Financial Services Bill

Debate between Lord O'Donnell and Lord Sassoon

Tuesday 26th June 2012 Lords Chamber

[Lord O'Donnell]

I support the noble Lord, Lord Flight, in that and pick up on what the noble Lord, Lord Eatwell, was saying about this issue. I completely agree that the problem is whether the governor concentrates on one area to the exclusion of the other. You risk making things worse if you make the governor chair of one of these committees and not the other. I would say that you cannot have a Governor of the Bank of England who is not sitting on the Monetary Policy Committee. I just cannot see how you would have a governor who does not have a vote on the interest rate for this country. It does not seem to make any sense whatever. The Financial Policy Committee is going to take decisions on instruments such as loan-to-value ratios which will have quite an important bearing on macroeconomic issues which also matter to the MPC. I completely accept the issues about concentration of power. They are very important and should be handled through the accountability relationships that we set up. I also agree that the third body is very different and therefore the governor should not chair it, but the MPC and the FPC overlap so much that I do not think it is feasible not to have one person chairing both. If you were governor, and sent your deputy to chair one of these meetings, can you imagine how much time would be spent instructing them on what you thought they should do and getting feedback? It is far more transparent and open that one person chairs both.

[Lord Sassoon]

My Lords, this has been a very interesting discussion. Let me first deal with Amendments 3 and 4 in the names of the noble Lords, Lord Barnett and Lord Peston, and remind the House of one or two background issues with the deputy governors. First, we are not creating any new positions here. We are talking about two deputy governors who were created in the Bank of England by the Bank of England Act 1998. For the avoidance of doubt, we are not talking about anything new, but about existing deputy governors. Of course, the details of their pay and that of all other members of the Bank’s senior management are set out in the annual report and accounts. If it helps the noble Lord, Lord Barnett, page 41 of the 2011 accounts sets it all out in full detail. We are not talking about something new here.

As to the question of the noble Lord, Lord Peston, about job descriptions, when the role is advertised for a new appointment, a full job spec of the sort that he would expect is indeed produced. If he will forgive me, we will come on to questions of appointment in a further grouping, when no doubt we can come back to that point.

The two amendments open up a discussion about why we have deputy governors and what is their role, so I should say a word or two on that. I suggest that the role of the deputy governors is crucial. It would be enormously challenging for the governor to handle the breadth of policy and operational responsibilities of the Bank without support from the two specialist deputy governors. Each of the existing deputies is responsible for the Bank’s activities relating to one of its two statutory objectives: monetary policy and financial stability. That in itself goes 90% of the way to explaining the job description in very clear terms. The deputy governors run those areas on a day-to-day basis; they take the lead in many cases in international negotiations in those areas; they communicate with the public; and they have a major role in the relationship with the Government and Parliament in their respective areas.

Particularly given the enhanced responsibilities that the Bill will give to the Bank, I see absolutely no reason why we would want to weaken the Bank’s senior executive team by removing the deputy governors. I hope that that is not what the noble Lords who tabled the amendment would want, although that would be its effect. Rather the reverse: the capacity of the Bank’s senior team must be strengthened to equip it for its new responsibilities, which is precisely why Clause 1 creates a new deputy governor post. The third deputy governor will be the chief executive of the PRA and will be responsible for prudential regulation within the Bank. This has been a useful teasing out of what the deputy governors do, and I hope that that explanation has proved useful.

I turn to Amendment 9 in the name of the right reverend Prelate the Bishop of Durham, which would require the court to remove responsibilities from the governor. It will be no surprise to the Committee when I say at the outset that I do not believe that that is appropriate. The governor is the most senior executive in the Bank and is ultimately accountable for all the Bank’s decisions and actions. Of course, a great deal of Bank policy-making is delegated by statute to policy committees, including the MPC and the FPC. Indeed, it could be argued that most of the Bank’s most vital decisions are taken by the FPC and the MPC—and, in future, also by the PRA board.

I largely agree with the three noble Lords who are very distinguished former Permanent Secretaries to the Treasury. The Committee should be very grateful that they are here and able to illuminate this debate with such clarity. However, having heard the noble Lord, Lord Turnbull, in particular, at Second Reading, I suspect that there may be moments later down the track when we may not be in complete agreement. The interventions of the noble Lords, Lord Turnbull and Lord O’Donnell, on the amendment have been illuminating. The noble Lord, Lord O’Donnell, quite rightly highlighted the co-ordinating role and the need for balance and the noble Lord, Lord Turnbull, rightfully made the point about where the buck stops. I suggest that it is right that the governor, as the head of the Bank and being fully accountable for the decisions taken by the Bank’s policy-making bodies, should chair these committees.

I will come on to some rightful concerns about that position in a moment but I add, in parenthesis, that I am also grateful to the noble Lord, Lord O’Donnell, for answering the question that I have had on a number of occasions from the noble Lords, Lord Barnett and Lord Peston, about what the Treasury representative does on the MPC. I was privileged to be there on one occasion; even the Permanent Secretary to the Treasury needs a holiday in August occasionally, so I deputised. I hope that the very clear explanation from the noble Lord, Lord O’Donnell, will mean that we do not get the question quite as often in the next two years, so I am grateful for that.

The substantive concern underlining Amendment 9, about the concentration of power in the Bank and in the governor as an individual, is an important issue. I was not going to argue for one minute, and will not argue, that the oversight committee is the answer to that point. No doubt we will come on to talk at length about the oversight committee which, among other things, responds to the Treasury Committee’s specific recommendation that reviews be retrospective in order to allow enough time to pass to learn the lessons effectively from decisions and actions that are taken by the Bank. We will come on to that but it does not address the issues we have here.

Let me suggest, in answer to the point in Amendment 9, that there are some effective checks and balances in the system. To start with, in each of the governor’s roles—as chair of the MPC, the FPC and the PRA, and as head of the Bank itself—he or she will be both supported and challenged by a group of experts. Those experts will include internal Bank executives such as the specialist deputy governors, who we have talked about; the executive directors and the non-executives of the two governing bodies, the court and the PRA board; and external members of the policy committees, the FPC and the MPC. I certainly agree with my noble friend Lord Sharkey that that challenge is important. It is already there and it will continue in the new construct so that in each area of the governor’s areas of responsibility, he or she will not be responsible for taking decisions alone. In the MPC and FPC, policy decisions are taken collectively, with each member having a voice and a vote.

On the specific issues raised by my noble friend Lord Sharkey, those votes do not always go the governor’s way. Members of the Committee may be aware that the governor has found himself on the losing side of the MPC vote on a number of occasions, most recently in the June MPC meeting. I suggest, first, that there is the right construct of individuals to challenge and that, secondly, we have evidence that challenge takes place and is effective. Equally, on the governing bodies of the Bank and the PRA, decisions will be taken collectively, with non-executive members being in the majority on both bodies. As chair of the PRA board, the governor will ensure strategic co-ordination between the PRA and the rest of the Bank group; that aspect of co-ordination is also important. That will help to ensure an effective and joined-up response to emerging threats to financial stability.

However, the governor will not play a hands-on role in the day-to-day running of the PRA. That will be the job of the deputy governor for prudential regulation in his or her role as chief executive. The governor will therefore be fully supported in all the different roles and will receive effective challenge from both Bank insiders and external members. It is entirely right that the responsibilities of the governor and the arrangements to ensure that he or she is both supported and held properly accountable should be determined and set by Parliament through the legislation we are scrutinising today, rather than delegated to the discretion of the Court of Directors of the Bank. For all those reasons, therefore, I cannot support the amendments in this group. I would ask the noble Lord, Lord Barnett, and the right reverend Prelate to withdraw their respective amendments.

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[Lord Sassoon]

My Lords, first of all, I am not going to respond to the challenge of how different governors have handled committee chairing. As I have explained, I have sat in on one meeting of the MPC. We have other noble Lords, or at least one, who have sat in on a lot of meetings. I am not sure where the noble Lord, Lord Peston, gets his first-hand experience from, but let us put that aside. I hear now that he has no first-hand experience. Well, I am glad to hear that, but let us put that on one side.

I appreciate that in this Bill, and under the present arrangements, the Governor of the Bank of England has a very challenging job. The essence of what we are putting back into the Bank of England is, of course, leadership in financial supervision, which was part of the historical role of the Bank, except for the last 15 years or so. The Bank has essentially had these responsibilities in the past. The governor is and will be very well supported, partly by the deputy governors, as I have explained, but also, of course, by the whole Bank and PRA executive. This whole construct has been discussed in detail with the present governor, so I am fully confident, without being able to go through the governor’s time and analyse it, that this has been carefully thought about and the new proposed role of the governor is entirely manageable with the support that the governor has and will have.

[Lord O'Donnell]

Having sat through large numbers of meetings of the Monetary Policy Committee chaired by Eddie George and Mervyn King, I know that the reality is that the chairman has one vote, although they have a casting vote. That dominates the style of the meetings; they are not so much dominated by the style of the individual who is chairing them. Having sat through all those, I do not think that the contrast is as great as the noble Lord, Lord Peston, makes out. It is certainly true that I remember one occasion when the vote was coming round to Eddie George and he was 4-3 down, and he chose to use his vote to make it 4-4 and then used his casting vote to make it 5-4. That was an interesting use of the chair’s power. It is important, though, that the chair has only one vote and that therefore, of the nine, they can be outvoted; indeed, that is a good thing.

As laid down in the previous Act, the governor has always had responsibility for financial stability, so it is a question of how they choose to use it. Like the noble Lord, Lord Peston, I worry about the sheer weight of meetings because it is not just these meetings but the international ones as well. That is an issue, and it may be that one of the things that we got wrong with the Bank of England Act was specifying precisely how many meetings there should be. On occasion, it would be nice if you could go through a period of longed-for financial and economic stability when you might be able to pass on one or two of these meetings and not be forced to have them quite so often when actually there was not that much to do. However, that is a nirvana that we are not that close to at the moment.