Economic Policies
Lord Eatwell Excerpts(12 years, 9 months ago)
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Lord Eatwell
My Lords, as but one little wavelet on the sea of outrage, may I ask the noble Lord whether, when he referred to the Government achieving stability for the British economy, he was referring to their achievement of reducing the growth rate from 2% to zero?
Lord Sassoon
My Lords, I was referring to 800,000 new private sector jobs since the election. I am talking about interest rates at levels we have not seen for 300 years, and more of the same.
Royal Bank of Scotland: LIBOR
Lord Eatwell Excerpts(12 years, 9 months ago)
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Lord Eatwell
My Lords, the Minister will be aware that at Prime Minister’s Questions today my right honourable friend Ed Miliband emphasised the need for great speed in sorting out the issues around the LIBOR scandal, and the need for more considered speed with respect to wider issues. Surely the greatest speed would be achieved by a judicial inquiry which could now sit for five days per week. How many days per week will a parliamentary inquiry sit?
Lord Sassoon
My Lords, it is not a question of trading how many days one inquiry or another will sit. I could read out the long list of judicial inquiries that have taken two, three, four, five or 10 years and more. We believe that a parliamentary inquiry can do its work effectively by Christmas. These matters will be debated in another place tomorrow.
Financial Services Bill
Lord Eatwell Excerpts(12 years, 9 months ago)
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Lord Eatwell
Lord Eatwell
My Lords, the amendment stands in my name and that of my noble friend Lady Hayter of Kentish Town. Members of the Committee will be aware that there has been considerable debate about the relationship between directions of the Financial Policy Committee and the attainment of a satisfactory rate of growth and employment in the economy. The issue at stake has been whether financial stability is achieved at the expense of growth and employment or whether financial stability can enhance the growth performance of the economy.
The amendments in this group—those in my name and that of my noble friend Lady Hayter, as well as those in the name of the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, and the right reverend Prelate the Bishop of Durham and those in the name of the noble Lord, Lord Sassoon—all seek to include growth and employment within the broad remit of the Financial Policy Committee. My amendment would balance a similar requirement on the Monetary Policy Committee to have regard to the general economic policies of the Government and argues that the Financial Policy Committee should have regard to the Government’s growth, employment and other economic objectives.
I suggest that “having regard to” is the appropriate admonition to the Financial Policy Committee at this stage and that the amendments in the names of the noble Baroness, Lady Kramer, and others and of the noble Lord, Lord Sassoon, are defective. They are defective because they are too insistent. The noble Baroness’s amendment, Amendment 35, states,
“in relation to financial policy in a manner designed to contribute to the achievement by the Bank of the Financial Stability Objective; and this shall include promoting … a stable and sustainable supply of finance to the economy, and … subject to that, the economic policy of Her Majesty’s Government, including its objectives for economic growth and employment”.
That of the noble Lord, Lord Sassoon, refers to the Financial Policy Committee “supporting” the economic policy of Her Majesty's Government.
In 2006, the economic policy of Her Majesty's Government resulted in an unsustainable boom. “Supporting” or “promoting” that policy would have been exactly the wrong thing to do. The role of the Financial Policy Committee is to lean against the wind in terms of what is happening in financial markets. When markets are overheated and expanding too fast and when the economy is growing too fast, it is the role of the Financial Policy Committee to use the levers at its disposal to change the supply of credit in the economy and consequently to slow growth down. That is why the careful wording, “having regard to”, embodied in my amendment is superior to “promoting” growth and employment, in the amendment of the noble Baroness, Lady Kramer, and to “supporting” growth and employment, in the amendment of the noble Lord, Lord Sassoon.
I have great respect for the position that the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, and the right reverend Prelate the Bishop of Durham are taking, because their intentions are entirely sound. Especially at a time of recession in Britain we all want to support growth and employment but we have to be careful in assessing the role of the Financial Policy Committee. In the amendments tabled by the noble Lord, Lord Sassoon, which were announced by the Chancellor in the Mansion House speech a few days ago, the emphasis on supporting is again excessive.
I suggest that the noble Baroness, Lady Kramer, and friends and the noble Lord, Lord Sassoon, look to a more careful wording than they have here. I think they have gone over the top in these recessionary times, but good times will return one day and in circumstances where growth is high, perhaps excessive, it will be the role of the Financial Policy Committee not to support the growth and employment policy of the Government of the day. I beg to move.
Lord Eatwell
My Lords, I am grateful to all noble Lords who have taken part in this debate. I was going to say “short debate” but it got a bit longer as we went along, as these things tend to do. The reason is because, although it appeared at the beginning to be a debate on semantics, it actually addressed the fundamental issue of giving powers to unelected officials in the form of the Financial Policy Committee, the exercise of which would in the past have typically been associated with elected, accountable politicians. That is a fundamental philosophical issue in the Bill and it is interesting to reflect for a moment on why it has arisen.
First, there is a fundamental difference among many in this House about whether it is more desirable to have a separable economic policy, in which monetary and financial policies are pursued entirely separately from policies on growth and employment, or a collective economic policy conducted with the Bank, the Treasury and all relative institutions collectively deciding on the overall stance that should be taken. That is a fundamental debate in economic analysis. However, it is not the point here, which is why we have been slightly diverted.
The point here is about the role of the Financial Policy Committee, which is an innovation that has arisen because of the change in economic circumstances, involving the speed at which innovation in financial policy can dramatically change the environment of a given government policy. The Government can suddenly find that a particular economic stance is being undermined or distorted by significant innovation in financial markets. The development, for example, of the credit derivatives that underpinned sub-prime mortgages in the United States changed the whole housing finance policy of the United States—an innovation by financial institutions that changed the environment of government policy.
The key role of the Financial Policy Committee is to watch out exactly for those sorts of things. That is what it is there for: to maintain a persistent study of what is happening in financial markets and how that might change the environment for government policy, and of the implications of any particular stance that the Government and/or other economic policy actors, such as the Bank, have taken.
Having said that, this was an interesting debate and we have eventually focused on the issue of “supporting” or “having regard to”. Obviously, since I put the amendment down with my noble friend, I think “having regard to” is a more appropriate relationship given the role of the Financial Policy Committee, but, in light of the debate, I beg leave to withdraw the amendment.
Lord Eatwell
“(1A) The Financial Policy Committee is to exercise its functions with a view to contributing to the achievement by the Bank of the FCA's integrity objectives, including but not limited to those set out in subsection (2)(f) of section 1D and section 1DA of FSMA 2000 as inserted by section 5 of the Financial Services Act 2012.”
Lord Eatwell
My Lords, I rise to move manuscript Amendment 35AB and speak to manuscript Amendment 110ZA, which is associated with it. First, I apologise to the Committee for introducing a manuscript amendment and, indeed, for introducing a manuscript amendment to replace a manuscript amendment. It displays the serious defects in my own drafting abilities and I hope to do better in future. I apologise for that but it is a testimony to the flexibility of your Lordships’ House that we are able to consider these amendments now, which are designed to give the Committee the opportunity to address a very important matter that, as we know, has arisen in the last few days. It would be foolish to pretend that these amendments have not been brought forward as a result of the revelations of the LIBOR scandal in the last few days. However, it is valuable to give the Committee the opportunity to debate these issues in a concrete way and with a concrete proposal on which it can opine.
The consequences of this scandal are so serious and so far-reaching that their implications for this Bill are immediate. Fortunately, we had not reached what might be deemed the relevant part of the Bill that should be amended to take account of what we now know—something that, a week ago, we did not know. We now know that the setting of benchmark prices is a fundamental element in the efficient operation and stability of financial markets as a whole—that is, of the generation of systemic risk as defined in the operating principles of the FPC—and that the process of setting one of the most important benchmark prices in the world, the dollar LIBOR, has been severely compromised.
Lord Kerr of Kinlochard
Given that the noble Lord has explained that the public inquiry he seeks is not an alternative to the Tyrie inquiry, can he confirm that the Opposition will be co-operating in full with the Joint Committee to be set up under Mr Tyrie?
Lord Eatwell
I certainly think that Mr Tyrie and the Treasury Committee can and will pursue their activities in their normal way, including perhaps the pursuit of this particular inquiry. As to the future policy of the Opposition on the organisation of that inquiry, we are trying to achieve the best possible outcome. I see the best possible outcome as a three-dimensional one.
Lord Carlile of Berriew
My Lords, I welcome the opportunity for this short debate on a matter of great public interest. I have to say to the noble Lord on the opposition Front Bench that the Opposition have asked the right question but given the wrong answer to that question. The LIBOR issue is an immense financial scandal. It appears to have not just the scope of one bank, but possibly to affect other financial institutions. It affects not only what has happened in the United Kingdom, but affects at least four jurisdictions, including the United States of America. It affects the reputation of the City of London in a major way. Those of us who are as old as I am remember bankers in the City of London by the adage, “My word is my bond”. Now we see, “My Maserati is my success”, as the evidence of what happens in the City of London. I hope that noble Lords of all parties and none will agree that, as a result of this scandal, we need to emerge from it with “my word” being “my bond” once again. The trust in the City of London is why the City of London succeeded in the past. It will not succeed in the future if those who do business there, if I may use a Scouse expression, are seen merely to be “wide loads”.
What has happened undoubtedly potentially merits investigation for criminality. I do not believe that a parliamentary inquiry is the right way to winkle out criminality, welcome though a parliamentary inquiry is. It is not a way in which criminal investigations are carried out. In fact, it is a ludicrous proposition to suggest that this is the job of a parliamentary committee, however well led. I do not for one moment question the leadership and integrity of Mr Tyrie. He is obviously very good at what he does. I do not favour a judicial inquiry, because a judicial inquiry can quickly become a behemoth. I do not draw a comparison with the Leveson inquiry. Lord Justice Leveson is not merely an old friend; he is doing a brilliant job with a very specific inquiry of an entirely different kind. However, I fear that if a judicial inquiry were established, within a few days we would see some of the best lawyers in London—including some Members of your Lordships’ House—earning vast sums of money from lining up in front of a senior judge, expecting an outcome at some distant time, possibly in this decade, possibly not.
Baroness Kramer
My Lords, I want to associate myself with the words we have just heard from the noble Lord, Lord Kerr, on the importance of acting quickly. I speak as someone who has spent most of her career in banking, working with clients on transactions that involve the LIBOR rate and I understand the significance of the issues we have discussed in this House.
As others have said, this is not just a UK issue. The earliest that any inquiry, as proposed by the noble Lord, Lord Eatwell, could begin would be the autumn, so we are looking at something like a two-year inquiry. I am not sure that he understands—
Lord Eatwell
If the noble Baroness would allow me, perhaps it would be for the benefit of the Committee if I said that I certainly did not rule out the Wheatley or Tyrie inquiries: I argued that both have something to contribute. I say that to the noble Lord, Lord Kerr, as well. Therefore, I accept the whole notion of acting quickly—it can be handled—but we then have to ask: what next?
Baroness Kramer
When the noble Lord, Lord Eatwell, talks about the Tyrie inquiry, I am still not clear whether he is talking about the Joint Committee of both Houses, in which the Lords are as involved as the Commons, or whether he is simply talking about the Treasury Select Committee acting, if you like, in its normal way. I think that he has avoided giving us clarity around that issue.
The critical thing here is that other jurisdictions will act. The United States will not sit around while a committee lasting one or two years talks about the fundamental issues of banking, so the actions that we are going to take have to be decided in a far more immediate way. We have great opportunity with this Bill and with the forthcoming banking reform Bill. The changes will have to be embedded in those Bills at the latest if we are to stem the tide of real disadvantage.
If anyone doubts that work is afoot elsewhere to deal with the problems that we have been so slow to pick up and deal with, I suggest they take a look at today’s Wall Street Journal. There is an article in there called “Lining Up Potential Successors to Libor”. It is very clear that we in the UK are on the back foot and we need right now to get on to the front foot and not start playing for the long grass, however worthy that is. It is that sense of urgency that I want to convey. If we hear that the answer for the British Government is going to be a commission, there will be a very cynical reaction in the United States that once again the Brits are going for another long-term committee with navel-gazing and endless discussion, rather than immediate action. Perhaps someone can tell me what the value is of a commission that reports after all the changes have taken place. That sounds to me like a method for closing a stable door long after the horse has bolted. It is crucial to get that horse moving now, without delay.
I also have to say that I regard a Committee of both Houses as an extraordinarily effective way of getting to the root of a problem. Think of the expertise we have in this House. Surely that is exactly what we should be using. The breadth of the experience we can bring is important. Moreover, it is very different from Leveson because at the heart of that inquiry is the reality that it is investigating a relationship between politicians and the media, one in which there is a high suspicion—outside here I would probably go further, but that would not be tactful—of collusion and corruption. Politicians cannot investigate themselves under those circumstances, but I do not think anyone is suggesting that that is the situation in the banking industry. We are not talking about political collusion or corruption here.
Indeed, if we doubt the effectiveness of the political system in handling this, let us look at Bob Diamond’s resignation this morning. It is easy to see what happened. He knew he would face the Treasury Select Committee on Wednesday, so he sat down with his lawyers—I am guessing that, but I suspect I am right—and started to role-play how he would behave in the meeting. Soon he realised that his position was totally untenable. That is effective action, and it is what we should be building on, not going back to some sort of long-term commission. The additional benefit is that if there is leadership from Parliament, it will continue to observe and supervise the banking industry for many years. It will not pack up and go away after 18 or 24 months. We should build on that, not lose it.
Perhaps I can make a last comment. We seem to be going through an extraordinary trend, if you like, of subcontracting out our responsibilities. As politicians with the privilege of being part of this Parliament, surely we ought to be taking the tough decisions. We should not be trying to find someone else to contract out to every time there is something tough to do, otherwise we might as well just become a commissioning body. I would argue that we should look at our strengths and skills and take this opportunity to act. That would show the banking industry and the wider world what we can do. The longer term is too late, and we have to be aware of that.
Lord Eatwell
My Lords, I am grateful to noble Lords who have taken part in a debate which, as the noble Lord, Lord Sassoon, said, is timely and important. I was impressed by the fact that virtually every noble Lord who spoke, with one or two exceptions to whom I shall refer in a moment, felt some wider consideration was needed than that currently envisaged in the Government’s proposals with respect to Mr Wheatley and—if I may be forgiven by the noble Lord, Lord Higgins, for using the shorthand—Mr Tyrie’s review. The noble Lord, Lord Carlile, wanted to go wider in a different way by introducing the innovation of a special prosecutor. Special prosecutors have at best a very mixed record in the United States, which should be taken into account. Focusing on the legal issues is too narrow an approach in the circumstances that we face. As the noble Lord, Lord Phillips, said, there is “a huge congregation of issues”; my noble friend Lord Myners said that a fundamental review was needed; a “strategic inquiry” was the phrase used by the noble Lord, Lord Higgins. As my noble friend Lord Peston pointed out, the next major financial crisis is unlikely to occur in the LIBOR market; the next scandal will occur somewhere else. Unless we look at the underlying foundations of problems in our banking industry, we will not be in the least prepared. The noble Lord, Lord Blair, with his experience of legal matters in financial regulation, referred to a need to consider things “in the round”—I could not have chosen a better phrase.
The major difference, as I detected, with the arguments that I put forward came from those who felt that I was trying to slow things down. That is the last thing that I am trying to do. As I pointed out, I am entirely supportive of Mr Wheatley’s proposals and I am supportive of the idea of a Joint Committee moving forward to deal with the specific implications and consequences of the LIBOR element—what Mr Tyrie refers to as the ring-fence proposals. However, as the noble Lords, Lord O’Donnell and Lord Kerr, said, if there is no sign of getting to a solution, then we can have an inquiry. As the noble Lord, Lord O’Donnell, said, we should perhaps consider whether we need to go further.
The key issue then becomes one of timing and why we should not get on with all three? We should understand of course the legal issues with respect to prosecution—I take that under advisement—but what is the problem with addressing these matters? There is no other reason not to deal with all three. I reject entirely the caricature that I was suggesting that things be slowed down; I certainly was not. We need to get on with the immediate issues, but there are much wider issues affecting the future of this country that need to be addressed.
Lord Howard of Lympne
The noble Lord has repeatedly talked about the need for a wider inquiry than what I think we have all agreed to call the Tyrie inquiry. Given what on any view are the extraordinarily wide terms of reference of which the Minister has informed the Committee today, can the noble Lord identify any specific angle, matter or issue that is not covered by those wide terms of reference?
Lord Eatwell
Yes, indeed, my Lords, I can do that straightaway. Those terms refer to,
“drawing on the conclusions of UK and international regulatory and competition investigations into the LIBOR rate-setting process, consider what lessons are to be learnt from them in relation to transparency, conflicts of interest, culture and the professional standards”.
It is from them that lessons will be learnt—not from the wider characteristics of the industry; not from what the regulators were doing; not from the unintended consequences of the reforms of the 1980s; and not from the change in the nature and conglomeration of the banking industry. Lessons will not be learnt from any of those issues, which are much wider than those in the terms of reference. I am happy to provide the noble Lord with a copy.
Lord Anderson of Swansea
Has my noble friend considered the problems caused by the timetable set by the Government? If the proposed Joint Committee goes through the normal procedures, it will have to call for evidence. That process will take several weeks, which will eat up the rest of July until the Recess begins. This House does not return until the beginning of October. If the timetable is to end by Christmas, the committee will have to have several weeks prior to Christmas before the publication of its report, which essentially means that only the months of October and November will be available for its considerations. That would be a wholly impossible timetable.
Lord Eatwell
My noble friend has made an important point about the pressures that will be faced by Mr Wheatley’s committee and, if we may call it that, the Tyrie committee.
I do not want to delay the Committee. I have made two major arguments in favour of the amendments put before your Lordships. First, the terms of reference, to which the noble Lord, Lord Howard, has just referred, are too narrow. My Tyrie refers to them as “ring-fenced”. That is his expert view, which I accept. Secondly, we have to take this matter out of party politics. It was awful how yesterday’s discussions degenerated into a spat about which politician said what to whom and when, and who was responsible. That is not the issue; the issue is the future of our financial services industry. Let us get this matter out of party politics. I believe that I have heard around the Chamber support for the position that I have taken and therefore wish to test the opinion of the Committee.
Lord Eatwell
“( ) factors likely to lead to a loss of confidence in the financial system as a whole”
Lord Eatwell
My Lords, this group of amendments is a rather mixed bag but all of them refer to various duties of the Financial Policy Committee. The first, Amendment 36, which is in my name and that of my noble friend Lady Hayter, adds to the definitions of systemic risk in new Section 9C(3) of the Bank of England Act 1998 the collapse,
“of confidence in the financial system as a whole”.
Academic research has identified four major sources of systemic risk, at least to date: first, linkages, or the connections between markets, referred to in new Section 9C(3)(a); secondly, the distribution of risk, particularly in the context of cyclical variations in risk, referred to in new subsection (3)(b); thirdly, excessive leverage, debt and credit growth, as referred to in new subsection (3)(c); and fourthly, the general collapse of confidence, which is not referred to at all. This is a serious omission—probably a slip in drafting, but none the less a serious omission in the analysis of systemic risk.
There can be a major systemic failure that is not associated with any of new subsection (3)(a), (b) and (c). You can have a situation that is not represented by linkages between firms, is not to do with the distribution of risk, and is not due to excessive leveraged debt or credit growth, but is due to the collapse of a firm in a particular strategic position within the industry, which leads to a general collapse of confidence. There is no necessary visible linkage between the firms, but the collapse of confidence can lead to a general systemic failure. Adding this fourth component—which is completely standard in the usual list of four in the academic literature—would complete the set from which, for some reason, this element has been neglected. To use the felicitous expression of the noble Lord, Lord Sassoon, it would plug the gap.
Amendment 37 is a probing amendment, although it has more substance than that. New Section 9C(4) of the Bank of England Act says:
“Subsections (1) and (2) do not require or authorise the Committee”—
the FPC—
“to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect”,
et cetera. The phrase “in its opinion” seems to me to make the new section completely meaningless. How would you ever tell? If something happened and the committee pursued some set of objectives that had a significant adverse affect on the capacity of the financial sector to contribute to growth—something the noble Lord earlier this afternoon pointed to as a very positive provision in the Bill—how would you then know whether this had been “in its opinion” or not? You would go along to the committee and ask, “Why did you do this?”. It would respond: “In our opinion, it was the right thing to do. End of story”. Consideration of the implications of its acts has been ruled out of court. The phrase “in its opinion” seems to make the clause devoid of meaningful content. If we remove it, we will improve the overall import of the Bill and, significantly, of this section that refers to the functions of the FPC.
With Amendment 39, I have a real mystery. Systemic risks are defined as credit growth, debt and leverage. However, in new Section 9C(7), all those terms are defined with respect to the UK only. Why is that? We live in a global financial market. Why do they refer to the UK? If these conditions had been in place and the FPC was considering the position of the Royal Bank of Scotland, that bank would have been found to be totally secure, because almost all the problems that assailed it occurred outwith the UK. The growth of credit from that bank was excessive outwith the UK. Its debt position was defined not by the debt it owed to individuals in the UK but to bond-holders and individuals throughout the world. I must be reading this completely wrongly but am totally mystified as to why credit growth, debt and leverage, as referred to in the definition of systemic risk, are confined to the UK. I would be very grateful if I could be enlightened and told that somehow I have got this wrong and that this does not confine consideration to the UK but is dealing with some other, wider element.
Continuing the international theme in this pot-pourri of amendments, I turn to Amendment 44, which deals with page 5, line 39, and refers to the overall functions of the Committee, suggesting that it should be,
“assessing its functions in the light of the policies of the European Financial Stability Board”.
As we know, much of the structure of the regulatory rule book for the UK will be written in Brussels. The EU, like the UK, is feeling its way towards defining the proper role of its macroprudential regulator, namely the European Financial Stability Board. The EFSB will, over the next couple of years, build a toolkit not unlike one that we desire for the FPC—rules on leverage ratios, procyclical provisioning, risk-weighted capital ratios and so on.
It is essential that measures taken in the UK are compatible with measures taken at the EU level, and vice versa. That is why the FPC must, at the very least, assess its functions in the light of what the European Financial Stability Board is doing. We will have an independent position, and the EFSB does not have the same European-wide status as the banking securities markets and insurance regulators, but none the less we want the activities of our FPC to be compatible with those of the EFSB.
To sum up, this is somewhat of a bran-tub. You put your hand in and take out amendments to see which aspect you would like to look at, so it is a slightly diverse group. Amendment 36 adds to systemic risk the risk of collapse of confidence in the system as a whole. Amendment 37 removes “in its opinion” from the new subsection whereby the FPC must take account of its impact on the financial sector’s contribution to growth, as the phrase would render the clause meaningless, or at least inoperable. Amendment 39 raises the question of why growth, debt and leverage are defined purely with respect to the UK, when—for goodness’ sake—we in Britain are dealing with some of the largest global financial institutions in the world. Amendment 44 simply adds to the functions and the need to take into account the actions of the European Financial Stability Board. Going back to Amendment 36 and the collapse of confidence in the system as a whole, I beg to move.
Lord Sassoon
My Lords, I do not know whether this group is a pot-pourri or a bran-tub, but let me attempt to do justice to a number of these amendments. Fine group though they make, they do not entirely find favour with the Government, as the noble Lord will know, because I do not believe they are necessary. I shall address each of them in turn.
Amendment 36 attempts to add,
“factors likely to lead to a loss of confidence in the financial system as a whole”,
to the list of specific types of systemic risks. I can reassure the Committee and the noble Lord in particular that new subsection (3) is not intended to be an exhaustive definition of systemic risk. The types of risk that have been highlighted in this section are generally accepted to be the main types of macroprudential risk, but systemic risks may well arise in future that are not included in these categories. That is why the FPC is free to look at anything else that it believes might pose a systemic risk to financial stability, and I would certainly expect that something that would undermine confidence in the system as a whole would have an impact on stability. It could be argued that market confidence is a necessary component for financial stability. I therefore believe that this is already included in the FPC’s objectives as they stand, and that Amendment 36 is not necessary.
Lord Eatwell
Yes, I can see that. I put a little question mark linking the two new subsections which seem to me to be contradictory, or at least inconsistent. I still do not understand why new subsection (3)(c) says that the systemic risks which the Financial Policy Committee has to consider are those which include,
“in particular … systemic risks attributable to structural features”,
and,
“unsustainable levels of leverage, debt or credit growth”.
How do we define leverage? It means,
“the leverage of the financial sector in the United Kingdom”.
Why? Debt means,
“debt owed to the financial sector by individuals in the United Kingdom”.
Why? Credit growth means,
“the growth in lending by the financial sector to individuals in the United Kingdom”.
Why? Why do we have these definitions when the noble Lord is quite right that new subsection (6) seems to contradict them?
Lord Sassoon
My Lords, the most important thing is that we are talking about financial stability in the UK, and the FPC needs to consider first and most importantly the metrics and indicators of financial stability in the UK. After all, the objective is for the FPC to protect and enhance the stability of the UK, so it is quite right that the definitions refer to the effects in the UK. We are not interested in the FPC deeming that it is not its business to deal with leverage in non-UK markets, but on the other hand it is quite right that the risks themselves may come from factors that arise outside the UK; I think that that is the point the noble Lord is trying to get to, which I believe is well covered by new subsection (6) and which we have made clear in the response to the Joint Committee. It is not the responsibility of the FPC to actually engender results outside the UK; it should be engendering results in the UK.
Lord Eatwell
I am sorry; the noble Lord must be wrong on that. If a bank is lending excessively outside the UK, then the FPC most certainly should be concerned. The idea that the FPC should be concerned only in managing results in the UK must be entirely wrong and could not be the basis of successful stability for the UK financial sector.
Lord Sassoon
No, my Lords, it is not wrong. If we are talking about a British bank, it is a British bank, and that is linked to these metrics and to the remit of the FPC. Of course that is captured in the FPC’s remit. I think we are getting ourselves excessively excited about a simple issue that is perfectly well drafted in the Bill, which is that the FPC has a wide and appropriate remit to deal with financial stability in the UK, but that it should properly take account of systemic risks that may arise both inside and outside the UK. That is exactly what the drafting of the two clauses taken together means. If the noble Lord had been critiquing the Bill as it was introduced in another place, he would have proper grounds for questioning that, but we have plugged a possible gap, and the construction now works.
Lord Sassoon
I shall have another go, because this is tricky but important. The Financial Policy Committee is charged with responsibility for the overall financial stability of the UK: the systemic risks and the macroprudential role. We need to distinguish that from the situation of individual firms which will or may contribute to the overall systemic risk. In this discussion we risk conflating two things. One is the systemic risk in the system, which the FPC is charged with dealing with. That is credit growth, debt and leverage as defined by subsection (7), which is referenced to the United Kingdom. The financial stability of the United Kingdom is the concern of the FPC. That does not mean that risk may not come from the international financial system—that is made completely clear by subsection (6). However, for individual financial institutions for which the PRA will have first responsibility, if the FPC considers that they contribute to the overall situation, it does not rule out or limit consideration of the factors that affect individual financial institutions. The clause and the definitions do not rule that out. We should not confuse what is being defined here. The definitions are not exhaustive of the systemic risks which the FPC should consider. It may consider whatever else it considers relevant.
Lord Eatwell
Let me try this just one more time, because the argument that the list is not exhaustive is a toss-away argument: we did not include that, but it does not matter, because it covers everything. Let us be a bit more serious and deal with precisely what is in the Bill. To make the discussion concrete, I shall deal with the first part of subsection (7), which refers to credit growth. In my opinion, credit growth is an important indicator of systemic risk. Indeed, Professor Shin of Princeton University, who is the authority in this field, has identified credit growth as one of the key variables which any macroprudential regulator should have in its sights.
Let us consider credit growth. We are told that with regard to systemic risks in particular,
“‘credit growth’ means the growth in lending by the financial sector to individuals in the United Kingdom and businesses carried on in the United Kingdom”.
That cannot be right, because the stability of banks and financial institutions in the UK often crucially depends on the nature of credit growth in lending to individuals outside the UK. The businesses to which they lend will operate within and outwith the UK. What is the notion that somehow it must be businesses carried on in the UK? Will, say, British Aerospace be included? It happens to be a British company, but I believe that most of its operations take place outside the United Kingdom. I may be wrong about that, but a substantial proportion of its operations take place outside the United Kingdom. Would British Aerospace be covered in respect of lending to businesses carried on in the UK?
We could take out subsection (7) and lose nothing. It is the old adage that you teach pupils all the time: when in doubt, take it out. It adds nothing but confusion to the specification of the role of the FPC and the definition of systemic risk. Of course, the FPC is responsible for systemic risk in the UK, because that is its juridical domain, but that systemic risk can arise from activities by UK institutions on a worldwide scale. When in doubt, take it out. Let us drop subsection (7) and make the Bill more coherent.
Lord Sassoon
As there is doubt about this—considerable doubt, it seems, in the noble Lord’s mind—that is precisely why we need to leave it in. Again, he conflates the role of the FPC, which is to deal with financial stability issues, threats and risks in the UK. He says that it is clear that the Financial Policy Committee's remit is only for the UK. I do not know how he comes to that conclusion. If there were no definition of levels of unsustainable leveraged debt or credit growth, that would precisely raise in people’s minds the question of what is their geographic limit.
Lord Sassoon
If the noble Lord will let me continue, this discussion precisely makes the point that the FPC is responsible for systemic risk, which may be measured in terms of these factors and others listed in the clause. In that respect, we are talking about the UK. That is independent of whether banks are or were lending excessively to foreign companies. That is dealt with in other ways, as I have explained: partly through the PRA looking at the individual leverage ratios or whatever for the individual bank. Equally, if there is a systemically important institution about which the FPC is concerned, this in no way limits the considerations to the business of that institution simply in the United Kingdom, because this is dealing with something else. This is dealing with the overall systemic risk that the FPC is trying to deal with, not any question about where individual firms are doing business.
Lord Eatwell
My Lords, if it in no way limits the consideration of systemic risk, I would say again that it is otiose; it is worthless. It adds only confusion to the Bill. With respect to the noble Lord, the juridical domain of the FPC is defined by the definition of “regulated persons”.
Lord Sassoon
My Lords, we risk confusing different things again. The definition of “regulated persons” is wholly different from the question of financial stability for the UK. The concept of “regulated persons” is dealt with elsewhere. We are in a completely different part of the financial landscape. We are risking mixing up the microprudential with the macroprudential. When the noble Lord reflects on this debate, he will understand that these definitions are appropriate. He would say that they are unnecessary; I say that they are necessary in order to define the objectives of the Financial Policy Committee. However, a careful reading will show that they in no way restrict the FPC or the PRA in looking at the activities of individual regulated businesses, wherever they are, in so far as they relate to regulated activities or to the financial stability objective.
I shall move on to Amendment 37, which seeks to remove the words “in its opinion” from the economic growth “brake” that prevents the FPC taking action that would have a significant adverse affect on the ability of the financial sector to contribute to long-term sustainable growth. I disagree with this for three reasons.
First, in principle, the FPC is the best placed to assess the likely effect of its own actions. We do not want the FPC to rely on other people in forming this assessment. The FPC will be the expert macroprudential regulator. It is the right body to decide how the brake applies and the drafting should reflect that. Secondly, that assessment will be completely open, transparent and subject to outside scrutiny via publication of the decisions in the FPC’s meeting records. The government amendment, which we will discuss shortly, will go further and require the FPC to explain how it has complied with the duty to consider the “brake”. Thirdly, in practical terms I do not believe that there is any sensible alternative to this approach. In whose opinion would it be, if not that of the FPC itself? I am sure that the noble Lord does not envisage the FPC’s meeting adjourning while it seeks the opinion of some other body.
Amendment 44 would add to the FPC a function of assessing its functions in the light of the policies of the European Systemic Risk Board, or ESRB. I appreciate the sentiment behind this amendment. The Government believe that, given the international nature of financial markets, macroprudential policy will be most effective when co-ordinated internationally. I assure the Committee that, in the Government’s view, the current measures in the Bill and other arrangements are more than sufficient to achieve this.
The Bill requires the FPC to have regard to the international obligations of the United Kingdom. This will encompass the obligation to have regard to any warnings or recommendations from the ESRB that apply to the UK. It is also worth noting that the Governor of the Bank of England, like all European central bank governors, is a member of the ESRB. The current governor is also the first vice-chair of the board. The Bank is, and will continue to be, closely involved with the work of the ESRB and this will be reflected in the work of the FPC. The governor will be able to feed back the decisions and policies of the ESRB directly to the FPC. As the governor and the Bank will influence the policy of the ESRB, I expect that it will often be closely aligned to that of the FPC. As I am sure the Committee is aware, the UK authorities are required to respond to any recommendations that they receive from the ESRB. I am sure that they will give careful consideration to the policies of that board.
On the basis of this more extensive debate than I had anticipated, I hope that the noble Lord, Lord Eatwell, will agree, on reflection, that his bran tub of amendments is not completely necessary. I would ask him to withdraw his amendment.
Lord Eatwell
My Lords, I think I am naïve, because I am bemused by the drafting of this Bill. Sometimes we are told that things are unnecessary; of course they are being done, but they do not need to be on the face of the Bill. At other times we are told, “We have got to describe everything in extreme detail. Even though there might be some apparent internal contradictions, at least it covers every base”. We do not seem to care very much, with respect to the logic of the story, whether we have the one or the other. I will comment on the amendments, so that we can take them formally as we go through.
With respect to the collapse of confidence in the system as a whole, that is just leaving a hole in the Bill. If the Minister wants to leave a hole in the Bill, that is up to him. I was trying to make it a bit better, and more comprehensive; just the sort of thing we are told that we should do. It would have helped; it would have provided the FPC with another stimulus in its overall definitions of its objectives, which would have contributed to its effectiveness. The idea that it is just rolled into everything else is not true. It is easy to construct models which do not have the other elements, and this element is important. I refer noble Lords to the literature: Professor Shin is the name reference.
If we turn to “in its opinion”, the noble Lord was very convincing on that one, so I take his arguments. On Amendment 39, and the whole addition of this business about the UK, I think that it is a mess. The noble Lord has been completely unconvincing. He has not been able to justify in any coherent way subsection (7) and that is regrettable. It is regrettable that the Bill is left like this. One would think that the Minister would at least say, “Let’s take it away and look at it, just to make sure that I have got it right”, since he cannot defend it on this occasion.
On Amendment 44, we are told, “Oh, it’s all going to happen anyhow. There are nice informal procedures, whereby these things will be taken into account. So you don’t need it, because it’s going to happen anyhow.” It is going to happen anyhow because the governor happens to have yet another hat: was it vice-president of the organisation? I am sure that the vice-president of that organisation is busier and better informed than the Vice-President of the United States is reputed to be on policy there. None the less, how can we be sure that our next governor—whoever it might be; maybe it will be the noble Lord, Lord O’Donnell, who is not in his place—will not also be the vice-president and be as engaged and whatever else it might be?
We cannot make laws on an ad hominem basis; that is not the right way to do it. Surely, if the noble Lord accepts that these functions are appropriate—indeed necessary—he should accept Amendment 44 or agree to have a look at it and come back with some rather better drafting than mine. In the mean time, I am sorry to be grumpy about this process, but I really thought that we were trying to improve the Bill. I beg leave to withdraw the amendment.
Lord Northbrook
I support the very sensible amendment in the names of the noble Lord, Lord McFall, and my noble friend Lady Noakes. As the noble Lord, Lord McFall, stated, the MPC’s remit is to target inflation. Finding an indicator—or a set of indicators—for the FPC is difficult. There is merit in amending the Bill to ensure that a set of statistics is available to help external bodies, including the Treasury, to assess the performance of the FPC. The recommendation in the Treasury Committee’s report says:
“The selected range of indicators must be flexible and under constant challenge and review, not only by Parliament, Government and the Bank of England, but also by others such as financial industry practitioners, the media, academia and the public. The indicators should be published so that the performance in maintaining financial stability may be monitored and so that it can be held accountable for that performance. The FPC should report against these criteria at regular intervals”.
To the same extent, the Joint Committee said:
“The FPC should begin work towards developing indicators of financial stability in dialogue with the Treasury. They should be published and the FPC should report against them. The set of indicators should be flexible and subject to regular review”.
The recommendations of these two committees are very powerful and, as the noble Lord, Lord McFall, has already stated, the court was generally supportive but did not believe that they should be put in the Bill. I happen to disagree: I think it would be much clearer to have these in the Bill.
Lord Eatwell
My Lords, I support the amendment in the name of my noble friend Lord McFall, and the noble Baroness, Lady Noakes. This is—reflecting our earlier discussions—one of the Tyrie amendments. It is very cleverly drafted because it does not attempt to specify a particular set of indicators. It knows that the FPC is in a learning experience: that we are all going to be in a debate over indicators, instruments and so on in the years to come. Nothing could further that debate better than to propose a set of indicators, such as, for example, the rate of credit growth, which we have just been talking about, although not just in the UK. This is an extremely valuable amendment which, is, I hear, supported all round the Committee and I would expect the Minister to take account of the weight of this support.
Also in this group is a series of amendments in my name and that of my noble friend Lady Hayter. I would like to take a few minutes to address these. They are all concerned with the reports that the Financial Policy Committee is required to make and they all specify characteristics of the report. The first one requires the presentation of scenarios: the attempt by the Financial Policy Committee to look at various potential crises—stress-testing, we call it at a micro level—and assess the impact of their policies and of various events. We have learnt from the Office for Budget Responsibility how useful this technique can be and I am sure it will be extremely effective in the assessment of macroprudential measures. Amendment 73, requiring the presentation of scenarios, fits in with the philosophy of policy-making and of the empirical basis of evidence-based policy-making in finance today. I therefore hope the Government will accept it.
Amendment 74 is consequential upon today’s acceptance of the Government’s Amendment 35A, which we agreed earlier this afternoon. After all, if the Financial Policy Committee is required to take into account government policies on growth and employment, then it is surely appropriate that it should report on its performance on what it is required to take into account. This should really have been down as a consequential amendment to Amendment 35A but I am happy to help the Government out and introduce their consequential amendment for them.
Amendment 75, on the issue of indicators, referred to by the noble Lord, Lord McFall, and the noble Baroness, Lady Noakes, places those indicators in the reporting structure of the FPC. Amendment 76 would relate the FPC’s report to the functioning of financial markets and of the wider economy. If they do not discuss that then I am blowed if I know what they are going to discuss. So let us at least hope that that is agreed by everyone around the Committee.
These are just four amendments to flesh out the characteristics of FPC reporting which will be a crucial part of FPC accountability. Given that we are handing these powers to unelected officials, the reporting structure is an important component. That reporting structure— and the debates over the role of the FPC—would be enormously enhanced by the acceptance of Amendment 40 in the name of my noble friend Lord McFall and of the noble Baroness, Lady Noakes.
Lord Sassoon
My Lords, I wish we had a simple tag that we could use for amendments which come up so often when talking about legislation where we all agree on the substance but there is a kind of debate on whether it needs to be in or not. We are substantially in that territory with a number of amendments in this group. I will take them in turn.
First, Amendments 40 and 75 seek to require the Financial Policy Committee to publish a set of indicators of financial stability. I agree that financial indicators will aid the Committee, Parliament and the public in assessing the effectiveness of the FPC’s actions, but I hope I can assure the Committee that the amendments are unnecessary. The noble Lord may groan, but I acknowledged at the outset that this is one of those “is it necessary or not” amendments. Let me try to give the evidence because it is important to adduce the evidence of how things are going already—of which there is quite a lot—to put flesh on to the bones of why I believe it. We have looked very carefully at the Treasury Committee’s recommendations and have accepted a lot of amendments as a result. The Government’s record in picking up the Treasury Committee’s recommendations is very clear. We have been through them very seriously, and we have accepted a lot of them. I am grateful to the noble Lord, Lord McFall of Alcluith, and my noble friend Lady Noakes for assiduously going through them and provoking a further debate on the ones we have not picked up. That is quite right and proper. This is one amendment that we believe is unnecessary. I will give some reasons why I think the Committee should be satisfied on this.
The starting point is the Bank’s statement, in its response to the Treasury Committee’s report on bank accountability, that the FPC will publish and report against a set of indicators. Further than that, the FPC has already given some signals of the indicators it finds most useful for assessing risk through its oversight of the Bank’s financial stability reports over the past year and so too has the governor via a letter to the Chairman of the Treasury Committee last year.
Financial Services Bill
Lord Eatwell Excerpts(12 years, 9 months ago)
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Lord Eatwell
Lord Eatwell
My Lords, this is another of those bran-tubs full of amendments, to jump us around various aspects of the functions of the FPC as set out on pages 5 and 6 of the Bill. Let us deal first with Amendment 42. I do not know whether this is a slip in drafting—although I know those never occur in the Treasury—but with respect to the need to understand or support the objectives of the FCA, the strategic objective of the FCA is left out. Since the FCA very emphatically has both operational and strategic objectives, it is interesting to know why the FPC does not have to avoid prejudicing the strategic objective of the FCA. According to this drafting, the FPC can readily prejudice the strategic objective that markets should function well. That is a mystery. We are going to have the FPC being able to ensure by its measures that markets do not function well. I think if it got up to that, it would rapidly get short shrift from the Treasury and, indeed, from Parliament, so I presume that this is just a slip and that the strategic objective of the FCA will be added to the operational objectives.
In Amendment 47, here the issue is knowledge collection for the FPC, in the sense that it is important that the FPC has knowledge of levels of leverage, as we discussed earlier this afternoon. Knowing levels of leverage is a vital part of systemic risk analysis so the amendment ensures that the FPC will have access to that information, either from the FCA or from the PRA, divulging levels of leverage as defined clearly in the Basel III agreement. You could take other definitions but the Basel III agreement is a perfectly reasonable definition of leverage and that is why my noble friend and I have used it here.
Amendment 51 is a probing amendment, tabled because I did not understand the issue of a “publication”, as referred to in new Section 9G(10) of the Bank of England Act 1998. Describing directions issued by the FPC, it says:
“The direction may refer to a publication issued by the FCA, the PRA, another body in the United Kingdom”—
so any other body, such as my local sports club—
“or an international organisation, as the publication has effect from time to time”.
I am sure that “publication” in this sense must be a term of art and I am missing something. I would be grateful if the noble Lord could elucidate the issue both of what a publication is in this context and what is “another body” in the UK. Does it include my local sports club, and if not, why not, since it is another body in the UK?
Amendment 53 is one of the standard openness amendments, which have been encouraged by the Treasury Select Committee in another place, requiring the chairman of the Treasury Select Committee to be informed and given reasons if a copy of a report on a direction is not laid before Parliament. A persistent problem that we are going to face in the workings of the FPC is that it is going to be using powers that have traditionally been those of the Executive or of Parliament. There is therefore always going to be this tension of accountability between the FPC and the Executive and Parliament until, after a few years, the process has settled down, we hope. In these circumstances, it seems important that if for some reason a report on a direction is not to be laid before Parliament, the chairman of the Treasury Select Committee should be informed and given reasons.
Amendment 64 is rather more important, particularly in respect of some of the discussions we have had over the last few days, including this afternoon, and relates to the definition of “regulated persons” and the scope of exemptions. We know from the whole LIBOR debacle that one of the problems was that this particular market did not come within the scope of regulation. I am sure the FPC would have been quick off the mark last March, when the Treasury first knew, or presumably even earlier when the FSA knew what was going on, and would have included the setting of benchmark prices within the definition of regulated persons or dealt with it under the scope of exemptions. The recommendations that the FPC should make on the scope of financial regulation are enormously important and it is vital that the FPC has the powers to keep these matters under review. Amendment 64 is, if anything, the most important amendment in this whole group. We have to give the FPC the power to make recommendations with respect to the scope of regulation as it affects financial stability and systemic risk.
Amendment 65, which applies to page 9, line 34, is one of these amendments to which I have already referred where the committee is given discretion over its own action, even though the action seems to be firmly defined in the particular new subsection of the Bill, which reads:
“The Committee may make a recommendation under subsection (2)(e)”—
with respect to additional persons who may be required by the PRA to provide information, so this is very important indeed—
“only if it considers that the exercise by the Treasury of their power to make an order under section 165A(2)(d) of FSMA 2000 in the manner proposed is desirable”.
It is only “if it considers” that. Why should it be its consideration that limits whether it makes a recommendation? Either this is just trivial—in other words it would not have acted if it had not thought it should act—or this is limiting the scope of any legitimate limitation on the recommendations that the committee might make. If we took out the phrase “it considers that”, it would read “The Committee may make a recommendation under subsection (2)(e) only if the exercise by the Treasury of their power to make an order under section 165A(2)(d) of FSMA 2000 in the manner proposed is desirable”.
There the test is the desirability of the Treasury’s action, whereas at the moment the test is whether “it considers that” it is a desirable action. How do we want the test to be posed? Should the test be posed that the committee decides to act, or that there is an objective consideration of the desirability of the action under consideration?
Amendment 88 is thrown into this group for reasons which are not entirely obvious, but I will speak to it because again it is a straightforward openness amendment requiring that the chair of the Treasury Committee be informed and given reasons should information concerning a direction not be published.
These amendments are all to do with the very important activity of directions and recommendations by the Financial Policy Committee. We have the need for information derived through directions and the openness issues, which are hugely important. The most important, particularly in the light of what we have seen over the last couple of days, is the question about the scope of financial regulation and the recommendations that the FPC may make about that scope as set out in Amendment 64.
To go back to the beginning of this bran tub-list, let us deal with Amendment 42. I simply want to ask the noble Lord why the FPC can actually, if it wishes, endanger the FCA’s pursuit of its strategic objective of having markets function well. I beg to move.
Baroness Noakes
May I clarify one item with the noble Lord, Lord Eatwell? He said in relation to Amendment 64 that the important thing was the definition of regulated persons and that that would have been necessary to ensure that the events in relation to LIBOR were kept under review. Is it not the definition of regulated activities rather than regulated persons that would have been relevant in that instance? That is to say, the activities were already being carried out by regulated persons but they were not regulated activities.
Lord Eatwell
The noble Baroness has made a very interesting point. I have forgotten the precise names, but you have a person who submits the information, and a person who receives it and then has the responsibility of transmitting that received information into the LIBOR setting. That is the person I have in mind.
Lord McFall of Alcluith
My Lords, I shall speak to Amendment 43. The four main Financial Policy Committee functions have been outlined in the Bill, but I would like the Minister to consider providing clear regulatory statements for both the FCA and the PRA, given that clarity is essential: there is an outside audience here, so transparency and clarity are very important. For both those bodies, that would be a helpful submission from the FPC.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, we are into another bran-tub—not a pot-pourri this time, but a bran-tub, I note; I am not sure what the distinction is. This is a varied group of amendments about the functions of the FPC.
I say to the noble Lord, Lord Eatwell, and all other noble Lords taking part in Committee that if there are definitional difficulties—we have got into one or two tangles about definitions, construction of difficult clauses and the interrelationship between clauses and subsections —I am very happy for the noble Lord or any other noble Lord to have meetings including the Bill team to try to thrash out some of those difficult issues outside the Committee if that would be helpful. Some of these things might more easily be done away from the constraints and formality of the debate. I lay that offer on the table to all noble Lords who are interested.
I will come back to Amendment 42, but let me start with Amendment 43, which would require the FPC to prepare and publish regulatory statements for the PRA and FCA. One of the most glaring flaws of the tripartite system of regulation was a lack of clarity about who was responsible for what. As we know, the Bill will create regulatory bodies with clear and separate responsibilities. Although the FPC will have the power to direct the FCA and the PRA, that will apply only in the case of actions required to address systemic risk. The Bill makes it clear that the FPC cannot make recommendations or directions that relate to specified persons—that is, individual firms. Decisions on the policy approach of the PRA and the FCA will be made by their respective boards, not the FPC. As such, the amendment would risk blurring those clear responsibilities of the regulators.
Amendment 47, which would provide the FPC with the power to direct the PRA to require the disclosure of leverage ratios, is simply unnecessary. The Government agree that the disclosure of leverage ratios would be beneficial. That is why we supported the Basel III proposals to require its calculation from 1 January 2013 and its disclosure from 1 January 2015. The Government have pushed for full implementation of Basel III.
The interim FPC recommended in November last year that the FSA encourage UK banks to disclose their leveraged ratios from 1 January 2013, and an update on the progress of that recommendation was included in the financial stability report published last week. I will not, but I could quote extensively from that report. It is clear from reading that FSR that the FPC is already using recommendations to address disclosure issues effectively, so I suggest that Amendment 47 is unnecessary.
Lord Eatwell
I do not want to delay the Committee, but will the noble Lord elaborate a little on “addressing effectively”?
Lord Sassoon
Perhaps the best thing is to quote what was written by the FPC in its most recent financial stability report, which was published last week. It states:
“Following FSA discussions with chief financial officers earlier this year, the major UK banks and building societies are expected to disclose leverage ratios, calculated according to the fully implemented Basel III definitions, in their end-2012 annual reports. Thereafter, UK banks and building societies will report on both a half-year and end-year basis”.
That is an example of the FPC in interim form, already using recommendations to address disclosure issues to pointed effect.
Lord Eatwell
I should have been clearer at the time about what I had in mind. Would it, for example, include a speech made by, say, the Governor of the Bank of England, if that speech had not actually been printed somewhere or issued on a website, but the governor had made a statement about some matter relevant to the FPC?
Lord Sassoon
First, it would be difficult to define the governor as a regulator or other body. If the governor had made a speech that had not been published, it would certainly not be a document. Even if it is a published speech, it is unlikely to be a document in the sense of what I am suggesting—rules, codes, guidance or formal statements. The situation which the noble Lord postulates would not be one that would fall within what we are talking about here; there is no question of that.
Amendment 64 is identical to one that was debated in Committee in another place. They debated a number of amendments, although they did not spend as long as we are going to spend, quite rightly, on all this. However, this was one that debated in another place. I should start by repeating what my honourable friend the Financial Secretary made clear there, which is that the FPC’s responsibility to monitor the perimeter of regulation is not only for the outer perimeter covered by Amendment 64. It also has responsibility for the inner perimeter, between those firms regulated prudentially by the PRA and those that fall outside the PRA’s regulation; that is one of the FPC’s most vital roles. To do this effectively, the FPC must monitor whether activities outside the perimeter of regulation or outside the PRA’s scope are being undertaken in such a way that could cause systemic risk or sufficient risk to other firms or consumers that they need to be made subject either to regulation or to a different style of regulation. When the FPC believes that the perimeter of regulation needs to be changed to bring such activities within regulation or within PRA regulation, it can make recommendations to the Treasury under new Section 90. The Treasury can then use its powers to modify the perimeter of regulation accordingly.
I do not agree that the way to ensure that the FPC undertakes the role effectively is to place it under an inflexible and bureaucratic requirement to produce an annual report on the matter. In particular, it seems unrealistic to expect the FPC to produce recommendations within 30 days of coming into formal existence. We need to allow it to use its own judgment and discretion to decide what activities might pose a risk and how and when it should investigate them.
Amendment 65 would amend the FPC’s power to make recommendations to the Treasury to extend the scope of the PRA’s ability to obtain information from unauthorised persons. Given its expertise in systemic financial stability, new Section 90 gives the FPC a power to make recommendations to the Treasury if it believes that the ability of the PRA to obtain information from those outside the perimeter of regulation is needed for financial stability reasons.
Lord Eatwell
If I may interrupt the Minister, for the information of all noble Lords, he is referring not to new Section 90 but to new Section 9O. He lost me for some moments.
Lord Sassoon
I am very grateful to the noble Lord. I should have been referring to new Section 9O in the previous amendment as well. What can I say, other than that the hour is late? I was thinking, “Why is there a typo in my speaking notes?”. I probably have a flood of notes coming from the Box on the matter, but the noble Lord got there first—in fact, I see I have only one.
As I was saying, new Section 9O gives the FPC a power to make recommendations to the Treasury if it believes that the ability of the PRA to obtain information from those outside the perimeter of regulation is needed for financial stability reasons. Removing the words “it considers that” from subsection (4) of new Section 9O —O for orange—would defeat the purpose of the recommendation power, which is to allow the FPC to make its own expert judgment about the need for the PRA to be able to obtain information that is relevant to financial stability from the wider class of person and make recommendations to the Treasury accordingly.
It is important to note that the decision to extend the PRA’s power still lies solely with the Treasury and is subject to approval by both Houses. It will be for the Treasury to look at the recommendation from the FPC alongside other information from the PRA and others and make a call on whether the power needs to be extended.
I shall now address Amendments 53, 87 and 88, all of which deal in some way with transparency and publication requirements around the FPC’s direction-making powers. Amendments 53 and 88 would require the Treasury to inform the chair of the Treasury Select Committee if the directions by the FPC were not laid before Parliament or published. The Government do not believe that it is necessary to make a restrictive legislative provision to provide that Parliament is informed in all cases when the publication of information or documents is deferred for public interest reasons. There is a well established principle that where public money is used to resolve threats to financial stability, the chairs of the relevant parliamentary committees are informed, in confidence if necessary. There are formal and informal mechanisms for this to happen, although I would point out that they are non-legislative mechanisms. I do not believe that the case has been made that it would be necessary, reasonable or proportionate to extend this principle to sensitive material that does not involve the use of public funds. The Bill already provides for the FPC to keep any decision to defer publication of information or documents relating to FPC decisions under review and to publish that material as soon as the threat to the public interest has passed—something we discussed in the previous Committee session. The Bill also requires that a copy of any direction included in the record of an FPC meeting must be laid before Parliament. Given these extensive requirements for the publication of FPC decisions, I do not believe that Amendments 53 and 58 are necessary or appropriate.
Turning briefly to Amendment 87, the provision which the noble Lord, Lord McFall, is attempting to amend already has the effect he desires. New Section 9W(3) reads:
“A direction under Section 9V must be in writing and may be revoked by a notice in writing”.
What the second part of this means is that a direction may be revoked as long as the Bank sends a notice in writing to revoke it. The Bank does not have any discretion to revoke a direction without sending a notice in writing. The Bank cannot revoke a direction orally. I hope that provides reassurance on why Amendment 87 is unnecessary.
I return briefly to Amendment 42, where we began, and an important question asked by the noble Lord, Lord Eatwell, about why, in his interpretation, the FPC can endanger the FCA’s objective of making sure that markets function well. I hope I have got his key question right, because it is an important one. I will try to explain why I believe that it is a misunderstanding and how it actually works. The strategic objective is an overarching umbrella objective to provide a common goal for the regulator and, in that sense, it acts as a mission statement. It is an objective which has been amended in line with the recommendation of the Independent Commission on Banking; it was endorsed by the Joint Committee and now reads “ensuring that markets function well”. Legally, actions taken by the FCA in discharging its general functions need only be compatible with the strategic objective but must advance one or more of its operational objectives. As such, it is the operational objectives which provide the crucial mandate for the FCA to act in these areas. The Treasury Committee states that the case has not been made for the strategic objective. The Government believe that the strategic objective will act as a high level mission statement that brings together the diverse aspects of the FCA’s work and, as such, it will serve a useful purpose in focusing the new, regulatory culture of the FSA. It will also operate as a check and balance on the operational objectives and help to ensure that the FCA does not pursue any single operational objective in a manner that undermines the overall functioning of the market.
It might also be worth adding that effective mission statements commonly clarify an organisation’s purpose. They usually set out the aims of an organisation and its key target for shareholders. They do not go into detail of an organisation’s goals or targets and the approach taken in achieving them. The FCA’s strategic objective clearly meets these criteria. It gives an overall purpose or aim to the FSA, which is to ensure that markets function well, and it clarifies that this only refers to the relevant markets as defined in new Section 1F in Clause 5.
Lord Eatwell
I wonder if I have got it right. The noble Lord’s argument about the position being somehow at a different level does not work. What works in the definition of the FCA’s general duties is the following: the Bill states that the FCA must discharge its functions to,
“act in a way which … is compatible with its strategic objective, and … advances one or more of its operational objectives”.
Consequently, the only way in which the FCA can pursue its strategic objective is via one of the operational objectives. Consequently, if you do not prejudice the operational objectives, you do not prejudice the strategic objective. It therefore has nothing to do with higher levels, but simply relates to the word “and” at a relevant point that I had missed—for which I apologise—in the general duties of the FCA. Is that correct?
Lord Sassoon
My Lords, I believe that the drafting is fine. I reiterate that in discharging its general functions, the FCA must act in a way that is compatible with its strategic objective but which advances one or more of its operational objectives. The drafting is, I believe, appropriate, but I will of course have another look to see whether the “and” is appropriate. The noble Lord’s colleague in another place was, I am sure, given a clearer explanation by my colleague the Financial Secretary on exactly this point. Of course I will look again, but my belief is that the drafting works. If, on reflection, it does not, I will, in the customary way, write to all noble Lords who have taken part in this discussion.
Lord Eatwell
My Lords, I am grateful to the noble Lord for working through this particular bran-tub. The point that I was trying to make on the amendment is that the drafting is right, but not for the reason he gave. That was why I apologised for not having spotted the relevant “and” in the drafting of the responsibilities of and pursuit of objectives by the FCA.
Perhaps I may comment on a couple of the other amendments in the group. The issue raised by Amendment 47 has not been satisfactorily dealt with by the piece that the noble Lord read from the Financial Stability Report. There was a meeting, and a willingness to provide information was expressed, but no requirement. The issue here is the requirement because it is imperative that the FPC has knowledge of the leverage ratios of regulated persons, and Amendment 47 ensures that it will. I urge the Minister to have a look at that amendment and see whether I am not right and it is perhaps a good idea to have this requirement rather than the informal relationship which he described earlier.
I am grateful to the Minister for the elucidation on publications and other bodies. I suppose it really means other relevant bodies, but then people would have a great debate about relevance. I hope that my research centre at Cambridge University is included, since it is devoted to financial regulatory issues. That is just a commercial.
Amendment 64 was about the scope of financial regulation. I would like to go away and consider the words of the Minister, and think about the issue of the scope and boundaries. As he said, it is enormously important and we have got to get it right. I am not at all convinced that I have got it right here, so it would be helpful for me to have a think about it, look it over again, and come back to this issue if necessary on Report.
In the mean time, since I now know that Amendment 42 is unnecessary—not for the reasons advanced by the noble Lord, but for other reasons—I beg leave to withdraw the amendment.
Viscount Trenchard
My Lords, I also support my noble friend’s amendment. In particular I think that this whole section is unclear and muddled. It is extraordinary to state that a committee of the court, which is the board of directors, may make recommendations within the Bank. The Financial Policy Committee is clearly a committee of the court. That has been stated. It is strange that it is asymmetric and different from the MPC. This is a recipe for muddle because if it is a committee of the board—that is, the court—it has no authority beyond the court. Any authority that it has is the authority of the court. To state that a committee of the board—the court—may make recommendations within the Bank seems weird.
Similarly, in making recommendations to the Treasury, if it is a committee of the court, it should be the court that makes those recommendations. We are getting very confused. The difference between the FPC, dealing with macroprudential regulation as a committee of the Court of the Bank of England, and the PRA not as a committee but a different body, but again within the Bank of England, is strange. I just think it all needs to be clarified a bit more.
Lord Eatwell
My Lords, I first address the amendment moved by the noble Baroness, Lady Noakes. I am now very puzzled by the status of recommendations, given that a recommendation is not necessarily something which needs to be followed. Given that there seems to be no indication, as the noble Baroness, Lady Noakes, pointed out, about the reactions to recommendations, it is difficult to assess the status of this concept within the structure of the Bill. My Amendment 69 simply deals with the offending new Section 9Q and deletes it. It states:
“The Financial Policy Committee may make recommendations to”,
the world. I am sure the world would be very grateful, but we should not expend public money on making recommendations to the world, and especially not on confirming them in writing. It would be interesting to know who these “persons other than those” are defined to be when we are talking about the context of macroprudential regulation; we are not talking about relationships, say, with individual firms or whatever. The noble Baroness, Lady Noakes, has picked up on some important and valuable obscurities in the Bill and it would be helpful if the Minister could elucidate them.
A sort of bran-tub of my amendments has again been grouped together. I am sorry about that but I am not responsible for the groupings. I could ungroup them but that would be tedious for everyone, so let us deal with them. Amendment 48 is included in the group, which again has been tabled in the context of directions. It refers to the point made with respect to the nature of directions. The Bill states in proposed new Section 9G(4) that:
“The direction may relate to all regulated persons or to regulated persons of a specified description, but may not relate to a specified regulated person”.
I understand entirely what the drafting is supposed to do, but given the level of conglomeration and concentration in the financial services industry, I do not think that this will work as it is quite possible to refer to,
“regulated persons of a specified description”,
but for there to be only one firm of that description. It is quite possible for that to happen. If this may not “relate to” in the sense that it may not have a relationship to, that would rule out, say, a reference to,
“regulated persons of a specified description”,
if it just so happened that the set of persons of that description contained but one element—just one firm of that type. We can see that there are various niche firms and highly specialised companies in the City. I can think of very highly specialised money brokers of which only one performs a particular role in the money markets. Perhaps my amendment would have been more helpful if it had changed the word “relate” to “refer”, so that the direction could not refer to an individual specified regulated person. That would be inappropriate and would go beyond what the FPC is designed to do. However, I am nervous that the activities of the FPC may be unreasonably limited by the possibility that there might be just one specific regulated person within a given class of persons to which the FPC wishes to issue a direction.
I turn to Amendment 50, which again refers to new Section 9G. Subsection (6) refers to the fact that a direction,
“may not require its provisions to be implemented by specified means”—
I am not quite sure what that means—but then it goes on to say,
“or within a specified period”.
This is very dangerous in the sense that it may be enormously important that a direction should be operational within a specified period. It may be important for the financial stability of Britain that actions take place within a month or six weeks, or whatever the period might be. Being unable to require that provisions be implemented within a specified period seriously weakens the ability of the FPC to pursue effectively the stability objective. I am also a bit worried about the term “specified means”, but again, I am not sure what it means. Perhaps the Minister could help me on that when he replies. I really think that the business of a specified period should be looked at very carefully indeed for fear of weakening the powers of the FPC.
Amendment 63 has been withdrawn, so I turn now to Amendment 66. It refers to the making of recommendations under new Section 9P(2), and states specifically that:
“The recommendations may relate to all regulated persons or to regulated persons of a specified description, but may not relate to the exercise of the functions of the FCA or the PRA in relation to a specified regulated person”.
Again, this is the problem. It is quite possible that a generic description could apply to just one regulated person. Therefore, this is the same point that I made with respect to Amendment 48. The word “relate”—that is, “have a relationship to”—could result in the FPC not being able to make recommendations because the specified activity was performed by only one particular institution.
Finally, Amendment 69 is where I follow on from the noble Baroness, Lady Noakes, and comments that have been made by the noble Lord, Lord Hodgson, and the noble Viscount, Lord Trenchard, about new Section 9Q being very odd. It states that:
“The Financial Policy Committee may make recommendations to persons other than those”,
namely, the rest of the world. With those comments, I look forward to hearing the Minister’s comments on the amendments in the name of the noble Baroness, Lady Noakes, and the various amendments in my bran-tub in this case.
Lord Sassoon
Yet another bran-tub—I am looking forward to another pot-pourri, which will come in due course, no doubt.
On this group of amendments around the levers and powers of the FPC, I will start with Amendments 42A and 62A in the name of my noble friend Lady Noakes, and I will follow with Amendment 69 from the noble Lord, Lord Eatwell. These amendments seek to remove the FPC’s powers to make recommendations. As my noble friend has said, she does not seek to remove those powers but to probe how they will operate and why they are necessary in some particulars, although Amendment 69 is intended to remove the wider recommendation power.
I say at the outset that recommendations will be the primary means by which the FPC will seek to address systemic risks, and I do not think that any noble Lords who have spoken are challenging that. It is a question of how they will operate and whether some of the power is redundant, but I hope that we would agree that recommendations will be at the heart of the FPC’s ability to do its job. My noble friend talked a bit about how it used to work; once upon a time there was, of course, regulation by the governor’s eyebrows, and a carefully calculated arching could elicit all sorts of reactions from the City.
I suggest that recommendations to industry from the FPC will fulfil a broadly similar—if more wordy—role to that of the governor’s eyebrows, by allowing the committee to highlight risks or unsustainable behaviour. However, recommendations, unlike the governor’s eyebrows, will have and need to have legal backing. The Bill allows the FPC to make recommendations to the PRA and FCA. In a moment I will come back to where the reciprocal requirement on those two bodies to follow through on the explanations is—to the Bank, to the Treasury and to other persons.
On the PRA and FCA, the question was: where is the duty? I am slightly puzzled by this, because it seems very clear, in new Section 9P(3), that the FCA and the PRA have a clear duty to comply or explain. They must either,
“act in accordance with the recommendations”,
or explain why not, and that is a firm legal duty.
Lord Eatwell
My Lords, I want to refer to that discussion on Amendment 50. First, the amendment would not give the FPC the power to specify a precise time. It could specify a period: by the end of the month, within six weeks, within two months, or whatever it might be. The notion of a precise time is an inaccurate reading of the amended subsection. Secondly, while it is clearly right that the PRA and the FCA may have specialist knowledge at the micro level of the regulatory system, we are giving these powers to the FPC because it has specialised knowledge with respect to macro- prudential measures. If the FPC feels that it is urgent, for macroprudential reasons, that measures be taken within a specified period and it has the specialised knowledge, it seems to me that denying it the ability to require something to be done within a given time seriously weakens its effectiveness.
Lord Sassoon
My Lords, we could discuss at some length what the meaning of a “specified period” might be. Clearly it could, if interpreted as the noble Lord says, be by a certain month end. Equally, it could mean tomorrow, on the day after tomorrow or at the beginning of next month. I did not want to detain the Committee for too long at this late hour but a recommendation or direction dictating that an action be implemented within a certain timescale could have a serious negative implication for the safety and soundness of individual firms or for consumers. The FPC will not necessarily be aware of those negative implications on individual firms or consumers but the regulators themselves will be.
There are scenarios that could be highly undesirable if they led to consumer detriment because the FPC had been specific about the timing of implementation. On the other hand, the arrangements that I have explained at some length, which mean that the FPC could issue the direction on a “comply or explain” basis, would put the individual supervisor or regulator in a position where it had to come back and justify very clearly why it had taken a particular course of action. I believe we have struck the right balance here, which avoids the difficulties to which I have referred.
Turning to Amendments 48 and 66, I will go straight to the critical issue that I was asked about on a couple of occasions in different ways. There may be other points that need to be made, but I will be clear on the questions about whether the FPC can be specific about one firm. The FPC can describe a type or class of firms even if that, in practice, only captures one firm. This is allowed so long as the FPC targets the risk and not the firm. The FPC is not allowed to say: “Do X to Barclays or prevent RBS doing Y”. However, in the circumstances that the noble Lord postulated, where a firm was the only one in a particular area or type of business, the FPC would not be prohibited or prevented from describing a class of one in those circumstances.
Lord Eatwell
I do not see how that can be right. Taking the first of the two amendments, the new Section 9G(4) would read:
“The direction … may not relate to a specified regulated person”.
If the direction is a generic direction and there is only one person who satisfies that generic description, it does relate to—that is, it has a relationship to. I think it is just the wrong verb. If you said “refer to”, you would be entirely right. “Relate to” is wrong. Perhaps later, over a glass of wine, we can turn to the Oxford English Dictionary, but I believe the word “relate” does not mean what the noble Lord has suggested it means. The word “refer” would mean that, but “relate” means “to have a relationship to”, and in the case that I have just described, it would certainly have a relationship to a specified regulated person.
Lord Sassoon
My Lords, my clear understanding of the drafting here—and like these other drafting points that we have dealt with, if I have got it wrong I will of course write—is that a specified regulated person is the key thing, which in the examples I gave would be Barclays or the RBS. We should not be concentrating on the verb “relate” but what we need to be looking at in new Section 9G(4) is the construction on “specified regulated person” and that would be naming an individual firm.
If the FPC were to make a direction related to regulated persons of a specified direction which happened only to be a class of one firm, then I am clear that that is what is intended here. If I have got it wrong, which I do not believe I have, I will clarify the situation. I wish I had the complete Oxford English Dictionary. It would be quite difficult to bring it in to discuss it over a glass of wine, but I have the Concise Oxford English Dictionary at my fingertips and it might help the noble Lord to say that the concise edition defines “relate” interalia as meaning “having reference to”. I do not know whether that helps him, but perhaps we can move on.
We were on Amendments 48 and 66, and I think that that particular point was the major one here concerning the Committee. I would just say more generally that we are absolutely committed to maintaining clarity of responsibilities and distinguishing micro or firm-specific roles from the macro role. We do not want any lack of clarity here, but on the situation which the noble Lord postulates, I hope that I have satisfied him that indeed the drafting is correct. After that long and interesting discussion, I would ask my noble friend to consider withdrawing her amendment.
FSA Investigation into LIBOR
Lord Eatwell Excerpts(12 years, 9 months ago)
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Lord Eatwell
My Lords, I am most grateful to the noble Lord, Lord Sassoon, for repeating the Statement made by the Chancellor of the Exchequer in the other place. I welcome the content of the Statement as far as it goes, but it does not go far enough.
It is difficult to exaggerate the seriousness of the LIBOR scandal for three reasons. First, because of the manipulation of this key benchmark rate, a London standard recognised throughout the world has accordingly affected financial transactions worldwide, directly impacting on the financial well-being of millions of families and firms.
The Serious Fraud Office has powers to investigate and to bring prosecutions in cases of fraud defined as,
“an act of deception intended for personal gain”.
This includes publishing false information to mislead investors as well as fraudulent trading. I am no lawyer, but common-sense interpretation of those words would suggest that the people with whom we are dealing have indeed been practising deception for personal gain. But they are not simply persons with some sort of criminal bent; they have been moulded by the environment in which they work and by what is regarded as acceptable practice on a day-to-day basis—fine for the firms for which they work, just so long as they make money for them.
Secondly, their actions have done enormous damage to our financial services industry in general and to the City of London in particular. They have not merely undermined but blown up the City’s hard-earned reputation for integrity and fair dealing and, most of all, destroyed the trust without which no honest financial system can operate. Every honest firm should welcome effective regulation. I am sick of hearing that regulation limits the operations of free markets and that if legislation results in more effective regulation banks will leave the country. Now we know just how free those markets actually are. We should not be held to ransom.
Thirdly, the financial services industry is, I am afraid, an industry with form. In the same week as we learnt of the manipulation of LIBOR, we learnt of the mis-selling of interest rate swaps, following on from the PPI mis-selling scandal. As the Chancellor commented, all of this is on top of the irresponsible lending practices at home and abroad that brought about the international financial crisis—practices in which British banks played a leading role, inflicting huge economic costs on the British people.
In the light of those three factors, an inquiry should meet the following criteria. First, it must address the culture of banking and the financial services industry as a whole in relation to the internal organisation of industries and the regulatory framework in which they operate. Secondly, it must address the key question of the boundaries of civil and criminal culpability. Thirdly, it must fundamentally reassess the scope of regulated activities. The inquiries that have been announced today meet only one of those criteria—the second, on the boundaries of civil and criminal culpability. I am delighted to hear that Martin Wheatley will conduct a speedy investigation into the narrow issue of the setting of LIBOR and the related issues of criminal sanctions.
The proposal for the parliamentary inquiry fails on the following grounds. First, the scope of the terms of reference, although it sound quite broad, is in fact limited to the lessons learnt from,
“regulatory and competition investigations into the LIBOR”.
So it is just about the lessons learnt from that particular problem, not the broader issues of professional standards in the industry as a whole and the structure of the industry. Secondly, it fails to address the overall question of the scope of regulated activities. Thirdly, a parliamentary inquiry will fail to restore public trust by creating a national consensus about what has got to be done. I have great respect for the chairman of the Commons Treasury Select Committee, not least because of the excellent critique of the Financial Services Bill by his Select Committee. Let us note that the most important elements of that critique have been pointedly ignored by the Government. A parliamentary inquiry is bound to appear to the public to be too introverted—a closed, establishment shop to which they have limited access, working within terms of reference that are far too restrictive. That is why there must be a full public inquiry that addresses all the issues at stake. As the Chancellor said, we know what has gone wrong. Yes, indeed, we do—but, at the most fundamental level, we do not know why or how.
I quite understand the argument that a proper inquiry might take too much time, but that can be easily dealt with by instructing the public inquiry to deal with issues sequentially. After Mr Wheatley’s report there could be an interim report on the immediate LIBOR issue, described in the terms of reference for the parliamentary committee. Following on from that, a much more considered report on corporate failings in compliance, culture, governance and organisation throughout financial services is the only full answer to the question: why did this happen? We owe the honest, committed people in the financial services industry that inquiry to lift the cloud that will otherwise hang over them.
The development of the financial services industry in this country has been guided by great public inquiries: the Macmillan Committee in the 1930s and the Radcliffe Committee in 1958 produced landmark reports. Now is the time for another. The reforms of the 1980s, while bringing many benefits, have had potentially disastrous, unintended consequences. There is a need for fundamental reform to the structure, style and content of the financial services industry to provide a framework for successful development in the future.
The Government have been bold in establishing the Vickers inquiry and bringing forward the current proposals and they deserve credit for that. However, the current proposal for a parliamentary inquiry, I regretfully say, by its very limitations—and especially the limitations of the terms of reference—can only do harm.
I should like to ask the Minister a couple of brief questions. First, why have the Government limited the scope to lessons drawn from international regulatory and competition investigations into the LIBOR rate-setting process? Why does it not go wider? Secondly, when did the Treasury first know of the substance of the FSA inquiry into LIBOR-fixing at Barclays?
Financial Services Bill
Lord Eatwell Excerpts(12 years, 9 months ago)
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Lord Eatwell
“Supervisory Board
In section 1 of the Bank of England Act 1998 (court of directors), for subsection (1) substitute—“(1) The court of directors of the Bank shall be replaced with a Supervisory Board.””
Lord Eatwell
My Lords, I shall speak also to Amendments 2 and 201. Before addressing the amendments, I crave the indulgence of the Committee in making a few general comments on the Bill and our procedures.
This is a very important Bill. Yet, as we know, it is a dog’s breakfast of amendments to earlier legislation and is, accordingly, extraordinarily and disproportionately difficult for the House to assess properly. The Treasury Committee of the other place has objected to the current construction and argues that there should be a new Bill to replace earlier legislation. Only then can that committee and, indeed, the regulated community gain a proper overview of the full import of the measures before us.
Most importantly, the Bill as currently drafted severely limits effective scrutiny by this Committee. Not only is there the question of excessive complexity in drafting but many of the most important debates on Bills take place on the Motion that Clause “X” stand part of the Bill. As this Bill is constructed, this is just about impossible, as failure to agree, say, that Clause 3 or Clause 5 stand part would not only wreck the entire Bill but render it completely meaningless by taking about 40 pages out of it. The drafting is a mess.
Secondly, there are fundamental problems with the overall structure of the Bill, identified by the Joint Committee and the Treasury Committee, which could better be addressed by proper redrafting rather than by piecemeal amendment.
Lord Phillips of Sudbury
I apologise to the noble Lord, Lord Eatwell, for interrupting at this early stage. I am sympathetic to the point that he has just made, but is not the problem one of standing orders rather than the drafting of the Bill?
Lord Eatwell
I think the answer is no. The issue is the straightforward drafting of the Bill. The problems, as I said, could be better addressed by proper redrafting rather than by piecemeal amendment. For example, the appropriate structure of the governance of the Bank of England in the 21st century, a matter to which the Treasury Committee paid particular interest, should be dealt with by a full rewrite of the Bank of England Act 1998 rather than by the cumbersome and opaque clauses before us.
Thirdly and most importantly, the Treasury Committee of the other place has raised a number of major objections to the content of the Bill with respect not only to Bank of England governance but to a number of other crucial issues of economic management, especially at times of crisis. Before today, few of these had been taken on board by the Government, although we will consider their proposal of an oversight committee later today.
I was delighted to read in the Financial Times yesterday that amendments derived directly from the Treasury Committee’s report of 24 May have been tabled by my noble friend Lord McFall, a distinguished former chair of the Treasury Committee, and by the noble Baroness, Lady Noakes, perhaps the most tenacious opposition speaker on Treasury affairs for many a long year—my noble friend Lord Myners has the scars to prove it. Your Lordships’ House has a fundamental responsibility to pass those amendments so that the other place has the opportunity to consider amendments proposed by its own committee. This is a valuable constitutional innovation.
I recognise that a fundamental rewrite of the Bill would take some time, but the Treasury Committee has faced up to this issue, too, arguing that the legislation is proceeding with undue haste. I agree. I recognise that the planning blight that hangs over the FSA is causing problems, but the performance of the shadow committees and authorities has already been such as to give us confidence that delay will not be disproportionately damaging.
All this adds up to the fact that the Bill as drafted is a barrier, not an aid, to effective macroprudential regulation. This is not a party political issue. I say with all due respect that the noble Lord, Lord McFall, and the noble Baroness, Lady Noakes, are not natural political allies. This is about getting the legislation right, which is what we on this side will endeavour to do.
The noble Lord, Lord Sassoon, and I worked well together to improve the Bill that established the Office for Budgetary Responsibility, and I hope that we can work well together to improve this Bill, although I would not start from here. When the Minister first speaks, I think he owes the Committee an explanation as to why the Government have consistently ignored the advice of the Joint Committee and the Treasury Committee on the structure of this legislation.
I turn—to the relief of the Committee, I am sure—to the amendments in this first group. Their fundamental objective is, I hope, clear: to set in train a wide-ranging restructuring of the governance of the Bank of England. The Bill gives the Bank remarkable new powers in macroprudential and microprudential regulation and in the assessment and management of financial crises. The structure of governance and levels of accountability should be appropriate to these new powers.
A key element in the structure of governance of the Bank is the court. As many commentators have noted, the current constitution of the court, its powers and resources are simply not up to the job. The Treasury Committee has paid particular attention to the role of the court, which is currently responsible for managing the Bank of England’s affairs other than monetary policy. The committee’s evidence sessions have exposed doubts, expressed by many witnesses, as to the court’s fitness for purpose as presently structured. A distinguished former member of the Monetary Policy Committee, in evidence to the Treasury Committee, described the court as,
“an historical legacy institution that now serves no useful purpose and creates the appearance or illusion of accountability or oversight where none exist”.
These concerns are especially important because of the role that the Financial Services Bill, as currently drafted, envisages for the court with respect to determining the UK’s financial stability strategy. In the context of monetary policy, where the Bank of England’s objective is to maintain price stability HM Treasury is required to write to the Monetary Policy Committee at least once a year to specify price stability and the Government’s economic policy. The annual Treasury remit letter fleshes out the concept of price stability in practical operational terms while avoiding undue rigidity. It strikes a balance between operational independence and democratic accountability.
A quite different model is proposed for financial stability. It is envisaged that the primary responsibility for determining and keeping under review the strategy for achieving the financial stability objective will reside with the court, although the court will be required to consult the Financial Policy Committee and the Treasury, and the Financial Policy Committee can, at times, make recommendations.
However, here we have a crucial difference in views—given the court’s role in determining the financial stability objective—on whether the court is up to the job. The view that the court should be abolished and replaced by a supervisory board was advanced by the Treasury Committee. In the face of the powerful arguments advanced by the Treasury Committee, the Government replied that they were not,
“at this time, minded to pursue the more radical changes to Bank of England governance recommended by the TSC, including the replacement of Court with a supervisory board. In general, the Government considers that the governance of the Bank should primarily be a matter for the Bank itself”.
This is astonishing. Indeed, it is nonsensical. As the Treasury Committee points out, the Government are the sole shareholder of the Bank, and many of the Bank’s responsibilities, functions and powers are defined by legislation. The Government do not regard the governance of private sector companies as a matter just for those companies. They really cannot wash their hands of this central issue.
Finally, the Bill grants major new powers to the person of the governor. It is important that the governor is backed up by a powerful supervisory committee to which he is accountable and is not an individual exposed on his or her own, so why a supervisory board? What is in a name? The whole point of this proposal is to recognise this necessary break with the past if we are to have a modern, effective structure of governance at the Bank of England. In the convoluted context of amendments to this Bill, we have been able to present only a sketch of what we on this side of the House have in mind, but we shall return to the matter on Report.
By accepting this amendment, the Government would acknowledge that the new Bank, with its new powers, would have a board to whom the executive is responsible and that is capable of performing an effective supervisory function. That should be its job: to supervise, to set strategy, to advise and review, not to run the Bank on a day-to-day basis and certainly not in the context of a crisis. These amendments are a signpost towards the new Bank with a new regulatory structure, and hence towards a truly effective regulatory system. I beg to move.
Lord Peston
I rise to support my noble friend. This is an immensely complicated Bill, and I certainly find it virtually impossible to follow. I cannot tell you how many hours I have put in trying to find out what almost any sentence actually refers to when it refers to some other sentence in the Bill. It contains clauses, subsections, paragraphs—I think I could find an infinite regress in there somewhere that went on for ever.
Lord Sassoon
I beg my noble friend’s pardon. I think I was looking at the Annunciator, which was misleading at the time. I rather wished we were already where my noble friend Lord Phillips of Sudbury was, on Clause 9, but sadly I looked down and we were still on Clause 1. We will come to all these points in due course.
I will respond to the comments on the form in which the Bill is presented. Although I explained at Second Reading why we are amending FiSMA rather than giving a wholesale rewrite, it is clearly of some concern to noble Lords and I should address the points as I did at Second Reading. Our approach was widely supported by consultation respondents. It will minimise the extent to which regulated firms and other users of FiSMA have to deal with legislative change. I appreciate that there might have been forms that would have made it easier at the margin for your Lordships’ House, but I think the substantive point here is that we are asking a major UK industry to absorb significant and necessary change and it is certainly the watchword of this Government in all that we do to minimise regulatory and administrative burdens; and we listened to what the industry had to say in response to the consultation.
I also believe that the way in which the board is constructed will allow for more focused parliamentary and stakeholder scrutiny of the key changes to the regime rather than open up a full discussion of everything again. The Government recognise that it is difficult. We have well over 300 pages of the Bill before us, which is precisely why we published a consolidated version of the Financial Services and Markets Act, which at some 650 pages was a huge exercise by Treasury officials. It took an enormous amount of time and is available on the Treasury website. I drew noble Lords’ attention to it at Second Reading. A comprehensive amended version, as it would be amended if this Bill goes through, is available for scrutiny on the Treasury website.
Lord Eatwell
The Minister is quite right—it is 658 pages, actually, and extremely difficult to read on a computer screen. Will the Treasury undertake to print a copy and provide it to every Member who has taken part in this short debate?
Lord Sassoon
My Lords, different noble Lords will want to digest the material in different ways. Some of us may find it much easier to focus on what we are interested in on a computer screen. I am certainly conscious of the wasteful expenditure of resources and taxpayers’ money when people do not want printed copies. I will investigate, but it may be that copies are available through the Library. I do not know—let me have a look at that. But it is certainly on the website. I suggest that noble Lords may not want to download all 600 pages but will be interested in particular sections. I underline the fact that a huge effort was gone into that far exceeds anything that would normally go into a Keeling schedule.
The noble Lord, Lord Peston, asked about Keeling schedules. When he asked about them a couple of days ago, I had no idea what they were. So I asked for somebody to have a look on the internet, where there is a very interesting debate. It starts by questioning whether these schedules were named after the stunt woman, Liise Keeling, or the distinguished former Member of Parliament for Twickenham, Mr E H Keeling, later Sir Edward. It was the latter who did it in conjunction with Mr R P Croom-Johnson, later Mr Justice Croom-Johnson. So there was, indeed, a Keeling schedule, but it is something that has fallen out of common use over the past decade and more. I suggest that we have gone rather further than a Keeling schedule in producing a fully amended version of FSMA on the Treasury website. There is not, before I am challenged, an amended version of the Bank of England Act, because the changes that we propose to that Act are relatively straightforward. The major innovations in the Bill, such as Clauses 3 and 5, which we will get to in due course, are drafted as entire new clauses, and may be read and scrutinised very straightforwardly as self-standing provisions.
Lord Sassoon
My Lords, it may be the largest Keeling schedule ever known to this House. I will certainly make sure that the Library is aware of where to find the amended version of FiSMA, and I am sure that it will print copies off on request in the normal way.
I turn now to the substance of this clause. The amendments put forward by the noble Lord, Lord Eatwell, seek to convert the court of directors into a supervisory board. We will discuss in detail later—as has already been identified by the noble Lord, Lord Burns, and others—government Amendment 13 and related amendments which, I suggest, address all the points of substance behind the amendments of the noble Lord, Lord Eatwell, by creating a statutory oversight committee. I will have a lot more to say about that when we get to Amendment 13.
The only substantive difference, as the noble Lord, Lord Eatwell, has said, between the Government’s amendments and those in his name appears to be in the name of the Bank’s governing body. The noble Lord’s amendments do not seek to change the structure or membership of the court; it is simply, as he identified, that he does not like the term “court”. I agree with other members of the Committee that simply changing the name is not what we should be focusing on. The name of the Bank’s governing body is largely irrelevant. It is important that it is a body that is fully equipped and prepared to fulfil its role in the new structure effectively and that the non-executives on the court have a clear and explicit remit to oversee the Bank’s performance, both in policy terms and operationally. We will come on to why the Government believe the amendments to the Bill that we have put down are needed.
In answer to the questions about why we put the amendments down when we did, I listened very carefully to all the points on governance and other issues that were made at Second Reading and have come forward, at the earliest practicable date, with amendments ahead of discussion in Committee rather than after it, both in relation to oversight and growth. I make no apology, but your Lordships will appreciate that there was not much time between Second Reading and today to get some important amendments sorted out in detail. I hope that explains what we have done.
Lord Eatwell
My Lords, on that point, it is my understanding that Mr Hoban made the commitment to produce this committee at Third Reading in the other place. It does not seem to me that the noble Lord had to wait until after Second Reading here to formulate his amendment.
Lord Sassoon
My Lords, as I said at Second Reading, I wanted to take full account of the wisdom of this House before we finalised and tabled the amendments. That is exactly what we have done and, as I will explain later, I believe that they meet the concerns of many noble Lords who spoke at Second Reading. The new oversight committee achieves the substance of what is required.
However, as has been said by a number of noble Lords in this debate, if we were to change “court” to “supervisory board”, as suggested by the noble Lord, Lord Eatwell, it would be grossly misleading. What many people, maybe most people, would understand by a supervisory board is that it would be a board of non-executives exercising independent oversight. Actually, as the Committee should be aware, merely changing the name “court” to “supervisory board” would means that it would still be a body made up of executive and non-executive directors, and therefore it would not have the effect that most people would understand by the term “supervisory board”, unlike the oversight committee which the Government are proposing and which we will come on to. I understand the point that the noble Baroness, Lady Liddell of Coatdyke, makes. We want proper, independent oversight, but changing the name of the court is not the way to do it. This has been an interesting debate but, on the basis of that explanation, I ask the noble Lord to withdraw his amendment.
Lord Eatwell
Will the noble Lord give his view of the amendments that we could call the Treasury Committee amendments, which are going to come before us and have been tabled by my noble friend Lord McFall and the noble Baroness, Lady Noakes?
Lord Sassoon
My Lords, when we come to those amendments I will give my view and the view of the Government, but in this group we are talking about the noble Lord’s amendments only.
Lord Eatwell
I mean generically. I raised the question in my opening remarks as to whether it would be appropriate for this House to give the other place the opportunity to discuss the amendments tabled by its own committee. Does the noble Lord think that is appropriate?
Lord Sassoon
My Lords, we have a series of amendments down in the name of my noble friend Lady Noakes and the noble Lord, Lord McFall of Alcluith. The best thing to do is to discuss them when they come up and take them one by one on their merits. If the noble Lord had wanted to discuss all these matters together, he could have grouped a number of amendments together but he, or the usual channels on his behalf, chose not to do so. We had better proceed as per the groupings list.
Lord Eatwell
My Lords, the noble Lord is not answering the question about what he considers to be the generic nature of that set of amendments derived from the Treasury Committee report.
I am very grateful to noble Lords who have taken part in this short debate. As I understand it, the discussion broke into two parts. Many noble Lords were disturbed by the complexity of the legislation before us and felt that this complexity was preventing a satisfactory consideration of the overall implications of the legislation. Having worked on this for some time, I have some sympathy with them. The noble Lord referred to the many hours that Treasury staff had to devote to creating the unified Bill—the Keeling schedule. Similar hours will no doubt have to be devoted to deriving a full understanding of the implications.
Leaving aside the issue of complexity, I turn to the issue of governance, which lies behind the first amendments that I have proposed and which will be before the Committee as we roll through a number of other amendments. Every noble Lord who spoke, with the exception, to a certain extent, of the noble Lord, Lord Burns, felt that there were important issues to be addressed with respect to the governance of the Bank of England and that the court as currently formulated is not fit for purpose. Some of this will be discussed later, in the context of my Amendment 8 and of Amendment 13, which establishes the oversight committee. There are some major questions to be raised about the oversight committee, which we shall deal with at that point. It does not achieve an effective system of clear, transparent governance in the way that one would expect of a major public institution.
With respect to the name, being a bit of a traditionalist myself, I have some sympathy with the noble Lords, Lord Flight and Lord Burns, who felt that the court might as well be called the court. However, when the noble Lord says that the term “supervisory board” is misleading, do we think that the term “court” is not misleading? Whatever does that mean to anybody not steeped in the history of the Bank of England? The Minister has failed to address the generic question about the amendments derived from the Treasury Committee in another place.
This is a significant constitutional development which I think is very valuable, but the noble Lord seems not to want to discuss it. We will return at several points—
Lord Sassoon
My Lords, is the noble Lord, Lord Eatwell, aware that what he describes as the Treasury Committee amendments were debated on Report in another place? Does he accept that, perhaps contrary to the impression which he may not have meant to give, they were indeed debated on Report in another place?
Lord Eatwell
I think that the noble Lord will find that not all the amendments were debated. Indeed, the key amendments relating to the governance of the Bank of England were withdrawn on the basis of Mr Hoban’s assertion that he was going to bring forward some new arrangements. Therefore, the issue before us is whether those new arrangements measure up to the issues raised by the Treasury Committee—a matter that we will discuss in a moment.
Given the nature of our discussion, which I think has got us under way and raised a number of important issues that are yet to be resolved, for the moment I beg leave to withdraw the amendment.
Baroness Kramer
My Lords, perhaps I may comment quickly on Amendment 9. The noble Lord, Lord Turnbull, presented what I suspect will be the Government’s argument, which is that having the Governor of the Bank of England in all these roles provides co-ordination. At Second Reading, I described the twin-peaks strategy as a small mountain range, so your Lordships will understand that I appreciate the need for co-ordination, but to use as the co-ordinating mechanism the single person of the Governor of the Bank of England strikes me as exceedingly inadvisable. The challenge is huge. It is a mechanism for co-ordination that is likely to suffocate, challenge and encourage group-think, but, frankly, no matter how much of a superman the individual who is appointed to that post is, I cannot see that they could possibly have shoulders broad enough to carry all those roles in the demanding way which this legislation and the economy require. Co-ordination strikes me as not the appropriate argument. If the argument is to be made, it must be on other grounds and not to make up for other weaknesses in the Bill.
Lord Eatwell
My Lords, the essence of the debate on these amendments comes down to a lack of a clear governance structure in the Bank. If there were a clear governance structure, with the roles which exist in modern corporations—described clearly by the noble Lord, Lord Sharkey—being performed, we could understand how the co-ordinating activities referred to by the noble Baroness, Lady Kramer, might be carried out. In general, any organisation would be expected to review its internal operations and create an efficient internal management structure, but there is no evidence that the Bank of England is capable of doing this. Given the significant powers that are to be bestowed on the Bank, surely the Government cannot sit idly by. This may be unfortunate, and primary legislation is probably too rigid for the goals that the noble Lord, Lord Sharkey, seeks, but we cannot accept a dictatorship at the Bank or even a belief elsewhere that such a dictatorship exists.
Generally, I am in favour of developing the roles of the deputy governors, particularly in the three major areas of financial stability, monetary policy and prudential regulation. That could provide a framework within which a more collegiate structure of decision-making was developed in the Bank. As I noted at Second Reading, given the differing roles of the MPC, the FPC and the PRA, it is likely that they will put forward contradictory proposals. If one person is supposed to chair all those committees, he or she will either be driven mad or will concentrate on one area to the neglect of others, as we saw the Bank do in the run-up to the crisis. Therefore it seems to me that the right reverend Prelate’s idea of having the deputy governors chair the committees is a good one. Then the Bank could presumably develop a proper management structure in which it was the role of the governor of the Bank to gather together the views of the committees and develop a coherent policy structure from their differing perspectives.
The right reverend Prelate is on to a very important development. It is unfortunate that these procedures do not seem to be developing within the Bank itself and that we do not have a clear governance structure for a Bank which is going to be placed, as the Government say, at the centre of UK financial regulation, and therefore I am very sympathetic to the ideas that the right reverend Prelate has developed.
Lord Tugendhat
My Lords, I was unable to participate in the early stages of the debate this afternoon because I was at a Select Committee, but now that I am here I should like, on the basis of experience, to support the proposition of my noble friend Lady Wheatcroft—not experience of the court of the Bank of England, I hasten to add, but of the European Commission. The President of the European Commission is appointed quite separately from the other members of the Commission and he has no particular power over who else is going to become a member. The way it is done leaves him at the mercy of Governments. My experience under a very strong and good president in the case of Roy Jenkins and under a much weaker and less effective president in Gaston Thorn is that if the chairman or president, whatever he is called, of a body has no influence over the appointment of his colleagues or over whether they stay or go, it seriously diminishes the significance of the person in charge.
As the noble Lord, Lord Burns, said earlier, we are trying to put together something that has a governance structure in keeping with the modern age and which sets an example, inasmuch as that is possible in a body such as the Bank of England which is quite separate from the corporate sector, to the rest of the country. If the chairman is to be taken seriously by the governor and, indeed, by the entire Bank of England beneath the governor, it is essential that he should be seen to be somebody who has played a significant role in the appointment. It would be quite unacceptable if a governor were appointed in whom the chairman did not have confidence. It would be quite unacceptable if the governor felt that the chairman did not have confidence in him, just as it would be unacceptable if the chairman felt that the governor did not have confidence in the chairman.
The noble Baroness, Lady Wheatcroft, has put forward a very sensible and practical proposition. As I say, I speak with experience of having served in a body where the chairman did not have the powers that the noble Baroness suggests. My experience is that that was not a very good way of doing things.
Lord Eatwell
My Lords, these amendments raise some interesting and important issues with respect to the person of the governor. Despite the warm words of the noble Lord, Lord Sassoon, about degrees of consultation, balance and so on, the idea remains that the person will be endowed, under this legislation, with quite extraordinary powers and therefore the process of appointment should be more transparent and subject to consideration by democratically elected Members. If we are to accept an unelected individual having these powers, at the very least the appointment process should be transparent.
The idea that the Treasury Select Committee should express its views is a very good one, but I am not sure about this notion of a veto. That goes a little too far. We do not want to politicise appointments to the extent that has occurred in the United States, which makes me nervous about the suggestion by the noble Lord, Lord Turnbull, that appointments might end up being considered by the whole House, which would inevitably be whipped and become very political indeed. The Treasury Select Committee, although it may sometimes be eccentric, is not party political in quite that sense. It is a good idea that the Treasury Select Committee is consulted about an appointment and it would be a bold Chancellor who would ignore the committee’s views. Since the committee does not have a veto, it is less likely to have the propensity to develop into an overly politicised hanging court. That covers Amendment 5, which is one of the amendments from the Treasury Select Committee in another place put forward by my noble friend Lord McFall and the noble Baroness, Lady Noakes.
I am sympathetic to the idea expressed in the amendment from the noble Baroness, Lady Wheatcroft, and found the arguments put forward by the noble Lords, Lord Burns and Lord Tugendhat, convincing. The notion that the chairman should be consulted and that the degree of confidence in the relationship between the chairman and the governor should thereby be established seems to have the ring of good sense about it. The Government should take this matter under serious consideration.
My noble friend Lord Peston referred to the role of the House of Lords. Although the expertise in your Lordships’ House often comes to bear most effectively and positively on Treasury issues, in the context of an appointment of this seriousness and magnitude, one really has to turn to elected Members. If the constitution of your Lordships’ House changes in the future, then perhaps the House of Lords could have a role in this respect. However, for the moment, the Treasury Select Committee should be the focus of consultation—
Lord Peston
The noble Lord has rather lost me. Is he saying that he agrees that the Commons should have a veto but the Lords should not, or that neither should have a veto?
Lord Eatwell
I hoped that I had made clear that I was not in favour of a veto for the Treasury Select Committee, but was very much in favour of it being consulted.
Lord Peston
In that case, I really cannot see the noble Lord’s argument at all. I hate to disagree with anybody sitting on my own Front Bench, but if this is a matter of consultation, it is a matter of great significance that your Lordships’ House is treated as an equal House. This principle has been established beyond any doubt whatever, and I therefore find it quite unacceptable that whoever is speaking from our Front Bench would not take that view on this subject. I am sorry to say that.
Lord Eatwell
The noble Lord and I are both professional economists and therefore we have disagreement built into our DNA. The role of the Treasury Select Committee in another place is special in this case.
I move on from the amendment tabled by the noble Baroness, Lady Wheatcroft, to Amendment 10, which raises some very difficult issues. Given the new, complex set of conflicting goals that the governor will necessarily need to navigate, the idea that his or her removal from office should be subject to some form of special scrutiny is entirely appropriate. I am not sure whether this is the right form of special scrutiny, but I am certainly going to take this away and think about it and may return to it on Report.
To sum up, Amendment 5 goes a little too far. Consultation is the key in the appointment process. The noble Baroness, Lady Wheatcroft, has identified something very valuable indeed, and we should be grateful to her, as should the Government, who should say so and accept her amendment. A number of very difficult issues have been raised with respect to Amendment 10, which I need to take away and think about at greater length before we come to Report.
Lord Sassoon
My Lords, first, of course the Government place great importance on the suitability and independence of the Governor of the Bank of England. We are all clear that the governor’s role is already a challenging one and that future holders of this post will need to possess an even broader range of skills, experience and expertise. We do not in any way seek to deny that. However, although I fully recognise the great importance of this appointment, I am very confident that there are already robust arrangements in place, which I will go through in a minute.
It is good that we are now focusing in this debate for the first time very directly on the amendments that we are discussing, which makes for a much more productive 35 minutes than we have had on this. In the debate, which has been instructive and interesting, I have heard some voices speaking up for some form of parliamentary veto, some arguing for consultation, some arguing that it should be the Treasury Committee in another place and some suggesting that it should be that committee and/or—I am not quite sure which—the Economic Affairs Committee of this House. Although it is not the subject of an amendment, I heard at least one suggestion that if we were going to change anything, we should go rather more radical and make it subject to a vote of the whole House in another place. That is a rather broad menu. There are many ways to skin this particular cat but I suggest that there are already robust arrangements in place
The governor and the deputy governors of the Bank are appointed by Her Majesty the Queen on the recommendation of the Chancellor and the Prime Minister. Since 2009, this Government and the previous Government have agreed that in principle these appointments will be subject to open public competition. That is what happened with the most recent example of Paul Tucker, who was appointment deputy governor in 2009, and that practice will continue. The Treasury Committee already holds pre-commencement hearings with those who have been selected to become governors and deputy governors. Therefore, I do not believe that Amendment 5 is necessary.
To be absolutely clear regarding something that I think I heard the noble Lord, Lord McFall, say, I certainly agree that Amendment 10 is connected with Amendment 5 but, to be technically right, I would not accept that Amendment 10 is consequential on it. I just wish to be clear on that technical point.
Having been appointed, the governor certainly cannot be removed on a whim. Indeed, the Government have no powers to remove a Governor of the Bank of England. Rather, the Treasury must give its consent if the Bank decides that the governor has met the criteria for removal. However, it is the Bank’s decision to make. The legislation is clear that the governor, a deputy governor or a director of the Bank can be removed only with cause—that is, if the Bank is satisfied that he or she has been absent from meetings of the court for more than three months without the consent of the court, that he or she has become bankrupt, or that he or she is unable or unfit to discharge their functions as a member. That is very clear.
Some commentators have suggested that the fact that the appointments of the chair and independent members of the Office for Budget Responsibility are subject to a Treasury Select Committee veto sets a precedent and that governor appointments should also be subject to a parliamentary veto. However, I agree with the noble Lord, Lord Turnbull, who suggested that these cases are rather different. The role of the governor and the members of the OBR are both characterised by the need for especially talented and independent candidates, but that is where the similarities end. The OBR performs an important function in providing an independent and unbiased forecast on which government policy can be based, whereas the governor carries out executive functions on behalf of the state.
More than that, and more broadly relevant to the amendments, this policy-making role makes the appointment of a prospective governor extremely market-sensitive in a way that appointments to the OBR and many other appointments simply are not. The uncertainty created by a public pre-appointment approval process could, depending on the market conditions at the time, be significantly damaging. The noble Lord, Lord Eatwell, may not like this analysis but I suggest that the person performing the role of governor attracts significant market interest. A huge amount of time and effort is spent examining every scrap of information relating to members of the Bank’s policy committees in order to gain insight into their thinking and determine likely future policy responses, and that will very much be the case with candidates for the post of governor.
Once the candidate is announced, his or her particular leanings can be factored into asset prices. The Treasury Select Committee will then be able to conduct pre-commencement hearings, providing a useful insight into the professional competence and personal independence of the appointee. However, I suggest that pre-appointment hearings of the sort suggested and necessitated by the amendments in this group would exacerbate the uncertainty of markets about who will be appointed, and that would be inappropriate.
I am also sure, and I do not need to point out, that I could apply similar arguments regarding the dismissal of a governor. The uncertainty around any such dismissal would be just as damaging. In addition, I cannot see how the position of a governor whom the Bank had sought to remove for reasons of unfitness for the post could be anything other than untenable if the Treasury Committee reversed the decision, so I simply do not understand how that would work in practice.
I believe that the current arrangement of pre-commencement, rather than pre-appointment, hearings provides the right balance. It gives Parliament an opportunity to question the new appointee on their views and qualifications without bringing into question, or placing doubts over, the appointment itself. A parliamentary veto on appointments and dismissals would introduce uncertainty into these processes, and that would apply whether the veto was given to the Treasury Committee in the other place or to your Lordships own Economic Affairs Committee. For these reasons, I believe it is inappropriate for the Bill to provide that a parliamentary committee must approve governor appointments or dismissals.
Lord Sassoon
I attempted to address the pre-appointment versus pre-commencement issue and I shall not repeat my remarks, other than to say that I believe that, for the market reasons I have given, among other reasons, it would be damaging if there were significant doubt over the clarity of the appointment of a particular individual as governor. One can very easily see how such a situation would be damaging and dangerous in present market conditions. Therefore, I repeat that I believe there is a distinction—
Lord Sassoon
Perhaps I may complete the answer to my noble friend Lady Kramer, then I will give way. As I pointed out, I believe that there is a great distinction between pre-appointment and pre-commencement, that we have the balance right, and that with any appointment put forward to the Queen on the recommendation of the Chancellor and the Prime Minister there will be a very high degree of likelihood, approaching certainty, that the figure appointed will have the confidence of the Treasury Committee.
Lord Eatwell
My Lords, following on from the point made by the noble Baroness, Lady Kramer, while I agree with the noble Lord that a veto by the Treasury Committee is not a good idea, I really do not understand his arguments about pre-appointment consultation, whereby a prospective candidate appears before the Treasury Select Committee prior to his or her appointment being confirmed.
The argument about market sensitivity entirely contradicts what the noble Lord told us about the collective decision-making process in the Bank. If there are all these collective procedures in which the governor is challenged and supported by deputy governors, technical staff, and so on, the idea that a new governor arriving would dramatically change the nature of monetary or stability policy seems to be ridiculous. There may be a change of tone or style, but the idea that the governor will somehow be the sole factor who can move markets by the very nature of his character would seem to reinforce all the fears of those who believe that we are appointing a sun king. The noble Lord argued persuasively that there existed a degree of collegiality in the Bank, which some of us were quite surprised to hear, but none the less we understand what he says. However, he cannot argue that and at the same time deny the possibility of pre-appointment consultation because it is market sensitive.
Lord Sassoon
My Lords, the noble Lord, Lord Eatwell, always applies impeccable logic but the way in which the markets look at these things is rather different and not necessarily logical. While I entirely accept at one level the logic of the noble Lord’s argument, it is not the way in which the markets seek to interpret what they can read into every tea leaf, let alone something as important as the appointment and the person of a new governor. I certainly do not accept that my two arguments are in any way at odds with one another.
Lord Eatwell
My Lords, if the markets are so irrational, as the noble Lord says, why will we have our appointment process distorted by these irrational forces? Surely, if they are so irrational we should simply leave them to their own devices and develop a sensible, coherent appointment process that fits the needs for the appointment of this very important figure.
Lord Sassoon
My Lords, I was not going to bring this up, but I am not sure about the logic of the position of the noble Lord, Lord Eatwell. I understand that he was arguing for consultation but not a veto by the Treasury Committee. I am not at all clear why, if he is asking for consultation but not a veto, he is so hung up on whether it be pre-appointment or pre-commencement. Pre-appointment seems to imply some form of effective veto that goes with it. I am genuinely rather confused.
Lord Eatwell
I thought that I had made that clear in my opening remarks on the amendments. An individual who is being proposed by the Government to Her Majesty for appointment may be found by the Treasury Select Committee to be unsatisfactory in various aspects of his skill set or whatever, but while the Government may ignore that, they would at least have to take it into account and justify the appointment. Indeed, in doing so, that would perhaps strengthen the position of the governor thereafter.
Lord Sassoon
My Lords, I have dealt as fully as I can with the arguments. All I would suggest is that it further points out that this is not an easy area. As the noble Lord, Lord Turnbull, said, there are lots of possible solutions. If he were to change it at all, he would go to a solution that is not one of the number on the table at the moment. The Government’s position remains that we have an appropriate balance in all of this.
In answer more specifically to the noble Lord, Lord Peston, since I had the time during that little exchange to do a bit more research into “a”s and “the”s, the point is simple. The first reference is to the creation of “a Governor” and the subsequent reference is to “the Governor” who is at that point in the flow of the legislation being created. I hope that that helps to explain what is going on.
Lord Eatwell
“(2A) The Chancellor of Exchequer shall only appoint a person under subsection (2)(e) if he is satisfied that the person has knowledge or experience which is likely to be relevant to the Court’s functions and would enhance the diversity of the composition of the Court.”
Lord Eatwell
My Lords, I beg to move Amendment 7, which as noble Lords will see from the Marshalled List refers to the experience and knowledge of individuals appointed to the court; that the Chancellor should be satisfied that they have appropriate experience and knowledge; and that their presence would enhance the diversity of the composition of the court.
The immediate reaction to this amendment might be yes, of course, it is unnecessary; anyone who makes sensible appointments would do that sort of thing. However, if it is accepted, a statutory responsibility to ensure that the supervisory board or the court, whichever we have, has a diverse range of appropriate talents will be a crucial guideline that Chancellors must follow and when necessary justify.
The importance of this amendment lies in its combination of expertise and diversity. The crisis should have taught us all of the dangers of conventional wisdom. Conventional wisdom underpinned the decision-making in central banks and treasury departments throughout the world and Mr Greenspan’s confession of the way in which his decisions were distorted by a conventional view of risk analysis has already been cited by my noble friend Lord McFall. In building a successful court or supervisory board, we need the contrary, the awkward and the different to be part of the debate. This will not guarantee that we get it right but at least we will be more likely to than if we appoint a committee of well intentioned sound thinkers who all think the same way.
Diversity here is a reference to diversity of view of analysis and of opinion. There is no doubt that often diversity of view is correlated with other aspects of diversity, maybe of gender or of ethnicity. This is not what I am trying to get at here, it is diversity of view that I would like to suggest. It would be pointless, for example, to appoint a racially diverse, gender-diverse board, all of whose members happened to share the same analysis and views. The degree to which diversities are correlated will perhaps provide some guidance and inspiration for a Chancellor. This amendment is designed to be a permanent challenge to the Chancellor in the very important task that he or she has of deciding on the composition of the court and particularly the non-executive members of the court.
Baroness Liddell of Coatdyke
My Lords, I support Amendment 7. Looking at this amendment the casual observer might wonder why it is necessary. It makes perfect sense that you would not leave governance of the Bank of England—and therefore governance of the economy and our financial institutions—to a bunch of interested amateurs. Frankly, however, we have occasionally seen that happen with some of our financial institutions—we need only look at the trails of chaos over the years from banks such as Barings and onwards to the catastrophe of Lehman Brothers. If noble Lords wish to read a horror story they should read Michael Lewis’s The Big Short. I confess that I did not understand some of the complex derivatives being talked about until I read The Big Short, and I have spent most of my life in and around the world of economics.
It is critically important that there is a balance of knowledge, experience and expertise on the supervisory board, or whatever we choose to call it. It will need people with a wide range of competence, with experience ranging from macroeconomics to prudential regulation. It is a wide mix to put together.
The other side of the coin—a matter to which my noble friend referred—is diversity of opinion. In this case, as he pointed out, we are not talking about gender or ethnic diversity, although that would be very good to have. We heard an exchange within the past hour between two distinguished economists—my noble friends Lord Peston and Lord Eatwell—and there will undoubtedly be differences of view among any number of economists. I would love to throw behaviouralists into the mix of any supervisory board of the Bank of England. Quite apart from behavioural economics, it is how people react that can bring economic chaos.
The amendment may seem unnecessary because it is a no-brainer that you would seek to do this anyway. We have learnt along the way, however, that it is better to get such things written down. Then you will have a wee bit more of a chance of achieving them. I therefore support Amendment 7.
Lord Sassoon
I hesitate in replying because the noble Lord, Lord Eatwell, might want to answer that excellent question. However, it is up to the noble Lord.
Lord Eatwell
If it is of convenience to the Committee I am quite happy to do that. The noble Lord—indeed, my old pal—Lord Andrew Turnbull, has put me on the spot here by placing me in opposition to some propositions put forward by my noble friend. I was very clear that I was seeking diversity of view. Where someone lives does not seem a basis for that.
Lord Sassoon
My Lords, that illustrates one thing about the amendment—that the ways in which people interpret its words are rather different, which in itself is not ideal.
The noble Baroness, Lady Liddell of Coatdyke, got it right when she said that it is a no-brainer, and we do not believe that it is necessary to make legislative provision for it. My noble friend Lord Phillips of Sudbury said so in vigorous and direct terms which I can only echo. On one level, I feel that I should say no more and sit down. Nevertheless, I should explain to the Committee exactly what is going on.
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. We understand the concern underlying the amendment and have already taken it into consideration, including in the latest appointments to the court. For example, both Tim Frost and Bradley Fried bring extensive experience of financial services as practitioners to the court. However, I do not believe that it is necessary to make legislative provision for this.
I can assure the Committee that the appointments of non-executive directors to the court are fully regulated by the Office of the Commissioner for Public Appointments, OCPA, which ensures a fair, transparent and competitive process. The practical elements of the appointments process are run by the Treasury, with the most recent interview panel consisting of senior Treasury officials, the chair of court and an independent assessor. The Treasury seeks to find the best candidates for these roles. This means people with a deep and diverse range of experience in relevant sectors. This can be, will be and is achieved without a prescriptive legislative obligation.
Court appointments are advertised openly. Applications are sought from candidates with diverse experience and from a variety of backgrounds. For example, the role profile for the last NED vacancy sought people with substantial experience as board members or heads of functions in a major financial services organisation; and/or someone who had built up a successful enterprise of a significant size; and/or someone who had played a prominent role in a relevant area of public policy, the voluntary sector or a trade union.
I can assure the Committee that the decision is taken with full consideration of the impact on the broader composition of the court and the fit of each candidate within the make-up of the court as a whole. I hope the noble Lord feels that he can withdraw his amendment.
Lord Eatwell
My Lords, I am grateful to all noble Lords—except the noble Lord, Lord Turnbull, who ambushed me—who have commented on the amendment.
As to the other issues raised by the noble Lord, Lord Phillips, most issues of integrity and so on are covered by the committee on appointments in public life, to which the noble Lord, Lord Sassoon, referred. All those elements have to be taken into account. However, the issue that does not necessarily have to be taken into account is diversity of view, which I am particularly emphasising at this point. The noble Lord may feel it inappropriate to consider all these matters but, other than diversity of view, they already have to be considered under legislative structures.
Lord Eatwell
“( ) In section 2 of the Bank of England Act 1998 (functions of the court of directors) for subsections (1) and (2) substitute—
“(1) The Supervisory Board will be responsible for overseeing the development and execution of the objectives and strategic policies of the Bank of England, including monetary policy and stability policy, subject to instructions from the Treasury.
(2) There will be a Supervisory Board Secretariat, charged with providing economic, legal and monetary advice and research support to the Supervisory Board.””
Lord Eatwell
My Lords, the amendment stands in my name and that of my noble friend Lady Hayter of Kentish Town. It takes us back, because of the way in which the Bill is constructed, to the court or supervisory board of the Bank of England. The amendment lays out the roles of the court to specify more clearly than current legislation does the role of the supervisory board or court—let us leave that argument aside and concentrate on the body—which the amendment states,
“will be responsible for overseeing the development and execution of the objectives and strategic policies of the Bank”.
It relates, therefore, to the development of strategic policies, as is laid down with respect to the Financial Policy Committee, as well as to the objectives and strategic policies. They are subject always to instructions from the Treasury, which are defined in statute, as are particular responsibilities of the Monetary Policy Committee. The idea is to ensure that the board has the status that I think everyone who has spoken today feels that it should have. That is the first part of Amendment 8; the supervisory board or court would have that appropriate status.
The second part of the amendment—which proposes that the supervisory board should have its own secretariat,
“charged with providing economic, legal and monetary advice and research support to the Supervisory Board”—
arises because, I regret to say, the Bank of England has form in this area. In the early days of the Monetary Policy Committee, its independent members were denied access to satisfactory technical support. The Governor of the Bank of England at the time declared that if they should have suitable support, it would undermine the status of the Bank. It was only after a public outcry once the governor’s position was made clear that suitable economic and secretarial support was given to the independent members of the Monetary Policy Committee to enable them to do their job. The governor had prevented them having that support until there was a public outcry.
Members of your Lordships' House who have been non-executive directors of boards will know how important it is for the non-executive directors to be able to access independent advice at times in order for them to fulfil their proper fiduciary role. Having access to advice—whether it be legal or, in the case of the court of the Bank, economic and monetary—is a crucial part of the independent directors being able to do their job.
If the Bank had not behaved in this way in the past, I would not feel that the amendment was necessary, because one would say, “Well, of course, they should have appropriate support”. Unfortunately, however, important independent members operating within the structure of the Bank have not in the past been given the support that they needed to do their job. It is therefore important that independent members of the court should have access to the advice and research support that can make them effective non-executive directors. I beg to move.
Lord Tugendhat
My Lords, I support the amendment of the noble Lord, Lord Eatwell. He draws the lesson from what happened to the outside directors of the Monetary Policy Committee. It might be said that the Bank has learnt its lesson on that and that the situation will not arise in the future, but as I pointed out at Second Reading, the Bank has behaved unacceptably in relation to having an inquiry into its performance during the financial crisis. Whereas the FSA had an inquiry and the results were published, the Bank of England rather stuck to Montagu Norman’s axiom, “Never explain, never excuse”. The Bank of England is a fine and venerable institution, but it finds it difficult to change. Unless there is some provision of the sort that the noble Lord, Lord Eatwell, suggests, one cannot be sure that the supervisory board—or whatever it is going to be called—will necessarily have the economic, legal and monetary advice and so forth that is required. The role that it is taking on is complex. It will deal with highly competent officials in the Bank. It is essential that the non-executives on the supervisory board have absolute certainty that they have all the back-up they require.
When one looks at the demands being placed on non-executive directors of more normal financial institutions, it is clear that, if they are going to fulfil their functions, they will need much more back-up than non-executive directors were accustomed to in the past. Their responsibilities and accountabilities are greater and they will need absolute certainty and right of access. That applies to the Bank of England and I hope that the Government will take into account that, if we are to have proper governance, it requires proper support.
Lord Sassoon
My Lords, we debated earlier amendments tabled by the noble Lord, Lord Eatwell, which sought to convert the Court of Directors into a supervisory board. Following on from those amendments, Amendment 8 sets out some of the functions of that board. There is little between the noble Lord and the Government on the substance of the amendment, but my key argument is that the amendment is not needed because its most important parts are addressed by government Amendment 13.
Government Amendment 13, which I will talk to at much greater length when we get to it, will give the new oversight committee responsibility for overseeing the Bank’s performance against its objectives and strategy—precisely what the first part of Amendment 8 seeks to achieve. As for the second part of Amendment 8, I appreciate that in the past the Bank was slow to realise that the MPC members needed their own dedicated support. That lesson was learnt a considerable number of years ago, and both MPC and FPC external members now have access to appropriate resources. The point about the FPC is important and relevant because that has been created in shadow form only very recently.
We can see the considerable output that the FPC is already producing, which it could not possibly do without that support. I am wholly confident that the oversight committee will have sufficient support once it comes into being, and I do not believe that it is necessary to put it into the Bill. I ask the noble Lord to consider withdrawing his amendment.
Lord Eatwell
I apologise that I was temporarily distracted by other channels. I am heartened to hear that the Government feel that the Bank has learnt its lesson on the provision of resources. I still feel that it would be appropriate to provide that insurance, particularly legal advice, for independent members. Legal advice is crucial for non-executive or independent directors in any environment because they can so easily be outgunned by the executive in a way that ultimately is not beneficial for the institution as a whole.
By the way, I am heartened by what the Minister had to say about the definitions of the supervisory board’s roles, but we will come on to that issue in our detailed consideration of his Amendment 13.
I am sorry to be so roundabout in this respect, but going back to the issue of resources, I will consider what the Minister has said and decide what I will do on Report. In the meantime, I beg leave to withdraw.
Lord Phillips of Sudbury
I am grateful for that, and I apologise for the error. However, I want to reinforce the importance of extending the power of delegation under new Section 3B. That could be very important to the work of the committee and strengthen it because it would bring in outside voices and give strength to its deliberations. I hope, therefore, that the Government may review this and decide to extend the power of delegation, not just to members but to outsiders as well. Subsection (3) already provides that outsiders can attend and speak at meetings of the committee, but to be members of a delegated body is crucial, as, indeed, in the review structure under new Section 3C, it would be helpful on occasions to have more than a single person appointed to conduct a review. If it is a complex review, there could be a lot of point in having a small team of three. At the moment that is not permitted by the wording of new Section 3C.
Lord Eatwell
My Lords, I welcome Amendment 11, which is the Treasury Select Committee amendment, put down by my noble friend Lord McFall and the noble Baroness, Lady Noakes. I also welcome the government amendment, which is taking us forward on this vexed issue of the governance of the Bank of England. I regard that as a general welcome, notwithstanding any criticisms or questions I may later have about some particulars of the amendment.
However, before getting into the discussion of Amendments 11 and 13, I reiterate the question raised by the noble Baroness, Lady Kramer, with respect to Section 241 of the Banking Act 2009, where it appears that the chair of the court is in the gift of the Chancellor of the Exchequer. There is nothing in that clause to suggest that the chair must be one of the non-executive members.
Baroness Kramer
I have tabled Amendment 98A, which I think fixes the problem, although it may be fixed by the Government before we get to that point.
Lord Eatwell
Let us hope that it is fixed by the Government, to general approbation.
I turn to Amendments 11 and 13. The noble Lord, Lord Turnbull, perhaps hit the right note when he said that there are elements of each of the two amendments that, if combined, could be turned into a truly satisfactory structure for this activity. As far as I can see, there are three crucial differences between the amendment proposed by my noble friend Lord McFall and that put forward by the Government. The first, as several noble Lords have pointed out, is that my noble friend’s amendment refers to the Court as a whole. Secondly, the Government’s approach would not allow the proposed oversight committee to consider the merits of the policy pursued by the Bank, a point that could be considered under Amendment 11. Furthermore, there is a third point: the Government’s approach does not commit anyone other than those internal to the Bank to know if a report is lying somewhere gathering dust, unpublished because of some concern about the public interest. Surely this is not the best way to grow confidence in the procedure, and the suggestions made in Amendment 11 would give some confidence that if reports were not published, at least there was some outside overview of the report and the reasons why it would not be published.
Given the detailed scope of the Government’s amendment, I am going to concentrate on its provisions. This represents a major concession, finally forced out of the Bank through gritted teeth by the criticisms of the Treasury Committee and the Joint Committee, to some sort of oversight of its actions. As the Committee will be well aware, the Bank has severely damaged its own reputation, as several noble Lords have said, by its persistent refusal to conduct a proper, wide-ranging review of its conduct in the run-up to the financial crisis. There was the downsizing of the financial stability department, for example; its obsession with moral hazard during the crisis when what was urgently needed was a recapitalisation of the banks; and indeed since the crisis the governor and others have persistently suggested that they knew what was going on but either did not have the tools to respond or were not loud enough in their protestations. I must say that that seems to be a derogation of duty.
So the Bank has form that has been damaging both to itself and to the effective development of stability policy and the British economy. It would greatly help the Committee if the Minister would specify precisely in what ways the proposal for an oversight committee now before us differs from the proposals first advanced by the Bank in January. Has the Treasury added to or subtracted from the bank’s suggestions, and what are the implications of the Treasury’s modifications? Can we now have confidence that the Bank will not only learn from its mistakes but have sufficiently critical procedures in place that it learns before making them?
I am afraid that my confidence in these proposals was severely undermined by the Bank’s own commentary on the proposed oversight committee:
“It is vital that the Oversight Committee does not seek to second guess the decisions of policymakers themselves. The passing of such judgements could threaten the relationship of trust that is necessary between policymakers and the Oversight Committee. Were the Oversight Committee to be seen to ‘take sides’ in the policy debate, those policymakers from whom it differed would be less likely to trust as independent its judgement of whether proper processes were followed”.
I think that that is nonsense. I really had no idea that policymakers in the Bank were such delicate flowers that they could not withstand a little robust assessment of their decisions.
On several occasions today, Members including myself have quoted from the evidence of Mr Greenspan before the US House of Representatives, when he said:
“This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year”.
At least Mr Greenspan had the guts to stand up and admit what was true for every central banker: that this was an intellectual failing, and analysis and judgments were wrong. That is why it is imperative that the oversight committee has the powers to penetrate groupthink at the Bank, to assess and evaluate analysis and judgments and to create a framework in which the institution can learn and adapt in the rapidly changing environment of financial markets. As the Treasury Committee itself said:
“It is unrealistic to suppose that an oversight body could plausibly be expected to commission an external review of a policy decision without assessing the substance”,
of that decision.
What is the full significance of the phrase,
“keeping under review the Bank’s performance”,
in new Section 3A(2)? Will it enable the oversight committee to review the judgments of the Financial Policy Committee as defined in proposed new Section 9C and the Monetary Policy Committee as defined elsewhere? For example, does the expression “duty of the FPC” include the tasks set out in new Section 9C(2)? Does the review of strategy include the right to criticise the intellectual framework used by the Bank in pursuit of its responsibilities under new Section 9C and the proposal of alternative frameworks? In other words, can the oversight committee do exactly what the Bank said it did not want the committee to do when it reviewed the proposal?
Then there are the phrases that the noble Lord, Lord Tugendhat, has referred to in respect of an office or employee of the Bank who could conduct the review but who has to be approved by the governor. I find that rather disturbing; surely if there is an employee who is truly competent and is chosen by the court and/or the oversight committee, and that employee may end up criticising some judgments of the governor, it is not appropriate that the governor should be able to approve that person.
As my noble friend Lady Drake pointed out, under new Section 3E(2) the oversight committee must monitor the Bank’s response and, to the extent that the Bank accepts the recommendations, monitor their implementation. As she pointed out, it is not at all clear what is going to happen if the Bank rejects the committee’s report. What is the committee supposed to do, slink away with its tail between its legs? What is supposed to happen in this case? What of the oxygen of publicity? As I have already commented, new Section 3D makes clear that the Bank may choose not to publish a report. That is entirely understandable in particular circumstances, but surely an outside eye needs to be cast over that decision, as my noble friend Lord McFall and the noble Baroness, Lady Noakes, have suggested.
I shall briefly address Amendment 29 in this group, which is in my name and that of my noble friend. Given what I have said already, the point of the amendment should be clear. As the Bill is presently drafted, the oversight committee would be able to keep only the procedures of the Financial Policy Committee under review. If that clause is inappropriate, as the Minister suggested in his introductory remarks, surely it should not be there or it should be appropriately amended. Proper oversight should be able to keep all the activities of the Financial Policy Committee under review. Once again, the Treasury seems to be unreasonably constraining the scope of oversight. The Minister shakes his head; I am delighted, but then why is the clause not amended?
I should refer to Amendment 31, which was put down in my name and that of my noble friend, and I was delighted to see that the noble Lord, Lord Sassoon, added his name to it. I regret that I have had to express such caveats regarding the Bank’s and indeed the Treasury’s motives in the design of the oversight committee but, as I said earlier, this is really because the Bank has let itself down and done itself significant reputational damage in failing to be open about its own failings in the crisis. A way of repairing that damage would be to develop an effective supervisory board, the court, with a proper strategic role including the oversight function, which I commend the Government for proposing.
I have raised these issues for clarification. I want to be clear that we have not been stuck with the proposals that the Bank itself put forward in January, and that the issue of oversight really would be as comprehensive as the noble Lord suggested. I hope that the Government consider the proposition put forward by the noble Lord, Lord Turnbull, and see that there are merits in both these amendments, and that by combining them later on in the development of the Bill a truly satisfactory structure could be attained.
Lord Sassoon
My Lords, it is generally accepted that carve-outs are needed, particularly in relation to the time-sensitivity of reports. As I have explained, this is very tightly circumscribed and the question of when it is appropriate to publish must be kept under review. The publication of the report, or any delay to that publication, can be achieved by the Bank only in those very circumscribed circumstances. They must keep publication under review. Therefore, there will be publication and appropriate challenge at the earliest appropriate time. It is difficult to see what the circumstances might be in which the Bank’s not agreeing with a recommendation would justify non-publication. There is proper but not excessive protection of the position here.
There was also a question from my noble friend Lord Hodgson about the Treasury’s possible ability to step in and in some way redact or hold back reports. The Treasury has no powers here. It merely receives a report. It is up to the Bank, again on public interest grounds, to hold back parts or the whole of a report. I should not say that I quite understand my noble friend’s cynicism about references to the Treasury because I certainly do not. However, I understand why he has properly raised the question.
I think I have already touched on this point but the noble Lord, Lord Eatwell, specifically referred to proposed new Section 3A and whether the government amendment allows the committee to consider the merits of the Bank’s action. Proposed new Section 3A provides that the committee is to keep,
“under review the Bank’s performance in relation to … the Bank’s objectives”.
I reiterate that the main concern here has been addressed.
On the broader question of what the Government have done not only in relation to the Treasury Committee but about the recommendations that the Bank made in January, there is nothing that I can add to what I said in my opening remarks, in which I attempted to be very clear on that point.
Lord Eatwell
Perhaps I can clarify the question for the noble Lord. The question is really about whether the oversight committee could pass judgment on the decisions of policy-makers. As the Treasury Committee put it:
“It is unrealistic to suppose that an oversight body could plausibly be expected to commission an external review of a policy decision without assessing the substance”.
This is what the Bank objected to in the initial form of the oversight committee. Has the Treasury put aside the Bank’s objections, and can the oversight committee now refer to make its assessment of the substance of policy decisions?
Lord Sassoon
Let me address this very directly. The requirement for the oversight committee to ensure that sufficient time has passed before commissioning a review is there precisely to ensure that it does not put itself in the position of second-guessing the Bank’s decisions when those decisions are still playing out. After that point, it will be appropriate to assess the effect of those decisions, but while they are playing out it will not be possible effectively to estimate how they are playing out and it would be inappropriate to do so. The way that the amendment is drafted is precisely consistent with the Treasury Committee’s recommendation that the reviews be retrospective, rather than in any sense contemporaneous.
I hear clearly what the noble Lord says: there is a difficult balancing act here, between allowing the oversight committee the ability to question everything and not boxing it into questioning the judgments that have been made on policy decisions. Yes, it can challenge and review judgments on policy decisions but it should not be boxed into doing so while the consequences of those decisions are playing out. In substance, that is what the Treasury Committee recommended.
Lord Eatwell
Let us focus this by taking a concrete example. It is now generally accepted by everybody except the Bank that the Bank made some calamitous decisions shortly before, or in the process of, the collapse of Northern Rock. Various statements were made by the governor that accelerated the run on the bank. The continuous reference to issues of moral hazard when the bank needed recapitalising did significant damage in that case, and that damage reverberates to this very day.
Now that significant time has passed, suppose we were to commission a review of the Bank’s activities at that time. Would it be permissible for the oversight committee to say, “Look, this decision was made on the wrong analytical grounds and was a serious mistake. The Bank should readjust its perspective to think in a different way. Perhaps it should introduce some other analytical tools so that that mistake is not made again”? Would that be appropriate?
Lord Sassoon
My Lords, without wanting to endorse the conclusions of the noble Lord, Lord Eatwell, from the experience in 2007, yes, of course it would be possible and appropriate for the oversight committee to conduct or commission that kind of review. Without detaining the Committee for much longer, I will address a couple of other points.
Lord Sassoon
My Lords, I think the critical point here is that the noble Lord, Lord McFall of Alcluith, posited a situation in which this would be, in his words, a sterile debate with the governor. It goes perhaps to the heart of the question that I started with as to why the oversight committee is a committee of the non-executives. It means that it is the oversight committee without the governor or any of the executives of the Bank being members of that committee that takes the decision, under this provision in Amendment 13, to commission reports over a very wide area. So there is no question at the front end of a negotiation with the governor and the executive about whether they would commission a report in those circumstances. That is for the oversight committee to do. We have discussed the timing issue. The report is made and, subject to the issues that we have already discussed, the report is published. I can assure the noble Lord, Lord McFall, that there is no negotiation to be had at that front end. The non-executive oversight committee of the court of the Bank will have a very clear statutory function to take precisely what is proposed in new Section 3A, and it will be untrammelled by any possibility of the sort of sterile debate that the noble Lord suggests might happen. I hope that that reassures him.
I want to address a couple of other points, largely people issues of two kinds here. My noble friend Lord Tugendhat and the noble Lord, Lord Eatwell, questioned the need for the governor to consent to the appointment of an internal reviewer. This is intended to be a perfectly straightforward and practical measure. In practical terms, if the person selected is on the verge of leaving the Bank for another post, going on sabbatical or maternity leave, or whatever, the non-executive directors on the court may not necessarily be aware of this, and it is a practical way of ensuring that the appointment works. It also provides the governor, as the person ultimately responsible for the staff who work for him or her, with the opportunity to determine whether the person selected has the capacity to undertake the review in the timescale envisaged without impacting their other responsibilities. There is no more to it than that.
Lastly, I go back to a point which I believe the noble Lord, Lord McFall of Alcluith, made at the beginning about the size of the court. It is not directly the subject of this amendment, but I think that it is worth answering that point. Given that there will be four executive members—the governor and three deputy governors—if the court were reduced to eight, it would not allow for a non-executive majority because we have four insiders on the court. More generally, if there were such a small number of non-executives, it would be difficult to have sufficient diversity of experience and views, which was a point that we discussed earlier and which I completely agree with. If we had a reduction in size, it would be impossible effectively to have a non-executive majority or indeed, as I say, sufficient diversity.
I hope that I have been able to deal with the very understandable and important questions and concerns on this issue so that the noble Lord, Lord McFall, might see his way to withdrawing his amendment and the Committee will support the Government’s amendments.
Lord Eatwell
My Lords, is the Minister accepting my Amendment 29? He seemed to say that it was referring to the right sort of thing. If he is not accepting it, why is proposed new Section 9B(4) left in the form that it is, referring only to procedures? I have another question, but would he answer that one?
Lord Tugendhat
May I add a question so that the Minister can answer both together? The Minister is dealing with these matters with such grace and elegance that I feel very bad in questioning his or the Government’s motives in any way. Nevertheless, when we were dealing with the question of whether the chairman should be consulted on the appointment of the governor, basically what the Minister said was that reasonable people will behave in a reasonable fashion and there is no need to spell all this out, because it will be done in the normal course of events. Here he is insisting on absolutely spelling it out so that in practice the governor has a block. Of course I agree that in a properly run organisation, as I am sure the Bank would be, an employee would not be appointed contrary to the wishes of the governor; the relationship between the chairman and the governor would overcome that. None the less, to give the governor an absolute block is a sort of belt and braces that is completely at odds with what the Minister said in an earlier discussion. That means that one does look with some suspicion as to why, as I said earlier, there is one sauce for the goose and another for the gander. If he wants to spell it out here, why could he not spell it out earlier?
Lord Eatwell
My Lords, if new Section 3A covers the point, and we want to avoid ambiguity, why not simply delete subsection (4) of proposed new Section 9B? What does it do?
Lord Turnberg
This amendment has been put in the wrong group. New Clause 9B(4) is about the Financial Policy Committee, not the oversight committee.
Lord Eatwell
The point is that the oversight committee is supposed to keep the activities of the Financial Policy Committee under review. There is an amendment among the amendments tabled by the noble Lord, Lord Sassoon, that changes “court of directors” in new Section 9B(4) to the “oversight committee”. So if we accepted his amendment, it would read that the oversight committee,
“must keep the procedures followed by the Committee under review”.
Why do we have that when we have new Section 3A doing all the work for us?
Lord Sassoon
I think that is wrong. It is not the Court of Directors that becomes the oversight committee; the Court of Directors remains the Court of Directors. It is effectively the committee of non-executive directors, or NEDCo, of the Bank, which becomes the oversight committee. The court remains the court. So there may be some misunderstanding of who is doing what here, but the Court of Directors must indeed keep the procedures of the FPC under review, which will be principally done through the oversight committee, which is a committee of the court.
Lord Sassoon
Court means the whole court, and that is in relation to the procedures. The oversight committee has the function and ability to look not only at the procedures but also at the question of whether the objectives of the Bank and the FPC are being met.
Lord Eatwell
I am afraid that this does not help, because the amendment tabled by the noble Lord, Lord Sassoon, Amendment 28, says on,
“page 3, line 28, leave out “court of directors” and insert “Oversight Committee”.
So this should actually read, “the oversight committee must keep the procedures followed by the Committee under review”. Why is that there when new Section 3A covers it, we are told? But I shall not pursue this—I shall leave it with the Minister. Either we have just got in a muddle or there is a drafting error.
Lord Sassoon
I think that it is me that has got in a muddle. It is kind to say that we have got in a muddle or that there is a drafting error. I apologise to the Committee, as I am the only person who has got into a muddle on this, as I track through amendments and consequential amendments. New Clause 9B(4) is being amended by government Amendment 28 so that it no longer says “court” but says “oversight committee”. I apologise for my confusion on this, but we may have finally got to what it is intended to say. The two things will be consistent so that the oversight committee, to the substance of the point, will be able to deal with both procedures as envisaged under new Clause 9B(4) as amended and as explained in Amendment 13. So I hope that we are getting there.
Lord Eatwell
We are getting somewhere. What we have here is redundancy. New Clause 9B(4) is redundant, given the Minister’s explanation of new Section 3A.
I apologise to the Minister for raising a quite different question, which I shall just leave on the table. In my earlier remarks, I did not refer to the schedule. In the enthusiasm to replace “court” or “Bank” with “oversight committee”, the Government have gone a bit too far. Perhaps the Minister could check on this later, because the terms and conditions of non-executive members of the Financial Policy Committee are now amended to be determined by the oversight committee. That must be a mistake—it must be the court as a whole. That is in government Amendment 91. In government Amendment 93, the oversight committee can remove appointed members of the Financial Policy Committee. Surely that must be a mistake as well—it must be the overall court. So I think that there has been a great enthusiasm for replacing “court” with “oversight committee” and somebody has got rather carried away. But I am not going to press this issue now. I shall just leave it on the table for the noble Lord and his officials to consider and bring back to us later.
Lord Eatwell
( ) the public”
Lord Eatwell
My Lords, I rise to move Amendment 16. The issue here is simply that with respect to the financial stability strategy we believe that consultation should be as widespread as possible. The main reason for stressing this is that the area of financial stability is at present unformed. There is as yet no clear analytical framework to which everyone can appeal, as is the case with monetary policy, and a number of ideas and empirical observations are, if you like, the grist to the mill, but what comes out of the mill is not necessarily consistent or widely accepted. Therefore consultation and ideas from a wide range of sources, particularly within the financial services industry, are immensely valuable as the financial stability strategy is developed.
Lord Northbrook
My Lords, when I first saw the amendment and the reference to the public I thought it could mean consulting someone on the Clapham omnibus about the Bank’s financial stability strategy. However, the noble Lord said that he meant financial institutions and those with a financial interest rather than a broad definition of the public.
Lord Eatwell
Perhaps I may clarify that point. It is a term of art to say that you consult the public. When an institution such as the Bank of England or the Financial Services Authority initiates a general consultation and publishes a consultation document, they consult the public. In fact, it tends to be the financial services industry and other immediately interested parties who are consulted, not the gentleman on the Clapham omnibus.
Lord De Mauley
My Lords, as I said in the debate on the last group of amendments, the Government recognise the need for transparency and accountability in financial regulation. The Bank also places great value on transparency and openness. It uses a variety of methods to engage with the public on issues of policy, including FPC and MPC meeting records, financial stability and inflation reports, public speeches, policy papers, consultations, regional agencies and various forms of social media. The Bank and the FPC further demonstrated their commitment to transparency in their work on macroprudential tools by publishing a discussion document in December that invited public opinion.
The Bank’s court will be responsible for setting the Bank’s strategy in relation to its financial stability objective. The Bill requires that the court consults the Treasury and the Financial Policy Committee about a draft of the strategy before determining or revising it. The Bill does not prohibit the court seeking the opinions of others. For example, the court might wish to consult the European Systemic Risk Board to get is opinion on the outlook for financial stability in the European Union; it might wish to consult the International Monetary Fund or the Financial Reporting Council, as the noble Lord, Lord Eatwell, mentioned; it would almost certainly want to consult the PRA board and perhaps the FCA too. The list goes on. The Bill is drafted in a flexible way which allows the court to consult anyone on its strategy.
As to Amendment 16 specifically, the current drafting of the Bill already allows the court to consult the public on its financial stability strategy. The Bank’s financial stability strategy is currently published annually in the Bank’s annual report and is available on the Bank’s website. It is open to any organisation or member of the public to send the Bank comments on its financial stability strategy if they wish. I would expect the Bank to take seriously any contributions from the public and, where appropriate, to take them into account when revising the strategy. Given that revisions to the financial stability strategy will be less frequent—every three years—the court may well choose to undertake a public consultation process in advance of revising its strategy, particularly if the Bank were considering making any significant changes to it.
Such a public consultation process may not be necessary or even possible on every occasion. For example, the changes being made might be minor and technical and so not warrant a public consultation. In other cases, the changes to the strategy may be urgent and so there may be inadequate time for public consultation.
While I entirely support the sentiment behind the amendment, I do not think that it would be appropriate to put in the legislation a prescriptive requirement for public consultation in all cases. On that basis, I hope that the noble Lord will feel able to withdraw his amendment.
Lord Eatwell
My Lords, I was very struck by the Minister’s speech because it was rather better than mine in support of my amendment. He said that the public would typically be consulted. The only slightly off-base comment that he made was that the financial stability strategy would be revised every three years. That is not according to the Bill, which says,
“complete a review … before the end of each relevant period”.
“Before the end” could be one month, six months, two years, 11 months or 30 days, whichever is relevant. The notion that revisions will take place irregularly—in fact, on a three-yearly basis—is not what is in the Bill.
The Minister then shot his fox by saying that urgent revisions might have to be made. In that case, given that revisions can take place at differing intervals depending on the exigencies of the time—let us remember that financial markets can change their character and behaviour quite rapidly and unexpectedly—and if this impinges on strategy, it should be appropriate that consultation takes place. My amendment provides that variations in strategy be widely consulted on, including among the public. A public consultation would take place, and the relevant authorities listed so accurately by the Minister would no doubt participate.
I do not understand the Minister’s rejection of what I would think is an extremely helpful amendment given what he had to say. However, we will come back to this matter on Report. In the mean time, I beg leave to withdraw the amendment.
Lord Eatwell
Lord Eatwell
The amendment relates to what I think is a mistake in drafting because there is failure in symmetry between the two new subsections. We have just discussed new Section 9A(2), which states that the Court of Directors must consult the Financial Policy Committee and the Treasury. New Section 9A(3) states:
“The Financial Policy Committee may at any time make recommendations to the court of directors as to the provisions”.
Why is the Treasury included in subsection (2) but not in (3)? Surely, if the Court of Directors must consult the Financial Policy Committee and the Treasury about a draft of the strategy, then if, from time to time, the Financial Policy Committee or the Treasury wishes to make recommendations to the court, the Treasury should be able to do so on the same terms.
I think that there is just a mistake in drafting here. If subsections (2) and (3) are to be symmetrical, my amendment should be accepted. I beg to move.
Lord De Mauley
My Lords, there are already a number of measures in the Bill relating to the Treasury’s involvement with the setting and revision of the Bank’s financial stability strategy. The court must, for example, consult the Treasury before setting or revising the strategy. In addition there is nothing to stop the Treasury making proactive recommendations to the court on the content of the strategy on a non-statutory basis. I believe that these arrangements strike the right balance between insulating the Bank from political pressure while ensuring that the Treasury’s voice will be heard.
I am not sure that this goes entirely to address the specific question from the noble Lord, Lord Eatwell, but the Treasury can at any time, if it wants to, make recommendations to the court as to its strategy. Express provision is needed for the FPC to make such recommendations since the FPC is a creation of statute and its functions need to be set out in statute. The Treasury is not a creation of statute and has the ability under common law to provide advice to anyone. I ask the noble Lord to withdraw his amendment.
Lord Eatwell
I am sorry—once again, I really do not understand. New Section 9A(2) is absolutely clear that the Court of Directors must consult the FPC and the Treasury in developing a proper financial stability strategy. That is good—after all, this particular strategy is a very complex thing and it is going to involve direct intervention in the growth, or limitations of the growth, of credit in the economy. New Section 9A(3) states that the Financial Policy Committee may at any time make a recommendation, which is perfectly reasonable. It is doing its research, it comes up with an idea, it finds that something has been left out that is terribly important, and so it goes along to the Court of Directors to say that it really needs to consider it.
Surely the Treasury should have the symmetric right as from new Section 9A(2) to new Section 9A(3). Unless the noble Lord can point to somewhere else in the Bill where this right is available to the Treasury, then this is the point at which to include the Treasury’s ability to make a recommendation on its observations on changing circumstances. After all, it has the widest observation of changes in economic circumstances, both domestic and international. If the noble Lord can point to another part in the Bill which I am overlooking then I will certainly withdraw my amendment. At present, I am not convinced. I would be grateful if he could enlighten me.
Lord De Mauley
I understand the question from the noble Lord, Lord Eatwell, but I do not have an answer for him now. It is an important question so perhaps I may look into it and write to him.
Lord Eatwell
It would be churlish to say no. On that basis, I shall leave the question on the table and, for the moment, beg leave to withdraw the amendment.
Lord Eatwell
Lord Eatwell
All right, here we go again. I shall speak also to Amendment 19, which is in my name and that of my noble friend Lady Hayter. The important point here is that the requirement for the relevant period at which there is to be a review of the financial stability strategy is defined as three years. I would remind noble Lords that it is just three and a half years since the collapse of Lehman Brothers. Given everything that has happened and the way that the financial world has changed dramatically year by year in the past three and a half years, it seems quite unreasonable that the relevant period should be deemed to be three years. That is really much too long. Surely there should be an appropriate annual review of the strategy. That would provide an opportunity for the sort of consultation on the financial stability strategy that the noble Lord tells us that the Government are seeking, and on that annual basis we could really have a rolling, learning process.
Three years as the defined relevant period is surely much too lengthy. After all, companies are required to produce annual reports and to deposit them with Companies House. The purpose of that is to keep a continuous, rolling review of the company’s strategy and performance. It is an important part of transparency in a market system and of conveying information. Similarly, discussion of the development of the financial stability strategy should be done annually to enable appropriate consultation and an appropriate learning experience both for the Financial Policy Committee as it deals with these extremely difficult and changing circumstances and for the regulated community. I beg to move.
Lord De Mauley
My Lords, Amendments 18 and 19 would require the court to review the Bank’s stability strategy annually. The extant legislation, the Bank of England Act, requires the court to determine and review the bank’s strategy in relation to the financial stability objective. That legislation does not set out how regularly the strategy should be reviewed. In practice, the court has recently revised the financial stability strategy annually. That is understandable given the sheer volume of legislative and other changes to the system of financial regulation in the past three or so years.
However, a strategy ought to be something for the long term. If the strategy is revised annually—ad infinitum, I contend—there is a risk that the short timeframe would lead to focus on short-term issues, reading more like what one might call a business plan than a genuine strategy. That is why new Section 9A will require the court in future to revise the Bank’s stability strategy at least every three years—more in line, I suggest, with a long-term strategy. Of course, if circumstances mean that the strategy must be changed in a shorter timeframe, new Section 9A allows the court the flexibility to revise the strategy earlier, as the noble Lord, Lord Eatwell, pointed out in an earlier debate.
We believe that a long-term financial strategy should provide vision, purpose and certainty for the Bank, its staff and the industry alike. That is why I believe that a three-year timeframe for a strategy is appropriate, so I ask the noble Lord to withdraw his Amendment 18.
Lord Eatwell
My Lords, once again, I thought that the noble Lord was making a better speech than me in support of the amendment. As he pointed out, the significant changes which have taken place over the past three years have required annual revision. Once one gets into a sequence of annual revisions, some of which can be looking back quite a long way—there is no reason why they should focus on the short-term—that creates an environment in which the regulated community knows what to expect every year, can consider the report, and if it says that the strategy is unchanged, that provides a great deal of comfort to the regulated community.
If there is no report, the regulated community is left hanging in the air, thinking, “Yes, it is all the same, but is something going on that is not quite so important but that they do not want to reveal to us?”. Surely, if there is a regular annual report, that provides a decision-making environment optimal for the financial services industry. Once one goes to three years and then is forced to do things once a year because so much is changing, think of the pessimism that one creates, think of the loss of certainty created in such circumstances. The industry wonders, “Why are they changing their three-year cycle? Why are they moving to one year? There must be something going on that we do not really know about. Perhaps something really bad is happening”.
If one sticks to a steady one-year cycle, apart from emergencies—to which the noble Lord referred, and on which I entirely agree—that creates the comfort and certainty which the financial services industry really needs with respect to, let us remember, the utilisation of instruments, such as leverage collars and countercyclical provisioning, which will have a major impact on business plans and performance of the whole financial services industry.
I really would press the Government to take this under advisement and to think carefully about it. We will return to this on Report because leaving the period at three years is not the way to effectively manage confidence and expectations in an industry in which confidence and expectations are paramount in decision-making. In the mean time, I hope that the Government will take it away and think about it, and I beg leave to withdraw the amendment.
Lord Eatwell
My Lords, I think the noble Lord said that he was going to take Amendment 28 away to consider it with Amendment 29. Surely he is not moving it now.
Lord Sassoon
My Lords, I have no recollection of saying that. I would like to move it formally.
Lord Eatwell
Lord Eatwell
In those circumstances, I think that I should reconsider. The noble Lord did say that he was going to take Amendment 28 away to consider the relationship between Amendments 28 and 29. I do not quite understand why he has now moved Amendment 28.
Lord Sassoon
What I said earlier was that of course I would consider whether there were any consistencies in drafting. I think that the noble Lord asked about a number of areas, and I said that I would look at them, but I certainly did not say that I would withdraw the amendment. I said that I would make sure that there was nothing that he had identified that created any difficulty through oversight in the drafting. Of course I will do that, and if we find anything wrong it can be corrected at a later stage. I certainly did not agree to take away Amendment 28.
Banking Reform
Lord Eatwell Excerpts(12 years, 9 months ago)
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Lord Eatwell
My Lords, having read the Statement, I am most grateful to the noble Lord for not repeating it. He has rescued the House from some tedium. However, I am concerned that the new procedures are having the unintended consequence of shielding the Minister from embarrassment, particularly the embarrassment of having watered down the Vickers proposals, and from a number of serious ambiguities in the Statement. I have not had the opportunity to read the White Paper. I hope it will provide a better vision of the future of UK banking than does the Statement.
We on this side of the House welcomed the Vickers report as a positive step along the road to making Britain’s retail banking system safer, in particular protecting households and small and medium-sized firms from the instability that, as we have seen to our cost, may well be generated in wholesale financial markets, by banks’ proprietary trading and by the complex interconnections that characterise today’s global banking.
The Statement suggests that one of the Government’s goals is,
“to curb risk-taking in financial markets”.
Can the Minister elaborate a little on this? As many have commented, a financial market without risk is the market of the grave. If Britain is ever to return to boisterous growth—something which under this coalition must be in increasingly serious doubt—financial institutions will need to take risks. Indeed, the expansion of credit is vital to recovery.
How does the Treasury intend to monitor the risk that is generated within the ring-fence system? What is the Treasury’s definition of “acceptable” levels of risk? What is the Treasury’s estimate of the impact of these measures on the supply of credit to households and to small and medium-sized firms? For example, what will be the impact on the supply of credit of the severe limitations on wholesale funding of the balance sheet, given the important role that wholesale funding has played in the British banking system over the past decade? What will be the impact of the new leverage collar on the supply of credit? All these issues refer directly to the ability of British industry to receive the funding that it needs for recovery.
What is the Government’s intention with respect to the substantial flow of liquidity into the UK economy from the Crown dependencies? Since large companies will be outside the ring-fence and the failure of those companies would impose unacceptable costs on the UK economy, is it not clear that the Government’s proposal has failed to deal with the issue of “too big to fail”? How would the Government deal with the failure of a non-ring-fenced bank that imposed destructive instability on large UK companies?
The Statement also reads:
“The deposits of individuals and their overdrafts, and the deposits and overdrafts of small and medium-sized businesses will, in general, be placed in ring-fenced banks”.
How can the Government be sure of this? What compels a saver to commit their savings to ring-fenced banks if those banks offer a lower rate of return than non-ring-fenced operations? Are the Government simply planning to force UK households to accept lower rates of return to secure the stability of institutions within the ring-fence?
The Statement also declares that,
“within certain constraints, firms may decide what to put inside the ring-fence”.
I presume, therefore, that they may decide what to put outside. What do the Government have in mind here? Why are they abdicating their responsibility to determine the boundary of the ring-fence?
We are told that the Government have decided that ring-fenced banks should be required to hold 10% capital against risk-weighted assets. Whence do the Government derive the belief that moving to a 10% capital-to-risk-weighted asset ratio will provide the resilience that the banking sector requires to head off a serious crisis? This belief is without empirical foundation. A little investigation would reveal that Allied Irish Bank, the collapse of which devastated the Irish economy, always had a capital-to risk-weighted asset that was higher than that which the Government now propose as the basis of security of ring-fenced banks.
More generally, it is well known that the outcome of regulatory actions—that they stimulate a creative response from the banks, creative in the sense that they work out ways to circumvent or evade the regulations—reduces the impact of regulatory innovation over time. How do the Government intend to keep the operations of the ring-fence under review? Would it not be appropriate to keep the Independent Commission on Banking in being and charge it with the task of reviewing regularly the performance of the ring-fence? Why not ask Sir John Vickers and his team to return to the issue—let us say—12 months after the ring-fence has been introduced?
What is to be done on the timing of this legislation? We have before the House a Financial Services Bill the structure of which, as has been recognised by the Government and throughout the House, is seriously deficient. Would it not be better for the Government to withdraw that Bill, go back and rewrite it in a way which corrects its deficiencies, and incorporate the new measures from the Vickers report and the White Paper in that revised Bill? The House would then have the opportunity of assessing in its entirety the new framework for financial services in this country, rather than this hotchpotch of measures being introduced one after the other without clarity as to the way in which they relate to one another.
Lord Sassoon
My Lords, I am sorry that the noble Lord, Lord Eatwell, has not yet had a chance to read the very detailed White Paper because, when he does, he will see that a lot of his detailed questions have been addressed.
I find it disappointing that the noble Lord comes here and takes such a picky attitude towards this fundamentally important reform being introduced by the Government. The previous Government had two years in which to act on the collapse of Northern Rock and then on the failures of RBS and Lloyds and did absolutely nothing about them. Did it not occur to them that there might be a problem with the structure of banking in this country? It seems not. For two years, they sat on their hands, asked no questions and did nothing. When this Government came into office, we established within weeks the Independent Commission on Banking under the chairmanship of Sir John Vickers. It has come up with a very fine report to government. We have considered it very carefully and have published our final response today. What we have before us is one of the most radical reforms of banking that I suggest the world has ever seen.
Why have we done that? We have done that because we face in this country something which my right honourable friend the Chancellor has characterised as the British dilemma: how do we continue to host a world-class financial services sector, a sector in which our banks are able to go out to compete vigorously, as they do, around the world with the best and biggest that the rest of the world has, without putting the UK taxpayer at excessive risk? That is what is encapsulated by our response to the Vickers commission, a response that picks up the essence of what Vickers recommended but which interprets it in a way that is appropriate, flexible, forward-looking and balances those key interests of ensuring that we have a world-class but safe banking system.
The noble Lord, Lord Eatwell, talked about risk-taking in the financial markets. The critical thing is that we want to make sure that the parts of the banks within the ring-fence, the parts of the banks in which the savings of the men, women and children of this country go, are properly ring-fenced and protected—the parts of the banks which service the SMEs of this country. We want to ensure that there is not inappropriate risk-taking within that ring-fence. The noble Lord asked how that is to be monitored. It is not for Her Majesty’s Treasury to monitor it; it will be up to the Financial Policy Committee to look at the system as a whole—as it already is in interim form—and it will be for the Prudential Regulation Authority, under the Bank of England, to supervise individual firms in future.
The noble Lord then talked about curbs on growth. That area is very important, because the flow of credit must go on, particularly at this time of challenge in the economy. That is precisely one reason why Sir John Vickers and the commission recommended that the implementation of the recommendations should be concluded by 2019, a recommendation that we have accepted. The numbers are set out in the document, but I suggest that the costs of implementation over that period and beyond on a running basis are very modest in relation to both the cost of the banking crisis over which the previous Government presided and the size of the UK economy.
The noble Lord then referred to the flow of funds in from Crown dependencies. He is clearly an expert on this subject. I believe that he is on the regulatory body of the States of Jersey. I am aware, as he is, that significant deposits flow from that and other Crown dependencies into the UK wholesale markets. That plays an important part of the funding of the wholesale markets and should continue.
The noble Lord, Lord Eatwell, then asked: what compels a saver to deposit his or her money in a ring-fenced bank? The fact is that 87%, or thereabouts, of deposits in the banking system at the moment are within banks that will be subject to the ring-fence. It is highly implausible to suggest that it would be wrong to protect 90% of the deposits of the British public but not to say that there are other places that are not ring-fenced that are accessible. What the noble Lord presents is not a realistic picture. Sir John Vickers and his commission raised the question of a de minimis limit and we set a limit that the ring-fence should not operate for banks with deposits below £25 billion. I suggest to the noble Lord that one thing on which we might agree is that we need more diversity, more competition and more new entrants in the banking sector. It is entirely appropriate, we believe, that the ring-fence should operate for only the biggest of our banks—those which account for some 90% of deposits.
The noble Lord then asked a number of technical questions about the way that the ring-fence will operate. I refer him to the details in the White Paper. If he has further questions that it does not answer, I should of course be happy to write on any supplementary questions that he may put, but there is a very full analysis there.
As to the capital ratios proposed here, the noble Lord talked about the Government proposing them but of course what analysis there was underpinning them was all the ICB’s analysis. The Government have done one thing in this area today, which is to put out a 3% rather than a 4% ratio against total unweighted assets. That is to create a level playing field with what is proposed in Europe. We want this measure to be not a front-stop but a back-stop, in line with what the ICB proposed, and we want to make sure that our banks have every opportunity to compete on a level playing field.
The noble Lord then asked whether we should ask the ICB to return to the operation of the ring-fence by keeping it under review and coming back to it one year after it comes into operation. Given that the implementation date is set by Sir John Vickers at 2019, it might be a little unreasonable to Sir John and his commission, who have done tremendous work on this, to keep them on the hook until 2020, or later, to ask them to come back to these issues. I am sure that there will be other ways of looking at the impact of these measures in due course.
Lastly, the noble Lord asked whether we should put these measures into one Bill with those in the Financial Services Bill, which is already before your Lordships’ House. This is to misunderstand the different nature of what is being addressed here. On the one hand, the Financial Services Bill deals with the structure of regulation and, on the other, the measures that we are talking about today relate to the structure of banking. I accept of course that the two things taken together are the measures that, combined, will make sure that this country has a world-class financial services sector and will not put UK taxpayers excessively at risk. However, they are two sets of distinct measures. Your Lordships will now have them in front of them so that they, can read across from one to another, but any suggestion of delaying the legislative process, which the noble Lord and others have constantly urged us to get on with, would be wholly inappropriate.
Lord Eatwell
Before the noble Lord sits down, I would like to press him on a question on which I am genuinely puzzled. The Statement refers to the idea that UK households will place their deposits in ring-fenced banks. Why should they do that if the rate of return is higher on non-ring-fenced banks than it is on ring-fenced banks, and why should not an innovative financial sector create devices whereby households can take advantage of a higher rate of return in non-ring-fenced financial institutions? We are not planning—or are we?—to reintroduce Regulation Q as it was in the United States, where there was a limitation on the return that households could receive on their deposits to force those deposits into the commercial banking system.
Lord Sassoon
My Lords, at the moment depositors have freedom as to where they place their deposits. It is certainly not the case that the vast majority of deposits go to the outliers, as there always are, in offering returns. When it comes to the future arrangements, I would anticipate that the vast majority of deposits will stay where they are. For better or worse, that is the system with a number of very large incumbent banks, which will all be ring-fenced. It will be very clear to people what the difference is between ring-fenced and non-ring-fenced banks. The Statement made by my right honourable friend was merely a clear statement of observed behaviour and likely behaviour into the future—not a Statement saying that people “must” or “are compelled to”, or that they do not have any choice. Of course they will have choice, but 90% of the deposits are where they are today and I anticipate that that is not somehow going to be magically changed overnight.
Budget: Cost of Changes
Lord Eatwell Excerpts(12 years, 9 months ago)
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Lord Sassoon
My Lords, what this Government have done as far as the wealthiest are concerned is to raise five times as much tax from them as the Labour Party would have done under its plans, so that the top 1% of the population of earners pay 27.7% of tax. We are very concerned to make sure that tax falls where it should: on the broadest shoulders.
Lord Eatwell
My Lords, I am intrigued by the noble Lord’s estimate. Let us say that there is a £150 million cost to these changes. Can he tell the House whether that is the limit of what can be afforded? Could £151 million be afforded, or perhaps two or three times that £150 million, or maybe 10 times that £150 million? What is the limit that can be afforded?
Lord Sassoon
My Lords, the recent Budget introduced £9 billion of tax changes. There were a number of measures on which we said we would consult. We consulted and made the changes that were appropriate, which added up to a total in the range of £120 million to £150 million. I can give the House the breakdown if it wants it. Those were the numbers that resulted from the changes that we believed appropriate, having listened to what people had to say to us.
Financial Services Bill
Lord Eatwell Excerpts(12 years, 9 months ago)
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Lord Eatwell
My Lords, I am grateful to the noble Lord for introducing this important Bill. Its importance can hardly be in doubt, given the core dilemma presented by the place of financial services in the British economy. On the one hand, Britain is a world leader in financial services and a considerable measure of our future prosperity depends on that industry. On the other hand, as we have seen, it is the industry that has greater potential than any other to inflict severe damage on Britain’s economy. The goal of regulation is to secure the benefits while minimising the costs and to achieve that in a manner that passes the tests of accountability, clarity, efficiency and transparency. Regrettably, the Bill fails all those four tests.
It certainly fails the test of clarity, being both complex and incomplete. The Bill is unnecessarily complicated because, instead of drafting a new template for the financial services industry, superseding all past relevant Acts and incorporating the new banking Bill that is yet to be published enacting the Vickers proposals, the Government have constructed a dog’s breakfast of amendments to earlier legislation.
Last week, noble Lords were no doubt surprised to receive a passionate entreaty from the Treasury Committee of the other place insisting that the Bill had been cobbled together with undue haste and had not received adequate consideration—in the case of some clauses, no consideration at all—and providing a checklist of serious failings in the legislation as currently drafted. From these Benches, I can assure the Treasury Committee that its despairing plea will not go unanswered. We intend to devote just as long as it takes to sort out this flawed Bill and thank goodness that the procedures of this House will allow us to do so. I am sure that all sides of the House will support this commitment, since this is essentially a non-partisan Bill. We all have a strong vested interest in getting it right. I hope that the Government will approach our deliberations in that spirit, although their negative performance in the other place was not encouraging.
The noble Lord, Lord Sassoon, referred to the regulatory failures that have been all too evident in the financial crisis. That there were serious failures is beyond doubt—most notably in the operation of the tripartite memorandum of understanding. But these were less failures of structure and more failures of the then conventional wisdom with respect to regulatory theory and practice. As the Joint Committee on the Bill noted:
“Successful regulation depends more on the regulatory culture, focus and philosophy than on structure”.
That point was made even more forcefully by Mr. Alan Greenspan in his evidence to the US House of Representatives in October 2008. Referring to the intellectual framework that guided the regulatory stance of the Federal Reserve System, Mr. Greenspan said:
“This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year”.
That was as true of the thinking of British institutions as it was of the United States.
In this context it is worth remembering why the tripartite system was created in the first place. One of the key reasons was that the Bank of England had proved to be such a fallible regulator. The cases of Johnson Matthey, BCCI and Barings come to mind. In the latter instance, the Bank’s performance was so bad that the Board of Banking Supervision was moved to comment that it would be a good idea if the Bank of England understood the products that it was supposed to be regulating.
Nonetheless, on the basis of what we have all learnt over the past four years, the fundamental thinking behind the reforms set out in this Bill is clearly well-founded, even if the execution falls a little short. The key thing that we learnt was that focusing on the stability of individual institutions, however large—so-called microprudential regulation—is not enough. The whole is bigger than the sum of the parts; systemic risk is all pervasive and by its very nature cannot be managed by individual firms. Hence the need for macroprudential regulation, spelt out so clearly in the FSA’s Turner review. But macroprudential regulation poses major new challenges to economic and financial policy-making. It will necessarily involve measures that cross what has previously been deemed to be the boundary between actions that might reasonably be left to unelected officials and actions that are necessarily the province of politically accountable decision-makers.
The essence of the macroprudential structures as set out in this Bill is that the Treasury cannot be trusted. Just as it was feared that the Treasury might approach the setting of interest rates with an inappropriate eye to political advantage, and hence the Bank of England was given control over interest rates, so now it is feared that the Treasury will fail to take away the punch bowl of loose credit in order to reap the short-term political benefits of a debt-fuelled boom. Accordingly, the Bank of England is given, via the new Financial Policy Committee, virtually autonomous control over a variety of instruments to manage the supply of, and perhaps later the demand for, credit. In addition, microprudential regulation is also taken into the Bank, in the form of the Prudential Regulation Authority.
This agglomeration of powers in the Bank of England poses two vital questions. Is the governance of the Bank of England such as to result in accountable, clear, efficient and transparent utilisation of these extraordinary powers? Equally, does the relationship between the Bank of England and the Treasury, as set out in the Bill, meet the test of these four principles? The answer given by the Treasury Committee to both of these questions is a resounding no. We on this side broadly agree with the Treasury Committee, though we differ in some details. We certainly agree that the governance of the Bank should not be a matter for the Bank itself. Our major disagreement with the Treasury Committee’s proposals is that they do not go far enough.
First, with respect to the governance of the Bank, the Government have responded to the evident lack of co-ordination in the crisis by designing a model of perfect co-ordination; namely, that one person should be responsible for everything. The Governor of the Bank of England will chair the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Authority, as well as being in overall charge of the Bank of England’s special resolution unit and its payment and clearing and settlement systems oversight department. When he or she has some spare time, this individual will also chair a number of important international committees. Even if it is possible to find the exceptional individual who can effectively take on all these tasks simultaneously, that person will be driven mad, for many of these activities will demand contradictory policies. Moreover, if ever there were a structure likely to result in the dangers of group think, this is it, since the group is a group of one.
Side by side with the inefficient, unaccountable and untransparent role of the governor is the now anomalous position of the court of the Bank. The Financial Policy Committee is to be a committee of the court. It is envisaged that primary responsibility for determining and keeping under review the strategy for achieving the financial stability objective will sit with the court, although the court will be required to consult the FPC and Treasury, and the FPC may at any time make recommendations to the court. On a moment’s reflection, it is clear that the court’s composition and powers are simply not up to the job.
In Grand Committee we will propose wide-ranging reform to the governance of the Bank of England to ensure that it has a structure of decision-making appropriate to the first half of the 21st century, rather than to 1694. In particular, we will require a more collegiate form of decision-making and propose measures to improve the accountability of what is, after all, a public institution. I was delighted to hear from the Minister that the Government are searching for good ideas in that area. I think that we have some.
Given that the governance of the Bank, as the Treasury Committee puts it, falls,
“well short of what would be expected in a modern institution, whether public or commercial”,
and that this is,
“especially important given that vitally important decisions made by the Bank’s executives, especially during times of financial instability, may not reasonably be made public and therefore be immediately available for scrutiny”,
the next question obviously arises. Are the powers of autonomous action endowed on the Financial Policy Committee and, accordingly, the Bank, appropriately balanced with the need for political oversight by the Treasury of the overall conduct of economic and financial policy? Does the Bill provide for sufficient parliamentary scrutiny to endow the FPC and the Bank with an appropriate level of legitimacy? Again, we believe that the Treasury Committee does not go far enough. The FPC is described by the Government as,
“a powerful new authority sitting at the apex of the regulatory architecture”.
The mechanisms to ensure democratic accountability of the FPC need to be commensurate with the strength of its powers.
The most important aspect of the relationship between the Bank and the Treasury is what should be done in a crisis. After all, it was in a crisis that the system failed. This is spelt out in Part 4 of the Bill and in the draft memorandum of understanding on crisis management. The draft memorandum of understanding, which, by the way, is in general far less clear than the old tripartite memorandum, at least makes clear that the Bank is the gatekeeper, defining when the Treasury may play a crisis management role. It is worth quoting the MoU. It states:
“The Bank has primary operational responsibility for financial crisis management. The Chancellor and the Treasury have sole responsibility for any decision involving public funds. When the Bank has formally notified the Treasury of a material risk to public funds, and either there is a serious threat to financial stability, or public funds are already committed by the Treasury to resolve or reduce such a serious threat and it would be in the public interest to do so, the Chancellor may use powers to direct the Bank. … Where the Bank is able to manage a financial crisis without public funds being put at risk, it will have autonomy in exercising its responsibilities”.
This is the most extraordinary nonsense, a fetishisation of the use of public funds. First, whatever is happening, the Treasury must wait for notification by the Bank of England before it can act. Given the Bank’s record on Northern Rock, that notification will come far too late. But secondly, and more seriously, households may be losing their savings, businesses may be collapsing, and economic activity may be in precipitate decline as the result of financial instability, but if there is no threat to public funds the Treasury is shut out of any active financial stability role until the governor invites it in.
This betrays a lack of understanding of the mutually reinforcing co-operative role that the Bank and the Treasury need to adopt to tackle macro-risk. This was put very clearly by Jacques De Larosière to the Economic Affairs Committee of your Lordships’ House three years ago. He said:
“Let us not hide ourselves from reality. Often ... fiscal policies can be part of systemic risk”.
The only sensible solution seems to be for a fundamental rewriting of Part 4 of the Bill to allow the Treasury to act when severe financial problems arise without the Bank acting as a gatekeeper. In 2008, the problem was not that the Treasury was too strong but that it was too weak. To ensure that the roles of the Bank and the Treasury are clear beyond all reasonable doubt and given that the MoU will evolve in the light of operational experience, the MoU itself must be the subject of enhanced parliamentary scrutiny. By the way, the definition in the Bill of the objectives of the Financial Policy Committee, with its peculiar emphasis on leverage, debt and credit growth in the UK, also betrays a worrying lack of understanding of the nature of systemic risk in a global financial system.
Many other aspects of the Bill require substantial revision by your Lordships’ House, ranging from procedures for consultation at all levels, the role of the tribunal in disciplinary cases, to the duty of care that retail financial institutions should exercise towards their customers, and the range of access to financial services and to the procedures for parliamentary scrutiny of the avalanche of secondary legislation that the Bill will stimulate. My noble friends and I are committed to playing a constructive part in that revision. However, at the core of the Bill—the core that we must get right—are the new procedures for macroprudential regulation. If an open and successful financial services industry is to be sustained, it is imperative that an accountable, clear, efficient and transparent mechanism for the management of systemic risk is established. Moreover, that mechanism must have as its ultimate objective the promotion of employment and growth in this country.
Lord Forsyth of Drumlean
The noble Lord has made a passionate and powerful speech about the importance of the Bill. Why have the Opposition agreed that it be referred to Grand Committee for its Committee stage?
Lord Eatwell
Our experience from the Bill establishing the Office for Budget Responsibility, given that everyone was trying to get it right, was that we managed to have a very constructive debate. The noble Lord, Lord Sassoon, was constructive in accepting numerous amendments from the Opposition and we felt that detailed debates on complex matters could be conducted more effectively in that less formal arena.
Debt
Lord Eatwell Excerpts(12 years, 10 months ago)
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Lord Eatwell
My Lords, yesterday’s government announcement on VAT will add £110 million to the annual deficit and hence cumulatively to the public debt. Will the Minister explain to the House why the announcement on VAT was not first made in Parliament, in compliance with the Ministerial Code? Will he also tell us what alternative ways of spending the £110 million of petty cash were considered? Does VAT now apply to humble pie?
Lord Sassoon
My Lords, I am glad that in the space of three minutes the party opposite’s definition of petty cash has come down from £1 billion to £110 million. On a number of issues, including the VAT changes, we said that we would consult. We have consulted and we have come up with what we believe is the right approach, having talked to a range of interested parties.