17:16 - Division on Amendment 3A - Ayes: 158 / Noes: 237 - Amendment 3A disagreed.
Lord Sassoon
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, this group of government amendments comprises two straightforward technical concessions, which I signalled in Committee. The first, government Amendment 20, responds to an amendment moved by my noble friend Lady Kramer in Committee. This helpfully highlighted that the legislation does not expressly prohibit the Chancellor from appointing the governor, or one of the deputy governors, of the Bank to be chair or deputy chair of court. As I assured my noble friend at the time, the policy intention—indeed long-standing practice—has always been for non-executives to play these crucial roles. However, Amendment 20 puts this beyond all doubt by explicitly prohibiting the governor and deputy governor from being appointed as chair or deputy chair of court.
The other amendments in the group deal with the terminology around the Court of Directors. In Committee, various noble Lords, including my noble friend Lord Philips of Sudbury and the noble Lord, Lord Burns, commented on the oddity of the Court of Directors being comprised of directors, which refers to the non-executive members only, and the executive members, who are not classified as directors at all. I make a commitment to go away and look at options for clarifying this, and the amendments in this group are the result. The amendments would change all references to “director” to “non-executive director”. This means that all the members of court are now directors, with the legislation distinguishing clearly between non-executive and executive directors. As I have said, these are straightforward concessionary amendments, which usefully tidy up the court arrangements, and I hope that the House will support them. I beg to move.
Lord Eatwell
My Lords, I congratulate the noble Lord on the improvement to the drafting of the Bill that these amendments secure. It is worth pointing out that this is not a mere clarification. A persistent feature in the development of corporate governance in this country in the past several years has been the enhancement of the role and responsibilities of non-executive directors. Clear recognition in the Bill that these are non-executives carries with it the potential for them to play a proper role in the overall oversight of the Bank, a matter which we will come on to later when we discuss the role of the oversight committee. I support the Minister’s amendments.
Lord Sassoon
Lord Eatwell
My Lords, in Committee my noble friend Lady Hayter and I sought to ensure that the body of what we can now comfortably refer to as “non-executives” was suitably diverse to overcome the dangers of groupthink. Groupthink, combined with a persistent failure to challenge the executive, has been all too evident at the Bank of England over the past five years and, indeed, in the years preceding the economic and financial crisis.
We were criticised at the time for the imprecision of the term “diverse”, which we included in our amendment in Committee. We have taken those criticisms on board. We have gone away and thought about them. In particular, we were very struck by the words of the noble Lord, Lord Sassoon, in criticising our position:
“As the Committee may be aware, the Treasury’s Select Committee report into the accountability of the Bank of England concluded:
‘The new responsibilities of the Bank will require its governing body to have an enhanced mix of skills’.—[Official Report, Commons, Financial Services Bill Committee, 21/2/12; col. 21.]
The Government agree with this conclusion and in their response to the Treasury Committee they committed to take it into consideration in relation to future appointments”.—[Official Report, 26/6/12; col. 176.]
We have decided to assist the noble Lord in taking it into consideration by using exactly those words, to which he has already agreed, in this amendment.
Let me reiterate the main point. Until now, those involved at the Bank in a non-executive capacity have not shown themselves capable of holding the executive to account. That is a serious failing in corporate governance. Until now, those involved in a non-executive committee at the Bank have been seduced by groupthink or overwhelmed by the power of the governor or deputy governors. This is again a serious failing in corporate governance. It is simply not good enough for the Government to say, “Well, we understand and we’ll do better in future”. It is simply not good enough to provide vague assurances. If we are to create a new Bank of England with new major powers and responsibilities, it should be capable of dealing with those responsibilities in a clear structured way with suitable non-executive scrutiny. That is what Amendment 2A would achieve using the words to which the noble Lord, Lord Sassoon, has already agreed.
Amendment 6A, which is also in this group, makes the same point with respect to the mix of skills on the Financial Policy Committee. Of course, the skills mix will be different on the FPC from on the court. There will be a need for more technical expertise. For example, it would be a huge mistake to rely just on people with experience of working in financial services. I notice, for example, that no one appointed to the interim FPC has done any serious economic research into the phenomenon of systemic risk—not a single one. That is exactly the phenomenon on which the FPC is supposed not merely to opine but to take action. Therefore I think that a degree of diversity in the skill set of non-executive directors appointed to the FPC will greatly enhance its effectiveness and indeed its reputation.
I hope, particularly since I used his own words in my amendment, that the Minister will be happy to accept these two constructive amendments. I beg to move.
Lord Sassoon
Noble Lords may be aware that a similar amendment to Amendment 2A was tabled and debated in another place. Then, as now, and as I said in Committee, the Government do not believe that such a legislative provision is necessary or appropriate. Starting with the question of knowledge and experience, the Government have repeatedly confirmed their commitment, as I did in words quoted by the noble Lord, to ensuring the appointment of serious, knowledgeable and experienced candidates who have the appropriate qualifications and skills to carry out the functions of non-executive directors of court. These appointments are fully regulated by the Office of the Commissioner for Public Appointments, which ensures a fair, transparent and competitive process. The code is binding and the Treasury is responsible for ensuring its compliance, thereby ensuring that appointments to court are made openly, transparently and on the basis of merit.
Even without a prescriptive legislative obligation, in order to build an effective court the Treasury is mindful of the need to seek not only an appropriate depth but breadth of skills and experience. Ministers can and do take this into account in forming their recommendation without the need to further impose a duty on Her Majesty to form a view as to the candidate’s knowledge or experience before she makes the appointment.
I turn to the question of diversity, which I understand to mean not only of gender, geography or ethnic background but also of sectoral experience, insight and knowledge, as is suggested by Amendment 6A. Court and, in future, FPC appointments are advertised openly, and applications are welcomed from candidates from a variety of backgrounds. For example, the role profile for the most recent court vacancies sought people with substantial experience as board members, as head of function of major financial organisations and as senior managers in a relevant area of public policy, or in the voluntary sector or a trade union.
The latest iteration of the Government’s code of good practice for corporate governance in central government departments clearly states that,
“a board should have a balance of skills and experience appropriate to fulfilling its responsibilities. Moreover, it stipulates that the membership of the board should be balanced, diverse and manageable in size”.—[Official Report, Commons, Financial Services Bill Committee, 21/2/12; col. 22.]
However, given the size of the non-executive contingent on court and the number of external members of the FPC, it would simply not be possible to prescribe a set of criteria to ensure full diversity—that is, to ensure that each and every different background and characteristic is represented on the board and committee —without severely limiting the potential field of qualified applicants. It is therefore a question of judgment.
I stand by exactly what I said in Committee, which is that the Government are committed to ensuring an appropriate breadth as well as depth of skills; and this is as true of the FPC as it is of the court. While I agree entirely with the sentiments and principles behind these amendments, I do not believe that it is necessary or appropriate to legislate to achieve these aims.
I hope that I have provided sufficient reassurance to the noble Lord and that he will be able to withdraw his amendments.
Lord Peston
Could the Minister confirm that all these appointments will be advertised in appropriate places? I think that he said it but I am not sure that I caught what he said.
Lord Sassoon
That is what I said, and I am sure that it will be clear on the record when the noble Lord reads it.
Lord Flight
Could I ask the Minister whether he feels that the arrangements as they stand, where these posts are advertised and people apply, have actually delivered the sort of Court of the Bank of England that is appropriate to the needs going forward? There has been, I believe, fair criticism of the court for not being a robust enough body, but the court is assembled by the very arrangements that the Minister is talking about.
Lord Sassoon
My Lords, the whole substance of the point here is that we are giving the court a very clear and enhanced mandate, particularly through the oversight committee, which we will come on to. In the context of the new role and mandate for the court, it will increasingly attract the very best people who go with the new mandate. The comparison with the past is not necessarily a fair one.
Lord Eatwell
The Minister in reply says that this amendment is not necessary or appropriate. However, in attempting to substantiate those propositions, he referred to the policy of the Public Appointments Committee, which is not responsible in any way for a mix of skills but simply for the quality of the individuals who come before it. When he referred to the variety of backgrounds, he did exactly the thing that I was afraid he would do: he referred to people with senior board experience in commercial and financial organisations and not to anybody who actually understands systemic risk or how to manage it. If they did, perhaps we would not have got into the mess that we did. So I am surprised—well, I suppose that I am not surprised—but I am disappointed that he finds it neither necessary nor appropriate.
Lord Sassoon
Can I clarify that I was citing the advertisement for the most recent court appointments and not for FPC appointments?
Lord Eatwell
That is very helpful, and I thank the Minister for it, but my point on the FPC is reinforced by what he has just said. I would hope that in FPC appointments some reference would be made to the appropriate skill set, which was not that quoted, although it may be appropriate for the court. Perhaps if I could nudge the Treasury in that direction when making an advertisement, that might be a result. Having said that, I beg leave to withdraw the amendment.
Amendment 2A withdrawn.
Amendment 2B
Lord Phillips of Sudbury
My Lords, I concur with what the noble Lord, Lord Flight, has said, and I am a bit foxed by the way in which the noble Lord, Lord Eatwell, introduced this amendment. I think I heard him say that these appointments have become more and more politicised, and that he regretted that. It strikes me that to require a debate to be held in the House of Commons after the appointment has been made is an invitation to the utmost politicisation, especially because, as far as I can see, there would be no consequence to that debate, in that the appointment would already have been made.
Lord Sassoon
My Lords, before I turn to the detail of this amendment, I thank the Bill team for dealing with a significant hatful of amendments, this being the first, that turned up from the noble Lord, Lord Eatwell, rather late yesterday evening.
Lord Sassoon
I will give way in a moment. I will do my best to engage in constructive and meaningful debate. As I say, I am very grateful to the team because we did not have much notice of a number of these amendments.
Lord Eatwell
I am sure the noble Lord does not want to mislead the House. The amendments were sent to the Bill team on Friday afternoon and I had a long telephone conversation with it to discuss them. I assure the noble Lord that I had that telephone conversation. He says from a sedentary position, “not on all of them”. All the major items were discussed at that time. For him to suggest that they appeared only yesterday is inaccurate.
Lord Sassoon
My Lords, Amendments 2B, 2C, 3L, 3M, 6B, 6G and 7F, among others—maybe that is the lot—appeared at the Treasury late yesterday and not all the amendments were discussed in the conversation to which the noble Lord refers. However, there are some important and some not so important matters in these amendments and I will do my best to do them justice.
As we have heard, this amendment relates to the role of Parliament in the appointment of the Governor of the Bank of England and has been the subject of much debate both here and in another place. Specifically, Amendment 2B seeks to secure a debate in another place following the appointment of the governor, something which I do not believe is necessary or appropriate. The Government are committed to maintaining an appointments process that is proportionate and attracts candidates of the highest quality. It is important to ensure the credibility of the candidate and safeguard his or her independence. If the appointment was subject to a debate in another place, I suggest that there is a significant risk of politicising the process and undermining the appointment of the new candidate. Of course, it has been argued that such a debate could enhance the credibility of the candidate but previous governors have achieved credibility without being subject to such a debate. Credibility ultimately stems from effective action to meet the Bank’s objectives. If the appointment were subject to a debate in another place, the candidate would not be present to answer questions or defend him or herself.
The noble Lord, Lord Eatwell, has already quoted me in the previous debate. I quote what he had to say on this matter in Committee on 26 June. He said:
“We do not want to politicise appointments to the extent that has occurred in the United States”.
The suggestion that appointments might end up being considered by the whole House made him “nervous” as it would,
“inevitably be whipped and become very political indeed”.—[Official Report, 26/6/12; col. 165.]
I very much agree with that. Therefore, the Government believe that the pre-commencement hearing held by the Treasury Committee strikes the right balance in terms of scrutiny of this executive appointment and allows for a more constructive debate with the candidate in attendance to satisfy the committee’s concerns about his or her personal integrity and professional competence. The Government welcome the Treasury Committee’s ongoing role in holding such hearings and, importantly, as my noble friend Lord Flight reminded us, holding the governor to account throughout his or her tenure. I hope I have provided sufficient reassurance and that the noble Lord feels able to withdraw this amendment.
Lord Peston
I wish to make a comment and ask the Minister a question. My comment is that there are no long words in this amendment. I would have thought that the average person who had been at school could just about understand it in a few minutes of reading it. The idea that the Minister cannot address your Lordships’ House without several days, if not weeks, of Treasury back-up seems to me absolutely preposterous. He should stop bellyaching about this sort of thing.
My question to him is: if this debate took place in both your Lordships’ House and the other place, has it not occurred to him that that debate might be devoted mainly to saying what an excellent appointment has been made in this case, what an extremely good person has been chosen and wishing him well in his very arduous task? Why is the Minister taking it for granted that the debate would be mostly about slagging off whoever the appointed person may be?
Lord Sassoon
My Lords, I am not taking it for granted. I am merely quoting the fears of the noble Lord, Lord Eatwell, when he addressed this issue in Committee. “Inevitably be whipped and become very political indeed,” were his words, not mine. However, I agree that this is the way that these things tend to go. The concept of a congratulatory first is not one that sits easily with another place.
Lord Eatwell
My Lords, I am grateful for the comments that have been made—some accurate, some less so. First, with respect to the issue of being politicised, my concern is motivated primarily by the powers being translated from elected persons to an unelected person. That is what is happening in this Bill. This will inevitably make the position of the governor much more of a political focus rather than the markets and technical focus it has been very much in the past—perhaps not in the 1930s with Montagu Norman, but in recent years. That is where the politicisation has come from. We need to recognise that powers have been transferred from the elected to the unelected by giving the elected some role.
The Minister did me the honour of quoting me, although of course out of context. I was referring—as I am sure he would agree—to pre-appointment hearings as are common in the United States. This is not the intention of this amendment at all. However, a series of important issues is going to come up again and again unless the Government take very seriously the very considerable conglomeration of powers in the hands of the governor, given by this Bill, and the fact that powers are being moved from the elected to the unelected. It is vital that Parliament should consider this crucial issue. I hope that the Minister will take some of these considerations away and think very carefully about them. In the mean time, I beg leave to withdraw the amendment.
Baroness Noakes
My Lords, as a former member of the court, I feel slightly under attack this afternoon, but I was long gone before the financial crisis. In the context of the previous amendment, my noble friend Lord Flight pointed out that the important way to express accountability is on an ongoing basis, not at the point of appointment. The most important thing, going forward, is whether or not the new oversight committee will do its job and who will make sure that it is held to account. It seems to me that it should be the Treasury Select Committee in another place and it is not something for which we need to legislate. The Treasury Select Committee is well apprised of the need to ensure that there are proper accountability mechanisms to act as a counterweight against significant additional powers for the Governor of the Bank of England; and that there are proper checks and balances within the Bank of England and then from the Bank to Parliament.
Lord Sassoon
My Lords, I am grateful to the noble Lord, Lord McFall of Alcluith, and to my noble friend Lady Noakes. My noble friend was an estimable member of the court and I am sure that she brought great distinction to its deliberations. As she reminds the House by referring to the oversight committee, the noble Lord, Lord McFall is right to say that the court has not always necessarily done everything that Members of Parliament would have wished in recent years. Critically, that is why the oversight committee that we are introducing changes the way that the court and particularly non-executives on the court will operate. I am grateful to be reminded of this critical background to our discussion. The other background point to make is that the noble Lord, Lord Eatwell, has made a number of references in this and earlier debates about politicisation and transferring powers from elected politicians to the Bank. This is a red herring. I am sure that I should not say it is nonsense, but I simply do not accept this background analysis.
Powers are not somehow being moved from elected politicians to the Bank. The Bank is being granted a range of powers which are regulatory in nature. Financial regulation has been undertaken by independent regulators for over a decade in the UK and before that, of course, large swathes of it were not in any way carried out by elected politicians or even properly constituted regulators. They were done in a self-regulatory way. So this idea that somehow we are transferring stuff from politicians to the Bank, as if some heinous crime was being committed and that we need lots of belts and braces, is the wrong background.
Let me specifically address the amendments here and the role of Parliament in key appointments. As we have heard, they are different in some respects from the previous amendment about appointing the Governor. The appointments of non-executive directors of the court are not currently subject to a pre-commencement hearing by the Treasury Select Committee. As with the Governor, the appointments of non-executive directors are made by Her Majesty and governed by the OCPA code. As I explained earlier, this stipulates certain practices in terms of a robust and fair appointment process, with appointments made principally on merit. Members of the court are accountable to Parliament and it is right that the Treasury Select Committee can and does invite them to give evidence at the appropriate juncture. However, the non-executive directors are not policymakers. Their role is to oversee the running of the Bank and it would be highly unusual to make such appointments subject to the consent of the Treasury Select Committee. The Government therefore believe that the current appointments process for non-executive directors of the court remains the right one. Similarly, the appointment of external FPC members will be subject to a robust process that seeks qualified and experienced candidates. External members of the FPC will be subject to pre-commencement hearings—as was the case with the appointees to the interim FPC. The FPC will be accountable for its actions to the Bank’s oversight committee and directly to the Treasury Select Committee, which we expect to take regular evidence from the external members of the FPC, as it does already from the MPC and the interim FPC.
As with the roles of governor and external members of the MPC, the market-sensitive nature of these roles means that the combination of pre-commencement hearings and Treasury Select Committee scrutiny in-post offers an appropriate balance in terms of parliamentary scrutiny. Again, the Government welcome the ongoing role played by the Treasury Select Committee. I hope that I have provided sufficient reassurance for the noble Lord to withdraw his amendment.
Lord Eatwell
My Lords, I am grateful to everybody who took part in this short debate, and especially for the support of my noble friend Lord McFall, who has such experience in these areas. I always take very seriously indeed the opinions of the noble Baroness, Lady Noakes. I quite understand her concern that accountability should be a phenomenon that is ongoing and not just on appointment. Why not on appointment, too, so to speak?
I was puzzled by the introduction with which the noble Lord, Lord Sassoon, prefaced his remarks. He stated that financial regulation had been going on for a decade. It has been going on at an international level since 1974. The whole point of this legislation is that macroprudential legislation has not been done at all before. That is why the various reports such as the Turner review by the FSA, the report of the US Treasury in 2009, and the report of the high-level committee of the European Union led by Monsieur de Larosière, all identified a new role for financial regulation in dealing with macroeconomic variables, which it had never done before. This is a new area of financial regulation which is specifically the responsibility of the Financial Policy Committee.
The Minister said that there had been no transfer of responsibilities. Was not the control of credit in our economy the responsibility of the Treasury? Has it not been so since the Second World War? Did not the various Acts on the control of credit start as Treasury Bills? Now the availability of credit is predominantly the responsibility of the Financial Policy Committee. That is a transfer of powers. I wonder if the Minister would like to consider that example.
The Minister then said something truly extraordinary. He said that the non-executive members of the court were not policymakers. Perhaps I may refer him to Clause 4 on financial strategy, which states:
“The Court of Directors must … determine the Bank’s strategy in relation to the Financial Stability Objective”.
That sounds to me as if they are policymakers. They must “determine the Bank’s strategy”. Are the non-execs therefore to sit down and keep quiet?
Lord Sassoon
My Lords, will the noble Lord, Lord Eatwell, concede that that is the responsibility of the Court of Directors as a whole, not of the non-executive directors as a group?
Lord Eatwell
Certainly, but that is not what the Minister said. He said that the non-executive directors were not policymakers—but they are to participate as a nine-member majority of the court, including the chair, as he pointed out. However, we now hear that they are to sit silently while the executive directors determine policy. That is nonsense and the Minister knows it. These individuals are policymakers—and rightly so; they should be. That is why we need the right sort of people, and why it is right that there should be suitable hearings preceding their appointment, as suggested by the amendment.
The Minister is getting into a muddle. He should go away and think hard about what the Financial Policy Committee is required to do, recognise that there has been a transfer of powers and that macroprudential regulation is something entirely new that has not been done before; and try to get some of the legislation right. In the mean time, I beg leave to withdraw the amendment.
Lord Sassoon
Lord Eatwell
My Lords, this is a major amendment that I had the pleasure of discussing with the Bill team on Friday. I was going to preface my remarks by saying that there is a developing consensus that the Government are piling responsibilities on the Bank of England. But I hear that consensus is not developing on the other side of this Chamber, since the noble Lord, Lord Sassoon, does not seem to recognise that the Bank and the governor are having these extra responsibilities or indeed that there has been transfer of powers.
Interestingly enough, others do recognise that. Mr Tyrie, just last week, with the oversight committee already in the Bill, referred to the Bank’s defective governance. Then, Mr Bill Winters, a former executive at JP Morgan and author of one of the very tightly constrained reviews into the Bank’s operations that was published last week, concluded that the Bank was too “centralised and hierarchical”. Then Sir John Gieve, a former deputy governor, commented on the same review saying,
“how do you bring more challenge into a hierarchical organisation?”.
That was last week, with the oversight committee in place. Those comments echo criticisms made by a number of former senior Bank of England staff and by serious commentators in the financial press. This is a serious issue.
I have already listed the major issues, but I will list them briefly in the context of this amendment because it may help the House. With respect to the powers assigned to the governor in the Bill, the power of an unelected person will be equivalent almost to that of the Chancellor of the Exchequer. Indeed, it will exceed the Chancellor’s powers in that the Chancellor is under constant scrutiny from Parliament whereas the governor is under less intense and less constant scrutiny.
We have to remember that the governor will not only chair every financial policy committee in the land with the sole exception of the FCA, but will be the lone high-level interlocutor with the Chancellor. He holds these positions while having no statutory responsibility to consult or involve other senior officials at the Bank or non-execs. He may consult and he may delegate, but it is entirely up to him or her. If they do not wish to do so they can ignore them all.
In Committee, the Government took an important step by creating the oversight committee. But noble Lords will notice that within the designations of the responsibilities of the oversight committee, there is one notable oddity. There is a notable absentee. Nowhere does there appear the verb “to oversee”. We have an oversight committee that does not oversee. In fact, a careful reading of the designated activities of the oversight committee reveals that all its key responsibilities are retrospective. It must keep under review. It must monitor. It must review procedures. It must conduct performance reviews. The only thing that it must not do is oversee. This is not an oversight committee, it is a hindsight committee—a valuable role, no doubt, but hardly an activity to moderate the powers of the “Sun King” governor other than by retrospective embarrassment, and governors of the Bank of England seem to be peculiarly impervious to embarrassment.
The amendment introduces the verb “to oversee”. It gives the oversight committee the power of oversight. This will have a number of beneficial consequences. The governor and the executive will, as in all good governance systems, be accountable to the non-executives for their activities and their policies. As in all well run organisations, the non-executives will not design the strategy or tactics of the Bank—that is the job of the executive—but they will be the advisers and the arbiters. They will oversee.
Instead of being either a glorified review committee in the shape of the noble Lord’s hindsight committee, or creatures of the executive, as in the court, the quality of a person likely to be willing to devote a considerable amount of time and effort to the job of non-executive of the Bank will be significantly enhanced because they are getting a real job. The foundations will be laid for the creation of a modern governance structure within the Bank of England, appropriate to the 21st century and to the major powers now vested in the Bank.
In this group there are also Amendments 3B, 3G and 3H, which are a direct consequence of the recognition of the role of the oversight committee in overseeing the activities of the governor in particular, and of the Bank in general. If the oversight committee is to exercise this role effectively it should have the final sign-off to the policies prepared by the court and by other executive institutions. I should be clear that in all well run firms it is the task of the executive to prepare policy and to execute it, but it is the role of the non-executives—of the oversight committee—to scrutinise and sign off the executive’s proposal. The oversight committee should oversee.
Amendment 3K makes clear that the role of the oversight committee in its task of overseeing is to approve the policy prepared by the court; it is the precise role of non-executives in all well run companies. Amendment 6C makes clear that the oversight committee is not to be confined to the impotent ghetto of reviewing procedures of the FPC but can also review the FPC’s policies. After all, if it cannot review policies what will the performance review be about? If it is given the task of performance review, surely it should review policies and not simply procedures.
I quite understand that the Government have not had long to consider this core idea, although they have had a bit longer than the noble Lord earlier suggested. I give credit to the Bill Committee and I understand the pressures it is under; similar pressures are experienced in my office.
Lord Sassoon
I do not want to labour the point but would the noble Lord, Lord Eatwell, accept that I did not list Amendment 3A as one that came late? I fully accept that this is not one of the hatful that I referred to as arriving late. We have indeed had longer to consider this amendment.
Lord Eatwell
Then I am sure that the noble Lord, having given the amendment such mature consideration, will be able to accept it.
I hope that, at the very least, the Government will agree to take this proposal away and think about it. After all, if we are going to have an oversight committee it should oversee; otherwise perhaps the Government should simply change the committee’s name. I beg to move.
Lord Sassoon
My Lords, I am grateful for this debate. The noble Lord, Lord Eatwell, started by welcoming the creation of the oversight committee as an important step, but then went a leap too far in getting rather confused about what, in his terms, “modern corporate governance” really means. As so many noble Lords have explained, it means that ultimately the governing body as a whole—the board of directors, the Court of the Bank of England—has to take the key decisions. As the noble Lord, Lord McFall of Alcluith, said, the principal role of the oversight committee is for learning lessons. I completely agree with him, and will go on to explain that the role of the oversight committee, as constructed in the Bill before these amendments, is completely in line with what the Treasury Select Committee envisaged.
My noble friends have explained all these things much more clearly than I could. The noble Lord, Lord Nickson, modestly said that he is out of date. I do not believe that he is out of date at all. He and the noble Lord, Lord Kerr of Kinlochard, who has great current experience of corporate governance in one of the UK’s largest multinationals, have got this right. I had been puzzled—I wondered whether I had missed something in all this—but I am grateful that the House shares my concerns.
To address the specifics, Amendment 3A would shift the oversight committee’s functions from a more backward-looking, reviewing role—the lesson-learning role that the noble Lord, Lord McFall, referred to—to a real-time overseeing role, which would involve scrutinising and perhaps second-guessing the Bank’s policy decisions while they are being taken. As my noble friends and other noble Lords have made clear, if that role is taken at the board level, it is taken by the board as a whole. I do not believe that this proposed new role would be at all appropriate.
As I have said, we can look to what the Treasury Select Committee in another place said when it recommended the introduction of ex-post reviews of the Bank’s policy performance. This is worth quoting at some length, from the committee’s 21st report of the Session, Accountability of the Bank of England:
“The Governor stressed to us that ‘the decisions that the PRA, FPC and MPC make on policy are not decisions that the Court needs to second guess’. We agree. The Bank’s governing body should place more emphasis on oversight and ex-post scrutiny. This does not require or authorise it to become involved in second guessing immediate policy decisions. But there is a need to analyse and learn lessons from the actions of the Bank on a routine and consistent basis, drawing on expertise from within the Bank. Ex-post review of the Bank’s decisions would, we believe, be in the interests of good governance of the Bank”.
The report went on to recommend that ex-post reviews of the Bank’s performance be carried out,
“not less than a year after the period to be reviewed”
in order to avoid,
“second guessing at the time of the policy decision”.
The current wording describes one of the functions of the oversight committee as,
“keeping under review the Bank’s performance”,
which is entirely consistent with the Treasury Select Committee’s recommendations and strikes the right balance between ensuring effective retrospective scrutiny of the Bank’s policy decisions and avoiding a situation where the non-executive members of the court would be second-guessing the policy decisions taken by the Bank’s expert policy committees and Bank executives. Of course, in this context my noble friend Lord Blackwell is quite right to point out that when these decisions are for the court as a whole, the non-executives are, as one would expect in any good modern corporate governance structure, in a majority.
I am a little puzzled by Amendments 3B, 3G, 3H and 3K, which seek to make the non-executives of the court solely responsible for determining the Bank’s financial stability strategy. Again, this is completely at odds, as the House has been told, with the way in which model corporate governance operates. Surely the reason for making the governing body as a whole, in this case the court of directors, responsible for the strategy is because it is that body, and in particular the executive members of that body, who will be accountable for delivering the strategy. Like other noble Lords, I struggle to see how the process that is proposed in these amendments could possibly work in practice. The oversight committee is made up of the non-executive directors of the court and those non-executives make up the majority of the court, as my noble friend has suggested.
On the role of the non-executives, I am sure that the noble Lord, Lord Myners, is right when he says he could not get the Treasury to take concerns seriously back in 2007, but I cannot answer for what happened in the Treasury under the previous Administration. All I can say is that if any member of the court of the Bank, whether executive or non-executive, came to the Treasury now, we would take their concerns extremely seriously.
I do not want to belabour the point, but I am not sure whether the noble Lord, Lord Eatwell, is envisaging situations in which the non-executive directors, coming from a court meeting in which they agreed the financial stability strategy, then go into an oversight committee meeting where they decide perhaps that the strategy agreed by the whole court was wrong in some way. We need to distinguish here clearly, as have many noble Lords, between the differing responsibilities of the court and of the non-executives on the court. The court, as the Bank’s governing body, is responsible for setting the Bank’s overall strategy, including its strategy for financial stability. It is the responsibility of the executives of the Bank, with the support of the court, to deliver that strategy. It is the responsibility of the oversight committee to hold the executive to account for how it delivers on the strategy by keeping its performance under review and, again in the words of the noble Lord, Lord McFall, for learning the lessons. This split of responsibilities in the Bill is appropriate and consistent with modern corporate governance.
Finally, Amendment 6C would add policies to the existing requirement in subsection (4) of new Section 9B that the oversight committee keep the procedures of the FPC under review. I can assure the noble Lord, Lord Eatwell, that this amendment is entirely unnecessary. The oversight committee is already responsible for keeping the policy and performance of the FPC under review. Subsection (2)(a) of new Section 3A of the 1998 Act, as inserted by Clause 3 of this Bill, clearly states that the oversight committee is responsible for keeping under review the Bank’s performance in relation to all of its objectives and strategy, including the objectives of the Financial Policy Committee. With the benefit of this useful debate, I hope that the noble Lord will see fit to withdraw his amendment.
Lord Myners
I want to be helpful and pick up one point about the references that have been made by several Peers to models of good corporate governance. The noble Lord, Lord Flight, with considerable experience and great standing in business in the City, has already pointed out one respect in which the court cannot be compared with a conventional board of directors: its ability in the end to remove the executive if it has lost confidence in it.
The point that I raised about our experience in 2007 is another distinct difference from corporate governance; namely, there is no shareholder to whom the non-executives can appeal. What happened in 2007 was that three members of the court had meetings with Treasury officials to raise their concerns about the absence of full challenge and the dominant influence of a single voice in the court. They expressed those views to Treasury officials, who shrugged their shoulders and said that there really was not much that they could do. The governor is ultimately appointed by Her Majesty and members of the court are elected to do their work, and there is nothing that the shareholder—effectively the Treasury—can do. That is another area where we must be very careful not to assume that we are just picking up the corporate model and inserting it into the Bank. The Bank is different by virtue of the very limited powers placed on the court and the absence of a shareholder.
Finally, I question whether the Minister’s constant references to good corporate practice would be reflected in the role of a board in overseeing ex post facto what a company does. My experience of sitting on boards is that boards are very much involved in reviewing the formulation and implementation of strategy on a constant basis, not in carrying out post-implementation exercises. Your Lordships’ House should be careful to recognise that there are limits to the complete applicability of corporate practice to the particular circumstances of the Bank of England, the court and the governor.
Lord Sassoon
My Lords, I know that the custom of this House on Report is that noble Lords do not make second substantive speeches, so the noble Lord will understand if I do not respond to his points—otherwise we will not make much progress. However, I will clarify one point in answer to the question asked by my noble friend Lord Flight about the removal of the governor and the suggestion by the noble Lord, Lord Myners, that the governor cannot be removed. This is of course wrong, as I am sure the noble Lord, Lord Myners, knows. If he would like to refresh his memory of the Bank of England Act 1998, paragraph 8 of Schedule 1 sets out precisely the conditions under which the governor can be removed.
Lord Eatwell
My Lords, I am very grateful for the discussion which I have enjoyed very much. I have been educated and entertained by the remarks made by noble Lords all around the House. The key position that we have to start from is that the Bank of England is different. Its structure is different and the structure of responsibilities is different. When we think about corporate governance, we have to think about the way in which we can maintain a suitable degree of accountability.
In Amendment 3A, I was attempting to nudge the Government a little further on the oversight committee which, as the noble Lord made clear in contradiction to what the noble Baroness, Lady Noakes, said, is entirely retrospective at the moment. In those circumstances, the maintenance of accountability is not really enough, given the degree of responsibility and powers that the Bank will have.
It occurred to me that a non-executive committee often has the final say. When things really go wrong, it is the non-executive committee that has to gather together and deal with what is going wrong in a company. Here the non-executive committee, by nudging it a little further and including the word “oversee”—for an oversight committee—would actually nudge the oversight committee, as conceived by the Government, in a direction in which it could hold to account the executive of the Bank to a greater degree than is the case at the moment. I think that the Government are being excessively complacent about this. We have this massive switch of powers, and we are being told that everything will be all right and that this Committee—which, as the noble Lord says, is entirely retrospective—will somehow create an aura of accountability. I just do not see that happening.
I regret that the noble Lord has not taken a constructive view of what we were trying to achieve. I would have been quite happy to accept some recognition by him that there is a degree of a problem in this particular institution and that we need—in this House and, indeed, in Parliament in general—to address this problem if we are to move forward successfully with the structure of financial regulation and oversight in this country. The noble Lord has given no indication of any sympathy whatever. Instead, he wants to keep the oversight committee purely retrospective, with no ability to take a broad view—not on a daily basis, of course not—and he wants the non-executives to have that specific role. Given that he has shown no interest at all and no understanding of the serious issues involved, I would like to seek the opinion of the House.
Lord Peston
My Lords, I support this amendment in substance. The noble Lord will be delighted to hear that I also wish to make a couple of semantic points. My noble friend said that the committee should have its own staff. My view is that it should not only have its own staff but should appoint its own staff, thereby guaranteeing that the staff are its own, work for it and, to use the slang expression, are not “narks” of the governor. Therefore, the noble Lord ought to accept the amendment.
My two semantic points are as follows. First, I find the committee’s name most unattractive. Will the noble Lord ask the Bill team to look up the definition of “oversight” in the dictionary as it has a very definite meaning which I am sure the Government and the Minister do not wish to be associated with this committee. It may not be too late to choose a more felicitous name. I wonder whether I am the only person who has thought what a ridiculous name the committee has.
Secondly, I congratulate my noble friend Lord Eatwell on solving the problem with which, as your Lordships know, the noble Lord, Lord Barnett, and I are obsessed: that is, the “must/may problem”. My noble friend has solved it in a really interesting way. He does not use “must” or “may” but “will”. I would like the Minister to ask the Bill team whether it would consider going down the path of using “will” rather than “must” or “may”.
Lord Sassoon
If the noble Lord, Lord Peston, could persuade his noble friend to rein back to just a couple of amendments a day, I am sure that we could carve out time to look at all sorts of semantics. However, I shall stick to the substance of this amendment, which seeks to place the bank under a statutory duty to ensure that the oversight committee has,
“adequate economic, legal and research support”.
I entirely agree with the sentiment behind this amendment. As we have already discussed this afternoon, the non-executive oversight committee has a very important job to do in reviewing the Bank’s performance and will require access to the information and analytical support that it needs. That is why, for example, the legislation makes it clear that members of the oversight committee have access to the meetings and papers of the MPC and FPC and have a specific remit to commission work and reviews from external bodies and experts.
It is a well established principle that it is the responsibility of the governing body of any organisation to ensure that its members and sub-committees are properly supported. I recognise that the Bank was slow to realise that the external members of the MPC required dedicated resource and support. I am confident that the Bank has learnt its lessons on this. Both the MPC and the FPC members have access to all the analytical and secretariat support that they need. I am wholly confident that the Bank will similarly make support available to the oversight committee to make sure that it is adequately supported without the need for legislation on this point. I hope, therefore, with the further reassurance on that, the noble Lord will see fit to withdraw his amendment.
Lord Eatwell
What the noble Lord has said does not address the important issue here. He said that the oversight committee will have access to papers, be able to commission work and have access to the secretarial and research skills of the Bank. However, the point of this amendment is to give what every non-executive group really needs, which is access to independent advice. Any non-executive group of which I have been a member has always prized its access to independent advice: that is, its ability to seek advice outwith the immediate organisation of which it is a part.
The point has been made around the House this afternoon that the Bank of England is different in a series of ways with respect to its overall organisation. It is also different in terms of the sorts of powers which it will exercise. Therefore, I feel very strongly that it is important that the oversight committee, which is, after all, the committee of non-executives, has access to independent advice. It is regrettable that the Government feel that assurances are enough. I entirely accept that the noble Lord and, indeed, the officials who have looked at this question feel confident in giving their assurances but they cannot bind their successors. The point of this amendment is to ensure that successors who hold this responsibility both within the Treasury and within the Bank recognise the importance of the advice and support that the oversight committee should receive if it is to do its job. I hope that the noble Lord will take that away and think about it although I probably hope in vain. Nevertheless, I beg leave to withdraw the amendment.
Lord Armstrong of Ilminster
My Lords, if I may take the semantic point raised by the noble Lord, Lord Peston, if the word “oversight” is capable of being misinterpreted why not use “supervisory”, which is just the Latin version and means exactly the same without the possible misunderstanding?
Lord Sassoon
My Lords, I am not at this point going to get sidetracked into semantics, fascinating though I find it, as noble Lords know. Let me echo again, because I had said already what a good job the Bill team was doing, that I completely agree about that. I am very sorry that the noble Lord, Lord Peston, thinks—I am sorry; I meant the noble Lord, Lord Barnett. Do forgive me. The noble Lord, Lord Peston, may think that I am doing an excellent job but I know that the noble Lord, Lord Barnett, does not. Anyway, it is entirely my fault and not the fault of my officials, as the noble Lord recognises.
Let me try to be brief on this one. This is not a question of the governor having a power to overrule the oversight committee, as other noble Lords have said. The construction in the Bill is that it is for the Bank as whole—the court of the Bank—to decide and to make an informed judgment whether damage might be caused by the publication of a report on a public interest test. I understand the starting point of the noble Lord, Lord Eatwell, which is some suspicion or concern that the people who commissioned the report—the oversight committee—should be the group of people who decide whether it should be published. However, it is appropriate for the Bank as a whole—that is, the court, with a majority of non-executive directors, as my noble friend has reiterated again—to take the decision.
Lord Sassoon
Perhaps the noble Lord will let me finish. It is a decision of the Bank. The Bank is better placed to make that judgment and the noble Lord, Lord Kerr of Kinlochard, makes the point that it would be only in exceptional extraordinary circumstances —I cannot remember his exact words—that one would envisage this being overturned somehow on the whim, or rather the view, of the governor, when the Court of the Bank of England looks at it.
Let me make one more point before I give way to the noble Lord, Lord Eatwell, because one critical part of this is that the Treasury will receive copies of all reports, regardless of their sensitivity. I would expect the Treasury to come to its own view on whether each report is genuinely unsuitable for publication. If it believes that the public interest carve-out was not justified, it would challenge that decision where appropriate, because the Treasury ultimately has an even wider perspective on the public interest. It is therefore right to remember that there is that further fallback, because the reports in all cases will go to the Treasury. Let me, as well as asking the noble Lord to consider withdrawing his amendment, give way to him.
Lord Eatwell
I just wanted to ask a question of clarification. What particularly disturbed me about subsection (3) of new Section 3D was that it refers to “the Bank”. Can the noble Lord assure me that in that subsection “Bank” means “court”? If he can, I would be happy. That is the point that I was trying to make. I think that I confused the noble Lord, Lord Kerr, slightly in that respect.
Lord Sassoon
Yes, my Lords, the court is the governing authority of the Bank, and that is, I believe, completely the right construction for this particular matter.
Lord Barnett
What the noble Lord said just now seems to provide a new reason to change the name of the oversight committee. We do not need one. He is saying that the governor and the board of the Bank will know better than the oversight committee. Why bother with an oversight committee at all? That would be a simple solution.
Lord Sassoon
My Lords, I find it is bizarre and slightly disappointing to see this amendment again. My noble friend Lord De Mauley explained in Committee why the FPC requires an express power in statute to make recommendations whereas the Treasury does not. As the noble Lord, Lord Eatwell, recognises, I wrote to all interested noble Lords on 2 July setting out that explanation again, so I had rather hoped that the matter was resolved. I fear I should again explain the legal position, which is that the Government are clear that both the Treasury and the FPC should be closely involved in the ongoing development of the Bank’s financial stability strategy. I am happy to put that on the record. I have said a lot of other things which I am happy to be quoted on, such as comparing the practice under the old tripartite regime of people not talking to each other on a regular basis with what I now observe, which is much more regular communication. However, by amending this part of the Bill, I suggest we will not do anything more on that front. The Government are clear on that, which is why subsection (2) of new Section 9A of the Bank of England Act, as inserted by Clause 4 of the Bill, requires the court to consult both the FPC and the Treasury before determining or revising the Bank’s financial stability strategy. We do not need to overlabour the point, but it is a critically important one that the noble Lord raises and it is in there.
Moreover, the Government’s view is that neither the FPC nor the Treasury should have to wait to be formally consulted on the strategy. This should be part of the normal ongoing dialogue. If either body wishes proactively to suggest changes or amendments to the Bank’s strategy for financial stability, it should and will be able to do so. In order to ensure that this is the case, it is necessary to create an express power for the FPC to make recommendations to the court regarding the Bank’s strategy. As I have said before, this is because the FPC is a creation of statute, which means that the FPC’s main functions need to be set out in the legislation. That is why new Section 9A gives the FPC a power to make recommendations to the court on the financial stability strategy. If the provision did not exist, it would be unclear whether the FPC had the power to do so. In contrast, it is not necessary to create specific statutory provision to allow the Treasury to make recommendations. The Treasury already has a common-law power to make recommendations at any time to whoever it wishes.
Of course, the noble Lord, Lord Eatwell, does not challenge that underlying basis, but he makes a huge drama out of European authorities and overseas bodies needing to understand whether the Treasury has authority to do this, that or the other. I find it very unlikely that European bodies would need to do that, but if they did, their lawyers would understand very clearly the common-law construction, which would be explained to them. If we went down the line of not relying on the common law in legislation, I hate to think how a Bill like this would grow like Topsy.
I am genuinely puzzled by all this, but I hope that the explanation of the common-law position is clear and that it can be explained in these unlikely situations that the noble Lord postulates. Of course, these European authorities will have the benefit of reading Hansard as well. It is an important point that the interaction is much better than in some respects it has been in the past. We expect that to be the case. I would like to think that perhaps we have finally put this point to rest and I ask the noble Lord to withdraw his amendment.
Lord Eatwell
My Lords, it would be easier to withdraw the amendment if the noble Lord had actually answered the points. Essentially, all he has done is reiterate the common-law point and make the rather bold assumption that European-trained lawyers on the European Systemic Risk Board would understand the common law. However, if he is confident that that is the case and that a suitable number of British-trained lawyers, or the equivalent, can be seconded to that body, then perhaps things will work out in a satisfactory manner. I am glad to hear that he is confident that the interrelationship between the Bank, the Financial Policy Committee and the Treasury is ongoing and regular today as it was not in the past. That is a considerable improvement and I am pleased to have that assurance. However, there is an important element in financial legislation which the noble Lord overlooks. Financial legislation in a global financial market has to be really clear to all those around that market who read it. Simply saying, “We know because we are trained in the common law,” is really not good enough. I was trying not to change the relationship but to make it clearer. However, given that the Government are apparently not interested in doing that, I beg leave to withdraw the amendment.
Lord Myners
My Lords, I will pick up on a term in the final sentence of the contribution of the noble Lord, Lord Hodgson. He referred to relying on the judgment of the non-executives. Many issues around the court will depend on the quality of the people appointed, and how they conduct themselves. A slightly less than perfect structure, superbly implemented, is likely to give a better outcome than a perfect structure that is poorly implemented. The Minister on a number of occasions referred to best corporate practice. Can he envisage any situation in which a corporate board performing effectively would not carry out an annual review of strategy? Every board of which I have been a member has had an annual strategy session to look again at past strategy and in many cases endorse or modify it in the light of circumstances. Regardless of what we say here, court directors seized by their legal responsibilities would almost certainly want to carry out an annual review. Does the Minister agree with that observation?
Lord Sassoon
My Lords, I certainly agree with the construction of my noble friends Lord Phillips of Sudbury and Lord Hodgson of Astley Abbotts. I think that essentially they are agreeing with the noble Lord, Lord Myners, that boards will take sensible views on these matters, and that we do not need to require the court to review the Bank’s stability strategy on an annual basis because a perfectly sensible arrangement will emerge that will to some extent involve a strategy that is set for a longer period than a year. Clearly, to some extent, a strategy needs to look out further—as the noble Lord, Lord Myners, agreed. Equally, of course a board will look to see how a strategy is going on a more frequent basis.
I have not changed my view since Committee on the lack of need for the provision proposed in the amendment. The interventions in this discussion reinforced my view. The legislation does not set out how regularly the Bank’s strategy should be reviewed. In practice the court has revised the financial stability strategy on an annual basis. That is understandable, given the sheer volume of legislative and other changes that there have been in the system of financial regulation in the past three years. On the other hand, as the noble Lord, Lord Myners, agreed, a strategy needs also to be a longer-term, forward-looking document. We do not need to hardwire in an annual review and suggest in any way that we require a short-term, business-plan view to be taken rather than a genuine strategy. That is why new Section 9A will require the court in future to revise the strategy at least every three years—so that it is a longer-term document—but there will also be flexibility for the court to revise the strategy earlier. I continue to believe that a three-year timeframe is the correct requirement for the Bill. It leaves plenty of flexibility.
I will add that I am conscious that in talking about this matter I use “court” and “Bank” to mean different things. I did not want to prolong the earlier debate, but I did not say then that court equals Bank. I am sure that the noble Lord, Lord Eatwell, did not believe that to be the case, or that I suggested it. What I suggested in the earlier context was that there were certain critical issues on which the court would take a decision. The matter that we talked about—the public interest test in connection with publishing reports—was one. Here is a clear example of a case where we are talking about the court setting a strategy for the Bank. There will be many more examples as we go through the Bill of cases where “court” and “Bank” mean different things. We need to look at each instance as it comes up. With that slight digression, I hope that the noble Lord has been comforted by this further discussion of the strategy timeframe issue.
Lord Eatwell
I am sorry that I did not make myself clear. I was referring to a review taking place other than at three years and the effect that that might have on the confidence of the markets. They might feel that the Bank is not sticking to its usual three-year timetable but is bringing things forward because something is going badly wrong that it knows about and perhaps the markets are not fully informed about. An annual review is embedded in so many companies. The annual away-day where everybody goes off and does the annual review is such a standard procedure that I think the three-year business is a mistake.
I want to return to the noble Lord’s revisionist comments on the position that he took on the earlier amendment when we were referring to the business of the oversight committee and the public interest notion of publication. I asked the noble Lord whether in this section Bank meant court. I think that I made clear that if it did mean court, the best option would be for it to say so. Therefore, the best option would be for him to come back at Third Reading and say, “Look, the word Bank occurs all the way through the Bill. It is used in different contexts in different places and let us be absolutely clear who is responsible. We will amend this clause at Third Reading to say ‘court’ because that is what I mean. It is not what I say; it is what I mean”. Let us now say that the noble Lord means court.
I was quite deliberately saying that if the noble Lord really wants the word Bank to mean court throughout the Bill I would read through it. I was confident that I would have no difficulty finding a number of cases where he did not want it to mean court. That is why he has now stood up, having received the advice of his officials, to correct what he said earlier.
Lord Eatwell
I am just finishing.
With respect to new Section 3D, it is important that we are clear that Bank means court there. We will take on advisement what the word Bank means elsewhere in the Bill.
Lord Sassoon
I merely wanted to say that I was not standing up to correct anything I said before: I stand exactly by everything that I said before. I wanted to head off the noble Lord, Lord Eatwell, from wasting a lot of time by going through and analysing the precise meaning and the underlined way in which the powers of the Bank would be exercised situation by situation in the Bill. It is up to the court as the governing body of the Bank as to what it takes unto itself and what it delegates to the executive of the Bank. I was merely trying to make a helpful suggestion that perhaps the noble Lord would find himself doing quite a lot of wasted work if we went too literally down this path.
Lord Eatwell
My Lords, I am sorry to prolong this, but now we are told that the court can delegate to the executive of the Bank. Is that the case in new Section 3D, which we discussed before? I am sorry to prolong this but I thought that the noble Lord made absolutely clear that in that section, Bank meant court—not a delegation to the executive or the governor or anyone else. He actually said himself, if I recollect accurately, that the court contains the nine members of the oversight committee, they would be sitting there and therefore they would not contradict themselves. There was no notion of delegation. They had a role. It is very important that legislation, particularly in financial policy, is clear. Can we please be clear on this particular element?
Lord Sassoon
I do think that the noble Lord, Lord Eatwell, is trying to get into semantic games. There is an important point. I was completely clear before and I think it is understood. It would be complete nonsense if a recommendation on such an important matter of the oversight committee, which is a committee of the court of the Bank, was taken by anything other than the court itself. That is plain and completely clear. That is what I said before and that is what I stand by. It would be absurd to suggest that the court would delegate such a matter. That is what I said and that is clear. But there are plenty of other matters throughout the Bill on what the Bank does where, equally, it would be ridiculous to suggest that the court did something itself and did not delegate.
Lord Eatwell
Well I rest on the proposition that I made earlier. If that is what the noble Lord means, why does he not say so instead of leaving this ambiguity on the face of the Bill?
However, returning to the issue of three years, I think that it is unfortunate for the reasons that I have spelt out. Annual reviews are completely usual and normal in the corporate and financial worlds. Everyone knows what they are. Three years leaves too much of a gap for unfortunate and disturbing events to occur that could then be exacerbated by the Bank’s seeming need to change tack at that time.
I hope people go away and think a little about this. I know that I almost certainly hope in vain, but hope springs eternal. In the mean time, I beg leave to withdraw the amendment.
Lord Eatwell
My Lords, I have added my name, as has my noble friend Lady Hayter, to Amendment 5, which is the second-best amendment of the noble Baroness, Lady Noakes. However, even in this second-best version, achieving what the noble Baroness, Lady Kramer, referred to as “a bit more challenge” is an excellent and desirable objective.
Lord Sassoon
My Lords, this is an interesting and important area. The balance of the FPC’s members between the Bank and non-Bank executives is an issue that has been raised a number of times in this House, in another place and in the committees that have scrutinised the Bill. My noble friends who have spoken to this issue have done so with characteristic clarity and eloquence.
There is clearly an important argument about the possibility of rebalancing the membership of the committee away from the Bank executives and towards the external members. The external members will need to provide an outside perspective and challenge function to the deliberations of the FPC and, crucially, Amendment 4 achieves the important objective of enhancing the role of the non-Bank members while avoiding creating a situation where the Bank would be in a minority on the committee, which would make it virtually impossible to hold the Bank accountable for the FPC’s actions.
I see a great deal of sense in the alternative ways of doing this, but in the Amendment 4 approach rather than the Amendment 5 approach—the second best approach, as we now know it. I could not talk in the language of cognitive limits and other good stuff but, in a practical sense, I understand why having only nine voting members, which is comparable with the MPC, is better than having 11 members with a Treasury observer. Making the FPC larger by creating additional members would risk making the group unwieldy, and I now understand—which I did not before—that the Tavistock Institute provides a theoretical underpinning to what I see as a practical argument.
On balance, the proposal put forward by my noble friends to rebalance the committee by removing a Bank member is not only preferable to the one of adding an external member but has some attractions. The tone of my noble friend Lord Deben’s remarks was to assume that of course I would dismiss all this out of hand. However, this is a serious point and the committee has come back to it. We have been here before in a number of respects and it is important.
Amendment 6 would ensure that it is the executive director with responsibility for the analysis of markets who would be removed from the FPC. Although the person in this position may have an important role in providing information relating to financial markets to the committee, it is true that this role could be achieved without that person being a voting member. The executive director who would remain as a voting member on the FPC would be the director with responsibility within the Bank for financial stability, and I agree that that executive director would seem to be the appropriate person.
The remaining amendments are consequential in nature and simply remove a later reference to the executive director with responsibility for the analysis of markets and reduce the quorum of the FPC from seven to six, reflecting its reduced size.
Baroness Noakes
My Lords, I recall that when the previous Government set up the Monetary Policy Committee, they formulated its secondary policy objective in precisely this form, “Subject to that”. Can the Benches opposite explain when they had a damascene conversion on this topic?
Lord Eatwell
I am sorry, I will say something. The Monetary Policy Committee has had a damascene conversion. You can see it in the quantitative easing policy. Indeed, the Treasury continuously encourages the Bank to take a more aggressive monetary policy with respect to growth and employment and to ignore the high rate of inflation.
Lord Sassoon
My Lords, first, this is well trodden ground for the House so I will be brief. In any case, my noble friends have all made extremely telling points, which knock this one pretty comprehensively on the head. The FPC’s primary focus must be financial stability. That is its primary purpose, in the same way that the MPC’s primary focus must be price stability. Both financial and monetary stability are necessary prerequisites for stable and sustainable growth, so both committees already contribute to growth by achieving their primary purposes. Subject to doing so, they should act to support the Government’s economic objectives. The result of giving the FPC dual, equally weighted objectives for financial stability and economic growth would be to allow the FPC to take action that would damage financial stability with the aim of encouraging growth. This would take the FPC outside its remit and expertise, and frustrate its primary purpose—which has got to be financial stability.
I do not believe that the model proposed in this amendment is appropriate or workable and I ask the noble Lord to withdraw it.
Lord Eatwell
My Lords, this has been an intriguing discussion, since it appears to ignore the economic history of the last two years. I was struck by the comment from the noble Lord, Lord Deben, that nobody would possibly accept the notion that financial stability was important when growth was absent. He should come more often and listen to the noble Lord, Lord Sassoon, justifying the current policies of the Government. The Minister continuously says it is vital that the policy which has produced zero growth over a year, and leaves us with a level of output about 3.5% lower than the peak in 2008, is entirely justified by the need to secure financial stability. He refers to low interest rates and financial stability all the time. If the noble Lord would like to hear someone justify that position, he can just turn up and listen to the noble Lord, Lord Sassoon, justifying the Government’s policy. He will get that straightaway.
Lord Deben
The noble Lord really must not interpret what I said in a way that is convenient for his argument and then blame the noble Lord, Lord Sassoon, for speeches that I have certainly heard and with which I agree. All I am saying is that the noble Lord’s idea that somehow or other, unless this is in here, nobody will take any notice of growth at all and that everyone will want a kind of sterile system is just not true. Nor is it sensible.
Lord Sassoon
I really do not want to prolong this too long, but the idea that somehow financial stability is the same as a sustainable fiscal position is really stretching the concepts a bit far. However, there we are.
Lord Eatwell
I was merely describing the way that the noble Lord continuously justifies the current squeeze that the Government wish to exert on the economy. The other really intriguing point is that it is the Government’s amendment that has introduced the growth and employment objective here, but he now tells us that it is outwith the committee’s expertise. So he has now introduced an amendment that is outwith the expertise of the committee that he has asked to consider it, even if as a secondary objective. I have been very struck by the debate, which has also failed to recognise, as I suggested earlier, the dramatic change in policy by the Monetary Policy Committee, urged on by the Government. This amendment simply attempted to believe, perhaps naively, that the Government might recognise what is happening in the policy-making of their institutions at the moment might give the FPC some credit for being able to make a mature and balanced judgment, given its overall responsibility for financial stability. However, I was no doubt overly naive there. On that basis, I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, again, this was an issue on which there was a comprehensive debate in Committee. As set out in subsections (1) and (2) of proposed new Section 9C of the Bank of England Act, the FPC is tasked with contributing to the Bank’s financial stability objective by identifying and monitoring systemic risks and taking action to reduce or remove those risks.
Subsection (5) defines “systemic risk” to mean,
“a risk to the stability of the UK financial system as a whole or of a significant part of that system”.
That means that any risk to UK financial stability is captured within the FPC’s remit. At the prompting of the Joint Committee that scrutinised the Bill in draft, we added subsection (6) to underline the fact that,
“it is immaterial whether the risk arises in the United Kingdom or elsewhere”.
Let me be clear: the FPC must identify and address any risk that could compromise the stability of the UK financial system regardless of its origin.
The purpose of subsection (3) is to specify certain types of systemic risk which the FPC should look for. This does not limit or restrict the FPC’s remit in any way. In other words, just because a systemic risk is not listed in subsection (3) does not mean that the FPC has any less of an obligation to identify, monitor and address it. There could perhaps be a temptation to continue adding to subsection (3) in an attempt to try to define all possible sources of systemic risk. But this would be a fruitless, and potentially counterproductive, endeavour.
Amendment 6E seeks to add,
“factors likely to lead to a loss of confidence in the financial system as a whole”,
to the list. I agree that a loss of confidence can magnify cross-sectional or structural risks captured in the financial system. But I do not believe it would be appropriate to expand subsection (3) in this way. As I have said, the list is not intended to be exhaustive, rather it is designed to highlight the broad categories of systemic risk that have been identified by academic research, something which the noble Lord is rightly keen that we should factor in. Subsection (3) as it stands already serves this purpose by describing the main categories of cross-sectional and cyclical risk. I hope that, on the basis of this explanation, the noble Lord will withdraw what I continue to see as an unnecessary amendment.
Lord Eatwell
Before the noble Lord sits down, I heard but one argument against the case that I was making, which was that it was not appropriate. Will he explain why it is not appropriate?
Lord Sassoon
My Lords, I thought that was what I had done in the last three minutes. I explained that this is not an exhaustive list. Yes, the factor that the noble Lord identifies is an important consideration, but we have included the much more specific categories of systemic risk which are identified in the research. If we started putting looser considerations in there, it would be difficult to know where the list should stop. Indeed, as one extends lists like this, it risks by implication leaving out other important factors. I do believe that subsection (3) and the whole of proposed new Section 9C as drafted completely embrace the ability and the requirement for the FPC to pick up what the noble Lord is getting at, but does not run the risk of us trying to draft in some of the other things that we all might be able to think of.
Lord Phillips of Sudbury
Before my noble friend sits down, will he comment on the essential point made by the noble Lord, Lord Eatwell, about the risks defined in subsection (3) covering only “micro” rather than “macro” risks? It does seem that the language is actually “macro”. It talks about systemic risks, structural features and so on. Does the Minister agree?
Lord Sassoon
Yes, I agree with my noble friend. He makes an important point.
Lord Eatwell
Well, yes, my Lords, the logic of the noble Lord’s argument is either to accept my amendment or delete proposed new subsection (3) altogether, because one has to ask: what does it do? It says:
“Those systemic risks include, in particular”.
In particular, this is what the committee should be looking at. That is misleading in that it focuses on structural issues of the economy, which are microeconomic —on leverage and on debt, which are microeconomic, and on credit growth, which is moving into the more macroeconomic area. What it fails to do is to take in the general point of the loss of confidence which can come from other sources.
As I pointed out when I introduced this amendment, I deliberately constructed it so as not to get into the trap of attempting to produce a detailed list. It certainly does not do that. It simply alerts the committee. If the committee is to be alerted to deal with a number of factors in particular, it seems that it should also be looking in particular at those factors which might lead to a general loss of confidence in the economy as a whole.
So if the Government really wish to ask the committee to focus in particular on some things, I would like my amendment to be accepted. If, on the other hand, it is quite happy to rely on subsections (5) and (6), I suggest that subsection (3) be deleted, so as not to create this spurious concentration on a particular list of points.
However, given that the argument has made little progress, I beg leave to withdraw the amendment.
Lord Sassoon
My Lords, of course, this is another issue that was discussed at some length in Committee. The Government recognise the importance of proper public and parliamentary scrutiny and accountability for macroprudential tools. That is why the Bill requires that macroprudential orders be subject to the affirmative procedure.
The Government have given a number of undertakings to further demonstrate our commitment to ensure transparency and effective scrutiny of macroprudential orders. In another place the previous Financial Secretary to the Treasury, Mark Hoban, clearly stated the importance that the Treasury places on taking a consultative approach to policy-making, and that he expected this to apply to macroprudential tools. In addition, my right honourable friend the Chancellor of the Exchequer has said that he would be happy for debates on tools to take place on the Floor of the House, subject to arrangement through the usual channels.
The Government have also committed to consult on their proposals for the FPC’s initial toolkit. I note that my noble friend has no complaint on that score. Nevertheless it is important to recognise that the consultation document containing the Government’s proposals, a draft order and an impact assessment on those proposals was published on 18 September. The consultation will run for a full 12 weeks. In Committee a number of noble Lords highlighted the 90-minute restriction on debates and the inability for orders to be amended. However, I believe that consultation and the statement made by the Chancellor address these concerns effectively. I encourage noble Lords to read the consultation and respond if they feel able to improve the drafting of the order. I also hope that the relevant parliamentary committees will make their views on the Government’s proposals known.
Importantly, the Government’s stance on the parliamentary control of these macroprudential orders has been endorsed by the Delegated Powers and Regulatory Reform Committee. Maybe I did not notice it, but I do not think that my noble friend referred to the DPRRC. I know that she regards the committee, in her words, as an early warning system of problems for Parliament to address. In this instance, it has considered our proposed procedure and determined that there is not a problem to address.
As I suspect my noble friend knows, the DPRRC has stated:
“The importance of the power is recognised by the application of the draft affirmative procedure or, in urgent cases, the 28-day ‘made affirmative’ procedure … The Joint Committee on the Draft Bill and the House of Commons Treasury Select Committee have recommended an enhanced affirmative procedure for the non-urgent orders, based on that in the Public Bodies Act 2011. But the affirmative procedure provided for in the Bill should be a sufficient safeguard against inappropriate use of these powers”.
It is also important to remember that orders made under new Section 9K will not always be major pieces of legislation. It could be the case that minor technical amendments need to be made to the tools over time. Under such circumstances, requiring the super-affirmative procedure would be a disproportionate use of parliamentary resources. I note that my noble friend has made some adjustments to the super-affirmative procedure that would make it less onerous, and she has addressed those at some length in her remarks. I still feel that her proposal would require a disproportionate amount of parliamentary time and resource.
The bare minimum amount of time to pass an order under these proposals is 40 days, which can be increased to 60 days by resolution of either House or by recommendation of a committee of either House. The time taken to make an order where the consultation process shows that substantial changes are required is even greater. Even once the 60-day period has elapsed, this amendment would require the Treasury to obtain prior approval to the amended instrument before it could be made. This would introduce a significant amount of uncertainty around the time it would take to amend the FPC’s macroprudential toolkit.
I have stated many times that the Government place great importance on public and parliamentary scrutiny of the macroprudential tools. Given the steps already in the Bill and the commitments made by this Government, I ask my noble friend to withdraw her amendment.
Baroness Noakes
My Lords, I am disappointed with my noble friend’s response on this. He has repeated that in the other place there can be a debate on the Floor of the House, but the location of a debate on a statutory instrument is completely irrelevant. The outcome is exactly the same. He has rested on the full process for the early order but, as I said, those ones, with a high degree of international agreement on what the early phase of macroprudential tools should be, were easy to do. That is not really an issue. My noble friend rightly raises the Delegated Powers and Regulatory Reform Committee, for which I have the highest respect. I have equally the highest respect for the Joint Committee which scrutinised the draft Bill, and high regard in particular for the Treasury Select Committee in another place, which has been tireless in its scrutiny of this legislation. I have two committees to play one.
The best parliamentary procedure would in this instance be the super-affirmative. I can only say that I am extremely disappointed with my Government for hiding behind the easiest option of parliamentary procedure, but I will accede to my noble friend’s request and beg leave to withdraw.