Bank of England and Financial Services Bill [HL]

Lord Eatwell Excerpts

Tuesday 15th December 2015 Lords Chamber

Moved by

[Lord Eatwell]

2: Clause 3, line 3, at beginning insert “At the request of the Treasury Select Committee of the House of Commons, or”

[Lord Eatwell (Non-Afl)]

My Lords, this amendment seeks to provide the Treasury Select Committee of another place with the ability to stimulate the oversight function of the Court of the Bank of England. It may be helpful to provide some context for this proposal. The measures in the Bill, in so far as they refer to the Bank of England, return the regulatory scope and powers of the Bank to roughly the same position that they were in in 1997. From 1997 onwards there was, first, the transfer of many, though not all, of the Bank’s regulatory powers to the FSA, then the abolition of the FSA and the transfer of prudential regulation to the PRA, and now the subsidiary status of the PRA is to be abolished and its activities fully reincorporated within the Bank, so we have come full circle. After major institutional reforms, we are back where we started, with all the powers of prudential regulation being exercised by the Bank. Conduct of business regulation, amalgamated in the FSA from various sources, now resides with the FCA, but it should be noted that few of these powers were originally exercised by the Bank of England.

It is worth recalling that the Bank of England that we began with, prior to the creation of the FSA, was not a successful regulator. The Bank failed in the case of the Johnson Matthey bank and over BCCI, and so glaring was its failure with respect to Barings that the then Board of Banking Supervision commented acerbically that the Bank of England should try to understand the institutions that it purports to regulate. Regulation was taken away from the Bank because it had failed as a regulator. Then, of course, the new tripartite regulatory structuring of the FSA, the Bank and the Treasury failed dramatically in the financial crisis of 2007-08, so the FSA was abolished. At least the PRA can hold its head up and declare that its position as an independent subsidiary is being abolished in this merry-go-round not because it has failed but because of a desire to restore the unitary power of the Bank of England. It is neater that way.

What this tale of circular institutional reform should teach us is that there is no specific institutional structure that can guarantee to deliver regulatory competence. The all-powerful Bank that we are now recreating has proved in the past to be a regulatory failure, while the tripartite structure of the FSA, the Bank and the Treasury failed even more spectacularly. Given that institutional reform will not be a panacea, there is a powerful case for thorough parliamentary scrutiny to at least attempt to identify the failings when they occur, as we can be sure that they will. Moreover, I remind noble Lords of the words of the Treasury Select Committee of another place with regard to the original proposal that a supervisory board be established at the Bank. The committee said:

“The Bank is a democratically accountable institution, and it is inevitable that Parliament will wish to express views and, on occasion, concerns about its decisions. Our recommendation that the new Supervisory Board have the authority to conduct retrospective reviews of the … prudential performance of the Bank, should, if operated successfully, provide the tools for proper scrutiny”.

In Committee I asked the Minister if he agreed with the proposition that the Bank should be a democratically accountable institution. He failed to reply. I will happily give way now if he wishes to comment. Apparently he does not.

Therefore, the Treasury Select Committee argued, correctly, that proper parliamentary scrutiny depends on internal reviews of the Bank, not just on the external inquiries of parliamentary committees. Internal review provides Parliament with the “tools for proper scrutiny”. The reason is obvious. The court that as a consequence of the Bill will be invested with the oversight function has full information about the operations and policies of the Bank—a level of information that even the most assiduous Treasury Select Committee could never have. Indeed, the court has information which is not, and sometimes should not be, in the public domain.

My amendment would allow the Treasury Select Committee of another place to request that the court exercise its oversight function. Note, as the Minister said, that the court is not compelled to comply. The wording of the noble Lord’s amendment, to which my amendment refers, states that the non-executive members of the court “may”—not must—“arrange for a review”.

Let us suppose that the Treasury Select Committee’s request stimulates a review. What happens then? First, as the noble Lord’s amendment requires, a report or reports will be made to the court. To discover what happens next we turn to Sections 3C, 3D and 3E of the Bank of England Act 1998, as amended. There we find that the Bank must give the Treasury a copy of the report and that the report must be published, unless the court of directors decides that publication is not in the public interest. Finally, in exercising its oversight function the court must monitor the response of the Bank—including the court itself—to any recommendations made in a report.

I have detailed the path that any report stimulated by a Treasury Select Committee request might take in order to reassure the House that safeguards are already built into the structure of the legislation before us that will ensure that information which it is not in the public interest to publish at a particular time will indeed not be published. Yet even without publication, a request by the Treasury Select Committee may well stimulate an important investigation that results in valuable internal reform at the Bank.

The government amendment makes a valuable addition to the powers of the non-executive members of the court in the exercise of their oversight function. However, the procedure envisaged by the government amendment is such that investigations can be stimulated only by insiders—not what might be considered proper democratic accountability. My amendment will at least provide a pathway along which proper democratic accountability may be exercised: not will be, but may be. The Treasury Select Committee will be able to request that the court institute a review. That is just a small increase in democratic accountability but one that may well avert future regulatory failings. I beg to move.

[Lord Turnbull (CB)]

My Lords, I am somewhat puzzled by the amendment, because it seems to be a power which the Treasury Select Committee already has and already exercises. I will give noble Lords three examples. It called for a report from the Bank into Northern Rock, another one into RBS, and then—with some delay, appearing only three days ago—finally into HBOS. Therefore the Treasury Select Committee, led by the people who lead it now, does not need this power. It is perfectly capable of forcing the Bank to undertake a review and to reveal the contents to that committee.

--- Later in debate ---

[Lord Bridges of Headley]

I begin by thanking the noble Lord, Lord Davies, for his kind words. Let me reciprocate by saying that it has been a pleasure having discussions with him, and with the noble Baroness, Lady Kramer. I hope that this constructive spirit is retained all afternoon.

The noble Lord, Lord Myners, made a good point: why are we bothering and why do we need to do this? The point that the noble Lord, Lord Davies, made answered that in large part: it is because there was concern. But specifically, the court’s powers of delegation are limited by paragraph 11 of Schedule 1, and it may not delegate duties and powers that are expressly imposed on the court in legislation unless it has express permission to do so.

This has been a good debate, and I return briefly to the points made by the noble Lord, Lord Eatwell. He asserted that we have gone back to 1997. I would dispute that that is the case. The Government have given the Bank the tools and powers that it needs to deliver its financial stability mandate. In particular, the Bank is now the statutory resolution authority with primary operational responsibility for financial crisis management. On top of that, we have created the FPC as a statutory committee of the Bank with the responsibility for monitoring and mitigating systemic risks for financial stability.

As to why prudential regulations should reside with the Bank, one of the key weaknesses of the tripartite system was a failure of co-ordination between those responsible for overseeing the financial system. We do not want to return to that. As the Chancellor said during the passage of the 2012 Financial Services Act, the Bank of England is the natural home for the microprudential, macroprudential and monetary policy functions because the interconnections are so great between these three critical functions. Having the PRA as part of the Bank also reduces underlap that could be harmful in the event of a crisis.

I turn to the issue of democratic accountability of the Bank. Since 2012, a number of measures have been introduced that have significantly enhanced the transparency of the Bank, and I will briefly recount some of these. For example, the court is now required to publish minutes of every meeting within six weeks. It has also voluntarily published historical records of court minutes, including those during the financial crisis, and, through this, Parliament and the public now have greater insight into the governance of the Bank and the key decisions made. Similarly, the Bank has introduced measures to enhance the transparency of the Monetary Policy Committee following the recommendations of the Warsh review. Clearly, therefore, the Bank is a more transparent institution than it was in 2012. However, there obviously remains room for further improvements. This Bill builds on those reforms through changes to the Bank’s governance, to its policy committees and to its accountability. However, as I argued previously—and as the noble Lord, Lord Turnbull, has argued—this amendment is not necessary.

[Lord Eatwell]

My Lords, I am impressed by the extensive lack of support for this amendment throughout the House. I say in response to what the Minister has said that, of course, the powers have developed and lessons have been learnt since the financial crisis, but I was referring to the recentralisation of powers rather than some of the extra powers that have resulted from the lessons learnt.

The main argument made against my amendment was that the power exists already. If the power exists already, the amendment does no harm—I have not heard anyone express the view that it does. However, the key reason for the need for my amendment was expressed clearly by the noble Lord, Lord Myners, who asked why conditions requiring members of a board to act were in the Bill at all. They are in the Bill because the action has not been present in the past. It is because of this lack of action that Parliament has lost a degree of confidence in relying just on the actions of the court and has decided that, to ensure appropriate transparency and efficiency in the operations of the court, it may be required to do certain things. That is why the Government have put into the Bill measures instructing the court to behave in particular way and why my amendment is there—because the court has not always responded to the requests of the Treasury Select Committee. It has not, for example, responded to repeated requests to publish a detailed review of its own actions during the financial crisis. My amendment, small in terms of changing circumstances though it might be, would have assisted the development of the democratic accountability of the Bank. However, in the circumstances, given the widespread lack of support around the House, I beg leave to withdraw the amendment.

Amendment 2 (to Amendment 1) withdrawn.