Financial Services Bill

Lord Myners Excerpts

Tuesday 10th July 2012 Lords Chamber

[Baroness Kramer]

My Lords, I am very much in favour of scrutiny by this House. I cannot pretend to be an expert either on the different varieties of orders or on the different measurements and tools that the FPC might introduce, but I would be concerned about a mechanism in this House that enabled tools to be amended. Although we have some experts, the capacity to understand the internal workings of a tool with sufficient precision to be able to introduce an amendment to a ratio strikes me as not the particular skill of a legislature or this House. We can raise questions about it or require that it be dismissed because the Government have not sufficiently made their case, but to amend it is not a skill with which we are particularly equipped.

For that reason, and with great respect to the House, it seems to me that the capacity for amendment is inappropriate in this case. The capacity to force the Government to make their case and to judge on that case is entirely appropriate, but not the capacity to substitute; that worries me.

[Lord Myners]

My Lords, I have considerable sympathy with the amendment. I declare my interest as a former member of the court from 2004 to 2008. I fully support the creation of the Financial Policy Committee—I think that it will become the most important committee in the Bank—but I am deeply anxious about the governance of the Bank and the lack of appropriate oversight from the court, the oversight committee as envisaged or, indeed, Parliament.

The Minister is in many ways the architect of this restructuring of regulation, as part of a project which he led for the Opposition, having ceased to work in the Treasury. I understand his thinking in evolving the proposals, but events have moved on. In the light of what we now know about the Bank of England, we must ask whether it is still right to put so much authority in the hands of the Bank without appropriate accountability.

When I was a member of the court, I sat in on a meeting of the Financial Stability Committee. That would have been in 2006 or 2007. At that meeting, one of the governors proposed that as a mechanism to cope with the crisis, the Bank should buy half a dozen or a dozen bicycles in order that members of the Bank could move swiftly and anonymously around the City. That tells us a huge amount about where the Bank sits in terms of its understanding of the complexity of financial markets. Some of the things that we have seen over the past few weeks have simply raised more questions about the wisdom of putting so much power in the hands of the Bank.

We are also about to have a piece of legislation to implement the recommendations of the Independent Commission on Banking. Having been intimately involved in the Government’s response to the banking crisis from 2008 onwards, I would point out that the losses incurred in the British banking system—at HBOS, Lloyds and Royal Bank of Scotland—largely occurred within the ring-fence. The losses of $5 billion which we have seen recently reported in London from JP Morgan took place within the ring-fence as envisaged by the Vickers report. The noble Baroness, Lady Kramer, looks somewhat sceptical about that. Those losses occurred within the treasury operations, or the investment office, of JP Morgan, and as such lay within the ring-fence rather than outside it. In being sympathetic to this amendment, and hoping that at the very least the Minister will go away and reflect on that, I think that the Minister will have to rethink some of the fundamental building blocks of this legislation—in particular the great powers and responsibilities that we are placing in the hands of the Bank of England—before we reach its next stage. These are powers and responsibilities that the Bank of England has historically not had and, in my judgment, is still not equipped to exercise.

If we are to do this then, at the very minimum, we must ensure that the Bank and its various agencies, including the Financial Policy Committee, are properly accountable to a court which is clear about its functions and clear about who it reports to. As a former member of the court I know that it was never clear who we reported to. It must also be clear about its parliamentary accountability.

[Lord Sassoon]

It is always entertaining to have one of the Second Reading speeches of the noble Lord, Lord Myners. I am not sure what it had to do with this particular amendment—which is to do with super-affirmative procedures in respect of orders made by the Treasury—but, anyway, we did talk extensively about governance of the Bank of England over the last couple of sessions, and there will no doubt be other opportunities to talk about them. Here we are talking about an amendment that seeks to require macroprudential orders to be subject to the so-called super-affirmative procedure. Although I was not going to question the competence of Parliament to get into the detail of the macroprudential tools, my noble friend Lady Kramer did make a powerful point about the level of scrutiny that is appropriate to tools that are—yes—very important but also highly technical.

I say that in the context of believing that proper parliamentary scrutiny of these tools will be important to the overall accountability. That is why the Bill, as has been noted, requires the macroprudential orders to be subject to the affirmative procedure. As the Committee would expect, the Government maintain that that strikes the right balance between accountability and timeliness. Orders cannot be made unless a draft is laid before and approved by resolution of each House of Parliament.

I will of course draw attention to what the Delegated Powers and Regulatory Reform Committee had to say, although my noble friend Lady Noakes dismisses its remarks as “interesting but not conclusive”. As a statement of fact, it is clear that its remarks are not conclusive. However, I take issue with her when she dismisses its remarks as “interesting”, because I think that we should take the consideration of the DPRRC very seriously on matters such as this. For the help of the Committee I shall quote the relevant paragraph, because I think that it shows that the DPRRC has thought about this matter in detail. It states:

“The importance of the power is recognised by the application of the draft affirmative procedure or, in urgent cases, the 28-day ‘made affirmative’ procedure … The Joint Committee on the Draft Bill and the House of Commons Treasury Select Committee have recommended an enhanced affirmative procedure for the non-urgent orders, based on that in the Public Bodies Act 2011. But the affirmative procedure provided for in the Bill should be a sufficient safeguard against inappropriate use of these powers.”

I really do not think that we should dismiss what the committee has said.

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[Lord Myners]

As I listened to the Minister, it seemed to me that he was implying that there may be times when the FPC has no recommendations outstanding. Surely, however, the FPC will always have recommendations outstanding. It will always have a preferred leverage ratio or a gearing ratio or a deposit to loan or some other of the macroeconomic tools that it has to apply to the banking sector. I am not sure how keeping recommendations under review and reporting on them actually works in a situation in which there will always be recommendations in place. I cannot envisage a situation in which the FPC will say, “We have no views on anything, and therefore there is nothing that we need to be reporting and monitoring”. I may have misunderstood the point; if I have, I apologise, but I would appreciate some guidance from the Minister.

[Lord Eatwell]

My Lords, we broadly welcome these amendments, in the sense that they are adding to the overall scrutiny and assessment of the activities of the FPC and thereby reinforcing, we believe, its general acceptability and strength of purpose. However, I want to raise a warning flag with respect to new Section 9QA(3), in which it is argued that the FPC will have to prepare,

“an estimate of the costs and an estimate of the benefits that would arise from … the direction or recommendation in question”.

These are macroeconomic measures. It is virtually impossible to provide a simple numerical estimate of the cost or benefit of a macro measure. There will be either a tendency to overestimate the costs, or a tendency to overestimate the benefit, in this particular case. Presenting an assessment in quantitative terms will give spurious precision and, indeed, spurious credibility to a particular measure. I assure the Minister that for any macro measure, I could write an entirely credible report saying that the costs exceeded the benefits and an equally credible report saying that the benefits exceeded the costs. This is simply extending the whole notion of cost-benefit analysis beyond the range in which it can effectively operate. It would be valuable to take account of an attempt to describe in broad qualitative terms the costs and benefits. However, please let us not have the spurious precision of numerical calculations of variables which, by their very nature, cannot be expressed in precise terms.

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[Lord Davies of Stamford]

My Lords, I have considered carefully over the last 24 hours whether I should say what I am now about to say to the House, but I have decided that it is right to. My noble friend’s amendment, which I support in principle, says in proposed new Section 9WA(2)(a):

“The membership of the Panel will be … the Deputy Governor for Financial Stability”.

In light of his answers yesterday to the Treasury Select Committee, it is completely wrong that the present deputy governor for financial stability should be given these responsibilities on this financial advisory panel, or any other responsibilities for financial stability. In the course of the performance yesterday, during which I assume that his answers were entirely honest and frank, he effectively made a plea of guilty to incompetence and complacency at a quite heroic level. He admitted having chaired a meeting at which several people said that there had been discrepancies between the LIBOR rate and the rate at which banks had been paying for deposits on the interbank market. In his defence yesterday, he said he thought that some of those discrepancies might have been due to transactions intermediated through brokers, but he did not ask what the position was. He did not pursue it. He did not make an attempt to discover what the real facts were. That was astonishingly negligent, to put it mildly.

The other incident, the conversation that he had with Mr Diamond of Barclays, which has been so much in the public mind in the last week or so, also casts a strange light on his actions in carrying out his responsibilities in the Bank of England. He said that he was under great pressure at the time and that there was a great financial crisis, so much so that he was not able to make a note of even very important telephone conversations. I assume that the conversation was not a casual one, but that it was deliberate and designed to achieve a particular purpose. The only purpose that it could have achieved, and the only effect that it could have had, would have been to have persuaded or encouraged Barclays to understate the cost that it was paying for deposits on the interbank market. Clearly, Barclays could not do anything about the actual cost that it was paying. It would have been taking on deposits at as low an interest rate as possible. There have been some strange things going on. I have little confidence in the personality of the present deputy governor of the Bank responsible for financial stability.

There is a defence of his actions which noble Lords might have seen in yesterday’s Financial Times. It was the first letter in the paper, with the heading going something like “Tucker and Barclays saved the British financial system”. The argument was that it was correct in difficult circumstances, when banks were being squeezed on the interbank market or the interbank market was drying up, to give a false impression of what was going on by recording and publishing false LIBOR statistics. I do not accept that defence. First, it is not a defence that either Mr Diamond or Mr Tucker is making. Secondly, even if it were their defence it would be wrong. It is important that no financial stability organisation or anyone concerned with financial stability should be tempted to believe that by falsifying statistics in a difficult situation that is contributing to a solution. That risks undermining not merely the credibility of the index that you are falsifying, but every announcement and index. If the Bank of England was prepared to collude with a clearing bank to falsify the LIBOR statistics, the markets would immediately assume that collusion might take place if it was convenient in other circumstances, and that perhaps regulators and banks would collude to understate their provisions. As soon as that rumour or suggestion got about, there really would be a crisis.

That is a road down which no one should go. I do not accept that defence of Mr Tucker’s actions. It is not of course the defence that he has been making. He has no defence because he has confessed to an extraordinary act of negligence. Had he not undertaken it, had he not let that meeting go past—and yesterday there were suggestions that at the time he had other evidence that the LIBOR market was not as straight and transparent as it ought to have been—the crisis that we have experienced recently would not have occurred. I am sorry to have to make these harsh comments about a man whom I have not met and whom I had not heard until I listened to his evidence yesterday. However, in present circumstances, it seemed to me important that if one felt sufficiently strongly about such a matter one should raise it in the House.

[Lord Myners]

My Lords, I take note of my noble friend’s comments, but I feel compelled to say a few words in response. Without drawing the ire of the Minister, I can link it back to the subject of the amendment.

I worked with Mr Tucker, the deputy governor, during the banking crisis. We should wait for the outcome of the Treasury Select Committee’s report and the Joint Committee report. It is wrong to say that if the manipulation of the LIBOR-setting process had not occurred we would not have had the global financial crisis. It was undoubtedly bad and reprehensible, in the words of Mr Diamond, but it did not itself cause the crisis. Listening to Mr Tucker yesterday and reflecting back on the extraordinary circumstances of October 2007, I sympathised with him. The banking system was on the verge of complete collapse. It is still not fully appreciated how close we came to the edge of the cliff. In those circumstances, when one seemed constantly to be in meetings and constantly to be on the telephone, not taking notes of meetings is pretty forgivable. I was delighted that Mr Tucker was able to settle the issues arising from Mr Diamond’s file note about the senior Whitehall figures. I look forward to the Chancellor of the Exchequer responding to the clarity that Mr Tucker has brought there.

Reflecting on my noble friend’s amendment, I ask whether we are creating positions in the Bank of England and in the architecture which are simply beyond the talents of any one person to fulfil? Mr Tucker is one of the outstanding candidates to be the next governor. He is not the only one, but it is not a long list and it has got decidedly shorter in the past seven days. Two people previously spoken about as candidates, Mr Varley and the noble Lord, Lord Green, have probably dropped off in the past few days, so it is not a strong list.

Looking then at the FPC and its oversight, where are we going to find the people with the necessary talents to do this job? We are on the horns of a dilemma. On the one hand, you want knowledgeable people—people who do not have to be taken through everything step by step, but come to the issues with a good and clear knowledge and the ability to spot where the critical questions lie. On the other hand, you do not want to start these committees with people who in some way are conflicted by their current employment, their past employment, their pension arrangements and so forth.

I do not have a view about whether the shadow FPC is doing a good job. I think one or two of its members appear to be. Mr Robert Jenkins, in particular, appears to be an independent spirit who is not in any way caught up in the groupthink and consensus that I associate with much of the heart of the Bank. The simple fact is that most members of the FPC have a career background in investment banking. They have a career background in the very activity which was associated with the global financial crisis. I think we have a problem here. How do we get the right people into the right committees and the right courts and the offices of governor and deputy governor? No architecture makes sense if we are creating it on the presumption that we can find people of integrity, raw talent and understanding to fill the jobs when that is not a realistic assumption. I think the heart of the matter raised by my noble friend in his amendment is: how can we be satisfied that the people sitting on the FPC are appropriately competent and are managing conflicts of interests, as they probably will always have conflicts as a prerequisite for qualification to sit on these various committees?

[Lord Liddle]

My Lords, that was a very interesting exchange between my noble friends Lord Davies and Lord Myners on the crucial question of how these matters should operate. I would like to add a point in favour of my noble friend’s amendment on the basis of work I have done on how the new European system is operating. I had a conversation in Brussels recently with André Sapir, who is on the board of the European Systemic Risk Board, about the role of independent economic expertise in assessing systemic risk. On that board, the independent economists have made a decision that they will not rely on the internal expertise of the European Central Bank, precisely for the reason that the noble Lord, Lord Eatwell, said. We are operating in a very uncertain world and no one really knows what the right road map is. What we need is the maximum amount of well informed, independent expertise on these matters. I feel very strongly that this amendment should be supported.

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I have two further concerns with this aspect of the amendment. First, it seems odd that a committee chaired by an executive of the Bank who is a member of the FPC and responsible for providing advice to the FPC should also be expected to assess its performance. Secondly, and more importantly, the Government have already brought forward amendments, which were debated and agreed two weeks ago, to create the independent oversight committee that I just referred to with responsibility for carrying out performance evaluation. So in this respect, too, the effect of the amendment would be to duplicate responsibilities, blur accountabilities and diminish focus, so I ask the noble Lord, Lord Eatwell, to withdraw the amendment.

[Lord Myners]

The Minister used the word “independent” on several occasions relating to oversight. Noble Lords will remember that when the Monetary Policy Committee was established, there was quite a brouhaha about whether the independent members of that committee should have access to independent advice. The Bank resisted that so the independent members had to rely upon the Bank’s own economists. It was only after a threat of resignation by one of the independent members of the MPC that they were granted the ability to appoint, I believe, a single researcher.

The culture of the Bank does not foster independence. It is a very hierarchical organisation. The view of the Bank is the view of the governor. The court has recently announced three independent reviews into aspects of the Bank’s conduct. They are all quite interesting because they date from October 2008. None of them will actually look at the real errors that were made by the Bank, which were pre-2008. We really want to ask what the Bank was doing in 2006 and 2007. These reviews exclude any examination of Northern Rock, and I think one could argue that if it had been handled in a different way, it might have had some impact on how the UK was impacted by the global financial crisis.

I put down a Question on these independent reviews. The independent reviewers were appointed through a process led by the governor. The independent reviewers do not have their own secretariat. They are reliant upon the Bank’s staff for support, so I put it to the Minister that for this approach to operate, it is important that the FPC has access to truly independent advice. In my view, advice that comes from career employees of the Bank can never have that element of total independence that is necessary in order to achieve the objective that I believe the Government have for the FPC and which my noble friend has at heart when proposing this amendment.

[Lord De Mauley]

I will, if I may, respond on that point. The noble Lord, Lord Myners, is right, and my noble friend Lord Sassoon acknowledged earlier, that previously the Bank was slow to recognise the MPC external members’ need to have access to dedicated support. The Bank has learnt its lesson.