opposition Front Bench that the Opposition have asked the right question but given the wrong answer to that question. The LIBOR issue is an immense financial scandal. It appears to have not just the scope of one bank, but possibly to affect other financial institutions. It affects not only what has happened in the United Kingdom, but affects at least four jurisdictions, including the United States of America. It affects the reputation of the City of London in a major way. Those of us who are as old as I am remember bankers in the City of London by the adage, “My word is my bond”. Now we see, “My Maserati is my success”, as the evidence of what happens in the City of London. I hope that noble Lords of all parties and none will agree that, as a result of this scandal, we need to emerge from it with “my word” being “my bond” once again. The trust in the City of London is why the City of London succeeded in the past. It will not succeed in the future if those who do business there, if I may use a Scouse expression, are seen merely to be “wide loads”.
What has happened undoubtedly potentially merits investigation for criminality. I do not believe that a parliamentary inquiry is the right way to winkle out criminality, welcome though a parliamentary inquiry is. It is not a way in which criminal investigations are carried out. In fact, it is a ludicrous proposition to suggest that this is the job of a parliamentary committee, however well led. I do not for one moment question the leadership and integrity of Mr Tyrie. He is obviously very good at what he does. I do not favour a judicial inquiry, because a judicial inquiry can quickly become a behemoth. I do not draw a comparison with the Leveson inquiry. Lord Justice Leveson is not merely an old friend; he is doing a brilliant job with a very specific inquiry of an entirely different kind. However, I fear that if a judicial inquiry were established, within a few days we would see some of the best lawyers in London—including some Members of your Lordships’ House—earning vast sums of money from lining up in front of a senior judge, expecting an outcome at some distant time, possibly in this decade, possibly not.
Lord Howard of Lympne
Could not the investigation that my noble friend asks for be carried out without the appointment of a special prosecutor but by the Serious Fraud Office, which has already embarked on such an investigation, with the director, if necessary, asking for additional resources to enable him to bring such an investigation to a speedy conclusion?
Lord Carlile of Berriew
I am grateful to my noble friend, who has considerable experience of dealing with high-level legal matters. I believe that might be achieved, but in my view there needs to be the clearest statement of intent by the Government. My intention, as my noble friend implies, is that whoever carries out this special investigation should be invested with the powers of the Serious Fraud Office, which are considerable and important. That is why I suggested earlier that this should take place under the instructions of the director of the Serious Fraud Office, Mr David Green QC. However, I believe that the Serious Fraud Office is completely unresourced for this kind of investigation. I also believe that in public terms, if the Government made it clear that they would provide Mr Green with the resources immediately to appoint a special prosecutor, albeit under his umbrella, and that person was provided with a team, probably largely from outside the SFO, which has been recruiting a large number of staff recently and may not have the experience to deal with this inquiry at present, then we would have a quicker and better result.
I do not want to detain your Lordships’ House for too long. However, I want to make the point that we have not yet reached the situation in which the essential issue is being investigated properly—that is, the potential criminality of those whom we were entitled to trust.
Lord Phillips of Sudbury
My Lords, I came to the City as a young lawyer in 1964 and am still there. Until last Christmas, I was a non-executive director of a well known City insurance entity. I agree wholly with the sentiments of the noble Lord, Lord Eatwell. However, the writing has been on the wall about the state of values in the City for very many years. The most recent shock—the LIBOR scandal as one might call it—is but one of many and there will be many more still to come, I am sad to say. It has been an open secret in the City that the culture has declined over the years to one of near amorality, where the law rather than normal moral instincts has been the arbiter of conduct. That in turn has declined, predictably, to a situation where too often if amorality is confronted with a significant loss of a good deal then there is little resistance left in the system and criminality occurs. Most of it is impossible to trace as it is in the form of market manipulation and oral conspiracies—whether within a firm or between different firms. It is a sad spectacle. To be fair, the vast majority of people in the City deeply regret where we have got to. Unfortunately, however, the culture of huge corporations tends to crush the moral life out of people in those entities. You get the occasional whistleblower who will stand out against the herd but one knows, I am afraid, what has happened recently to those few brave people.
The noble Lord, Lord Eatwell, is absolutely correct in his strategic overview of where we now are. We must, however, ponder this a little more than the space of this debate will allow. I am inclined towards giving serious thought to some sort of commission. It does not have to be a royal commission—a phrase which has attracted a good deal of adverse thought lately—but it is such a huge congregation of issues, not just confined to the City and certainly not confined to narrow misdeeds such as the LIBOR matter, that we may be better off with a royal commission that can look at the thing in the round, take its time, and let the criminal side of all this be separated and dealt with by the Serious Fraud Office or, conceivably, a special prosecutor.
My Amendment 109—to which my noble friend Lady Kramer and the noble Baroness, Lady Meacher, have added their names, and which we will probably get to next time—ironically achieves almost the identical effect to that of the first part of Amendment 110ZA, tabled by the noble Lord, Lord Eatwell, so I am obviously in favour of that.
In closing, the other quick point I should like to make is to wonder whether there should not be a wider duty of integrity in the Bill than that which applies only to the FCA in proposed new Section 1D on page 17 of the Bill. The prudential authority should be subject to a similar integrity objective, and it might make sense to have such an objective for the whole financial regulatory sphere. That is all I wish to say beyond thanking the noble Lord, Lord Eatwell, for raising this matter at this time.
Lord Neill of Bladen
My Lords, I should like to make a few observations about the amendment. We are at Committee stage of the Bill. While it is passing through your Lordships’ House there has been an enormous scandal about the fixing corruptly of the LIBOR rate by Barclays over, I understand, a period of years—a practice in which it is possible that other banks took part. They have thereby done enormous damage to the reputation of the City of London as a place where you can get honest dealing. The matters thus far brought to light show innate corruption, whereby it is seen as perfectly all right to rig the figures that you supply in order to fix the LIBOR rate and to bring in profit or reduce losses. That is a form of corruption.
One can go back to one’s early days with a bank. I banked with Barclays from the mid-1940s onwards. The notion of the bank then being involved in this type of activity was absolutely laughable. The banks have turned into merchant banks of the worst possible character, and that ethos is reflected in conduct that reveals a completely disgraceful picture.
The question is: what is the best way to have a wider inquiry into that matter? At the moment, it is a pity that what is called the Tyrie inquiry is being allowed to carry on on its own, without any thought as to whether or not the investigation of those facts would be central to any wider inquiry about the integrity of banks. However, how do you investigate integrity? The theory is that you are not allowed to look at other cases because Tyrie is dealing with the matter. In fact, it is the best possible evidence you can have of the way that bankers think today. You want to know all the details of that case and not exclude them from it, rather than ask a generalised question: how do we establish integrity or lack of it in the City?
I therefore assume that today we are having an exploratory discussion, that the amendment will be withdrawn, and that there will be time, at least by Report, to consider revised proposals of what might be done by way of investigation. The suggestions of noble Lord, Lord Carlile, are interesting and persuasive, but all this has just been pitched upon the House of Lords because of a curious financial scandal coming to light at this very time while we are in Committee. I hope that consideration will be given as to whether matters in relation to the banks and financial institutions could be better conducted after we have had time to think and the Government have had time to react to the amendment. I hope that some reasonable and rational delay will be introduced and that the amendment will be withdrawn.
Lord Davies of Stamford
My Lords, I am very glad indeed that we have an opportunity to discuss this extremely important matter. The news over the past few days has been dramatic and horrific, and the public would think that our parliamentary system was woefully inadequate if we did not take time not just to discuss this matter but to come rapidly to conclusions, which is why I profoundly disagree with the noble Lord, Lord Neill, that we should not take any decision today and that the amendment be withdrawn. I hope that my noble friend who spoke extremely powerfully on his amendment will press it in due time.
There seems to be prima facie evidence of widespread abuses, dishonesty and corruption—a good word that I take from the noble Lord, Lord Neill, with pleasure, because it is the right word—in our banking system. None of us would have supposed that that would arise here in the City of London. All of us have been excessively complacent about the standards of conduct which are applied in the City of London.
Lord Kerr of Kinlochard
My Lords, like the noble Lord, Lord Neill, I hope that the noble Lord, Lord Eatwell, will withdraw his amendment. His three-dimensional answer to my question made it impossible for me to support it, because I fear that he is taking a hostage. The most important thing that must be done is to establish quickly how we can ensure that the fixing of LIBOR cannot happen again. That is the crucial operational thing to do. I agree with those who say that this is an international scandal. I agree that around the world, people know about this. There are plenty of other scandals in the banking system that must be addressed, such as the mis-selling scandal and questions of remuneration and bonuses. There is plenty of time for a study of the culture of the banking and financial services industry. That is important but not urgent. What is urgent is to do something operational now.
I understand from the Prime Minister’s Statement that the Wheatley report will be published this summer. That fits very well with the Tyrie exercise, which will finish this autumn and can establish what happened. It should not go into areas of criminality. What was said by the noble Lord, Lord Carlile of Berriew, was fully justified; I would not go down the special prosecutor route but would follow the advice of the noble Lord, Lord Howard. We need a quick operational inquiry to establish how to make sure that this shocking thing—this poisoning of the water supply that is a scandal around the world—is put right and cannot damage London, and borrowers and lenders, any more.
I will say one further thing to remedy an omission in our discussions, and those of the other place, yesterday. I am confident that Mr Agius is an honourable man. It is a pity that no tribute was paid yesterday to the way in which he immediately accepted responsibility and felt that the buck must stop with him.
I was reminded of the noble Lord, Lord Carrington. Nobody thought he was responsible directly, hands on, and involved in the loss of the Falklands. I do not believe for a moment, and I do not believe that anybody in this Chamber believes, that Marcus Agius was in any way involved in fixing the LIBOR rate, yet he undoubtedly did the right thing, and it is important that that should be put on the record. It makes a striking contrast to the behaviour of some others in public life these days. I advise anyone intrigued by this reference to read a remarkable speech made on Friday on the Steel Bill by the noble Lord, Lord Fowler, referring to another Member of the present Government.
Baroness Kramer
My Lords, I want to associate myself with the words we have just heard from the noble Lord, Lord Kerr, on the importance of acting quickly. I speak as someone who has spent most of her career in banking, working with clients on transactions that involve the LIBOR rate and I understand the significance of the issues we have discussed in this House.
As others have said, this is not just a UK issue. The earliest that any inquiry, as proposed by the noble Lord, Lord Eatwell, could begin would be the autumn, so we are looking at something like a two-year inquiry. I am not sure that he understands—
Lord Eatwell
If the noble Baroness would allow me, perhaps it would be for the benefit of the Committee if I said that I certainly did not rule out the Wheatley or Tyrie inquiries: I argued that both have something to contribute. I say that to the noble Lord, Lord Kerr, as well. Therefore, I accept the whole notion of acting quickly—it can be handled—but we then have to ask: what next?
Baroness Kramer
When the noble Lord, Lord Eatwell, talks about the Tyrie inquiry, I am still not clear whether he is talking about the Joint Committee of both Houses, in which the Lords are as involved as the Commons, or whether he is simply talking about the Treasury Select Committee acting, if you like, in its normal way. I think that he has avoided giving us clarity around that issue.
The critical thing here is that other jurisdictions will act. The United States will not sit around while a committee lasting one or two years talks about the fundamental issues of banking, so the actions that we are going to take have to be decided in a far more immediate way. We have great opportunity with this Bill and with the forthcoming banking reform Bill. The changes will have to be embedded in those Bills at the latest if we are to stem the tide of real disadvantage.
If anyone doubts that work is afoot elsewhere to deal with the problems that we have been so slow to pick up and deal with, I suggest they take a look at today’s Wall Street Journal. There is an article in there called “Lining Up Potential Successors to Libor”. It is very clear that we in the UK are on the back foot and we need right now to get on to the front foot and not start playing for the long grass, however worthy that is. It is that sense of urgency that I want to convey. If we hear that the answer for the British Government is going to be a commission, there will be a very cynical reaction in the United States that once again the Brits are going for another long-term committee with navel-gazing and endless discussion, rather than immediate action. Perhaps someone can tell me what the value is of a commission that reports after all the changes have taken place. That sounds to me like a method for closing a stable door long after the horse has bolted. It is crucial to get that horse moving now, without delay.
I also have to say that I regard a Committee of both Houses as an extraordinarily effective way of getting to the root of a problem. Think of the expertise we have in this House. Surely that is exactly what we should be using. The breadth of the experience we can bring is important. Moreover, it is very different from Leveson because at the heart of that inquiry is the reality that it is investigating a relationship between politicians and the media, one in which there is a high suspicion—outside here I would probably go further, but that would not be tactful—of collusion and corruption. Politicians cannot investigate themselves under those circumstances, but I do not think anyone is suggesting that that is the situation in the banking industry. We are not talking about political collusion or corruption here.
Indeed, if we doubt the effectiveness of the political system in handling this, let us look at Bob Diamond’s resignation this morning. It is easy to see what happened. He knew he would face the Treasury Select Committee on Wednesday, so he sat down with his lawyers—I am guessing that, but I suspect I am right—and started to role-play how he would behave in the meeting. Soon he realised that his position was totally untenable. That is effective action, and it is what we should be building on, not going back to some sort of long-term commission. The additional benefit is that if there is leadership from Parliament, it will continue to observe and supervise the banking industry for many years. It will not pack up and go away after 18 or 24 months. We should build on that, not lose it.
Perhaps I can make a last comment. We seem to be going through an extraordinary trend, if you like, of subcontracting out our responsibilities. As politicians with the privilege of being part of this Parliament, surely we ought to be taking the tough decisions. We should not be trying to find someone else to contract out to every time there is something tough to do, otherwise we might as well just become a commissioning body. I would argue that we should look at our strengths and skills and take this opportunity to act. That would show the banking industry and the wider world what we can do. The longer term is too late, and we have to be aware of that.
Lord Myners
My Lords, I fear that the noble Baroness, Lady Kramer, might not have been listening to my noble friend Lord Eatwell. He supports the inquiry to be chaired by Mr Andrew Tyrie as well as the Wheatley review. I believe that the proposal of my noble friend is complementary to and necessary as an addition to those reviews.
Yesterday the Chancellor of the Exchequer said in the other place,
“we know what has gone wrong”.—[Official Report, Commons, 2/7/12; col. 613.]
I do not think that the people of this country know what has gone wrong. With all respect to the noble Lord, Lord Kerr, this is not simply a question of LIBOR. I first tabled a Written Question for the Minister about the manipulation of the LIBOR rate in March last year and got a very backhanded response from him; I have raised it several times subsequently. But this goes well beyond LIBOR. The lying and deceit around LIBOR manipulation that we know has taken place systemically across the banking industry—it is not limited to Barclays alone—is but a symptom of a wider cancer at its heart.
You can go to your bank manager to have your passport photograph signed. Banking was a profession held in high regard. It was associated with trust, integrity and prudence. How has that changed, and why? That is why we need a commission of review. The terms of reference of the Tyrie review are, as my noble friend said, extremely limited. They are ring-fenced and precise, so they do not ask the sort of questions that should be asked. Yesterday in this House the call was made for a review that would focus on the transparency, culture and professional standards of the banking industry. The Tyrie terms of reference do not look at the transparency, culture and professional standards that were called for by the speaker in this House—and that speaker was the Minister. We need a fundamental review of what has gone wrong in banking.
How can it be that a bank built on the Quaker traditions of Barclays can find itself in a position where three of its senior board members have resigned within 24 hours and where I confidently predict more will resign by the end of this week? How can we be comfortable with that? The noble Lord, Lord Kerr, referred to Mr Marcus Agius, whom I know well and hold in extremely high regard. It seems as if Barclays has been involved in a car accident where Mr Agius was the passenger sitting in the back. Yesterday he resigned, taking the blame for the accident. Today Barclays has concluded that it is the driver who should take responsibility, and now Mr Agius has got back into the car, which he has to drive from the back seat. This is a state of complete chaos. How can a great British industry, one in which we have led the world, have got itself into such an awful mess?
To answer those questions, we probably need to go back to the 1980s to see how the transition has taken place. Tyrie and Wheatley are not going to do that. Their work should continue, but the call by my noble friend Lord Eatwell for a thorough, deep and considered evidence-based review of what has gone wrong in banking, and what we can do to ensure that it does not happen again, seems to be an undeniable case. I shall certainly support the amendment if my noble friend presses it to a vote.
Lord Higgins
My Lords, we should be grateful for the opportunity to have a debate this afternoon because it enables us to focus on what our priorities should be. We have essentially been considering two things: how wide an inquiry do we need and how urgent is it that it should produce results quickly? What has become quite apparent is that one inquiry is not going to be enough. What has happened is this: on the one hand we need a short-term inquiry, but on the other hand we need a strategic inquiry. We also need the kind of investigation which the noble Lord, Lord Carlile, has put forward, but in a sense it is a separate issue because the outcome of that inquiry will presumably be the prosecution of particular individuals. In no way would the noble Lord’s inquiry tell us how to reform the banking system. So that is something which is self-contained and separate.
We come then to the question of the best tactical answer. I fear that the position has been somewhat confused by the references to Mr Tyrie. Let me make it absolutely clear—I speak as someone who was the chairman of the Treasury Select Committee for 14 years—that I have the greatest respect for Mr Tyrie, who has been doing a magnificent job as chairman of the committee, which I understand is to take evidence from Mr Diamond this week. But the question then arises of whether Mr Tyrie should also be the chairman of the Joint Committee, the proposal put forward by the Government. I think that this confuses the matter. The shorthand around the use of the word “Tyrie” has actually become extremely confusing. Yesterday I expressed a view that I shall repeat now: to do the jobs both of chairman of the Treasury Select Committee and chairman of the Joint Committee is too much. It will distract from the normal work of the Treasury Select Committee, while the Joint Committee will need the full attention of whoever is appointed as its chairman.
I am not clear on how it suddenly became apparent that Mr Tyrie would chair the Joint Committee. My noble friend the Minister pointed out yesterday that the Joint Committee will presumably decide who its chairman should be. I would prefer Mr Tyrie to continue as chairman of the Treasury Committee because he is doing such a good job, and I believe that someone else should chair the Joint Committee. However, that will be a matter for him and the respective committees to decide. At all events, the Joint Committee is the right way to go as regards the immediate investigation and rapid conclusions on what needs to be done urgently. That leaves unanswered some of the more fundamental positions that need to be considered. The body which could most appropriately do that was suggested by the opposition Front Bench.
To summarise, leaving the separate Carlile issue on one side, the Treasury Committee should continue with its work in the normal way; the Joint Committee should consider the immediate actions that need to be taken as it unearths the problems, as no doubt it will; and there ought also to be a longer-running inquiry. There will not then be any accusation that we are kicking the matter into the long grass, and at the same time we will get rapid results on the tactical situation. In the light of your Lordships’ debate, it is becoming increasingly apparent that that structure is the right approach.
Lord O'Donnell
My Lords, I support the sentiments expressed by the noble Lord, Lord Kerr, and the noble Baroness, Lady Kramer, and believe that we need to handle the very important issues raised by the noble Lords, Lord Eatwell and Lord Myners. There is a way of managing all of this.
First, importantly, we have a lot of information already. We want an inquiry to establish the facts, but we need to bear in mind that we have MoJ, CFTC, and FSA reports on the LIBOR issue that have raised enormous issues. I would very strongly support what the noble Lord, Lord Carlile said, but with the noble Lord, Lord Howard, variant, if I might put it that way; that is, that these reports have raised serious issues of criminality. We need to investigate those issues quickly, with sufficient resources, and with all the power and vigour that we would use if this were some other form of crime. That process is crucial. It should happen straight away, and it should not be resource-constrained.
Secondly, the Wheatley report will be important specifically to the way in which we handle the LIBOR issue. It is urgent, and plenty of others would like to take this business away from us. The Wheatley report, which should be with us through the summer, will suggest some amendments to this Financial Services Bill. I particularly like the suggestion of LIBOR being a qualifying financial instrument, which might well get us through a lot of these issues.
We then come to the more general set of issues on what is wrong with banking and how we can restore confidence in it. Those are very important questions. In my maiden speech, I suggested that we should have a Joint Committee of both Houses chaired by the chairman of the Treasury Select Committee who would have authority and power. Given the experience of Members of this House, it could come up with some answers that would get past the problem of reputational issue. Both Houses acting together would command confidence and such a committee more generally at what emerges from the LIBOR case.
Some issues will emerge directly from the LIBOR case which will relate to our future banking reform legislation, touching on the whole question of splits and the like. That Joint Committee could guide us as regards the changes we would need. I am in favour of changes to that legislation and I would look at total assets rather than only at risk-weighted assets, and at total leverage ratios rather than only at what is proposed. However, that is a separate issue that we will come to later in this House.
Lord Peston
My Lords, the background to my few remarks is the text:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.
I am delighted that some of the better educated—no doubt those who were taught economics—are well aware of the provenance of this remark, which was by Adam Smith. He would not have been in the least surprised by what happened with LIBOR or by all the other conspiracies that, if we had enough time, I could tell you about, including the price fixing that still goes on in our economy.
Turning to my main remarks, I have a feeling that I will be in somewhat of a minority. I found what the noble Lord, Lord Sassoon, said yesterday, in announcing the Government’s proposal for what we will call the Tyrie inquiry to be totally unconvincing. The public require an objective inquiry which they can believe without a shadow of doubt is not a stitch-up. I do not believe for one moment that the remit given to the chairman of the Treasury Select Committee enables that inquiry to take place in any way whatever. I speak for myself in saying that, although I regard myself as totally objective and totally honest, if I were asked to be on that inquiry I would refuse because I do not believe that the public want people who are involved inside to be conducting it. We have very much to face up to that. I might ask the noble Lord, Lord Sassoon, why, if he is so anxious to keep politics out of things, does he make political remarks in almost every address he gives to this House—but that is simply me being my usual acerbic self.
Am I right, that the Prime Minister—given that this is a matter of absolute national importance—did not consult the Leader of the Opposition in deciding how we should go forward? The Government ought to backtrack and try to find a consensual way of going forward that would involve the Prime Minister talking to the Leader of the Opposition. I am not saying that we would definitely get a good outcome to that but I am absolutely convinced that that is the approach that ought to have been adopted.
I want to say a brief word about how speedily anything can happen. We are going to rise in three weeks’ time and, in the case of our House, not come back until October. As far as I can see, that means that any inquiry will certainly have to be short—whether it will be sweet, I do not know. This notion that it is all going to be done very quickly I just do not find believable, whoever does it. I have a holiday booked so I am not very keen on coming back earlier but we may have to. Again, perhaps the Minister can talk to us about the speed of the inquiry.
Perhaps I might ask another practical question: am I right that the corrupt practices on LIBOR have stopped? Do we know for a fact that they have definitely stopped? Perhaps the Minister could tell us. I hope that they have definitely stopped.
What is unavoidable is that we have to look at what the regulators have been doing. An inquiry that does not do a full examination of the regulators themselves would simply not be worthwhile. We are told that neither the FSA nor the Bank had the power to investigate the setting of LIBOR. I would have thought that the head of the FSA and, even more, the governor could have sent for some of the people involved with LIBOR for an informal chat—forgetting about what their powers might be—just to find out what they were doing, looking for some enlightenment. I find it astonishing that we are being told that neither the governor nor the main regulator knew about LIBOR, and did not think to apprise themselves of what went on, whatever they thought their formal powers were. I must say, if I had been one of them, I would have done that—perhaps that is why I have never been appointed to anything.
I have also been going through the nightmare of rereading your Lordships’ Second Reading debate, in which I was unable to take part. What is absolutely fascinating is that the one acronym that never appears in any noble Lord’s speech is LIBOR. There we are, all the great experts, and what we are really doing—as always happens—is fighting the battles of the past. Most of the speeches were looking at accounting for the financial crisis that started a few years ago and discussing a Bill to prevent that financial crisis ever happening again.
The great Chicago economist Frank Knight—who was very much on the right, I might add—wrote a classic work called Risk, Uncertainty and Profit. He said that risk was what you did not know was going to happen but that it was measurable, due to probability and that sort of thing. He argued that what really mattered was uncertainty, which you know about in an almost contradictory way: you know that what is really going to happen is something that is totally unexpected. The problem was how to prepare for it—how to expect the unexpected. He never found a satisfactory answer to that but he did say that the free market capitalist system was at least the best way of adapting to those unexpected shocks when they occurred.
This is where I disagree very strongly with the noble Lord, Lord Kerr, who said that what we have to do is make sure that LIBOR does not happen again. That is precisely to get it wrong: LIBOR is not going to happen again; something different is going to happen and we need a system that prepares us for dealing with something different. I do not think any of what the Government are proposing covers that.
En passant, the noble Viscount, Lord Trenchard, said that light-touch regulation was discredited. I have to tell him, I would be a light-touch regulator if I were one, because I do not believe that the role of the regulator is to run the businesses that it is regulating. That is my concept of light-touch. I believed it then and, if you accept my concept of light-touch, I believe it now. One place I would like us not to go to is the regulators essentially running the banking system, and I hope that the noble Viscount agrees with that.
Going back to the issue of the Joint Committee, it should not be ad hominem, as I think has been said; it is nothing to do with Andrew Tyrie. The real question is: should the Treasury Select Committee in the other place, which deservedly has a tremendously high reputation, be involved in this in any way? I do not want to go down the path of the Joint Committee; I would much rather go down the path suggested by my noble friend Lord Eatwell. I would be interested to know if other noble Lords know anything about this, but I think it would be a terrible mistake, in trying to maintain the very high reputation of the Treasury Select Committee, if it got involved in this inquiry. That would be a mistake beyond belief.
We end up with two possibilities. One is that we divide and test the opinion of the House on what my noble friend Lord Eatwell proposes; he will decide this. The other, which is what I would like to see happen—and I know I am being immensely naive here and there is probably nothing the Minister can do to help us—is that the government proposals are withdrawn and the Minister’s right honourable friend the Prime Minister and my right honourable friend the Leader of the Opposition do what I suggested earlier: get together and see if they cannot come to us with some proposals. This is a matter of national importance.
The noble Lord, Lord Carlile, will notice that I have not said a word about prosecuting the guilty because that is not my subject. As an atheist, I believe that if we do come back to this planet, I intend to come back as a Queen’s Counsel and certainly not as an economist. I really do believe that in the national interest the leaders of both main parties should get together and come back to us with some jointly agreed proposals.
Lord De Mauley
My Lords, I think I detect that the mood of the House is that we should move towards a conclusion. I do not want to stifle debate but perhaps I might suggest that my noble friend should speak and then my noble friend the Minister should wind.
Lord Framlingham
My Lords, I shall be very brief. Issues such as this are extremely complicated on the one hand and very simple on the other. We are dealing specifically with LIBOR—at least I am—which I am not an expert in. I am sure that there need to be inquiries—what sort of inquiries will be determined today, or later—which need to get to the bottom of the problem as quickly as possible.
In his opening remarks, the noble Lord, Lord Eatwell, said he was not sure what the word “integrity” meant in this context. I know precisely what the word “integrity” means. I also know precisely what the word “greed” means. I also know precisely what the word “criminality” means. Finally, I know what the word “prison” means. I support the noble Lord, Lord Howard, in this. Whatever else happens in terms of inquiries, the Serious Fraud Office should get on to this immediately to find out what has gone on and who the culprits are, and bring them to justice. That will be the best way to make sure these things and others like them do not happen again.
Lord Blair of Boughton
My Lords, I know that the Minister is about to speak but can I give a slight and practical example of how witnesses will approach these different inquiries. I find myself entirely in agreement, as any Cross-Bencher should be, with both sides of the House. How does a witness approach these different inquiries? They approach the criminal inquiry with the narrowest possible dimension about the facts in dispute. I have appeared at the No. 1 court at the Old Bailey, so I know what it feels like. You are always told that you should answer only the question you are asked. When you appear in front of a parliamentary inquiry, you have the same approach with a view as to where the political issues will come from, which you have to think about. When you appear, as I did, in front of Leveson, you do so on a completely different basis. My evidence to Leveson began in the 1820s. In other words, you are looking at the whole issue in the round. I do not understand why there needs to be any dispute between the two sides of the House in this debate. Have a criminal inquiry, have Tyrie and have a judge-led inquiry into the ultimate circumstances of the way in which the banking culture has taken over parts of our society.
Lord Sassoon
My Lords, first, let us be clear that these amendments have very little to do with the Bill before us today. They are all about the Opposition’s misguided attempts to slow down what we need to do to deal with the consequences of the LIBOR scandal. We need rapidly to restore public confidence in the financial services industry, which the Government are pressing on with. We do not need to kick these very serious matters into the long grass, as the Opposition now propose. It is time for Parliament, as well as the Government, to take clear leadership on these matters. The events of recent days have highlighted that the culture of banking is badly broken. The Government are in the process of fixing the system, but we need to change the mindset of the profession and those working in it. This is about restoring banking to what it should be about: to be the most, and not the least, trusted profession.
The basic facts of the attempted LIBOR manipulation are clear. There have already been published reports from three regulators in the UK and the US. We do not need a judicial inquiry to tell us what the facts are. A judicial inquiry would be principally aimed at establishing the facts; it would likely take years to complete, might not be able to start until after prosecutions had been completed and would cost the taxpayer millions of pounds.
Now we need three things. First, we need the rapid prosecution of individuals who may have broken the criminal law. This is what the SFO and the Crown Office in Scotland are looking to do. Secondly, we need to look at how LIBOR cannot be fixed again, which is the subject of Martin Wheatley’s review. Thirdly, we need to look into the ethical and professional standards of the financial services industry and we need to do so urgently to ensure that the banking industry is serving the needs of the wider UK economy and the continued global competitiveness of London and the UK.
For this reason, the Government recommend that Parliament considers undertaking an urgent inquiry into the culture and ethics of the banking industry to help shape the urgent reform that is so much needed. The Government propose the establishment of a full parliamentary committee of inquiry, comprised of representatives from both Houses, and set up by a joint resolution of both Houses. The proposed terms of reference for the committee are building on the Treasury Select Committee’s work and drawing on the conclusions of UK and international regulatory and competition investigations into the LIBOR rate-setting process, consider what lessons are to be learnt in relation to transparency, conflicts of interest and the culture and professional standards of the, financial services industry, including the interaction of these with civil sanctions and criminal law. While I hear noble Lords seeking to paint this as a narrow inquiry, on any construction, these words will give the Joint Committee a very wide remit.
I am also glad that the Opposition now seem to support the creation of this committee. I have laid out what is required. We certainly do not require a proliferation and duplication of reviews that could go on for several years. We recommend that the inquiry should commence immediately and conclude by Christmas. As noble Lords are aware, the Government plan to introduce the banking Bill that will implement the recommendations of Sir John Vickers’s Independent Commission on Banking in January next year. This will bring far-reaching and lasting changes to the structure of British banks. The Government’s preferred timetable for the committee of inquiry would allow the Government to use the Bill to make any appropriate further changes needed to the standards of the banking industry and the criminal and civil powers needed to regulate it, and hold people to account for their behaviour.
The Joint Committee will do its work well and comprehensively and will report by Christmas. However, if, at that stage, this House or another place was not satisfied with the work of the Joint Committee, it will be possible for Parliament to press for a further inquiry. At that time, the inquiry proposed by this amendment would not even have started. The Government fully intend that Parliament should play a significant role in getting to the bottom of what happened and helping make the system more robust. It is surely highly desirable and consistent with many of our previous discussions in recent months that your Lordships’ House should be fully engaged in the process, bringing the full breadth of its expertise to bear from Peers of all the main parties and none.
This is already a big Bill, on which time is now being taken up by debating the merits of an inquiry—a debate that will not help noble Lords with the key business of the House today, namely scrutinising the detailed contents of the Financial Services Bill. It may help your Lordships to know that in another place on Thursday there will be debates on two Motions—one an opposition Motion, another a government Motion—to consider in detail the questions that we have debated at some length this afternoon. It is appropriate to leave another place to debate those Motions on Thursday so that we get on with and stick to the Committee’s core task today on the Financial Services Bill.
Lord Carlile of Berriew
I am grateful to my noble friend for his response. Will he confirm that, if there is to be an SFO-led inquiry into any criminality arising from the LIBOR incident, the SFO will not be expected to meet the cost of that inquiry from its existing budget but will be given the separate funding needed so that the inquiry can be full, complete and properly resourced?
Lord Sassoon
My Lords, as was in the Statement yesterday, I can confirm that the SFO is on the case, looking at all the possibilities for criminal prosecutions and that the Crown Office in Scotland is doing likewise. There has been no request of which I am aware from the SFO for additional resources. I assure my noble friend that, if there was such a request, it would be looked at sympathetically by the Government. It has been an important and lively debate because these are critical issues for the financial services industry and I hope that, with those further explanations, the noble Lord, Lord Eatwell, will withdraw his amendment.
Lord Barnett
I am sorry to hear that it has been a wholly non-party political debate today until the noble Lord got up. However, will he at least consider—or, if not him, get somebody in government to consider—the point that my noble friend Lord Peston made? Given the circumstances of great national interest involved here, the Prime Minister should take the trouble to talk to the leader of the Opposition with a view to finding a way through that would be accepted on all sides. In those circumstances—if he could give us the kind of assurance that we need—I would certainly press my noble friend to withdraw the amendment. Can he give us any kind of assurance?
Lord Sassoon
My Lords, even better than that, two Motions will be tabled in another place on Thursday which will give an opportunity for the different views of the Government and Opposition on these matters to be aired fully. We should look very seriously at where that debates leads to.
Lord Eatwell
My Lords, I am grateful to noble Lords who have taken part in a debate which, as the noble Lord, Lord Sassoon, said, is timely and important. I was impressed by the fact that virtually every noble Lord who spoke, with one or two exceptions to whom I shall refer in a moment, felt some wider consideration was needed than that currently envisaged in the Government’s proposals with respect to Mr Wheatley and—if I may be forgiven by the noble Lord, Lord Higgins, for using the shorthand—Mr Tyrie’s review. The noble Lord, Lord Carlile, wanted to go wider in a different way by introducing the innovation of a special prosecutor. Special prosecutors have at best a very mixed record in the United States, which should be taken into account. Focusing on the legal issues is too narrow an approach in the circumstances that we face. As the noble Lord, Lord Phillips, said, there is “a huge congregation of issues”; my noble friend Lord Myners said that a fundamental review was needed; a “strategic inquiry” was the phrase used by the noble Lord, Lord Higgins. As my noble friend Lord Peston pointed out, the next major financial crisis is unlikely to occur in the LIBOR market; the next scandal will occur somewhere else. Unless we look at the underlying foundations of problems in our banking industry, we will not be in the least prepared. The noble Lord, Lord Blair, with his experience of legal matters in financial regulation, referred to a need to consider things “in the round”—I could not have chosen a better phrase.
The major difference, as I detected, with the arguments that I put forward came from those who felt that I was trying to slow things down. That is the last thing that I am trying to do. As I pointed out, I am entirely supportive of Mr Wheatley’s proposals and I am supportive of the idea of a Joint Committee moving forward to deal with the specific implications and consequences of the LIBOR element—what Mr Tyrie refers to as the ring-fence proposals. However, as the noble Lords, Lord O’Donnell and Lord Kerr, said, if there is no sign of getting to a solution, then we can have an inquiry. As the noble Lord, Lord O’Donnell, said, we should perhaps consider whether we need to go further.
The key issue then becomes one of timing and why we should not get on with all three? We should understand of course the legal issues with respect to prosecution—I take that under advisement—but what is the problem with addressing these matters? There is no other reason not to deal with all three. I reject entirely the caricature that I was suggesting that things be slowed down; I certainly was not. We need to get on with the immediate issues, but there are much wider issues affecting the future of this country that need to be addressed.
Lord Howard of Lympne
The noble Lord has repeatedly talked about the need for a wider inquiry than what I think we have all agreed to call the Tyrie inquiry. Given what on any view are the extraordinarily wide terms of reference of which the Minister has informed the Committee today, can the noble Lord identify any specific angle, matter or issue that is not covered by those wide terms of reference?
Lord Eatwell
Yes, indeed, my Lords, I can do that straightaway. Those terms refer to,
“drawing on the conclusions of UK and international regulatory and competition investigations into the LIBOR rate-setting process, consider what lessons are to be learnt from them in relation to transparency, conflicts of interest, culture and the professional standards”.
It is from them that lessons will be learnt—not from the wider characteristics of the industry; not from what the regulators were doing; not from the unintended consequences of the reforms of the 1980s; and not from the change in the nature and conglomeration of the banking industry. Lessons will not be learnt from any of those issues, which are much wider than those in the terms of reference. I am happy to provide the noble Lord with a copy.
Lord Anderson of Swansea
Has my noble friend considered the problems caused by the timetable set by the Government? If the proposed Joint Committee goes through the normal procedures, it will have to call for evidence. That process will take several weeks, which will eat up the rest of July until the Recess begins. This House does not return until the beginning of October. If the timetable is to end by Christmas, the committee will have to have several weeks prior to Christmas before the publication of its report, which essentially means that only the months of October and November will be available for its considerations. That would be a wholly impossible timetable.
Lord Eatwell
My noble friend has made an important point about the pressures that will be faced by Mr Wheatley’s committee and, if we may call it that, the Tyrie committee.
I do not want to delay the Committee. I have made two major arguments in favour of the amendments put before your Lordships. First, the terms of reference, to which the noble Lord, Lord Howard, has just referred, are too narrow. My Tyrie refers to them as “ring-fenced”. That is his expert view, which I accept. Secondly, we have to take this matter out of party politics. It was awful how yesterday’s discussions degenerated into a spat about which politician said what to whom and when, and who was responsible. That is not the issue; the issue is the future of our financial services industry. Let us get this matter out of party politics. I believe that I have heard around the Chamber support for the position that I have taken and therefore wish to test the opinion of the Committee.
Lord Sassoon
Lord Eatwell
“( ) factors likely to lead to a loss of confidence in the financial system as a whole”
Lord Eatwell
My Lords, this group of amendments is a rather mixed bag but all of them refer to various duties of the Financial Policy Committee. The first, Amendment 36, which is in my name and that of my noble friend Lady Hayter, adds to the definitions of systemic risk in new Section 9C(3) of the Bank of England Act 1998 the collapse,
“of confidence in the financial system as a whole”.
Academic research has identified four major sources of systemic risk, at least to date: first, linkages, or the connections between markets, referred to in new Section 9C(3)(a); secondly, the distribution of risk, particularly in the context of cyclical variations in risk, referred to in new subsection (3)(b); thirdly, excessive leverage, debt and credit growth, as referred to in new subsection (3)(c); and fourthly, the general collapse of confidence, which is not referred to at all. This is a serious omission—probably a slip in drafting, but none the less a serious omission in the analysis of systemic risk.
There can be a major systemic failure that is not associated with any of new subsection (3)(a), (b) and (c). You can have a situation that is not represented by linkages between firms, is not to do with the distribution of risk, and is not due to excessive leveraged debt or credit growth, but is due to the collapse of a firm in a particular strategic position within the industry, which leads to a general collapse of confidence. There is no necessary visible linkage between the firms, but the collapse of confidence can lead to a general systemic failure. Adding this fourth component—which is completely standard in the usual list of four in the academic literature—would complete the set from which, for some reason, this element has been neglected. To use the felicitous expression of the noble Lord, Lord Sassoon, it would plug the gap.
Amendment 37 is a probing amendment, although it has more substance than that. New Section 9C(4) of the Bank of England Act says:
“Subsections (1) and (2) do not require or authorise the Committee”—
the FPC—
“to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect”,
et cetera. The phrase “in its opinion” seems to me to make the new section completely meaningless. How would you ever tell? If something happened and the committee pursued some set of objectives that had a significant adverse affect on the capacity of the financial sector to contribute to growth—something the noble Lord earlier this afternoon pointed to as a very positive provision in the Bill—how would you then know whether this had been “in its opinion” or not? You would go along to the committee and ask, “Why did you do this?”. It would respond: “In our opinion, it was the right thing to do. End of story”. Consideration of the implications of its acts has been ruled out of court. The phrase “in its opinion” seems to make the clause devoid of meaningful content. If we remove it, we will improve the overall import of the Bill and, significantly, of this section that refers to the functions of the FPC.
With Amendment 39, I have a real mystery. Systemic risks are defined as credit growth, debt and leverage. However, in new Section 9C(7), all those terms are defined with respect to the UK only. Why is that? We live in a global financial market. Why do they refer to the UK? If these conditions had been in place and the FPC was considering the position of the Royal Bank of Scotland, that bank would have been found to be totally secure, because almost all the problems that assailed it occurred outwith the UK. The growth of credit from that bank was excessive outwith the UK. Its debt position was defined not by the debt it owed to individuals in the UK but to bond-holders and individuals throughout the world. I must be reading this completely wrongly but am totally mystified as to why credit growth, debt and leverage, as referred to in the definition of systemic risk, are confined to the UK. I would be very grateful if I could be enlightened and told that somehow I have got this wrong and that this does not confine consideration to the UK but is dealing with some other, wider element.
Continuing the international theme in this pot-pourri of amendments, I turn to Amendment 44, which deals with page 5, line 39, and refers to the overall functions of the Committee, suggesting that it should be,
“assessing its functions in the light of the policies of the European Financial Stability Board”.
As we know, much of the structure of the regulatory rule book for the UK will be written in Brussels. The EU, like the UK, is feeling its way towards defining the proper role of its macroprudential regulator, namely the European Financial Stability Board. The EFSB will, over the next couple of years, build a toolkit not unlike one that we desire for the FPC—rules on leverage ratios, procyclical provisioning, risk-weighted capital ratios and so on.
It is essential that measures taken in the UK are compatible with measures taken at the EU level, and vice versa. That is why the FPC must, at the very least, assess its functions in the light of what the European Financial Stability Board is doing. We will have an independent position, and the EFSB does not have the same European-wide status as the banking securities markets and insurance regulators, but none the less we want the activities of our FPC to be compatible with those of the EFSB.
To sum up, this is somewhat of a bran-tub. You put your hand in and take out amendments to see which aspect you would like to look at, so it is a slightly diverse group. Amendment 36 adds to systemic risk the risk of collapse of confidence in the system as a whole. Amendment 37 removes “in its opinion” from the new subsection whereby the FPC must take account of its impact on the financial sector’s contribution to growth, as the phrase would render the clause meaningless, or at least inoperable. Amendment 39 raises the question of why growth, debt and leverage are defined purely with respect to the UK, when—for goodness’ sake—we in Britain are dealing with some of the largest global financial institutions in the world. Amendment 44 simply adds to the functions and the need to take into account the actions of the European Financial Stability Board. Going back to Amendment 36 and the collapse of confidence in the system as a whole, I beg to move.
Lord Sassoon
My Lords, I do not know whether this group is a pot-pourri or a bran-tub, but let me attempt to do justice to a number of these amendments. Fine group though they make, they do not entirely find favour with the Government, as the noble Lord will know, because I do not believe they are necessary. I shall address each of them in turn.
Amendment 36 attempts to add,
“factors likely to lead to a loss of confidence in the financial system as a whole”,
to the list of specific types of systemic risks. I can reassure the Committee and the noble Lord in particular that new subsection (3) is not intended to be an exhaustive definition of systemic risk. The types of risk that have been highlighted in this section are generally accepted to be the main types of macroprudential risk, but systemic risks may well arise in future that are not included in these categories. That is why the FPC is free to look at anything else that it believes might pose a systemic risk to financial stability, and I would certainly expect that something that would undermine confidence in the system as a whole would have an impact on stability. It could be argued that market confidence is a necessary component for financial stability. I therefore believe that this is already included in the FPC’s objectives as they stand, and that Amendment 36 is not necessary.
Lord Eatwell
Yes, I can see that. I put a little question mark linking the two new subsections which seem to me to be contradictory, or at least inconsistent. I still do not understand why new subsection (3)(c) says that the systemic risks which the Financial Policy Committee has to consider are those which include,
“in particular … systemic risks attributable to structural features”,
and,
“unsustainable levels of leverage, debt or credit growth”.
How do we define leverage? It means,
“the leverage of the financial sector in the United Kingdom”.
Why? Debt means,
“debt owed to the financial sector by individuals in the United Kingdom”.
Why? Credit growth means,
“the growth in lending by the financial sector to individuals in the United Kingdom”.
Why? Why do we have these definitions when the noble Lord is quite right that new subsection (6) seems to contradict them?
Lord Sassoon
My Lords, the most important thing is that we are talking about financial stability in the UK, and the FPC needs to consider first and most importantly the metrics and indicators of financial stability in the UK. After all, the objective is for the FPC to protect and enhance the stability of the UK, so it is quite right that the definitions refer to the effects in the UK. We are not interested in the FPC deeming that it is not its business to deal with leverage in non-UK markets, but on the other hand it is quite right that the risks themselves may come from factors that arise outside the UK; I think that that is the point the noble Lord is trying to get to, which I believe is well covered by new subsection (6) and which we have made clear in the response to the Joint Committee. It is not the responsibility of the FPC to actually engender results outside the UK; it should be engendering results in the UK.
Lord Eatwell
I am sorry; the noble Lord must be wrong on that. If a bank is lending excessively outside the UK, then the FPC most certainly should be concerned. The idea that the FPC should be concerned only in managing results in the UK must be entirely wrong and could not be the basis of successful stability for the UK financial sector.
Lord Sassoon
No, my Lords, it is not wrong. If we are talking about a British bank, it is a British bank, and that is linked to these metrics and to the remit of the FPC. Of course that is captured in the FPC’s remit. I think we are getting ourselves excessively excited about a simple issue that is perfectly well drafted in the Bill, which is that the FPC has a wide and appropriate remit to deal with financial stability in the UK, but that it should properly take account of systemic risks that may arise both inside and outside the UK. That is exactly what the drafting of the two clauses taken together means. If the noble Lord had been critiquing the Bill as it was introduced in another place, he would have proper grounds for questioning that, but we have plugged a possible gap, and the construction now works.
Baroness Noakes
I do not wish to be unhelpful to my noble friend, but I am probably going to be. What the noble Lord, Lord Eatwell, says seems to make sense. The systemic risks in subsection (3)(a) and (b) are defined in subsections (5) and (6) as not having any geographic restriction, but subsection (3)(c), which is defined by subsection (7), as the noble Lord, Lord Eatwell, said, relates only to,
“individuals in the United Kingdom and businesses … in the United Kingdom”,
for credit growth, debt, and so on. That ignores the fact that many banks have global balance sheets. As we do not have rigid subsidiarisation, a UK balance sheet could have significant exposures to other territories, depending on how a particular bank’s overseas operations were organised. Many of them are run as branches out of the UK institution and therefore, I should have thought, would be posing the kind of risks on which the FPC would need to keep an eye. I am unclear why we have chosen that formulation. I accept that for the systemic risks it does not matter where it applies, but when we are talking specifically about credit growth, debt and leverage, it is as if it can impact on the UK only if it happens in the UK, and I do not think that that is correct.
Lord Sassoon
I shall have another go, because this is tricky but important. The Financial Policy Committee is charged with responsibility for the overall financial stability of the UK: the systemic risks and the macroprudential role. We need to distinguish that from the situation of individual firms which will or may contribute to the overall systemic risk. In this discussion we risk conflating two things. One is the systemic risk in the system, which the FPC is charged with dealing with. That is credit growth, debt and leverage as defined by subsection (7), which is referenced to the United Kingdom. The financial stability of the United Kingdom is the concern of the FPC. That does not mean that risk may not come from the international financial system—that is made completely clear by subsection (6). However, for individual financial institutions for which the PRA will have first responsibility, if the FPC considers that they contribute to the overall situation, it does not rule out or limit consideration of the factors that affect individual financial institutions. The clause and the definitions do not rule that out. We should not confuse what is being defined here. The definitions are not exhaustive of the systemic risks which the FPC should consider. It may consider whatever else it considers relevant.
Lord Eatwell
Let me try this just one more time, because the argument that the list is not exhaustive is a toss-away argument: we did not include that, but it does not matter, because it covers everything. Let us be a bit more serious and deal with precisely what is in the Bill. To make the discussion concrete, I shall deal with the first part of subsection (7), which refers to credit growth. In my opinion, credit growth is an important indicator of systemic risk. Indeed, Professor Shin of Princeton University, who is the authority in this field, has identified credit growth as one of the key variables which any macroprudential regulator should have in its sights.
Let us consider credit growth. We are told that with regard to systemic risks in particular,
“‘credit growth’ means the growth in lending by the financial sector to individuals in the United Kingdom and businesses carried on in the United Kingdom”.
That cannot be right, because the stability of banks and financial institutions in the UK often crucially depends on the nature of credit growth in lending to individuals outside the UK. The businesses to which they lend will operate within and outwith the UK. What is the notion that somehow it must be businesses carried on in the UK? Will, say, British Aerospace be included? It happens to be a British company, but I believe that most of its operations take place outside the United Kingdom. I may be wrong about that, but a substantial proportion of its operations take place outside the United Kingdom. Would British Aerospace be covered in respect of lending to businesses carried on in the UK?
We could take out subsection (7) and lose nothing. It is the old adage that you teach pupils all the time: when in doubt, take it out. It adds nothing but confusion to the specification of the role of the FPC and the definition of systemic risk. Of course, the FPC is responsible for systemic risk in the UK, because that is its juridical domain, but that systemic risk can arise from activities by UK institutions on a worldwide scale. When in doubt, take it out. Let us drop subsection (7) and make the Bill more coherent.
Lord Sassoon
As there is doubt about this—considerable doubt, it seems, in the noble Lord’s mind—that is precisely why we need to leave it in. Again, he conflates the role of the FPC, which is to deal with financial stability issues, threats and risks in the UK. He says that it is clear that the Financial Policy Committee's remit is only for the UK. I do not know how he comes to that conclusion. If there were no definition of levels of unsustainable leveraged debt or credit growth, that would precisely raise in people’s minds the question of what is their geographic limit.
Lord Sassoon
If the noble Lord will let me continue, this discussion precisely makes the point that the FPC is responsible for systemic risk, which may be measured in terms of these factors and others listed in the clause. In that respect, we are talking about the UK. That is independent of whether banks are or were lending excessively to foreign companies. That is dealt with in other ways, as I have explained: partly through the PRA looking at the individual leverage ratios or whatever for the individual bank. Equally, if there is a systemically important institution about which the FPC is concerned, this in no way limits the considerations to the business of that institution simply in the United Kingdom, because this is dealing with something else. This is dealing with the overall systemic risk that the FPC is trying to deal with, not any question about where individual firms are doing business.
Lord Eatwell
My Lords, if it in no way limits the consideration of systemic risk, I would say again that it is otiose; it is worthless. It adds only confusion to the Bill. With respect to the noble Lord, the juridical domain of the FPC is defined by the definition of “regulated persons”.
Lord Sassoon
My Lords, we risk confusing different things again. The definition of “regulated persons” is wholly different from the question of financial stability for the UK. The concept of “regulated persons” is dealt with elsewhere. We are in a completely different part of the financial landscape. We are risking mixing up the microprudential with the macroprudential. When the noble Lord reflects on this debate, he will understand that these definitions are appropriate. He would say that they are unnecessary; I say that they are necessary in order to define the objectives of the Financial Policy Committee. However, a careful reading will show that they in no way restrict the FPC or the PRA in looking at the activities of individual regulated businesses, wherever they are, in so far as they relate to regulated activities or to the financial stability objective.
I shall move on to Amendment 37, which seeks to remove the words “in its opinion” from the economic growth “brake” that prevents the FPC taking action that would have a significant adverse affect on the ability of the financial sector to contribute to long-term sustainable growth. I disagree with this for three reasons.
First, in principle, the FPC is the best placed to assess the likely effect of its own actions. We do not want the FPC to rely on other people in forming this assessment. The FPC will be the expert macroprudential regulator. It is the right body to decide how the brake applies and the drafting should reflect that. Secondly, that assessment will be completely open, transparent and subject to outside scrutiny via publication of the decisions in the FPC’s meeting records. The government amendment, which we will discuss shortly, will go further and require the FPC to explain how it has complied with the duty to consider the “brake”. Thirdly, in practical terms I do not believe that there is any sensible alternative to this approach. In whose opinion would it be, if not that of the FPC itself? I am sure that the noble Lord does not envisage the FPC’s meeting adjourning while it seeks the opinion of some other body.
Amendment 44 would add to the FPC a function of assessing its functions in the light of the policies of the European Systemic Risk Board, or ESRB. I appreciate the sentiment behind this amendment. The Government believe that, given the international nature of financial markets, macroprudential policy will be most effective when co-ordinated internationally. I assure the Committee that, in the Government’s view, the current measures in the Bill and other arrangements are more than sufficient to achieve this.
The Bill requires the FPC to have regard to the international obligations of the United Kingdom. This will encompass the obligation to have regard to any warnings or recommendations from the ESRB that apply to the UK. It is also worth noting that the Governor of the Bank of England, like all European central bank governors, is a member of the ESRB. The current governor is also the first vice-chair of the board. The Bank is, and will continue to be, closely involved with the work of the ESRB and this will be reflected in the work of the FPC. The governor will be able to feed back the decisions and policies of the ESRB directly to the FPC. As the governor and the Bank will influence the policy of the ESRB, I expect that it will often be closely aligned to that of the FPC. As I am sure the Committee is aware, the UK authorities are required to respond to any recommendations that they receive from the ESRB. I am sure that they will give careful consideration to the policies of that board.
On the basis of this more extensive debate than I had anticipated, I hope that the noble Lord, Lord Eatwell, will agree, on reflection, that his bran tub of amendments is not completely necessary. I would ask him to withdraw his amendment.
Lord Eatwell
My Lords, I think I am naïve, because I am bemused by the drafting of this Bill. Sometimes we are told that things are unnecessary; of course they are being done, but they do not need to be on the face of the Bill. At other times we are told, “We have got to describe everything in extreme detail. Even though there might be some apparent internal contradictions, at least it covers every base”. We do not seem to care very much, with respect to the logic of the story, whether we have the one or the other. I will comment on the amendments, so that we can take them formally as we go through.
With respect to the collapse of confidence in the system as a whole, that is just leaving a hole in the Bill. If the Minister wants to leave a hole in the Bill, that is up to him. I was trying to make it a bit better, and more comprehensive; just the sort of thing we are told that we should do. It would have helped; it would have provided the FPC with another stimulus in its overall definitions of its objectives, which would have contributed to its effectiveness. The idea that it is just rolled into everything else is not true. It is easy to construct models which do not have the other elements, and this element is important. I refer noble Lords to the literature: Professor Shin is the name reference.
If we turn to “in its opinion”, the noble Lord was very convincing on that one, so I take his arguments. On Amendment 39, and the whole addition of this business about the UK, I think that it is a mess. The noble Lord has been completely unconvincing. He has not been able to justify in any coherent way subsection (7) and that is regrettable. It is regrettable that the Bill is left like this. One would think that the Minister would at least say, “Let’s take it away and look at it, just to make sure that I have got it right”, since he cannot defend it on this occasion.
On Amendment 44, we are told, “Oh, it’s all going to happen anyhow. There are nice informal procedures, whereby these things will be taken into account. So you don’t need it, because it’s going to happen anyhow.” It is going to happen anyhow because the governor happens to have yet another hat: was it vice-president of the organisation? I am sure that the vice-president of that organisation is busier and better informed than the Vice-President of the United States is reputed to be on policy there. None the less, how can we be sure that our next governor—whoever it might be; maybe it will be the noble Lord, Lord O’Donnell, who is not in his place—will not also be the vice-president and be as engaged and whatever else it might be?
We cannot make laws on an ad hominem basis; that is not the right way to do it. Surely, if the noble Lord accepts that these functions are appropriate—indeed necessary—he should accept Amendment 44 or agree to have a look at it and come back with some rather better drafting than mine. In the mean time, I am sorry to be grumpy about this process, but I really thought that we were trying to improve the Bill. I beg leave to withdraw the amendment.
Lord Sassoon
Lord McFall of Alcluith
“(8) The Treasury and the Financial Policy Committee must agree and publish a set of indicators which the Committee will use to measure its performance in meeting the Financial Stability Objective.”
Lord McFall of Alcluith
My Lords, this amendment is in my name and that of the noble Baroness, Lady Noakes. The Minister has just said that the FPC is responsible for overall financial stability in the UK. That was a question that exercised us in the Joint Committee on the draft Financial Services Bill, the question being, “How do we work towards establishing financial stability indicators between the FPC and Her Majesty’s Treasury?”. We realise that it would be difficult to set indicators for the FPC and, unlike the MPC, which has a single measured target—namely, the rate of inflation—the FPC does not do that. We think it important that our indicators, particularly for external assessment, should see whether the FPC is doing its job and achieving the government target, unlike the MPC, where it is very easy for people to see that it is dealing with that issue.
We understand that the FPC’s performance will be the focus, but it is important to put forward an amendment to the Bill. The Court of the Bank of England said in its response to the Treasury Committee that it did not want this in legislation, and in a follow-up letter to the Treasury Committee the governor said that there should not be hardwiring of a narrow set of indices in legislation. He wanted flexibility on this issue and a review at regular periods.
We realise that the snapshot element of stability has to mean that we need flexibility on this issue, and that the financial stability report would be an important tool for accountability, just as the inflation report is for the MPC. However, the Government responded to the Treasury Committee that in an annual remit to the FPC they would recommend additional indices if that needed to be fleshed out. Something needs to be in the Bill, and primary legislation is a good place to put that.
The governor set out in his letter to the Treasury Committee a number of indices that we could discuss. I would like this amendment to provoke discussion of a number of those indices—for example, a simple averaged leverage ratio of the major UK banks, the aggregate leverage ratio of the UK banks, the UK long-term real interest rates, the household debt-to-income ratio and the growth of lending in the UK to the non-financial sector, which has been topical now for four or five years without any solution in sight. These indicators are important, but if the Minister thinks that the Monetary Policy Committee and the inflation report, when it is produced to Parliament, are going to cause a bit of heat, in terms of the FPC this will really exercise politicians. We can imagine that certain judgments of the FPC would be unfavourable to a number of politicians who have particular constituency interests, and the FPC would find itself in the eye of the storm. Ahead of time, looking at certain indices and working out, the FPC is extremely important. When a body such as the FPC is given responsibility, it should be allowed to get on with that. I do not want to see it in the eye of the political storm. In order to ensure that that is not the case, we have to get these indices so that we understand what the FPC is about. There is some external assessment so that politicians and others do not just jump on the FPC for a job that it is pursuing as the result of inadequate indicators that have been supplied to it. That is the basis of the amendment. I beg to move.
Baroness Noakes
My Lords, as the noble Lord, Lord McFall, has already said, my name has been added to this amendment. It is one of those that have been put forward in the spirit of co-operation with the other place, and is one of the items left over, in the opinion of the Treasury Select Committee in the other place, at the conclusion of consideration of this Bill there. I was happy to put my name to it so that we could have a proper debate on the issue in your Lordships’ House.
There does not seem to be any fundamental disagreement that some indicators of financial stability should be used in the dialogue about how well financial stability is going along and ultimately, I imagine, how well the FPC is doing its job. Consequently, I am unclear why there has been so much resistance to date to recognising the importance of this in the Bill. The Bank of England rightly said that this should not be hardwired into legislation—that is, the hardwiring of the particular indicators. I do not think that anyone has a monopoly of wisdom at the moment regarding what those indicators should be and it is clear that the nature of the indicators will change over time, so it is wholly inappropriate for specific indicators to be reflected in the Bill. The amendment would merely ask the FPC and the Treasury to agree and then publish a set of indicators, and clearly that can vary over time.
I find it difficult to understand the Treasury’s approach on this. Usually the Treasury likes to get stuck in on practically anything and not leave things to the Bank of England, but it seems quite content to leave the issue of financial stability indicators solely to the Bank of England and to have no direct locus itself. It was curious that when the Government responded to the Treasury Select Committee’s 21st report of 2010-12, when this issue was raised, the response said:
“If necessary, as part of its annual remit to the FPC the Treasury will be able to make recommendations about additional indicators that it feels the FPC should consider”.
I do not understand why we have to have this indirect dancing around recommendations made in the context of an annual remit to the FPC. The measurements that are used to tell whether or not the financial stability objective has been met should be so caught in the dialogue between the Treasury and the FPC that it should be a routine item for discussion, not one left to the possibility of recommendations.
This is all part of the link of accountability from the functions of the Treasury in relation to the FPC to Parliament. The Treasury should be accountable to Parliament for its role in agreeing the indicators and not just say, “Well, it’s really up to the Bank of England and we’ll give them a recommendation if we feel that they’re seriously out of line”. I am struggling to find why the Government have not embraced the very modest idea that the Treasury should be agreeing this issue with the FPC.
Lord Davies of Stamford
My Lords, I think that my noble friend Lord McFall and the noble Baroness, Lady Noakes, have been very persuasive on this point. All human institutions—indeed, all human beings—perform best in life and achieve the most when we set ourselves clear objectives, we monitor our performance in meeting them and we are quite clear and honest with ourselves and others about the extent to which we have met them. Clearly, with regard to an institution that has public responsibilities and fiduciary responsibility on behalf of the public as a whole to supervise our financial sector, those criteria and objectives and the extent to which they have been achieved or otherwise should be a matter of public knowledge and public debate. I am certain that matters should proceed like that.
As the noble Baroness has just said, the amendment would not in any way hardwire specific metrics or criteria into the legislation; it says merely that the FPC and the Treasury would have to agree among themselves what particular objectives or criteria they were going to adopt for a foreseeable period, and then we could watch to see whether they were adopted or not. I do not have any specific objectives or criteria to put forward except perhaps an addition to the sort of principles that my noble friend Lord McFall referred to. We should at least mention something that, while it is quite obvious, the public would expect to be there, such as that the FPC would expect to intervene sufficiently early and to be sufficiently alert to the difficulties that can arise in order to avoid situations where the Bank of England has to supply either solvency support to banks by way of deposits in a crisis or indeed liquidity support or solvency support if it requires accuracy or nationalisation. These are extreme examples of how things can go badly wrong. They have gone badly wrong over the last few years and there should be an explicit commitment to avoid those mistakes and those disasters in any agreed criteria which may come out of the discussion between the Treasury and the FPC foreseen by the amendment.
Lord Northbrook
I support the very sensible amendment in the names of the noble Lord, Lord McFall, and my noble friend Lady Noakes. As the noble Lord, Lord McFall, stated, the MPC’s remit is to target inflation. Finding an indicator—or a set of indicators—for the FPC is difficult. There is merit in amending the Bill to ensure that a set of statistics is available to help external bodies, including the Treasury, to assess the performance of the FPC. The recommendation in the Treasury Committee’s report says:
“The selected range of indicators must be flexible and under constant challenge and review, not only by Parliament, Government and the Bank of England, but also by others such as financial industry practitioners, the media, academia and the public. The indicators should be published so that the performance in maintaining financial stability may be monitored and so that it can be held accountable for that performance. The FPC should report against these criteria at regular intervals”.
To the same extent, the Joint Committee said:
“The FPC should begin work towards developing indicators of financial stability in dialogue with the Treasury. They should be published and the FPC should report against them. The set of indicators should be flexible and subject to regular review”.
The recommendations of these two committees are very powerful and, as the noble Lord, Lord McFall, has already stated, the court was generally supportive but did not believe that they should be put in the Bill. I happen to disagree: I think it would be much clearer to have these in the Bill.
Lord Eatwell
My Lords, I support the amendment in the name of my noble friend Lord McFall, and the noble Baroness, Lady Noakes. This is—reflecting our earlier discussions—one of the Tyrie amendments. It is very cleverly drafted because it does not attempt to specify a particular set of indicators. It knows that the FPC is in a learning experience: that we are all going to be in a debate over indicators, instruments and so on in the years to come. Nothing could further that debate better than to propose a set of indicators, such as, for example, the rate of credit growth, which we have just been talking about, although not just in the UK. This is an extremely valuable amendment which, is, I hear, supported all round the Committee and I would expect the Minister to take account of the weight of this support.
Also in this group is a series of amendments in my name and that of my noble friend Lady Hayter. I would like to take a few minutes to address these. They are all concerned with the reports that the Financial Policy Committee is required to make and they all specify characteristics of the report. The first one requires the presentation of scenarios: the attempt by the Financial Policy Committee to look at various potential crises—stress-testing, we call it at a micro level—and assess the impact of their policies and of various events. We have learnt from the Office for Budget Responsibility how useful this technique can be and I am sure it will be extremely effective in the assessment of macroprudential measures. Amendment 73, requiring the presentation of scenarios, fits in with the philosophy of policy-making and of the empirical basis of evidence-based policy-making in finance today. I therefore hope the Government will accept it.
Amendment 74 is consequential upon today’s acceptance of the Government’s Amendment 35A, which we agreed earlier this afternoon. After all, if the Financial Policy Committee is required to take into account government policies on growth and employment, then it is surely appropriate that it should report on its performance on what it is required to take into account. This should really have been down as a consequential amendment to Amendment 35A but I am happy to help the Government out and introduce their consequential amendment for them.
Amendment 75, on the issue of indicators, referred to by the noble Lord, Lord McFall, and the noble Baroness, Lady Noakes, places those indicators in the reporting structure of the FPC. Amendment 76 would relate the FPC’s report to the functioning of financial markets and of the wider economy. If they do not discuss that then I am blowed if I know what they are going to discuss. So let us at least hope that that is agreed by everyone around the Committee.
These are just four amendments to flesh out the characteristics of FPC reporting which will be a crucial part of FPC accountability. Given that we are handing these powers to unelected officials, the reporting structure is an important component. That reporting structure— and the debates over the role of the FPC—would be enormously enhanced by the acceptance of Amendment 40 in the name of my noble friend Lord McFall and of the noble Baroness, Lady Noakes.
Lord Sassoon
My Lords, I wish we had a simple tag that we could use for amendments which come up so often when talking about legislation where we all agree on the substance but there is a kind of debate on whether it needs to be in or not. We are substantially in that territory with a number of amendments in this group. I will take them in turn.
First, Amendments 40 and 75 seek to require the Financial Policy Committee to publish a set of indicators of financial stability. I agree that financial indicators will aid the Committee, Parliament and the public in assessing the effectiveness of the FPC’s actions, but I hope I can assure the Committee that the amendments are unnecessary. The noble Lord may groan, but I acknowledged at the outset that this is one of those “is it necessary or not” amendments. Let me try to give the evidence because it is important to adduce the evidence of how things are going already—of which there is quite a lot—to put flesh on to the bones of why I believe it. We have looked very carefully at the Treasury Committee’s recommendations and have accepted a lot of amendments as a result. The Government’s record in picking up the Treasury Committee’s recommendations is very clear. We have been through them very seriously, and we have accepted a lot of them. I am grateful to the noble Lord, Lord McFall of Alcluith, and my noble friend Lady Noakes for assiduously going through them and provoking a further debate on the ones we have not picked up. That is quite right and proper. This is one amendment that we believe is unnecessary. I will give some reasons why I think the Committee should be satisfied on this.
The starting point is the Bank’s statement, in its response to the Treasury Committee’s report on bank accountability, that the FPC will publish and report against a set of indicators. Further than that, the FPC has already given some signals of the indicators it finds most useful for assessing risk through its oversight of the Bank’s financial stability reports over the past year and so too has the governor via a letter to the Chairman of the Treasury Committee last year.
Baroness Noakes
My Lords, my noble friend is mischaracterising what I was suggesting in relation to this matter. The amendment states merely that the Treasury and the FPC,
“must agree and publish a set of indicators”.
There is no suggestion that the Treasury could use this mechanism to tell the FPC not to look at certain things. The issue is whether or not the Treasury should take the responsibility of agreeing a range of indicators that are appropriate to the FPC’s objectives, just as the Treasury does in relation to the indicator that is set for the MPC. We know that it is radically different from the MPC, and that a single indicator cannot be set and that it cannot be the sole responsibility of the Treasury. However, the Treasury should have some responsibility for agreeing with the FPC the range of indicators that will be used.
I hear the cry of a child in the Public Gallery. It is amazing the effect that one has when talking about financial stability.
It is important that the Treasury should be engaged formally in the process, and it should not just leave it to the Bank of England. Equally, the Bill should not be silent and leave it to the Bank of England to choose whether or not to put forward indicators. I agree that it is doing so at the moment, but is it wise to legislate that there should be no requirement for it to do so?
Lord Sassoon
My Lords, I am sorry if my noble friend thinks that I mischaracterised her argument. My interpretation of the words,
“The Treasury and the Financial Policy Committee must agree … a set of indicators”,
is that effectively the Treasury would have a veto over the set of indicators. What would happen if the Treasury and the FPC did not agree? It states in the amendment that they must agree. They would therefore have to find some common ground and it would be difficult if the Treasury dug its heels in and said, “We believe that this and that should be in the indicators”. Our starting premise here is that the FPC is the expert body and it should be left to define the indicators. As I have tried to indicate to the Committee, the Bank and the FPC are already on the case, providing a high degree of transparency, and there will be a series of draft policy statements available in time for consideration of the passage in the relevant secondary legislation. There will be appropriate scrutiny, but we would be going into pretty dangerous territory if we were to hard-wire the Treasury into the set of indicators that should be for the experts to set. Appropriate parliamentary and public scrutiny is allowed for in the Bill in the way that I have described.
Amendment 73, which would require the financial stability report to include the FPC’s predictions about the likely future state of the UK financial stability, is unnecessary. Subsection (3)(d) of new Section 9T, which appears at the bottom of page 11 of the Bill, already requires the report to include an assessment of the risks to stability that is very similar to the suggestion of the noble Lord, Lord Eatwell, that it includes a “range of … possible scenarios”. Subsection (3)(e) of new Section 9T already requires that the report includes the committee’s view of the outlook for the stability of the UK financial system. The interim FPC has already published three financial stability reports since its establishment. As I am sure the Committee is aware, the most recent report, published just last week, contains a whole chapter devoted to the committee’s outlook and the actions that the FPC felt necessary to tackle risks that it had identified.
I move on to Amendment 74. It is important that we learn from the mistakes of the previous system of regulation. In that system, the Bank was given responsibility for maintaining financial stability but no means of achieving that objective. That is why it is vital to give the FPC effective and proportionate powers to use certain macroprudential tools. However, the use of those tools will need to be monitored carefully. That is why the Bill already requires that the financial stability report includes an assessment of the extent to which the committee’s actions have succeeded in achieving its objectives, including its new secondary objective for economic growth. That is also why the FPC is required to publish and maintain policy statements for each of its macroprudential tools. We expect these statements to include estimates of their impact on both financial stability and growth. As we will discuss in due course, other amendments will require the FPC to produce explanations of how its actions are compatible with its objectives, including the costs and benefits of those actions. I do not therefore think that Amendment 74, which would require the financial stability report to include an assessment of the impact of each of its macroprudential measures on employment and economic growth, is needed.
Lastly, on Amendment 76, the smooth and efficient functioning of financial markets is a key requirement for financial stability. As such, the FPC’s objective to protect and enhance the resilience of the UK financial system extends to the functioning of markets. As I have mentioned, the Bill already requires the FPC to include an assessment of its actions as part of the financial stability report. The amendments that I have made require the FPC to explain how its actions are compatible with its objectives with regard to financial stability and supporting the Government’s economic policy. I therefore regard Amendment 76 as unnecessary because the same ground is already amply covered by the Bill.
I hope that on the basis of those explanations and reassurances noble Lords will withdraw or not move their amendments.
Lord McFall of Alcluith
My Lords, this was the gentlest of amendments ever. The genesis of it was the tripartite authority, and how the link between the Bank and the Treasury did not work as well as it could. Here we have an ill-defined term—financial stability—for which there is no definition whatever. On that basis, in getting the balance right between the two institutions, the Joint Committee at the time recommended—and I promoted, because I did not want anything prescriptive—that they should agree indicators. That is a very general term, so that people knew what the Treasury was expecting, and what the Financial Policy Committee was asked, and tasked, to do. That was the genesis of it. If we do not get that balance right we could find, in a few years time, someone saying in this very place—if it still exists—why did they not come to some agreement, so that there was a general consensus on what was happening?
Far from it being dangerous territory, I think it is nothing more than plain common sense. I hope that the Minister will look at this again, particularly when we come back to the Report stage, but I do not intend to move the amendment tonight. I beg leave to withdraw.
Lord Sassoon
“9CA Specification of matters relevant to economic policy
(1) The Treasury may by notice in writing to the Financial Policy Committee specify for the purposes of section 9C(1)(b) what the economic policy of Her Majesty’s Government is to be taken to be.
(2) The Treasury must specify under subsection (1) the matter mentioned there—
(a) before the end of the period of 30 days beginning with the day on which section 9C comes into force, and(b) at least once in every calendar year following that in which the first notice under that subsection is given.(3) Where the Treasury give notice under this section they must—
(a) publish the notice in such manner as they think fit, and(b) lay a copy of it before Parliament.”
Lord Sassoon
“( ) the responsibility of the Committee in relation to support for the economic policy of Her Majesty’s Government, including its objectives for growth and employment;”