Financial Services Bill

Lord Sassoon Excerpts

Wednesday 17th October 2012 Lords Chamber

[Lord Tunnicliffe]

I spent some years sitting on the Benches opposite facing the noble Baroness, Lady Noakes, and it comes as a refreshing new experience to find myself so frequently in agreement with her on this Bill. I am sure that will distress her as much as it is distressing me. Unfortunately, her caveating remarks are every bit as important as the lead remarks recommending the amendment.

We would not be able to support the amendment as drafted because, as she rightly points out, it could involve a direction to the MPC. This part of the Bill is a limiting list. The noble Baroness may want to consider either extending the list—we would look at that with great interest—or reversing it and extending the powers to the whole of the activity as her present amendment does and then caveating it with a number of areas where this power could not be used. This is a very useful amendment to develop the debate. I look forward to the Minister’s reply and thank the noble Baroness for proposing it.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, first let me be clear that I do not believe that it would be appropriate to extend the scope of the power in the way that is suggested by this amendment. It would make the power unusable. I was going to remind my noble friend, but she already made the point, that the Treasury already has a very broad power of direction over the Bank. As my noble friend pointed out, Section 4 of the Bank of England Act 1946, which continues and will continue to be operative, as my noble friend says, allows the Treasury to,

“give such directions to the Bank as ... they”,

the Treasury,

“think necessary in the public interest, except in relation to monetary policy”.

I think we are all agreed that the amendment was not intended to cover monetary policy.

[Lord Tunnicliffe]

Does the noble Lord agree that every Committee that has looked at this and reported and all professional commentators take the view that the power is so wide and so nuclear that no Chancellor would ever use it?

[Lord Sassoon]

My Lords, the noble Lord, Lord Tunnicliffe, is getting ahead of me. That was precisely what I was going on to explain. He is absolutely right that the power has never been used. Even at the height of the recent financial crisis, the then Chancellor felt unable to use this power to direct the Bank. Indeed, Alistair Darling’s book is rather interesting on this point. He explains in it that he was told,

“that it might be legally possible”,

to direct the Bank, but that,

“there would be wider implications of such an action. We had set great store by making the Bank independent and a public row between myself and Mervyn would have been disastrous, particularly at this time”.

The 1946 Act direction power is considered, and was considered by a Chancellor very recently, to be such a nuclear option because it is so broad that it would be very difficult to use. This means that any use of the power would likely be interpreted as the Chancellor overruling decisions and judgments that should rightly be for the Bank. This would be seen as a direct challenge to the Bank’s independence and a judgment on the competence of the Bank’s senior executives, which could cause a crisis in leadership in the Bank and a serious loss of public confidence. That line of thinking has prevented Chancellors from using the 1946 Act power in the past, as the fallout could be more damaging than the situation that they might be trying directly to address.

That risk was recognised by the Treasury Committee. That is why their report recommended that,

“the Chancellor should be granted a power to direct the Bank in a crisis which is free of the problems associated with the power under the 1946 Act”.

That is why the new power of direction in Clause 57 is designed to be a targeted and usable power. There will still be the power in the 1946 Act, for the reasons that underlie what my noble friend and the noble Lord, Lord Tunnicliffe, said. It is probably worth maintaining that reserve power somewhere in the system, albeit with the caveat that it is difficult to see the situation in which it might be exercised.

On the other hand, and going to the heart of who is in charge and who is responsible for what is in the new system, it was muddled and confused under the tripartite system but we want to make it much clearer in the new system that the Chancellor and the Treasury are principally there as guardians of public funds. That is why the specific direction in Clause 57 is designed that way. It is targeted. It does not allow the Treasury to overrule the Bank’s decisions and judgments; it allows the Treasury to take the decisions that are rightly for the Government to take. It is designed to allow the Chancellor to intervene to require the Bank to take specific action in a crisis management situation where public funds are at risk. That is why the power covers only the Bank’s crisis management functions, specifically the provision of liquidity and the operation of the special resolution regime. Again, I hope that that helps the noble Lord, Lord Peston, with the intended scope of this.

[Lord Peston]

My Lords, the noble Lord has clarified that very well. I take it that there would still be, as happens all the time, informal meetings between the Chancellor and the Governor, where the Chancellor might say, “Well, it is your decision but I am a bit worried about this or that”. Nothing will infringe on that because, as the noble Lord well knows, no system can work without informal and off the record meetings and things of that sort. This will not get in the way of what one might call ordinary human behaviour.

[Lord Sassoon]

No, indeed. The next time, in another context, the noble Lord challenges me about why we are not disclosing more meetings, I shall remember what he just said about informal and confidential meetings. It is important that they happen. Having seen how things happened before and how they happen now, it is striking to see the much greater regularity of meetings between the principals—they are critical—than happened at some periods in the past. That is very important as a background in peacetime as well as in crisis time.

I hope that is clear. The Bank is in charge of operating the resolution regime, but the Chancellor must agree to any use of public funds and has the final say when they are used. Even setting aside the unintended drafting of Amendment 190ZE to include a power that would be even more widely drawn than the 1946 Act, the targeted power that we have drawn is the appropriate one. If we had drawn the power more widely to allow for future proofing, as my noble friend puts it, I would be standing here defending why we had left such an important area open in the Bill. It is better to draft such a power related to the system as we know it. It is broadly future proofed in the sense that there is a clear distinction between the use of public funds and other matters, and after that helpful debate I hope that my noble friend will withdraw her amendment.

[Lord Barnett]

I thought that the Minister in his earlier answer was about to say that the meetings between the Governor and the Chancellor would be available on the web. The other day he rather misled me and probably the House when he said, in answer to my question about a meeting between the OBR and the Chancellor and how often he had had meetings in the last 12 months, that it was all transparent and on the web. I am no expert in these matters, but I spent quite a bit of time on the web and could not find it there. I asked my noble friend Lord Peston, who is perhaps better on the web. He too spent a lot of time on it and still could not find it, either transparently or non-transparently. Can the Minister explain to the House whether it is misleading to suggest that these things are transparent on the web?

[Lord Sassoon]

My Lords, although I believe that we are allowed to use portable electronic devices in the Chamber, I cannot in 30 seconds find it. I can assure the noble Lord, Lord Barnett, that it is done on either a quarterly or six-monthly basis. I do not know whether the search was made on the OBR website or the Treasury website, but my recollection is that the OBR releases something on its website periodically. I will find the appropriate link and let the noble Lords have it.

[Lord Peston]

I understood him to say the other day that it was on the Treasury website and I wasted three-quarters of an hour this morning. There is lots of good stuff on it. You can spend a happy day searching the Treasury website, but it did not contain anything that the Minister had told us it did contain. We can leave it at that.

[Lord Sassoon]

I apologise if I directed people to the wrong website. I will find the right one, which I think might be the OBR’s own website.

--- Later in debate ---

[Lord Tunnicliffe]

My Lords, the intention behind this amendment is twofold. It is to bring more players into the decision about an early notification and to bring in the requirement for early notification. Touching first on bringing new bodies into this, the clause effectively brings the FPC, the FCA and the PRA into the early notification procedure advocated in this clause. The essence of our concern has been rehearsed around the House. It is that the Bill gives enormous power to the Governor of the Bank of England and, in a crisis, he effectively ends up as the gatekeeper of information flowing from the Bank to the Government. We believe that there should be ways of making this gate wider and that where the FCA and the PRA—I shall talk about the FPC in the next amendment—believe that an early warning is required, they should have a duty to consider the circumstances; and where they believe that it makes sense, they should have a duty to communicate that to the Treasury or the Secretary of State. This would clearly require them, as part of their function, to be proactive in their stance when they are horizon-scanning or looking forward at various risks.

The second part of the amendment is about the essence of an early warning. The concept of an early warning is that it is a warning short of a formal notice. The amendment lowers the bar from the form of words in the Bill that implies the “probability” of a material risk or the requirement of the use of public funds to the “possibility”. It echoes the concerns of the Treasury Select Committee in its 21st report which was published on 8 November 2012. Its recommendation at paragraph 166 was:

“We are concerned that the formal notification of a material risk to public funds may still not give the Chancellor enough time to consider other policy options. The Treasury needs to know as early as reasonably possible when it might receive a notification. We therefore recommend that the forthcoming legislation also require the Bank to give the Chancellor an early warning of the possibility that a notification of a material risk to public funds may need to be given, and full information about the circumstances”.

We very much agree with that recommendation and in this amendment we seek to give effect to it.

The process of crisis that we are debating will probably involve protecting the activation of the proactive intervention framework. The noble Baroness, Lady Noakes, knows what I am talking about because she is familiar with the document, The Bank of England, Prudential Regulation Authority: Our Approach to Banking Supervision, published in May 2011. The PIF is described on page 18. It describes five stages of escalation, which presumably are the key stages that lead up to a crisis. There is almost a presumption that there is a clear difference between normal business and a crisis. I hope it never happens, but if it did, it would be an escalating situation. Some of the stages of the proactive intervention framework will be in private. Some will not want to be the subject of a notice, as the final notification as envisaged in the Bill should be. The ability and duty of the Bank to give a notice of possibility would allow those private activities, in the early stages of the PIF, to take place, alerting the Government that they have to start thinking about the possibilities and how they may develop.

The counterargument often revolves around the fact that the Chancellor and the Governor of the Bank of England talk to each other. Of course, at the moment we have two most charming individuals and I am sure that they have useful conversations. However, once again, if you go into the evidence of the Select Committee and its comments, clearly this has not always been true. I am rather sorry that the noble Lord, Lord Lawson, is not in his place so that he could reflect on the events of 1984 when he had to find a great deal of money to save a failing bank and, according to the Select Committee, was advised of that requirement on the morning of the crisis. Equally, one cannot read Alistair Darling’s book without a clear feeling that the day-to-day communication between the Governor of the Bank of England and the Chancellor was less than warm. Certainly, it was not enough to leave one comfortable that the necessary preliminary warning that this amendment envisages would take place at an informal level.

As this crisis gathers, one has to presume a situation that relationships could really be quite bad. They could be in seven years’ time. The new governor might turn out to be less charming than the present one. The Chancellor of the day could well be less charming and communicative than the present one. In fact, there could have been a total breakdown of trust between them. It has happened in the past. This amendment would require a preliminary notice and there would be a dereliction of duty if the Government did not provide this preliminary notice. This mechanism would allow the Government to start their preliminary thinking and consider mitigation measures other than the expenditure of public money—as envisaged in the Bill —and give the lead times necessary. Crucial is a situation of no surprise. We are very uncomfortable about the sense behind some of the remarks, and the extent to which the governor is the gatekeeper of information to the Government. We believe the Government should be equally sensitive and concerned and I commend the amendment to the them.

[Lord Sassoon]

My Lords, I am genuinely puzzled about this amendment. I know that it was put forward in another place by Mr Leslie, the colleague of the noble Lord, Lord Tunnicliffe, and that it is designed to implement a Treasury Select Committee recommendation to create an early-warning mechanism of a risk to public funds. No one would be keener than me to have such a mechanism in place if I believed that it was necessary because I thought that the Treasury would not, under the provisions of this Bill, get sufficient early warning.

However, this provision and the question of an early warning do not rely on what I think we all agree is very important; namely, that there is constant dialogue about a whole range of things between the Treasury and the authorities, including the Bank. The question of an early warning does not rely on that, although we would expect it to carry on because it is working well at the moment.

I believe that the amendment is unnecessary and inappropriate. Therefore, let me carefully go through why. First, as the Government made clear in their response to the Treasury Select Committee, the duty on the Bank to notify the Treasury of risks to public funds already achieves this aim. The existing duty is already designed to give the Treasury an early warning of a potential risk to public funds. That is because Clause 54 sets an extremely low bar for notification; for example, when the Bank or the PRA looks at the position of a firm or a group of firms, if it thinks that a possible future scenario could lead to a situation in which the Treasury might reasonably be expected to decide to use public money to protect stability or the public interest, a notification must be made.

I do not think that the bar could be set much lower than that. For example, in the type of scenario described by the noble Lord, where the Bank is aware that at some point in the future a risk to public funds could arise, the Bank should be making a notification of a risk to public funds under the existing duty in Clause 54. I am happy to put that on the public record again. The Bank completely accepts that and there is no debate about the interpretation of the duty under Clause 54.

With this amendment, the noble Lord also risks undermining the clarity and force of the statutory duty to notify the Chancellor of risks to public funds by broadening the grounds on which it could be triggered to include risks to the FCA’s objectives which do not involve public money. Just as in the previous debate we were talking about issues which related to the line between risk to public money and other matters, again, in relation to this particular early warning, the duty is drafted very deliberately with the line drawn, which is not reflected in the noble Lord’s amendment.

[Lord Tunnicliffe]

I feel that the words used by the Minister are quite a shift. He referred to a “possible future scenario”. As I read Clause 54, it is much closer to a probable future scenario. Will he explain to me—I am sure that he is much more familiar with the Bill than I am, much as I have tried to study it in the past few days—where in statute I can draw the comfort that a possible very low bar to notification is emphasised.

[Lord Sassoon]

My Lords, the fact is that a regulator would have to look at future scenarios when it is thinking of its duty under Clause 54. The clause refers not to a situation that has arisen but to,

“a material risk of circumstances”,

which links it, as I have said, to the provision of financial assistance. It is clear and simple. There is a lot of other stuff in Clause 54(1), but the key things are,

“that there is a material risk of circumstances within any of the following cases”,

which are then explained in detail. As understood by the Government and the Bank, this is a forward-looking statement and requirement, which obliges them to think about possible future scenarios that could lead to the situations that are then developed in Clause 54. Of course, the duty in Clause 55 is to notify any changes to that.

[Lord Tunnicliffe]

I think that some of what the Minister has just said is quite a shift from what Clause 54 says. I would be delighted if he came forward on Report with some amendments that contained a duty to look at scenarios and a duty to bring forward a notification at the point of a possibility. There has been considerable debate in another place and in various committees, as to what “a material risk” means. There is a commitment in Clause 61 that it must be in the MoU, but as I search the MoU I cannot find it coming readily out to me—I shall be asking about that later. I invite the Minister to consider what he has said and see whether he can improve the legislation so that there will be no ambiguity about the test that the Bank has to apply in bringing forward a notification.

[Lord Peston]

My Lords, perhaps I can help the Minister—it is not a question of persuading him to say yes or no at the moment. Looking at Clause 54, I take “material risk” to mean a significant probability; “possible” is much less than that. I think that my noble friend suggests in his amendment that Clause 54 would be strengthened if we went down the “possible” line, the technical point being—and I do not press it—that there is deep philosophical argument, particularly within probability theory, about the difference between possible and probable.

I interpret the amendment to mean that if the relevant body—whether the Bank of England or another regulator—is looking at a specific part of the financial services sector, or even a specific firm within it, it should let the Government know that it is doing so and that one definitely possible outcome is a need for the use of public funds. The amendment, as I understand it, is simply an attempt to be helpful to HMG when it comes to the control of public money. The Minister may say, “We do not want to know about possibles; we only want to know when the real demand for the money is coming”. That may be his argument, but that is the difference—am I not right?—as to what we are talking about here.

[Lord Sassoon]

Perhaps I did not make sufficiently clear the rather obvious point that we need to look at the heading of Clause 54, “Duty of Bank to notify Treasury of possible need for public funds”. At the risk of stating the obvious—it seems that we need to come back to the obvious—this whole duty is about the notification of a possible need for public funds. If we wanted to say “probable need for public funds”, the Bill would say “probable” in the clause heading, but it does not, it says “possible”. I advise the noble Lord that we are looking at the heading of Clause 54 in part 4 on page 134 of the Bill.

[Lord Peston]

Forgive me. I am willing to accept that I am wrong. I agree that the top line says “possible” but “material risk” is what goes into the material section of the Bill. That seems to me to undermine the clause heading. That seems to me the real point. Why have the Government put in “material risk” if they meant possible risk?

[Lord Sassoon]

My Lords, there are some points where, frankly, I have to take the advice of the legal experts here, which I have done. Frequently Bills, this one included, contain constructions which follow some sort of drafting formula and are sometimes difficult to understand. As I say, my starting point is that if I really thought that the Treasury was not going to get the sort of early warning which the noble Lord, Lord Tunnicliffe, and the Treasury Committee rightly ask for, I would propose a government amendment. I take the point that “possible” appears in a heading and not in Clause 54(1) but it is very clear from the heading that we are talking about the material risk in the context of the possible need for public funds. I assure the Committee that all the advice that I have been given is to the effect that this will achieve the purpose that the noble Lord, Lord Tunnicliffe, desires. Finally, I draw the noble Lord’s attention to paragraph 13 of the draft MoU to find the interaction between the MoU and these issues. On the basis of those explanations, I hope that the noble Lord will feel able to withdraw his amendment.

[Lord Tunnicliffe]

My Lords, this has been a useful debate. However, members of the Treasury Committee are concerned that there is confusion about material risk. We will come to the extent to which the MoU does or does not define that. I believe that a Prime Minister once said, “Circumstances, old boy, circumstances”. As I said, I am happy to accept the Minister’s assurance that the legislation will work under the present charming governor and charming Chancellor, but it needs to be future proof. The words that the Minister used in connection with this important point were reassuring but they need to be in the Bill if they are to persist beyond the tenure of the present Government. I hope that he will consider bringing forward an amendment to achieve that. In the mean time, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Sassoon]

My Lords, I am very happy to accept the spirit in which the noble Lord, Lord Davies of Oldham, has spoken to the amendments in the name of his noble friend Lord Tunnicliffe. However, the rather hesitant and apologetic tone in which he presented them would make it all the more surprising if I were to say that they found favour with me. They do not, but I will take them seriously because although they replicate amendments that were debated in Committee in another place, of course we as a Government should respond to them.

Why do I believe that it would be a mistake to include the FCA as a full participant in the crisis management MoU? The issue goes right to the heart of what the new regulatory architecture is trying to achieve. The Government are committed to moving away from a tripartite model where accountability was confused and diluted, and responsibilities were overlapping and unclear. There cannot be an issue in the Bill that goes closer to the heart of it than the MoU. A key element in achieving the clarity of responsibilities that we need is making the Bank a single point of accountability for financial stability. We debated that, and it goes to the heart of the architecture. This will help to ensure clarity and focus of communication; it will reduce the potential for delay or confusion; and it will provide the best chance of delivering a timely and successful solution to a risk to public funds. The construction of the MoU, and who is and who is not a party to it, flows directly from that central part of the architecture which this Bill seeks to put in place.

Of course there will be occasions on which the FCA might need to be involved in discussions around financial crisis management. For example, the FCA might have a role in identifying how a scenario might impact on the interests of consumers and in suggesting what action should be taken to protect those interests. However, the FCA does not need to be one of the primary participants in the MoU for those interactions to take place. The legislation provides explicitly for this co-operation between the participants to the MoU and the FCA to be covered in the MoU. That is why, as I am sure the noble Lord, Lord Davies of Oldham, will have noted, paragraph 34 of the draft memorandum sets out that the Bank and the Treasury will involve the FCA and other organisations as necessary. Again, I fully understand and respect the substantive point made by this amendment but it is dealt with through the obligation in the legislation for the co-operation. It is backed up by a paragraph in the draft MoU and that is where we believe it should rest in a way that is compatible with this greater clarity of responsibilities that we have to get into the new system.

To underline the point, the FCA does not have a significant role in the crisis management itself. It is not responsible for responding to or managing serious threats to stability—that is for the PRA and the Bank— nor for prudentially regulating firms that are likely to pose a risk to public funds; a matter for the PRA. Therefore, the FCA does not need to be a primary participant in the crisis MoU alongside the Treasury and the Bank of England. Indeed, I would suggest to the Committee that, if the FCA were included in this way, it would force the FCA to be a participant in meetings and discussions where it had no clear role.

The approach taken by the Bill is the most sensible solution. It ensures an appropriate level of FCA engagement in crisis management, without requiring the conduct regulator to get involved in aspects of crisis management where it has no remit or expertise. I would hope that, on the basis of this explanation of the rationale for the position, the noble Lord would feel able to withdraw the amendment.

[Lord Blackwell]

Before the noble Lord responds, clearly one area where the FCA has particular responsibilities are competition issues relating to the industry. Can my noble friend put on the record that, if a competition issue is raised in a crisis management situation, there will be an explicit expectation that the FCA would be involved it that?

[Lord Sassoon]

My Lords, I believe that paragraph 34 of the MoU is sufficiently widely drawn that the MoU will provide for the Bank and the Treasury to involve the FCA in that circumstance. However, we do not specify, and it would not be right to specify, the particular circumstances because the competition and other remits are made clear in the general objectives and obligations that the authorities are under. I do not believe that there is any lacuna in that respect.

[Lord Flight]

My Lords, I want briefly to support the Government’s position here. I am one of the few people still around who participated in the lifeboat back in 1974 in the wake of the secondary banking crisis then. Although I felt that the Bank of England had been less than perfect in allowing that crisis to develop, the way in which it handled it was first class. It did not cost the taxpayer a penny and the lifeboat got to grips and sorted out the various banks that were, in essence, bust.

The fears that I expressed in the other place at the time of the FiSMA about the tripartite agreement were exactly what transpired. The three parties failed to reach agreement, as I think is now widely recognised and known, and it is a miracle that the banking system did not actually collapse because it was dangerously close to doing so. In a banking crisis which is not about, if you like, conduct and how customers are treated, but for whatever reason is about the potential pack of cards implosion of the banking system, it is crucial that it is the banking regulator entity—in essence the Bank of England in consultation with the Chancellor of the Exchequer of the day—that has clear authority to get on and take the necessary measures promptly.

[Lord Davies of Oldham]

My Lords, I am not sure that we are disputing that last point. We are arguing that there may be a crisis in which the contribution of the FCA would be of considerable importance. Perhaps the Minister will answer this point for the clarification of the Committee and all those interested in this matter. We are not quite clear why the other regulator, the PRA, operates in a different fashion from the FCA with regard to the consultation on the memorandum. I should like the noble Lord at least to identify that factor.

[Lord Sassoon]

I am not quite sure I have understood what clarification the noble Lord is asking for. The simple fact is that we are talking about a memorandum to do with crisis management. Crisis management is to be led by the Bank of England under the clear responsibilities that we have in this framework and therefore the memorandum is focused entirely on matters where the responsibility lies between the Bank and the Treasury in so far as public money is at risk. We are talking about matters where essentially the FCA is an ancillary party because dealing with crisis management is not the FCA’s principal role. It has a lot of other responsibilities in the new system, but crisis management is not one of them. That entirely drives the logic behind who is and who is not party to the MoU. I do not know whether that helps the noble Lord.

[Lord Davies of Oldham]

The Minister is always helpful, if not always totally convincing. We shall think further about this matter and the answers he has given today. For the time being, I beg leave to withdraw the amendment.

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[Lord Davies of Oldham]

My Lords, again I apologise to the Committee that this amendment is also a casualty of the fact that we ought to have tabled and discussed it the other evening in the context of Clause 54, but in fact we failed to do so. I would therefore ask the Committee to show a degree of patience and bear in mind the content of Clause 54 which, as the Minister has already identified, is absolutely critical to this part of the Bill. We want to make our argument as it relates to Clause 61 because that is where the amendment is actually located. However, Clause 54, which sets out the circumstances under which a decision is made to notify the Treasury about the need for financial assistance to address a risk to public funds, is the background to the amendment.

The amendment seeks to arrive at a clearer definition of what “material risk” means. We have already had one shot at this issue today and I think we made a modicum of progress, but as my noble friend Lord Peston indicated, if we are not careful we might become engaged in a somewhat philosophical debate about the definition of risk. However, the term “material risk” appears in the Bill and therefore we ought to be as clear as we possibly can about what the term means. In the context of the memorandum of understanding, this amendment states that the memorandum needs to make provision for what the Bank and the Treasury regard as material risk. The amendment requires the definition to include risks that significantly impact on the safety and soundness of PRA-authorised persons and factors that put at risk relevant markets functioning well.

These are specifically and deliberately definitions which directly refer to the roles and objectives of the PRA and the FCA respectively. This is because the Opposition argue that the Bill and the draft memorandum are too vague about the role of the FCA and PRA in circumstances of material risk to public funds. I do not think that our discussion earlier this afternoon cleared this matter up. That is why we are once again giving the Minister the opportunity of being clearer about the matter, perhaps. We want to ensure that the Bank—the governor—will involve the FCA and PRA in these matters. The importance of defining material risk, and concerns that the Bill currently falls short on this, was raised by the committee convened to look at the draft legislation. That pre-legislative committee argued that it should be subject to parliamentary approval and should not be left to the memorandum of understanding.

We have parliamentary colleagues who have a real anxiety about this matter. I do not think that the discussions we have had thus far this afternoon allay all those anxieties. However, the Minister may be able to have a better shot at it a second time. I beg to move.

[Lord Sassoon]

Well, I will have another shot at it, but I do not suppose the schoolmaster opposite will necessarily mark me any better, however well I do. I am under no illusions. Nevertheless, I take this amendment suitably seriously. I will go through the arguments in the expectation that perhaps all will become clear and I will get an alpha plus for this one.

Amendment 190ZEB would link the threshold of the “public funds notification” detailed in Clause 54 to risks that could significantly impact the safety and soundness of PRA-authorised persons or undermine the orderly operation of financial markets.

This amendment would make the public funds trigger confusing, and less, rather than more, effective. I should explain why. The phrase “public funds notification” set out in Clause 54, which is a notification that public funds could be at risk, is precisely that. It is not a notification that there are circumstances in the financial sector that threaten the PRA or FCA’s objective.

The PRA will be responsible for prudential regulation of a large number of small deposit-takers and insurers, many of which can and do fail without any risk to public funds. Requiring the Bank to make a formal notification to the Treasury under Clause 54 every time and any time any of these institutions got into trouble could lead to a relatively large number of notifications where there was in fact no risk to public funds.

Similarly, adding a reference to the FCA’s objective to the definition of material risk in this way would broaden the grounds on which the duty to notify would be triggered to risks which do not involve public money. It would mean that the notification under Clause 54 was not in fact a public funds notification at all. Crucially, this would mean that the Treasury’s power of direction in Clause 57, which is available where there is a live public funds notification, would be available when there is no risk to public funds. I do not know whether that is what was intended here but I hope that the noble Lord would agree that that is not what should be achieved. This matters because decisions to use public funds to resolve a financial crisis are for the Government to take, usually the Chancellor personally. As such, the purpose of Clause 54 is to ensure that the Treasury is always informed when there is a material risk to public funds, and not for other, wider purposes.

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[Lord Davies of Oldham]

This amendment furthers the points that my noble friend and I have already made this afternoon about widening the range of individuals who should be in a position to contribute their knowledge, experience and advice to a crisis management scenario. We remain concerned that the Government have narrowed the point of action in crisis management. I listened very carefully to what the Minister said about the advantages of that narrowness and fully understand it, but I am still unconvinced that the Government have the Bill right about who should contribute fully to the management of what we all recognise is an issue of very great significance to the nation.

The memorandum of understanding on crisis management must, according to the Bill, make provision about obtaining and sharing information. This amendment seeks to facilitate this requirement and enhance the Bill. We need to ensure that certain key personnel can consult directly with the Treasury. The amendment develops our clearly argued concern that reference in the legislation to “the Bank” is too often taken to mean, or certainly risks being interpreted and acted on as meaning, simply the governor. We argue that the Bank’s deputy governors and the chief executive of the FCA should in the Bill be explicitly enabled to consult directly with the Treasury in such extreme circumstances.

We are worried about the concentration of power and feel that relevant alternative voices must be given the opportunity to be heard in the management of an issue of such great concern for the nation. This is particularly important if there proves to be a difference of opinion within the Bank. We know there are differences of opinion in the Bank on very important matters. One would expect that highly capable individuals with different experience would not always reach an identical opinion. If they did, they would not deserve the high position they occupy because they would be merely yes men or, in one or two cases, yes women.

Under the current formulation of financial regulation, the Chancellor can hear directly from the chairperson of the FSA. Under the new system and the memorandum of understanding, the Chancellor could hear from no one but the governor.

In the other place, the Minister said, “Well, of course, the Bank encompasses a range of people”. We are not convinced about that. We do not feel that the position is explicit enough. It does not address the point about including the FCA in the vital process of obtaining and sharing information. Nor does it indicate that, at a moment of great crisis for the nation, voices which might present a somewhat different view from that of the governor will have their position adequately reflected to the Chancellor. In every other aspect of the role that the Chancellor plays, he welcomes engaging with the opinions of a large section of the population, represented by Parliament. We are talking about crisis management here. It is an extremely important dimension. We all recognise the constraints; I am not sure that it is right that the legislation should so circumscribe those who advise the Chancellor. I beg to move.

[Lord Sassoon]

My Lords, the arguments represented by the amendment have been raised at virtually every stage of this Bill’s progress in both this House and another place. Indeed, my honourable friend the former Financial Secretary speculated that it seemed to reflect the Opposition’s obsession with dominant figures preventing any dissent emerging from within an organisation. That is probably more a reflection of where those concerns are coming from than anything to do with how the Bank of England operates. This is an extraordinary line with which the Opposition persist. I start by repeating what the Government have said on every previous occasion when this point was made. I agree entirely that frequent communication between Treasury Ministers and the senior executives of the central bank and financial regulators is important. However, there is absolutely no need to legislate to ensure that the deputy governors of the Bank and the chief executive of the FCA can speak directly to the Treasury. There is categorically nothing prohibiting that in the legislation or anywhere else. In fact, Treasury Ministers regularly meet the current deputy governor for financial stability and senior executives in the FSA. Senior Treasury officials maintain a virtually constant dialogue with the deputy governors and senior FSA figures via meetings, phone calls and e-mail. The same was true under the previous Government. I was a senior Treasury official in this area for three years. There were many things that did not work well under the previous regime—that is why we are changing it—but I know perfectly well from experience over a long period that official contact with deputy governors works extremely well. I see no reason why that should change in future. It has existed over a considerable number of years and is just a natural part of the way the system operates.

In a financial crisis where public funds were at risk, if one of the deputy governors or the CEO of the FCA felt that there was something that the Treasury should know about, they would of course be able to speak to the Treasury directly. They are senior figures who are well aware of their responsibilities and quite used to making their feelings felt. In the case of the deputy governors, as well as the CEO of the FSA and the future FCA, they will be in front of the Treasury Select Committee. It is extraordinary to suggest in some way that legislation should be required to allow those senior figures in the system to make their views clear, as they have always done in the past.

However, when it comes to the statutory duty to notify the Chancellor formally of a risk to public funds, this responsibility is rightly given to the Bank of England as an institution. In practice, I would expect that in most cases a notification would be made by the governor personally to the Chancellor, but there is no reason why one of the deputy governors cannot send it on behalf of the Bank. The key thing is that it must be a decision of the Bank. As the Government have made clear on multiple occasions, the Bank must come to a view internally about the best way to fulfil the duties and responsibilities that are placed on it, including the duty to notify the Chancellor of risks to public funds.

On the basis of that further explanation of the position, I ask the noble Lord to withdraw Amendment 190ZEF.