FSA Investigation into LIBOR
Lord Sassoon Excerpts(12 years ago)
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The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I shall now repeat a Statement made by my right honourable friend the Chancellor of the Exchequer in another place. The Statement is as follows.
“Mr Speaker, on Thursday I updated the House on the Financial Services Authority’s investigation into Barclays and the attempted manipulation of the LIBOR market in the years running up to and during the crisis. The House has just heard from the Prime Minister, and I would like to give more details of the steps we are taking.
This morning, I spoke to Marcus Agius, who confirmed that he was resigning as chairman of Barclays because of the unacceptable standards of behaviour within the bank. The Treasury Select Committee is calling the chief executive of Barclays to account for himself and for his bank on Wednesday. I look forward to hearing his answers.
As I also said last week, every avenue of possible criminal investigations for individuals involved in attempted manipulation of LIBOR is being explored. However, in the view of its chairman, the noble Lord, Lord Turner of Ecchinswell, the powers that were given to the authority do not allow it to pursue criminal sanctions. People in the country ask why it did not have the necessary powers. Those who set up the tripartite system must answer for that. People ask whether these gaping holes in the existing law mean that no action at all is possible. After all, fraud is a crime in ordinary business; why should it not be so in banking? I agree with that sentiment, and I welcome the Serious Fraud Office’s confirmation that it is actively and urgently considering the evidence to see whether criminal charges can be brought, particularly in relation to the current Fraud Act and in relation to false accounting. It expects to come to a conclusion by the end of this month. We would encourage it to use every legal option available to it.
I would like to address three further issues today. First, what happens to the money we get from the fines; secondly, urgent changes to the regulation of LIBOR and other markets to prevent such abuse occurring again and to ensure the UK authorities have the powers they need to hold those responsible to account; and thirdly, the wider issue of what went so badly wrong in the culture of our banking system and the way it was regulated which allowed such fundamental failures of basic standards of conduct to go unchecked and unchallenged.
Last week, I said that we wanted to ensure that fines paid by the financial services industry in future go to the Exchequer. Today, I can confirm we will propose amendments to the Financial Services Bill in the autumn to make this happen. This will remove a long-standing anomaly and bring the regulator into line with regulators in other sectors of the economy. The new arrangement will apply to fines received from 1 April 2012 so that it includes the Barclays penalty. From now on, the multimillion pound fines paid by banks and others who break the rules will go to the benefit of the public, not to other banks.
That brings me to the second question of the urgent changes we need to make to the regulation of LIBOR to prevent this ever happening again and to ensure that in future authorities have the appropriate powers to prosecute those who engage in market abuse and manipulation. I have today asked Martin Wheatley, the chief executive designate of the Financial Conduct Authority, to review what reforms are required to the current framework for setting and governing LIBOR. This will include looking at whether participation in the setting of LIBOR should become a regulated activity, the feasibility of using of actual trade data to set the benchmark, and the transparency of the processes surrounding the setting and governance of LIBOR.
The review will also look at the adequacy of the UK’s current civil and criminal sanctioning powers with respect to financial misconduct and market abuse with regard to LIBOR. It will assess whether these considerations apply to other price-setting mechanisms in financial markets to ensure that these kinds of abuses cannot occur elsewhere in our financial system.
We need to get on with this and not spend years on navel-gazing when we know what has gone wrong. I am pleased to tell the House that Mr Wheatley has agreed to report this summer so that the Financial Services Bill currently before Parliament or the future legislation on banking reform can be amended to give our regulators the powers they clearly need.
The review is essential to ensuring that we mend the broken regulatory system introduced by the previous Government, which allowed these abuses to happen. But the manipulation of the most-used benchmark interest rate reveals that there is a broader issue of the professional standards and culture in some parts of the financial services industry that was allowed to grow up in the years before the crisis and which may still need change.
I do not think a long, costly public inquiry is the right answer. It would take months to set up and years to report. We know what went wrong. We cannot wait until 2015 or 2016 to fix it. In just six months’ time we will be bringing forward the banking reform Bill that will implement the recommendations of Sir John Vickers’s Independent Commission on Banking. This will bring far-reaching, lasting change to the structure of British banks, ring-fencing retail banks from their investment banking arms. Let us see whether we can use this banking Bill to make any further changes needed to the standards of the banking industry, and the criminal and civil powers needed to regulate it and hold people to account for their behaviour.
As the Prime Minister said, we propose that Parliament establishes an inquiry into professional standards in the banking industry. The Government will, in the coming days, lay before both Houses a Motion to establish a Joint Committee drawn from the Commons and the Lords. It should be chaired by the chair of the Treasury Select Committee, the honourable Member for Chichester. He and his committee have already been quick off the mark in investigating the issue, and we certainly await their hearings this week to proceed.
I propose that the terms of reference should be these: building on the Treasury Select Committee’s work and drawing on the conclusions of UK and international regulatory and competition investigations into the LIBOR rate-setting process, consider what lessons are to be learnt from them in relation to transparency, conflicts of interest, culture and the professional standards of the banking industry. I propose that it should be able to call witnesses under oath, including current Members of Parliament and Lords. I can confirm that we will provide the committee with the resources it needs to do the job. I would suggest to the House that we ask the Joint Committee to report by the end of this year, 2012. That is enough time to do the job—and to do it well—but not so long that this issue drags on for years, and it means, in very practical terms, that we can amend our banking Bill to take on board its recommendations.
I hope that all parties will support the Motion we put forward. The failure to regulate the banks in the boom years cost this country billions. The behaviour of some in the financial services has damaged the reputation of an industry that employs hundreds of thousands of people and is vital to the economic prosperity of the country.
We are changing the failure of regulation; reforming the banks. Now it is time to deal with the culture that flourished in the age of irresponsibility and hold those who allowed it to do so to account.
I commend this Statement to the House”.
My Lords, that concludes the Statement.
Lord Sassoon
My Lords, I am grateful for the welcome that the noble Lord, Lord Eatwell, gave to the Statement. However, I am sorry that he thinks that the immediate action that the Government have taken is not appropriate and that he would like it to go further.
I cannot think of a better way of getting a national consensus and getting rapidly to the heart of these issues than through a Joint Committee of the two Houses—not least because, as we saw two weeks ago in the Second Reading of the Financial Services Bill, there is extraordinary and relevant expertise that can be brought to bear from this House alone. There was a remarkable debate on that Bill in which two former Chancellors, three former Treasury Permanent Secretaries, former members of the Court of the Bank of England, other former Treasury Ministers and leading financial journalists all spoke. We should not undersell the great expertise that can be brought to bear through the Joint Committee, which will have public hearings and be able to call, under oath, whomever it chooses to call. I do not agree with the noble Lord that we should go through some other route.
I remind your Lordships that recent public inquiries and those that are still live have taken an extraordinary amount of time and cost a huge amount of public money. Leveson, established in July 2011, has so far cost £2.8 million; Baha Mousa, started in May 2008, ran for more than three years at a cost of £13 million; the Mid-Staffs inquiry started in June 2010 and is still running—it is nearly finished—and so far has cost £11.8 million. These are expensive and long inquiries. For the safety and good order of our financial services markets, we need to get on with the inquiry and a Joint Committee is the appropriate way to do so.
The proposed terms of reference will come back to your Lordships’ House via a Motion that will go through both Houses. I do not read them as being limited in the way that the noble Lord, Lord Eatwell, seeks to limit them. The proposed terms of reference refer to drawing on and building on both the Treasury Select Committee’s work and the conclusions of the UK and international regulatory and competition investigations into the LIBOR rate-setting process. Then I read what follows, which states,
“consider what lessons are to be learnt from them in relation to transparency”—
that is LIBOR and the work of the Treasury Select Committee—
“conflicts of interest, culture and the professional standards of the banking industry”.
I read that as the committee being able to go extremely wide in its investigation and I am sure that it will do so. I certainly do not believe that there is a problem of the sort identified by the noble Lord.
As to when the Treasury first knew about the substance of the LIBOR-fixing allegations and investigation at Barclays, naturally Treasury officials have been in contact with the FSA during its investigations to consider LIBOR policy as it is in contact with FSA officials about many other things that they do. As was the case under the previous Government, it would be inappropriate to disclose the details of meetings while this is an area of developing policy.
Baroness Kramer
My Lords, I said last week that there was public outrage, and that outrage has only been growing. Mr Diamond remains in post; he just does not get it. That now raises questions about the fitness of Barclays’ board, which also just does not get it. Does the Minister agree that this matters? I very much welcome the review that Martin Wheatley will lead. Whatever changes are made to the rate-setting of LIBOR will always depend on engagement with the major banks. Therefore, there must be confidence that the banks fully understand their role in providing that information.
The other area of outrage, as I recognise it, is the perceived impotence of the FSA in being able to pursue sanctions for activities that are so widespread that, according to the Telegraph, they have their own technical term—the,
“dislocation of Libor from itself”.
Will the Minister explain why there is no scope under Clauses 397 and 400 of FiSMA, which I can quote if he wishes, to pursue individuals and the officers who supervise them? Surely an amendment could be put into the Financial Services Bill. It would be welcome if there was any way for it to be retrospective. Can he also explain why it was the CFTC in the United States that jumped on the issue in May 2008, based on information from whistleblowers, whereas with the same information the FSA did not become engaged until 2010? Obviously, I am dependent on media reports. Can we please look at the powers, resources and capacity of the FSA to ensure that it is never again in such a position?
Lord Sassoon
My Lords, first, I will not comment further on the senior executives of Barclays. Clearly the chief executive is coming before the Treasury Committee later this week and will be asked a lot of questions that will further elucidate those aspects.
On the question of prosecution, the basic flaw is that the setting of LIBOR was not and is not a regulated activity, so the FSA does not have a direct way in. My noble friend is right to be quizzical and shake her head but that is the position as it was under FiSMA and the construct put in place by the previous Government. If the FSA wanted to bring criminal prosecutions, as it has done with the civil settlement, the attempted fixing of LIBOR is an activity that is ancillary to a regulated activity. The construct is difficult and the chairman of the FSA has pointed out the difficulties.
As I said in repeating my right honourable friend’s Statement, most normal people would assume that there was a prima facie case to look at the Fraud Act and false accounting and that is precisely what the SFO was doing. Through the inquiries that are going on, we will look at what needs to be done to plug gaps in the financial services legislation. For the avoidance of doubt, I should tell my noble friend that there will certainly be no retrospective legislation in respect of criminal action because—before anybody else jumps up—it would be against the European Convention on Human Rights. I am sure that my noble friend would not want us to go there—and she acknowledges that.
As to which regulator started work when, I would not rely too much on what the newspapers say. As with all these things, I am sure that in due course the regulators will look into their conduct and the lessons to be learnt. I certainly would not take as gospel the newspaper reports of who started when.
Lord Barnett
My Lords, the Minister is obviously aware that this has not just started. It has been going on for years and it could not have involved only Barclays but virtually every major bank, not only in the UK but elsewhere. Barclays could not have been handling this on its own. Listening yesterday to the chairman of the FSA, the noble Lord, Lord Turner—who unfortunately is not in his place—the FSA knew nothing whatever about it, nobody in the Bank of England seems to have known anything about it, and now the noble Lord, Lord Sassoon, tells us that the Treasury has known about it apparently for only a short while. We obviously recognise that to be the truth, but should there not be criticism of some of the people involved here? The sheer incompetence of not knowing anything about it deserves some kind of criticism.
I appreciate that the Minister cannot say that he will listen and change anything, because it is a matter for the Chancellor. However, my noble friend Lord Eatwell put a lot of serious points to him and I hope that he will take them back to the Chancellor to ensure that there are some changes. There should be some changes now.
Lord Sassoon
My Lords, first, as we discussed last week, there are a significant number of other banks under investigation. Secondly, we could debate the history of this for a very long time, but this Government are moving extremely fast on a number of fronts to plug the gaps through one or both of the pieces of legislation that are or will shortly be before Parliament. We need to get this right, which is what we are doing.
Lord Blair of Boughton
My Lords, could I ask about the statement that the FSO will begin to consider criminal charges in the next month? I follow the noble Baroness, Lady Kramer, in referring to the level of outrage in the country about these events. The SFO could announce today that it is launching a criminal investigation. It is about not criminal charges but a criminal investigation into conspiracy to defraud, because if this is not a conspiracy to defraud, then I have never seen one—and I have seen a few.
Lord Sassoon
My Lords, just to repeat: the SFO is actively and urgently considering the evidence to see what criminal charges can be brought. It expects to come to a conclusion by the end of this month. That is exactly where it should focus its efforts.
Lord Marlesford
My Lords, unlike the noble Lord, Lord Eatwell, I see much merit in a parliamentary inquiry, especially if, as has been suggested, it includes people of the talent and experience of my noble friend Lord Lawson. There are many from all sides in this House who can do this. It is an inquiry that needs, above all, practitioners and people from the financial world rather than lawyers, and it does not prevent further inquiries in due course.
However, four points of action were put forward by the Prime Minister under the heading of banking in his Statement. Three of them are quite clearly covered by the Chancellor’s Statement but one is not. That is a confusing matter and I would like enlightenment. In the four actions proposed by the Prime Minister, one was,
“increasing the taxes banks must pay”.
What was the Prime Minister referring to?
Lord Sassoon
I am grateful to my noble friend for confirming that a Joint Committee is the way to take this forward. We have already increased the tax on the banks by putting a special levy on them so that the big banks effectively do not take any advantage of the lowering of corporation tax, which other parts of industry have already benefited from. This tax on the banks is enduring and will raise far more than the one-off tax that the previous Government brought in. So we have already done that.
Lord Myners
My Lords, I broadly welcome the Chancellor of the Exchequer’s Statement, and in particular the appointment of a Joint Committee, the report to be produced by Mr Martin Wheatley and the timetable to which both those reports are working.
I would like to return to the point I made to your Lordships’ House earlier about the BBA. It is increasingly clear that the British Bankers’ Association was very aware of what was going on—the collusion that was leading to fraud. The chairman of the BBA at that time is now a Minister in Her Majesty’s Government. Will the Minister assure us that the work being done by Mr Wheatley will look at the BBA’s role? It appears that there is a prima facie case that the BBA colluded in and supported a corrupt act. I am grateful that the Minister and the Chancellor have confirmed that there is no lacuna in legislation that prohibits criminal prosecution of the quite monstrous things that appear to have occurred here.
I have two further short questions. There was no suggestion by the Minister that any action would take place to lead to an inquiry and the payment of compensation to those who lost out as a result of this systemic collusion and manipulation of an important rate. That includes taxpayers, because there were a number of arrangements between the central bank, the Treasury and banks that were based on the LIBOR rate. Will the Minister confirm that there will be an appropriate investigation about whether the taxpayer was disadvantaged? Finally, will the Minister explain why the FSA’s fine was so small compared with the fines imposed by the American regulators?
Lord Sassoon
My Lords, on the first point, presumably if there is evidence that the BBA colluded in criminal activity, that will be well within the scope of the work that the SFO might do. As for the wider question about the role of the BBA, the review of LIBOR will look comprehensively at governance, which comes very much back to the BBA role and what, if any, that should be in the future framework.
On the question of whether there should be compensation, our difficulty at the moment is that we do not know whether LIBOR was successfully manipulated as opposed to there being an attempt to manipulate it. From the evidence that has already been made public, we know—
Lord Myners
The American regulators were very clear that LIBOR was manipulated. They were unequivocal in that statement. They understand the subtleties of the issue.
Lord Sassoon
My Lords, if the noble Lord will hear me out, we know that there was attempted manipulation from the evidence that has already been made public. I do not know on what basis the American authorities have come to that conclusion, and it may just be semantics, but the authorities are currently investigating whether LIBOR was actually manipulated.
It is also worth bearing in mind that, in the case of Barclays, it was the dollar LIBOR rate and not the sterling LIBOR rate that was the subject of the attempted manipulation that has come out. I completely agree with the noble Lord, Lord Myners, that these investigations need to carry on, but we cannot come to any conclusion about the answer.
Lastly, I answered a question about the fine last week, but I will repeat it in summary. This is the largest fine that the FSA has ever handed down, which indicates the seriousness of this matter within a UK context—the US has a completely different approach to the way it imposes penalties. The most important and relevant point is that this is the largest ever fine in the UK handed down by the FSA.
Lord Elystan-Morgan
My Lords, if I may, I will make a point in support of the very pertinent submission made by the noble Baroness, Lady Kramer. This is not a question of who should prosecute or who can prosecute. A simple, straightforward criminal offence was created in Section 397 of the Financial Services and Markets Act 2000; I checked it. That provision deals with a false statement or declaration that is made deliberately or misleadingly and that distorts a market. It is an offence that is punishable on indictment with a maximum of two years’ imprisonment. There would seem to be ample prima facie evidence that such an offence has been committed. In the circumstances, bearing in mind the damage done and the ruthlessness with which such practices were conducted, is there any reason why persons responsible should not stand trial?
Lord Sassoon
My Lords, I am sure that the FSA will listen to the analysis given by the noble Lord, Lord Elystan-Morgan; and if it has not already got to the bottom of it, it will take his points on board. The authority is acutely aware that it needs to press on, but the noble Lord, Lord Turner of Ecchinswell, has made it clear that it is very difficult, which is why the FSA seems to be taking the lead on this.
Lord Higgins
My Lords, it would seem that Barclays’ defence is, “We had to cheat in order to preserve our reputation”. That suggests that the bank is seriously misguided in the way it looks at these matters. Certainly there is a case for a parliamentary investigation, which I support. It is equally true that we should be absolutely clear that the terms of reference are the right ones for such an investigation.
If I may, I will make a very narrow point. As I understand it, the proposal is that the Joint Committee should be chaired by the Member for Chichester, Mr Tyrie, for whom I have the very greatest respect. However, as I was myself chairman of the Treasury Committee for some 14 years, I question whether it is appropriate that his energies should be diverted from the Treasury Committee, where he is doing an excellent job, by being chairman of this authority. This is too heavy a burden for one person, however talented, to take on, and we ought to consider that point.
Lord Sassoon
My Lords, on my noble friend Lord Higgins’ first point, there were two distinct periods during which Barclays was found to have attempted its manipulation. The first period was before the financial crisis, when its traders appear to have been driven by pure greed and tried to drive rate up. The second period was during the financial crisis when the preservation of Barclays’ reputation seemed to be the main driver and it was attempting, it seems, to move the interest rate down. I think there were those two distinct motivations.
Regarding the committee chair, notwithstanding the suggestion that the chair of the Treasury Committee chairs the Select Committee, I would guess that the formal position is that the committee itself will decide who the chair will be. I imagine that this will be taken up either in the Motion itself, in which case your Lordships will have a chance to take a view on it, or the committee will decide who the chair will be in due course.
Baroness Williams of Crosby
My Lords, I want to pursue for a moment the sheer seriousness of the situation that the noble Lords, Lord Eatwell and Lord Blair, and my noble friend all pointed to. I can think of nothing more likely to undo the prospect of this country’s return to prosperity from the crisis than the present, huge doubts about the trustworthiness of the financial system. When I extensively read newspapers from the United States, what comes out very loud and clear is the view that as a result the major beneficiaries will be countries that are in direct rivalry and competition with the City and that hope to gain from what they regard as an extremely dangerous problem that we have brought upon ourselves.
I am satisfied with the prospect of a parliamentary inquiry and I accept what the noble Lord said about the necessity for speed and getting on with it. The noble Lord, Lord Eatwell, and my noble friend Lord Higgins asked about the terms of reference. The missing term of reference that troubles me is the inquiry’s relationship to the role of the regulators. The Daily Telegraph may not be a very good source, but it is becoming completely clear that there were seminars, discussions, meetings and debates throughout 2007 and 2008 about LIBOR, and if anything is likely to be true about those rumours and suggestions it is vital that we explore whether our present regulatory structure is adequate to deal with an issue as serious and as far-reaching as this one. I therefore, with great respect, suggest to the Minister, probably with the support of the Opposition, that the terms of reference should at least extend to the roles of regulators, to the reasons why they failed to probe into this matter at an earlier stage and to what steps could now be taken to give them the confidence and the resources to enable them to do better in future.
Lord Sassoon
My Lords, I certainly agree with my noble friend that these are all relevant and important questions. It is equally important that the proposed Joint Committee’s terms of reference should be clear and should focus on transparency, culture and professional standards. The role of the regulators is rather different, but I am sure that the Treasury Select Committee, in the normal course of its business, will want to ask questions about those matters in due course. However, I take on board what my noble friend has to say.
FSA Investigation into LIBOR
Lord Sassoon Excerpts(12 years ago)
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The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I will now repeat a Statement made by my right honourable friend the Chancellor of the Exchequer in another place.
“Mr Speaker, I would like to update the House on the Financial Services Authority’s investigation into the manipulation of the setting of the LIBOR and EURIBOR interest rates and the Government’s response.
The London Interbank Offered Rate or ‘LIBOR’ and the Euro Interbank Offered Rate or ‘EURIBOR’ are the benchmark reference rates that are fundamental to the workings of the UK, European and international financial markets, including markets in interest rate derivatives contracts. These contracts may sound exotic, but they are the bread and butter of our financial system and are used by businesses and public authorities every day, and they affect the mortgage payments and loan rates of millions of families and hundreds of thousands of firms, large and small. LIBOR and EURIBOR are by far the most prevalent benchmark reference rates used in euro, US dollar and sterling interest rate derivatives contracts. The outstanding interest rate contracts alone are estimated to be worth $554 trillion.
Yesterday, the FSA published notice that Barclays had, on numerous occasions, acted inappropriately and breached principles 2, 3 and 5 of the FSA’s Principles for Businesses. As a result, the FSA has imposed a financial penalty of £59.5 million on Barclays. In other words, the FSA reports that this bank, on numerous occasions, did not conduct its business with due skill, care and diligence. The bank did not take reasonable care to organise its affairs responsibly and effectively, with adequate risk management systems, and it did not observe proper standards of market conduct. As the FSA puts it,
‘Barclays’ misconduct … created the risk that the integrity of LIBOR and EURIBOR would be called into question and that confidence in or the stability of the UK financial system would be threatened’.
Barclays is not alone in this. The FSA is continuing to investigate the conduct of a number of other banks in relation to LIBOR. The FSA continues to commit significant resources to its investigations into potential attempts to manipulate LIBOR, and it continues to work with its counterparts overseas and with other authorities in the UK. The investigations concern a number of institutions both based in the UK and overseas, but it is already clear that the FSA’s investigation demonstrates systematic failures at the heart of the financial system at the time.
I want to thank Adair Turner and the team at the FSA for a very thorough piece of work. However, it begs three vital questions. First, how were such failures allowed to continue undetected and unchecked—particularly in the two years before the financial crisis, when the FSA is clear that the most serious breaches occurred, and the only motive was greed? Secondly, what changes are needed to our regulatory system in the future to prevent such abuse occurring again, and to make sure that the authorities have every power they need to hold those responsible fully to account? Thirdly, what further investigations are required into the activities at Barclays, what sanctions are available, and what questions must their chief executive answer?
First, the FSA report is a shocking indictment of the culture at banks like Barclays in the run-up to the financial crisis. The e-mail exchanges between derivative traders and the LIBOR submitters read like an epitaph to an age of irresponsibility. Through 2005, 2006, and early 2007, we see evidence of systematic greed at the expense of financial integrity and stability. They knew that what they were doing was wrong: ‘Keep a secret’, one trader tells another in February 2007, ‘If you breathe a word of this, I’m not telling you anything else’. Yet no one at Barclays prevents them, no one in the tripartite regulatory system knows anything about it, and the Government of the day were, literally, clueless about what was going on.
The FSA is clear that the most serious breaches of its Principles for Businesses occurred in the years leading up to the financial crisis. Once the crisis is under way, Barclays’ concern switches from the greed of traders to concern from the management about the reputational risk to the firm. Barclays itself raises concerns about the LIBOR with the FSA in late 2007 and 2008. Yes, the financial system was experiencing a severe stress, and markets were frozen. However, it is clear that Barclays—and potentially other banks—was still in flagrant breach of its duty to observe proper standards of market conduct and to give citizens and businesses in this country and elsewhere proper transparent information about the true price of money. Britain’s tripartite system of regulation failed us in war and in peace—and the country has paid a heavy price for that.
That brings me to the second question of how we can prevent this from ever happening again. This Government are getting rid of the whole tripartite system. The Financial Services Bill now before Parliament will create a new, far tougher regulatory system. A new Financial Conduct Authority will focus, razor-like, on market abuse and protecting consumers. We have been reviewing with the FSA and the Bank of England the operation of the LIBOR regime—which was not regulated under the last Government’s Financial Services and Markets Act. The market is already changing and the role of LIBOR is changing with it. As part of our review into LIBOR and the strength of the financial regulatory architecture, we will examine if there are any gaps in the criminal regime inherited by this Government and we will take the necessary steps to address them.
I cannot comment on possible criminal investigations for individuals involved in this activity. The authorities are exploring every avenue open to them, but shockingly, the scope of the FSA’s criminal powers granted by the previous Government does not extend to being able to impose criminal sanctions for manipulation of LIBOR. As part of our review into LIBOR and the strength of the financial regulatory architecture, we are examining whether strengthening the criminal sanctions regime for market abuse and market manipulation is warranted, and if so, we will provide for these powers quickly. In addition, next week the Government will publish a consultation in response to the report on the failure of RBS, and will consider the possibility of criminal sanctions for directors of failed banks where there is proven criminal negligence.
Under the previous Government’s regime, fines paid to the FSA are used to reduce the annual levy other financial institutions are asked to pay. I am far from convinced that in all cases this is the best use of the money. We are considering amendments to the Financial Services Bill that ensure that fines of this nature go to help the taxpaying public, not the financial industry. I have also asked my officials urgently to investigate whether this legislation could be applied to the fine imposed on Barclays. However, it is clear that what happened in Barclays and potentially other banks was completely unacceptable, and that it is symptomatic of a financial system that elevated greed above all other concerns, and brought our economy to its knees. That brings me to the final point.
As I say, a number of individuals are under formal investigation by the FSA, and this number is expected to increase as the investigations continue. The Serious Fraud Office is aware of the matters under investigation, and there are ongoing discussions between the FSA and the SFO about the evidence as it develops. As far as the chief executive of Barclays is concerned, he has some very serious questions to answer today. What did he know, and when did he know it? Who in the Barclays management is involved, and who, therefore, should pay the price? It is quite right that the Treasury Select Committee has asked him to appear urgently to account for himself and for his bank. We all want to hear his answers.
The story of irresponsibility is not over yet. Our financial services should be a source of economic strength and national pride for this country. However, failures in our banks and financial system have cost the country billions and put thousands out of work. Those responsible should be held responsible. We want our financial services to support the creation of jobs and prosperity for millions. This Government are sweeping away the regulatory system that failed. They will protect taxpayers, punish wrong-doing, and put right the wrongs of the age of irresponsibility.”
My Lords, that concludes the Statement.
Lord Sassoon
My Lords, I am grateful to the noble Lord, Lord Tunnicliffe, for confirming the Opposition’s support for possible amendments to the Financial Services Bill to reflect these matters and for his frank admission that there may be lacunae in the law that now need to be plugged.
The noble Lord, Lord Tunnicliffe, asked what the Bill will do to improve matters. First, we are creating a focused conduct regulator, the FCA, which will supervise in a much more focused way than the FSA the conduct of markets because it will not have all of the prudential side to look at. The FCA’s operational objective of protecting and enhancing market integrity goes to the heart of our discussion. Because it is a self-standing body, the FCA will create a different culture and risk appetite. It will take a tougher, more proactive and more focused approach to these sorts of issues and there will be specific powers that we will discuss in detail through the Bill’s proceedings. For example, in circumstances like this, the new power of the FCA to disclose the fact that a warning notice in respect of a disciplinary matter has been issued means that the FCA will be able to disclose that it is taking action at a much earlier stage in an investigation than the FSA. So the new structure will be much better suited to dealing with this sort of problem.
There is also a lot of ongoing work to review how the LIBOR-setting process works. There are consultants involved with the BBA and the panel banks working with the FCA. There is a supervisory committee for this work on which the Treasury sits as a non-voting member but providing strategic steer for the work. I would expect findings to be published from that review within the next few months. There are all sorts of ideas floating around, such as changing the LIBOR data to actual trading data rather than the submission basis we have now and whether there should be a new LIBOR code and so on. So there are a lot of ideas, the work is well advanced and will be reported in the next few months.
The criminal law ought to be the last stage. As the noble Lord said, we have to get the culture right within the banks. We have to have appropriate powers in the FCA to be able to detect things as early as possible and take action. We need to see whether there are any gaps in the criminal law. As with the forthcoming report into RBS, there will be a consultation on whether there should be new criminal sanctions on negligent directors of failed banks. So this is very much on our mind.
The noble Lord then asked about people who have lost money. This is a difficult issue because it is not possible to know whether LIBOR has been manipulated on any particular day. It will be impossible to know what the effect of the attempted manipulation has been, if any. It is a complicated rate-setting process which means that half of the submissions that go in are excluded from the calculation. So some of these fraudulent or incorrect rates that went in—I should not presume anything that hints at criminality; that is for others—may not have got into the calculation. So we do not know whether people have benefited because the rate went up higher or lower than it should have been. People could have either benefited or lost out; it is not clear.
The noble Lord made some interesting observations about culture and management and so on. My right honourable friend did not want to list all the questions that the Treasury Committee will no doubt ask of the chief executive of Barclays but I am sure they will include one or two of the questions that the noble Lord put.
Lastly, the noble Lord talked about the stain on the banking industry. It is important to say that, although it is indeed a stain on the banking industry and that it has significant effects on London and the UK, there are also banks under investigation that are not British or headquartered and managed from the UK. There were regulatory failures in the run-up and through the financial crisis in the US and other countries. So, yes, it is a serious day for the banking industry; yes, there is a stain that needs to be dealt with; and yes, London needs to clean up its act but it is not only the UK that is involved in this.
Baroness Kramer
My Lords, the public are rightly outraged by the manipulation of interest rates and Europe is going to look more suspiciously at London just at a time when we are trying to protect the City. So there are great issues at stake.
Will the Minister explain why the FSA’s fine on Barclays is so small? As far as the company is concerned, £59.5 million is a freckle and far less than the fine in the United States. Surely it is not the senior regulator in this case. Why are there no sanctions at all—we are not just talking about criminal sanctions—against anybody senior? It is one thing to go after the traders but systematic mismanagement and manipulation of the market over four years surely affects senior people and has to engage them. The questions are to be asked by the Treasury Select Committee, which is an outstanding Committee, but surely they should be coming from the regulator with the ability to follow with direct sanctions.
Lastly, it is crucial that the Financial Services Bill is looked at again because, although we have a new form of regulator coming in the FCA, which I hope will be rigorous and effective, we must ensure in this Bill that the regulator has real teeth so that there is fear when that regulator looks again at this kind of mismanagement, and a fundamental change in behaviour.
Lord Sassoon
My Lords, I share the concerns of my noble friend. This is the largest fine ever imposed by the FSA. The US comes at this in a different way in many respects so the seriousness of the issue is demonstrated by the size of the fine in relation to anything else that has ever been done by the FSA in this country. It is the largest. The FSA sets the fines and it should do so. This has to be an independent process and I am sure nobody would want the Government involved in it.
As far as the investigations are concerned, my noble friend may be jumping ahead of the ongoing investigations by the FSA and SFO. I do not know where they will come out or who will be involved, but those investigations are going on. As for a powerful regulator for the future that is able to do this, I could not agree with her more. The FSA model completely failed. As I have already explained, the Financial Conduct Authority will be focused and will have as a core objective the integrity of markets. It will be much better placed to deal with these kinds of problems as they come up in future.
Lord Morris of Aberavon
My Lords, when I was a young barrister, I occasionally prosecuted, on behalf of the Board of Trade, persons thought to be unfit to be directors of a public company. Those cases, as I recollect, were not all that difficult. The Minister has mentioned criminal sanctions, where of course the burden of proof is the usual one and it is high. Without prejudice to a particular case, is similar procedure still available to prevent directors holding positions in future on the grounds of unfitness?
Lord Sassoon
My Lords, I am grateful to the noble and learned Lord. As I said, we have concerns about the question of directors, particularly directors of banks, to make sure that the regime is appropriate and tough enough. The regime for directors of banks, because of the special nature of their role, should be looked at on its own merits. That is why it is timely that the RBS report and consultation, going very much to this point, will be published next week by the Treasury. I hope that we will get a debate going about what is appropriate in terms of the special regime that might be appropriate for directors of failed banks if they are shown to have behaved negligently.
Baroness O'Cathain
My Lords, the Statement says that this was going on throughout 2005, 2006 and early 2007. Was it stopped in 2007, or has it been going on since then? I wonder whether it has been going on for another five years. If so, what do my Government propose that we should be doing? Can we actually believe these people?
Lord Sassoon
My Lords, on the particular case, the FSA report sets out what was going on. The important point for my noble friend is that the point of highlighting the dates which my noble friend gave was that this activity was going on before the financial crisis. It was going on in an atmosphere of greed in what were perceived to be the good times. When the financial crisis hit, the activity of the individuals at Barclays was motivated by something else, which was to do with the reputation and standing of Barclays in the market. The particular relevance of those earlier dates was to distinguish what then happened during the later period, in the financial crisis.
As the FSA and other regulators’ investigations go on, they will tell us more about the extent and duration of these activities. Given that the banks have been on warning of this for a period, I would like to think that they have taken significant steps to clean up their activity. We want to make sure that, as I have described with this ongoing review of the LIBOR system, the system is appropriate to the new market circumstances.
Lord Radice
As a former chairman of the Treasury Select Committee, I of course strongly support the idea of its investigation. Does the Minister agree that if the executives of Barclays did not know what was going on, they ought to consider their position? If they did know what was going on, they ought to resign immediately.
Lord Sassoon
My Lords, the noble Lord, Lord Radice, makes some good points, which I am sure the chief executive of Barclays will be pressed on when he comes before the successors to the noble Lord on the Treasury Select Committee.
Lord Hughes of Woodside
My Lords, in the Minister’s Statement he repeatedly says that there were failures of the regulatory system and it was matter of greed, and so on and so forth. What was going on was not a failure. It was deliberate criminal deceit. Under those circumstances, how can the Minister possibly say that criminal charges should be the last resort rather than the first resort? By all means, let us try to tidy up the system. In view of what appears to be absolute, outright criminality, we should recall that fraudsters rely on the fact that they will escape the law through such mealy-mouthed words.
Lord Sassoon
My Lords, I am certainly not going to jump to premature conclusions which are not for the Government—or, I suggest, other Members of this House—to jump to, about what is or is not criminal activity. I have made it quite clear in repeating my right honourable friend’s Statement that investigations continue by the FSA and the Serious Fraud Office. We will hear the views of the appropriate authorities in due course on these matters, but those investigations are ongoing.
Lord McAvoy
My Lords, from every noble Lord and noble Baroness who has spoken there has been consensus on the seriousness of this, and also about making sure that the appropriate steps are taken to, at the very least, prevent a repeat of it. However, moving forward should be done on the basis of honesty and not scoring cheap points. It is regrettable that the Minister used the word “clueless” to describe the previous Government. If the Government want consensus, as everyone who has spoken does, they should make sure that there is no repeat of that, or they might be asked what measures their party proposed during that time.
Lord Sassoon
My Lords, during earlier parts of today, I have criticised the former Government’s behaviour and policies on certain matters. I have commended certain things that they had done. In this case, I stand by the words of my right honourable friend the Chancellor.
Lord Foster of Bishop Auckland
Does the Minister agree that the apparently noble gesture of the directors of Barclays in waiving their bonuses this year is not good enough? I will be pretentious and say that we, the people, demand that they pay back every bit of the bonuses for the years in question.
While we are talking about this, I cannot remember—because I have been in this place for so long—whether the process of deregulation was begun by the Minister’s Government. It was the noble Baroness herself who elevated greed to a virtue. Then the whole international financial consensus pleaded with us all for soft-touch regulation. That is what they got. We were wrong, but they were wrong for exploiting it. They, and not the two Governments who have been involved, are culpable.
Lord Sassoon
My Lords, on the noble Lord’s first point, I am sure that the board of the bank in question will listen to his views on bonus matters. That is principally a matter for the board of Barclays Bank to consider.
The noble Lord, Lord McAvoy, has said that we should not get too far into prior history here. There is a risk that I will get drawn into these matters. It was Mr Gordon Brown and Mr Ed Balls who espoused very explicitly the virtues of light-touch regulation, and that was the environment in which these traders operated.
Lord Empey
My Lords, LIBOR rates could not have been interfered with by one institution alone. There would have to be accomplices. I therefore presume that that is one of the directions in which the investigation will go.
Is the time ever going to come again in this country when someone takes professional responsibility for what is going on, leaving aside the criminal activities that will be pursued by the regulatory authorities? Is no one going to take professional responsibility and suffer a professional sanction if they are found in default?
Finally, sadly, we as taxpayers own substantial numbers of banks. Can the Minister assure the House that there is no such activity in institutions that are owned or partly owned by the taxpayer?
Lord Sassoon
My Lords, on the first point made by the noble Lord, Lord Empey, as I have said, other banks are being looked at by the relevant supervisory authorities here and in other countries. All that is ongoing. I very much endorse what the noble Lord has to say about the profession taking responsibility. If the banking industry wants to be thought of as a profession, clearly it should think about how it re-establishes professional standards. I speak as a chairman of the ifs School of Finance, the former Institute of Bankers, so I feel very strongly about that and believe that the profession needs to think about it very clearly.
I am not aware of public authorities being involved. I can be pretty clear that no public body is involved in any way in the LIBOR-setting regime and therefore in what we are discussing this afternoon.
Lord Lea of Crondall
My Lords, would the noble Lord remind us of the basis of company law? In whose interests are the banks supposed to be operating? Is it, in some sense, the public interest, the customer’s interest, the worker’s interest? Whose interest is being served by the banks? Is he satisfied that there is now a general perception in this country that it is not like that at all and that the banks are operating in the interest of some people at the top of the banks?
Lord Sassoon
My Lords, I think the issue here is that, whatever the law says about the way in which the banks have to operate, the behaviour that has been exposed in this case is that of naked greed, and that is completely unacceptable whatever the legal framework. It is at heart an ethical question as much as anything else, as I see it, and is quite independent of the legal framework around it. Whatever the requirements of the boards vis-à-vis shareholders and other parties, at the heart of this—as has been exposed very clearly by these extraordinary e-mails—were individuals behaving in a most extraordinary way.
Lord Marlesford
My Lords, is not one of the most serious aspects of this whole thing the potential economic consequences that are going to come from the reputational damage to the City of London, which is so important to the British economy? Would he agree that the only way of restoring reputation from malfeasance is to seek out and deal very publicly with those who are responsible? Does he remember—I remember all too well, as I declare myself to have been a victim of it—the malfeasance in Lloyd’s of London, which was never really sorted out because no one was held to book and certainly no one suffered any particular penalty that I can recollect. One thing that they seem to be able to do in the United States is to deal very severely with individuals who are found to have misbehaved from positions of great financial responsibility.
Lord Sassoon
My Lords, I completely agree with my noble friend Lord Marlesford that the reputational consequences here are very serious. I stress the point that this is not simply a London or a UK banks’ issue as it appears. The inquiries clearly cover other regulators and other banks and we will see where they go. However, it is precisely because of the significant reputational damage that the Chancellor has come forward immediately with his response, which I repeated this afternoon.
On the question of Lloyd’s of London, without repeating the tortured and difficult history there, it is worth saying that after a long and difficult period for that market, Lloyd’s of London is at the forefront again of the world’s specialist insurance market. It has a critical position and is, I believe, stronger than ever. While we certainly do not want to go through a long and difficult period, as Lloyd’s of London did, it does show that well-regulated markets in London are capable of leading the way in innovation and value-adding in financial markets.
Lord James of Blackheath
I make one observation, perhaps as a correction of the comment made by the noble Lord, Lord Marlesford. I speak as the former chairman of the committee that created Equitas for the solution of the Lloyd’s of London problem and put in place the Equitas solution. The difficulties with Lloyd’s of London were caused, to a very large extent, by another great failure of regulation by a parallel market in America. It was not wholly a United Kingdom problem. The problems of Lloyd’s of London were exacerbated to an alarming extent by the failure of the US authorities to regulate the clubs that were put together for litigation purposes on a group class action basis relating to asbestosis, which allowed open, free entry to anyone who wanted to join, regardless of the fact that they had never been near a scrap of asbestos in their whole life. This is what created the enormity of the problem. It was a massive failure of regulation by the USA authorities that undermined a major institution, and we should not forget that. These things are never isolated.
Lord Sassoon
My Lords, I am always interested by my noble friend Lord James of Blackheath’s sometimes remarkable interventions. I think we are a little off the LIBOR case at the moment.
Taxation: Avoidance
Lord Sassoon Excerpts(12 years ago)
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Lord Clinton-Davis
To ask Her Majesty’s Government what action they are taking regarding the use of devices to avoid or minimise the payment of taxation.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the Government act as soon as they become aware of schemes to avoid tax and challenge those by every means available. In the past year, seven schemes have been closed down with immediate effect, and since 2010 the Government have litigated some 30 avoidance cases. The Government are now consulting on a general anti-abuse rule and extending the successful Disclosure of Tax Avoidance Schemes regime to ensure that even more schemes are disclosed.
Lord Clinton-Davis
I thank the Minister for that reply. Is it not the case that thousands of extremely rich people are engaged in tax avoidance schemes and that the country is suffering a heavy loss as a result—some £25 billion? Is there not a case for setting up an all-party committee to look into this atrocious situation, which continues? What the Minister said deals with only part of the problem, not the whole problem.
Lord Sassoon
My Lords, I certainly agree with the noble Lord, Lord Clinton-Davis, about the seriousness of the problem. That is why the Government—and HMRC in particular—are tackling it with all the available weapons. I stress that the Disclosure of Tax Avoidance Schemes regime, which was introduced by the previous Government in 2004, has been a successful part of that. Of the total tax gap, that is estimated to be around £35 billion, £5 billion is estimated to be as a result of avoidance. It is important to be clear on the figures.
In relation to schemes of wealthy individuals, the K2 and Icebreaker schemes, which have had much recent publicity, are under investigation by HMRC. HMRC and, of course, the Government want to make sure that everyone, wealthy or not, pays a fair amount of tax. HMRC has rolled out some very specific initiatives within its High Net Worth Unit in order tackle even more vigorously the particular challenges around individuals of high net worth.
Lord Forsyth of Drumlean
Does my noble friend agree that the best way to avoid people coming up with complex tax avoidance schemes is to have simpler, lower taxes—which will maximise revenue and obviate the need for people to use their energies in this way—and concentrate on creating wealth and growth in our economy?
Lord Sassoon
My Lords, I am always prepared to consider every suggestion that comes up in your Lordships’ House. However, I think that one is getting a little radical and I cannot promise him much early progress on it.
Lord Dykes
Will my noble friend bear in mind that, as tax avoidance and evasion from the UK is at least 15 times greater than social security abuse and fraud, that the Government should therefore be 15 times more energetic in dealing with tax avoidance and evasion than they are with social security?
Lord Sassoon
My Lords, I do think that we are comparing apples and pears. We will be vigorous on both fronts. In relation to tax avoidance, HMRC has reassigned some £900 million of its expenditure within the spending round to tackle this issue. We should also remember that while the tax gap in the UK is £35 billion—about 8% of liabilities—it compares well on an international comparison. For example, the equivalent in the US is 14% and in Sweden 10%. So, yes, there are big numbers to be played for, but good progress is being made.
Lord Davies of Oldham
The House may have been encouraged by the Minister’s initial constructive response but past practice does not seem to quite measure up to his optimism. He commended the legislation passed by the Labour Government in 2004 under which accountants have to submit to Her Majesty’s Revenue and Customs any scheme which leads to tax avoidance. Was this implemented in the famous case of the comedian Jimmy Carr? Did his accountant inform HMRC? If so, what was done about it? If he did not, when are the Government going to act?
Lord Sassoon
My Lords, individual taxpayer confidentiality is very important. It is the prime reason why we are certainly not going to see individual tax returns published and, therefore, I am not going to comment on an individual case. That particular case has had a great deal of airing in the past couple of weeks.
The Earl of Listowel
Is the Minister aware of the job that charities do for their donors by picking out case histories of how their donations can make a difference to particular families and children? Might not Her Majesty’s Customs and Revenue do more to inform taxpayers about the value for money that they get in paying for services? It could give a specific example of, say, a bright graduate, recruited into the teaching profession, making a difference to particular children in an inner city area? The graduate could then say, “I am so grateful for the money that trained me and for the difference that I have been able to make to these children”. There are many concrete examples of the difference that taxpayers’ money makes to individuals, children and families.
Lord Sassoon
I agree with the noble Earl that the voluntary and charitable sectors make an enormous contribution. Often they deliver more cost-effective and better quality services than public bodies and the tax regime around charities supports that. That is precisely why we are so keen to drive forward philanthropy and a tax system to support it. I share the noble Earl’s sentiments.
Economy: Deficit Reduction
Lord Sassoon Excerpts(12 years ago)
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Lord Barnett
To ask Her Majesty’s Government whether they remain of the opinion that their deficit reduction plan has been the right policy for the United Kingdom; and, if so, why.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, tackling the large deficit that this Government inherited was, and is, necessary to restore public finances to a sustainable path. Reversing the historic rise in public debt will strengthen the UK’s medium-term growth prospects.
Lord Barnett
My Lords, has the Minister seen the OECD’s latest figures, which show that when the Government took office in 2010 our net debt in that year was 53.9% of GDP, while in Germany it was 52.2%? By 2013, next year, they say that UK debt will be 74%, although it is likely to be higher now in the light of the latest figures, while Germany’s will still be 50.5%. The budget deficit was serious, of course, but it cannot be blamed for those figures. Does the Minister not agree that those figures show that the real reason behind this is that Germany had growth, whereas the Chancellor’s deficit reduction plan deliberately had no growth? In those circumstances, can we now expect another U-turn, shortly I hope, to provide some capital for structural expenditure, which might just help to kick-start a bit of a revival?
Lord Sassoon
My Lords, the debt figures that the noble Lord, Lord Barnett, recited precisely illustrate the structural deficit challenge that we inherited from the previous Government. We have already reduced the current budget deficit from 11% to 8% of GDP in two years, but there is much more to do, and we will do it. We will be reducing borrowing by £155 billion a year by 2016-7, compared to what it otherwise might have been under another Government. We will keep on with that task.
Lord Sharkey
My Lords, the Oxfam report, The Perfect Storm, published two weeks ago, says:
“The combination in the UK of economic stagnation and public spending cuts is causing substantial hardship to people living in poverty”.
In view of this, could the Minister tell the House what plans the Government have in place to mitigate the effects of their deficit reduction programme on our most deprived groups and communities?
Lord Sassoon
My Lords, I can assure my noble friend that the Government are committed both through the changes that we are making to the income tax system and to other public expenditure decisions to protect the vulnerable and reward those who choose to work, particularly at the lower income levels. So we have, for example, the uprating of benefits by 5.2% more than average earnings growth to protect people from rising prices; reforms to the tax credit system, so that we are tackling the deficit in a fair way; uprating the child tax credits, so that families see an increase of £135 per child this year as well as £180 over inflation last year; changes to personal allowances, which will benefit 25 million people, taking 260,000 people out of income tax altogether; and the fairness premium at £7.2 billion—I could go on. My noble friend is right, and I can confirm that this will be very much at the forefront of the Government’s thinking.
Lord Peston
My Lords, bearing in mind that the Lords reform Bill is predicated on the Government’s view that your Lordships’ House lacks legitimacy, I congratulate the Minister on his willingness—at least on this occasion—to answer our questions, albeit not very satisfactorily. I hope he continues with that.
On the substantive issue, has the Minister seen the Governor of the Bank of England’s latest, extraordinarily pessimistic forecast about the likely status of what one would have called the real economy—as opposed to the financial economy? Bearing in mind that most of the Government’s expenditure cuts have not yet been made, surely the governor in his pessimism is actually not being pessimistic enough. Does the noble Lord agree?
Lord Sassoon
My Lords, I think that the Governor of the Bank of England is, as always, being very realistic and clear about the nature of the dangers that we continue to face particularly because of the eurozone crisis. This is precisely why we will stick to the fiscal course that we have charted; why it is supported by the IMF, the OECD and business organisations here; and why it is that we have 10-year interests at 1.7 per cent. We will do nothing to jeopardise that position in the face of the very real dangers that the governor points out.
Lord Ryder of Wensum
My Lords, leaving aside the welcome reductions in corporation tax, will my noble friend please remind your Lordships of the three main supply-side measures promoted by the Treasury to encourage growth?
Lord Sassoon
My Lords, the first thing that we need to do to support growth is to continue to have companies and individuals confident that we will stick to a responsible course and keep interest rates low. It is from this that all else flows. As well as tight fiscal discipline, it is important that we have a loose monetary discipline. That is the right policy prescription. We will target our other efforts into making sure that education, infrastructure and each of the key drivers of medium-term sustainable growth are supported in all that we do as a Government.
Lord Low of Dalston
My Lords, the Minister has referred to the reduction of the deficit from 11% to 8% of GDP. However, is it not the case that the deficit on current spending has hardly changed over the course of the last year and that almost all the reduction in the total deficit has come from cuts in investment spending?
Lord Sassoon
No, my Lords, that is not correct. Last year, Government departments came in with underspends of some £6 billion—and that was certainly not all capital spending. What my right honourable friend the Chancellor was able to do this week by cutting fuel duty, putting £550 million back into the pockets of hard-working families, illustrates how we are able to use underspends and put them to very good use where they are most valuable to our people.
Lord Davies of Oldham
My Lords, can the Minister explain why the Prime Minister was the only leader of a nation attending the G20 whose country was in recession? If he is talking about inheritance, does he recall the fact that, in 2010, this Government inherited a 2 per cent growth rate and now it is nought?
Lord Sassoon
My Lords, we face very difficult challenges. For all the deficit reduction that we have done, this country still has a budget deficit higher than Greece, Portugal and Spain. Yet we have interest rates that are very much lower and the confidence of the markets, and it is off that base that sustainable growth will come.
Financial Services Bill
Lord Sassoon Excerpts(12 years ago)
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Lord Peston
My Lords, I notice that the Chief Whip is in her place, so when will we who propose to spend quite a lot of time on the Bill and make serious contributions be told of the days on which we will be sitting, and how many days we will be sitting, before the House rises? It would enable some of us at least to get something resembling a life.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the Forthcoming Business will be issued in the normal manner following discussions through the usual channels.
Lord Burns
My Lords, I agree with the noble Baroness, Lady Liddell, that the Bank of England needs a modern and transparent form of governance, the best governance that it can have. I also agree with the noble Lord, Lord Flight, that the form of governance that is best known in this country and is best practice is a unitary board—a board that consists of a majority of non-executive directors. It also consists of executive directors with a non-executive chairman. The present structure of the court seems to me very close to that. We may not like its name, but in terms of structure, it seems it could very easily be turned into such a body. The issue is not what its name is or even the composition of it; it is to do with the powers that the court has.
It has been mentioned that the court has many of the powers that a normal board would be expected to have. Some of those powers that it does not practise at present are contained in the amendment that the noble Lord, Lord Sassoon, will move later today to do with dealing with issues of oversight of policy in the past and the extent to which that should be done.
I would hope that we could retain the present structure of the court. As I said, whether the name should be changed is a matter of taste, but we should concentrate on the powers of that court and the extent to which the powers that it needs to operate as a normal board are contained in some of the other amendments being put forward. Certainly, as I interpret some of those that we have seen already, it begins to come quite close to what I would expect to be a modern, transparent and very good form of governance.
Lord Sassoon
My Lords, it has been an interesting 45 minutes. I really thought that this group of amendments was going to be, in cricketing terms, a loosener from the opening fast bowler from the Opposition Benches, instead of which I have been faced with a number of bouncers and, I dare say, a couple of wide balls on the way through.
I will not respond to all of what I might term the Second Reading points that have been reiterated. I answered all the substantive points at Second Reading and would refer noble Lords back to those debates. I also will not be tempted into discussing clauses yet to come. In answer to my noble friend Lord Eccles about what “micro” means—
Lord Sassoon
I beg my noble friend’s pardon. I think I was looking at the Annunciator, which was misleading at the time. I rather wished we were already where my noble friend Lord Phillips of Sudbury was, on Clause 9, but sadly I looked down and we were still on Clause 1. We will come to all these points in due course.
I will respond to the comments on the form in which the Bill is presented. Although I explained at Second Reading why we are amending FiSMA rather than giving a wholesale rewrite, it is clearly of some concern to noble Lords and I should address the points as I did at Second Reading. Our approach was widely supported by consultation respondents. It will minimise the extent to which regulated firms and other users of FiSMA have to deal with legislative change. I appreciate that there might have been forms that would have made it easier at the margin for your Lordships’ House, but I think the substantive point here is that we are asking a major UK industry to absorb significant and necessary change and it is certainly the watchword of this Government in all that we do to minimise regulatory and administrative burdens; and we listened to what the industry had to say in response to the consultation.
I also believe that the way in which the board is constructed will allow for more focused parliamentary and stakeholder scrutiny of the key changes to the regime rather than open up a full discussion of everything again. The Government recognise that it is difficult. We have well over 300 pages of the Bill before us, which is precisely why we published a consolidated version of the Financial Services and Markets Act, which at some 650 pages was a huge exercise by Treasury officials. It took an enormous amount of time and is available on the Treasury website. I drew noble Lords’ attention to it at Second Reading. A comprehensive amended version, as it would be amended if this Bill goes through, is available for scrutiny on the Treasury website.
Lord Eatwell
The Minister is quite right—it is 658 pages, actually, and extremely difficult to read on a computer screen. Will the Treasury undertake to print a copy and provide it to every Member who has taken part in this short debate?
Lord Sassoon
My Lords, different noble Lords will want to digest the material in different ways. Some of us may find it much easier to focus on what we are interested in on a computer screen. I am certainly conscious of the wasteful expenditure of resources and taxpayers’ money when people do not want printed copies. I will investigate, but it may be that copies are available through the Library. I do not know—let me have a look at that. But it is certainly on the website. I suggest that noble Lords may not want to download all 600 pages but will be interested in particular sections. I underline the fact that a huge effort was gone into that far exceeds anything that would normally go into a Keeling schedule.
The noble Lord, Lord Peston, asked about Keeling schedules. When he asked about them a couple of days ago, I had no idea what they were. So I asked for somebody to have a look on the internet, where there is a very interesting debate. It starts by questioning whether these schedules were named after the stunt woman, Liise Keeling, or the distinguished former Member of Parliament for Twickenham, Mr E H Keeling, later Sir Edward. It was the latter who did it in conjunction with Mr R P Croom-Johnson, later Mr Justice Croom-Johnson. So there was, indeed, a Keeling schedule, but it is something that has fallen out of common use over the past decade and more. I suggest that we have gone rather further than a Keeling schedule in producing a fully amended version of FSMA on the Treasury website. There is not, before I am challenged, an amended version of the Bank of England Act, because the changes that we propose to that Act are relatively straightforward. The major innovations in the Bill, such as Clauses 3 and 5, which we will get to in due course, are drafted as entire new clauses, and may be read and scrutinised very straightforwardly as self-standing provisions.
Lord Peston
This reminds me of the Marx Brothers stuff and the great joke about whether we have an insanity clause. Am I to understand that there is no such thing as a Keeling schedule and that it does not exist? Is that the answer to my question?
Lord Sassoon
It is something that used to exist and the concept is still out there in the ether, but it has fallen out of common use over the past 20 years. For this Bill, there is no Keeling schedule but there is the 658-page, fully amended version of FSMA, which is accessible on the Treasury website. It serves the purpose of a Keeling schedule and does more than that.
Lord Phillips of Sudbury
I am reluctant to intervene on the Minister again, but it is important that even if he does not provide a print-off of this labour of love, hard copies of this mammoth work should at least be available in the Library. Some of us find that the time that it takes to run off 658 pages on our clapped-out machines is itself unnecessary.
Finally, the Minister may find that a Keeling schedule is exactly what has been done by the Treasury in this regard. That is my understanding of a Keeling schedule.
Lord Sassoon
My Lords, it may be the largest Keeling schedule ever known to this House. I will certainly make sure that the Library is aware of where to find the amended version of FiSMA, and I am sure that it will print copies off on request in the normal way.
I turn now to the substance of this clause. The amendments put forward by the noble Lord, Lord Eatwell, seek to convert the court of directors into a supervisory board. We will discuss in detail later—as has already been identified by the noble Lord, Lord Burns, and others—government Amendment 13 and related amendments which, I suggest, address all the points of substance behind the amendments of the noble Lord, Lord Eatwell, by creating a statutory oversight committee. I will have a lot more to say about that when we get to Amendment 13.
The only substantive difference, as the noble Lord, Lord Eatwell, has said, between the Government’s amendments and those in his name appears to be in the name of the Bank’s governing body. The noble Lord’s amendments do not seek to change the structure or membership of the court; it is simply, as he identified, that he does not like the term “court”. I agree with other members of the Committee that simply changing the name is not what we should be focusing on. The name of the Bank’s governing body is largely irrelevant. It is important that it is a body that is fully equipped and prepared to fulfil its role in the new structure effectively and that the non-executives on the court have a clear and explicit remit to oversee the Bank’s performance, both in policy terms and operationally. We will come on to why the Government believe the amendments to the Bill that we have put down are needed.
In answer to the questions about why we put the amendments down when we did, I listened very carefully to all the points on governance and other issues that were made at Second Reading and have come forward, at the earliest practicable date, with amendments ahead of discussion in Committee rather than after it, both in relation to oversight and growth. I make no apology, but your Lordships will appreciate that there was not much time between Second Reading and today to get some important amendments sorted out in detail. I hope that explains what we have done.
Lord Eatwell
My Lords, on that point, it is my understanding that Mr Hoban made the commitment to produce this committee at Third Reading in the other place. It does not seem to me that the noble Lord had to wait until after Second Reading here to formulate his amendment.
Lord Sassoon
My Lords, as I said at Second Reading, I wanted to take full account of the wisdom of this House before we finalised and tabled the amendments. That is exactly what we have done and, as I will explain later, I believe that they meet the concerns of many noble Lords who spoke at Second Reading. The new oversight committee achieves the substance of what is required.
However, as has been said by a number of noble Lords in this debate, if we were to change “court” to “supervisory board”, as suggested by the noble Lord, Lord Eatwell, it would be grossly misleading. What many people, maybe most people, would understand by a supervisory board is that it would be a board of non-executives exercising independent oversight. Actually, as the Committee should be aware, merely changing the name “court” to “supervisory board” would means that it would still be a body made up of executive and non-executive directors, and therefore it would not have the effect that most people would understand by the term “supervisory board”, unlike the oversight committee which the Government are proposing and which we will come on to. I understand the point that the noble Baroness, Lady Liddell of Coatdyke, makes. We want proper, independent oversight, but changing the name of the court is not the way to do it. This has been an interesting debate but, on the basis of that explanation, I ask the noble Lord to withdraw his amendment.
Lord Sassoon
My Lords, when we come to those amendments I will give my view and the view of the Government, but in this group we are talking about the noble Lord’s amendments only.
Lord Eatwell
I mean generically. I raised the question in my opening remarks as to whether it would be appropriate for this House to give the other place the opportunity to discuss the amendments tabled by its own committee. Does the noble Lord think that is appropriate?
Lord Sassoon
My Lords, we have a series of amendments down in the name of my noble friend Lady Noakes and the noble Lord, Lord McFall of Alcluith. The best thing to do is to discuss them when they come up and take them one by one on their merits. If the noble Lord had wanted to discuss all these matters together, he could have grouped a number of amendments together but he, or the usual channels on his behalf, chose not to do so. We had better proceed as per the groupings list.
Lord Eatwell
My Lords, the noble Lord is not answering the question about what he considers to be the generic nature of that set of amendments derived from the Treasury Committee report.
I am very grateful to noble Lords who have taken part in this short debate. As I understand it, the discussion broke into two parts. Many noble Lords were disturbed by the complexity of the legislation before us and felt that this complexity was preventing a satisfactory consideration of the overall implications of the legislation. Having worked on this for some time, I have some sympathy with them. The noble Lord referred to the many hours that Treasury staff had to devote to creating the unified Bill—the Keeling schedule. Similar hours will no doubt have to be devoted to deriving a full understanding of the implications.
Leaving aside the issue of complexity, I turn to the issue of governance, which lies behind the first amendments that I have proposed and which will be before the Committee as we roll through a number of other amendments. Every noble Lord who spoke, with the exception, to a certain extent, of the noble Lord, Lord Burns, felt that there were important issues to be addressed with respect to the governance of the Bank of England and that the court as currently formulated is not fit for purpose. Some of this will be discussed later, in the context of my Amendment 8 and of Amendment 13, which establishes the oversight committee. There are some major questions to be raised about the oversight committee, which we shall deal with at that point. It does not achieve an effective system of clear, transparent governance in the way that one would expect of a major public institution.
With respect to the name, being a bit of a traditionalist myself, I have some sympathy with the noble Lords, Lord Flight and Lord Burns, who felt that the court might as well be called the court. However, when the noble Lord says that the term “supervisory board” is misleading, do we think that the term “court” is not misleading? Whatever does that mean to anybody not steeped in the history of the Bank of England? The Minister has failed to address the generic question about the amendments derived from the Treasury Committee in another place.
This is a significant constitutional development which I think is very valuable, but the noble Lord seems not to want to discuss it. We will return at several points—
Lord Sassoon
My Lords, is the noble Lord, Lord Eatwell, aware that what he describes as the Treasury Committee amendments were debated on Report in another place? Does he accept that, perhaps contrary to the impression which he may not have meant to give, they were indeed debated on Report in another place?
Lord Eatwell
I think that the noble Lord will find that not all the amendments were debated. Indeed, the key amendments relating to the governance of the Bank of England were withdrawn on the basis of Mr Hoban’s assertion that he was going to bring forward some new arrangements. Therefore, the issue before us is whether those new arrangements measure up to the issues raised by the Treasury Committee—a matter that we will discuss in a moment.
Given the nature of our discussion, which I think has got us under way and raised a number of important issues that are yet to be resolved, for the moment I beg leave to withdraw the amendment.
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.
Lord Peston
Before the Minister finishes what he is saying, could I ask him a question which is a sort of question of economics? I entirely agree with the noble Lord, Lord O’Donnell, that it would seem very strange indeed if the Governor of the Bank of England did not chair both the FPC and the Monetary Policy Committee. But then I ask myself, “Does that mean that there is a vast amount of spare capacity in the governor; that he has been twiddling his thumbs looking for other things to do, and this is a way of making use of his skills?”. This is a very serious question. I remember that when I chaired the Economic Affairs Committee—or rather, its predecessor—the previous governor chaired the committee in a way completely different from the way that the present governor chairs the MPC. I could enlarge on that, if the Committee liked. I was given a complete set of papers for the MPC, a vast amount, which I found fascinating. On the basis of those papers, I would have found it a full-time job just to chair that committee. I am therefore at somewhat of a loss as to where the spare capacity comes from. What is the governor not now going to do in order to chair the FPC? That is a very serious question indeed. This would not have been a problem for the previous governor, because he regarded his role as chairman as just chairman. He did not intervene; for example, he always voted last. He was never defeated, and when he used to give me lunch regularly I would say to him, “There is no big deal in being on the losing side”. He said, “It is impossible for me as Governor of the Bank of England ever to be defeated in the MPC. It would be quite out of the question”. I was very impressed with the present governor being willing to be defeated. I am often defeated, but I never think I am wrong; I just shrug and walk away.
Could the Minister therefore tell me where the spare capacity in the governor is to be found, so that he can chair both these committees entirely satisfactorily, in the way the present governor does it?
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.
Lord Barnett
Name one. Anyway, I do not wish to delay the Committee much longer, and I will withdraw the amendment.
Lord Sassoon
Before the noble Lord sits down, I would point out that very recently Rachel Lomax was a very distinguished deputy governor of the Bank, to name but one, and there are now some very able senior female members in the banking sector, to avoid any doubt on that matter.
Lord Peston
Women comprise half the population of the country, do they not? If we look at ratios, there is not a lot to boast about.
Lord Eatwell
The noble Lord and I are both professional economists and therefore we have disagreement built into our DNA. The role of the Treasury Select Committee in another place is special in this case.
I move on from the amendment tabled by the noble Baroness, Lady Wheatcroft, to Amendment 10, which raises some very difficult issues. Given the new, complex set of conflicting goals that the governor will necessarily need to navigate, the idea that his or her removal from office should be subject to some form of special scrutiny is entirely appropriate. I am not sure whether this is the right form of special scrutiny, but I am certainly going to take this away and think about it and may return to it on Report.
To sum up, Amendment 5 goes a little too far. Consultation is the key in the appointment process. The noble Baroness, Lady Wheatcroft, has identified something very valuable indeed, and we should be grateful to her, as should the Government, who should say so and accept her amendment. A number of very difficult issues have been raised with respect to Amendment 10, which I need to take away and think about at greater length before we come to Report.
Lord Sassoon
My Lords, first, of course the Government place great importance on the suitability and independence of the Governor of the Bank of England. We are all clear that the governor’s role is already a challenging one and that future holders of this post will need to possess an even broader range of skills, experience and expertise. We do not in any way seek to deny that. However, although I fully recognise the great importance of this appointment, I am very confident that there are already robust arrangements in place, which I will go through in a minute.
It is good that we are now focusing in this debate for the first time very directly on the amendments that we are discussing, which makes for a much more productive 35 minutes than we have had on this. In the debate, which has been instructive and interesting, I have heard some voices speaking up for some form of parliamentary veto, some arguing for consultation, some arguing that it should be the Treasury Committee in another place and some suggesting that it should be that committee and/or—I am not quite sure which—the Economic Affairs Committee of this House. Although it is not the subject of an amendment, I heard at least one suggestion that if we were going to change anything, we should go rather more radical and make it subject to a vote of the whole House in another place. That is a rather broad menu. There are many ways to skin this particular cat but I suggest that there are already robust arrangements in place
The governor and the deputy governors of the Bank are appointed by Her Majesty the Queen on the recommendation of the Chancellor and the Prime Minister. Since 2009, this Government and the previous Government have agreed that in principle these appointments will be subject to open public competition. That is what happened with the most recent example of Paul Tucker, who was appointment deputy governor in 2009, and that practice will continue. The Treasury Committee already holds pre-commencement hearings with those who have been selected to become governors and deputy governors. Therefore, I do not believe that Amendment 5 is necessary.
To be absolutely clear regarding something that I think I heard the noble Lord, Lord McFall, say, I certainly agree that Amendment 10 is connected with Amendment 5 but, to be technically right, I would not accept that Amendment 10 is consequential on it. I just wish to be clear on that technical point.
Having been appointed, the governor certainly cannot be removed on a whim. Indeed, the Government have no powers to remove a Governor of the Bank of England. Rather, the Treasury must give its consent if the Bank decides that the governor has met the criteria for removal. However, it is the Bank’s decision to make. The legislation is clear that the governor, a deputy governor or a director of the Bank can be removed only with cause—that is, if the Bank is satisfied that he or she has been absent from meetings of the court for more than three months without the consent of the court, that he or she has become bankrupt, or that he or she is unable or unfit to discharge their functions as a member. That is very clear.
Some commentators have suggested that the fact that the appointments of the chair and independent members of the Office for Budget Responsibility are subject to a Treasury Select Committee veto sets a precedent and that governor appointments should also be subject to a parliamentary veto. However, I agree with the noble Lord, Lord Turnbull, who suggested that these cases are rather different. The role of the governor and the members of the OBR are both characterised by the need for especially talented and independent candidates, but that is where the similarities end. The OBR performs an important function in providing an independent and unbiased forecast on which government policy can be based, whereas the governor carries out executive functions on behalf of the state.
More than that, and more broadly relevant to the amendments, this policy-making role makes the appointment of a prospective governor extremely market-sensitive in a way that appointments to the OBR and many other appointments simply are not. The uncertainty created by a public pre-appointment approval process could, depending on the market conditions at the time, be significantly damaging. The noble Lord, Lord Eatwell, may not like this analysis but I suggest that the person performing the role of governor attracts significant market interest. A huge amount of time and effort is spent examining every scrap of information relating to members of the Bank’s policy committees in order to gain insight into their thinking and determine likely future policy responses, and that will very much be the case with candidates for the post of governor.
Once the candidate is announced, his or her particular leanings can be factored into asset prices. The Treasury Select Committee will then be able to conduct pre-commencement hearings, providing a useful insight into the professional competence and personal independence of the appointee. However, I suggest that pre-appointment hearings of the sort suggested and necessitated by the amendments in this group would exacerbate the uncertainty of markets about who will be appointed, and that would be inappropriate.
I am also sure, and I do not need to point out, that I could apply similar arguments regarding the dismissal of a governor. The uncertainty around any such dismissal would be just as damaging. In addition, I cannot see how the position of a governor whom the Bank had sought to remove for reasons of unfitness for the post could be anything other than untenable if the Treasury Committee reversed the decision, so I simply do not understand how that would work in practice.
I believe that the current arrangement of pre-commencement, rather than pre-appointment, hearings provides the right balance. It gives Parliament an opportunity to question the new appointee on their views and qualifications without bringing into question, or placing doubts over, the appointment itself. A parliamentary veto on appointments and dismissals would introduce uncertainty into these processes, and that would apply whether the veto was given to the Treasury Committee in the other place or to your Lordships own Economic Affairs Committee. For these reasons, I believe it is inappropriate for the Bill to provide that a parliamentary committee must approve governor appointments or dismissals.
Lord Peston
Before the noble Lord moves on to his next point, can he, for my education, explain one aspect of the drafting of the Bill? With regard to what we are discussing, can he tell me whether there is any significance in lines 8, 9, 10 and 11 on page 1, which refer to “a Governor” and “a Deputy Governor”, and line 15, et cetera, where the references are to “the Governor” and “the Deputy Governor”? Is this a fundamental matter of parliamentary draftsmanship, which is beyond me, or is it simply a grammatical error?
Lord Sassoon
My Lords, it relates to the former. I do not think it is fundamental; it just fits in with the construct of the legislation that we are talking about. There is no mystery behind it; it is purely a case of the grammar that the draftsmen have thought appropriate to use in the different lines.
Baroness Kramer
My Lords, the Minister has just put forward an argument for retaining the current process, which excludes the Treasury Select Committee from participating in the appointment of the governor. However, has he ever looked at the idea of allowing the Treasury Select Committee to question pre-appointment, even if there is no veto? I think we can all see a potential scenario—one that we hope never to have—where an appointee who is already in position, although they may not have commenced the role, comes before the Treasury Select Committee and does not win the confidence of the committee or the confidence of Parliament. That would leave us in a particularly dire situation and it is one that I think most of us would wish to avoid.
Lord Sassoon
I attempted to address the pre-appointment versus pre-commencement issue and I shall not repeat my remarks, other than to say that I believe that, for the market reasons I have given, among other reasons, it would be damaging if there were significant doubt over the clarity of the appointment of a particular individual as governor. One can very easily see how such a situation would be damaging and dangerous in present market conditions. Therefore, I repeat that I believe there is a distinction—
Lord Sassoon
Perhaps I may complete the answer to my noble friend Lady Kramer, then I will give way. As I pointed out, I believe that there is a great distinction between pre-appointment and pre-commencement, that we have the balance right, and that with any appointment put forward to the Queen on the recommendation of the Chancellor and the Prime Minister there will be a very high degree of likelihood, approaching certainty, that the figure appointed will have the confidence of the Treasury Committee.
Lord Eatwell
My Lords, following on from the point made by the noble Baroness, Lady Kramer, while I agree with the noble Lord that a veto by the Treasury Committee is not a good idea, I really do not understand his arguments about pre-appointment consultation, whereby a prospective candidate appears before the Treasury Select Committee prior to his or her appointment being confirmed.
The argument about market sensitivity entirely contradicts what the noble Lord told us about the collective decision-making process in the Bank. If there are all these collective procedures in which the governor is challenged and supported by deputy governors, technical staff, and so on, the idea that a new governor arriving would dramatically change the nature of monetary or stability policy seems to be ridiculous. There may be a change of tone or style, but the idea that the governor will somehow be the sole factor who can move markets by the very nature of his character would seem to reinforce all the fears of those who believe that we are appointing a sun king. The noble Lord argued persuasively that there existed a degree of collegiality in the Bank, which some of us were quite surprised to hear, but none the less we understand what he says. However, he cannot argue that and at the same time deny the possibility of pre-appointment consultation because it is market sensitive.
Lord Sassoon
My Lords, the noble Lord, Lord Eatwell, always applies impeccable logic but the way in which the markets look at these things is rather different and not necessarily logical. While I entirely accept at one level the logic of the noble Lord’s argument, it is not the way in which the markets seek to interpret what they can read into every tea leaf, let alone something as important as the appointment and the person of a new governor. I certainly do not accept that my two arguments are in any way at odds with one another.
Lord Eatwell
My Lords, if the markets are so irrational, as the noble Lord says, why will we have our appointment process distorted by these irrational forces? Surely, if they are so irrational we should simply leave them to their own devices and develop a sensible, coherent appointment process that fits the needs for the appointment of this very important figure.
Lord Sassoon
My Lords, I was not going to bring this up, but I am not sure about the logic of the position of the noble Lord, Lord Eatwell. I understand that he was arguing for consultation but not a veto by the Treasury Committee. I am not at all clear why, if he is asking for consultation but not a veto, he is so hung up on whether it be pre-appointment or pre-commencement. Pre-appointment seems to imply some form of effective veto that goes with it. I am genuinely rather confused.
Lord Eatwell
I thought that I had made that clear in my opening remarks on the amendments. An individual who is being proposed by the Government to Her Majesty for appointment may be found by the Treasury Select Committee to be unsatisfactory in various aspects of his skill set or whatever, but while the Government may ignore that, they would at least have to take it into account and justify the appointment. Indeed, in doing so, that would perhaps strengthen the position of the governor thereafter.
Lord Sassoon
My Lords, I have dealt as fully as I can with the arguments. All I would suggest is that it further points out that this is not an easy area. As the noble Lord, Lord Turnbull, said, there are lots of possible solutions. If he were to change it at all, he would go to a solution that is not one of the number on the table at the moment. The Government’s position remains that we have an appropriate balance in all of this.
In answer more specifically to the noble Lord, Lord Peston, since I had the time during that little exchange to do a bit more research into “a”s and “the”s, the point is simple. The first reference is to the creation of “a Governor” and the subsequent reference is to “the Governor” who is at that point in the flow of the legislation being created. I hope that that helps to explain what is going on.
Lord Peston
My concern was with the correct use of English. It does not help but I cannot believe that it matters at all.
Lord Sassoon
Even if it does not matter, I try. I do my best to answer these points, even if it causes more confusion. Sometimes the “a”s and the “the”s could be very important.
I move on to Amendment 6 tabled by my noble friend Lady Wheatcroft, on which, no surprise, I will not be much more accommodating, but it is an important point that should be discussed. As I said, it is vital that the post be filled by the best possible candidate and taken from candidates who have expertise and skills to fulfil the role effectively. The legislation as it stands does not prohibit the Chancellor consulting widely before recommending that a candidate be appointed as governor. In practice, the Treasury and the Bank work together closely to recruit for key Bank of England posts. I am sure that my right honourable friend the Chancellor of the Exchequer will engage with key individuals as appropriate during the process to identify the next Governor of the Bank of England. Indeed, well ahead of the formal process kicking off, the chairman of court, Sir David Lees, and the Chancellor are already in touch on this matter.
However, I suggest that we should keep in mind that the appointment is ultimately for the Queen to make on the advice of the Prime Minister and Chancellor. Many people may be consulted as part of the process to appoint a new governor, but it would be impractical to attempt to define them prescriptively in the Bill. By leaving the legislation broad in this way, the Chancellor will be able to consult whoever he or she feels will add value to the advice. The people consulted may well change depending on the circumstances of the appointment. I suggest that that is how to leave the legislation but I hope that I have given the Committee some perspective on how these things will be handled. I hope that the noble Lord will feel able to withdraw the amendment.
Lord McFall of Alcluith
My Lords, the aim of the exercise is contained in the Treasury Committee report, which said that an amendment was tabled on Report in the other place but that because of “insufficient time” the Minister did not give an answer. This amendment is to elicit an answer. I suggest that the Minister should think again on this issue.
The noble Baroness, Lady Kramer, said that there is a role for Parliament. If Parliament feels excluded, that does not augur well for the stability of the system. I understand that giving a veto to a parliamentary committee is a bold measure, so I understand the concerns being expressed. The noble Lord, Lord Turnbull, made the point that the Treasury Committee could make a recommendation and the House could look at it. There has to be either a formal or an informal way of including Parliament in this. My noble friend Lord Peston said that if the Governor of the Bank of England left, he would leave the country.
Lord Sassoon
My Lords, just before the noble Lord, Lord McFall, sits down it may be worth being clear for the record that when I said the governor can be fired if he or she proves to be unfit to perform the role, that was completely right. In answer to the question from the noble Lord, Lord Peston, about whether the governor can be fired for wrecking the economy, I would suggest that at that point the Bank would probably decide that the governor was unfit. Without getting into a long debate about where unfitness comes into it, it is worth saying that at that point, unlikely though the scenario might be, wrecking the economy might lead the Bank to decide that the fitness test would apply.
Baroness Wheatcroft
I thank my noble friend the Minister for his reply; I confess I found it disappointing and I thank those noble Lords who spoke in support of my amendment. I was trying to find a simple means of showing that the court was held in some esteem and had powers to exercise. I do not doubt that informal conversations go on but I am slightly reluctant to rely on informal arrangements when we are trying to strengthen the corporate governance of the Bank. Not just to strengthen the corporate governance but to strengthen the perception of that corporate governance. I would ask my noble friend to think about this matter and maybe other ways in which he might strengthen perceptions of the corporate governance of the Bank. However, I shall not move my amendment.
Lord Turnbull
My Lords, I direct this question to the noble Lord, Lord Eatwell. Does he regard Amendments 122 and 123—which were tabled by the noble Lord, Lord McFall, and refer to persons representing the constituent parts of the United Kingdom —as helpful or unhelpful to his cause? Are they helpful because they may add to diversity, or unhelpful because you would be choosing people on the basis of their geographical representation rather than their professional expertise?
Lord Sassoon
I hesitate in replying because the noble Lord, Lord Eatwell, might want to answer that excellent question. However, it is up to the noble Lord.
Lord Eatwell
If it is of convenience to the Committee I am quite happy to do that. The noble Lord—indeed, my old pal—Lord Andrew Turnbull, has put me on the spot here by placing me in opposition to some propositions put forward by my noble friend. I was very clear that I was seeking diversity of view. Where someone lives does not seem a basis for that.
Lord Sassoon
My Lords, that illustrates one thing about the amendment—that the ways in which people interpret its words are rather different, which in itself is not ideal.
The noble Baroness, Lady Liddell of Coatdyke, got it right when she said that it is a no-brainer, and we do not believe that it is necessary to make legislative provision for it. My noble friend Lord Phillips of Sudbury said so in vigorous and direct terms which I can only echo. On one level, I feel that I should say no more and sit down. Nevertheless, I should explain to the Committee exactly what is going on.
As the Committee may be aware, the Treasury’s Select Committee report into the accountability of the Bank of England concluded:
“The new responsibilities of the Bank will require its governing body to have an enhanced mix of skills”.—[Official Report, Commons, Financial Services Bill Committee, 21/2/12; col. 21.]
The Government agree with this conclusion and in their response to the Treasury Committee they committed to take it into consideration in relation to future appointments. We understand the concern underlying the amendment and have already taken it into consideration, including in the latest appointments to the court. For example, both Tim Frost and Bradley Fried bring extensive experience of financial services as practitioners to the court. However, I do not believe that it is necessary to make legislative provision for this.
I can assure the Committee that the appointments of non-executive directors to the court are fully regulated by the Office of the Commissioner for Public Appointments, OCPA, which ensures a fair, transparent and competitive process. The practical elements of the appointments process are run by the Treasury, with the most recent interview panel consisting of senior Treasury officials, the chair of court and an independent assessor. The Treasury seeks to find the best candidates for these roles. This means people with a deep and diverse range of experience in relevant sectors. This can be, will be and is achieved without a prescriptive legislative obligation.
Court appointments are advertised openly. Applications are sought from candidates with diverse experience and from a variety of backgrounds. For example, the role profile for the last NED vacancy sought people with substantial experience as board members or heads of functions in a major financial services organisation; and/or someone who had built up a successful enterprise of a significant size; and/or someone who had played a prominent role in a relevant area of public policy, the voluntary sector or a trade union.
I can assure the Committee that the decision is taken with full consideration of the impact on the broader composition of the court and the fit of each candidate within the make-up of the court as a whole. I hope the noble Lord feels that he can withdraw his amendment.
Lord Tugendhat
My Lords, I support the amendment of the noble Lord, Lord Eatwell. He draws the lesson from what happened to the outside directors of the Monetary Policy Committee. It might be said that the Bank has learnt its lesson on that and that the situation will not arise in the future, but as I pointed out at Second Reading, the Bank has behaved unacceptably in relation to having an inquiry into its performance during the financial crisis. Whereas the FSA had an inquiry and the results were published, the Bank of England rather stuck to Montagu Norman’s axiom, “Never explain, never excuse”. The Bank of England is a fine and venerable institution, but it finds it difficult to change. Unless there is some provision of the sort that the noble Lord, Lord Eatwell, suggests, one cannot be sure that the supervisory board—or whatever it is going to be called—will necessarily have the economic, legal and monetary advice and so forth that is required. The role that it is taking on is complex. It will deal with highly competent officials in the Bank. It is essential that the non-executives on the supervisory board have absolute certainty that they have all the back-up they require.
When one looks at the demands being placed on non-executive directors of more normal financial institutions, it is clear that, if they are going to fulfil their functions, they will need much more back-up than non-executive directors were accustomed to in the past. Their responsibilities and accountabilities are greater and they will need absolute certainty and right of access. That applies to the Bank of England and I hope that the Government will take into account that, if we are to have proper governance, it requires proper support.
Lord Sassoon
My Lords, we debated earlier amendments tabled by the noble Lord, Lord Eatwell, which sought to convert the Court of Directors into a supervisory board. Following on from those amendments, Amendment 8 sets out some of the functions of that board. There is little between the noble Lord and the Government on the substance of the amendment, but my key argument is that the amendment is not needed because its most important parts are addressed by government Amendment 13.
Government Amendment 13, which I will talk to at much greater length when we get to it, will give the new oversight committee responsibility for overseeing the Bank’s performance against its objectives and strategy—precisely what the first part of Amendment 8 seeks to achieve. As for the second part of Amendment 8, I appreciate that in the past the Bank was slow to realise that the MPC members needed their own dedicated support. That lesson was learnt a considerable number of years ago, and both MPC and FPC external members now have access to appropriate resources. The point about the FPC is important and relevant because that has been created in shadow form only very recently.
We can see the considerable output that the FPC is already producing, which it could not possibly do without that support. I am wholly confident that the oversight committee will have sufficient support once it comes into being, and I do not believe that it is necessary to put it into the Bill. I ask the noble Lord to consider withdrawing his amendment.
Lord Eatwell
I apologise that I was temporarily distracted by other channels. I am heartened to hear that the Government feel that the Bank has learnt its lesson on the provision of resources. I still feel that it would be appropriate to provide that insurance, particularly legal advice, for independent members. Legal advice is crucial for non-executive or independent directors in any environment because they can so easily be outgunned by the executive in a way that ultimately is not beneficial for the institution as a whole.
By the way, I am heartened by what the Minister had to say about the definitions of the supervisory board’s roles, but we will come on to that issue in our detailed consideration of his Amendment 13.
I am sorry to be so roundabout in this respect, but going back to the issue of resources, I will consider what the Minister has said and decide what I will do on Report. In the meantime, I beg leave to withdraw.
Lord Sassoon
My Lords, it may be helpful if I speak early in this group because there are substantial government amendments here. The Treasury Committee’s report last November concluded that the increased responsibilities given by this Bill to the Bank of England warranted another look at the Bank’s governance arrangements. The Bank’s Court of Directors has been statutorily responsible for managing the Bank’s affairs since nationalisation in 1946, albeit with some modernising changes brought in by the Bank of England Act 1998 and the Banking Act 2009. I expect the court, as it has done over the decades, to adapt and evolve to the Bank’s changing role, which was brought in by this Bill to enable it to continue to operate as an effective governing body.
However, we should not—and I am already clear from our Second Reading debate that we do not as a House—underestimate the court’s task. It must effectively oversee the transition to the new arrangements, ensure that the Bank is adequately resourced to meet its new responsibilities, and at the same time provide a vital link of accountability to Parliament.
Recognising this challenge, in January the court published its response to the Treasury Committee’s recommendations, proposing the creation of a new oversight committee made up of the court’s non-executive directors. The court accepted the Treasury Committee’s recommendation for retrospective reviews of policy, proposing that the oversight committee commission these reviews from expert external bodies. The court also accepted that an ex-post review or reviews be published, subject to the need to maintain appropriate confidentiality. In line with the Treasury Committee’s proposals, the court proposed to give the oversight committee the papers from the meetings of the MPC and FPC.
Some hours ago, the noble Lord, Lord Eatwell, somewhat mischaracterised the Government’s approach to governance. The Government’s position has been that governance is in the first instance for the Bank itself, but we have not sought to distance ourselves. We listened to the Treasury Committee’s and then to the Bank’s response and have come forward, in the light of those responses and the Second Reading debate, with these amendments.
Subsequent to both the Treasury Committee’s and the court’s response, the Chancellor agreed with the governor and the chairman of court that the oversight committee’s remit would be extended to encompass the commissioning of internal reviews of the Bank’s policy performance. Finally, as part of our response to the Treasury Committee and the Joint Committee that scrutinised the Bill in draft, the Government committed to considering further whether the proposed reforms ought to placed on a statutory basis.
My honourable friend the Financial Secretary to the Treasury restated this position in another place. As I said during Second Reading, the Government have now determined that that should be done, and we are tabling these amendments.
Amendment 13 writes the new oversight committee into the Bill, simplifying the governance structure of the Bank by subsuming the role and responsibilities of the existing committee of non-executive directors—the so-called NedCo—into the new oversight committee.
Subsection (2)(a) of new Section 3A provides that the oversight committee will be responsible for keeping under review the Bank’s performance in relation to its objectives and strategy. This includes both monetary policy and financial stability, including the responsibilities of the MPC and the FPC.
Subsections (2)(b) and (c) give the oversight committee responsibility for overseeing the Bank’s financial management and internal financial controls, and subsection (4) lists a number of additional responsibilities in relation to the procedures of the MPC and the FPC and the terms and conditions and remuneration of key posts within the Bank. I hope that when we hear from the noble Lord, Lord Eatwell, he will accept that that provision fulfils the purpose behind his Amendment 29, which would make the non-executive committee of court responsible for overseeing the activities as well as the procedures of the FPC.
The oversight committee will be made up of all the non-executive directors of court, but in some cases it may be inappropriate for particular directors to have an active role in certain of the oversight committee’s functions. For example, a director of court who is also an external member of the FPC—as is the case with Michael Cohrs at present—should not have a role in directly overseeing the FPC’s performance. Subsection (4) of new Section 3B therefore allows the oversight committee to delegate any of its functions to two or more of its members.
New Sections 3C and 3D give the oversight committee an express power to commission and publish external and internal performance reviews. I hope that that satisfies the noble Lord, Lord McFall of Alcluith, whose Amendment 11 is also intended to implement the Treasury Committee’s recommendation for retrospective reviews of the Bank. In fact, in a number of respects, government Amendment 13 in the names of the noble Lord and my noble friend Lady Noakes goes further than that. Amendment 11 relates only to reviews carried out by the court itself; whereas Amendment 13 provides for reviews to be commissioned from an external person, such as an academic or independent expert, or from an officer or employee of the Bank itself.
I also note that Amendment 11 is limited to reviews of past conduct; whereas government Amendment 13 allows reviews of current practice to be carried out that may be appropriate to the functions of the oversight committee in the financial management and internal financial controls of the Bank.
Consistent with the Treasury Committee’s recommendations, subsection (5) requires the oversight committee to ensure that sufficient time has elapsed before commissioning any review, to allow it to be effective and to avoid impeding the ability of the Bank to continue to operate effectively while the review takes place.
In line with the Treasury Committee’s recommendation and the amendment tabled by the noble Lord, Lord McFall of Alcluith, new Section 3D would require the oversight committee to publish its reviews, unless publication would be against the public interest. Published reviews will also be laid before Parliament. Where publication of all or part of a review is delayed, the oversight committee must keep that decision under review and publish that material as soon as the sensitivity has reduced.
New Section 3E requires the oversight committee to monitor the Bank’s response to the report and ensure that it fully implements recommendations that it accepts. That gives the oversight committee an explicit role in ensuring that reviews translate into real action, and that the Bank fully takes on board the lessons learnt.
The Treasury Committee recommended that non-executives have access to all papers considered by the MPC and the FPC. New Section 3F implements that recommendation and goes even further by allowing members of the oversight committee to attend all MPC and FPC meetings in order to observe their discussions.
The remainder of the new clause and government Amendments 28, 30, 33, 91 to 96, 98, 99 to 101 and 145 to 147 make consequential amendments to implement the new oversight committee, and I do not intend to take up the Committee’s time by making any further reference to them.
In conclusion, the Government fully recognise the importance of strong lines of accountability for the Bank, given its expanded responsibility and powers. The amendments represent the most significant legislative reform of the governance arrangements of the Bank of England since nationalisation, and on that basis I hope that the Committee will support them.
Lord Phillips of Sudbury
My Lords, in the provisions setting up the oversight committee, which obviously has a hugely important and wide-ranging job to do, my noble friend mentioned the right of delegation in new Section 3B, but that is limited to two or more of its members. He mentioned under new Section 3C the right of delegation of a review to a person whom the committee can appoint. May there be wisdom in having a slightly wider power of delegation, so that one could under new Section 3B have an outside person or persons as part of that sub-committee and, in new Section 3C, more than one delegated reviewer? There may be occasions when that would be helpful.
Lord Sassoon
My Lords, I think I have covered the point but perhaps I can reflect on that and respond to it, because I suspect that the Committee might want me to respond to other points after we have heard the debate.
Lord Phillips of Sudbury
I see:
“There is to be a sub-committee of the court of directors … consisting of the directors of the Bank”.
It is not all the directors, some of the directors. I have got you.
Lord Sassoon
I have been restraining myself from clarifying a number of other points, but I think that there is perhaps a point that will help the Committee. A director, as defined, is a non-executive director, so the executive members—the governor and the deputy governors—do not, under the definitions here, count as directors. It is only the non-executive directors, which may help my noble friend.
Lord Phillips of Sudbury
I am grateful for that, and I apologise for the error. However, I want to reinforce the importance of extending the power of delegation under new Section 3B. That could be very important to the work of the committee and strengthen it because it would bring in outside voices and give strength to its deliberations. I hope, therefore, that the Government may review this and decide to extend the power of delegation, not just to members but to outsiders as well. Subsection (3) already provides that outsiders can attend and speak at meetings of the committee, but to be members of a delegated body is crucial, as, indeed, in the review structure under new Section 3C, it would be helpful on occasions to have more than a single person appointed to conduct a review. If it is a complex review, there could be a lot of point in having a small team of three. At the moment that is not permitted by the wording of new Section 3C.
Lord Sassoon
My Lords, in most senses I am very grateful for the number of questions. I am also grateful for the general welcome that there has been for the Government bringing forward this very important series of amendments to the way that the oversight and governance of the Bank operate. We are coming to one of the key parts of this Bill. I am grateful, therefore, for the general support from around the Committee for what we are trying to achieve here. Let me reassure noble Lords that a lot of their concerns have been thought about and are adequately dealt with, although there are one or two things on which we have consciously taken a particular course, which not all members of the Committee would agree with.
Let me start by reassuring my noble friends Lord Flight, Lord Hodgson and Lord Tugendhat, and others, that we are certainly not creating any new body here. The committee of non-executive directors of the court, the so-called NedCo, already exists; we are folding that committee’s responsibilities into the new oversight committee, so we are not proliferating committees.
I have considerable sympathy with the position of the noble Lord, Lord Burns. To summarise his position, it is that in fact a mature board can do all of this without effectively throwing the executives out of the room. There is, however, a long tradition within the governance of the Bank of this critical role of NedCo, which has been accepted and not seriously challenged over the years, combined with calls from all sorts of quarters, including the Treasury Committee, to do it in the way that we are doing it. We have had calls for a supervisory board from the noble Lord, Lord Eatwell, and others, which have a similar end. Many, therefore, both in this House and in another place, have been calling for this separation.
Yes, I understand that in the best of all worlds it should not be necessary, but the Government have responded to the calls for this separation between the executives and the non-executives to carry out the oversight role. We believe that we have done it in the most efficient and effective way here by not creating new committees and additional complexity. Neither have we chosen to do it in what I would suggest would be another inappropriate way—namely, to have a supervisory board, which is itself composed only of non-executives. All these considerations, therefore, have been factored into the basic construction here.
In terms of the basic construct, my noble friend Lady Kramer asked whether the Chair of Court would be executive or non-executive. It will be non-executive. I am aware that my noble friend has identified a possible lack of clarity by reviewing the existing legislation, and I know that she has tabled an amendment on this that we will debate later. However, the intention is very clearly that the chair will be non-executive.
I will take some of the other key points. My noble friend Lady Kramer asked whether new Section 3C(5) would mean that the committee should avoid criticising the Bank. That is absolutely not the case. The section only relates to the timing of reviews, and it is sensible to provide that, in deciding when to carry out a review, the committee should consider whether having a review at that time would disrupt the ability of the Bank to do its job properly. My noble friend also went back to questions about why the Bank had been so tardy, and about the scope of the reviews it recently commissioned. I would suggest that that illustrates why this amendment is appropriate and will make the whole position much clearer and different with this remit on the oversight committee. Without debating the rights and wrongs of the timing and the scope of reviews that have recently been commissioned, this amendment very much deals with that concern.
The noble Lord, Lord Eatwell, raised a concern about the scope of the work here, and what is kept under review. As he helpfully clarified, Amendment 29 seeks to require the non-executive committee to oversee the activities of the FPC. That is precisely what the Government believe Amendment 13 achieves as it makes the oversight committee responsible for overseeing the Bank’s performance against its objectives, including the FPC’s pursuit of its objectives. I believe, therefore, that in drafting its scope, that concern is taken fully on board.
My noble friend Lord Phillips of Sudbury asked questions on the ability of the committee to delegate, and on the interaction of new Sections 3B and 3C. These are different points, and therefore the construction here works as it was intended. New Section 3B allows the committee to delegate its own functions to two or more members of the committee. That is a different point from that in new Section 3C, which allows the committee to appoint, not to delegate, others—either an individual or a group—to undertake reviews of Bank performance. Therefore, the drafting works on that point and deals appropriately with the concerns that my noble friend expressed.
As regards the concerns around these processes, a number of points have been raised about possible redaction or disagreement with recommendations and so forth. The noble Baroness, Lady Drake, asked what would happen if the Bank did not accept recommendations that had been made. If that were the case, it would certainly be made public that the Bank had rejected a recommendation. I would expect that any such decision would therefore be subject to very close scrutiny, including appropriate parliamentary scrutiny. That would work in a very similar way to the scrutiny that surrounds government responses to independent and other reviews. There is no way that the Bank could walk away from proper challenge in such circumstances.
Baroness Drake
On that point, I am sure that it would leak or become obvious but what is laid before Parliament is not the report that the Treasury receives but the report that the Bank publishes. This provision allows for the Bank not to publish on the grounds of its view of a public interest issue.
Lord Sassoon
My Lords, it is generally accepted that carve-outs are needed, particularly in relation to the time-sensitivity of reports. As I have explained, this is very tightly circumscribed and the question of when it is appropriate to publish must be kept under review. The publication of the report, or any delay to that publication, can be achieved by the Bank only in those very circumscribed circumstances. They must keep publication under review. Therefore, there will be publication and appropriate challenge at the earliest appropriate time. It is difficult to see what the circumstances might be in which the Bank’s not agreeing with a recommendation would justify non-publication. There is proper but not excessive protection of the position here.
There was also a question from my noble friend Lord Hodgson about the Treasury’s possible ability to step in and in some way redact or hold back reports. The Treasury has no powers here. It merely receives a report. It is up to the Bank, again on public interest grounds, to hold back parts or the whole of a report. I should not say that I quite understand my noble friend’s cynicism about references to the Treasury because I certainly do not. However, I understand why he has properly raised the question.
I think I have already touched on this point but the noble Lord, Lord Eatwell, specifically referred to proposed new Section 3A and whether the government amendment allows the committee to consider the merits of the Bank’s action. Proposed new Section 3A provides that the committee is to keep,
“under review the Bank’s performance in relation to … the Bank’s objectives”.
I reiterate that the main concern here has been addressed.
On the broader question of what the Government have done not only in relation to the Treasury Committee but about the recommendations that the Bank made in January, there is nothing that I can add to what I said in my opening remarks, in which I attempted to be very clear on that point.
Lord Eatwell
Perhaps I can clarify the question for the noble Lord. The question is really about whether the oversight committee could pass judgment on the decisions of policy-makers. As the Treasury Committee put it:
“It is unrealistic to suppose that an oversight body could plausibly be expected to commission an external review of a policy decision without assessing the substance”.
This is what the Bank objected to in the initial form of the oversight committee. Has the Treasury put aside the Bank’s objections, and can the oversight committee now refer to make its assessment of the substance of policy decisions?
Lord Sassoon
Let me address this very directly. The requirement for the oversight committee to ensure that sufficient time has passed before commissioning a review is there precisely to ensure that it does not put itself in the position of second-guessing the Bank’s decisions when those decisions are still playing out. After that point, it will be appropriate to assess the effect of those decisions, but while they are playing out it will not be possible effectively to estimate how they are playing out and it would be inappropriate to do so. The way that the amendment is drafted is precisely consistent with the Treasury Committee’s recommendation that the reviews be retrospective, rather than in any sense contemporaneous.
I hear clearly what the noble Lord says: there is a difficult balancing act here, between allowing the oversight committee the ability to question everything and not boxing it into questioning the judgments that have been made on policy decisions. Yes, it can challenge and review judgments on policy decisions but it should not be boxed into doing so while the consequences of those decisions are playing out. In substance, that is what the Treasury Committee recommended.
Lord Eatwell
Let us focus this by taking a concrete example. It is now generally accepted by everybody except the Bank that the Bank made some calamitous decisions shortly before, or in the process of, the collapse of Northern Rock. Various statements were made by the governor that accelerated the run on the bank. The continuous reference to issues of moral hazard when the bank needed recapitalising did significant damage in that case, and that damage reverberates to this very day.
Now that significant time has passed, suppose we were to commission a review of the Bank’s activities at that time. Would it be permissible for the oversight committee to say, “Look, this decision was made on the wrong analytical grounds and was a serious mistake. The Bank should readjust its perspective to think in a different way. Perhaps it should introduce some other analytical tools so that that mistake is not made again”? Would that be appropriate?
Lord Sassoon
My Lords, without wanting to endorse the conclusions of the noble Lord, Lord Eatwell, from the experience in 2007, yes, of course it would be possible and appropriate for the oversight committee to conduct or commission that kind of review. Without detaining the Committee for much longer, I will address a couple of other points.
Lord McFall of Alcluith
Could the Minister point to where his amendment says that that would be allowed? Looking at proposed new Section 3A(2), I can imagine a very sterile debate between the oversight committee and the Bank or the governor. The function of the oversight committee is to keep,
“under review the Bank’s performance in relation to … the Bank’s objectives”.
If it asked, “Did you stick by your objectives?”, the Bank answered, “Yes”, and the committee said, “We don’t think you did stick by your objectives”, where would it go on that issue? The committee could ask, “Did the Financial Policy Committee do its duty under Section 9C?”. The answer could be, “Yes, it has”, or, “No, it hasn’t”. The Minister needs to point to areas that would allow for the questions that my noble friend Lord Eatwell has asked.
Lord Sassoon
My Lords, I think the critical point here is that the noble Lord, Lord McFall of Alcluith, posited a situation in which this would be, in his words, a sterile debate with the governor. It goes perhaps to the heart of the question that I started with as to why the oversight committee is a committee of the non-executives. It means that it is the oversight committee without the governor or any of the executives of the Bank being members of that committee that takes the decision, under this provision in Amendment 13, to commission reports over a very wide area. So there is no question at the front end of a negotiation with the governor and the executive about whether they would commission a report in those circumstances. That is for the oversight committee to do. We have discussed the timing issue. The report is made and, subject to the issues that we have already discussed, the report is published. I can assure the noble Lord, Lord McFall, that there is no negotiation to be had at that front end. The non-executive oversight committee of the court of the Bank will have a very clear statutory function to take precisely what is proposed in new Section 3A, and it will be untrammelled by any possibility of the sort of sterile debate that the noble Lord suggests might happen. I hope that that reassures him.
I want to address a couple of other points, largely people issues of two kinds here. My noble friend Lord Tugendhat and the noble Lord, Lord Eatwell, questioned the need for the governor to consent to the appointment of an internal reviewer. This is intended to be a perfectly straightforward and practical measure. In practical terms, if the person selected is on the verge of leaving the Bank for another post, going on sabbatical or maternity leave, or whatever, the non-executive directors on the court may not necessarily be aware of this, and it is a practical way of ensuring that the appointment works. It also provides the governor, as the person ultimately responsible for the staff who work for him or her, with the opportunity to determine whether the person selected has the capacity to undertake the review in the timescale envisaged without impacting their other responsibilities. There is no more to it than that.
Lastly, I go back to a point which I believe the noble Lord, Lord McFall of Alcluith, made at the beginning about the size of the court. It is not directly the subject of this amendment, but I think that it is worth answering that point. Given that there will be four executive members—the governor and three deputy governors—if the court were reduced to eight, it would not allow for a non-executive majority because we have four insiders on the court. More generally, if there were such a small number of non-executives, it would be difficult to have sufficient diversity of experience and views, which was a point that we discussed earlier and which I completely agree with. If we had a reduction in size, it would be impossible effectively to have a non-executive majority or indeed, as I say, sufficient diversity.
I hope that I have been able to deal with the very understandable and important questions and concerns on this issue so that the noble Lord, Lord McFall, might see his way to withdrawing his amendment and the Committee will support the Government’s amendments.
Lord Eatwell
My Lords, is the Minister accepting my Amendment 29? He seemed to say that it was referring to the right sort of thing. If he is not accepting it, why is proposed new Section 9B(4) left in the form that it is, referring only to procedures? I have another question, but would he answer that one?
Lord Tugendhat
May I add a question so that the Minister can answer both together? The Minister is dealing with these matters with such grace and elegance that I feel very bad in questioning his or the Government’s motives in any way. Nevertheless, when we were dealing with the question of whether the chairman should be consulted on the appointment of the governor, basically what the Minister said was that reasonable people will behave in a reasonable fashion and there is no need to spell all this out, because it will be done in the normal course of events. Here he is insisting on absolutely spelling it out so that in practice the governor has a block. Of course I agree that in a properly run organisation, as I am sure the Bank would be, an employee would not be appointed contrary to the wishes of the governor; the relationship between the chairman and the governor would overcome that. None the less, to give the governor an absolute block is a sort of belt and braces that is completely at odds with what the Minister said in an earlier discussion. That means that one does look with some suspicion as to why, as I said earlier, there is one sauce for the goose and another for the gander. If he wants to spell it out here, why could he not spell it out earlier?
Lord Sassoon
My Lords, in legislation we come back regularly to this question of what needs to be spelled out and what does not. Elegantly or otherwise, I am not sure what more I can say other than that we have to take each case on its merits. Sometimes there are good arguments for spelling things out and at other times there are not. I know that I will disappoint my noble friend and it is a perfectly fair question, but I am not sure that there is much more that I can usefully add.
On the question from the noble Lord, Lord Eatwell, about Amendment 29, I will be clear. I do not accept Amendment 29 because I do not believe that it is necessary. I believe that Amendment 13, which I thought was helpfully clarified during this debate, more than covers the ground. I refer the noble Lord in particular to proposed new Section 3A(2)(a), which I would suggest makes it clear right at the beginning of the Government’s amendment that the function of the oversight committee and its ability to review performance is very widely drawn in relation to the objectives of the Bank and of the FPC. I believe that new Section 3A enables the oversight committee explicitly to review the activities of the FPC, which are there right at the beginning of this amendment.
Clearly I am having difficulty understanding the noble Lord’s concerns but I am absolutely clear that the substance as he has explained it and the specific example that he gave are completely within the ambit of what is being put in the Bill as the function of the oversight committee.
Lord Eatwell
The point is that the oversight committee is supposed to keep the activities of the Financial Policy Committee under review. There is an amendment among the amendments tabled by the noble Lord, Lord Sassoon, that changes “court of directors” in new Section 9B(4) to the “oversight committee”. So if we accepted his amendment, it would read that the oversight committee,
“must keep the procedures followed by the Committee under review”.
Why do we have that when we have new Section 3A doing all the work for us?
Lord Sassoon
I think that is wrong. It is not the Court of Directors that becomes the oversight committee; the Court of Directors remains the Court of Directors. It is effectively the committee of non-executive directors, or NEDCo, of the Bank, which becomes the oversight committee. The court remains the court. So there may be some misunderstanding of who is doing what here, but the Court of Directors must indeed keep the procedures of the FPC under review, which will be principally done through the oversight committee, which is a committee of the court.
Lord Burns
The references here to the Court of Directors of the Bank in new Section 9B(1) says:
“There is to be a sub-committee of the court of directors of the Bank”.
When it says Court of Directors in that case does it mean the whole court? Earlier we were being told that “directors” simply means the non-executive directors and that the governors are not counted as being directors of the court. That seems to be part of the problem that is causing this ambiguity.
Lord Sassoon
Let me try again. The court of the Bank, which is the executives and non-executives, must keep the procedures under review. The non-executives through the oversight committee have a remit and function that includes procedures but goes wider and is able to review the performance of the Bank and the FPC against its objectives in the full wide way that I believe the noble Lord, Lord Eatwell, is asking for it to do—and I am confirming that it does.
Lord Burns
For clarification, when it says the Court of Directors, does that mean the whole court or does it mean only the non-executives?
Lord Sassoon
Court means the whole court, and that is in relation to the procedures. The oversight committee has the function and ability to look not only at the procedures but also at the question of whether the objectives of the Bank and the FPC are being met.
Lord Eatwell
I am afraid that this does not help, because the amendment tabled by the noble Lord, Lord Sassoon, Amendment 28, says on,
“page 3, line 28, leave out “court of directors” and insert “Oversight Committee”.
So this should actually read, “the oversight committee must keep the procedures followed by the Committee under review”. Why is that there when new Section 3A covers it, we are told? But I shall not pursue this—I shall leave it with the Minister. Either we have just got in a muddle or there is a drafting error.
Lord Sassoon
I think that it is me that has got in a muddle. It is kind to say that we have got in a muddle or that there is a drafting error. I apologise to the Committee, as I am the only person who has got into a muddle on this, as I track through amendments and consequential amendments. New Clause 9B(4) is being amended by government Amendment 28 so that it no longer says “court” but says “oversight committee”. I apologise for my confusion on this, but we may have finally got to what it is intended to say. The two things will be consistent so that the oversight committee, to the substance of the point, will be able to deal with both procedures as envisaged under new Clause 9B(4) as amended and as explained in Amendment 13. So I hope that we are getting there.
Lord Eatwell
We are getting somewhere. What we have here is redundancy. New Clause 9B(4) is redundant, given the Minister’s explanation of new Section 3A.
I apologise to the Minister for raising a quite different question, which I shall just leave on the table. In my earlier remarks, I did not refer to the schedule. In the enthusiasm to replace “court” or “Bank” with “oversight committee”, the Government have gone a bit too far. Perhaps the Minister could check on this later, because the terms and conditions of non-executive members of the Financial Policy Committee are now amended to be determined by the oversight committee. That must be a mistake—it must be the court as a whole. That is in government Amendment 91. In government Amendment 93, the oversight committee can remove appointed members of the Financial Policy Committee. Surely that must be a mistake as well—it must be the overall court. So I think that there has been a great enthusiasm for replacing “court” with “oversight committee” and somebody has got rather carried away. But I am not going to press this issue now. I shall just leave it on the table for the noble Lord and his officials to consider and bring back to us later.
Lord Sassoon
I am grateful to the noble Lord because I think that we are getting into very detailed drafting points. I will certainly have a look at those points and write to the noble Lord and copy the letter to others who have spoken in this debate, just to check that nothing has gone astray in the drafting here. We will take that on board.
Lord Phillips of Sudbury
I hope that my noble friend agrees that the noble Lord, Lord Burns, had quite a point. It harks back to earlier discussions about the complexity of drafting. It is the fact, as I hope my noble friend will confirm, that the definition of Court of Directors in Clause 1 of the Bill includes the four executive directors and “not more than 9” non-executive directors—which makes 13. The interplay of the phrase Court of Directors and the new body that is the subject of the government amendment makes for extraordinary complexity in understanding. One thing that my noble friend might consider for the next stage is that when the Bill and his amendment refer to non-executive directors they say non-executive directors, because there are four executive directors—the governor and three deputy governors. They are directors too.
Lord Sassoon
“Oversight Committee
(1) The Bank of England Act 1998 is amended as follows.
(2) For section 3 substitute—
“3A Oversight Committee
(1) There is to be a sub-committee of the court of directors of the Bank (“the Oversight Committee”) consisting of the directors of the Bank.
(2) The functions of the Oversight Committee are—
(a) keeping under review the Bank’s performance in relation to—(i) the Bank’s objectives (that is, the objectives specified in relation to it in this Act and the other objectives for the time being determined by the court of directors of the Bank),(ii) the duty of the Financial Policy Committee under section 9C, and(iii) the Bank’s strategy as for the time being determined by the court of directors of the Bank (including its financial stability strategy);(b) monitoring the extent to which the objectives set by the court of directors of the Bank in relation to the Bank’s financial management have been met;(c) keeping under review the internal financial controls of the Bank with a view to securing the proper conduct of its financial affairs;(d) the functions conferred on the Oversight Committee by the provisions listed in subsection (4).(3) The Bank may arrange for specified functions of the Bank to be discharged by the Oversight Committee.
(4) The provisions referred to in subsection (2)(d) are—
(a) section 9B (review of procedures followed by Financial Policy Committee);(b) section 16 (review of procedures followed by Monetary Policy Committee);(c) paragraph 14 of Schedule 1 (remuneration of Governor and Deputy Governors);(d) paragraph 5 of Schedule 2A (terms and conditions of office of members of Financial Policy Committee appointed under section 9B(1)(e));(e) paragraph 9 of that Schedule (removal of members of Financial Policy Committee appointed under section 9B(1)(e));(f) paragraph 4(2) of Schedule 3 (terms and conditions of office of members of Monetary Policy Committee appointed under section 13(2)(c));(g) paragraph 9 of that Schedule (removal of members of Monetary Policy Committee appointed under section 13(2)(c));(h) paragraph 15 of Schedule 1ZB to the Financial Services and Markets Act 2000 (terms of service and remuneration of members of the governing body of the Prudential Regulation Authority).3B Oversight Committee: procedure
(1) The chair of the court (designated under paragraph 13 of Schedule 1) is to chair meetings of the Oversight Committee (when present).
(2) The Committee is to determine its own procedure, but this is subject to subsection (1) and subsection (5).
(3) The Committee may invite other persons to attend, or to attend and speak at, any meeting of the Committee.
(4) The Committee may delegate any of its functions to two or more of its members.
(5) If a member of the Committee (“M”) has any direct or indirect interest (including any reasonably likely future interest) in any dealing or business which falls to be considered by the Committee—
(a) M must disclose that interest to the Committee when it considers that dealing or business, and (b) the Committee must decide whether M is to be permitted to participate in any proceedings of the Committee relating to any question arising from its consideration of the dealing or business, and if so to what extent and subject to what conditions (if any).3C Reviews
(1) In the discharge of any of its functions, the Oversight Committee may arrange—
(a) for a review to be conducted under this section in relation to any matter by a person appointed by the Committee, and(b) for the person conducting the review to make one or more reports to the Committee.(2) The persons who may be appointed to conduct a review include an officer or employee of the Bank.
(3) A review under this section is a “performance review” if it—
(a) is arranged by the Committee in the discharge of any of its functions under section 3A(2)(a) and (b), and(b) relates to past events.(4) If the person to be appointed to conduct a performance review is an officer or employee of the Bank, the appointment requires the consent of the Governor of the Bank.
(5) In the case of a performance review, the Committee must have regard to the desirability of ensuring that sufficient time has elapsed—
(a) for the review to be effective, and(b) to avoid the review having a material adverse effect on the exercise by the Bank of its functions.3D Publication of reports of performance reviews
(1) The Bank must give the Treasury a copy of any report made to the Oversight Committee by a person appointed under section 3C to conduct a performance review (as defined by subsection (3) of that section).
(2) Subject to subsection (3), the Bank must also publish the report.
(3) Subsection (2) does not require the publication of information whose publication at the time when the report is made would in the opinion of the Bank be against the public interest.
(4) Where the Bank decides under subsection (3) that publication of information at the time when the report is made would be against the public interest, it must keep under consideration the question of whether publication of the information would still be against the public interest.
(5) Where the Bank decides that publication of any information is no longer against the public interest, it must publish the information.
(6) The Treasury must lay before Parliament a copy of any report or other information published by the Bank under this section.
3E Recommendations resulting from review
(1) This section applies where a report made by a person appointed under section 3C to conduct a review makes recommendations to the Bank as to steps to be taken by it.
(2) The Oversight Committee must—
(a) monitor the Bank’s response to the report, and(b) if or to the extent that the Bank accepts the recommendations, monitor the implementation of the recommendations.3F Oversight Committee: further provisions
(1) The documents to which the Oversight Committee is to have access in the discharge of its functions include documents considered, or to be considered, by the Financial Policy Committee or the Monetary Policy Committee.
(2) One or two members of the Oversight Committee may attend any meeting of the Financial Policy Committee or the Monetary Policy Committee, but a person attending by virtue of this subsection may not speak unless invited to do so by the person chairing the meeting.
(3) Subsection (2) does not affect—
(a) anything done in relation to the Financial Policy Committee by a member of that Committee who is also a member of the Oversight Committee,(b) the powers of the Financial Policy Committee under paragraph 13 of Schedule 2A, or(c) the powers of the Monetary Policy Committee under paragraph 13A of Schedule 3.”(3) In section 4 (annual report by the Bank), in subsection (2), for paragraph (a) substitute—
“(a) a report by the Oversight Committee on the matters for which it is responsible, and”.(4) In section 16 (functions of court of directors)—
(a) in subsection (1), for “court of directors of the Bank” substitute “Oversight Committee”,(b) in subsection (2)—(i) for “the court’s function” substitute “the function of the Oversight Committee”,(ii) for “the Committee” substitute “the Monetary Policy Committee”,(c) omit subsection (3), and(d) accordingly, in the heading, for “court of directors” substitute “Oversight Committee”.”
Baroness Hayter of Kentish Town
My Lords, we support Amendment 21, moved by my noble friend Lord McFall, and his comments on women’s representation. It was within this century that I joined the Board for Actuarial Standards, and I was the only woman there. It is extraordinary for some of us to find that we are still fighting for that goal. Not only did they put lots of women on the board after me, which I think was a good thing, but the new chair who took over yesterday is also a woman.
I shall speak particularly to the three amendments standing in the name of my noble friend Lord Eatwell and myself, which cover two particular issues: one is to correct the composition of the FPC itself and the other is to deal with pre-appointment hearings. On the composition of the FPC, we should first recall that the FPC’s work will impact throughout the economy, on the financial sector itself but also on businesses large and small, and on consumers. The latter categories need to have confidence that there is someone on the FPC who understands their interests and is speaking up for them. As Mark Hoban said in the other place, we need,
“more challenging voices in the board room, not fewer”,
and that must be equally the case with the FPC. So merit is a clear necessity but, as we said on an earlier amendment, so is a range of backgrounds, experience, interest and knowledge, whether from the wholesale markets, insurance, deposit-takers or others. So too, as was mentioned by my noble friend Lord McFall, is the voice of consumers, be they SMEs, businesses or indeed individual consumers. The FPC may have a role in loan-to-value decisions, for example, but the consideration of the FPC of this has to have input from those who are further down the food chain who will feel the impact of any change in policy.
On the question of pre-appointment hearings by the Treasury Select Committee, I argue that there is less market sensitivity over these than could possibly be the case even if we accept it in the case of the governor. There would be much less for these appointments. Indeed, when challenged on this very issue in the other place by Chris Leslie, Mr Hoban was quite unable to give any examples of where this might be an issue. Mr Tyrie made the point in the other place in April that as the Treasury Select Committee intends to hold hearings anyway, and if the person failed to find favour with the Treasury Select Committee, it would probably be pretty untenable for that person then to take up their appointment, because without the confidence of Parliament it is hard to see how they could do their job. It would therefore be sensible to engage with the Treasury Select Committee earlier in the appointment process.
The FPC has a vital public role to play. It acts on behalf of the nation—including Scotland, for the moment, so maybe we could have it there so long as it chooses to stay in the United Kingdom—so it needs the confidence of people’s elected representatives, which the Treasury Select Committee pre-appointment can of course help.
Lord Sassoon
I need every cheer I can get at this hour of the evening—I am very grateful to my noble friend. Let me press on. This group deals with various aspects of FPC membership, and I will address in turn each of the amendments that have been moved.
Amendments 21 and 21A would fundamentally alter the balance of membership of the FPC by adding either two or four additional external members. Following the advice of my noble friend Lord Hodgson, I disagree with these amendments for three reasons. First, the ratio of the FPC between Bank executives and non-Bank members is six to five, which closely mirrors the MPC, where the ratio is five to four. In answer to the noble Lord, Lord Burns, I can confirm that as with the MPC, the FPC members will act as individuals, and that no change to the membership of the MPC is proposed in this. The MPC model has worked well, and is much admired around the world, and we should not fix something that is not broken.
Lord Flight
I thank the Minister for giving way. Is it six or seven members? By my account there are the governor and the two deputy governors, the chief executive and the two members appointed. That makes seven. The whole point of my private amendment, which suggested that there should be eight members, was to give a majority. Are all three deputy governors to be members?
Lord Sassoon
The three deputy governors are to be members—I count that up as a six to five ratio. It is not correct that the Bank has seven insiders. The Financial Conduct Authority is an independent regulator, which is emphatically not one of the Bank members. I doubted whether I could count to six at this hour, but it is six. However, I am grateful to my noble friend for getting that clarification.
Lord McFall of Alcluith
Would the Minister expand on that clarification? At present, the MPC contains two deputy governors, Charlie Bean and Paul Tucker, and there will be a third one, who will take the membership up to six. However, there are only four external members of the MPC at the moment: Ben Broadbent, David Miles, Adam Posen and Martin Weale.
Lord Sassoon
My Lords, no change is being proposed to the membership of the MPC, which will remain with five internal and four external members. The third—the new deputy governor—will not join the membership of the MPC. Let me press on.
Baroness Hayter of Kentish Town
I will not hold the Minister for too long. He has stressed, and it was stressed in the other House, the independence of the Financial Conduct Authority, but of course there is a veto—the financial regulator is able to override the Financial Conduct Authority. It is, therefore, independence up to a point.
Lord Sassoon
My Lords, I am sure that we will come back to that point later on in our discussions. I would, however, absolutely refute any idea that the FCA will not be independent of the Bank of England. It will be completely separately constituted; there will be a number of links, of which the noble Baroness mentions one, but I would not characterise that as in any way impinging on the independence of the FCA.
That was the first reason for rejecting these amendments. The second reason is that the change suggested would create a committee of 13 members, a committee so large that it could prove to be unwieldy, which could obstruct effective discussion and decision-making. There is a genuine risk that having too many external members without sufficient time or space within the meetings to put their points across effectively could undermine their ability to provide an external viewpoint and challenge, which I know the Committee wishes to see. In addition, of course, these points are even more relevant to the amendment proposed by my noble friend Lord Flight, which would increase the size of the FPC to 15 members, or 16, if one includes the Treasury representative.
Thirdly, I do not agree that the Bank executives on the FPC should be in a minority. Ultimately, both the MPC and the FPC must be Bank committees if we are to hold the Bank to account for the decisions that they make.
On the amendments that relate to the experience, knowledge and potential interests of external FPC members, I assure your Lordships’ House that the Chancellor will take great care to ensure that the independent members of the FPC are sufficiently qualified and experienced to provide diverse and effective expertise and challenge to the FPC’s decision-making. Finding strong candidates with breadth as well as depth of experience will clearly aid the committee in achieving its objectives.
Specifically on Amendment 24, the Government recognise the importance of the contribution of the different constituent parts of the UK to the financial services sector. The sector is often wrongly characterised as being confined to the City of London. This is plainly wrong. Regional issues and intelligence already form an important part of the Bank’s policy-making process. The Bank has 12 agencies in a national network across the United Kingdom that assess economic conditions in their regions. This feeds into the policy-making process.
On appointments to the FPC, the Bill already requires the Chancellor to be satisfied that the candidate has knowledge or experience that is likely to be relevant to the committee’s functions. This will include relevant experience within the financial services and regulatory sectors, not only within the constituent parts of the UK but internationally. All four of the current independent members of the interim FPC have experience in financial services as a practitioner or a regulator.
I should add that while we have been having this discussion, my Front Bench has had a ratio of two women to every man. Therefore, I certainly appreciate, as do the Government, the importance of appointments that recognise gender diversity. It will be an important consideration when deciding on external members of the FPC. The Government believe that there are certainly many credible and expert female candidates out there for permanent FPC appointments. We will continue to encourage women to apply for future vacancies on the FPC.
The noble Lord mentioned the importance of having consumer views on the FPC. I agree that it will be vital. I accept that it took a long time with the FSA. It is fully recognised that we must have a broad spectrum of views, experiences and relevant knowledge if the FPC is to deliberate in an even-handed way. However, consistent with arguments over the size of the FPC, it will never be possible to ensure that all interested groups are represented on it at all times. We need to be clear about that.
On Amendment 27A, I reassure my noble friend Lord Flight that, in appointing external members, the Chancellor will be very mindful of the need for those people to offer a genuinely external and independent perspective. However, some familiarity with the workings of the central bank may well prove useful for external members, so I would not want completely to rule out individuals with some experience of working for the Bank becoming members of the FPC. For the sake of clarity, I add that there is no requirement for the FPC’s external members to be members of the court. One current member, Michael Cohrs, was subsequently appointed to the court, but there is no requirement for that to be the case. Nor is it the general case at the moment.
Amendments 26 and 27 deal with the role of the Treasury Committee in appointments to the FPC. As I have said at some length today—I will not labour the point—the Government strongly support the Treasury Committee’s role in holding hearings with individuals who have been appointed as members of the MPC, and now the FPC, before they take up their appointment. However, for the reasons that I gave earlier, those hearings should not take place before the appointment. In one case, just as with the appointment of the governor, the decision is that of Her Majesty on the advice of the Prime Minister and the Chancellor. In the case of the FPC and the MPC, it is rightly a decision for the Chancellor to take. There are risks in the rather febrile environment that we have had for a number of years now—risks that arise from market speculation about the balance of the committee and where the candidates may be coming from. So, yes, there should be pre-commencement hearings, but pre-appointment hearings would create the potential for danger and damage, which we should not entertain.
The Government place paramount importance on finding strong candidates for the FPC. I can reassure the Committee that future appointments of new independent members to the FPC will follow a process similar to that used to appoint MPC members, including an open, public competition. This, in addition to the pre-commencement hearings held by the Treasury Committee, will ensure that qualified and experienced candidates are appointed to the FPC, while avoiding the uncertainty that could arise from holding those hearings before the appointment is finalised.
On the basis of that short and focused debate, I ask the noble Lord, Lord McFall of Alcluith, to withdraw his amendment.
Lord Sassoon
Lord Eatwell
My Lords, I think the noble Lord said that he was going to take Amendment 28 away to consider it with Amendment 29. Surely he is not moving it now.
Lord Sassoon
My Lords, I have no recollection of saying that. I would like to move it formally.
Lord Eatwell
In those circumstances, I think that I should reconsider. The noble Lord did say that he was going to take Amendment 28 away to consider the relationship between Amendments 28 and 29. I do not quite understand why he has now moved Amendment 28.
Lord Sassoon
What I said earlier was that of course I would consider whether there were any consistencies in drafting. I think that the noble Lord asked about a number of areas, and I said that I would look at them, but I certainly did not say that I would withdraw the amendment. I said that I would make sure that there was nothing that he had identified that created any difficulty through oversight in the drafting. Of course I will do that, and if we find anything wrong it can be corrected at a later stage. I certainly did not agree to take away Amendment 28.
Lord Sassoon
Financial Services Bill
Lord Sassoon Excerpts(12 years, 1 month ago)
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Lord Sassoon
That it be an instruction to the Committee of the Whole House to which the Financial Services Bill has been committed that they consider the Bill in the following order:
Clauses 1 to 3, Schedule 1, Clause 4, Schedule 2, Clause 5, Schedule 3, Clauses 6 to 10, Schedule 4, Clauses 11 to 13, Schedule 5 Clauses 14 to 20, Schedule 6, Clauses 21 to 27, Schedule 7, Clauses 28 to 32, Schedule 8, Clauses 33 and 34, Schedule 9, Clause 35, Schedule 10, Clause 36, Schedule 11, Clauses 37 and 38, Schedule 12, Clause 39, Schedule 13, Clauses 40 and 41, Schedule 14, Clause 42, Schedule 15, Clause 43, Schedule 16, Clauses 44 to 90, Schedule 17, Clauses 91 to 95, Schedules 18 and 19, Clauses 96 to 100, Schedules 20 and 21, Clauses 101 to 104.
Wales: Barnett Formula
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Lord Wigley
To ask Her Majesty’s Government what representations they have received from the Welsh Government concerning the reform or replacement of the Barnett formula.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, bilateral discussions between the Government and the Welsh Government on all proposals arising from the Holtham commission, including funding reform, are continuing. To repeat what I have said on a number of previous occasions, as set out in the coalition programme for government, while the Government recognise concerns expressed over the Barnett formula, they believe that at this time the priority must remain the reduction of the deficit.
Lord Wigley
My Lords, is the Minister aware that in regard to the funding needed to maintain the level of public services in Wales up to the UK average, last year the Holtham report indicated an underfunding of some £400 million? Figures released yesterday indicate that by 2010-11, based on Treasury outcome figures, that had increased to an underfunding of £540 million. Is he further aware that when the Secretary for Wales addressed the National Assembly on 23 May, she said that,
“everybody knows that the Barnett Formula is coming to the end of its life.”?
When will it be buried and replaced by a needs-based formula?
Lord Sassoon
My Lords, first, on the numbers, which the noble Lord, Lord Wigley, quoted, when the Holtham commission reported to the Welsh Assembly in July 2010, it claimed that Wales had a £300 million funding shortfall. I do not recognise the new figure put out by Plaid Cymru yesterday but the point is that Wales has received nearly £500 million additional funding in the current spending review, SR10. In 2010-11, funding in Wales was running at some 15% above the level in England, so we need to keep the numbers in perspective. As I have said previously, yes, we recognise the significant issues that there are with the Barnett formula.
Lord Barnett
My Lords, as the noble Lord knows, a powerful Select Committee of this House unanimously recommended major reform, which would help not only Wales but every other part of the UK, particularly Scotland, where there needs to be reform. I gather that, subject of course to the Scottish people sensibly voting against separating from the UK in a referendum, the Government have in mind a major financial reform in Scotland, probably well before the time that the Minister has always mentioned. In those circumstances, would not then be a good time for Scotland to make that piece of essential reform?
Lord Sassoon
My Lords, we are straying a bit from Wales, but I am very happy to talk about Scotland. Of course, we recently passed through this House the new Scotland Bill, now an Act, which made some very significant changes resulting from the Calman commission recommendations. In respect of the eponymous formula of the noble Lord, Lord Barnett, the difficulty that we have among others is that there is no consensus across the UK on what could replace it. Since 1978, it has stood the test of time, and it is very difficult to find a better basis.
Lord Roberts of Conwy
Would my noble friend agree that ideally what is required is a formula that is adaptable to the special needs of Wales, Scotland and other national regions?
Lord Sassoon
Yes, indeed, I would agree with my noble friend that that should be the objective of any replacement for the formula.
Baroness Hollis of Heigham
My Lords, the Minister said that his priority was to seek to reduce the deficit. Given that under the Barnett formula, which has not stood the test of time, Scotland is over-funded by £4 billion at the expense of English taxpayers, would that £4 billion not be a useful contribution to the deficit—or is the Minister so casual about our finances?
Lord Sassoon
No, my Lords, the Treasury is not remotely casual about the national finances, and what the noble Baroness says about the Scottish funding situation might well be challenged by others in other devolved parts of the nation.
Lord Forsyth of Drumlean
My Lords, it would not be challenged by me—and, indeed, the Select Committee came to that unanimous view. But what is the difficulty with finding an agreed needs-based formula for funding when the money that Scotland receives is distributed to health and local authorities using precisely a needs-based formula for funding? Surely it is time to deal with a matter that is creating division in the United Kingdom at a time when we need unity.
Lord Sassoon
My Lords, one difficulty is that there is no consensus on the appropriate way in which to measure needs for any replacement. As the previous Government said in response to the Select Committee report,
“the Barnett formula has a number of strengths, among them the merit of allowing the devolved administrations to determine their own assessment of needs and priorities in devolved areas”.
Lord Richard
My Lords, I am obliged to the Leader of the House. The Minister says that there is no consensus in the United Kingdom about the Barnett formula, but there is a great deal of consensus that it does not operate fairly. The Select Committee was unanimous in that opinion, taking a great deal of evidence on it and coming to that conclusion. For the Minister to come along parroting, as he does every time the issue is raised, that we cannot do it now because of the deficit, is frankly unworthy of the subject. It is totally dismissive of the decision that the Select Committee took.
Is it not also true that there is a perfectly practical alternative to the existing Barnett formula to which the noble Lord, Lord Forsyth, referred—a needs-based formula? The Select Committee was set up to look precisely at this issue, which it did, and now it is time that the Government did.
European Union Committee: Multiannual Financial Framework
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The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, this afternoon’s debate has been very interesting and I welcome the committee’s views and the report into the next multiannual financial framework, the MFF. I would also like to thank the committee for all its work.
The Government will publish their final response to the report at the end of this month, so the debate is timely but, as I am sure those who have spoken this afternoon would expect, I will reflect on some of the more detailed points and ask noble Lords to wait for the formal response. I will answer as many of the points raised as I can, but let me principally set out what the Government believe is most important with respect to the MFF.
As the EU Committee is well aware, the Government are taking tough positions in Europe on the MFF. Negotiations are continuing towards the European Council where a presidency negotiating box will be discussed. This sets out the parameters of the MFF negotiation, moving us on from the Commission’s original proposal in June last year. I have been asked about details of the strands of negotiation, on a number of which there is little to say. In answer to the specific question from the noble Lord, Lord Boswell of Aynho, we are seeking significant reductions and reforms, including cuts from regulations. Negotiations on those specifically are going reasonably well, alongside the MFF negotiations. We are confident that we are making progress, but it is not decision time yet.
The ongoing instability in the euro area is vindication of this Government’s efforts to impose strict financial discipline on our domestic budget. We have made tough choices at home and it is now vital that EU member states show that same resolve. At a time when member states across Europe are tightening their belts, the European Commission must lead from the front to ensure that the same discipline is seen in the EU. What are they doing instead? They have called for increases in expenditure which are frankly incredible. The Commission’s proposal earlier this year to increase the annual budget by 6.8% for 2013 was completely unreasonable. The UK is committed to taking action to curb irresponsible increases in the budget, for 2013 and the next multiannual financial framework, and we will continue to work with like-minded member states to that end.
The noble Lord, Lord Harrison, asked what the evidence is for what we have achieved in the past two years. I remind noble Lords that the original Commission proposal for the 2011 budget was an increase of 5.8% and it came in at 2.9% after tough negotiations. In 2012 the original Commission proposal of 4.9% was reduced to 2.02%. The UK has been at the heart of the negotiations in Council to block increases and that is where we will continue to be. The Commission’s proposals for the next multiannual financial framework go even further, seeking to increase its revenue and spending. It wants new taxes to boost the Brussels budget, as well as an absurd spending increase. This is simply not acceptable on either front. Instead of consolidation, the Commission proposed expansion. Tough multiannual financial framework ceilings represent the best opportunity to restrain EU annual budgets and member states have recognised this link.
At the European Council in October 2010, member states agreed that,
“the forthcoming Multi-annual Financial Framework reflect the consolidation efforts being made by Member States to bring deficit and debt onto a more sustainable path”.
What has happened? Rather than follow this path, the Commission has bowed to pressure from the European Parliament to increase the budget. This returns us to the extravagance and reckless expenditure that sowed the seeds of the global economic crisis. The 11% increase proposed for the next financial framework is therefore incompatible with the tough decisions being taken in the United Kingdom and in countries across Europe. We cannot and will not support it.
In December 2010, the Prime Minister and colleagues from other member states, including France and Germany, set an upper limit for the next framework in their open letter to President Barroso. They stated clearly that,
“payment appropriations should increase, at most, by no more than inflation”.
This view has been acknowledged by the EU Committee. In answer to the specific question from the noble Lord, Lord Hannay of Chiswick, I confirm that it remains the Government’s position. The Commission claims to have done as we have asked, but let me be clear: it has not. On average, expenditure in each year of the next framework would be about €14 billion higher than it is today. In addition, the Commission has earmarked an extra €18 billion in off-budget expenditure. As the committee noted in its report, this shows an alarming lack of transparency, which brings added risks of poor oversight and control.
The Government’s overriding priority on expenditure is to restrain the total budget size but, within that context of restraint, the Government want to see taxpayers’ money directed towards areas of greatest European added value. The great majority of specific suggestions for directing expenditure that I have heard this afternoon are consistent with that.
Growth and competitiveness, external funding and the climate change components of the budget are priority areas. While our objective is to restrain the size of the budget, we believe that these areas should see a proportionately greater share in the next framework. However, this focus also demands tough choices. The first among them is a point raised by the noble Lord, Lord Boswell of Aynho. Very substantial reductions are required to the direct payments component of the common agricultural policy and to the administration budget.
Before I respond to a few of the many points on specific expenditure, a couple of general points were raised. Other noble Lords, including my noble friend Lord Maclennan of Rogart, raised the question of a five-year framework. We agree with the concerns raised in this area, but our overriding concern in the negotiations has to be to seek restraint. If restraint can be guaranteed in a five or seven-year MFF or some form of review can be built in, we are willing to discuss it, but it has to be subsidiary to our main objective.
In response to requests for increases in expenditure as opposed to relative prioritisation within the budget, whether for good things such as Europol or any number of others, I reiterate that if the Government’s opening position were to be to recommend explicit increases in certain areas of the budget before we achieved any corresponding decreases, we would be at risk of seeing ourselves committed to a higher overall budget, which would undermine the Government’s top priority here. Of course we will retain flexibility as negotiations progress in how we allocate spending, but I am going to do nothing this afternoon to endorse any absolute areas of increased expenditure. I hope that all noble Lords will understand why that is.
I turn to a few specifics, starting with issues about the common agricultural policy which were raised by the noble Lord, Lord Carter of Coles. We are seeking substantial reductions to the CAP focused on Pillar 1, the direct payments. The Commission proposal does not deliver the reform that we need. Direct payments represent low value for money. The Government are also sceptical about the Commission’s proposals on greening in the CAP. The Pillar 2 rural development is better and we want to see it taking a greater share of the total.
In answer to the specific question of the noble Lord, Lord Liddle, I am sure that he was not seeking to walk me into some trap, talking about rich farmers. That is not how I would express it. The UK is opposed to the Commission’s proposal to cap direct payments to large farms, which is the right way to see it. The CAP should encourage competitiveness, and capping direct payments would discourage that. I am afraid that I do not believe that there is merit in that capping.
On the European External Action Service, the Government do not support the ring-fencing of expenditure. The key is again—this is my constant refrain—to see restraint over the MFF in respect of the EEAS. Of course we expect the External Action Service to show value for money. We have consistently opposed increases in this specific area.
My noble friend Lord Bowness asked about the need for more judges. Yes, the Government are aware of the large backlog of cases facing the ECJ. We support reforms that would enable the ECJ to operate more efficiently. We hope that ECJ capacity will increase as a result of cost-effective reforms, which are achievable.
The noble Lord, Lord Harrison, asked about support for transitional regions and other structural and cohesion funds. The overall levels of the structural and cohesion funds should fall in real terms. The SCFs in rich member states should be cut significantly, and a greater share should be seen to go to poorer member states. The Government do not believe that the transition regions as proposed are affordable. Yes, the UK’s opposition to the transition category would reduce our share of receipts, but remember that two-thirds of this loss would be offset by the way in which it flows through the calculation of the abatement, a subject to which I will return.
The noble Baroness, Lady Young of Hornsey, mentioned ERASMUS, and ERASMUS for All can certainly add value. Again, the increase proposed is unacceptable. The Government can accept an increased share only within the envelope of a real-term freeze. Within that, among other things, the Government support the inclusion of a reference to grass-roots sport. Yes, of course we recognise the important contribution which cultural and creative sectors make to job creation and growth but, again, with the same caveats that I will not repeat.
In broadly similar territory, the noble Lord, Lord Kakkar, raised the question of the Connecting Europe Facility. He was quite right to draw attention to the 400% increase proposed in that area. Negotiations do not include specific numbers, but it is clear that substantial reductions will be needed from what is proposed.
Those were some issues on the budget—but, as noble Lords have pointed out, it is not the only priority. The MFF represents the only true opportunity for the EU to introduce a new system of own resources, the system that funds the EU budget. I share the strength of view of the noble Lord, Lord Liddle, on these issues. I hope that the noble Lord is absolutely clear that we will defend our rebate. I assure the noble Lord, Lord Williamson of Horton, that we will not trade with the abatement as has happened in the past. We will resist any change to the abatement; our abatement remains absolutely justified. The structure of EU spending means that we get less per capita than any other member state. Without the abatement, the UK’s net contribution would be the largest across the EU and twice as large as contributions made by France and Italy.
Ideas for new taxes have also been touched on this afternoon. Again, noble Lords will not be surprised to hear that the Government strongly oppose any new taxes to fund the EU budget. We attach considerable importance to the principle of tax sovereignty; we oppose any new taxes or changes to the existing system that increase the UK’s contributions or pose a threat to our long-term position—including, specifically, any financial transaction tax to fund the EU budget. We cannot accept a budget that asks for more and asks for a greater share from taxpayers and the UK.
In answer to the points made by the noble Lord, Lord Giddens, if the eurozone moves towards greater fiscal integration and imposes taxes on some joint basis within the eurozone, that will be for the eurozone. Our main concern in that context will be to see that nothing that is done affects the single market and how that is driven forward. The noble Lord also raised the question of project bonds. As I said on other occasions, yes, we will look sympathetically at detailed proposals if and when they come forward.
The MFF represents the opportunity for a far-reaching review of the spending framework. We must focus on combining stability with flexibility and building on the work going on across Europe to improve spending frameworks. We are faced with a liability of unspent commitments, which will soon be worth the equivalent of two annual EU budgets. Again, this is incredible. Of this, the Commission has said that almost €70 billion is “higher than expected”. This is extraordinary. This mountain of unspent commitments has, in the Commission’s own words, created a “snowball” effect on payment levels. We need real, practical solutions to address this liability. So far, the Commission has rejected every suggestion from member states.
The basic credibility of EU spending depends on orderly accounting. We have touched on it many times in your Lordships’ House, but nevertheless it is still astonishing and disappointing that the European Court of Auditors has not granted a positive opinion on the EU’s accounts for 17 consecutive years. This system must focus on the level of cash payments—actual spending—that the MFF will allow. Instead, the Commission continues to focus on commitments and on planned spend. Payments determine the cost to the taxpayer. The Prime Minister made this clear in his letter in 2010.
The Government took tough decisions at home and will continue to encourage our European counterparts, member states and the Commission to take the difficult decisions to cut deficits and tackle the root causes of the ongoing crisis. The current Commission proposal for the MFF is completely incompatible with the decisions being taken in finance ministries across Europe, with the realities felt by taxpayers across Europe and even with the views of President Barroso, who in June last year argued that:
“Many Member States need to show more ambition when it comes to fiscal consolidation”.
The MFF must deliver real fiscal consolidation. This cannot be achieved with substantial increases in the budget, new taxes to fund the EU budget or unreasonable changes to the UK’s abatement. This will be a tough negotiation but the Government are prepared to meet that challenge. We will be working tirelessly towards a deal, but it has to be a deal on the UK’s terms and has to be informed by the excellent work of this committee and the many points that have been made in this debate, for which I am very grateful.
Banking Reform
Lord Sassoon Excerpts(12 years, 1 month ago)
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The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I refer the House to the Statement on banking reform made in another place by my honourable friend the Financial Secretary to the Treasury, copies of which have been made available in the Printed Paper Office and the text of which will be printed in full in the Official Report.
Lord Sassoon
My Lords, I am sorry that the noble Lord, Lord Eatwell, has not yet had a chance to read the very detailed White Paper because, when he does, he will see that a lot of his detailed questions have been addressed.
I find it disappointing that the noble Lord comes here and takes such a picky attitude towards this fundamentally important reform being introduced by the Government. The previous Government had two years in which to act on the collapse of Northern Rock and then on the failures of RBS and Lloyds and did absolutely nothing about them. Did it not occur to them that there might be a problem with the structure of banking in this country? It seems not. For two years, they sat on their hands, asked no questions and did nothing. When this Government came into office, we established within weeks the Independent Commission on Banking under the chairmanship of Sir John Vickers. It has come up with a very fine report to government. We have considered it very carefully and have published our final response today. What we have before us is one of the most radical reforms of banking that I suggest the world has ever seen.
Why have we done that? We have done that because we face in this country something which my right honourable friend the Chancellor has characterised as the British dilemma: how do we continue to host a world-class financial services sector, a sector in which our banks are able to go out to compete vigorously, as they do, around the world with the best and biggest that the rest of the world has, without putting the UK taxpayer at excessive risk? That is what is encapsulated by our response to the Vickers commission, a response that picks up the essence of what Vickers recommended but which interprets it in a way that is appropriate, flexible, forward-looking and balances those key interests of ensuring that we have a world-class but safe banking system.
The noble Lord, Lord Eatwell, talked about risk-taking in the financial markets. The critical thing is that we want to make sure that the parts of the banks within the ring-fence, the parts of the banks in which the savings of the men, women and children of this country go, are properly ring-fenced and protected—the parts of the banks which service the SMEs of this country. We want to ensure that there is not inappropriate risk-taking within that ring-fence. The noble Lord asked how that is to be monitored. It is not for Her Majesty’s Treasury to monitor it; it will be up to the Financial Policy Committee to look at the system as a whole—as it already is in interim form—and it will be for the Prudential Regulation Authority, under the Bank of England, to supervise individual firms in future.
The noble Lord then talked about curbs on growth. That area is very important, because the flow of credit must go on, particularly at this time of challenge in the economy. That is precisely one reason why Sir John Vickers and the commission recommended that the implementation of the recommendations should be concluded by 2019, a recommendation that we have accepted. The numbers are set out in the document, but I suggest that the costs of implementation over that period and beyond on a running basis are very modest in relation to both the cost of the banking crisis over which the previous Government presided and the size of the UK economy.
The noble Lord then referred to the flow of funds in from Crown dependencies. He is clearly an expert on this subject. I believe that he is on the regulatory body of the States of Jersey. I am aware, as he is, that significant deposits flow from that and other Crown dependencies into the UK wholesale markets. That plays an important part of the funding of the wholesale markets and should continue.
The noble Lord, Lord Eatwell, then asked: what compels a saver to deposit his or her money in a ring-fenced bank? The fact is that 87%, or thereabouts, of deposits in the banking system at the moment are within banks that will be subject to the ring-fence. It is highly implausible to suggest that it would be wrong to protect 90% of the deposits of the British public but not to say that there are other places that are not ring-fenced that are accessible. What the noble Lord presents is not a realistic picture. Sir John Vickers and his commission raised the question of a de minimis limit and we set a limit that the ring-fence should not operate for banks with deposits below £25 billion. I suggest to the noble Lord that one thing on which we might agree is that we need more diversity, more competition and more new entrants in the banking sector. It is entirely appropriate, we believe, that the ring-fence should operate for only the biggest of our banks—those which account for some 90% of deposits.
The noble Lord then asked a number of technical questions about the way that the ring-fence will operate. I refer him to the details in the White Paper. If he has further questions that it does not answer, I should of course be happy to write on any supplementary questions that he may put, but there is a very full analysis there.
As to the capital ratios proposed here, the noble Lord talked about the Government proposing them but of course what analysis there was underpinning them was all the ICB’s analysis. The Government have done one thing in this area today, which is to put out a 3% rather than a 4% ratio against total unweighted assets. That is to create a level playing field with what is proposed in Europe. We want this measure to be not a front-stop but a back-stop, in line with what the ICB proposed, and we want to make sure that our banks have every opportunity to compete on a level playing field.
The noble Lord then asked whether we should ask the ICB to return to the operation of the ring-fence by keeping it under review and coming back to it one year after it comes into operation. Given that the implementation date is set by Sir John Vickers at 2019, it might be a little unreasonable to Sir John and his commission, who have done tremendous work on this, to keep them on the hook until 2020, or later, to ask them to come back to these issues. I am sure that there will be other ways of looking at the impact of these measures in due course.
Lastly, the noble Lord asked whether we should put these measures into one Bill with those in the Financial Services Bill, which is already before your Lordships’ House. This is to misunderstand the different nature of what is being addressed here. On the one hand, the Financial Services Bill deals with the structure of regulation and, on the other, the measures that we are talking about today relate to the structure of banking. I accept of course that the two things taken together are the measures that, combined, will make sure that this country has a world-class financial services sector and will not put UK taxpayers excessively at risk. However, they are two sets of distinct measures. Your Lordships will now have them in front of them so that they, can read across from one to another, but any suggestion of delaying the legislative process, which the noble Lord and others have constantly urged us to get on with, would be wholly inappropriate.
Lord Eatwell
Before the noble Lord sits down, I would like to press him on a question on which I am genuinely puzzled. The Statement refers to the idea that UK households will place their deposits in ring-fenced banks. Why should they do that if the rate of return is higher on non-ring-fenced banks than it is on ring-fenced banks, and why should not an innovative financial sector create devices whereby households can take advantage of a higher rate of return in non-ring-fenced financial institutions? We are not planning—or are we?—to reintroduce Regulation Q as it was in the United States, where there was a limitation on the return that households could receive on their deposits to force those deposits into the commercial banking system.
Lord Sassoon
My Lords, at the moment depositors have freedom as to where they place their deposits. It is certainly not the case that the vast majority of deposits go to the outliers, as there always are, in offering returns. When it comes to the future arrangements, I would anticipate that the vast majority of deposits will stay where they are. For better or worse, that is the system with a number of very large incumbent banks, which will all be ring-fenced. It will be very clear to people what the difference is between ring-fenced and non-ring-fenced banks. The Statement made by my right honourable friend was merely a clear statement of observed behaviour and likely behaviour into the future—not a Statement saying that people “must” or “are compelled to”, or that they do not have any choice. Of course they will have choice, but 90% of the deposits are where they are today and I anticipate that that is not somehow going to be magically changed overnight.
Lord Bilimoria
My Lords, building on what the noble Lord, Lord Eatwell, has just said, if we look back at the financial crisis, the FSA was asleep on the job, and that is being addressed by the Financial Services Bill. There is no question about that. The organisations that have got away scot free in the banking reform and the Financial Services Bill are the credit rating agencies, which were so much to blame globally for the crisis, the credit crunch and the great recession. Will the Minister address that point? Secondly, does he agree that it is surely a question of balance? Have we got the balance right with the banking reforms? There is no question that the good point about the big bang is that it opened up the economy, but the negative is that it is probably too open and not regulated enough. Are we going too far here? Quite frankly, this looks like Groundhog Day to me. We have been here before in 1933 with the Glass-Steagall Act. What lessons have been learnt from that? Have we not learnt?
Lord Sassoon
The noble Lord, Lord Bilimoria, makes a very good point about the credit rating agencies. The Bill is about the structure of banking. Credit rating agency regulation is now essentially in the hands of the European Commission. The appropriate sub-committee of your Lordships’ European Union Committee produced an excellent report, which we debated recently, on this subject. Yes, we must keep the subject of credit ratings under discussion, but the competence is not primarily here, and it is not the subject of the Statement we are addressing.
On the lessons of history, Glass-Steagall and so on, this is a different model from the Glass-Steagall model and from the model that the US is implementing at the moment. The commission talked to a very wide range of people and, I am sure, studied the history very carefully. In the knowledge of the current and historical international precedents, that was its fundamental judgment about the high but flexible ring-fence. I believe it has come up with something that takes all those lessons on board, is appropriate for what we need now and is not going to impact significantly on the necessary driver for growth in this country, which is keeping credit flowing this year, next year and the year after.
Baroness Kramer
It is with real pleasure that I welcome the White Paper and the Statement by the Minister. He will be aware that my colleagues in both Houses, especially Vince Cable, have long called for the structural separation of vanilla banking from more speculative investment banking. We look at Vickers and the White Paper as a very acceptable and effective compromise. As a result of its structural nature, ring-fencing has far more possibility of resisting erosion over the years as the masters of the universe regain their confidence and begin to attempt to transfer risk back to the taxpayer.
The Minister mentioned the Government’s decision to stick with the 2019 timetable. Is that a really robust measure? He will have heard some of the major banks trying to put a bit of pressure on this. A long-grass strategy is clearly under consideration by those who are resistant to these changes.
I see no reason why the Financial Services Bill should be held up to make way for legislation that comes from this White Paper, but will the Minister and his team take a look to make sure that what is likely to flow from this can find a framework and that there will be genuine capacity within the Financial Services Bill? He will know that I am particularly taken with the section in the White Paper called “A More Diverse Banking Sector”. I am delighted to see that and the whole competition area in the White Paper emphasised so strongly. Will he make sure that the capacity for that exists comfortably within the Financial Services Bill when it leaves this House?
Lord Sassoon
Perhaps I might answer my noble friend first. I am grateful to her for welcoming these next steps as we implement Vickers. On the questions about timetabling, we are firm not only on implementation by 2019 but on sticking to our commitment to completing the passage of the legislation in this Parliament, which allows for time for pre-legislative scrutiny this autumn and a proper and full process. On her point about whether we have thought about the read-across to the Financial Services Bill, we have done so—for example, we have picked up the Vickers recommendation about the FCA having a competition objective, and that is already drafted in the Financial Services Bill. There will be other important elements, such as account-switching, that will come in from September 2013. Everything fits together. I appreciate her recognition that a more diverse banking sector has also been thought about; it is a very important element of this.
Lord Tugendhat
My Lords, I welcome the Statement and I congratulate the Government on the speed at which they are moving. I have one question: where one part of a bank is within the ring-fence and one part is outside, does the White Paper say anything about auditing? Would one expect there to be the same auditors for both parts of the bank, or would they expect to have different auditors? Does the White Paper take a view on that?
Lord Sassoon
As far as I am aware, there is no prohibition or restriction on the use of auditors. I am pretty sure that the audit position is not addressed, but if I am wrong about that I will write to the noble Lord.
Lord Rees-Mogg
We were just brewing up to have a very satisfactory little argument about the Glass-Steagall Act. The important thing about it is how long it lasted; it was passed by the Senate in the 1930s and ultimately repealed by President Carter, who had been persuaded to do so by Wall Street. Its great virtue was that it identified more clearly than previous legislation, and more clearly than most subsequent legislation, the difference between retail bankers and what you could call casino bankers, and put different responsibilities on them. That protection worked. If one went, as I did, to Wall Street in the 1950s, one found that Wall Street had come to the conclusion that it was not going to have another slump, primarily because of that Act but also because of the wartime Bretton Woods agreement, which was masterminded by our very own Maynard Keynes. This is a consistent fruit. The set of ideas that were developed in response to the crisis of the early 1930s worked their way through the financial body and the intellectual body, and gave us what we are now looking for—a restabilisation of our own economy in its own terms.
Lord Sassoon
The noble Lord, Lord Rees-Mogg, of course speaks with great authority on these matters. All I do is to say that I listen with great interest to his historical analysis.
Lord Desai
My Lords, before we had the report from Sir John Vickers at the commission, there was talk of living wills that banks would make. Whatever happens, we are now to make quite sure that the taxpayer does not once again have to bail banks out. While it is all right to have ring-fencing and so on, we have to remember that Northern Rock was not a bank with investment banking divisions. It was a bank which failed purely because of misbehaviour. Are we sure that, whatever happens, if even a ring-fenced bank fails it will not be rescued by the taxpayer?
Lord Sassoon
The noble Lord, Lord Desai, as always, brings up important points. Of course, living wills are an integral part of the whole construct for better resolution of banks than we had before. Indeed, the FSA has been leading the project for a couple of years or more to make sure that all the arrangements are in place. The noble Lord draws attention to another important part of the construct.
Lord Bates
But can my noble friend confirm that the banking crisis actually cost the taxpayer, in direct cash, loans and guarantees, close to £500 billion—£465 billion pounds? Therefore, it behoves the Government to take some action to protect savers and the interests of the taxpayer in this regard. The introduction of the leveraging ratio is therefore welcome, particularly as it follows international norms rather than putting our industry at a competitive disadvantage.
I have one small, technical point. The Minister has an incredible grasp of the detail, but does my noble friend have understanding of whether there will be any implications of introducing that leverage ratio for the Government’s holdings in Lloyds Banking Group and RBS?
Lord Sassoon
I am grateful to my noble friend for pointing out the extraordinary cost of the banking crisis. He cites one figure; I think that the estimates ranged from £140 billion upwards. They are extraordinary figures, which, as I said at the outset, the then Government did not seem to think required any response. I completely agree with my noble friend Lord Bates that something needed to be done, and that is what we have brought forward.
As for the effect on the Government’s holdings in RBS and Lloyds, I am sure that your Lordships like reading, as I do, the fine detail of impact assessments. At the back of the White Paper, the impact assessment contains several paragraphs analysing the effect. It gives a number on a rather theoretical comparison of what the effect might be, but then points out that this is probably already priced into the market so that the price of the holdings today takes account of what is proposed.
Lord Jones of Birmingham
My Lords, I declare an interest, and refer noble Lords to the register of interests, advising both providers of finance and also those who consume it. I remember my Yorkshire grandmother when I was about 12 saying that it was a condition of my Christmas present that an account was opened at the Halifax Building Society, and it went in there. Little did Grandma Jones ever believe that that money and its successor funds would be used to be gambled by the Bank of Scotland on commercial folly, so I congratulate the Minister on a good start.
However, of course we have one or two problems. First—and I would welcome the Minister’s comments on this—I notice that the Statement includes SMEs inside this ring-fence as well as private individuals, the provision of retail, the taking of deposits and the provision of finance. The problem is: how do we get capital and liquidity back into the small business sector? Bigger businesses have balance sheets awash with cash but lack the confidence to invest it. At this moment, smaller businesses do not. One of the biggest reasons for this is that they have lost trust in the banking sector. If you had a good credit record in 2008 and 2009 but had your credit facility taken away and had to borrow from friends and mortgage your house, you are hardly likely to trust the bank the next time around. Today does nothing to help that unless you make a virtue of necessity and prove to small business that this will in some way free up capital towards the provision of liquidity. I am not sure that this measure in any way does that and would welcome the Minister’s comments.
Secondly, there is the enormous problem of how you get the balance right so that we are seen as a well regulated, safely executed and prosecuted banking environment, without encouraging the most successful of our globally competitive sectors not to leave these shores. It would not go elsewhere because of all the problems with salaries and bonuses and the vilification of banking but because it will just become too difficult to lend here and easier to lend in other markets. I ask the Minister, and I include his coalition partners in this—it would be nice to have a Secretary of State for Business who supported business for once—whether, just for once, some positive words might come from the Government about the financial services sector in this country, rather than constant smacking instead of encouragement.
Lord Sassoon
My Lords, the noble Lord, Lord Jones of Birmingham, is always rightly concerned about the financing of British business, which is very important. Today’s measures are not principally about that. I could talk about the £21 billion national loan guarantee scheme or the fact that our 10-year sterling sovereign rate has been in the 1.5% to 1.7% range for the past few weeks, which is an unprecedented level. That all flows through. Here, we are significantly reducing the risk of another banking crisis. It was that crisis—the disruption and its aftermath—that caused such difficulty in the flow of loans to our businesses. Whatever we do here to minimise the chances of it happening again must be good for our businesses.
As for the UK being a competitive centre of banking, the Government are working incredibly hard. For example, only this morning I was at a very important meeting with businesses and authorities from the UK and Hong Kong, talking about how we would build the offshore RMB centre in London. That is an example of the forward-looking approach that we take to making sure that the UK and London continue to be the global financial centres of choice.
Baroness Drake
My Lords, I have only just had time to read the White Paper but I ask the Minister to elaborate on two issues. The Statement makes it clear that the strength of a country’s banking sector strengthens its stability and gives it a competitive advantage—a view that I endorse. However, that view clearly worried the European authorities, as evidenced by Mr Enria’s evidence to the Joint Committee on the Financial Services Bill. These are my words, not his, but he expressed the view that capital requirements for banks in Europe should have both a minimum and a maximum. However, the White Paper confirms that the Government support the ICB view that further buffers should be added to those of the Basel III international standards, and that the Government will, through the CRD4 negotiations, work to ensure that they can be implemented in accordance with EU law. Therefore, my first question is: how confident are the Government of securing the national regulatory freedom to impose the additional capital buffers that they would like to see?
Secondly, I am pleased to read in the White Paper that, for the first time, the position of pension funds in the ring-fencing will be important. The issue is to do with making sure that the regulatory framework for pension funding is not breached when dealing with the banking separation.
Lord Sassoon
In answer to the noble Baroness’s first point, we are confident, and we are absolutely on top of and watching her second point, which is important.
Baroness Wheatcroft
My Lords, I welcome the White Paper and the accompanying Statement. Separating risky banking from core retail banking is essential but we have to be careful that the ring-fence does not become a Chinese wall. It will take some policing. We also need to be very careful in watching to what extent the hedging that will be allowed within the ring-fence is monitored by the various authorities. I have some qualms about that.
I am also concerned about the timetable. I am delighted to hear that the 2019 deadline will stay but I am puzzled as to why that needs to be the case for more than the capital requirements. I would have thought that the ring-fence might have been installed sooner than 2019, which sounds a long time away. My final point is about why on earth households would put their money into a ring-fenced bank. I cannot see why their money should be guaranteed if they put it in a riskier institution. Perhaps the Minister will answer that.
Lord Sassoon
I would very much like to respond to those points but I see that the clock has reached 20 minutes. I do not like to do this but I had better write to my noble friend Lady Wheatcroft on these important points.
Businesses: Tax Liability
Lord Sassoon Excerpts(12 years, 1 month ago)
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Lord Kennedy of Southwark
To ask Her Majesty’s Government what is the normal notice period that HM Revenue and Customs gives to businesses in relation to changes in their tax liability.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, changes in tax law are normally confirmed at least three months before the tax year in which they come into effect or the publication of the Finance Bill in which they are to be included. The Government normally announce such changes at Budget for enactment through the following year’s Finance Bill. The Government also consult on most changes to tax law, unless they are straightforward changes, revenue protection measures or areas where there is a risk of forestalling.
Lord Kennedy of Southwark
On 18 May, HMRC issued new guidance concerning the tax rates to be charged to the waste industry with immediate effect. It resulted in a 2,500% tax increase and put jobs and businesses at risk. I raised it in the House on 29 May. The Government then did a U-turn—the official line was that they clarified their position. The problem is that half the industry does not accept the veracity of the clarification of the Government’s guidance. Does the Minister accept that we have a serious problem and will he agree to facilitate a meeting between me, my good friend the Member of Parliament for Mitcham and Morden and the relevant Treasury Minister with a representative of the industry to sort out this shambles of all shambles?
Lord Sassoon
My Lords, before I get what I might call my noble friend Lady Trumpington’s question, “What on earth are we talking about?”, it might be helpful to give a little background. Landfill tax is payable by landfill site operators per tonne of waste put into their sites. It is sometimes called by the press “the skip tax”.
Recently HMRC responded to concerns expressed by some landfill operators that certain companies were not paying the correct rate of tax and in that process were disadvantaging those companies that were paying the correct rate of tax. There is no new tax policy here. The rates of landfill tax have not changed, but HMRC issued guidance in response to that request. Since the issuance of that guidance, there has been some misinterpretation which HMRC has sought to correct. I appreciate that there may still be some residual concerns, and I am very happy to facilitate a meeting. Because it is an operational matter, I suggest that the person who it would be most helpful to meet is the director at HMRC who is directly responsible, and I will help to set that up.
Lord Lawson of Blaby
This Question concerns Customs and Excise. Is the Minister aware that a report published by the Institute of Fiscal Studies last year pointed out that, while some unhealthy foods are subject to the standard rate for VAT, there are many other unhealthy foods which are zero-rated? Would he care to suggest to the Chancellor of the Exchequer that no unhealthy foods should be zero-rated? I am sure that the Chancellor could do with the additional revenue.
Lord Sassoon
My Lords, I think that we probably call it Her Majesty’s Revenue and Customs these days. That aside, I will of course pass on my noble friend’s representations on this important matter.
Lord Foulkes of Cumnock
My Lords, will the Minister tell the House whether the decision by Her Majesty’s Revenue and Customs to put Rangers Football Club into liquidation was made by officials or was referred to Ministers?
Lord Sassoon
My Lords, as previously in answer to any football club tax questions, I can say only that I cannot talk about individual taxpayer matters for reasons of confidentiality, which the noble Lord, Lord Foulkes of Cumnock, well knows.