Financial Services Bill

Debate between Lord O'Donnell and Lord Archbishop of Canterbury

Tuesday 3rd July 2012 Lords Chamber

[Lord O'Donnell]

My Lords, I rise to support Amendment 35A and in particular to speak in favour of the phrase “subject to that”. It is important that we understand why this was put there for the MPC. The basic economic principle was that low and stable inflation was the best prerequisite for long-term sustainable growth. Shocks to economies happen, which mean that inflation will move away either above or below. When that happens, the MPC has a choice. It has a choice of which path of its instruments—we thought at the time of just interest rates but obviously QE is part of it—it should choose. The legislation gives a very clear answer to that because it says “subject to that, look to the broad economic objectives”, so it should be choosing that path which best meets those economic objectives while hitting long-term stable inflation.

It works for the symmetry with the FPC because we would all say that financial stability is a necessary and sufficient condition of sustainable economic growth. When you get shocks to financial stability—and boy have we had a shock—you then have choices about how you get back from those shocks. I strongly agree with the noble Lord, Lord Eatwell, that in these circumstances you do not want to have pro-cyclical regulation, which could make matters worse. It is really important that the “subject to that” is there and that that builds in the economic policy.

For those who want to explain economic policy in a lot more detail and put subsectors in, I would say that could be a very long list, so I think you have to rely on economic policy. The amendment is very clear. It refers to the Government’s,

“economic policy … including its objectives for growth and employment”.

I, for one, would ask “What is the economic policy of the Government?”. The Prime Minister made that clear when he said that we do not live by GDP growth alone and that what really matters is maximising well- being. Therefore, I think we have an overall strong objective which allows us to get to the right policies. It is not about a simple mechanistic formula.

[The Lord Bishop of Durham]

My Lords, I would hesitate to disagree with the strong voices who have accused me of coercion. It is some time since I was last accused of coercion—not since the Church Commissioners sold off my palace with its dungeons. Coercion is much less of an opportunity than it used to be.

The amendment is not coercive and I disagree with the views that have suggested that it is intended to be. It is part of a series of amendments which are meant to open up the market and make it easier to have more stable and sustainable supplies of finance across the market. It refers to a stable and sustainable supply of finance; not to creating it but to enabling it—making it possible. One of the characteristics of many areas of economic stress, such as those in my diocese, is the creation of microeconomies, which may be much weaker or stronger than the national averages may indicate. Many contributions from noble Lords have tended to look at the macro and national picture and have forgotten some of the local and smaller problems that happen but which nevertheless affect many people. Adequacy of finance varies significantly even within one size or sort of company, as I remember from my days in the oil industry during a collapse in the oil price. SMEs in the south of England may find a very different position from what they will find in the north-east. The noble Viscount, Lord Trenchard, called it an amendment for a planned economy, but the word used is not “planned”; rather the intention is reflected in the word “promoting”.

The speeches of many noble Lords seem to assume that the present situation is working. In many parts of the country, it is not. Some areas are virtually demonetised, apart from cash, and this is a significant problem. The reports of the Bank of England agent in the north-east indicate the irregularity of finance. Anyone who has managed the finances of a company and a social enterprise, as I have, will know that that is a more serious problem than a continual supply or even a shortage of supply. You need to know what you are planning for. Moreover, a lack of attention to regulatory barriers to access to finance is likely to result, without attention, in a less competitive and open market that in turn will see a continuation of these inequalities across the country.

It may well be that the language of the amendment to which I have added my name is a little too forceful and coercive—I am rather attracted by coercion—and that seems to be a common view which I would probably be hard put to resist. I hope that the Minister will take note of the issues of closed and inadequately liquid markets in certain areas of our economy and of access to finance being more difficult in less fashionable areas where the need for employment creation is severe.

Financial Services Bill

Debate between Lord O'Donnell and Lord Archbishop of Canterbury

Tuesday 26th June 2012 Lords Chamber

[Lord O'Donnell]

Perhaps I may respond to the noble Lord’s comments about the Monetary Policy Committee and the Treasury person on it, having been that Treasury person at a very large number of MPC meetings. That person is referred to as the Treasury representative. In the early stages of the meetings, they would explain what was going on in fiscal policy to allow fiscal monetary co-ordination to take place. However, the convention was that the Treasury representative did not get involved in the committee’s discussion about a decision on interest rates.

[The Lord Bishop of Durham]

I shall speak to the amendment in my name, which is in this group. The noble Lord, Lord Eatwell, and others, have commented that the governor’s powers under this Bill are extraordinary. In fact, in the internal running of the Bank the governor will become totally dominant and virtually unchallengeable, as it will the governor who sits on all the relevant key committees. By virtue not only of sitting on them but of chairing them, the governor will have power over the agendas and the conduct of business. That will enable the governor essentially to control the direction of the PRA, the MPC and the FPC completely.

The purpose of the amendment is to pick up some of the points that the noble Lord, Lord Barnett, made so well a few moments ago and which had been made earlier. It seeks to balance the powers in the committees so that the deputy governors have control of their own special areas and are capable of ensuring that the committees focus on the areas that they know well. Noble Lords are aware that in the crisis of 2008, part of the problem, which has been brought out in subsequent inquiries, was that the governor’s focus was inevitably on one area and that others were overlooked because they were not the governor’s principal concern at the time. It is therefore necessary to try to balance the internal powers to create a robust and demanding internal discussion within the Bank long before it comes to the oversight or review of what might have gone wrong in the past—in other words, to stop things happening before they happen rather than afterwards.

Government Amendment 13, which is a fascinating, interesting and useful amendment that will be discussed later, seems, with respect to the noble Lord, to be retrospective rather than prospective. There is quite a lot of closing the stable doors after the horses have left. We do not want another run on the banking system; we want people to stop one. It is the old pink elephant problem: how do you prove that the system has stopped pink elephants being around because you never see one? We will be looking backwards, not forwards, with Amendment 13. It is useful in helping us to understand what has gone wrong but not what happened at the time.

My other concern in trying to balance out these major three committees, two being chaired by a deputy governor, is to try to make the FCA slightly less of the runt of the litter. At the moment, with one person having so much control, the FCA, which is the only committee of the big four that the governor does not chair, ends up being overlooked, I fear. Will the Minister comment on whether he agrees with the point made forcefully earlier that the most rigorous models of governance today should be those that are modelled on the Bank, which include ways of ensuring that it is a learning organisation before rather than after disasters happen. What further action can he suggest to ensure that the FCA’s voice is heard clearly, given its widespread impact on consumer finance across the whole nation and not only in the major financial institutions in the City of London?