Financial Services Bill

Debate between Lord De Mauley and Baroness Noakes

Wednesday 25th July 2012 Lords Chamber

[Lord De Mauley]

I thank noble Lords for introducing their amendments. Let me go through them. Amendment 139B would make explicit that both the PRA and the FCA should have specific regard to the UK Corporate Governance Code. That is an important point. The code is the benchmark for good governance. The Bill makes clear that both the PRA and the FCA will be required to have regard to such principles of good corporate governance as it is reasonable to apply to them. That includes principles from the UK Corporate Governance Code. The Government fully expect the regulators to comply with the relevant principles of that code.

However, generally accepted principles change over time—it is worth noting that just two years ago the UK Corporate Governance Code was called the combined code. I hope that noble Lords will accept that it would not be appropriate to put an explicit reference in the Bill to a specific document which may change from time to time, or the name of which may change completely.

Amendment 144K would require that the Bank must be satisfied that the non-executive members of the PRA board have relevant experience in the sectors that the PRA will regulate, including banking and insurance. Amendment 144L would require that the Bank must be satisfied that the PRA board must include members with insurance expertise. I thank my noble friends for raising this issue, which is also important. The Bank and the FSA have been clear that they understand that the nature of insurers’ business models exposes them to a different set of risks than banks, and that therefore the regulation of insurance requires a different approach.

I can categorically confirm to the Committee that the Government and the Bank are clear that the PRA board will have members with the necessary expertise in each of the sectors that the PRA regulates, including insurance. It will also be important for the PRA board to have expertise in investment banking, building societies and credit unions, for example.

My noble friend Lord Sharkey said that insurance expertise on boards should not be left to the discretion of the Bank. He is right; it will not be; the Treasury will approve the appointment of PRA non-executives. I hope that noble Lords will therefore accept that it is unnecessary to make such detailed provision in the Bill.

Amendment 144M would make explicit that appointments to the PRA board must take place in accordance with the principles of merit, fairness and openness. Of course the Government agree with the intention behind the amendment. Paragraph 10 of Schedule 1ZB already requires that the appointments to the PRA board should take place in line with,

“generally accepted principles of good practice relating to the making of public appointments”.

The clearest articulation of those principles is the Code of Practice for Ministerial Appointments to Public Bodies, published by the Commissioner for Public Appointments. The aim of that code is,

“to ensure that public appointments processes are fair, open and transparent, command public confidence and result in appointments which are made on merit”.

Although some of the principles in the code are relevant only to ministerial appointments, some have wider application. Merit, fairness and openness clearly fall into that category.

Amendment 146A would require that the Treasury approve remuneration of the PRA board. Let me respond to this amendment in the context of the Government’s approach to the FCA and the various policy committees of the Bank. The Treasury has no role in relation to the setting of remuneration for the FSA board, nor will it have any such role in relation to the FCA board. This is as it should be. The FSA is, and the FCA and the PRA will be, independent of government. The Treasury has no role in the setting of the remuneration of external members of the MPC because the Bank is separate from government. The Bank determines how much it needs to pay to get the right people, while still ensuring value for money.

Similar considerations apply to the PRA board. The Bank will need to assure the quality of the leadership of the PRA, so it must be able to determine the remuneration of the PRA externals in the same way as it determines the remuneration of other parts of the Bank group. The Bank and the PRA operate separately from the Treasury and they account separately to Parliament. Parliament has a key interest in whether the PRA is delivering value for money, which is why the PRA falls within the remit of the National Audit Office.

I hope that I have persuaded noble Lords to accept the government amendments and not to press their own in this group.

[Baroness Noakes]

My Lords, could I clarify with the Minister what he said about the composition of the PRA board? I think he said that the Government were clear that there would be a member with insurance expertise. Did he mean any member, or a non-executive member? There only has to be a majority of non-executive members. I think that my noble friend said that, under that formulation, he believes that that could be met by having an executive member with insurance expertise. The drive of the amendments that we have been discussing was that there should be a non-executive member in an oversight role on the PRA board, bringing in insurance expertise.

[Lord De Mauley]

My Lords, I categorically confirmed to the Committee that the Government and the Bank are clear that the PRA board will have members with the necessary expertise in each of the sectors that the PRA regulates, including insurance. I did not specify, in answer to my noble friend’s question, but I will write to her if I may.

--- Later in debate ---

[Baroness Noakes]

My Lords, the noble Lord, Lord Tunnicliffe, reminded me that this morning I carried out my annual clearing out of documents to be binned or not to be retained. One of those that I reviewed was the document to which he has just referred, the Bank’s announcement in relation to how it would manage the PRA. That document did not go into the bin; it was saved for another day. However, it reminded me of the importance of the issue.

My noble friend Lord Hodgson referred to the number of staff who have left the FSA over the past year and a half. It is a very significant number of people at many levels, and often very senior people. The organisation is trying to live up to this new judgment-led supervisory approach and to cope with major organisational change, as the FSA is split into two organisations. My question to my noble friend on the Front Bench is: what confidence do the Government have that new regulatory organisations will have the staff? I am sure he will say, as the noble Lord, Lord Tunnicliffe, anticipated, that this amendment is not necessary. That may be so, but it is important to know from the Minister whether the Government believe that these organisations are ready for the responsibilities that they are to take on.

[Lord De Mauley]

My Lords, my noble friend’s Amendment 138C would make the FCA and the PRA consider whether their staff are appropriately experienced and endowed with the requisite level of expertise and knowledge to carry out their general functions. That would be inserted into the list of principles of regulation to which both regulators will be required to have regard. Of course, we agree that it is absolutely critical that the new regulators employ the right staff—staff who have the necessary skills and experience to use their informed judgment will be the defining factor in the success of the new regulatory system. Likewise, we agree with the Joint Committee’s assertion that the PRA and FCA will need to attract staff with the appropriate approach and experience. As my noble friend suggests, it is important that staffing decisions are made by the regulators themselves. Specifically, they should be empowered to consider whether they are appropriately staffed in order to meet their statutory objectives.

In that regard, the FSA paper setting out its vision for the FCA’s approach to regulation, published in June 2011, highlighted the importance that the FCA will place on such matters. It says that,

“the FCA will need to retain and attract professional and dedicated staff, equipped with the skills and knowledge to tackle the difficult issues ahead. It will need to be a dynamic and learning organisation, committed to developing individuals within a career that includes management and specialist paths. It will put a premium on flexibility and team-working where resources are allocated flexibly across the organisation”.

There is a similar commitment in the PRA approach to the banking document:

“The PRA will maintain its own in-house specialists including staff with particular expertise in risk management and risk modelling”.

I also understand my noble friend’s concerns about the requisite experience of the European policy-making process. Indeed, engagement with international regulatory bodies will be crucial for the regulators. I confirm, therefore, that I would absolutely expect the regulators both to employ staff with the requisite knowledge of European policy-making and to provide comprehensive training for staff who work in areas where knowledge of this is desirable. However, again, these will rightly be operational matters for the regulators.

My noble friend Lady Noakes asked whether the Government have confidence in the ability of the regulators to find the necessary staff. Yes, we do: we will draw on the best of the staff of the FSA and of the bank cadres and I am confident that, with focused objectives, they will quickly develop deeper expertise in their areas.

[Baroness Noakes]

Could I have a follow-up to that one? Has the FSA managed to recruit for all the staff it has lost, particularly those it has lost at senior levels over the last 18 months?

[Lord De Mauley]

My Lords, I cannot answer that here and now, but I will write to my noble friend on that point.

Meanwhile, I assure my noble friend Lord Hodgson that while staffing is not a matter for the Bill—as the noble Lord, Lord Tunnicliffe, suggested—we regard it as absolutely key for the regulators themselves to consider. On this understanding, I ask him to withdraw his amendment.