Financial Services Bill

Lord Myners Excerpts

Tuesday 6th November 2012 Lords Chamber

[Lord Hodgson of Astley Abbotts]

My Lords, like my noble friend Lady Noakes I have some difficulty in understanding the thrust of these amendments. I see the issue of the nomenclature, which may be unfortunate, but I have to say, as a director of a company, that keeping under review and overseeing are almost one in the same. I do not see the difference between those two functions. It is absolutely clear that keeping under review and oversight are running on similar tracks.

The dangers behind the noble Lord’s amendments are that we are starting to find a way of dividing responsibilities. We are moving from clear lines of responsibility to a situation where a sub-committee of the board, as appears in the Bill, is starting to dictate the pace of the board itself. That is an unworthy, unnecessary and potentially dangerous development.

[Lord Myners]

My Lords, I support my noble friend’s amendment. The decisions on the aggregation of power within the Bank of England are now set. The Government are clear in their determination to achieve that.

In my view, no one form of regulatory architecture can be assuredly more successful than others. Looking around the world at what happened with the global financial crisis, we saw many different structures of regulatory architecture come under strain. Some point to the twin peaks system associated with Canada as evidence that the Government’s current thinking in this area is consistent with a model that appeared to work better there than in other jurisdictions. However, if one wishes to understand why Canada did not experience the same harsh consequences of the global financial crisis, as in the United States, Europe and the United Kingdom, one finds the answer in matters other than regulatory architecture—including the nature of the economy and control of lending and leverage—which are inherent in the Canadian system and distinct from those followed elsewhere.

If we are going to aggregate this power in the hands of the Bank of England, we have to ask ourselves questions about checks and balances because we learnt from the failure of individual UK banks and institutions that, in almost all cases, there was an overly dominant individual in charge of the organisation that failed. That is the big lesson, which the FSA has not picked up completely in its reports on the collapse of RBS and HBOS. However, it is a clear lesson, whether it is Sir Fred Goodwin at Royal Bank of Scotland or Mr Adam Applegarth at Northern Rock; and similarly Mr Crawshaw at Bradford & Bingley and Mr Cummings, Mr Hornby and others at HBOS.

Are we creating an architecture here in which we are putting too much power in the hands of one person? I think we are. I was a member of the court for four years and have seen how it and the Bank operate. One must be careful not to extrapolate from the behaviours of the existing incumbents of senior positions in the Bank and members of the court into the future, but a very clear lesson to me was that the court just could not be effective at corporate governance, as both the noble Baroness, Lady Noakes, and the noble Lord, Lord Hodgson, referred to earlier. The court cannot be effective in that way. When I was a member in 2007, three members of the court sought to escalate matters to the Treasury about the Bank’s management of liquidity and of risk. It simply was not possible for my two colleagues and me to register with the Treasury or anyone else, in any meaningful way, our concerns about the Bank’s failure to understand the risks that were accumulating in the system.

Are we creating a structure now in which that could not happen again in the future? I do not think we are. We are not clear as to the role of the court. We give it some responsibilities but very little power to influence the responsibilities that we give it. We must ask important questions about the constitution and membership of the court to ensure that, in future, it is not simply a ceremonial body that is, on the whole, discouraged by the governor from asking questions, but something that at least approaches the independent challenge that one would expect—

[Lord Hodgson of Astley Abbotts]

My Lords—

[Lord Myners]

I will give way in a moment to the noble Lord, Lord Hodgson, who has had his opportunity. We must look to create a body that is capable of appropriately challenging the current governor and governors in the future. I am not sure that this is necessarily seriously advanced by the language we are using here. Perhaps I will anticipate the point on which the noble Lord, Lord Hodgson, wishes to intervene by saying that he is quite correct about perhaps dancing on the head of a pin when it comes to whether these are questions about supervisory roles or oversight. However, it is absolutely critical that we ensure, in this Bill, that the court is able to appropriately challenge and check the authority that this Bill places in the hands of the governor. We have learnt painfully in recent years about the consequences of coping with a dysfunctionality between the governor and members of the court. I give way to the noble Lord if he still wants to come in.

[Lord Hodgson of Astley Abbotts]

The noble Lord was quite right. I understood the force of his polemic and the seriousness of the point he was making but could not see how that is in any way addressed by adding the word “overseeing” to “keeping under review”, which seems to me, as he indicated, to be a distinction without a difference.

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[Lord Myners]

The words proposed by my noble friend take us a little further in the right direction. I would like to go a great deal further but am more than happy to support my noble friend’s amendment.

[Lord Blackwell]

My Lords, despite the cogent words of the noble Lord, Lord Myners, I share the confusion on this side of the House about what these amendments are intended to do. Everyone agrees that it is vital that there should be strong oversight of the governor and the executives of the Bank by the non-executive directors and that we have proper accountability and scrutiny. But what is proposed here is a court that will have a clear and very sizeable majority of non-executive directors. The amendments proposed by my noble friend earlier made it clear that all the members of that court would be directors, and would be directors in common, sharing responsibility for the decisions of the Bank. However the non-executive directors would be in a majority, and if those non-executive directors disagreed with what the executives proposed, they could make that clear in the court and they would have the majority to hold sway.

According to these amendments, the court, involving all directors, would be able only to propose policies and then a sub-committee of the board of only the non-executives would then go away and approve them. That seems to turn corporate governance on its head. Either we have a supervisory board of non-executives, which is a totally different structure, or we accept that the Court of Directors is indeed the Court of Directors and should, with all its members, accept responsibility. What we have here is a very sensible proposal for an oversight committee of non-executive directors that will play its role in allowing non-executive directors to review and scrutinise offline, but to report to the full court, as is normal in any governance process. All directors must share equal responsibility in the end for the decisions of that organisation.

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[Lord Sassoon]

My Lords, I am grateful for this debate. The noble Lord, Lord Eatwell, started by welcoming the creation of the oversight committee as an important step, but then went a leap too far in getting rather confused about what, in his terms, “modern corporate governance” really means. As so many noble Lords have explained, it means that ultimately the governing body as a whole—the board of directors, the Court of the Bank of England—has to take the key decisions. As the noble Lord, Lord McFall of Alcluith, said, the principal role of the oversight committee is for learning lessons. I completely agree with him, and will go on to explain that the role of the oversight committee, as constructed in the Bill before these amendments, is completely in line with what the Treasury Select Committee envisaged.

My noble friends have explained all these things much more clearly than I could. The noble Lord, Lord Nickson, modestly said that he is out of date. I do not believe that he is out of date at all. He and the noble Lord, Lord Kerr of Kinlochard, who has great current experience of corporate governance in one of the UK’s largest multinationals, have got this right. I had been puzzled—I wondered whether I had missed something in all this—but I am grateful that the House shares my concerns.

To address the specifics, Amendment 3A would shift the oversight committee’s functions from a more backward-looking, reviewing role—the lesson-learning role that the noble Lord, Lord McFall, referred to—to a real-time overseeing role, which would involve scrutinising and perhaps second-guessing the Bank’s policy decisions while they are being taken. As my noble friends and other noble Lords have made clear, if that role is taken at the board level, it is taken by the board as a whole. I do not believe that this proposed new role would be at all appropriate.

As I have said, we can look to what the Treasury Select Committee in another place said when it recommended the introduction of ex-post reviews of the Bank’s policy performance. This is worth quoting at some length, from the committee’s 21st report of the Session, Accountability of the Bank of England:

“The Governor stressed to us that ‘the decisions that the PRA, FPC and MPC make on policy are not decisions that the Court needs to second guess’. We agree. The Bank’s governing body should place more emphasis on oversight and ex-post scrutiny. This does not require or authorise it to become involved in second guessing immediate policy decisions. But there is a need to analyse and learn lessons from the actions of the Bank on a routine and consistent basis, drawing on expertise from within the Bank. Ex-post review of the Bank’s decisions would, we believe, be in the interests of good governance of the Bank”.

The report went on to recommend that ex-post reviews of the Bank’s performance be carried out,

“not less than a year after the period to be reviewed”

in order to avoid,

“second guessing at the time of the policy decision”.

The current wording describes one of the functions of the oversight committee as,

“keeping under review the Bank’s performance”,

which is entirely consistent with the Treasury Select Committee’s recommendations and strikes the right balance between ensuring effective retrospective scrutiny of the Bank’s policy decisions and avoiding a situation where the non-executive members of the court would be second-guessing the policy decisions taken by the Bank’s expert policy committees and Bank executives. Of course, in this context my noble friend Lord Blackwell is quite right to point out that when these decisions are for the court as a whole, the non-executives are, as one would expect in any good modern corporate governance structure, in a majority.

I am a little puzzled by Amendments 3B, 3G, 3H and 3K, which seek to make the non-executives of the court solely responsible for determining the Bank’s financial stability strategy. Again, this is completely at odds, as the House has been told, with the way in which model corporate governance operates. Surely the reason for making the governing body as a whole, in this case the court of directors, responsible for the strategy is because it is that body, and in particular the executive members of that body, who will be accountable for delivering the strategy. Like other noble Lords, I struggle to see how the process that is proposed in these amendments could possibly work in practice. The oversight committee is made up of the non-executive directors of the court and those non-executives make up the majority of the court, as my noble friend has suggested.

On the role of the non-executives, I am sure that the noble Lord, Lord Myners, is right when he says he could not get the Treasury to take concerns seriously back in 2007, but I cannot answer for what happened in the Treasury under the previous Administration. All I can say is that if any member of the court of the Bank, whether executive or non-executive, came to the Treasury now, we would take their concerns extremely seriously.

I do not want to belabour the point, but I am not sure whether the noble Lord, Lord Eatwell, is envisaging situations in which the non-executive directors, coming from a court meeting in which they agreed the financial stability strategy, then go into an oversight committee meeting where they decide perhaps that the strategy agreed by the whole court was wrong in some way. We need to distinguish here clearly, as have many noble Lords, between the differing responsibilities of the court and of the non-executives on the court. The court, as the Bank’s governing body, is responsible for setting the Bank’s overall strategy, including its strategy for financial stability. It is the responsibility of the executives of the Bank, with the support of the court, to deliver that strategy. It is the responsibility of the oversight committee to hold the executive to account for how it delivers on the strategy by keeping its performance under review and, again in the words of the noble Lord, Lord McFall, for learning the lessons. This split of responsibilities in the Bill is appropriate and consistent with modern corporate governance.

Finally, Amendment 6C would add policies to the existing requirement in subsection (4) of new Section 9B that the oversight committee keep the procedures of the FPC under review. I can assure the noble Lord, Lord Eatwell, that this amendment is entirely unnecessary. The oversight committee is already responsible for keeping the policy and performance of the FPC under review. Subsection (2)(a) of new Section 3A of the 1998 Act, as inserted by Clause 3 of this Bill, clearly states that the oversight committee is responsible for keeping under review the Bank’s performance in relation to all of its objectives and strategy, including the objectives of the Financial Policy Committee. With the benefit of this useful debate, I hope that the noble Lord will see fit to withdraw his amendment.

[Lord Myners]

I want to be helpful and pick up one point about the references that have been made by several Peers to models of good corporate governance. The noble Lord, Lord Flight, with considerable experience and great standing in business in the City, has already pointed out one respect in which the court cannot be compared with a conventional board of directors: its ability in the end to remove the executive if it has lost confidence in it.

The point that I raised about our experience in 2007 is another distinct difference from corporate governance; namely, there is no shareholder to whom the non-executives can appeal. What happened in 2007 was that three members of the court had meetings with Treasury officials to raise their concerns about the absence of full challenge and the dominant influence of a single voice in the court. They expressed those views to Treasury officials, who shrugged their shoulders and said that there really was not much that they could do. The governor is ultimately appointed by Her Majesty and members of the court are elected to do their work, and there is nothing that the shareholder—effectively the Treasury—can do. That is another area where we must be very careful not to assume that we are just picking up the corporate model and inserting it into the Bank. The Bank is different by virtue of the very limited powers placed on the court and the absence of a shareholder.

Finally, I question whether the Minister’s constant references to good corporate practice would be reflected in the role of a board in overseeing ex post facto what a company does. My experience of sitting on boards is that boards are very much involved in reviewing the formulation and implementation of strategy on a constant basis, not in carrying out post-implementation exercises. Your Lordships’ House should be careful to recognise that there are limits to the complete applicability of corporate practice to the particular circumstances of the Bank of England, the court and the governor.

[Lord Sassoon]

My Lords, I know that the custom of this House on Report is that noble Lords do not make second substantive speeches, so the noble Lord will understand if I do not respond to his points—otherwise we will not make much progress. However, I will clarify one point in answer to the question asked by my noble friend Lord Flight about the removal of the governor and the suggestion by the noble Lord, Lord Myners, that the governor cannot be removed. This is of course wrong, as I am sure the noble Lord, Lord Myners, knows. If he would like to refresh his memory of the Bank of England Act 1998, paragraph 8 of Schedule 1 sets out precisely the conditions under which the governor can be removed.

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[Lord Hodgson of Astley Abbotts]

My Lords, I am slightly concerned at the proposed obligation to conduct an annual review. The role of directors is constantly to keep a strategy under review and to see whether it is still relevant. However, to impose this would impose a burden. A proper strategy review is an extremely expensive and far-reaching undertaking. It would be far better to have a backstop of a three-year requirement and rely on the good judgment and good sense of the directors, in particular the non-executives, to call for more frequent reviews as and when they are needed. It is inconceivable that we would go through the sorts of events that we have been through since 2008 and that non-executives would sit and say, “We do not need to look at the strategy”. It is part of their role to do that and we should rely on their judgment, not on process, with a backstop of the three years, as proposed.

[Lord Myners]

My Lords, I will pick up on a term in the final sentence of the contribution of the noble Lord, Lord Hodgson. He referred to relying on the judgment of the non-executives. Many issues around the court will depend on the quality of the people appointed, and how they conduct themselves. A slightly less than perfect structure, superbly implemented, is likely to give a better outcome than a perfect structure that is poorly implemented. The Minister on a number of occasions referred to best corporate practice. Can he envisage any situation in which a corporate board performing effectively would not carry out an annual review of strategy? Every board of which I have been a member has had an annual strategy session to look again at past strategy and in many cases endorse or modify it in the light of circumstances. Regardless of what we say here, court directors seized by their legal responsibilities would almost certainly want to carry out an annual review. Does the Minister agree with that observation?

[Lord Sassoon]

My Lords, I certainly agree with the construction of my noble friends Lord Phillips of Sudbury and Lord Hodgson of Astley Abbotts. I think that essentially they are agreeing with the noble Lord, Lord Myners, that boards will take sensible views on these matters, and that we do not need to require the court to review the Bank’s stability strategy on an annual basis because a perfectly sensible arrangement will emerge that will to some extent involve a strategy that is set for a longer period than a year. Clearly, to some extent, a strategy needs to look out further—as the noble Lord, Lord Myners, agreed. Equally, of course a board will look to see how a strategy is going on a more frequent basis.

I have not changed my view since Committee on the lack of need for the provision proposed in the amendment. The interventions in this discussion reinforced my view. The legislation does not set out how regularly the Bank’s strategy should be reviewed. In practice the court has revised the financial stability strategy on an annual basis. That is understandable, given the sheer volume of legislative and other changes that there have been in the system of financial regulation in the past three years. On the other hand, as the noble Lord, Lord Myners, agreed, a strategy needs also to be a longer-term, forward-looking document. We do not need to hardwire in an annual review and suggest in any way that we require a short-term, business-plan view to be taken rather than a genuine strategy. That is why new Section 9A will require the court in future to revise the strategy at least every three years—so that it is a longer-term document—but there will also be flexibility for the court to revise the strategy earlier. I continue to believe that a three-year timeframe is the correct requirement for the Bill. It leaves plenty of flexibility.

I will add that I am conscious that in talking about this matter I use “court” and “Bank” to mean different things. I did not want to prolong the earlier debate, but I did not say then that court equals Bank. I am sure that the noble Lord, Lord Eatwell, did not believe that to be the case, or that I suggested it. What I suggested in the earlier context was that there were certain critical issues on which the court would take a decision. The matter that we talked about—the public interest test in connection with publishing reports—was one. Here is a clear example of a case where we are talking about the court setting a strategy for the Bank. There will be many more examples as we go through the Bill of cases where “court” and “Bank” mean different things. We need to look at each instance as it comes up. With that slight digression, I hope that the noble Lord has been comforted by this further discussion of the strategy timeframe issue.

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So I do not advocate my alternative, Amendment 5, and note that even with the modest change in my Amendment 4 the FPC would number 10, or 11 if you include the Treasury, and would thus be outside the cognitive limit referred to in Sir David Walker’s report. If the Government cannot face telling the Bank it cannot have two extra people on the FPC, the solution is available to them by adding one, as in Amendment 5, although the Government would have to recognise that this solution would be sub-optimal. I beg to move.

[Lord Myners]

My Lords, I support the amendment in the name of the noble Baronesses, Lady Noakes, Lady Wheatcroft and Lady Kramer. I, too, have been struck by the potency of the Walker report appendix on group effectiveness, drafted by the Tavistock Institute. My experience leads me to conclude that the larger the group, the less effective it becomes. The R-squared is actually extraordinarily high and making the FPC any larger would not be the right solution, although it would be better than doing nothing.

Amendment 4 is, in my judgment, significantly superior to Amendment 5 and I think the noble Baroness, Lady Noakes, has, as she so often does, put her finger on the issue. It is almost certainly the governor who is insisting on having this right to appoint additional people to the committee. The past culture of the Bank is that it speaks with a single voice and that voice expresses the opinion of the governor. The more people around the committee table who therefore speak with that single voice, the better it is from the perspective of the executive. From the perspective of a functioning committee, that is almost certainly not an optimal outcome. In fact, if the Tavistock Institute had been invited to comment on the existence of a cabal or blocking group within a committee, I am sure it would have been even more powerful in its views about its appropriate constitution.

The central thrust of everything we are doing in helping the Government get this legislation through Parliament is to try to ensure that we have as many checks and balances in place as is appropriate. One of them must be a check on the strength of the voice of the executive of the Bank on these committees and, while both of the amendments put forward by the noble Baroness, Lady Noakes, will achieve that, Amendment 4 is preferable to Amendment 5.

[Baroness Wheatcroft]

My Lords, Amendment 4 will achieve an improvement in the balance of the FPC and I support the other amendments in this group, tidying-up amendments which would bring the number of extra appointees from the Bank down to one instead of two. It is obviously better to have a balance, if we can, between the Bank team and the outsiders—as they will undoubtedly feel that they are to start with.

We have heard about groupthink. There obviously has been a fair amount of groupthink at the Bank in the past, although it is worth remembering that on the Monetary Policy Committee the Governor of the Bank of England has been outvoted on several occasions, so it is possible for people to disagree with the governor and for the committee to go against him. However, on the basis that a balance would be better, bringing down the level of Bank people represented on the FPC would be an improvement.