Bank of England and Financial Services Bill [HL]

Debate between Lord Sharkey and Lord Carrington of Fulham

Wednesday 11th November 2015 Lords Chamber

[Lord Sharkey]

My Lords, Clause 12 abolishes the existing PRA. It defines the Bank as the new PRA, exercising its function through the PRC. The key questions here are why, and what is the benefit? I asked these questions at Second Reading. The Minister, in his letter to me, received last Thursday, answered by saying:

“Bringing micro-prudential regulation more fully into the Bank will support the Bank’s aim of installing a unified culture and flexible and co-ordinated working across its twin aims, aims of monetary and financial stability”.

That is very nearly weapons-grade corporate speak.

I invited the Minister at Second Reading to say what that means in plain English and to give concrete examples of how it would operate. I again invite him to do exactly that. I also invite him, having explained what it means, to say why it is better than what we now have. Andrew Tyrie asked the governor a similar question on 20 October at the Treasury Select Committee. He made the point that the PRA had been successful and asked why this change was needed if the PRA was not “broke”—if it wasn’t broke, why change it? The governor said that no one had made that point to him but he agreed that the PRA had been successful.

Clause 12 brings about a significant change. It brings the PRA directly into the close embrace of the Bank. Despite unevidenced assertions to the contrary, it must reduce the practical and cultural independence of the PRA, and this is absolutely not desirable. Doing all this without a convincing or even intelligible reason is surely the wrong thing to do.

The Treasury briefing paper for the Bill hints at another reason for absorbing the PRA into the Bank—that is, to conform with the governor’s “One Bank” strategy aimed at breaking down barriers within the Bank,

“that could stand in the way of a unified culture and impede flexible and coordinated working across the Bank”.

There are two worrying things about that statement. The first is the “One Bank” strategy itself. As my noble friend Lady Kramer said at Second Reading, the Parliamentary Commission on Banking Standards had many conversations about the importance of ensuring that,

“the Bank was not one single monolith and that there should be an opportunity for real challenge rather than groupthink”.—[Official Report, 26/10/15; col. 1073.]

The “One Bank” strategy appears to be in danger of doing exactly that—moving the Bank back to monolith status, suppressing opportunities for real challenge and recreating the conditions for groupthink.

The second worrying thing about the Treasury briefing note statement is the reference to breaking down,

“barriers that could stand in the way of a unified culture and impede flexible and coordinated working across the Bank”.

Leaving aside the question of whether a unified culture is always desirable, one has to ask, “What are these barriers?”. What barriers have been identified in the workings of the Bank with the PRA?

The position on Clause 12 is that the Government have simply not put forward any compelling reasons for the changes that it produces. We have seen no strong, or even fairly strong, or evidenced argument that either the current situation is unsatisfactory or that the proposed changes would be better. Absorbing the PRA into the Bank is an important and radical step. It should not be taken without strongly evidenced arguments. In the absence of such arguments, we are left with only weakening of the independence of a vital organisation, with no assurance of any real benefit. Like my noble friend Lady Kramer and my former noble friend Lord Flight, I would prefer to see the PRA more independent rather than less. However, if we cannot have a more independent prudential regulator, we can at least try to stop it becoming a less independent prudential regulator.

[Lord Carrington of Fulham (Con)]

My Lords, I refer noble Lords to my interests as declared in the register of interests. It seems to me that these clauses come to the nub of bank regulation in the Bill. The real question that we are looking at is whether it is better to have a stand-alone regulator or one which is integrated into the Bank of England, albeit with Chinese walls, a separate committee structure, independent directors and so on. To answer that question we have to consider why the FSA failed. The FSA was set up very much as a stand-alone organisation with its own rulebook, structures and independence from both the Treasury and the Bank of England, yet it completely failed to identify the problems that were building up in the banking system prior to 2008 and was unable to take action if it did identify those problems. However, there is increasing evidence that it was not even aware that problems were being created.

The noble Lord, Lord Sharkey, suggested that there are no problems with the PRA. That may well be true. Certainly, the PRA has operated well since it was created. I have had personal experience of dealing with people of excellent quality in the PRA and, indeed, of better quality than people in the equivalent posts in the FSA. However, I warn that the PRA has not been tested in the way that the FSA was. There has not been a major financial crisis since 2008. The PRA has not had to face the same problems. Frankly, we do not know whether the PRA would be able to cope with a crisis of the magnitude of 2008 or whether indeed it would suffer from the same problems that the FSA suffered from.