Financial Services Bill

Lord Northbrook Excerpts

Tuesday 10th July 2012 Lords Chamber

[Baroness Noakes]

My Lords, the noble Lord, Lord McFall, is unable to be with us this afternoon because he is en route to receiving an honorary degree tomorrow, which I am sure the Committee will agree is well deserved.

This is another amendment that the noble Lord, Lord McFall, and I have tabled to ensure that the issues covered in the first report in this Session of the Treasury Select Committee in another place are properly debated. I am pleased to see that the noble Lord, Lord Eatwell, has added his name to the amendment. The noble Lord, Lord Eatwell, has already emphasised the importance of the macroprudential tools which are covered by new Sections 9G to 9M. I am sure that the thrust behind these new sections will command general support, but the detail of the new tools must be approached with very great care. My noble friend does not like the term “experiment”, but most of us think that if something looks like an experiment and sounds like an experiment, it is an experiment. We cannot get away from the fact that, because these macroprudential tools have not been used before in this country, nor is there much international experience to go by, we are talking about something very new which should receive very considerable scrutiny. Not even the Bank of England claims a monopoly of wisdom on what these macro- prudential matters should be.

This experimental phase will run for some time. The measures that are initially specified will almost certainly vary over time, as the focus of risks to financial stability changes and as experience is gained of working with the measures. We have something that is very new and, as the noble Lord, Lord Eatwell, has also pointed out, these are very powerful tools to be placed into the hands of the FPC. We have already seen the FPC’s first shot at what it believes those macroprudential tools should be. It has suggested a countercyclical capital buffer, sectoral capital requirements and a leverage ratio. At that time the FPC said that some other measures, such as loan-to-value ratios and loan-to-income ratios, would need public support before they were introduced. I would like to suggest that all the potential measures need public support and therefore there has to be proper debate before it would be wise to introduce them. The Government have, correctly, decided that the new measures cannot simply be set by the FPC or the Bank. They have to be prescribed by the Treasury by order, and that order is subject to parliamentary approval. That meets the point which troubled the noble Lord, Lord Peston, a little while ago.

So far, so good. The measures are to be initially specified by the Treasury, not left to the Bank and the FPC, and they have to be approved by Parliament. The problem is that new Section 9M prescribes the draft affirmative procedure. This procedure is, of course, better than the ordinary affirmative procedure which is, in turn, better than the negative procedure. However, none of these procedures is, in truth, more than a rubber stamp. Oppositions know this only too well, but that knowledge seems somehow to evaporate when they find themselves on the government Benches. Some of us still remember.

The importance of the macroprudential measures lies not in their technical specification and potential impact on financial stability, though those are very important issues. The equally important issues are the consequences of using the measures and their impact on the wider economy. These matters need proper scrutiny and debate both in Parliament and, as we discussed earlier, outside. Once the FPC has been granted these measures they will be able to use them without any further parliamentary intervention. The price for getting these wrong could be very high and so Parliament needs to be very sure that it understands the potential impact of the powers and that it has an opportunity to amend or circumscribe them if that is appropriate. The only way we can get a proper debate in these terms is through the use of the super-affirmative procedure, and that is what the amendment proposes.

The Treasury Select Committee in another place believes that the super-affirmative procedure is appropriate and fully in accordance with Erskine May, which describes the procedure as used,”

“in enactments where an exceptionally high degree of scrutiny is appropriate”.

It is inescapable that these measures fall into that category. It is generally the case that Governments never start out thinking that the super-affirmative procedure is the right one. However, the will of Parliament does sometimes prevail over the Executive in this area.

The Government recently accepted in the Public Bodies Act 2011 that their powers to wind up such hugely important bodies as the Home Grown Timber Advisory Committee or the Railway Heritage Committee should be subject to the super-affirmative procedure, but it appears that they have yet to be convinced that granting these massive new powers to the FPC is of that importance. It is a no-brainer that the super-affirmative procedure should be used and I hope that my noble friend will be prepared to accept that that is the case.

I am aware that the Delegated Powers Committee, which I hold in the highest regard, has not raised objections to the affirmative procedure in the Bill. That is interesting but not conclusive. The final arbiter on these matters is Parliament. The Delegated Powers Committee acts as an early warning system of problems for Parliament to address. The committee does not act on behalf of Parliament to approve particular procedures.

In responding to the Treasury Select Committee, the Government have raised concerns about timing and, in particular, the impact of recesses. This is a red herring. We are not generally dealing with matters which need to be introduced immediately. However, if the FPC woke up one morning with an urgent need to acquire a new macroprudential tool, one’s first reaction would be that that was surprising. However, if that were genuinely the case and the Treasury were committed, my Amendment 62 does not remove the ability to act with urgency. The powers set out in new Section 9M for the made affirmative procedure can be used when the Treasury is convinced of the urgency of the matter.

When the Governor of the Bank of England came to talk to a number of us last week, he rightly emphasised the accountability of the Bank and the FPC to Parliament. Accountability is an ex post concept: Parliament also has to have the ability to be involved fully ex ante in the formulation of important matters such as the macroprudential measures, and the super-affirmative procedure is the only proper way to proceed. I beg to move.

[Lord Northbrook]

My Lords, I support my noble friend Lady Noakes in her Amendment 162. Like my noble friend, I believe that there should be stronger parliamentary scrutiny of the macroprudential tools.

While I accept that there must be flexibility to grant the FPC new tools quickly in rare and urgent circumstances, I still agree with the Treasury Select Committee’s report on the accountability of the Bank of England. As the legislation stands, approval by the House of Commons requires only a 90-minute debate in a general committee and a decision without debate in the House. Like the Select Committee, I recommend that the Government amend the draft legislation to require debates on orders prescribing macroprudential measures to be held on the Floor of the House and not be subject to the 90-minute restriction. The House would benefit from prior scrutiny of such orders by the committee. This view is supported by the Joint Committee on the draft Financial Services Bill, which agrees that there should be a system of enhanced parliamentary scrutiny of these important tools. Like my noble friend Lady Noakes, I was disappointed. Although I respect enormously the Delegated Powers Committee, I felt that its arguments for not wishing this were not as substantial as I would have liked.