Bank of England and Financial Services Bill [HL]

Lord Bichard Excerpts

Monday 26th October 2015 Lords Chamber

[Lord Bichard (CB)]

My Lords, I should declare an interest as the chair of the board of the National Audit Office and it is in that capacity that I want to address the audit proposals contained in Clauses 9 to 11. I should say at the outset that, unlike the previous speaker, I have major reservations about these proposals. Those reservations are shared by the Comptroller and Auditor-General, as has been mentioned. We believe that the clauses as drafted are deeply flawed and that, if they remain, they will create an expectation that the Comptroller and Auditor-General is prepared to carry out value-for-money studies in circumstances that would compromise his independence. They would also create a damaging precedent for other audit work across government. Let me explain those concerns by reference to specific clauses.

Clause 11 seeks to provide the Comptroller and Auditor-General with powers to undertake value-for-money studies at the Bank but does not provide for the audit independence that is essential to genuine accountability. The importance of this independence is enshrined in the National Audit Act, which applies to most of the C&AG’s work. Under that Act the C&AG has,

“complete discretion in the discharge of his functions”,

whether any examination is carried out,

“and … the manner in which any … examination is carried out”.

Under the Bill, the C&AG would not be able to decide whether an examination was carried out but would instead have to persuade the Court of the Bank of England to allow him to examine an area. This clearly limits greatly the C&AG’s freedom of action and therefore his ability to hold an important public entity to account for the use of its resource.

The Bill also states that the C&AG’s examinations are,

“not to be concerned with the merits of the Bank’s general policy in pursuing the Bank’s objectives”.

This is a further unacceptable constraint on the independence of the NAO and differs again from the language used in the National Audit Act. That legislation prohibits the NAO from questioning the merits of policy objectives but, in contrast, the Bill prohibits the questioning of the policy fulfilling those objectives and, as such, it limits and confuses the C&AG’s remit. I assume that the Bank, or maybe others, have argued that to give the NAO full value-for-money rights would limit the Bank’s own independence. But the NAO already operates in many different sectors with full rights, without impinging on the independence of the public bodies concerned.

It has always been accepted by the C&AG that he cannot, for example, question the merits of policy objectives. In many circumstances—for example, in the military—it is accepted that it would not be appropriate to question operational decisions. In the context of the Bank of England it is entirely accepted that it would not be appropriate, for example, to examine the Bank’s interest rate decisions. To suggest that the NAO might take a different view is to ignore decades of experience of successive C&AGs in the most sensitive areas of government. If this clause remains as drafted it will inevitably set a damaging, indeed dangerous, precedent for audit and accountability right across government. The NAO currently audits a wide range of public bodies, including the recent addition of Network Rail. Many of these, like the Bank of England, are concerned to be independent of government in their operational decision-making. If these provisions remain as drafted then every new body, and many existing ones, will want the same ability to veto and limit the NAO’s work, to the great disadvantage of Parliament and the taxpayer.

I can be more succinct in dealing with Clauses 9 and 10. Clause 9 seeks to provide the C&AG with some of the powers he would have if he was the auditor of the Bank’s financial statements. This aims to ensure that he has access to the information he would need to identify and undertake VFM studies. However, given the severe limitations placed on the C&AG’s VFM examinations, this is little more than ceremonial in reality. Clause 10 seeks to ensure that the activities of the Bank which are the subject of an indemnity or guarantee given by the Treasury, and which therefore represent a risk to public funds, are audited by the C&AG. The Bank would still, however, have the power to elect which aspects of the relevant financial reporting framework to accept—thus limiting again the NAO’s ability to conclude on the truth and fairness of financial statements.

I will make three further points of clarification. First, the NAO did not at any point lobby for powers over the Bank. The NAO was approached by the Treasury, not the other way around. When it became clear that the proposed clauses, as drafted, were unacceptable, the C&AG informed the Treasury of his strong concerns at the earliest opportunity. However, the clauses remain.

Secondly, the C&AG has sought to achieve some consensus with the Bank, and met with the deputy governor for prudential regulation on 3 September. At that meeting, he offered further discussions on the audit arrangements. Regrettably, that offer has not been taken up by the senior management at the Bank.

Finally, some might argue that some access on the part of the C&AG is better than none. However, limiting access in the way the Bill now proposes would create an expectation that the C&AG was prepared to carry out value-for-money studies in circumstances that would compromise his independence. He is not. It would also, as I have said, create a damaging precedent. Neither the C&AG nor the board of the National Audit Office regards this as acceptable, and I will therefore seek the removal of these clauses from the Bill, if the further discussions already kindly offered by the Minister do not find us a way forward.