Financial Services Bill

Debate between Lord Sassoon and Lord Stewartby

Tuesday 3rd July 2012 Lords Chamber

[Lord Stewartby]

My Lords, I well remember the debates that we had all those years ago on the Monetary Policy Committee, and how many objectives could be added to the central one. This is a bit of a nostalgic occasion, because we are going through different subject matter but the same basic problems. I start from the point that the more of these extras you have, the more confusing they are likely to become for those who have to identify them and classify them under a heading—for example, “You’ve got a bit of employment here, and perhaps supply of finance. How is that getting on in our calculations?”. Those who attempt to allocate specific ingredients under these headings will fairly quickly find themselves with a lot of practical problems.

That leads me to say that I am probably a bit more cynical than sceptical than most noble Lords here today. There is a tendency to be overexpansive in economic policy-making, because Governments tend to be optimistic, and are therefore more likely to err on the side of overcooking than undercooking. Their focus also tends to be short-term rather than long-term. It is very difficult to feed in long-term assessments of this when it takes a good while for the implications of individual policies to be evident. I am, therefore, at the cautious end of this argument, and we ought to be very careful about not loading the process with too many objectives.

We should definitely say that nothing should conflict with growth or whatever we want, but it is different when one puts it in a negative rather than a positive way. You can add any number of “promoting”, “contributing”, “having regards to” and so forth, but the fact that there are all these different explanations illustrate that it is not a precise science. To treat it as though it were would be a recipe for difficulty and internal conflict. I may, therefore, be in a minority of one about this, but most of what has been said this afternoon comes from a starting point that itself is questionable.

[Lord Sassoon]

My Lords, the Government have always been clear that the Financial Policy Committee, as the body responsible for ensuring the stability and safety of the financial sector as a whole, must have financial stability as its primary focus. That is our starting point. However, we have been equally clear that the FPC must balance the pursuit of its primary objective for financial stability with the wider impact of its actions.

In our February 2011 consultation document the Government spoke of the need to,

“build the balance between financial stability and sustainable economic growth”,

into the FPC’s objectives. In addition, my right honourable friend the Chancellor made clear, when giving evidence to the Treasury Select Committee almost exactly a year ago, that we do not seek “the stability of the graveyard”. Our first shot at achieving this symmetry within the FPC’s framework was the creation of an economic growth “brake” for the FPC. The provision set out in subsection (4) of new Section 9C prevents the FPC from taking action that would significantly adversely affect the ability of the financial sector to contribute to medium- or long-term economic growth in all cases, regardless of the strength of the financial stability rationale. That is a very strong backstop provision.

However, the Government have listened to calls, both in another place and in our Second Reading debate in this House, for the FPC to be given a positive duty to support economic growth. In response to those calls, government Amendment 35A amends the Bill to give the FPC a secondary objective to support,

“the economic policy of Her Majesty’s Government, including its objectives for growth and employment”.

As many noble Lords are aware, this wording is identical to that used in the MPC’s secondary objective.

The noble Lord, Lord Eatwell, has used similar wording in his Amendment 34, but in the form of “having regard” rather than a secondary objective. I believe that in this case a secondary objective is more appropriate—more purposive, in the words of my noble friend Lord Hodgson of Astley Abbots—than “having regard”. We mean to be purposive here. The Government’s intention is to require the FPC to seek proactively to support economic growth. For this, you need an objective, not simply “having regard”.

Some noble Lords have questioned how such an objective bites in the context of the MPC. I am very glad that the noble Lord, Lord Barnett, is at last starting to get answers to his questions from the noble Lord, Lord O’Donnell, who is much more expert in these things than I am, and long may he continue to keep the noble Lord, Lord Barnett, supplied with explanations. In my inadequate way, I shall attempt to give one or two examples; first, of how the new secondary objective will impact on the FPC’s decision-making. I do not want to get sidetracked too much on the MPC but I will make one or two remarks to suggest that similar wording has impacted on the MPC as well. It is most important to think about the FPC, because that is what we are talking about here.

Let us imagine that the FPC takes action, such as imposing additional capital requirements, during the upturn of the cycle, when systemic risks are building up and financial stability concerns are heightened. If the situation changes—for example, the expansion subsides and the financial stability risks reduce—the secondary objective for economic growth will incentivise the FPC to remove those additional capital requirements in order to free up money for lending to the real economy. This effect will work in tandem with the new requirement for the Bank to review previous actions, which we will discuss in due course.

Scotland Bill

Debate between Lord Sassoon and Lord Stewartby

Thursday 15th March 2012 Lords Chamber

[Lord Stewartby]

For information, is the no-detriment principle embodied anywhere in statute within the devolution area?

[Lord Sassoon]

I will correct this if I am wrong, but I believe that it is set out not in statute but, along with a lot of other critical issues relating to the financial arrangements, in the financial accords with lots of other things that support the way in which money flows through to Scotland.

Independent Commission on Banking

Debate between Lord Sassoon and Lord Stewartby

Monday 19th December 2011 Lords Chamber

[Lord Sassoon]

My Lords, the report today is a response to the Vickers commission’s work on the structure of banking. I fully accept the noble Lord’s reference to other matters, particularly accounting standards. The committee of this House did some extremely important work in that area. I do not pretend that we are solving everything today and accounting is another issue that I am sure Members of this House will not forget as we go forward.

[Lord Stewartby]

My Lords, will my noble friend say something about supervision and where it fits into this very complicated arrangement of new committees and authorities? The report of the Joint Committee, which was published only today, states that it is planned that microprudential regulation will be done through a new subsidiary body called the prudential regulatory authority. However, regulation is not a micro-activity. Supervision is a micro-activity, but regulation is not. If microprudential regulation is meant to refer to supervision, it would be better to say so and not to put it in that form of verbiage.

[Lord Sassoon]

My Lords, I am sure that there will be other occasions and places in which to discuss the Joint Committee’s important report on the Bill, so I do not want to get dragged too far into doing that. I recognise that, even for those of us who have been involved in the banking industry, confusing “regulation” and “supervision” can sometimes be a trap into which it is easy to fall. Supervision will be the responsibility of the Bank of England in the new structure, if the Bill is passed by Parliament.

Regulatory and Banking Reform

Debate between Lord Sassoon and Lord Stewartby

Thursday 16th June 2011 Lords Chamber

[Lord Sassoon]

My Lords, there are many questions wrapped up in all that. I am conscious that we have four minutes to go. I repeat myself, but we have set up the independent commission with a suitable group of experts and resourced with a secretariat that is now grappling with precisely these questions. Legal separation has, in the history of the US and Glass-Steagall, proved itself to be an incomplete answer to this. We have to find the best answer. We have set out the Government’s perspective, which is to endorse the principle, and set down the standards by which we shall judge the solution that the commission comes up with. I am sure it will listen to the ideas that are put forward here this afternoon, as well as to all the other submissions that it receives. It is not an easy challenge for the commission, but it is made up of the best people to carry it out.

On the international side, one of the standards by which the Government will judge the solution and decide whether to endorse it is compatibility with the international rules. That is the minimum. That is not what the noble Lord went on to say. As to whether other people will come with us, all I can say is that there has been a high degree of interest in what the commission has come up with in its interim report. People around the world are studying it. We shall see in time whether they will follow it. All I know is that the eyes of the world are very much on the continuing work of the commission.

[Lord Stewartby]

My Lords, I draw attention to a confusing passage in the Statement, which makes the text about micro and macro more difficult to understand. It says:

“The Prudential Regulatory Authority will focus on microprudential regulation. It will bring judgment to the vital task of regulating the soundness of individual firms”.

However, that is not a task for regulation; it is a task for supervision, which is not mentioned in the Statement and caused some confusion in earlier business on these matters. I shall not say this at any length but supervision is a separate process, which got slightly lost under the old system. We need to be careful that these are two separate things, which are complementary and sometimes overlap, but nevertheless are not the same. The text on that needs another look.

[Lord Sassoon]

I am grateful to my noble friend because this is a technical but very important area. He is completely right that there is a fundamental distinction between supervision and regulation and often texts can be loose on this. I hope that when he has a chance to read the White Paper he will see that there is extensive discussion of these areas. I refer him to the interesting remarks of the governor last night about the approach to supervision which he intends the Bank and the PRA under it to adopt in the new world, and that that should be a very different approach to supervision from what we have seen recently with the FSA. I take my noble friend’s points to heart, but the short text of the announcement does not give the full flavour that lies behind it.

Financial Services Regulation

Debate between Lord Sassoon and Lord Stewartby

Wednesday 16th June 2010 Lords Chamber

[Lord Sassoon]

We will put in place as soon as possible an interim financial policy committee. Whether we need legislation and what the nature of that legislation is rather critically depends on the institutional arrangements we are going to put in place. That is something we will come back to when I repeat, no doubt, my right honourable friend’s Statement tomorrow.

[Lord Stewartby]

My Lords, since this subject is going to come before your Lordships’ House on many occasions, no doubt, in the next year or two, could we make sure that there is a degree of rigour in the choice of the terminology? In this Statement, we read about macro-prudential supervision and micro-prudential regulation. Regulation is not the same as supervision, however, and vice versa. Some of the problems in the past few years have been due to the fact that people who should have been regulating were not. They were supervising but were not in a position to do so. We need to get this straight.

I was chairman of the audit committee of an international bank for many years. I never came across micro-prudential regulation because regulation inherently is not a micro subject. It is the framing of rules which the industry must observe and which individual bodies must observe. It is not a detailed operation; that is left for supervision. This confusion contributed to the fact that it was not always done as it should be.

[Lord Sassoon]

My Lords, I thank my noble friend Lord Stewartby for pointing out one of the critical parts of the construct we will put in place. I apologise for using the new terminology—I hope he will forgive me—but the macro-prudential regulator also needs to have oversight of the micro-prudential regulation, the supervision of individual firms. That is part of what we will come back to tomorrow.