Economy: Interest Rates
Lord Lawson of Blaby Excerpts(10 years, 6 months ago)
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Lord Newby
My Lords, the Government have given the MPC the role of ensuring that inflation stays as near as possible to 2%. As the noble Lord knows, subject to that, the Government have given the committee the role of pursuing their policies in terms of employment and growth. Separate to what the Bank is doing, the Government have set in train a whole raft of policies, whether they be apprenticeships, reducing national insurance payable by businesses or increasing tax-free investment allowances, which we believe will lead to growth—non-inflationary growth. It is extremely interesting in terms of those two, as he says, incompatible points, that during the life of this Government we have been able to generate an additional 2 million jobs, and inflation over the period has, if anything, fallen.
Lord Lawson of Blaby (Con)
My Lords, is it not simply the case that the 0.5% policy rate was a crisis rate, set because of the economic crisis in which this country was plunged, and the fact that we are now likely gradually to come to more normal rates of interest is a tribute to the fact that we are successfully emerging from that crisis?
Lord Newby
The noble Lord is exactly right. One of the benefits of a gradual increase in interest rates will be that savers, who have had a very poor return on their savings, will start to get what they would consider a more normal return in the future.
Economy: Inflation
Lord Lawson of Blaby Excerpts(10 years, 9 months ago)
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Lord Newby
My Lords, the noble Lord knows that this Government and the previous Government decided to move to CPI from RPI as a measure of inflation simply because we believe it is a more appropriate way of measuring inflation. It is as straightforward as that. Everyone who is affected by CPI rather than RPI will be affected by a better measure of inflation.
Lord Lawson of Blaby (Con)
My Lords, while the operational independence of the Bank of England on monetary policy is of the first importance, would my noble friend consider saying gently to the governors that their authority would be greater and the effectiveness of monetary policy enhanced if they were to talk rather less about matters that are market sensitive?
Lord Newby
There is a tension as far as the Bank of England is concerned. If it does not say anything it is criticised for not giving any indication of what it thinks; and when it does say something, it is criticised for saying what it thinks. That is an inevitable problem. On balance, it is better to have the governor and other members of the senior management of the Bank of England explaining what they think is happening to the economy, what they are doing and why they are doing it.
Economic Inequality
Lord Lawson of Blaby Excerpts(10 years, 10 months ago)
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Lord Newby
My Lords, one of the priorities of the Government is to ensure that work pays for everybody. This is one of the benefits that the Universal Credit will bring. This is one of the advantages of taking 2.7 million people out of income tax altogether. This is one of the reasons why my colleague, Vince Cable, has asked the Low Pay Commission to look at raising the minimum wage beyond what it might otherwise do, and this is why the Government support the living wage. Ensuring that work pays—and pays well—for people at modest levels of income is a top priority for this Government.
Lord Lawson of Blaby (Con)
My Lords, does my noble friend agree that it is far more important to focus on making the poor richer than on making the rich poorer?
Financial Services (Banking Reform) Bill
Lord Lawson of Blaby Excerpts(11 years ago)
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Lord Eatwell (Lab)
My Lords, everyone in the House has from time to time expressed the view that this is a great experiment. We are not quite sure how the ring-fence will work and therefore it is appropriate that that it be monitored promptly and on a regular basis. I think this is a very sensible amendment—I would do, since I moved a version of it earlier—and I urge the House to support the Government.
Lord Lawson of Blaby (Con)
My Lords, I thank my noble friend Lord Deighton for putting forward this amendment. As he said, it is something which the banking commission, of which I had the honour to be a member, has been calling for. It is extremely welcome and it is very good that he has acceded to it. As the noble Lord, Lord Eatwell, said, the whole idea of ring-fencing is something of an experiment. We do not know whether it is going to work and therefore it is necessary that after an appropriate time it should be thoroughly investigated to see whether it is working satisfactorily and, if it is not, to have a move to full separation.
We know for certain that full separation works; indeed, separation was the norm in this country for most of our lifetimes. It is only during the past 25 years that there has not been separation. In the old days, there were the so-called joint stock banks, which were to do with the commercial banks and did retail lending and lending to small businesses, which are now known as SMEs, and there was a completely different group called the merchant banks, which were different people and institutions. For a long time, most of them were partnerships and had a different set-up altogether. They did what is now known as investment banking and it worked extremely well. We know that separation can work but we do not know whether this idea can work, so it is right that there should be a review.
While commending the Government, and in particular my noble friend, for introducing this, I hope that it will not be necessary. That is not because the ring-fence will, as it were, be found to work. I have grave doubts about that if it persists. However, there must be considerable doubt as to whether it will persist. Some noble Lords may have seen the interesting report in today’s Financial Times that the HSBC is thinking seriously of spinning off its UK retail and commercial banking enterprise as a separate company, with outside shareholders taking up to 30% in it. That is according to the Financial Times; we do not know, but there is a good reason for that. If the requirements of the ring-fence are really to be enforced toughly, they will make it so difficult, complicated, burdensome and onerous that many banks should, if they are rational, ask, “Is it actually worth staying together? Might it not be better for us”—the management—“and for our shareholders to separate and release increased shareholder value for that purpose?”. I hope that the institutional shareholders will also keep the banks up to the mark. That would be the happiest conclusion—that we will not even need the review because separation will happen of its own accord. However, just in case it does not we will need the review and I am grateful to my noble friend.
Lord Turnbull (CB)
My Lords, we should welcome this shortening of the period, particularly when one remembers that the clock for the new period does not start ticking until the transition to ring-fencing is complete—and that is a date in 2019. If we are adding four years to that, it will be 2023 before this review takes place; so even bringing it back to 2021 is to be welcomed.
Lord Deighton
My Lords, these amendments require the PRA to review proprietary trading by UK banks and PRA-regulated investment companies and prepare a report to the Treasury. That will be followed by an independent review of the issue. The PRA must consider in its report the extent to which regulated firms engage in proprietary trading. It will then have to assess whether that risks their safety and soundness.
As the Parliamentary Commission on Banking Standards showed, proprietary trading can take many forms. That is why we are requiring the PRA to look into what particular risks different forms of proprietary trading can pose to the safety of the firm.
To help to give a full picture to the Treasury and to Parliament, the PRA must also report on steps it has taken to deal with risks from proprietary trading and whether it encountered any difficulties when it tried to tackle those risks. Building on that, the PRA must then give an assessment of whether it believes the tools it has to tackle proprietary trading are appropriate, given the risks that may exist at that time and in future. It must also consider whether restrictions imposed on proprietary trading in other countries have been effective. The experience of the United States in relation to the Volcker rule, which banned proprietary trading by banks, will be particularly relevant.
That review will take place within a year of the ring-fence coming into force. The Government have committed to ring-fencing being implemented in 2019, so this will take place in 2020. In Committee, there was some discussion about the appropriate timing of the review. The Government returned to the original PCBS recommendation, which said that the review must include,
“an assessment of the impact of the ring-fencing rules on proprietary trading by banks”.
To do that, the ring-fence must be in place for at least some time to consider such issues. While the ring-fence and proprietary trading are in many ways distinct issues, they will of course interact. Therefore we think it is right to allow the PRA to consider the impact of risks from proprietary trading on ring-fenced banks and whether the safeguards in place are sufficient for the particular requirements for the safety of ring-fenced banks. I know that members of the PCBS have been very concerned about that in the past, and I want to make sure that this review looks at this important area.
Following the PRA’s report to the Treasury and to Parliament, the Treasury will set up an independent review panel. The first task for that panel will be to consider the evidence that the PRA gathered and come to a view on its findings. It will then have to make recommendations about whether future measures to deal with risks from proprietary trading are necessary. The independent review will be able to make any recommendations in relation to proprietary trading that it considers appropriate. It will not be constrained, and like the PRA review, will be able to consider the experience other countries have had with restrictions on proprietary trading, such as in the US with the Volcker rule. By the time of the review, I imagine that a wealth of information and views will be available to help the independent panel come to its conclusions. The independent review panel must make its recommendations in a report to the Treasury and to Parliament.
As I have said previously, the PCBS heard in evidence that proprietary trading does not currently pose a large risk for the UK financial system, but it can do little harm to keep this area under review, should risks emerge in the future.
As noble Lords have seen when we debated other parts of the Bill, and, indeed, through this Government’s willingness to set up and listen to the ICB in the first place, we are in favour of independent reviews. Therefore we are persuaded that proprietary trading is an area where an independent review in future can add value. These reports will give a future Parliament all the information it needs to assess whether future safeguards are necessary. I beg to move.
Lord Lawson of Blaby
My Lords, once again I would like to thank the Government and, in particular, my noble friend Lord Deighton, for moving this amendment. It is in response to a strong recommendation that was encapsulated in a specific report on this subject among the five reports from the Parliamentary Commission on Banking Standards.
Just as in the previous amendment, which concerned the review of the ring-fence, initially the Government were prepared to look at it only from the point of view of whether an individual banking institution had been gaming the ring-fence. They have now agreed to look at the system as a whole, and I am grateful for that. Again, initially the Government said, “No way should there by a review of proprietary trading”, but they have now come round to saying, “Yes, the parliamentary commission was right and there should be a review”. I am extremely grateful to my noble friend for that. He said that there is no risk at the moment. That is because proprietary trading has, for the time being, stopped to all intents and purposes. Yet at its peak it was for many banks up to 30% of their total business. One must imagine that that is quite likely to occur again in future. I do not know whether it will but it is clearly possible. But if I might say so to my noble friend, it is not simply a question of risk—although risk is obviously an important factor.
There was an important debate on Thursday last week on the five reports of the Parliamentary Commission on Banking Standards. Unfortunately, I was unable to attend but I read the Hansard report. It was introduced by a magisterial speech by the most reverend Primate the Archbishop of Canterbury and there were a number of good speeches—it read very well. In particular, I was impressed by the speech by my noble friend Lord Deighton, in which he gave us a little autobiographical counter. He spoke a little bit about his own experience as a banker. One thing I noted in particular. He said he was always conscious of the importance in banking of, “putting the customer first”. That is a very important aspect of banking culture. Indeed, banking culture was one of the most important things that the parliamentary commission was set up to look into.
However, in proprietary trading there is of course no question of putting the customer first—because there is no customer. It is the bank trading on its own behalf. That involves a totally different culture and mindset. If you want to preserve in banking—as I think we should—the culture that my noble friend believes in, as he said on Thursday, then you should ban proprietary trading by banks altogether. It is fine for hedge funds. It is an excellent activity for them and they can do it very well. I am not suggesting that it should be made an illegal activity, but banks should not do it. Most of us on the commission—though clearly not all—came to that conclusion. We called for a review because we were unsure about the practicalities. There is some difficulty in defining the sort of proprietary trading that should be banned for banks because there is a need for market-making. The line between market-making and proprietary trading is very clear in the minds of those doing it, but whether it is clear in law is another matter. We thought it useful to look at the American experience.
Finally on this, I say to my noble friend that we should look at the American experience but not too much at the American legislation. The complexity and detail of the American legislation was simply appalling. It is a problem across the legislative system that they have in the United States. My noble friend quite rightly referred to the Volcker rule because Paul Volcker insists that there should be a ban—for cultural reasons, above all. He also told us, when he gave evidence to the commission, that the legislation introduced in Congress was certainly not the sort he had in mind.
Having said that, I wish the Government well in this. It will be an important review, for the reasons that I have outlined. I commend the Government for repenting, if slightly belatedly—but as the right reverend Prelates on the Bishops’ Benches will know, better “the sinner that repenteth”, et cetera. Thank you very much.
Lord Deighton
We now turn to the proposal to put in the Bill new requirements on regulators to meet the auditors of banks. This issue has been subject to extensive debate. The Government have been clear throughout that the regulators should carry the full responsibility for managing an effective relationship with the auditors of banks they supervise, and be held to account for how well they deliver it.
The reasons for this are strong. Before the crisis, regulators neglected their engagement with auditors while the auditors themselves signed off on the accounts of banks which we now know were, in some cases, in dire straits. The Government took action. There is now a requirement in the Financial Services and Markets Act for the PRA to lay its code of practice on auditor engagement before Parliament, meaning that the regulators will be held accountable for how well they deliver on the requirement to engage with the auditors of banks.
However, it has become clear how strongly the PCBS valued the opportunity to go further and specify the number of meetings in statute, to ensure auditors’ insights are used. For those reasons the PCBS is clear that, over time, this dialogue between auditors and regulators must not be allowed to lapse. The proposed amendment therefore includes two provisions to ensure that this crucial dialogue is preserved.
First, the regulators must disclose in their annual report the number of meetings they have held with the auditors. This allows Parliament to hold the regulators to account for the frequency of meetings. Secondly, the regulators must meet at least once per year with the auditors of firms that the PRA, the leading prudential regulator, considers to be important to the stability of the United Kingdom economy. This is a minimum requirement. The Government believe that it is right to place the duty on the regulator to determine how many more meetings are required with the auditors of firms of particular types, consistent with its risk-based, judgment-led approach. This allows the regulators to focus their resources where the risks are highest.
Some noble Lords may argue that the minimum requirement should be higher. The Government do not agree. The Government have said that the regulators must meet with any firm that may be important to the financial system at least once per year, but within this group, there will be firms of major and firms of minor significance.
For firms of major significance, once may be too little; for firms of minor significance, once may be sufficient. For example, under the PRA’s current code, for banks that could have the most significant impact on financial stability, the PRA code mandates at least three meetings a year. For other firms whose failure could still materially impact the UK financial system, the PRA code mandates at least one bilateral a year. The FCA meets at least twice per year with the auditors of the most significant banks and at least once per year with those in the next largest category.
The Government believe that it is right that Parliament does not seek to specify this level of detail in legislation. To do so would risk misaligning the PRA’s resources with the risks the financial system faces. The Government therefore believe that this amendment arrives at a suitable compromise between the desire to specify in the Bill a minimum number of meetings, to prevent meetings between auditors and regulators from lapsing entirely, and an approach that requires regulators to take responsibility for pursuing proportionate and high-quality engagement, and enhanced mechanisms for accountability. I commend these amendments to the House.
Lord Lawson of Blaby
My Lords, once again, I am extremely grateful to my noble friend Lord Deighton and his colleagues in the Treasury for agreeing to bring forward this amendment. As he pointed out, it is in response to a recommendation of the Parliamentary Commission on Banking Standards. Hitherto the Treasury has been reluctant to accept this, but it has now done so and it is in the Bill. Incidentally, this was also a recommendation of your Lordships’ Economic Affairs Committee, in its report on the auditors a little while back. This provision is needed in the Bill because we have been here before. The Banking Act 1987—I introduced the Bill that led to that—enabled these meetings to take place, and for a number of years they did. However, in the run-up to the great banking crisis and meltdown they had ceased. That is why we on the commission felt that this time it was necessary to have this provision in the Bill, and I am grateful to my noble friend for that.
I know that the hour is getting late but I should mention another matter that relates to a recommendation of the commission. There was lamentable failure of these meetings to take place and the fact that the auditors were in front of the crisis—the dog that never barked—was partly because of the lack of meetings and was largely the fault of the regulators at the time. It was their responsibility above all to seek such meetings. However, there was also the lamentable inadequacy of the accounting system at the time, IFRS. It is probably an inadequate system in general but it is particularly flawed when it comes to the auditing of banks. That is increasingly recognised within the accountancy profession. It is too late for me to go into the details, and I have explained the specific failings in previous debates and I will not go over the ground again.
When the commission addressed this issue it said that since we cannot change IFRS because the “I” represents an international agreement—although it is, in fact, a European agreement because the Americans have made it clear that they do not want to have any part of it—the PRA must require the major systemic banks to produce a second set of accounts that satisfies the needs of prudential regulation and supervision. That involves a small extra cost to achieve a considerable objective.
When this matter was discussed in Committee, my noble friend Lord Deighton said that there was no need to put such a provision in the Bill because the PRA had the power to do so—and I very much hope that it will do so. It is up to the Treasury Committee in another place to keep the PRA up to the mark. I hope that the present chairman of that committee will do that. Andrew Tyrie, the Member of Parliament for Chichester, outstandingly chaired the work of the Parliamentary Commission on Banking Standards and he secured its important and unanimous report. However, I was slightly alarmed in Committee when the Minister said that the regulators already have power,
“to make rules requiring banks to prepare additional accounts, to the extent that this is permissible under EU law”.—[Official Report, 23/10/13; col. 1022.]
While I thank him for the amendment, I must ask him: if the PRA wishes a systemically important bank to present a set of accounts in a way that it feels is necessary for proper prudential supervision, what will it be prevented from doing under EU law? The House needs to know that.
Lord Deighton
With respect to the question asked by my noble friend Lord Lawson about what constraints the EU law would put on the PRA getting the information in the form that it requests, this is merely tying it into what comes out of the capital requirement directive IV, just to make sure that it is consistent. I am not aware of a particular constraint, but I am aware that there will be additional disclosure responsibilities that come along with that. We really just want to integrate it, but I do not believe that it is a constraint; it should actually help with disclosure.
Lord Lawson of Blaby
I am most grateful, but will my noble friend agree to look further into this and, if there is a constraint, to write to me?
Lord Deighton
Of course, I would happy with that undertaking. I fully accept the observation from the noble Lord, Lord McFall, that an audit needs to have the context of the business model behind it to have a proper understanding of where the business is going. We will certainly encourage the regulator to ensure that the dialogue with the auditor takes into account what is really happening in the business and does not just look at the numbers in isolation.
Lord Lawson of Blaby
My Lords, it is incumbent on us to respond to the very kind words of my noble friend Lord Deighton. As he said, the Bill has been completely transformed. I have been a Member of this House for a very long time now but I cannot recall a Bill—let alone a Bill as important as this one—to have been so totally transformed for the better. It is not only a great deal bigger but also a great deal better as a result of its passage through your Lordships’ House. I am extremely grateful and the nation will be extremely grateful.
There has been a lot of nonsense talked about the excessive size of the banking sector in this country. Some people have been even as foolish as to talk about a monocrop economy. The fact of the matter is that banking accounts for a little over 5% of this country’s GDP; it is nothing like a monocrop economy. However, it is a supremely important sector and one in which we are world class.
There is a size problem—I have not got time to go into it now and it would not be proper to do so—with individual institutions. As the former Governor of the Bank of England said, if an institution is too big to fail, it is too big. The size of the sector is a great strength of this country. As the present governor, Mr Carney, said recently, it is a great strength of the United Kingdom that we are prominent and world class in this growing and supremely important industry. We want it to grow further, which I hope it will. It is our great strength. It is what economists call the law of comparative advantage—you should do what you are best at—and this is a sector in which we are very good. However, if it is going to get bigger and bigger, which I think it will and should, it has to be both clean and robust. The purpose of the Parliamentary Commission on Banking Standards was to try to ensure that it would be both clean and robust. That is what the Bill is about.
I say again how grateful I am to the Government, and particularly to my noble friend Lord Deighton, for having implemented so many of the recommendations of the parliamentary commission to ensure that the Bill leaves this House in an infinitely better state than when it arrived here.
Lord Eatwell
My Lords, the noble Lord, Lord Deighton, expressed the view that this was the final piece of the jigsaw in financial regulatory reform. He is going to be disappointed in that respect. What we have achieved is but a step on the road. Many issues have still not been addressed and many parts of the financial services industry have not been incorporated into the overall consideration of what is necessary as we move into the future with a successful and resilient banking system, to which the noble Lord, Lord Lawson, referred. More will need to be done.
I add my thanks to those of the noble Lord, Lord Deighton, to the Parliamentary Commission on Banking Standards, and particularly the Members of this House—the noble Lords, Lord Lawson, Lord Turnbull and Lord McFall, the noble Baroness, Lady Kramer, and the most reverend Primate the Archbishop of Canterbury. They have done a fantastic job, as was discussed in the debate last Thursday, and they deserve the thanks of the whole House.
I also thank those on this side of the House who have contributed so constructively to the discussion of the Bill—my noble friends Lord Watson, Lord Brennan, Lord Mitchell and Lady Hayter. I would particularly like to thank my noble friend Lord Tunnicliffe for keeping me in order, as he has done throughout this entire process. I would also like to thank our researcher, Miss Jessica Levy, who has worked alone, as opposed to having a team of officials. She has done the most remarkable job. She is a very talented person and we would not have been able to achieve what we have achieved and contributed from this side without her help.
The noble Lord, Lord Higgins, who regrettably is not in his place at the moment, referred to the somewhat unfortunate process by which the Bill has got to this stage. The Treasury has made a bit of a shambles of it, really, and we have just been catching up through these various stages. I hope that when we next have a financial services Bill that, instead of having this elaborate and confusing process of continuously amending parts of FSMA, we have a proper coherent rewritten Bill to consider at the very beginning and that it is considered properly by both Houses in its passage.
That critical comment about the Treasury has not diminished at all my pleasure in discussing the Bill with the noble Lord, Lord Deighton. Ageing professors typically take rather excessive proprietorial pride in the achievement of their pupils; all I can say at this stage is that I am delighted that my teaching of the noble Lord does not seem to have done him any permanent harm.
Financial Services (Banking Reform) Bill
Lord Lawson of Blaby Excerpts(11 years ago)
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Lord Eatwell
My Lords, I support the sentiments expressed by the most reverend Primate, in particular in pointing out the considerable confusion in the Government’s position in Committee when they told us, on the one hand, that the FPC had this power already and, on the other hand, that they proposed to give the FPC the power in 2018. We were told both things at once and it was not at all clear that the Government really knew what was happening with respect to the development of the use of the leverage ratio as an important element in the FPC’s toolkit.
However, the matters have been clarified by the correspondence between the Chancellor and the Governor of the Bank of England which was made available to us yesterday. I would like to hear confirmation from the Government that this is a case not of whether a leverage ratio will be available to the FPC, nor of whether the FPC will have that within its macroprudential toolkit, but simply of when this power will be available—I hope that it is sooner rather than later—and perhaps how it might be exercised. However, given that the use of macroprudential tools is already set out in great detail in the previous Financial Services Act, even that may be unnecessary.
Lord Lawson of Blaby (Con)
My Lords, I support strongly what the most reverend Primate the Archbishop of Canterbury and the noble Lord, Lord Eatwell, have said. I speak in support of them because this is a particularly important issue.
In constructing a safe banking system, a number of things are taken into account, including risk-weighted assets and other matters of that kind, but there is no doubt that the leverage ratio is the single most important element in having a strong and robust banking system. This amendment is not about what number it should be. I mention en passant that the Government say that we must not interfere with what the Vickers committee recommended, yet when the Vickers committee recommended a number which they did not like they disagreed with it. Nevertheless, that is water under the bridge.
The review is quite unnecessary—although it will probably not do any harm—because the issue of the leverage ratio is peculiarly simple. Who will be responsible for setting the leverage ratio, the Treasury or the Financial Policy Committee of the Bank of England? The amendment is important because it would give the Minister the opportunity to make a clear statement. There has been movement since Committee. The Governor of the Bank of England, Mr Carney, gave evidence to the Treasury Committee in another place only yesterday saying that his understanding was that it would be the responsibility of the Financial Policy Committee of the Bank of England. We would like to have that explicitly stated by my noble friend here today.
The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, the amendment would require the Government to make an order giving the FPC a power to direct the PRA to set a leverage ratio within six months of Royal Assent. It is absolutely the case that it will be the FPC which exercises these powers. It has never been the intention that the Treasury would have those powers. For those who are not so familiar with the context, I shall have another go at being less confusing about the background, because it is important to understand why the review is necessary to get to that end case and what the current situation is.
There was a lot of concern around the idea that the Chancellor has the power to set a leverage ratio, which I think was in part a result of some confusion about how the law currently stands and works—which in turn is partly because of the various domestic and international reforms running to different timescales. We are in a process of change and a lot is moving around.
I tried last time to clarify the current powers of the regulator and the future powers of the FPC during Committee. I thought that I nearly succeeded, because I think that the noble Lord, Lord Lawson, is on record as saying that he was encouraged to some extent. That was a ringing endorsement compared to how I did on some of the other amendments, so I thought that I had done quite well.
The Government have sought to provide further clarity on this point through the recent exchange of letters with the Governor of the Bank of England. I will return to that. I hope that, with that explanation and a description of the steps that the Government will take to clarify matters further, I can satisfy your Lordships that their concerns about what I agree is a very important issue will be addressed.
First, I shall try to explain the current state of the law. Then I will explain our proposals in that context, because I think that that will give noble Lords the full picture.
Under current law, three bodies are concerned with the leverage ratio: the Treasury, the FPC and the PRA. Of course, the last two are part of the Bank of England group. Of those three, one has the direct power to set a minimum leverage ratio now. That is the PRA. Let me make it absolutely clear: it can do that not just on a firm-specific basis but on a system-wide basis. It can do that now; it has that power. It can set the leverage ratio directly, as it did back in June, or on the basis of a recommendation from the FPC. When I replied to the noble Lord, Lord Turnbull, I talked about the June action of the PRA as the killer fact; it was obviously not as emphatic as I hoped.
Under FiSMA, the FPC has two sorts of powers. First, there is a wide power of recommendation on any issue with regard to financial stability, which it makes to the PRA to exercise under its powers on a “comply or explain” basis. For that to work, the PRA must have powers to apply rules across the whole sector, which, as I have just explained, it does. It is envisaged that that is how most of the FPC’s decisions will be enacted. Secondly, the FPC has a narrow set of macro-prudential tools, which are powers to direct the PRA to act. There are currently two powers of direction. Currently, they are a counter-cyclical capital buffer and sectoral capital requirements. The Government also committed—this was the original situation—to giving the FPC a third direction tool to vary the minimum leverage ratio once the minimum was set in 2017.
For the avoidance of doubt, the Treasury plays no role here. If the PRA wants to set a leverage ratio either under its own initiative or under the recommendation of the FPC, it does not have to ask the Treasury, and the Treasury has no veto. The Treasury is the only body of the three that does not have the power or influence to set the leverage ratio. So the debate is essentially about how and when the Treasury grants the FPC that specific power of direction over the PRA, rather than the PRA retaining some discretion in the matter.
That being established, let me turn to the Government’s recent exchange of letters with the Bank of England. The Government have already committed to give the FPC the power of direction to vary the leverage ratio through time in 2018, subject to a review in 2017, but, given progress internationally—all the transformational change that we just discussed—there is a case for such powers being given earlier, or specified in a different form. To settle this debate, the Chancellor asked the governor, who is the chair of the FPC, to review the matter and make a recommendation to him that he could take to Parliament. The Government believe that that is the right approach to granting the FPC additional powers of direction, for a number of reasons.
First, there is an existing process for the FPC being granted such powers, established under the Financial Services Act, which many in this House and the other place, including the chair of the PCBS, helped to design. These are prescribed by the Treasury by order under Section 9L of the Bank of England Act 1998. Before making an order, the Treasury must consult the FPC and make an order in Parliament. This is subject to the affirmative resolution procedure, so must be approved by each House of Parliament.
To fulfil their duty of proper consultation before bringing a proposal under the Act, the Government believe that it is appropriate and necessary that the Bank furnish them with the relevant information from the planned review of the leverage ratio. As noble Lords can see from the governor’s response to the Chancellor, he is more than happy to go along with that process, given the things that are going on this year. Secondly, as a matter of policy, there are a number of outstanding technical issues that will need to be settled before the Chancellor can bring fully fleshed-out proposals back to Parliament.
Lord Lawson of Blaby
“MiscellaneousMeetings between regulators and auditors of relevant authorised persons
(1) The FCA and the PRA must make arrangements to meet the auditors of each relevant authorised person at least twice in each calendar year.
(2) The FCA and the PRA may conduct meetings under subsection (1) jointly or separately (but each relevant authorised person’s auditors must be met separately).
(3) The purpose of each meeting is to discuss matters about which the FCA or the PRA believe that the auditors may have views or information.
(4) A relevant authorised person has a duty to ensure that its auditors attend meetings in accordance with this section (and compliance with that duty may be considered for purposes of the exercise of functions under FSMA 2000).
(5) In this section, “relevant authorised person” has the meaning given in section 71A of FSMA 2000.”
Lord Lawson of Blaby
I will try to be brief; I hope that the Government can readily accept this. This amendment concerns the need to have regular meetings between the bank’s supervisors and its auditors. I use the old-fashioned word “supervisors” rather than “regulators” because it gives a more accurate picture. I was very glad that the new Governor of the Bank of England, in his recent speech at some Financial Times junket or other—a very good speech indeed—referred throughout to “banking supervision”, which is a more accurate, old-fashioned term. It is important that there should be this regular dialogue. I will briefly go back a little into the history of this.
When I was Chancellor in the 1980s, I was very concerned to discover that there was no discussion between the auditors and the supervisors of banks—which was the Bank of England at that time, as it is now. I looked into it and discovered that it was because they were prevented from doing so. Under their duty of confidentiality to their client, the auditors were not able to speak to anybody about any concerns they might have had about what was going on in a particular bank. It applied to other clients, but the important thing was that it applied to the banks. Therefore, when I greatly strengthened banking supervision in what became the Banking Act 1987, I included legislation to remove that legal barrier. In introducing that I made it quite clear that I expected as a result that there would be a regular dialogue between the banking supervisors and the bank’s auditors so that each could compare notes about concerns they might have had about a particular bank.
I now regret that that was not in the Bill, but it was a clear expectation, stated from the Dispatch Box. These meetings took place for a number of years. Then, as time went on, fewer and fewer of them took place. In the run-up to the terrible crisis of 2008 it was significant—the Economic Affairs Committee of your Lordships’ House took evidence about this—that the meetings had virtually ceased. They did not happen at all, which was a huge mistake. Therefore the Economic Affairs Committee of your Lordships’ House recommended that there should be a mandatory requirement for those meetings to take place. That is all the more important with banks because with other businesses the auditor can qualify the bank’s accounts if it has a concern which the board of the client does not address. That is a signal that everybody can see. However, no auditor ever qualifies a bank’s accounts, and for a very good reason—because it would lead to a run on the bank. That is all the more reason for this dialogue to happen.
The Economic Affairs Committee of your Lordships’ House recommended this mandatory duty. When the parliamentary banking commission came to look at it again, we, too, recommended that there should be this mandatory duty. The Government have said that they entirely agree that there should be these meetings. They have announced that they have been moving gradually—I hope that they will move a little further—and have said, “Yes, these should take place, specifically at least twice a year”. However, they have so far resisted having that on the statute book. As noble Lords will know, once bitten, twice shy. We have been through this before: although we had all the good intentions, it was not on the statute book, and eventually it did not happen. Therefore, I say to the Minister, the Government have agreed that this should happen, and I cannot see any reason why it should not be in the Bill. Furthermore, from the history I have recounted, I can see a good reason why it would be folly, and dangerous, not to have it in the Bill. I beg to move.
Lord McFall of Alcluith (Lab)
My Lords, as a fellow member of the Parliamentary Commission on Banking Standards, I support the amendment moved by the noble Lord, Lord Lawson. The lack of a relationship with auditors is something that I have noticed since the beginning of the financial crisis. Indeed, at that time regulators told me that, when deciding what regulation banks should be subject to, they sent their less experienced regulators to the smaller banks and their more experienced regulators to the larger ones. By the way, when the regulators go to the larger banks they are sometimes taught by the people working in them because the quality is higher there. So the relationship between the regulators and the auditors is very important.
Martin Wheatley, who is now chairman of the FCA, is on record as saying that the FSA never looked at banks’ business models. In other words, it did not look at the profit and loss element of banks because it felt that it was none of its business. If the FCA is now to adopt the new policy of looking at business models, which tell you everything about a company, then the auditor is going to have a central role to play. I know that the audit profession has been rather taken aback by the criticism of the Treasury Committee and the Parliamentary Commission on Banking Standards, which posed the question, “What is an audit?”. The profession will have to do an awful lot of work on that because it has largely believed that audits cover something that has occurred in the past and not something that will happen in the future. It has not taken high-risk, low-probability strategies or low-risk, high-probability strategies into consideration. Auditors are in the unique position of looking at the business model and so can assist banks in having a forward look at that. They can also help regulators to understand what a business model is about. As the noble Lord, Lord Lawson, said, this measure was not put on the statute book previously and therefore lapsed by default. In the interests of being constructive on this issue and wanting to ensure that we have auditors who keep bank executives on their toes, I agree wholeheartedly with the noble Lord, Lord Lawson, that we need to see this measure written into the Bill.
Lord Deighton
My Lords, we are considering a proposal to mandate the regulators to meet the auditors of all the banks they supervise at least twice a year. Strengthening the quality of engagement between auditors and supervisors is an objective that the Government share. I think that there is absolutely no disagreement between us about how important that is and how it has not always worked well in the past. I listened to the concerns of the noble Lord, Lord Lawson, that voluntary commitments for regulators and auditors to meet regularly could easily fall into abeyance. However, some lessons have been learnt from the financial crisis, and the Government have taken meaningful steps to ensure that the new regulator does not slip into the habit of neglecting engagement with auditors.
FiSMA now includes new Section 339A, which requires the PRA to have arrangements for sharing information and opinions with auditors of PRA-authorised firms, and to publish a code of practice to set out the way in which it will comply with this obligation. This code of practice sets out in detail the principles governing the relationship between the regulators and bank auditors and must be laid before Parliament whenever it is changed. This change to the law has greatly improved the regulators’ engagement with auditors since the crisis, so the Government have taken action here. The Government believe that the action they have taken in this respect is in line with changes to ensure that the regulators now follow a judgment-led approach to supervision that ensures regulators are clear in their purpose and direct resources to the most important cases.
One of the criticisms of the old FSA was that its approach did not focus on the most significant issues and too much resource was taken up by inflexible processes. Operationally, this new legal framework forces regulators to be more diligent and allows them to be held accountable. The essential strength of the new legal framework is that it demands diligence from the regulators through parliamentary review and encourages proportionality by allowing them to specify where they will focus their resources. The result has been that the PRA will meet with firms which have the potential to cause major economic disruption in the case of failure at least three to four times per year. The FCA will meet with the auditors of those firms at least twice a year. This is exactly what we want—prioritised, high-quality engagement where it matters.
The Government therefore remain unconvinced of the value of changing the frequency of this dialogue in statute without some reference to proportionality. Two meetings a year with the auditors of important firms is too little, while the same number for very small firms may be too many. The Government favour the current legal framework with its provisions for diligence and prioritised application of resources. Of course, there may be refinements that can be made in the law to ensure that the requirements on regulators are always express.
Lord Lawson of Blaby
For clarification, if my noble friend reads the amendment, he will see that it does not say that the meetings should be held twice a year but that they should be held at least twice a year, so there is flexibility there. I hope that he will take this back and bring forward something better than he has said so far—interesting though that is—at Third Reading, because he has not addressed the critical point of the need to have a statutory requirement for these meetings to take place. He can decide what the right periodicity is; what I am anxious about is that there should be this statutory requirement.
Lord Deighton
I was just getting to that. The Government believe that there is a superior approach to strengthening the law in this area by clarifying the requirements on regulators to meet auditors enough times to accomplish their objectives. I think we agree that the periodicity should not be the constraint, although perhaps we could deal with that by a requirement to disclose the frequency of meetings with certain types of firm to ensure accountability. Such an approach would, in the view of the Government, be superior and retain proportionality and the judgment-based approach while increasing accountability. If the noble Lord will withdraw his amendment I will be willing to return to it at Third Reading, subject to further consideration of these issues.
Lord Lawson of Blaby
In answer to the useful point of clarification by my noble friend Lord Higgins, will this measure definitely be on the face of the Bill?
Lord Lawson of Blaby
Given that undertaking, for which I am extremely grateful, I beg leave to withdraw the amendment.
Lord Lawson of Blaby
“Proprietary trading
(1) The PRA and the FCA must carry out a review of proprietary trading by relevant authorised persons.
(2) The review must be completed before the end of the period of 3 years beginning with the day on which this Act is passed.
(3) The PRA and the FCA must give the Treasury a report of the review.
(4) The report must include—
(a) an analysis of any action taken by the PRA and the FCA to monitor whether and to what extent relevant authorised persons engage in proprietary trading and any action taken by the PRA or the FCA to discourage relevant authorised persons from doing so;(b) an account of any difficulties encountered by the PRA or the FCA in taking that action and an assessment of its efficacy;(c) an account of any requirement imposed on relevant authorised persons which the PRA or the FCA consider may be engaging in proprietary trading to publish a statement of the exposure to risk of relevant authorised persons in their trading operations and of the controls applied to limit that risk;(d) an assessment of the impact of the ring-fencing rules on proprietary trading by relevant authorised persons;(e) an assessment, drawing on experience in countries other than the United Kingdom, of the feasibility of prohibiting relevant authorised persons from engaging in proprietary trading or limiting the extent to which, or circumstances in which, they may do so (having regard, in particular, to any difficulties of definition); and(f) a comprehensive analysis of the advantages and disadvantages of prohibiting relevant authorised persons from engaging in proprietary trading or limiting the extent to which, or circumstances in which, they may do so.(5) The Treasury must lay a copy of the report before Parliament.
(6) The PRA and the FCA must publish the report in such manner as they think fit.
(7) The Treasury must, following receipt of the report, make arrangements for the carrying out of an independent review to consider the case for the taking of action in relation to proprietary trading by relevant authorised persons.
(8) The appointment by the Treasury of persons to carry out the review requires the consent of the Treasury Committee of the House of Commons.
(9) The reference in subsection (8) to the Treasury Committee of the House of Commons—
(a) if the name of that Committee is changed, is to be treated as a reference to that Committee by its new name, and(b) if the functions of that Committee (or substantially corresponding functions) become functions of a different Committee of the House of Commons, is to be treated as a reference to the Committee by which the functions are exercisable;and any question arising under paragraph (a) or (b) is to be determined by the Speaker of the House of Commons.(10) The persons appointed to carry out the review must give the Treasury a report of the review once it has been concluded.
(11) The Treasury must lay a copy of the report before Parliament and publish it in such manner as it thinks fit.
(12) In this section—
(a) “proprietary trading”, in relation to a relevant authorised person, means trading with funds on markets on the relevant authorised person’s own account (whether or not in connection with business with the relevant authorised person’s customers),(b) “ring-fencing rules” has the meaning given by section 417 of FSMA 2000,(c) “relevant authorised person” has the meaning given by section 71A of FSMA 2000.”
Lord Lawson of Blaby
This is one of the most important matters that we will have to decide, not merely to make the banking system safer but to address the cultural problem. Proprietary trading is, as noble Lords will be aware, trading which a bank does entirely on its own behalf. There is no client at all. It is the furthest from the culture that we expect of banking, which is a culture of prudence and of servicing clients. Here, there is no client and we know from experience that, far from there being a culture of prudence, proprietary trading tends to be of a highly speculative and gambling nature.
It has also, incidentally, been connected with some of the greatest scandals. The LIBOR scandal, for example, was a proprietary trading scandal. Even when there is not a scandal, even when it is perfectly reasonable—I have nothing against speculation as such—in my judgment it is alien to what the banking culture should be. Speculation should be left to the hedge funds. It is a hedge fund activity par excellence and it should not be conducted by banks. That is my view. The view of the commission was slightly different. It was that, while that is probably so, there are practical difficulties and therefore there needs to be a full-scale review a few years hence to see how this is working.
At the moment, of course, there is very little proprietary trading going on in this country. Before the great crash of 2008, the amount of proprietary trading that some banks were doing accounted for more than 30% of their total business; it was as big as that. It has now disappeared, but it will almost certainly come back. Incidentally, when we had this debate in Committee my noble friend Lord Deighton said that there was no need to do anything now because there was no proprietary trading going on. With the greatest respect, he missed the point. We are saying that we should review this a few years hence when there may well be something going on. In fact, there almost certainly will be something going on. We are not legislating just for the here and now, but for the medium term and, so far as we can, for the long term. There will not be another banking Act for a very long time, so it is important that this review is in place.
There is one other thing that the review will be able to do. My good friend Paul Volcker, a very distinguished former chairman of the Federal Reserve in the United States, has been largely responsible for introducing what is known as the Volcker rule in the United States, which attempts to ban proprietary trading. Their system of legislation is so appalling that the rule has got encrusted with myriad barnacles which may make it less effective, but, nevertheless, the clear intention was to ban proprietary trading. He is a very wise observer of the banking scene over many years and he understands full well the practical and cultural problems that derive from banks engaging in proprietary trading.
A review a few years hence will be able to take account not merely of what is happening in the banking world in England at the time but will be able to see how the Volcker rule has worked in practical terms in the United States—and, if it has been defective in any way, we can learn from their experience. Therefore, I urge my noble friend, who made a remark yesterday, almost en passant, about proprietary trading when we were talking about the ring-fence, to go further today and to accept the amendment which we, as a commission, feel is right. He may want to change the wording in some way or other—I suspect that the period we set was a bit too soon; it might be sensible to have it a little further out—but I will leave that to his excellent judgment. The important thing is that the essence of this must be accepted by the Government. I beg to move.
Lord Lucas (Con)
My Lords, I am interested in a side effect of this amendment. I hope that it may result in us taking a proper look at high-frequency trading, which seems to me to be pretty close to theft, organised on behalf of stock exchanges at the expense of the rest of us in mutual funds and pensions. It seems extraordinary that we allow a certain group of investors privileged access to the stream of information coming out of an exchange, and allow them advantages over real investors. Real investors invest in real funds for long-term real return, performing the function of the market in terms of the allocation of capital and giving people an opportunity to invest their money at risk for return in order to enable them to live in retirement and to prosper from giving other people the use of their money. These are important functions of the market and high-frequency trading seems to me to be parasitical on that.
I have heard it argued that it improves, net-net, the terms on which investors are able to trade. That is not what investors tell me. They say it is as if someone is moving ahead of them. Every time they get into the market they can feel the market being moved ahead by the high-frequency traders. I think that that is an aspect of proprietary trading to which we should pay close attention, and I very much hope that this review will allow us to do so.
Lord Lawson of Blaby
I am grateful that my noble friend said that he would come forward with something at Third Reading. That something will have to be not the possibility of a review but a clear commitment to a review. I think that it is a separate matter from the ring-fence. The ring-fence is about a division of banking; this is a ban. As the noble Baroness, Lady Cohen, said, this is not something that banks should be doing at all. It is a perfectly legitimate hedge fund activity, but there is a fundamental difference. On the basis of what my noble friend said—I hope that I have interpreted it correctly—I beg leave to withdraw the amendment.
Lord Lawson of Blaby
My Lords, I am very grateful regarding a number of issues. The Government have said that they are going to move further and will probably —and, in most cases, definitely—bring something forward at Third Reading. That is excellent, but it means that we are going to have a lot of government amendments to consider for Third Reading. I stress what I said yesterday about how important it is that this House has plenty of time to consider the amendments that the Government, to whom I am grateful, will bring forward. They must be tabled at the earliest practicable date and well before the date set for Third Reading otherwise it will be necessary for that date to be postponed.
Lord Newby
My Lords, I understand the point being made by the noble Lord. I am not sure at this point, without further discussion, whether we need an amendment at Third Reading. We think that the way forward might be a PRA policy statement, but we can have urgent discussions with the noble Lord on that.
Financial Services (Banking Reform) Bill
Lord Lawson of Blaby Excerpts(11 years ago)
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Lord Lawson of Blaby (Con)
My Lords, this is a very important Bill indeed. We all know the great damage that the banking meltdown in the western world has caused, not least in this country. This Bill seeks to deal with that. There are few more important matters—there may be more important matters in the world but they are not susceptible to legislation. This is a vital matter that we can do something about by legislation, and that is what this Bill is about.
In chronological order, I thank the noble Lord, Lord Barnett, for the kind things he said about points that I had made in earlier debates on this Bill. I agree with much of what he said. I also agree with much of what the noble Lord, Lord Eatwell, has just said. I congratulate the Government on setting up the Vickers commission, on having accepted the recommendations of the Vickers commission and on their amendment endorsing part of the recommendations of the Parliamentary Commission on Banking Standards, of which I was a member. The most reverend Primate the Archbishop of Canterbury was a distinguished member; I hope that he will contribute to our debate. The noble Lords, Lord Turnbull and Lord McFall, whose names are on Amendment 4, were also commissioners. I congratulate them on suggesting that there needs to be a review.
The Government have moved a very long way—and I am delighted—but not quite far enough. That is what we are discussing in this group of amendments. To get to the core of the issue, what the Vickers commission concluded and what the Government have accepted is that there is a problem with the relationship and, indeed, the mixing of commercial and retail banking with investment banking. The Vickers commission accepted that; that is why it introduced the ring-fence. The Government accepted that; that is why they accepted the recommendation of the Vickers commission for the ring-fence.
I have always been in favour of full separation—I came out publicly in favour of it long before the Vickers commission was even set up. We know that this works. It worked in the United States for many, many years under the Glass-Steagall arrangements and it is no accident that serious problems emerged after the Glass-Steagall Act had been repealed. Indeed, the Glass-Steagall Act would have worked for a great deal longer had not successive American Administrations been lobbied by the banks to introduce loopholes in one place and another. Anyhow, that is water under the bridge.
What is the danger? The danger accepted by the Vickers commission and the Government is twofold. First, although my noble friend Lord Flight is absolutely right that ordinary, plain, vanilla banking is a very risky business and often goes wrong, there is one particular range of risks in lending: the bad lending. In investment banking you had a whole new and very complex range of risks. It is not the case that nothing has ever gone wrong there; for example, there have been huge problems with derivatives that are a product of the complexity of investment banking. So there is first the question of whether it is sensible—when straightforward, plain, vanilla banking is risking enough —to add to that a whole new range of risks, a whole new complexity, which can make it more likely that the retail deposit-taking banks will get into difficulties. It must be unwise to do that.
The other problem is about the cultures. The Vickers commission did not talk about this, or think about it; it did not raise the issue of culture. But culture is very important. I was glad that when my right honourable friend the Prime Minister introduced the setting up of the Parliamentary Commission on Banking Standards, he explicitly said that it needed to look at the culture of banking, because something had gone wrong with it.
The culture of retail banking and the culture of investment banking are two quite separate things. One is, or should be, a culture of caution and prudence; the other is a culture of creativeness—which is very desirable—and risk-taking of a totally different order. That is another thing that the Vickers commission did not look at.
Now we come to the question of whether the proposal for a ring-fence will do the trick. We do not know. In the Parliamentary Commission on Banking Standards, we decided that although we had our doubts, it should be given a chance—but that there should be a proper review process, so that if it is proved not to be working, we shall move to something that will work.
Another of the things that the Vickers commission did not consider is the problem of governance. The ring-fence is a curious system, because there is one company with two subsidiaries—the retail bank and the investment bank—and we are told that they are completely separate, yet they are together. There is a real question whether that model of governance is workable. I know of distinguished bankers—at least one of whom is present in the Chamber as I speak—who have grave doubts on this score.
There is also a problem within the law. Boards of directors are responsible to the shareholders, so if there is complete separation it is clear that the board of the retail bank has responsibility to the shareholders of the retail bank and the board of the investment bank has responsibility to its shareholders. But under the ring-fence proposal there are two entities that we are told are completely separate, yet there is a single group of shareholders to whom they are responsible. We do not know whether this will work. We do not know whether there might be cultural contamination across the ring-fence. There is no legislation that can prevent cultural contamination, and that would be a very serious matter.
In the commission, we said that two kinds of review powers were needed. The first would look at individual institutions. If, after a number of years, we find that an institution has found a way round, or has burrowed under, the ring-fence and found a way of evading what the Government and Parliament decided, it should be obliged to separate its retail banking and its investment banking. But we also said that a second kind of review power was vital. The proposed system is a right idea of the Vickers commission. A number of the Vickers commission are friends of mine, they are very clever, and I have nothing against them—but they do not know whether it will work either. It has never been tried anywhere in the world, whereas complete separation has been tried, and it has worked. So it is vital that if the system proves not to do the trick, we move to complete separation.
Therefore, we need two kinds of review. The first is a review of an individual institution behaving in a way that undermines the ring-fence, and the second is a review to consider whether the system itself does the trick. The government amendment accepts in principle the first kind of review, but it does not accept the second kind.
I ask my noble friend to give a firm assurance that, as part of the review, the Government will look at whether the system is working and, therefore, whether full separation will be moved to. With the best will in the world, I know that he will wish to make it work, that the PRA and FCA will wish to make it work, and so will Uncle Tom Cobley and all. But if it is not working, will the Government look at full separation? Unless that undertaking is given here, in this House, I will seek to take the opinion of the House on Amendments 5 and 6, which are linked. Amendment 6 derives from Amendment 5, as noble Lords will know.
Given that the Government have gone so far, which I welcome, I hope that they will be prepared to make this further step and give this clear undertaking to the House.
Lord Flight
My Lords, I have broadly been in support of a Glass-Steagall separation of investment and banking banks, but there seems to me something slightly wrong with the concept of having a review and prejudging the outcome of that review. Playing devil’s advocate, I make a point on the other side of the coin. Europe has had universal banking for a long time; that is the banking tradition in continental Europe and there is still a case for universal banking to continue, although it is right out of fashion now. I repeat my point that, to a fair extent, the profits of investment banking have subsidised ordinary banking and benefited ordinary retail customers; the losses have generally come from bad lending. So it is slightly premature to prejudge the review. I cannot see what is wrong with having a review with the understanding that the Government will act on the basis of the recommendation of that review at the time. We will have moved on from the present and other factors may have come to light as well. I do not see what is gained by prejudging the result of the review.
Lord Lawson of Blaby
“142VA Review of operation of legislation relating to ring-fencing
(1) The Treasury must, before the end of the initial period, appoint a panel of at least 5 persons (the review panel) to carry out a review of the operation of the legislation relating to ring-fencing.
(2) The legislation relating to ring-fencing means—
(a) Part 9B of FSMA 2000 (as inserted by section 4);(b) orders and regulations made by the Treasury under that Part;(c) ring-fencing rules, as defined by section 142H(3) of FSMA 2000, made by the FCA or the PRA;(d) section 192JA of FSMA 2000 (as inserted by section 116);(e) rules made by the FCA or the PRA under that section. (3) The initial period is the period of 4 years beginning with the first day on which section 142G of FSMA 2000 is fully in force.
(4) The members of the review panel must be persons—
(a) who appear to the Treasury to be independent of the PRA, the FCA, the Bank of England and the Treasury, and(b) who do not appear to the Treasury to have any financial or other interests that could reasonably be regarded as affecting their suitability to serve as members of the review panel.(5) In appointing the members of the review panel, the Treasury—
(a) must have regard to the need to ensure that the review panel (considered as a whole) has the necessary experience to undertake the review,(b) must ensure that at least one of the members is a person appearing to the Treasury to have substantial experience in central banking or banking regulation at a senior level, and(c) must obtain the consent of the chairman of the Economic Affairs Committee of the House of Lords and the chairman of the Treasury Committee of the House of Commons.(6) The Treasury must appoint one of the members of the review panel to be chair of the panel.
(7) The review panel must, within a reasonable time after the end of the initial period, make a written report to the Treasury—
(a) setting out the results of the review,(b) making such recommendations (if any) as the panel considers appropriate.(8) The report must in particular include—
(a) an assessment of the extent to which the operation of the legislation relating to ring-fencing is facilitating the advancement by the PRA of the objective in section 2B(3)(c) and by the FCA of the continuity objective, and(b) any recommendations which the panel considers appropriate for the making of further changes in the law with a view to better facilitating the advancement of those objectives; provided that such recommendations are consistent with the continued protection of core activities as defined in section 142B of FSMA 2000.(9) The Treasury must—
(a) lay a copy of the report before Parliament, and(b) publish the report in such manner as they think fit.(10) Any expenses reasonably incurred in the conduct of the review are to be paid by the Treasury out of money provided by Parliament.”
Lord Lawson of Blaby
My Lords, in the light of the clear and explicit assurance given by the Minister that the independent review will be able to recommend full separation, I will not move the amendment.
Lord Lawson of Blaby
Before my noble friend sits down, can he give an undertaking that he will produce the further amendments he proposes to introduce at Third Reading in good time so that we can thoroughly evaluate them and decide whether they go far enough in meeting the commission’s requirements? There has been a tendency recently—I know that a lot of work is involved—to produce complicated amendments at the last minute which do not give noble Lords time to assess them properly.
Lord Newby
I have a great deal of sympathy with what the noble Lord says, and I can give an assurance that we will bring the amendments forward at the earliest possible point. I cannot say what day that will be, and we may of course have different definitions of “giving short notice”, but we will do our best to give the noble Lord several days’ notice. We hope that, as we get towards Third Reading, the number of amendments we bring forward will be much lower than at the previous stage.
Lord Newby
My Lords, we now move to a group of government amendments which pertain to the scope of the offence relating to a decision that results in bank failure. This offence was introduced through amendments to the Bill in response to a recommendation by the PCBS. As tabled in advance of the debates in Committee, and building on the FiSMA definition of “bank”, the offence would have applied to retail banks and building societies. This meant that all deposit takers except credit unions were covered.
As discussed in earlier debates on the scope of the senior managers regime, the Committee debate on 15 October has prompted the Government to reconsider this position. In the light of the persuasive arguments put forward in that debate, we are amending these clauses so that the offence may be committed not only by senior managers of a bank, but by senior managers of relevant authorised persons. “Relevant authorised person” is defined by government Amendment 106 to include banks and those investment firms that are regulated by the PRA as well as the FCA. These are known as systemic investment firms, because their large size means they have a significant impact on the wider financial sector. Smaller investment firms will continue not to be covered by the offence. This is because, like credit unions, they do not represent a significant risk to taxpayer funds, or to financial stability, and their failure is very unlikely to lead to serious harm to customers.
The Government shared this definition with the members of the former PCBS and are hopeful that the scope now captures those firms that the PCBS had in mind. I hope that these amendments fully meet the House’s concerns on the matter.
The other amendments in this group make consequential amendments to Clauses 27 to 28 which are necessary to give effect to this change, and improve the drafting of the existing provisions. There was also some debate in Committee over whether the cross-heading as tabled properly represented the offence. In the light of this, I have asked the House printers to amend the heading so it now reads, “Offence relating to a decision causing a financial institution to fail”. I trust that this addresses the concerns raised. I beg to move.
Lord Lawson of Blaby
I make one point of clarification on what my noble friend said. I apologise for my cold. It is absolutely necessary that the definition of “bank” should be extended in the way that the noble Lord has said. I am very pleased with that. He gave us a reason that these investment banks, or these investment institutions, might be a potential liability for the taxpayer. I hope he will withdraw that. It is very important that there is no taxpayer liability there. The reason we wanted it expanded is that we were concerned about banking standards, which was what this commission was all about: banking standards and culture. That is why it is necessary that there should be this regime for these banks, not because there might be a taxpayer risk or bailout.
Tackling Corporate Tax Avoidance: EAC Report
Lord Lawson of Blaby Excerpts(11 years, 1 month ago)
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Lord Lawson of Blaby (Con)
My Lords, I start by thanking my noble friend Lord MacGregor for his outstanding chairmanship of the committee, and for introducing this debate today. He has been outstanding. He has been a friend of mine for a very long time, since before either of us entered the House of Commons, let alone this very illustrious House. Indeed, for part of my time as Chancellor he was my Chief Secretary to the Treasury, and I could not have had a better one. He has proved that he is a man of many talents, because he is as good a chairman of a Select Committee of your Lordships’ House as he was a Chief Secretary to the Treasury.
This report is called, Tackling Corporate Tax Avoidance in a Global Economy: Is a New Approach Needed?. Our answer was yes and the Government’s answer was no. That is a slight difference between us. My noble friend Lord MacGregor, who is a man of great understatement, said that in his judgment the Government’s response to our report was complacent and inadequate, as indeed it was, and in many ways it was also appallingly petty. I will refer to one or two things in a moment, but first let me reflect on why it was quite so bad.
One change that has occurred since my time has concerned me more and more. During my time there were two revenue departments—the Inland Revenue and Customs and Excise. The Inland Revenue was an absolutely first-class department, and it was a privilege to be the Minister responsible for it. Customs and Excise was very different; it was excellent on the drugs side. Its intelligence network, which is of the greatest importance in combating drug imports, and so on, was considerably superior to that of the police. It was also pretty good in its anti-smuggling responsibilities. Where it fell lamentably short of the standards set by the Inland Revenue was on the tax side. What happened is that subsequently, after my time, the two departments were merged and, instead of the standards of the better department being the standards of the whole, it has gone more the other way round. That happens very often with mergers of one kind or another, which look extremely rational but have that result.
Another thing that has greatly weakened tax policy in this country is that, again in my time, there was a very small tax policy division in the Treasury, but there was also a powerful tax policy division in the Inland Revenue. Since then, tax policy has been put entirely in the Treasury. There is now no tax policy division in the Inland Revenue, with the result that people on the policy side know nothing, or very little, or certainly very much less, about how the system works in reality. The knitting together of policy and administration is crucially important. So I am not surprised—although I do not think that it is the only reason—that the Government’s response to our report was so pathetically lamentable. I think that that has contributed to it.
Before I say anything more that my noble friend the Minister might find disagreeable, I will say one thing that pleased me about the Government’s response. Perhaps he would like to speak about it. One recommendation that we made was that the Government should look again at the different treatment of debt and equity capital in a company’s accounts. This completely different treatment, in which there is a tax allowance for interest on debt but no allowance of any kind for the dividends paid on equity, encourages the accumulation of debt. The noble Lord, Lord McFall, mentioned that he was a member of the Parliamentary Commission on Banking Standards, as was I. We made a recommendation on that, because it is real Alice in Wonderland; you have the regulator telling the banks that they must have less debt and more equity and the tax system saying that they must have more debt and less equity. That really cannot be very sensible. Even apart from banks, as the Mirrlees report pointed out, and as we point out in our report, there are very good reasons why this should to be looked at seriously.
I am glad of one good deed in a naughty world. The Government said in their response that they welcome,
“the Committee’s interest in this area. In response to the recommendation of the Parliamentary Commission on Banking Standards, the Government is reviewing the wider case for an allowance for corporate equity. The tax treatment of debt is one of the issues being explored by the OECD BEPS project”.
I am very glad to hear that, and I hope that my noble friend the Minister will tell us where they have got to on that, and what is their latest thinking.
For the most part, I am afraid that this is an extremely disappointing reply—and that is an understatement. I will give the House a flavour of the reply. On our main recommendation the Government say that they,
“do not consider that a fundamental review of the corporate tax system is necessary or would add value at this stage … and to change the rules unilaterally could undermine our attractiveness as a location. Changes on this scale could impose significant transitional costs on HMRC and businesses”.
There are a number of fallacies there. First, it is certainly desirable that we should have in this country as benign a tax regime as we can, consistent with finding the finance to pay for necessary public expenditure. But in my experience, what people look to when they are thinking about where to locate their investment and do business is, first, the size of the market, and how prosperous and good it is; whether the rule of law can be relied on; and whether the overall tax regime is attractive. The personal tax regime has, in my experience, more of an effect in many cases on how people see the jurisdiction than corporate tax or other forms of taxation. They also take into account the social legislation and whether there is too much regulation. All those things are taken into account. The idea that somehow, if we go it alone on corporation tax, we will no longer be attractive, is totally absurd.
We have to go it alone, because there has been a fundamental change in the world economy. Nothing in this world that I have ever come across is all good; there are always some disadvantages. Some of our witnesses tried to pretend that a lot of modern commerce has become dematerialised through the internet age. Nothing could be as material as a cup of coffee, yet Starbucks was among the most prominent of the early users of tax avoidance, which, I may say, is totally legal. That is the point: it is totally and completely legal. But globalisation has changed things—and, overwhelmingly, it has done good. If I had to choose the single best thing that has happened as a result of globalisation, it would be the success of so much of the developing world. The emerging world has really emerged successfully, which would not have been possible without globalisation or the freedom of trade and capital movements. Those private capital movements dwarf aid flows into complete insignificance, as well as being of rather better quality than aid flows. Globalisation has enabled China and a number of other countries, most but not all of them in Asia, to develop in the most wonderful way in the past 25 years. But nothing is without its drawbacks and disadvantages.
The Government have to face up to the fact that globalisation means that the corporation tax system is no longer fit for purpose, and will not and cannot be fit for purpose, because multinational companies will move profits legally to wherever the tax regime is lowest. A number of ill effects flow from this. One is that the Chancellor loses much needed revenue—and I feel for him, particularly when we have a deficit the size of the one we still have, although happily it has gone down a great deal. Loss of revenue is a serious business. A second flaw, defect or downside, as other noble Lords said, is that it brings the whole tax system into disrepute. That is not a good thing at all.
The third thing is that it is grossly inequitable. Although all those multinationals—I have nothing against multinationals—can shift their profits and intangible assets around the world in such a way that they pay little or, in some cases, no UK corporation tax, the backbone of this country is the small and medium-sized enterprises that are national companies, not multinationals. They still have to pay the full rigour of corporation tax. There is no level playing field. It is a totally inequitable system.
What are the Government doing? They are just prancing around and saying, “We are talking about it with our opposite numbers from other OECD countries and other European countries” and goodness knows what. They love going to conferences, and every so often they go to a conference and make a statement that they have reached a great understanding or agreement, but they have not. The system is just the same. The problem is just the same; it has not gone away. Then they say, “We will approach it this way, but we could not possibly take a lead”. God forbid that the United Kingdom should take a lead and introduce a sensible tax system of its own, which would probably comprise—although we do not lay down what it should be—a very low level of tax on corporate profits with a low level of corporate sales tax, because sales in this country are sales here that could be taxed here.
So what is the answer? We should take a lead, but instead, nothing happens. I have to say to the Government, “You’re not even getting nowhere fast; you’re getting nowhere slowly”. This simply will not do. They have to realise that corporation tax in the modern world has had its day as a major source of revenue. We have to find a new system. The modest proposal that we made, which was that there should be a review, is incontrovertible. I hope that my noble friend will sing a different song from the pathetic government response which this committee was accorded.
Financial Services (Banking Reform) Bill
Lord Lawson of Blaby Excerpts(11 years, 1 month ago)
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Lord Lawson of Blaby
“Meetings between regulators and bank auditors
(1) The FCA and the PRA must make arrangements to meet the auditors of each bank at least twice in each calendar year.
(2) The FCA and the PRA may conduct meetings under subsection (1) jointly or separately (but each bank’s auditors must be met separately).
(3) The purpose of each meeting is to discuss matters about which the FCA or the PRA believe that the auditors may have views or information.
(4) A bank has a duty to ensure that its auditors attend meetings in accordance with this section (and compliance with that duty may be considered for purposes of the exercise of functions under FSMA 2000).”
Lord Lawson of Blaby (Con)
My Lords, Amendment 92 is in my name and those of the noble Lords, Lord Turnbull and Lord McFall. Grouped with it is Amendment 104D, which I will also speak to, although it has to be said that these two amendments have nothing whatever to do with each other. I will speak first to one and then to the other.
If I may be forgiven, I will go back a little bit in time to when I was Chancellor in the 1980s. As a result of what came to light with the collapse of the Johnson Matthey bank, and the total failure of supervision exercised by the Bank of England, which at that time had that responsibility, I became concerned about the quality of banking supervision in this country. I therefore introduced what became the Banking Act 1987 in order to greatly enhance the quality of bank supervision and bank regulation in the United Kingdom. If I may say, it was not helpful that the Labour Government tore that system up in 1997, but that is another story.
The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, these two amendments concern the role of auditing in banks. Many excellent points have been made about the historical challenges and weaknesses and to some of the problems they have created. However, not all of these have specifically addressed the amendments themselves.
Amendment 92 seeks to strengthen quality engagement between auditors and supervisors. We agree we want to accomplish that and the noble Lord, Lord Eatwell, made the same point. The question is about the most effective way to ensure it is consistently brought about and the difference between us is about how we accomplish that. It may appear attractive to require greater engagement in statute as a guard against complacency in the future, but the clause risks weakening the auditor dialogue and perpetuating the tick-box approach that was found wanting in the last financial crisis. That was one of the most important lessons about regulation we learnt from that crisis. The FSA was widely criticised for measuring adherence to its rules—like how many times you met the auditor—but not coming to an informed judgment about the risks in individual companies and the wider market. That is where the focus of our regulation needs to be.
I may have been in the private sector too long, but solving a major problem by legislating for a number of meetings has never been the best way to get quality outcomes to serious problems. The FSA was criticised, beforehand, for not engaging enough with the auditors of the banks they supervised. The then statutory requirement for regulators to meet with auditors at least once per year simply became another process and the wider purpose of the meetings was not properly developed. The whole point of the Financial Services Act 2012 was to make sure such failing was addressed and that the regulators follow a judgment-led approach to supervision. This means that all enforcement activities must enhance the regulators’ understanding of the business and the wider market to better enable them to detect risks before problems become serious.
FSMA now includes a new Section 339A—which deals with the powers to which my noble friend referred—requiring the PRA to have arrangements for sharing information and opinions with auditors of PRA-authorised persons, and to publish a code of practice setting out the way in which it will comply with this obligation. This code of practice, which we have talked about, sets out the principles governing the relationship between the regulators and bank auditors. The code has been laid before Parliament, so provision has already been made, both in and under FSMA, for a regular dialogue between the regulator and the auditor. These requirements mark a change in focus away from process—stipulating the number of meetings—to actual outcomes: getting them to do the job properly. This requires regulators to consider serious engagement with auditors and subjects their stated approach to scrutiny so we can see if they are complying with the code of conduct: it does not just fall away. This process is not only more rigorous in the short term, but gives the opportunity for parliamentary scrutiny when the codes of practice are laid before Parliament and provides a check on potential complacency in the future.
My noble friend Lord Lawson referred to the need to make sure the dialogue was at least quarterly: the PRA code says that it should be. Most noble Lords will not be familiar with the details of the code of practice, but for the major firms—the ones that are perceived to represent the greatest risk to the stability of the financial system—at least three or four meetings per year are encouraged. This is a risk-based approach and the meetings are: at least one routine bilateral meeting between the lead audit partner and the supervisor; one routine trilateral meeting between the lead audit partner, supervisor and the chair of the firm’s audit committee; and one bilateral meeting between the lead audit partner and supervisor in the lead-up to and during the annual audit of accounts.
Conversely, the amendment’s legal requirement for more regulator meetings with auditors would just follow in the footsteps of the tick-box policy from before the crisis. I am really talking about the smaller, much lower-risk firms, where the guidance is, generally speaking, for at least one meeting a year. Having two meetings a year would simply increase the workload of regulators and take them away from exercising judgment and away from prioritising the most concerning engagements. They would simply be setting up meetings, irrespective of individual circumstances, just because they needed to fulfil a rigid requirement. In our view, such rigidity would weaken engagement and impair the regulators’ ability to adapt their approach as circumstances change.
Because of all that, the Government remain unconvinced of the need to define the frequency of this dialogue in statute, as the PRA code already specifies this and invites scrutiny. My noble friend Lady Noakes put it very well when she spoke about how the world has moved on and how this now operates.
In relation to the second amendment, the Government have been clear that the crisis highlighted deficiencies in accounting standards and the fact that there was room for improvement. We all agree with that, and that is what we said in our response to the final banking standards report. The regulators must have the information they need to do the job of safeguarding financial stability, and in some instances that may require disclosure of financial information on a basis different from that used by other audited bodies. In response to the noble Lord, Lord Hollick, the PRA will have access to management accounts, for example.
In response to the banking standards report, the Government asked the PRA, working with other authorities and the FPC, to undertake a broad-based review of this subject. That review will take account of the nature and scope of information required to create a separate set of accounts, the costs and benefits of the initiative, and international requirements. From 2014, the new Capital Requirements Directive IV will require banks to disclose supplementary information which goes beyond the international financial reporting standards. Therefore, it is not yet clear whether we need an additional, separate set of accounts in the light of the extensive prudential and other regulatory reporting requirements that are being imposed through the CRD IV framework.
However, I can assure noble Lords that, whatever the outcome of this review, the powers that have been given to the regulators under the Financial Services and Markets Act, as amended in 2012—this, again, goes back to my noble friend asking about the existing powers—are already sufficient to permit the regulators to do everything that this amendment gives them the power to do. Their current powers would permit the regulators to make rules requiring banks to prepare additional accounts, to the extent that this is permissible under EU law, to specify the principles that should govern the preparation of such information and to make it public. To the extent that the amendment merely gives the regulators the powers they already have and does not require anything else of them, it is unnecessary. I therefore ask the noble Lord to withdraw the amendment.
Lord Lawson of Blaby
My Lords, I have listened to what the Minister has said. On the second of his two points, I think that he is very close to the position that I and other noble Lords who have spoken are in concerning the IFRS accounts and their defects. He is very much closer than he is on the first one, and he is very close to what I was trying to say. He said that the Government are going to see whether they can get an improvement. He referred to CRD IV, which goes some of the way but is not entirely satisfactory. The only way that we will get accounts in a form that is satisfactory for the regulators and the supervisory requirements is if they ask for that. He is absolutely right that they can do that now. In practice, they could have done it before the 2008 crash, but they did not. That is the problem. Those of us who support the amendments are saying: once bitten, twice shy. It could have been done before; it can be done now. But it was not done before. Therefore there should be a statutory duty, which would make it more likely that it will be done. How can that be objectionable?
On the first issue the principle is the same: once bitten, twice shy. The idea that this is simply a bit of box-ticking is an insult to the intelligence of this House. As we say in the amendment, the meetings should take place more than once a year—and they will be nothing to do with box-ticking. They will be meetings of the kind that the supervisor and the regulator find most useful. Those people will use their discretion; there is no box to be ticked at all. That idea is—if I may say so, with great respect to my noble friend the Minister—a total absurdity.
It is perfectly true that under the code of practice and so on, such meetings could take place anyway. But that was also the case before: not only could such meetings have taken place, but the Banking Act 1987, which was then in force—that part was not repealed— encouraged them to do so. However, although meetings did take place to begin with, towards the end they did not happen. That is why it makes sense to make it a statutory duty for those meetings to happen. They will not take the form of box-ticking; they will take the form that the regulators and the supervisors find most useful. We leave that to their discretion, but we do not wish to leave to their discretion—this is, in effect, the Government’s position—whether the meetings take place at all. We may wish to discuss this further, but for the present I beg leave to withdraw the amendment.
Lord Lawson of Blaby
“Leverage ratio
(1) The Treasury must make an order under section 9L of the Bank of England Act 1998 (macro-prudential measures) enabling the Financial Policy Committee to give a direction under section 9H in respect of a leverage ratio for banks.
(2) The direction above may specify the leverage ratio to be used.
(3) For the purposes of this section “leverage ratio” has the meaning which the Financial Policy Committee considers that it has in European Union law or procedure from time to time.
(4) The order under subsection (1) must be made within the period of 6 months beginning with the date on which this Act receives Royal Assent.”
Lord Lawson of Blaby
My Lords, the amendment concerns an issue of critical importance. As was said in the previous debate, the regulatory and supervisory system clearly failed badly. The regulators were not primarily responsible; the bankers were primarily responsible—but the regulatory and supervisory system performed badly, as did the auditors. We are all of us seeking to prevent that sort of problem from occurring again, and part of that endeavour is to have a supervisory regime that requires the banks to be more prudent than they were in the years leading up to the disaster of 2008.
This subject was considered by the Independent Commission on Banking—the Vickers commission—and one of its conclusions was that basing the regulatory requirement on what are known as risk-weighted assets was unsatisfactory. That is, incidentally, also the considered view of the Bank of England and the PRA. One of the reasons why that is unsatisfactory is that the amount of risk with which one weights particular assets is to a large extent subjective. It is done by the banks, using their own models. The Basel people set a test for a whole lot of different banks. They gave them all the same portfolio of assets and asked the banks to risk-weight them. The difference between the risk weighting of the overall package in one bank was getting on for three times that of another. Indeed, for particular classes of assets, the difference between the risk weighting of the banks was eight times. To a large extent, the banks were able to use whatever risk weighting they chose.
Lord Blackwell
My Lords, from the discussion, I am once again not clear on whether this needs to be built into the legislation in the way that is being suggested. As the noble Lord, Lord Turnbull, has said, I do not think that anyone would now dispute that it is a useful backstop to have a leverage ratio alongside the risk-weighted assets calculation of capital. However, that is built into CRD 4, and the PRA and FPC have recently demonstrated that they are perfectly capable of anticipating that in terms of the capital guidance that they give to institutions on the capital that they are required to hold.
There is an argument about whether 3% is the right level or not. I can assure my noble friend Lord Lawson that in the UK at least, whatever banks may have done in the past, they would not get away with applying whatever risk weighting they chose to devise against their own risk assets. All the risk weightings applied in the risk-weighting process are reviewed intensely by the PRA. It has to approve the internal model in order for it to be used to assess your own risk capital, and that process is now extremely well scrutinised by the regulator.
Nevertheless, there is a good argument that, because the process is bound to be imprecise, having a backstop of an overall leverage ratio makes sense. I think that is generally agreed. However, if you make that leverage ratio too restrictive, you may distort behaviour in a way that you do not desire by encouraging banks and other financial institutions to put too many of their assets into risky assets. If you have only a leverage ratio that does not discriminate by risk, and you are allowed only to hold that amount of assets, then you will stop risk weighting them and simply go for the riskiest assets you can get within that overall leverage ratio. The two have to work together. We should be careful about believing that having too hard a biting overall leverage ratio will reduce banks’ risks as it may work in the other direction.
Lord Lawson of Blaby
The issue here is not whether you should have a leverage ratio; it is not whether it should be statutory or not. The issue is who should determine it: the Chancellor of the Exchequer or the Financial Policy Committee of the Bank of England. That is the issue. Although I speak as a former Chancellor of the Exchequer, I still think it would be better left to the FPC. That is the issue; not whether it should be statutory or whether it should be alone without any consideration of risk-weighted assets. The issue is simply who should determine it.
Lord Blackwell
I thank my noble friend for that clarification, but I was responding to the points that were made by him and other noble Lords in advancing their arguments. If you come down to the question of “Does the PRA need more powers in order to enforce a higher or more restrictive leverage ratio?” then it can, under its existing powers, require capital add-ons to banks if it is not satisfied with the risk weightings. That is the way it would deal with it. It seems a slightly tangential point as to whether it is setting the overall leverage ratio or whether it is setting the capital ratio by other means. I should like to hear the Minister’s response on whether he thinks there is a case for this being built into the legislation.
Lord Deighton
I apologise to the noble Lord. I was so excited about the first question that I forgot about the second one. It is consistent with what I have already said that the FPC intends to address this recommendation in that timescale, but a full assessment will depend on the definition of leverage agreed internationally, so it all rather depends. In terms of who is going to implement it, as I said, the regulators already have the power to do so. In June this year, they changed the ratios on our key eight institutions to protect them in the mean time, so they have these powers and they have exercised them. I think that is a killer fact.
Lord Lawson of Blaby
My Lords, in some ways this has been a rather puzzling debate. I warmly endorse what the noble Lord, Lord Eatwell, said. This is one of the most important—if not the most important—issue that we have to discuss in the course of this extremely long Bill. For that reason alone, I think it likely that we will wish to come back to it at Report. Meanwhile, I am encouraged to some extent by what my noble friend the Minister said. However, he seemed to be saying at least two completely different things, if not three. One was that we would have to have the leverage ratio—we are all in agreement that we have to have a leverage ratio—that was internationally agreed. Then he said that we would also have discretion, with the FPC, to decide the leverage ratio, and therefore that there was no need for the amendment because the provision was already there.
First, I am not convinced that it is already there. I shall read very carefully what the Minister said. When my right honourable friend the Chancellor responded to the recommendation of the Parliamentary Commission on Banking Standards, he said nothing of the sort. Nor did he say whether he disagreed with it. He said the first part of what my noble friend said: namely, that we have to accept the international standard.
There are only two major global financial centres: New York and London. It is important that we do what is right for our financial centre—and the United States takes the same view. We should not rely on international agreements. Too often it is the lowest common dominator that is agreed. The United States is going its own way, particularly with large banks. It realises that it is a major global financial centre and that New York is so important to the American economy that they have to get it right.
In the United Kingdom, the banking and financial sector is even more important to the British economy. In relative terms, it is five times as important to our economy as the American banking and financial sector is to theirs. Therefore, it is all the more important, if we are to have a strong and successful financial centre and a strong and successful economy in this country, to do what is right.
It is quite clear that that means that we should have a leverage ratio that may be the same as what is agreed internationally—if it is agreed internationally—but may well be a more prudent one. It certainly would not be a less prudent one, but it may be in the interests of the City of London and the British economy that it should be more prudent.
The amendment states that the decision should be taken by the Financial Policy Committee of the Bank of England. In a sense, my noble friend agreed with that when he said that the duty was already there and that we had given it to the committee. If that is so, it is good news. However, I suspect that it is not entirely the case. Therefore, it is very likely—in fact, more than likely—that we will come back to this very important issue on Report. In the mean time, I beg leave to withdraw the amendment.
Lord Lawson of Blaby
“Proprietary trading
(1) The PRA and the FCA must carry out a review of proprietary trading by banks.
(2) The review must be completed before the end of the period of 3 years beginning with the day on which this Act is passed.
(3) The PRA and the FCA must give the Treasury a report of the review.
(4) The report must include—
(a) an analysis of any action taken by the PRA and the FCA to monitor whether and to what extent banks engage in proprietary trading and any action taken by the PRA or the FCA to discourage banks from doing so;(b) an account of any difficulties encountered by the PRA or the FCA in taking that action and an assessment of its efficacy;(c) an account of any requirement imposed on banks which the PRA or the FCA consider may be engaging in proprietary trading to publish a statement of the banks’ exposure to risk in their trading operations and of the controls applied to limit that risk;(d) an assessment of the impact of the ring-fencing rules on proprietary trading by banks;(e) an assessment, drawing on experience in countries other than the United Kingdom, of the feasibility of prohibiting banks from engaging in proprietary trading or limiting the extent to which, or circumstances in which, they may do so (having regard, in particular, to any difficulties of definition); and(f) a comprehensive analysis of the advantages and disadvantages of prohibiting banks from engaging in proprietary trading or limiting the extent to which, or circumstances in which, they may do so.(5) The Treasury must lay a copy of the report before Parliament.
(6) The PRA and the FCA must publish the report in such manner as they think fit.
(7) The Treasury must, following receipt of the report, make arrangements for the carrying out of an independent review to consider the case for the taking of action in relation to proprietary trading by banks.
(8) The appointment by the Treasury of persons to carry out the review requires the consent of the Treasury Committee of the House of Commons.
(9) The reference in subsection (8) to the Treasury Committee of the House of Commons—
(a) if the name of that Committee is changed, is to be treated as a reference to that Committee by its new name, and(b) if the functions of that Committee (or substantially corresponding functions) become functions of a different Committee of the House of Commons, is to be treated as a reference to the Committee by which the functions are exercisable; and any question arising under paragraph (a) or (b) is to be determined by the Speaker of the House of Commons. (10) The persons appointed to carry out the review must give the Treasury a report of the review once it has been concluded.
(11) The Treasury must lay a copy of the report before Parliament and publish it in such manner as it thinks fit.
(12) In this section—
(a) “proprietary trading”, in relation to a bank, means trading with funds on markets on the bank’s own account (whether or not in connection with business with the bank’s customers),(b) “ring-fencing rules” has the meaning given by section 417 of FSMA 2000.”
Lord Lawson of Blaby
My Lords, this amendment is in my name and those of the noble Lords, Lord Turnbull and Lord McFall. It concerns proprietary trading, which gave the banking commission so much concern that we produced a report entirely devoted to the subject.
Proprietary trading is speculative activity conducted by an institution entirely for its own benefit, where no clients are involved at all. It uses its own financial resources to conduct the speculative activity, which can be very profitable. I have no argument with it taking place, but I have always believed that it is the sort of thing that hedge funds should be doing—and good luck to them. It is not something that banks should be doing.
There are two main reasons for this. One is that it can be exceedingly risky—and we know that there is enough risk in the system without that. Since the activity can be perfectly well done—and in a free market, should be done—by other institutions, namely the hedge funds, that is fine.
The other reason that it is dangerous for banks to do this is the issue of culture. When the Parliamentary Commission on Banking Standards was set up, one thing that we were charged to do was to look at the issue of banking culture, because it was clear that it had gone radically wrong. Two aspects of banking culture in particular are relevant here. One is prudence. It always used to be the case—and it should now be the case—that this is an essential part of the culture of any bank. People put their deposits in banks thinking that it is a safe thing to do because bankers are prudent. The other aspect of the culture is service to clients. Of course, with proprietary trading, by definition there is no client; there is no service to clients at all. It is pure speculation on the financial markets, and on the bank’s own books, without any clients being involved.
That is why my old friend Paul Volcker—whom I have known for many years; he was chairman of the Fed when I first became Chancellor, and I had a lot to do with him—lobbied the American Government to introduce what was called the Volcker rule, which forbids American banks from conducting proprietary trading. He did this for the same reasons that I outlined. However, we did not go that far.
Incidentally, it is interesting that proprietary trading was rife in British banking before the crash. As much as 30% of the business of some banks was proprietary trading. Now it has almost completely disappeared, in the aftermath of the crash. The banks are saying, “Why are you bothered about proprietary trading? We don't do it any more”. That is true—they do not. But they will. They will come back, as they did before. When they feel that they have got over the aftermath of the disaster, and the blood is coursing rather faster through their veins, they will take these risks and do it all over again.
What we have said is that this is a serious issue that needs to be addressed, and that in three years’ time there should be a serious review of this, which will take into account what is happening in the banking world and will see how the Americans have got on with banning proprietary trading for banks. I am not totally optimistic, because the Americans have a crazy legislative system in which, once a piece of legislation has been introduced, the legislators festoon it like a Christmas tree with all sorts of baubles of this, that and the other. The simple rule that Paul Volcker wanted has been encrusted with page after page of appalling legislation, which he regrets; he makes no bones about that. I am quite sure that we in this country, with our much superior system of government, would not do that.
Nevertheless, we will be able to learn something from the experience of the United States. We will learn from the experience of what happens over the next three years, and I strongly hope—again, I cannot see any objection—that the Government will accept the amendment, which calls for a review to be held in three years’ time, and, in the light of that, for the Government to decide whether we should have a Volcker rule in this country and whether we should ban banks, although certainly not hedge funds, from engaging in proprietary trading.
Lord Deighton
I was trying to be clear but I shall reinforce my comments. I think this issue was covered on the first day in Committee when we dealt with the details of ring-fencing. It is clear that proprietary trading for ring-fenced banks is not allowed; it is an excluded activity, as defined. As my noble friend implies, there are some exceptions to that which are predominantly related to a bank’s own hedging activities to deal with its own surplus liquidity. My noble friend’s phrasing was accurate and the issue is included in the Bill.
Lord Lawson of Blaby
My Lords, I think that there has been a slight misunderstanding. My noble friend the Minister said that we have gone down the ring-fencing route instead. That is a different matter altogether. The idea of ring-fencing is to put a sharp barrier between the commercial banking operations of a universal bank—the lending to individuals and to small businesses and, indeed, medium-sized businesses—and the investment banking activities. There should be a line between them. There is also the great question, which we debated earlier, as to whether there should be a total separation. This is about whether a universal bank—I agree with my noble friend that it would not be done in the ring-fenced part—should be permitted to engage in proprietary trading at all.
It is all very well to say that there may be cultural contamination as a result of proprietary trading but that, as there are other forms of cultural contamination as well, we should not bother about this one. I do not buy that. If we can significantly reduce the amount of cultural contamination by making proprietary trading by banks illegal, that is a plus. There may still be other problems with the banking culture, but at least we would have solved an important part of it.
My noble friend the Minister also seemed to say that there was no need to review this issue. There is a need to review it for the very reason that the noble Lord, Lord Turnbull, pointed out. The overwhelming weight of evidence received by the commission in conducting its inquiry was that it would be a very good idea for banks not to engage in proprietary trading for some of the reasons that I and other noble Lords have given in this short debate. However, as the noble Lord, Lord Turnbull, identified, the problem was how precisely you define proprietary trading and distinguish between it and market-making and some of the other activities referred to.
I have known Paul Volcker for 30 years. He is a very wise old bird. I am not suggesting that my noble friend the Minister is not wise, but of all the people I have known in the financial sector Paul Volcker is among the wisest, if not the wisest. If he thinks that this measure is desirable and workable, that carries a great deal of weight with me. He said that if a chief executive of a bank did not know whether or not he was engaging in proprietary trading he ought to be fired. At one level that is a perfectly good answer. Nevertheless, there is a complicated issue of definition. That is why we have said that we should see how things develop over the next three years and see whether there is a workable system in the United States or whether those who say that it is completely impossible to have a satisfactory definition because it will not work are right. We will find that out and then we will take action accordingly.
It is nice to hear mention of the notion that the PRA can bear down on proprietary trading as it implies an acceptance that there is, or could be, a problem. However, that is not the same thing as saying very clearly that no bank should be doing this, even if it is not a ring-fenced bank. At present, the Bill does not go far enough in that regard. This is something to which we will almost certainly wish to return on Report. I beg leave to withdraw the amendment.
Lord Lawson of Blaby
My Lords, I strongly support the amendment moved by the noble Lord, Lord Turnbull. I know that my noble friend Lord Higgins wants to give us the benefit of his wisdom, but perhaps I may intervene now because I would like to explain to the noble Viscount, Lord Trenchard, why he has got completely the wrong end of the stick in terms of what this amendment is about. I must say that I was puzzled when he said that one of the reasons we got into difficulties with banking was because of interference with bankers’ remuneration. There has been no interference with bankers’ remuneration at all. It is true that there is a proposal from the European Union to cap bonuses, but that is not something we have in this country and the commission was explicit in saying that we do not want to see it. This amendment has nothing to do with that.
This amendment is about the structure of remuneration, not the quantum. We are not making a statement about the quantum, but about the structure. I shall explain why that is so. I am sure that the right reverend Prelate the Bishop of Birmingham will accept that nothing in this world is without flaws. I yield to no one in my conviction that, for all its flaws, the market system is the best system for conducting an economy and securing economic prosperity for the benefit of the people of a country. One of the essential elements of the market system, without which it cannot work, is the fear of failure. However innovative, adventurous and enterprising industrialists may be, they always know that if they get it wrong, they will fail. The fear of failure is vital because it is an essential market discipline. The problem in banking is that when you have banks that are too big to fail, that fundamental discipline does not work. That is the difficulty. If it is the case, as it was in the management of the banks up to the crisis, of “Let’s gamble, because heads I win, and tails the taxpayer loses”, you are encouraging gambling. You are bound to see more recklessness, which is exactly the reverse of what banks should be doing.
The noble Viscount referred to the good old days of the merchant banks. I knew them very well. While I did not have the privilege of working in a merchant bank, for a time I wrote the Lex column in the Financial Times, so I got to know them. One of the reasons for their great success was that although they were extremely innovative and they were staffed by very clever people, on the whole they were partnerships, and the partners had their own fortunes at stake. That was the vitally important discipline, but that is not the case with the banks. Incidentally, however, it is the case for hedge funds. I can recall, as will many noble Lords, that some years back there were a few people who thought there were dangers in the City and that some things might go wrong. What did they point to? They pointed to the so-called shadow banking system—the hedge funds. They thought that the big banks were fine, but that those dodgy hedge funds might cause problems. In fact, there were very few problems with them. Why was that? First, the hedge funds knew that they were not too big to fail. They knew that they would not be bailed out by the taxpayer. Secondly, on the whole, the proprietors’ own money was invested in the hedge fund.
This remuneration code set out in the amendment is not the whole solution to this problem. We have to make it possible for banks to fail, and that is part of what the Government have been doing with the resolution procedures and the bail-ins; we have read page after page on that. We have to enable banks to fail because that is the only way we will get the right kind of system; not that we want them to fail, but it has to be possible for them to do so. But unfortunately, at the present time, I do not think that they will be allowed to fail. They believe that they will always be bailed out by the taxpayer, so we have to buttress this in another way.
One of the most important aims of the amendment is to replicate after a fashion the discipline of the partnership. It provides that the PRA will be able to insist that bonuses—saying nothing about how much they are—would have to be deferred for a number of years in order to ensure that top management is more careful. It will know that it cannot grab the all bonus money in one year in the knowledge that the institution will be bailed out later on. Management will have to think a bit longer term. In a sense, it is like top managers’ own capital being invested in the company because their bonuses will be deferred for a number of years. The amendment provides a remuneration code to act as a sort of buttress. On its own it will not do much, but it could serve as an important buttress to other measures that the Government are introducing—there are a few more that I would like to see introduced. That will give us a banking system which is not a casino.
Viscount Trenchard
My Lords, I have listened carefully to my noble friend Lord Lawson and I apologise if, as he said, I got the wrong end of the stick. I would like to make just two points. With regard to my noble friend’s assertion that there has been no interference in variable remuneration by the state until now, unfortunately I believe that that is not correct. I have served on the executive committee of a bank since 2009 and the regulator has definitely interfered with the variable remuneration in terms of its ratio to fixed remuneration. Over the past three years, that has led the firm to increase fixed salaries considerably, and that has been going on in many banks all over the City. I am just saying that that has already happened and that the attempt to apply restrictions on the proportion of variable to fixed remuneration has led to inflation in fixed salaries.
The second point is that Kleinwort Benson was a listed company when I joined it and that the other merchant banks were mostly companies by that stage. I agree entirely with my noble friend that the partnership ethos was still there, but the listed nature of the businesses enabled even relatively junior people to be awarded modest amounts of shares as part of their variable remuneration from an early stage.
Financial Services (Banking Reform) Bill
Lord Lawson of Blaby Excerpts(11 years, 1 month ago)
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Lord Newby (LD)
My Lords, the amendment would introduce a system under which the regulators would be able to award compensation against a firm that mistreated a whistleblower. Whistleblowing is an important issue and the Government agree that we need to have a proper system for protecting whistleblowers in the financial services industry as elsewhere. However, I do not think that the noble Lord’s amendment would be a helpful addition to the legislative framework, particularly at this point. Let me explain why.
In the summer, the Government launched a call for evidence on the whistleblowing framework to see whether there was a case for reforming the law protecting whistleblowers. This will be able to take account of submissions from the financial services regulators as well as from other interested parties. The call for evidence closes on 1 November and, once the evidence has been assessed, the Government will consider what if any action needs to be taken. It would not be sensible to prejudge the outcome of the call for evidence and implement changes without first looking at all the evidence available to support any changes. Moreover, the Government do not think that it would be appropriate to have different laws or protections for whistleblowers in different sectors. It would not be right to suggest that whistleblowers were more deserving of protection in some sectors than in others. I am sure that this is not what the noble Lord intended, but there is a risk that giving the regulators a special role in protecting whistleblowers in the financial services sector will be seen as special treatment for that sector.
Finally, this power does not seem consistent with the role and competence of the financial services regulators. There is a comprehensive system of protection for employees in employment law, which applies across the board, protecting workers in every sector. It provides a route of redress using employment tribunals for individuals who have suffered a detriment or dismissal as a result of blowing the whistle.
Lord Lawson of Blaby (Con)
I think my noble friend may have slightly missed the point. It is well documented that what happens normally is not that the whistleblower is dismissed—then, of course, there is the protection of employment law—but that he is stuck in that job and will never ever have any further promotion. I may be wrong, but I do not think there is any redress under employment law for that.
Lord Newby
My Lords, to the extent that there is or is not redress for that, the review which is under way will be looking at that element of the system as well as everything else. The evidence submitted, including by those who are keen to see the law changed and strengthened in that respect, will be able to take account of all that.
Lord Lawson of Blaby
“Abolition of UKFI
(1) All property, rights and liabilities of UKFI are, by virtue of this section, transferred to the Treasury.
(2) Immediately after the transfer effected by subsection (1) UKFI is dissolved.
(3) “UKFI” means UK Financial Investments Limited, company registered number 06720891.”
Lord Lawson of Blaby
My Lords, the noble Lords, Lord Turnbull and Lord McFall, also have their names to this amendment. It is the simplest amendment that we have before us. It may be because it is so simple that it was the first one that my right honourable friend the Chancellor rejected after the commission had published its recommendations. I think that he was hasty and I therefore hope that the Government will reconsider this.
Briefly, as a result of the crisis that broke in 2008, the Government felt obliged to rescue a number of our biggest banks. The Government took control of these banks to the extent of more than 80% in the Royal Bank of Scotland, which was their biggest stake. This was the previous, Labour Government, and instead of straightforwardly taking this stake which the taxpayer owned—and the Government is a trustee for the taxpayer—they interposed this curious body called UK Financial Investments Ltd. We all know why this was done; I fully understand it and am extremely sympathetic. There is always a fear that a Labour Government might be engaged in a policy of bank nationalisation. In order to demonstrate that this was just a rescue operation and not bank nationalisation, they created this body, UKFI, to stand between the Government and the bank itself.
Clearly, that no longer applies. There is no longer a thought that somehow this is nationalisation by the back door. Whatever else the coalition may be guilty of, it is not seeking to do that. So the whole rationale—the whole raison d’être—of UKFI has gone. Incidentally, not only was it a conclusion of the commission that UKFI should be abolished but it was also the strong view of the previous Governor of the Bank of England, now the noble Lord, Lord King. He made it absolutely plain.
The reason is clear. UKFI gets the Government off the hook in a way that they should not be off the hook and obscures what can really go on. What has happened in practice is that when the Government have had difficult decisions to take, they say, “Oh, we can’t do it. UKFI owns the controlling stake”. When, however, the Government want to intervene—for example, the removal of Stephen Hester from the job of chief executive of RBS—they use their muscle. When it is convenient to act directly, they do; when it is not convenient, they have this charade of UKFI to give them an excuse for not doing what needs to be done.
If, as a Government, you have the responsibility of the controlling shareholding, that should be quite clear and you should exercise that responsibility properly and be held to account for it. The Government say, “But we don’t have banking expertise”. Of course they do not have banking expertise. It does not matter because they can appoint the right people to the boards of the banks that they hold and, as we have suggested, they can also have a cadre of banking experts within the Treasury who can advise them on how to handle the situation.
Like the previous Governor of the Bank of England, we have said that quite simply UKFI should be abolished. I suspect that many people secretly—or at least without admitting it—realise that that should have been done long ago, but it is not too late. The case of the Royal Bank of Scotland is particularly to the point. If UKFI had not existed, the Government would have had to face up earlier to the question of what to do about the Royal Bank of Scotland Group. The commission has said that there is a very strong case, which we have advocated, for the classic good bank/bad bank split. The good bank/bad bank split is a classic technique for dealing with major banking problems: put all the bad loans into the bad bank, as was done with Northern Rock, and not only can the good bank be privatised much more quickly than the group as a whole, it can get back to lending to SMEs much more effectively.
One of the biggest economic problems we have is the difficulty of lending to SMEs. Some people say, “Money is very cheap. The rates could not go any lower: they are 0.5%”. They are not 0.5% for SMEs. A good SME is lucky if the rate of interest, including the charges it has to pay, is in single figures. Very often it is 10%, 11% or 12%. There is a real problem in this country that the banks have so much bad debt on their books, and are so scared of having any further bad debts—particularly since they have been told they have to strengthen their balance sheets and so on—that they are far too reluctant to lend. This is a real problem for the British economy.
I am very glad that my right honourable friend the Chancellor has said that he will set up an inquiry and that he has asked the Rothschild Group to look into this, given that that was the recommendation of the banking commission. I hope that this evening my noble friend the Minister can tell us the outcome of the Rothschild investigation and what the Government’s intentions are. This is important to the British economy, bearing in mind the huge size of the Royal Bank of Scotland Group.
As we have recommended, the way to clean this up is to abolish UKFI, which was there for a purpose that no longer exists. I very much hope that the Government will reconsider the Chancellor of the Exchequer’s overly hasty rejection of the modest and sensible recommendation of the commission. I beg to move.
The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, the intention of the amendment is to transfer into HM Treasury the function of managing the Government’s shareholdings, in particular in RBS and Lloyds. As my noble friend Lord Lawson has pointed out, the Chancellor of the Exchequer, in his Mansion House speech in June, has already made it clear that he rejects this particular PCBS recommendation.
As has been pointed out in a number comments already, UKFI was not a creature set up by this Government; it was set up by the previous Government when they made the initial capital injections into RBS, Lloyds, Northern Rock and Bradford and Bingley, with the idea of being able to manage these investments on an arm’s-length commercial basis. So that was the genesis.
This group works closely with the management of RBS and Lloyds to assure itself of their approach to the strategy and to hold management to account for their performance. RBS and Lloyds are led by their management and board in the interests of all shareholders, including the taxpayer. So, while it may be possible to imagine different arrangements to fulfil these objectives—you can make the arguments and the pros and cons of the different ways of doing it—the current ones work well, as my noble friend Lord Garel-Jones has said, and it would not make sense to change them at this stage. So, just as my noble friend Lord Lawson said it is a simple amendment, there is a simple reason to reject it—it does not make any practical sense. UKFI is working fine and the time and effort it would take to pull it back into the Treasury and to reorient all that work there would distract our efforts on the important work that is currently going on.
My noble friend Lord Lawson referred to the review at RBS in particular, which we are two-thirds of the way through, and the bad bank/good bank option. I am afraid I am going to disappoint my noble friend. I am not going to tell him what the result is but it will be ready this autumn and we will announce the outcome and the rationale behind it. The matter is being pursued with great urgency and the last thing we want to do at the moment is to destabilise the arrangements for conducting that important analysis, which is really the most important thing.
I reiterate that UKFI is staffed by some very good top people. I have worked with them and I have seen the work that they do. Frankly, we have been able to recruit top-class people to do this work on our behalf. I can assure the Committee that the Government continue to value the role that they play. It was demonstrated again, as my noble friend pointed out, by the role they played in advising the Chancellor on the successful divestment of 15.5% of the Government’s shareholding in Lloyds at 75p per share. They will carry on looking at the full range of options for RBS and managing the timing of the subsequent tranches of the sale of Lloyds back into private ownership.
I am grateful to the PCBS and the noble Lord for raising these issues, but the Government consider that UKFI has a vital role to play which it is performing well. I therefore cannot support the amendment and I urge the noble Lord to withdraw it.
Lord Lawson of Blaby
My noble friend will not be surprised to hear that I am wholly unconvinced by his reply; nevertheless I shall please him by withdrawing the amendment.
Financial Services (Banking Reform) Bill
Lord Lawson of Blaby Excerpts(11 years, 2 months ago)
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Lord Newby
My Lords, as noble Lords have said, the governance of the Bank of England was debated at great length just a year ago during the passage of the Financial Services Act. As a result of those debates, the Government accepted that the additional responsibilities for financial stability transferred to the Bank would put strain on its governance structures, and as a result we provided for a powerful new oversight committee, which has been established as a sub-committee of the Bank’s court.
These changes were introduced as recently as April this year and should be allowed time to develop. Making further changes now would serve only to introduce uncertainty into the Bank’s governance at a time of significant change in its senior management. It would also prevent the new system having time to prove itself. Moreover, it is the Government’s view that the amendments would weaken rather than strengthen the Bank’s governance structures.
I shall deal with the amendments in turn. Amendment 83 proposes that the name of the governing body should change from the court to the board of directors. Our view is simple: changing the name of the court would make no difference to how it operates in practice. Indeed, in substance the court now operates along the same lines as a modern plc board. It has a clear division between the role of the chief executive and non-executive chair; it is made up of a majority of independent non-executive directors; and there are formal, transparent appointment procedures for executive and non-executive directors alike.
Amendment 84 proposes that the number of non-executive directors should be reduced from nine to four and would require the appointment of a non-executive chairman. The reduction in the number of non-executive directors would drastically alter the balance of membership of the Bank’s governing body, resulting in an equal number of executive and non-executive members. It is our view that this would significantly reduce the level of independent advice and challenge available to the governors and increase the risk of decision-making becoming dominated by a small group. The court already has a non-executive chair, so we believe this proposal is unnecessary.
Amendments 85 and 86 propose abolishing the new oversight committee and rolling its powers into the proposed new board of directors. This would be a backward step for the accountability of the Bank. The oversight committee, which is made up exclusively of non-executives, was established to provide stronger challenge to the Bank’s executive. It has a clear remit to monitor the Bank’s performance against its objectives and strategy, including the Bank’s monetary and financial policy objectives. In order to deliver these responsibilities, the committee has the power to appoint any person to review any matter. These powers cover not only the Bank’s operational performance but also its policy decisions. These responsibilities are very important to the accountability of the Bank, and the Government believe they must continue to be carried out by a non-executive body independent from the policy-making process. These amendments would transfer the powers of the oversight committee to a board of directors whose membership included the governor and three deputy governors of the Bank. It cannot be right for the governors to have a role in scrutinising the policy processes that they themselves are responsible for administering, especially when the processes in question are of such vital national importance.
These amendments also seek to introduce more specific legislation to govern how the performance of the Bank’s policy functions are monitored. This is unnecessary. The oversight committee already has wide-ranging powers to review the Bank’s performance in relation to any matter, including specific provision to review the procedures of the MPC and Financial Policy Committee. The Government also believe that it is unnecessary to introduce legislation covering requests for information. The current arrangements are effective, and historically the Bank has been very co-operative with both the Treasury and Parliament. Moreover, Parliament already has wide-ranging powers to hold public authorities to account, including the power to call any witnesses to appear in front of any of its committees, as the governors of the Bank of England know only too well.
Amendment 87 would require the Chancellor to appoint an additional external member to the FPC with experience of financial crises. The FPC’s objectives—
Lord Newby
I believe it is in this group. I hope that noble Lords will not mind if I deal very briefly with it, and we will come back to it if that is the wish of the House. Amendment 87 would require the Chancellor to appoint an additional external member with experience of financial crises. The FPC’s objectives are to exercise its functions with a view to contributing to the achievement of the Bank of England’s financial stability objective and, subject to that, support the economic policy of Her Majesty’s Government, including their objectives for growth and employment. The Government agree with the commission on the importance of ensuring that the FPC has the necessary expertise and experience to understand and draw lessons from history. The current membership of the FPC equips it to do so. In the Government’s response to the PCBS we will take this into account, alongside other relevant factors, when making future appointments to the FPC. However, I do not think it is either necessary or desirable to include a provision of this nature in legislation. It risks constraining the Government’s flexibility, as the noble Baroness, Lady Noakes said, to appoint the best candidates by placing particular emphasis on only one of a number of criteria relevant to the appointment process.
I am also not persuaded that the balance of the FPC should be changed by the addition of a fifth external member. The current composition strikes the right balance between ensuring that there is sufficient input from the Bank, as executive, and internal Bank of England expertise, while supporting the role of the external non-executives in providing a challenge to members’ thinking. Furthermore, the oversight committee, a sub-committee of the Court of Directors consisting of the non-executive directors of the Bank, is able to undertake or commission reviews of the FPC’s performance, ensuring that it is held to account for its decisions. The oversight committee also monitors the processes of the FPC to ensure that all members have the required information and to tackle any emergence of groupthink. In view of these arguments, I hope the noble Lord will withdraw his amendment.
Lord Lawson of Blaby
My Lords, my noble friend the Minister has just pathetically addressed Amendment 87. None of his arguments stack up. We are saying here that it would be desirable—I cannot understand why the Government are opposing this—that there should be an additional external member who would have great knowledge and he might even be an academic, which would enormously please the noble Lord, Lord Eatwell. However, he need not be an academic; he could be someone who had a great knowledge of past financial and banking crises.
I think it was the philosopher Immanuel Kant who first observed that the only lesson of history is that no one ever learns the lessons of history. Financial crises are not unique; there have been a series of them over the years, both in this country and in the western world more generally. We commissioned a study of past financial crises. It was conducted by an excellent man, Mr John Sutherland of the Bank of England. It is remarkable how the same mistakes were made time and again. Everyone knows now about the crisis of 2008, but the time will come when that generation will have learnt the lessons of their own lifetime but not of the past, and it would be extremely useful to have someone on the Financial Policy Committee with such knowledge and expertise. It may not prevent a further substantial crisis but it will, at trivial cost, reduce the risk significantly. I cannot understand why the Government object to this.
My noble friend the Minister said that there should not be this guidance; that the Government should be able to appoint the best people. In other words, they should be able to appoint people who have no knowledge of past financial crises. Why do they want to do that? Why on earth is the reason they should want to do that when they have been given this opportunity to buttress all the other excellent measures in the Bill with someone on the FPC who has some knowledge and understanding of previous financial crises? Such knowledge is not widespread among the great majority of people. I have known this neck of the woods for a long time and there is very little knowledge of previous financial crises, yet there is a lot to be learned from them. It seems to me that the Government could easily accept having someone on the FPC who has this knowledge and I cannot understand why they do not do so.
Lord McFall of Alcluith (Lab)
My Lords, I support the noble Lord, Lord Lawson, on that point. The historical issue is extremely important. If all MPC members had a copy of Adam Smith’s The Wealth of Nations—Adam Smith was a professor of moral philosophy in Glasgow University 250 years ago—we would not be in this crisis. If we could give them something from the 20th century, it would be John Kenneth Galbraith’s treatise. As he said, all financial crises have leverage at their core. In many ways, as the City historian David Kynaston said, the banking community has to come into the rest of society; it has been an island apart from it.
I remember when I was chairman of the Treasury Select Committee and Sir Richard Lambert was appointed to the Monetary Policy Committee. All flutters were let loose because he was not an economist and therefore could not know about or have an intelligent opinion on the MPC. He proved that he was efficient and in fact the banking community is now calling on him to chair a committee so that it can re-engage with the rest of society.
I remember when Professor Danny Blanchflower was appointed to the Monetary Policy Committee. He was resident professor of economics at Dartmouth College but those with the closed-shop mentality did not want such an individual because he was in America. However, we were in the jet age and he came across every couple of months for the MPC. He gave us an insight into the US labour market and US housing.
My plea to the Minister is to get rid of the mentality that it is only economists and those who are in the system who understand it. This crisis has had a hugely detrimental effect on society. If the economists again do not engage with society, then that is where problems will arise.
Professor Larry Summers, who was a contender for the Treasury Secretary’s job and is the Charles W Eliot Professor at Harvard, said:
“The financial crisis has made me rethink everything about economics”.
That is what he has done. The link between economics and society is so important. Let us get rid of the elitism; let us get rid of the closed shop; let us let in people with experience who understand society and can impart to people who have the great gift of economics the knowledge that they are part of society and that the consequences to society will be dire if they do not have a wide perspective on the implications of their actions.
Lord Turnbull
I listened to the responses to my intervention and divide them into two categories. One is points made by the noble Lord, Lord Eatwell, the Minister and the noble Baroness, Lady Noakes, on specifying expertise and skill. I can see some force in those points. If we are going to have the opportunity, I will try to improve on it. My main area of disagreement is that I just do not agree with the idea that the oversight committee—the repository of who is responsible for reviewing what the Bank has done—should be hived off to a committee of non-executive directors. It should be built into the DNA of the whole organisation. However, I can see I am not going to be able to persuade noble Lords of that, so—
Lord Lawson of Blaby
Before the noble Lord withdraws the amendment, I would like to correct the Minister on what he said before about the noble Lord, Lord King—the former Sir Mervyn King. He is a very old friend of mine, and I can assure the House that in advance of this crisis, he had no knowledge whatever: it was not his interest. He was interested in two things: monetary policy and microeconomics. He was very good at microeconomics, but he had no knowledge or interest in past financial crises at all. He mugged it up later, of course, after the crisis broke. Of course he mugged it up: he is a clever man and able to do so, but I am afraid that the Minister was briefed by his officials to say something totally false and misleading.
Lord McFall of Alcluith
The noble Lord, Lord King, whom I know as well and for whom I have tremendous respect, told me on many occasions that he attended MIT for his PhD. He shared an office with Ben Bernanke, who was an historian of financial crises in the 1930s. He assured me that he learned quite a lot in those three years.
Lord Lawson of Blaby
“Excessive lobbying by banks
(1) If the Governor thinks that the way in which banks are lobbying about regulation or policy is creating a risk to the stability or effective regulation of the banking sector, the Governor must lay a report before Parliament.
(2) In subsection (1) “lobbying” means activities designed to influence Her Majesty’s Government, the FCA or the Bank of England.
(3) In this section “bank” has the meaning given by section 2 of the Banking Act 2009.”
Lord Lawson of Blaby
My Lords, I shall be brief; the hour is getting late. Like the amendment that I spoke to earlier about the desirability of having somebody on the Financial Policy Committee who had some knowledge of past financial crises, which I regret that the Government have not accepted, this amendment is also a proposal of the Parliamentary Commission on Banking Standards. It is about lobbying. The context of this applies to all bank lobbying, but it is particularly important in the context of what we were discussing last week in Committee, namely the ring-fence. We were very concerned, as my noble friend the Minister will recall, that this should be strengthened and kept under review. We had various proposals to that end.
In the United States, the parallel was the separation through the Glass-Steagall Act of 1933. That, as my noble friend the Minister will be aware, was gradually eroded over time. It was eroded in two ways. First, the banks found ways round it to some extent. More importantly, by extensive lobbying, the banks were able to get the Government of the day to do a little amendment here and a little amendment there, which created loopholes which did not previously exist. We know that, following the recommendation for the ring-fence in the Vickers commission and report, the banks only accepted it with gritted teeth. They were not happy; they accepted it very reluctantly. They will clearly be seeking any way they can, including through lobbying, to get a change here and a change there over time which will enable them to undermine the ring-fence. That is natural; they feel it to be in their interest.
Times have changed. When I became Chancellor 30 years ago, the Bank of England had no responsibility for monetary policy, which was my responsibility. It did however have the dual responsibility of the regulation and supervision of the banking sector, and being the sponsoring department for banks, representing the interests of the banks to the Chancellor of the day. If the banks had points to make in those days, they would go first and only to the Governor of the Bank of England. The governor would assess whether he felt there was merit in what they were saying, and if there was he would go and see the Chancellor and put the banks’ points to him. That has all changed. Now, the banks go directly to the Government of the day. Indeed it is no secret that the carpets in Number 10 and Number 11 Downing Street have been worn almost threadbare by the lobbying of the banks. That caused great concern to the previous Governor of the Bank of England, and we had some concern about it in the commission. We felt that the best remedy was encapsulated in this amendment: that if the Governor of the Bank of England of the day feels concerned, he should be able to flag it up in a public way. The hope is that that deterrent will keep the amount of lobbying within reasonable bounds. There is the opportunity to do that, and indeed there is a requirement to do that.
That is what we are suggesting in this amendment. Even though the hour is late, I hope that my noble friend will reflect seriously on this proposal and the merit of accepting it.
Lord Newby
My Lords, I agree with my noble friend that the Governor of the Bank of England should never hesitate to speak out should he have concerns about the influence of lobbying by the financial services industry. However, we do not believe that there is a problem. Indeed, I fully expect that the governor would raise the alarm to both the Government and Parliament if he believed that any particular factor or circumstances, including lobbying by a bank, seriously put at risk the Bank’s ability to meet its objectives.
However, the Government do not believe that it is either necessary or desirable for this specific requirement to be placed on the statute book. The Financial Services Act 2012 brought together responsibility for all aspects of financial stability within the Bank of England group. As a result, the Bank has a statutory objective to protect and enhance the stability of the financial system. The Government are confident that the governor will act appropriately if he believes that excessive lobbing is impeding the Bank’s ability to meet that objective, which would obviously be the case if there was lobbying with the intention of undermining the ring-fence. Indeed, the Bank has already committed to raising the alarm in such circumstances in its response to the Commission on Banking Standards.
Therefore, while we fully accept that one of the roles of the governor is to raise the alarm if he believes that bank lobbying or indeed anything else creates a risk of undermining the stability or regulation of the banking sector, it is simply not necessary to have such a requirement in the Bill.
Lord Lawson of Blaby
I have heard what my noble friend has said and I am slightly reassured. I hope that the present Governor of the Bank of England will read those words and will realise that, without it being on the statute book, he has been charged by the Government with a duty to raise the alarm if there is any case of excessive lobbying. I am very glad to have that on the record, and I beg leave to withdraw the amendment.