Financial Services (Banking Reform) Bill
Lord Turnbull Excerpts(11 years, 1 month ago)
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Lord Eatwell
My Lords, this amendment, which I hope will become a new clause in the Bill, is probably the most important in the Bill. It defines whether we are really serious. If we are not serious, we will reject the idea of having a leverage ratio as one of the armaments of the FPC. If we are serious, the Financial Policy Committee must have this tool.
As the noble Lord, Lord Lawson, has argued, risk-weighted assets have been discredited as a measure of risk within the banking system. It is regrettable that so much legislation both here and in some of the discussions in Basel and in the European Union still use this discredited measure as a means of devising appropriate regulatory measures.
The leverage ratio is simple, it is clear and it provides a protection to the overall stability of the financial system; it provides protection for a resolution regime; and it provides protection for depositors because, with the regulatory determination of the amount of capital relative to the asset base of the bank, that regulatory determination pursuing those goals will have the effect of reducing an important component of systemic risk. It is not me who makes that argument; the Government did so in the Financial Services Act 2012. In defining systemic risk, that Act defines one of the characteristics of systemic risk as “unsustainable levels of leverage”.
If the Financial Policy Committee is supposed to be managing systemic risk and a component of systemic risk is unsustainable levels of leverage, why cannot the Financial Policy Committee have the tools to do anything about it? At the moment the Government are telling us that they will review whether the FPC should be given this particular tool in 2017. They will review it: we are not even sure that the Financial Policy Committee will receive the ability to manage the leverage ratio in 2017-18.
By the way, even if it does appear in 2018, the Financial Policy Committee and the Governor of the Bank of England will be given this tool just as Mr Carney gets on the plane back to Canada. We have managed to secure someone who the Government tell us—and I think is generally acknowledged—is a highly skilled central banker and we are not giving him the tools to do the job which he is asked to do in the 2015 legislation. I notice that it was said in the Commons Public Bill Committee that:
“The Financial Policy Committee cannot be expected to work with one hand tied behind its back”.—[Official Report, Commons, Financial Services (Banking Reform) Bill, 26/3/13; col. 207.]
Not giving the Financial Policy Committee this particular power ties both its hands behind its back because it is, as I have already said, required to take account of unacceptable levels of leverage and yet it has no tool to do anything about it. The amendment of the noble Lords, Lord Lawson and Lord Turnbull, and of my noble friend Lord McFall, achieves that goal. Surely this is what is necessary if we are serious and are not overwhelmed by the lobbying of the banks.
Lord Turnbull (CB)
My Lords, I support the amendment and the account given by the noble Lord, Lord Lawson. I shall add a bit of background to this matter. For probably two decades, up to about 2004, the leverage ratio of the British banking system fluctuated between 20 and 25. It then rose, reaching a peak in 2008 of somewhere over 40. The Government’s wish that the number of the leverage ratio should not be greater than three implies that the limit of their ambitions is to get this leverage ratio back to 33, which is still, by historical standards, a very high ratio.
A very interesting chart in the Vickers commission report shows how risky people thought assets were. It shows that they fell—this is the assessment that banks put into their own models—between 2004 and 2008. How can anyone believe that 2008 was a year of greater financial stability? I believe the way this came about was as follows. You said in 2004, “I have a portfolio of commercial property and have not lost a penny on it in the past 10 years, so I will give it a weight of X”. You come to 2008, four or five years later, and say, “I have still not lost any money on this, which tells me that this portfolio is not as risky as I thought it was in 2004, so I will give it a lower risk rating”. What is happening all the time when you have an upswing is that, as the upswing gets riper and riper, the risk weights go down and down, until there is a crash. The whole purpose of having a leverage ratio is to provide a backstop to that. One or two people argue that we should run on basic leverage ratios alone but, in my view, both the leverage ratios—unweighted and risk-weighted—should run in tandem. Each provides a check on the other. Relying solely on risk-weighted assets leads you into the farce of banks marking their own homework and doing the opposite of what they should be doing by marking things as less likely at precisely the moment in the cycle where they become more likely.
Another argument that has come up in relation to 3% and 4% is that we must not get out of step with regulation abroad. However, when it comes to risk-weighted assets, the Government have accepted that they want to impose a higher figure—partly because we have more systemically important banks and it is important for a medium-sized economy running a very large banking sector for that sector to be safe. When you say, “Does that not mean that what we thought was a 3% figure should move pari passu”, the answer is, “Oh no, we can’t do that because we will get out of line with what everyone else is doing”. But if you can do it for one of these measures, why can you not do it for the other? I find that argument completely unconvincing.
There was a view in the commission that higher leverage ratios were a good thing. However, that is not what this amendment is about. Although we thought that, the amendment says that it should be the FPC that makes the judgment. As my noble friend Lord Eatwell has pointed out, the absurdity of hiring this super-duper, global-standard central banker and then not giving him this essential tool until the very point at which his contract ends is beyond belief. It seems an absolutely simple point that the FPC should start this. Elsewhere in the world, other people will be thinking about this and it seems very strange indeed to leave the Bank and the FPC unable to start deploying this measure.
There is an argument that certain kinds of banks, particularly those with low-risk assets, will find that this 4%, or the leverage ratio, becomes the binding ratio. People making that argument cite, principally, various former building societies. You have to look around and ask where the biggest failure in Britain was. It was former building societies thinking that they had a portfolio that was a good deal safer than it really was. Some of them also got into quite a lot of commercial real estate. Northern Rock, for example, would have been well advised to have followed a leverage ratio of this kind. If it turns out that the supply of mortgages is not adequate—although we are doing lots of other things to promote it—you might want to differentiate between one kind of organisation and another. That should be done by the regulator as a derogation from a world in which we are working with higher leverage ratios than the Government currently envisage.
Lord Higgins (Con)
My Lords, I also support my noble friend’s amendment, but with some qualifications and a request for some clarification. The amendment simply refers to “proprietary trading by banks”; that does not distinguish between one part of a ring-fenced bank and another. The arguments on this issue are so clear that we should take a perfectly clear view that there ought to be no proprietary trading whatever by any ring-fenced bank.
There is also no real need to wait three years for such an inquiry. My noble friend referred to the Volcker rule in America; not all of us in this Chamber have Paul Volcker as a personal friend, but I have great respect for him. He is absolutely right that this should not be carrying on in the United States. Although it may be that there has been a decrease for the moment, over a period of three years the situation might change somewhat. Therefore, we could take a clearer view on this between now and Report than is set out in the amendment. As my noble friend has pointed out, this is effectively the banks’ carrying out risky trading on their own behalf—in the past, not infrequently, it was risky trading on their own behalf with clients’ money—and this, again, is a crucial point. Perhaps we should clarify that aspect of the matter, but I have not the slightest doubt that this is a move in the right direction and I hope that we can make rapid progress on it.
Lord Turnbull
I reassure the noble Lord, Lord Higgins, that it is certainly not intended, while this activity might remain within a banking group, that it should be done, under the plan, by a ring-fenced bank. One of the reasons why we took the view that we should wait and see is that the dividing line between a proprietary trade and a trade on behalf of a customer is not straightforward, which is why it is very difficult in the US. For example, if I lend the noble Lord money he may seek some kind of hedge which I would provide. That might mean that my position as the bank is no longer what I really want it to be. As a bank, I would look around to see what my colleagues have done during the course of the day, and we would then add up all the positions that we have taken. We may well find that that position is not where we really want to be, so on the following day the bank goes out and undertakes a trade which gets it back to the degree of hedged position that it wants. Was that a proprietary trade or was it a trade that was a consequence of serving a customer? That is why this is actually very difficult and why we are wise to wait and see whether workable definitions could be found of what constitutes real proprietary trading and of what constitutes trading in response to a customer. This measured amendment enables us to do precisely that.
Lord Deighton
My Lords, the ICB considered in detail the case for a ban on proprietary trading in the UK, but decided in favour of ring-fencing. The PCBS heard evidence from a wide range of sources that prop trading does not appear to play a large role in the UK at the moment—as my noble friend Lord Lawson pointed out—nor did it play a significant role in the financial crisis. The noble Lord, Lord Turnbull, has already addressed the question of my noble friend Lord Higgins, but it should of course be noted that the ring-fenced banks will be banned from proprietary trading as well as from market-making and other forms of trading activity that would expose them to risks from global financial markets. Therefore, from a prudential perspective, much of the risk posed by prop trading can be addressed by a suitably robust ring-fence which is, of course, the thrust of our legislation. This was the point made by the PRA in response to questions from the PCBS.
It is also worth noting that the evidence heard by the PCBS also suggests that prop trading is not necessarily the sole avenue for the cultural contamination of banks. For example, the PCBS highlighted in its excellent report the serious failings in culture and standards at HBOS, a bank which did not engage in any prop trading at all. Indeed, it is perfectly possible to run an integrated securities business with full integrity in a way that manages any potential conflicts of interest quite satisfactorily, so they do not necessarily follow. It is far from clear, therefore, that prop trading is the real problem facing the UK financial system, or that structural solutions address cultural problems. In light of that, and of observations about the practical difficulties of a ban on prop trading, as it is being attempted in the US through the Volcker rule, the PCBS did not recommend a ban on prop trading.
It is not wholly clear what further evidence would support a different conclusion to that reached by the PCBS in its own assessment, so it is unclear what a further review into proprietary trading within such a short period of the PCBS’s own report would add. Still less is there a need for such a review to be followed immediately by an independent review of the same question. Of course, we have no issue with reviews as a matter of principle: we are just not sure that, in this case, legislating for one in advance really does much for us.
As the findings of the PCBS do not suggest that prop trading presents a serious prudential risk at this time, I do not think we need to legislate for the regulator to carry out a further review. The absolutely valid point made by my noble friend Lord Lawson was that this could change in the future. That is what we are trying to address. Should that happen, the PRA has made it clear that it already has the powers it needs to bear down on prop trading where it endangers the safety and soundness of a firm or where the risk incurred is not consistent with the publicly stated risk appetite of a bank.
Moreover, monitoring and reviewing all risks to a bank constitutes an essential part of the PRA’s work. The PRA’s approach is to insist that firms adopt and follow a risk appetite that is consistent with the PRA’s statutory objective to promote the safety and soundness of firms that it regulates. This will include regular monitoring and review of all risks, not limited just to those associated with prop trading. Therefore, to require the PRA by legislation to undertake such a review seems unnecessary. Should we legislate for a review of how reference rates are set, for example? Should we legislate for a review of mis-selling practices? Why, therefore, should we do it for prop trading? It is not apparent to me what problem a review would solve. While I think that reviews can play a useful role, in this case we are not sure that it is justified in advance.
We need to give the regulator the space to allocate its resources in a way that is appropriate and proportionate when considering all the different risks to the UK financial system, not only focusing on one particular risk. Our more widely framed reporting requirements allow for this. For all of these reasons, I do not think that a review on the particular issue of prop trading is necessary. The regulators are already subject to extensive reporting requirements. I expect the PRA to make the Treasury, and Parliament, aware of any emerging risks it identifies, whether through prop trading or anything else. The deputy governor for financial stability has already written to the chair of the Treasury Committee, offering to discuss arrangements for reporting. I therefore ask the noble Lord to withdraw his amendment.
Lord Turnbull
“Remuneration code
(1) The FCA and the PRA must prepare (and may from time to time revise) a remuneration code.
(2) The remuneration code is to apply to all persons who have approval under section 59 of FSMA 2000 to perform a function in relation to the carrying on by a bank of a regulated activity which is designated under subsection (6B) or (6C) of that section as a senior management function.
(3) The remuneration code must—
(a) require that persons to whom the remuneration code applies are, except in specified circumstances, to receive a proportion of their remuneration in the form of variable remuneration,(b) require that a specified measure of profits is to be used in calculating any variable remuneration which is calculated by reference to profits,(c) require that the nature and amount of variable remuneration is to strike an appropriate balance between risk to the bank providing it and fair reward for the receipient of it,(d) require a proportion of variable remuneration to be deferred for such period, not exceeding 10 years, as is appropriate to strike a balance between risk to the bank providing it and fair reward for the recipient of it, (e) require that no, or only a limited amount of, variable remuneration of a person to whom the remuneration code applies is to be calculated by reference to sales made by the person or by any group of persons employed by the bank providing it, and(f) require that non-executive directors of a bank are not to receive variable remuneration.(4) A requirement imposed by the remuneration code is a relevant requirement for the purposes of Part 14 of FSMA 2000.
(5) In this section “variable remuneration” means remuneration (whether in money or in securities or any other form of money’s worth) the amount or value of which varies in accordance with profits, sales or other matters.”
Lord Turnbull
This amendment stands in my name and in the names of the noble Lords, Lord Lawson and Lord McFall. It seeks to legislate for a remuneration code for banks administered by the PRA and the FCA and to provide some headings on its content. I shall speak also to Amendment 96 which seeks to establish a more stringent regime for clawback.
We can analyse this remuneration issue at several levels. Is a special regime needed for banks? We already have a regime for remuneration in UK corporates, partly determined by BIS regulations and partly enforced by the guidance issued by investors and investor groups such as the ABI and the NAPF. This remuneration structure has recently been reinforced by increasing the amount of disclosure and by increasing the voting power of shareholders. We also have—or have had—a remuneration code for financial institutions—going wider than banks—administered by the old FSA. Why should we go to something more stringent for banks?
The Parliamentary Commission on Banking Standards took the view that a special regime for banks beyond that required for other financial institutions and listed companies generally was justified. Why was that? We identified a number of characteristics that make banks special. They are responsible for an essential service which has to be operated continuously and has, hitherto at least, created a presumption of being too big or too complex to fail, thereby creating an implicit guarantee which can be exploited. Banks are highly interconnected and can fail very quickly, damaging not just themselves but affecting people’s confidence in other parts of the banking industry and the wider economy. Banks are also very highly geared, as has been mentioned today. Their capital structure is not at all like that of the general run of FTSE companies. Equity counts for low single figures. Like the noble Lord, Lord Flight, I read Essays in Money and Banking in Honour of R S Sayers, and the ratios were vastly higher in those days. As a result, those running banks are incentivised to take risks and their shareholders are incentivised to support them. Therefore, I think you can rely less on countervailing pressure from shareholders to achieve restraint in bank remuneration.
Banks are also special in the way they behave. Total remuneration has increased hugely and takes a very high share of the total surplus compared with dividends, taxation, retentions, building up capital and so on. As has also been said today, cash bonuses have been paid on the basis of mark-to-market profits which, in the end, proved ephemeral. There is unlimited upside when remuneration takes the form of equity but, unlike the old partnerships which have gradually been superseded, there is limited downside.
If you accept the premise that there should be something special for banks, what should be the content of this regime? The first thing that should not be there is what the EU and the European Parliament are trying to put in: a limit on the ratio of variable pay to base pay. That is likely to be counterproductive, pushing up base pay and reducing the quantum which is provisional and, therefore, at risk of clawback. What should be there is something about the proportion of variable pay that is deferred and the time period over which it is deferred. The commission recommended that some, not necessarily all, could be deferred for up to 10 years, in recognition of the cyclical nature of banking.
Amendment 96 seeks to strengthen clawback. The terms “clawback” and “malus” sometimes get muddled up. Most of what people have said is strengthening clawback is better described as malus. It is where remuneration has been conditionally offered but not yet vested and there is still the option of cancelling the vesting. This clause suggests that, in the really serious case of a bank being run so badly that it fails and ends up being taken into public ownership or requiring the commitment of public money, even sums that have been vested should be at risk. Some of this could be pension money. If someone has paid for a pension regularly, through contributions, I would, by and large, say it was their money. However, we have seen instances where very large, discretionary amounts are paid into people’s pension funds precisely in order to put them somewhere where, hitherto, they have had immunity.
Those are the principal components of the amendments. You could go further. For example, Charles Goodhart has argued that it is a mistake, in the case of banks, to make variable pay take the form of shares because the shares are highly geared and it would be better if a significant amount was not in shares but in bailable bonds. This would limit the upside but that value would not be transferred if the bank failed.
What is the scope of these arrangements? How far down the bank should they go? They should certainly cover the senior managers’ regime. What is offered below that is not the licensing regime that we suggested which should apply to people who had the ability to damage the bank in some way. As it is set up at the moment, it could be any employee, which is a much less focused scope in terms of who is covered.
The other issue is about which parts of banking should be covered. We came across this argument and are still uncertain about whether it is those people who work in entities which take deposits or whether it should also cover people engaged in investment banking, which is the common sense view. Another amendment in my name attempts—probably unsuccessfully—to produce a definition which is wider than simply those who are in banking entities which take deposits. However, the noble Lord, Lord Newby, has written to a number of noble Lords recognising this problem and undertaking—I hope he will confirm this—to work with us to find a definition which covers the kind of people and activities that we want it to.
The final question is whether this all needs legislation. I can confidently predict the noble Lord’s response as we have had it at least three times today. I think he will say, “We agree there is a need for a special regime for banks and we agree on lots of the components that should be in it. We will work with you to agree the coverage, but we do not agree that it needs to be in legislation as the PRA has all the powers that it needs”. I think that is pretty much what is in his folder. Why is the commission pressing for legislation? In the whole of the financial crisis, two issues have infuriated the general public. The first, which we dealt with last week, is the absence or extreme weakness of personal accountability. The second is the sense that the bankers made the money but did not lose it in the bad times. They were incentivised to excessive risk-taking: too much upside, not enough downside. The public find the existing regime incomprehensible and they want something done about it. In particular, they want assurance that it cannot happen again. The way to ensure that there is no backsliding is to provide the powers proposed in my amendment. We should also set some of the parameters of what that covers.
Lord Eatwell
My Lords, we have already, on some previous amendments, begun to discuss the issue of the culture within banks and the culture which contributed significantly to the disaster in the banking system of the past four or five years. Nowhere does that bite become more evident than in the issue of remuneration. There has been considerable disquiet about the sheer scale of remuneration but this amendment, particularly in terms of the elements listed under subsection (3), goes to the heart of the matter which is the relationship between remuneration and risk-taking and the way in which remuneration systems incentivised, to an extraordinary degree, risk-taking which went way beyond the ability of the financial institution to manage it effectively.
If we are to persist with the banking structure we now have in this country, with very, very large banks—which are extremely difficult to manage—dominating the banking scene, then it is necessary to de-incentivise the risk-taking which did so much damage. That is the most valuable element in this amendment. The elements to which the noble Lord, Lord Turnbull, referred are also important, but we need to provide a clear statement that a remuneration code will be developed which does not incentivise selling insurance or financial instruments that individuals or firms do not need. This has been a characteristic of banking in this country over the past four or five years and has been directly incentivised by remuneration structures. We have to remove that sort of structure by giving the FCA and the PRA the responsibility to develop a code, expressed here in quite flexible terms, without the excessive rigidity in current European Union proposals. This is a very flexible structure but it focuses on the exact issue of incentives and risk-taking. In that sense, I think that it could achieve an enormous amount in changing the culture in British banking and in ensuring that banking is more stable and significantly safer than it has been in the past.
Lord Turnbull
My Lords, I agree that this has been an interesting debate. I start by thanking the right reverend Prelate the Bishop of Birmingham for his supportive remarks. He referred to the way in which companies print mission statements, values et cetera—what the most reverend Primate the Archbishop of Canterbury referred to as doing the three Ps, or, “Print, pin up and pray”. We have to move beyond that and make these things a reality.
First, I will respond to various speakers. The noble Lord, Lord Phillips, made two comments. One was to ask about all the other people in the City. The remuneration code which exists—I declare an interest as a director of an insurance company—still applies and will apply. The issue here is whether a kind of upper tier is to be created that relates specifically to banks. I believe there is a case for that. He also asked why anybody needs variable remuneration. A number of noble Lords have given the answer to that. One is that base pay builds in fixed costs. In the case of banks, why do you defer? One reason is because, particularly given the way that they are accounted for, profits which look okay today vanish tomorrow—they are ephemeral. You suddenly find that a series of trades that you had valued at a certain level just disappears. You should wait and see until the profits are actually made and then you can pay it out. The argument has also been made that this would tend to raise base pay. A degree of variable pay is actually a beneficial part of the system, although it needs to be controlled.
The noble Viscount, Lord Trenchard, asked about leaving the responsibility to shareholders. If shareholders own only 3% of the business, are they really going to be a sufficiently powerful force, particularly when their investment is highly geared? They share the same incentive as the managers. The managers are, in a sense, overincentivised and the shareholders are the same. The other thing that has come out is that there are strong externalities working in this world. The failure of a bank, and particularly the banking system, has the ability to create havoc over a wide area. The impetus and responsibility on the state to see that the banks provide a continuous service means that other people have a locus in this. You cannot simply allow banks to be run with the entire remuneration system being put into the hand of one set of stakeholders, such as the shareholders.
As for inflation over the past two or three years, my reading is that bank pay has probably plateaued in that period. Most inflation came in the decade before that, when there was precious little intervention from either the state or investors. The noble Lord, Lord Higgins, said that my support for variable pay was based on giving it to them so that you can then claw it back, but the deferral is really there because you want to make sure that these profits have actually been delivered and the benefits then shared with the bank, in terms of its capital, and through dividends. I absolutely agree that many banks are too big to manage. At the moment, a lot of them are shedding activity, although we will have to wait to see whether they are going fast or far enough.
The Minister’s response was pretty much as I expected but there was also quite a lot of “wait and see”. There will be new proposals but what is not clear is how far the Government have really taken onboard that there is a case for going further with banks than with other financial institutions. This crisis owed nothing to the rest of the City; if anything, the rest of the City were victims of it. We were arguing that provisions for longer deferral were more appropriate for banks than generally.
It is partly a question of knowledge; I do not know that people really understand what the remuneration code is. Between now and Report it would be quite good if the PRA or the Treasury could circulate to us what this code now looks like, which propositions are currently being consulted on and which decisions, if any, have not yet been put into effect. We will then be better able to judge whether we think this is going to be adequate, otherwise it really is a case of “Trust us, we’ll get round to it”. But this crisis is six years on. Time is moving on, so simply saying “We will get some further proposals next year” is not enough. A better job needs to be done in informing people of what is currently being considered. They will then be in a better position to make a judgment on whether that is good enough or whether we need to go further. Preferably, to pick up the point that the noble Lord, Lord Lawson, made, if there was quite a lot more time between now and Report we would be able to look at that to get a better understanding of what is in the pipeline.
The final question was about pensions. If you say, “What is in someone’s pension fund is inviolable”, you create an absolute incentive for people to stack money in there. This is about not their contributions but the discretionary payments that the company has decided to put in. Perhaps it has put another £1 million into someone’s pension fund. If that is done on a contractual basis, by saying, “Here is the regular contribution we make to your pension fund and here is the addition that we are making. You should be aware that that bit could be clawed back”, then I do not really accept the argument that says, “It’s your money now—it’s absolutely yours forever and we can never touch it”. You need to set up the basis on which deferred pay is offered in a way that makes it possible to claw it back.
We have seen in two cases, RBS and HBOS, that pensions were a crucial issue. In both cases, by a kind of popular pressure, concessions were made but it should not really need to depend on that. We should not simply accept the story that nothing more can be done. However, there is work needed to understand what the PRA and the Treasury have in mind. That would put us in a better place to take the discussion further between now and Report. On that basis, I beg leave to withdraw the amendment.
Lord Turnbull
“Special measures
(1) This section applies where the FCA or the PRA—
(a) has reason to believe that a bank’s systems or professional standards or culture do not provide sufficient safeguards against the commission of actions in respect of which the FCA or the PRA has power to take action, but(b) do not have reason to believe that any such action has been committed (ignoring any action which is already being investigated or in respect of which action has been or is being taken).(2) The FCA or the PRA may give notice to the bank of the belief mentioned in subsection (1)(a).
(3) If the FCA or the PRA gives a notice under subsection (2), it must invite the bank to make representations showing that sufficient safeguards are in place.
(4) Following the giving of a notice under subsection (2) and the receipt of representations under subsection (3) (if any are made), the FCA or the PRA may commission an independent investigation into the bank’s systems and professional standards and culture with a view to establishing whether sufficient safeguards are in place; and for that purpose—
(a) “independent” means independent of the FCA, the PRA and the bank, and(b) an investigation may not be commissioned from a person involved in the auditing of companies.(5) The bank must cooperate with the investigation.
(6) Following receipt of the report of the investigation under subsection (4), the FCA or the PRA may by notice require the bank to take measures to provide sufficient safeguards and to monitor their effectiveness.
(7) The bank must—
(a) comply with the notice, and(b) appoint an appropriately senior member of the bank’s staff to oversee compliance.(8) Compliance by a bank with a duty under this section may be considered for the purposes of the exercise by the FCA or the PRA of functions under FSMA 2000.”
Lord Turnbull
Amendment 97 would create a regime of special measures. In the report of the Parliamentary Commission on Banking Standards, from paragraph 966 onwards, we argued that regulators should have a power to give notice to a bank where they believe that the bank’s systems, professional standards and culture do not provide sufficient safeguards. First, they could require an independent investigation, and then require a remedial programme of corrective action. This would be seen as a precursor to enforcement. It is basically a way of trying to avoid getting into the morass of enforcement. A similar regime is operated in the US by the office of the controller of the currency. It is called the safety and soundness plan.
Although the amendment refers to the PRA or the FCA, I believe that it would work best if the special measures plan was jointly owned. The twin peaks system of regulation has its advantages but there was always a danger that with each regulator focusing on its specific areas of concern, between them they would fail to capture the bigger picture. There could be a more generic problem of standards and culture and this would be an opportunity to work collectively and engage with the bank.
It may well be that yet again the response is that regulators have these powers already. Indeed, if they believe that the way that a bank is being run is a risk factor, they can impose a capital add-on. However, the argument against all these cases where we have these powers already comes back to if that is case, how did we get into this problem in the first place? What we are trying to establish is whether things will be different in the future. It would help us judge that better if the PRA/FCA could produce a working document on how they envisage using powers of this kind—a special measures regime—where they are looking for generalised improvements in the culture and the way that a bank is being managed. I beg to move.
Lord Newby
My Lords, we agree with the spirit behind the special measures proposal, as the noble Lord expected, but we do not believe it is necessary to give the regulators new powers in this area. They already have the powers to do everything the PCBS has asked. We have therefore been working with them on how they could respond to the recommendation using their existing powers.
The regulators published their responses earlier this month. These responses explain that both the FCA and PRA can, and in fact do, use the powers that they already have to do many of the things that the PCBS recommended and that are included in the amendment. The regulators have a significant range of powers to identify and tackle serious failings, either to rectify existing problems or prevent further consumer loss or reputational damage to markets. In fact, the regulators are able to replicate all the steps outlined in the amendment using their existing powers.
For example, the regulators already have the ability to give notice to a firm through an appropriate mechanism, be it a letter or an e-mail, as a matter of course if they have any concerns or think there may be a problem. The regulators will look to engage with the firm to address the concerns they raise. Whenever it is appropriate, the regulators may request information from the firm under Section 165 of FiSMA. If, following an investigation, the regulators believe further action is needed, the PRA and FCA can use their powers under Sections 55M and 55L of FiSMA to impose requirements on firms to undertake or cease a particular action. These powers can certainly be used to require a bank to adopt additional safeguards or to strengthen its existing safeguards.
Similarly, the regulators can appoint an independent person to undertake investigations using their power under Section 166 of FiSMA to commission a skilled persons report, or under Section 167 to conduct an investigation into the business of an authorised person. Both the PRA and FCA are committed to doing so in instances that they believe add substantially to their understanding of an issue. However, we do not think it is appropriate that the use of an independent person should be a requirement in all cases. There are some instances where the necessary information will be available from other supervisory sources making any such requirement unnecessarily costly and counterproductive.
Finally, there are already duties in regulations made by the regulators that require firms to deal with their regulator in an open and co-operative way. It may be that the noble Lord has not had a chance to look at the responses from the regulators and that, having done so, he will be satisfied, or, equally, that he would like further clarification. I suggest to him and any other noble Lords who have a particular interest in this matter that, if they have any further concerns having looked at those documents, we would willingly arrange a meeting with the Treasury to discuss any further elaboration that the noble Lord feels would help clarify how the system is going to work. Given that the powers exist, we really believe that the special measures powers envisaged in the amendment are unnecessary, and I therefore ask the noble Lord to withdraw it.
Lord Turnbull
I am grateful to the Minister. I think I received a link to the document but never got round to reading it. I will go and find it again and if I cannot find it I will come back and ask for assistance. I welcome the fact that this is recognised as a tool by the regulators. It may be that when I have read the remarks the Minister has just made, I will find that satisfactory.
One other point that I agree with concerns the use of Section 166. At various conferences I go to around the City, people think that Section 166 is probably being overused. Very often you could say, “We want you, the company, to investigate this. You could get it done by your chairman of audit or your chairman of risk or someone else”, but inevitably one of the four accounting companies ends up being a rather expensive and laborious way of doing it. I share the noble Lord’s sentiments on that.
I will go and do a bit more homework. In the mean time, I beg leave to withdraw the amendment.
Financial Services (Banking Reform) Bill
Lord Turnbull Excerpts(11 years, 2 months ago)
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Lord Turnbull (CB)
I speak to Amendments 89 and 90 in my name. A recurrent theme in the reforms to which we have come back several times this afternoon and this evening has been to increase competition in the banking system. This should engage not just the banks but their regulators too. We tabled these two amendments, Amendment 89 relating to the FCA and Amendment 90 relating to the PRA.
The proposal for the PRA is to add an additional objective to promote competition in a way that is as far as possible consistent with its main duty of providing financial stability. The difference between the amendment tabled by the Government and my amendment is sufficiently small that I think we can accept their measure as taking us forward on that front. However, the parliamentary commission also believed that a change was needed to the architecture of the FCA’s objectives. I wish to put the other side of the case. A fear, which many in the financial world share, is that the FCA will give too much emphasis to bringing about change through enforcement, will wait until something goes wrong and then intervene heavily. However, the FCA, when properly directed, can be a very powerful force for improving competition.
As the Minister has set out, the present architecture has the overall strategic objective of ensuring that relevant markets function well, and has three operational objectives below that: namely, the appropriate degree of protection for consumers; enhancing the integrity of the UK financial system; and promoting competition in the interests of consumers. We queried whether the strategic objective did anything or even whether it could be unhelpful and could be used to trump or confuse the clarity of the operational objectives. Our preferred solution was to drop the strategic objective and promote the other three to primary objectives by deleting the word “operational”, thus ensuring that the competition objective comes into the front rank along with the other two. I am rather surprised that the Government have not supported this, particularly as they accepted the pro-competition logic in the PRA case. I was not convinced by the Government’s response with regard to providing a mission statement. My riposte to that is that the chief executive of the FCA thought the strategic objective,
“added little or nothing to the three operational objectives”.
He continued:
“You could argue that promoting effective competition in the interest of consumers and the market, enhancing the integrity of the system and ensuring an appropriate degree of protection encompass everything that is in the phrase ‘ensuring markets work well’”.
Therefore, if you can achieve something in fewer words and with fewer objectives, and the other one is largely redundant, I would dispose of it.
In my view the aspect of FCA culture that most people feel needs to be bolstered is competition. The current architecture is weaker in that respect than the proposed amendment. We have heard the opposing view from the Minister, but that is the logic behind the position which the commission took.
Lord Eatwell
My Lords, I remember discussing this at length during the passage of the previous Financial Services Bill. At that time, I commented that one could often detect whether a proposition made any sense by proposing a negative outcome. If we suppose that the duty is to make the markets work badly, that does not make any sense at all. Therefore, it seems to me that the strategic objective is entirely redundant and serves no useful purpose. Indeed, the idea of changing what were previously operational objectives into prime objectives places competition at that prime level and achieves the objectives which the Government themselves have argued are necessary. For some reason, this issue was never satisfactorily explained previously and has not been satisfactorily explained now. We should apply Occam’s razor and take it out.
Lord Turnbull
“Court of directors to become board of directors
(1) The court of directors of the Bank of England shall become the board of directors of the Bank of England.
(2) Accordingly, in the Bank of England Act 1998—
(a) in sections 1(1), (2) and (4), 2(1), 4(2), (3) and (4), 9A(1), (4) and (5), 9B(1), 9G(2), paragraphs 8 to 12A and 13(1) and (3A) to (6) of Schedule 1 and paragraphs 5 and 14 of Schedule 3, for “court” substitute “board”,(b) in section 2(2) to (4) for “court’s” substitute “board’s”, and(c) in paragraph 14(2) of Schedule 1, for “court” substitute “board of directors, or former members of the court of directors,”;and any reference to the court in any other enactment or instrument is to be read as (as appropriate) being or including a reference to the board.”
Lord Turnbull
I shall speak also to Amendments 84, 85 and 86. I believe that my colleague, the noble Lord, Lord Lawson, may speak to Amendment 87.
For those who took part in proceedings on the Financial Services Bill in 2012 these clauses will be Groundhog Day—fighting old battles all over again. The arguments about accountability are familiar, were set out in great detail in the Treasury Committee’s report Accountability of the Bank of England, and rehearsed again in the report of the banking commission. This is not surprising, given the overlap in membership of the two groups.
The dispute can be briefly summarised. The Bank of England’s responsibilities have been hugely enhanced, and its accountability has changed—one has to concede that—but not kept pace. Not only has the scope of the Bank’s responsibilities grown but so has its nature. It is now not just responsible for generic policies such as monetary policy or financial stability; it also has powers over the lives and livelihoods of individual citizens and individual businesses. It is therefore important that its accountability keeps pace with those changes.
Just as important as the Bank of England’s accountability to Parliament is its ability to be self-critical. This is the key feature about which people were dissatisfied. The Bank should be ready to review what it has done, consider how successful it has been and draw lessons from that. One can see that at some time in the not-too-distant future, the Bank will need to review the whole exercise of QE, which involves the spending of billions and billions of pounds, and be able to review the policy candidly, even when the results may not be entirely satisfactory or the Bank thinks that it can make improvements.
Amendment 84 would abolish the Court of the Bank of England and replace it with a board of directors. This is the most eye-catching measure—after all, the court has existed for 319 years—but not the most important. In a sense, it is what you would do last, having made the other changes to signify that the Bank’s governance had conclusively changed. The court has some desirable features, which were noted in earlier discussions. It is a unitary board and is no longer chaired by the governor. When I worked for the Treasury, I had to recommend appointments to the court. However, it has come a long way from the old 16-member court, which was like an in-house focus group on which every region or interest imaginable was represented. It has been replaced by a 14-member court with five executives and nine non-executives.
The Financial Services Act 2012 genuflected in the direction of improving internal review by creating an oversight committee of non-executives. I would contend that that still does not go far enough. The central recommendation in Amendment 86 is not about whether the court should be a supervisory board or a board of directors; it concerns the abolition of the oversight committee and the transfer of its responsibilities from a committee of non-executives to the whole board—as I will call it—of the Bank.
We are seeking this change because we believe that the responsibility to be self-critical should not reside solely with the non-executive directors but should be fully embraced by the whole board, including the governor and deputy governors. Looking critically at one’s own work should be something that the governors embrace enthusiastically and not have imposed on them. It is illogical to praise the court for being a unitary board but with regard to this particular function —the function of review—to assign self-examination to the non-executive directors.
I should make it clear that, as with the oversight committee, it is not implied that the commissioning of a review is to be done internally. The board should determine in each case how best to conduct it—whether it is to be done internally with help or to be done externally.
The next important element of the amendments relates to expertise. The chairman of the Bank has hitherto been a highly experienced, highly respected, all-purpose FTSE chairman with an industrial rather than a financial background. Amendment 84 requires that whoever is appointed should have experience in financial matters and financial markets. However, looking at the advertisement that has just been issued for the new chair, I wonder whether it has really caught up with the change in the nature of the work that the Bank is now involved in. The words “prudential” and “macro” do not appear in the advertisement; nor do the words “central bank” or “knowledge of central bank work” or “knowledge of international financial policy”—for example, familiarity with the work of the Financial Stability Board. It still looks pretty old fashioned. Therefore, we are trying to change the nature of the people who are appointed to this organisation to reflect the new, wider role that it is taking on.
With regard to the new arrangements, this proposal is not meant to trample over current operations. The review work would always take place at a time when the operation was no longer critical, so there would be a clear difference between reviewing performance in the past and day-to-day operations.
Finally, the Treasury Committee and the parliamentary commission recommended that the board, or whatever it is called, should be smaller than the current one of 14 members. It was recommended that there should be a board of eight, including three internal members—the governor and two deputy governors—and four external members. Although the governance of the Bank has moved somewhat, my contention is that it still does not fully reflect the change in the nature of the work that it has to do.
Lord Eatwell
My Lords, we had a considerable discussion about the creation of the rather unfortunately named oversight committee, given the dual meaning of the word “oversight”, during the passage of the Financial Services Bill, now an Act. I am broadly in sympathy with the argument that the noble Lord, Lord Turnbull, has made, which carries through the logic from the ICB or the Treasury Committee—I cannot remember which had the initial discussions—through the banking commission, looking at the overall problem of Bank of England governance in the 21st century, particularly now, given its greater responsibilities.
I should like to make only one major point, which the noble Lord, Lord Turnbull, and his colleagues, including the noble Lord, Lord Lawson, might like to consider, and that is the business of expertise. I entirely agree that the chairman should be a non-executive with considerable experience of prudential or financial matters. That is fine. However, Amendment 84 then says:
“The persons appointed to be non-executive members of the Bank must have—
(a) experience in the running of large organisations and financial institutions”.
That would exclude a lot of people who would be highly desirable. It would exclude Sir John Vickers, for example, and that seems to me to be undesirable. I am very much in favour of academics being in these organisations, such as Sir John Vickers, and I would not like that area of expertise to be ruled out.
Lord Newby
My Lords, I will answer that question. The principal role of the Financial Policy Committee and its principal area of responsibility is to maintain the stability of the financial system. That is very different from any of the other committees established by the Bank. As for people on the FPC who have any understanding of financial crises, at the moment, Dr Donald Kohn, for example, clearly falls into the category of people with that ability. The former governor believed that he had extensive knowledge of financial history, and therefore there was and is no lack of it on the relevant committees, even without the provision on the face of the Bill.
Lord Turnbull
I listened to the responses to my intervention and divide them into two categories. One is points made by the noble Lord, Lord Eatwell, the Minister and the noble Baroness, Lady Noakes, on specifying expertise and skill. I can see some force in those points. If we are going to have the opportunity, I will try to improve on it. My main area of disagreement is that I just do not agree with the idea that the oversight committee—the repository of who is responsible for reviewing what the Bank has done—should be hived off to a committee of non-executive directors. It should be built into the DNA of the whole organisation. However, I can see I am not going to be able to persuade noble Lords of that, so—
Lord Lawson of Blaby
Before the noble Lord withdraws the amendment, I would like to correct the Minister on what he said before about the noble Lord, Lord King—the former Sir Mervyn King. He is a very old friend of mine, and I can assure the House that in advance of this crisis, he had no knowledge whatever: it was not his interest. He was interested in two things: monetary policy and microeconomics. He was very good at microeconomics, but he had no knowledge or interest in past financial crises at all. He mugged it up later, of course, after the crisis broke. Of course he mugged it up: he is a clever man and able to do so, but I am afraid that the Minister was briefed by his officials to say something totally false and misleading.
Financial Services (Banking Reform) Bill
Lord Turnbull Excerpts(11 years, 2 months ago)
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Lord Turnbull (CB)
My Lords, I, too, am grateful to the noble Lord, Lord Sharkey, for giving us the opportunity to debate this issue, although, as I will make clear shortly, I have come to a slightly different conclusion. When we get to Amendment 103 next week, we will be talking about the RBS good bank/bad bank issue. The Parliamentary Commission on Banking Standards, which more or less in the same paragraph talked about that issue, also recommended that the Government should examine the scope for the disposal of any RBS good bank as a multiple entity. I think that these studies were called for by the end of September. We have now gone beyond that point and I hope that the Minister will be able to tell us when we can expect those reports. To some extent, the amendment in the name of the noble Lord, Lord Sharkey, seeks to pre-empt the conclusion. I should like to wait to see what the Government have to say on this and then take the matter on from there.
There are also other concerns. As well as trying to increase competition faster than would be achieved under RBS’s current plans, we should always be seeking to return RBS to its position as a fully effective lender, particularly to SMEs. We are asking it to reconstruct itself so that it gets back into the private sector and becomes a ring-fenced bank and a non-ring-fenced bank. My concern is that if we also ask it to start work on a regional agenda now, that will simply overload the system and not get it to the point of becoming an effective lender, which is the main priority in the short term.
It is not clear to me that the regional agenda will necessarily be an effective model, particularly when it is created by taking clones of existing bank networks—by simply breaking up the existing banks into smaller bits and trying to run them on the same lines, with much of the same culture and same technology. I wonder whether that will work and whether the future doe not lie in a more disruptive technology that will grow up from below. I wonder why, for example, we are keen on switching. Why will people want to switch from one kind of a bank to another kind of bank if it is just a smaller version of the same kind of bank? I am beginning to think that the real future lies not so much in the break-up of the existing model but in a disruptive technology, with someone doing to banking what Amazon has done to retailing.
It is inevitable that there will be a full market investigation reference to the Competition Commission. Again, I would not start that now, while so much else is going on, but begin somet ime after 2015. My preference would be to fold this regional debate into that, rather than pursue it now.
Lord McFall of Alcluith (Lab)
My Lords, the noble Lords, Lord Eatwell and Lord Sharkey, have done the Committee a service by raising this issue. Four years on from 2010, when the Government came into office, we have much less competition: banks are bigger; the cost of capital, as the noble Lord, Lord Higgins, said, is more expensive; and SMEs’ credit is still drying up. The problem is that British banking lacks a “spare tyre”, as Adam Posen of the Monetary Policy Committee said. I remember a conversation that I had with Stephen Hester when he was chief executive of the Royal Bank of Scotland. He said, “If you have new entrants into the banks, all they will do is replicate the business model that already exists. You need a Google, a Yahoo or a Facebook to have that disruptive technology”, as the noble Lord, Lord Turnbull, described.
I was of the opinion that, as a commission, we should have a referral to the Competition and Markets Authority straight away because this is an area in which, when talking about change, we are talking about years and possibly decades. If we do not get on to this straight away then we will see very little improvement at all in five or 10 years’ time. As the noble Lord, Lord Eatwell, said, if we are talking about establishing regional banks—an aspiration which the most reverend Primate the Archbishop of Canterbury articulated—we need a secure structure. We have to understand how small banks failed. People say, “Well, small banks are just the same as large banks”. I have a quote here from February 2006 in which an individual said,
“we are now in the midst of another wave of innovation in finance. The changes now underway are most dramatic in the rapid growth in instruments for risk transfer and risk management ... These developments provide substantial benefits to the financial system. Financial institutions are able to measure and manage risk much more effectively. Risks are spread more widely, across a more diverse group of financial intermediaries, within and across countries”.
So, the system is safer. The individual who said that was a certain Tim Geithner, whom the President of the United States then appointed as the United States Treasury Secretary. Mr Geithner had a great knowledge of individual institutions but Mr Geithner, like the IMF and others, was clueless about the interconnectedness of the banks, which is why the banks went down. Whether we are talking about large investment banks or small regional banks we must turn our attention to that area of risk if we want a better system.
My noble friend Lady Liddell mentioned the Airdrie Savings Bank. I was privileged to give the 150th anniversary address there. To re-emphasise what she said, the non-executive directors there were local and unpaid. The Airdrie Savings Bank was a fly on the back of the elephant that was the Royal Bank of Scotland. However, the Airdrie Savings Bank prospered and the Royal Bank of Scotland went under. The Chancellor at that time, Alistair Darling, said that he got a call in the morning from Tom McKillop, the chairman of the Royal Bank of Scotland, saying that it would be out of business in the afternoon if the Government did not step in. Surely there are lessons to be learnt there from the small banks.
I do not accept the proposition that small and regional banks are not on. A chief executive of a very large bank said to me in private that we should look at retail banking in the United Kingdom as utilities—as predictable and boring activities. That is the way we should be looking at our banks. I think a referral to the Competition and Markets Authority would be wise at the moment because we will be talking about this issue for 10 or 15 years to come. If we do not look at the structure of retail banking in the United Kingdom, we are simply going to replicate what we have at present. There is an opportunity for innovative thinking. These amendments offer the Government that opportunity and I hope that the Minister in replying will indicate that this is a fertile area and we can get on to looking at a new structure for our banking.
Lord Turnbull
My Lords, these clauses exemplify the maxim, “be careful what you wish for”. The commission recommended that the UK Government should prepare a UK version of the bail-in scheme being negotiated in the EU as a precaution against the possibility that the EU scheme could be delayed. One only has to look at the Solvency II directive to know how long these things can take. We have a slightly different explanation today, which is that we are sufficiently close to finalising the EU scheme that it is safe to proceed to legislate for it. In other words, that implies that this is a substantive scheme, not an interim scheme that might in due course be replaced by an EU scheme. I wonder if the Minister could clarify this.
My only other remark is to say that I very much support the remarks that the noble Lord, Lord Eatwell, has made about people who, once or twice in a lifetime, have a very large sum in their accounts. The other example that could have been quoted is people who sell a business before they retire.
Lord Flight
My Lords, I can see something like a bail-in scheme working satisfactorily with regard to a bank the size of the Co-op Bank, for example, and indeed the proposals to bondholders are effectively a do-it-yourself bail-in scheme. However, in the unlikely event that it was necessary, if a bank as large as Lloyds Bank were in trouble, I find it difficult to believe that the situation could be resolved by a bail-in scheme. This is in part for the reasons that others have given, that the knock-on effects to the rest of the banking system are too large. So while the bail-in system makes great sense, I do not think it can be a sort of universal solvent to the possible need for taxpayer money to be used when huge banks are in trouble, or for so long as we have huge banks.
Lord Newby
My Lords, we now turn to the government amendments which implement another important part of the recommendations of the Parliamentary Commission on Banking Standards on senior persons and banking standards rules. This group also contains a number of amendments to the amendments the Government have tabled. I begin by explaining how the government amendments will deliver the goal of improving standards of conduct in banking.
The Parliamentary Commission on Banking Standards concluded that the current system for approving those in senior positions in banks—the approved persons regime—had failed. It saw it as overly complex and unable to ensure that individual responsibilities were adequately defined or that clear expectations were set for those holding key roles. The commission’s central recommendation in this area is for the creation of a senior persons regime applying to senior bankers. The regime for senior managers in banks will have the following features. It will reverse the burden of proof so that senior bankers will have to show that they did what was reasonable when a bank fails to comply with regulatory requirements in their area of responsibility, or face regulatory action for misconduct. It will have mandatory statements of responsibility, so that whenever someone is a candidate to be a senior manager in a bank, the bank will have to set out clearly what aspects of the bank’s business they will be responsible for. There will be powers for the regulators to make conduct rules for senior managers in banks instead of the old system of statements of principles supported by codes of practice. There will be a requirement that the register kept by the FCA must state who is a senior manager in a bank and give details of regulatory action taken against them.
The new regime for senior managers will also retain the tools which the regulators have under the existing approved persons regime. The regulators will also retain their tough powers under FSMA to impose unlimited fines on, or publish notices of censure about, senior managers in banks. It may sometimes still be appropriate for the regulators to approve people to perform functions that are not senior management functions but which still involve important responsibilities. The Government have therefore chosen to retain the power for the regulator to pre-approve individuals to perform functions outside the senior managers regime. It is for the regulators to determine what functions, if any, should be subject to pre-approval outside the senior managers regime. I am confident that noble Lords will agree that retaining this power is a sensible safeguard at a time when concerns about individual standards in financial services remain acute.
In addition to the regime for bank senior managers, the commission also recommended the introduction of a standards regime that would apply to a wider class of individuals who work in banks. The Government have therefore provided the regulators with a new power to make conduct rules for anyone who is employed by a bank, even if they are not a senior manager or other approved person. This is an extension of regulatory power in relation to individuals, and gives the regulators the power to impose a single set of banking standards rules for all who work in banks. Employees of banks could face disciplinary action if they breach these standards rules or if they are knowingly concerned in regulatory breaches by the bank. The regulators will not be compelled to make conduct rules. They will be able, quite properly, to exercise their supervisory judgment to determine who in a bank should be subject to rules, and what standards to impose.
Finally, the commission also recommended including provision for time-limited and conditional approvals of senior bankers, and longer time limits for the regulators to take disciplinary action against individuals. The Government also accepted these recommendations. Accordingly, the Bill will allow the regulator to grant approval to perform senior management functions in banks subject to conditions, as well as to take steps to vary an approval it has already given, for example by imposing new conditions.
Perhaps I may respond to the amendments tabled by the noble Lords, Lord Brennan, Lord McFall and Lord Watson. Amendments 46A, 46B and 47A seek to ensure that responsibility for preventing money laundering and other financial crime is also a senior management function. The Government agree with concerns that underpin these amendments. UK banks should uphold the highest standards in preventing criminal activity, and not facilitate it. Where there is evidence that banks have not lived up to those standards, the people at the top should be held to account. I reassure noble Lords that the new regime for senior managers will deliver precisely that accountability in relation to financial crime. Therefore, while we can all support the result that the noble Lords want to achieve, I can assure them that these amendments are unnecessary and there are no loopholes when it comes to such matters.
I shall try to explain why. The definition of “senior” is quite comprehensive. It encompasses all aspects of the bank’s operations and would therefore include responsibility for aspects of a bank’s operations that are concerned with the prevention of financial crime, where those aspects could involve serious consequences for the bank, for business or other interests in the United Kingdom. The amendments could in fact have the unintended effect of requiring junior staff with specific duties in relation to financial crime to be treated as senior managers. That would run in the opposite direction to what the parliamentary commission intended, which was to focus on senior persons in charge of all aspects of the bank’s activities.
Amendment 53A has two limbs. The first seeks to ensure the operational objectives that the FCA must consider when making rules of conduct for approved persons or bank employees. I can assure your Lordships that this part of that amendment is unnecessary. The reference to the operational objectives in new Section 64A(1) attracts all aspects of these objectives as defined in Sections 1B, 1C, 1D and 1E of FiSMA, without any additional words.
The second limb of Amendment 53A, and Amendment 53B, would require both regulators to use their new powers to make rules of conduct specifically about the conduct of individuals responsible for preventing money laundering or other financial crime. I am not sure what these changes would add. The Fraud Act 2006, the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2007 already bite on bank senior managers. Adding regulatory rules mandating compliance with statutory requirements would add little. Further, the regulators already have a power to make conduct rules applying to persons in banks who have responsibility for compliance with money laundering regulations and other laws creating financial crimes. We certainly expect the regulators to use this power to make rules about aspects of conduct that include ensuring that firms comply with their obligations relating to money laundering and preventing financial crime. However, to single these areas out in primary legislation adds little bite to the existing regime and is, we believe, unnecessary. I hope, therefore, that noble Lords will agree not to press those amendments.
I also assure the noble Lords, Lord Brennan, Lord McFall and Lord Watson, that Amendment 54A is unnecessary. The reference to an application for approval in a context which refers to a person approved under Section 59 of FiSMA already always means an application under Section 60. There is no other section under which such an application can be made. I hope, therefore, that the noble Lords will agree not to press their amendment.
Finally, I turn to Amendment 100, tabled by the noble Lords, Lord Eatwell and Lord Tunnicliffe. This amendment is the same as an amendment brought forward on Report in another place. The government amendments, which implement the commission’s key recommendations, go much further than the noble Lords’ amendment, which would really just rename the existing approved persons regime as a “licensed persons regime”, and that is all. It would not deliver the real improvements sought by the parliamentary commission. I hope therefore that the noble Lords will agree not to press this amendment. I beg to move Amendment 45.
Lord Turnbull
My Lords, an important finding of the commission was that the existing approved persons regime was flawed. After a debacle wiping billions of pounds off the value of shareholdings, requiring the state to inject billions of pounds into the industry and take huge financial exposures, and after several serious lapses of conduct, according to my researches one person has been fined and another person has negotiated an agreement not to practise.
Our conclusion was that the APR operates mostly as an initial gateway to taking up a post, rather than serving as a system through which regulators can ensure the continuing exercise of responsibility at the most senior levels within banks. A major cause of this flaw was that responsibilities were ill defined and were not joined up, so that those at the top could claim they “didn’t know” or, “It wasn’t me”.
We proposed a two-tier system: a senior persons regime, now called a senior managers regime, covering a meaningful chain of accountabilities, which we wanted to apply to all banks and holding companies operating in the UK; and, below that, a licensing regime, where no prior approval from the regulator would be required to employ anyone but banks would have to take responsibility for ensuring that those they did employ were properly qualified and trained and that they observed a code of conduct. This would apply to those who could seriously damage the bank or the bank’s reputation or harm a customer’s reputation.
The commission welcomes many of the Government’s proposals: defining the functions of senior management; requiring senior managers to have a statement of responsibilities; extending the limitation period for regulators to take enforcement action from three years to six; recording information on a person’s regulatory history so that a new employer can find out important details about whom they are recruiting; and the reversal of the burden of proof on whether a person is fit and proper.
However, serious issues are left unresolved. Amendment 55 provides a definition of a bank to which the regime applies. I found it impossible to discover what the definition means. Does it meet the commission’s objective of covering all banks and holding companies operating in the UK? Would the Minister clarify what he means by “bank”? Could it be a ring-fenced bank, a non-ring-fenced entity conducting investment activities within a group, a whole group or a freestanding investment bank? In our view, the new senior managers regime should apply to all such entities. It would make a mockery of the scheme if, as I suspect may be the case, it applied only to banks taking deposits from the general public—that is, ring-fenced banks. It would be completely unacceptable if the regime did not apply, for example, to the senior managers overseeing the LIBOR traders, to those overseeing rogue traders such as the “London Whale”, to those overseeing the marketing of highly dubious packages of sliced and diced mortgages or to those engaged in the mis-selling of interest rate swaps. I very much hope that the Minister will be able to give us an answer today or address this between now and Report.
There is no mention of the licensing regime, which the commission recommended. The Government said that they would ensure that regulators had the ability to take regulatory action against persons who were not senior persons—senior managers—or who were not subject to prior regulatory approval. There is no mention of the licensing regime in the government amendment. They have come up with something rather different in Amendment 53 on the rules of conduct. It states:
“If it appears … necessary or expedient for … advancing one or more of its operational objectives, the FCA may make rules about the conduct of the following persons”,
and those persons could be any employee of the bank.
I question whether that is the right answer. It is “may” rather than “must”, but I should have thought it essential that the FCA made rules. Is it right that it should apply to all employees from purely backroom or administrative staff? In some ways, the government scheme goes wider but it is possibly too permissive.
The final omission to highlight is that we propose that as well as an initial statement of responsibilities for each manager, there should be a handover note when people change jobs. We think that that is crucial because without it the chain of accountability breaks down, and when someone changes jobs we are back to, “I didn’t know”, or, “It wasn’t me”.
Viscount Trenchard (Con)
I intervene to ask the Minister to comment on some concerns that I have about this new “approved persons” or senior managers’ regime. First, I am worried that it will place British banks at a considerable disadvantage when they try to recruit the most talented managers available, not just from the United Kingdom but from around the world. Everybody agrees that bank management failed, so it is clear that the supervision of senior mangers needs to be enhanced and improved. For example, someone may be offered a job to work in Hong Kong, where he would probably pay less tax anyway, and he is unlikely to run the risk of being individually liable or culpable in that jurisdiction. I am not sure which other jurisdictions intend to introduce some kind of senior managers’ regime such as this.
My second concern is that it seems to me that it is up to the manager to prove that he was not negligent in the exercise of his responsibilities. It is wrong that a senior manager should be deemed to be guilty unless he can prove his innocence. My third concern is that to increase the individual responsibilities of senior managers will have the unintended consequence of diminishing the responsibility of the board of directors as a whole, or the executive committee, risk committee, or whichever committee it may be. I have sat on an executive committee of a bank and often the business being discussed was not my responsibility, but I felt that I should understand what was going on and what the discussion was about because I was collectively responsible as a member of that committee. What worries me is that if it is very clear that the individual manager is going to be responsible, that effectively diminishes the responsibilities of the other members of the committee. It also diminishes the ability of the chief executive to change the responsibilities of his senior team based on his judgment, because it would be too complicated as each department or division would effectively be under the supervision of people outside the chief executive’s control. Can the Minister comment on these points as well?
Lord Newby
My Lords, perhaps I may start by dealing with the three points on which the noble Lord, Lord Turnbull, sought clarification. The first was on the definition of “bank” for the purposes of these amendments. The regime will apply to all UK institutions that have permission to take deposits. That covers ring-fenced banks, other banks, building societies, credit unions and some wholesale deposit takers, but it does not cover things which in popular parlance are called banks but which do not take deposits.
Lord Turnbull
If a bank divides itself under the new regime into a ring-fenced bank which takes deposits and puts its investment activities—derivatives, underwriting and proprietary trading—into a non-ring-fenced bank which does not take deposits, does it mean that that mass of activity will not be covered by the regime? Much of the malefaction took place in that area.
Lord Newby
My Lords, I repeat: it is limited to banks that take deposits, because the view is that they are of a different order of significance in the system. I think that we have a difference of view.
Lord Turnbull
The question then becomes, “Should it be those areas?”, and a question of whether the Minister will take this back to the Treasury and come up with a scheme that includes them. I do not think it will be understood that the people supervising some of the activities that I mentioned are not covered by it. We are actually weakening the regime.
Lord Turnbull
My Lords, this is another example of where we should be careful what we wish for. The Treasury committee and the parliamentary commission both welcomed the Government’s damascene conversion —that was what it was called in our report—announced in the Budget last year to create a payments regulator. However, this has been done in a quite extraordinary way with some 40 pages of amendments having been produced only two or three days before we were due to examine them. Although the new clauses were published following a process of consultation, there does not seem to be time for anyone in Parliament or anyone affected by them to scrutinise them. How can we tell whether what has been drafted is workable, reflects the views expressed in the consultation or will deliver what the Government want? From a procedure point of view, the usual channels might consider whether the gap between Committee and Report might be rather longer than normal so that we get a chance to look at not just this but also at the bail-in provisions as we have only had a small amount of time to consider them.
Through much of the consideration in Committee my view has been pretty close to that of the noble Lord, Lord Eatwell. However, as regards whether this body should be independent or part of the FCA, I am in the other camp. One of the key features here is that there is doubt about whether competition comes high enough up the FCA’s priorities. We shall come to later amendments whereby the parliamentary commission wanted to push competition higher up the FCA’s priorities. The proposal before us serves the interests of competition better than by making the body under discussion another department within the FCA, so there is another side to the case.
Lord Flight
I support these amendments. The biggest part of the Bill is concerned with creating competition in the banking industry. The thought had crossed my mind that we are proliferating yet another regulator but I am persuaded by the argument advanced by the noble Lord, Lord Turnbull, that it might get lost within the FCA which has many other things to focus than competition. However, I make the small point that in the past year the Payments Council has done a good job in bringing in the ability to transfer a bank account within seven days. Although the new body will be more representative, the Payments Council should not be overcriticised for what it has achieved while it has existed.
Financial Services (Banking Reform) Bill
Lord Turnbull Excerpts(11 years, 2 months ago)
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Lord Turnbull
“Reviews142J Reviews of ring-fencing
(1) The Treasury must make arrangements for the carrying out of reviews of the effects of the operation of the provision made by or under this Part in relation to ring-fenced bodies, including ring-fencing rules made by the PRA and the FCA and any rules made by the PRA and the FCA under section 192JA (rules applying to parent undertakings of ring-fenced bodies).
(2) The first review must be completed before the end of the period of 4 years beginning with the date on which section 4 of the Financial Services (Banking Reform) Act 2013, so far as it inserts this section, comes into force.
(3) Subsequent reviews must be completed before the end of the period of 5 years beginning with the date on which the previous review was completed.
(4) Not less than 9 months, nor more than 12 months, before the date on which a review is due to be completed, the PRA and the FCA must publish a joint assessment of the impact of the operation of their ring-fencing rules.
(5) For the purposes of this section, a review is completed when the report of it is published.
142JA Persons by whom reviews are to be conducted
(1) The Treasury shall appoint not fewer than 5 persons to conduct a review of whom one is to chair it.
(2) A person may not be appointed to chair a review unless the chairman of the Treasury Committee of the House of Commons has notified the Treasury that, in the chairman’s opinion, the person is likely to act independently of the Treasury, the PRA and the FCA in carrying out the review.
(3) The persons appointed to conduct a review must include at least one person with substantial experience in central banking or financial regulation at a senior level.
(4) The reference in subsection (2) to the Treasury Committee of the House of Commons—
(a) if the name of that Committee is changed, is to be treated as a reference to that Committee by its new name, and(b) if the functions of that Committee (or substantially corresponding functions) become functions of a different Committee of the House of Commons, is to be treated as a reference to the Committee by which the functions are exercisable;and any question arising under paragraph (a) or (b) is to be and any question arising under paragraph (a) or (b) is to be determined by the Speaker of the House of Commons.142JB Reports of review
(1) The persons appointed to conduct a review must give the Treasury a report of the review.
(2) The report must include an assessment of the extent to which the provision made by or under this Part in relation to ring-fenced bodies, including ring-fencing rules made by the PRA and by the FCA, are facilitating the advancement by the PRA of the objective in section 2B(3)(c) and by the FCA of the continuity objective.
(3) If the report is made before section 4 of the Financial Services (Banking Reform) Act 2013, so far as it inserts section 142JD, has come into force it must also include a recommendation as to whether or not section 4 of that Act should be brought into force to that extent.
(4) The report must include—
(a) recommendations to the Treasury as to the provision that should be included in orders and regulations under this Part, and(b) recommendations to the PRA and FCA about the provision that should be included in ring-fencing rules.(5) The Treasury must lay a copy of the report before Parliament and publish it in such manner as it thinks fit.”
Lord Turnbull (CB)
I shall speak also to Amendments 10, 14 and 116 in the group. I also express my regret that I was unable to take part in debate on Second Reading. All these amendments relate to the so-called first reserve power, under which a ring-fenced bank group which fails to respect the principles of ring-fencing can be required to divest itself of the non-ring-fenced assets.
First, I must congratulate the Minister on surviving the reshuffle, despite the fact that his tenure is rapidly approaching the average for a junior Minister in the Treasury. More importantly, I must record my congratulations to the noble Baroness, Lady Kramer, on her promotion to Minister of State. She has been an excellent colleague to all of us on the Parliamentary Commission on Banking Standards; she will be sorely missed in our deliberations.
Let me say a few words of introduction. It was always inherent in the timetable of the parliamentary standards work and the timetable of the Bill that many of the clauses to implement our recommendations would need to be introduced in the Lords after completion of the Commons work, but we have certainly ended up with more than we bargained for, with total amendments running at 116 pages and government amendments accounting for 95 pages of that: more than three times the length of the original Bill. That tells us something about the process of legislation. We are dealing with amendments to amendments to amendments which are in turn amending statutes that have already been amended more than once.
The Government’s response to the parliamentary commission’s report stated:
“We today set out plans to implement the major recommendations of Changing banking for good”.
The reality, however, is somewhat different. There are recommendations that HMG have faithfully embraced and provided proposals to implement them. There are also recommendations where the Government say that they accept them but the provisions in the Bill dilute them to the point where they may be ineffective or where they say that legislation is not required: I am sure that we will hear that plea quite often. There is also a long list of recommendations which the Government have rejected or simply ignored: recommendations on leverage, proprietary trading, special measures, a new regulatory decisions committee for banking, the strategic objective of the FCA, and so on. Of course, in Committee and at Report, I and my colleagues on the parliamentary commission will seek to work constructively with the Government to bring us closer to our recommendations so that we succeed in achieving the purpose of the title of the report, which was Changing Banking for Good.
We are locked into this unsatisfactory legislative process, and we will therefore need a degree of flexibility. In debate on a previous financial services Bill, the noble Lord, Lord Eatwell, sought and secured some relaxation of the constraints on speaking at Report. I would certainly support him if he seeks similar dispensation this time.
I turn specifically to ring-fencing, which is the subject of the amendments in this group and the background to it. There was a vigorous debate within the commission on whether to endorse the ring-fencing plan of the independent commission, the Vickers commission. By the time we started work, the Government had effectively told us that they were minded to accept it. Alternatively, should we continue to press the case for full separation of investment banking activities from commercial and retail banking, in effect adopting a UK version of Glass-Steagall, which the US had operated for many years but which was eroded and finally abandoned? The arguments for this were, first, that investment banking activities are inherently riskier and so imperilled the continuity of regular commercial banking and, secondly, that there was cultural contamination in that there were attitudes to risk and remuneration which were alien to good customer-focused banking.
Lord Blackwell
My Lords, I must express some reservations about the arguments put forward by the noble Lord, Lord Turnbull. It is not that I do not understand the significance of having continuous and effective review of these ring-fencing procedures, but it seems to me that we have set up, with a lot of time in this House and the other place, a regulator that has learnt in that legislation and its constitution and objectives many of the lessons of the past, and we have entrusted that regulator with maintaining the stability of the financial sector and enforcing this legislation, if the Bill is passed. I think there is a danger in seeking to replace the regulation of an industry by an independent regulator with what might be in danger of turning into regulation by parliamentary committee. Parliamentary committees have many virtues and values, but they cannot engage dispassionately in the same evaluation of detailed analysis and commercial information that a regulator can, and they are more likely to be swayed by current opinions of the day. I pay tribute to the work of the commission on which the noble Lord, Lord Turnbull, and other noble Lords sat, which did an excellent job. I worry about the possibility of moving away from regulation by independent regulators, which are deliberately made independent of the Executive, towards regulation by parliamentary committees.
Lord Turnbull
The noble Lord, Lord Blackwell, referred to the fact that this might become a parliamentary committee. I think it is very clear that this would not be a parliamentary committee. The person who chairs it should,
“act independently of the Treasury, the PRA and the FCA”.
It would be much more like the Vickers commission.
Lord Blackwell
I thank the noble Lord for that clarification. I was responding to the fact that the amendment suggests that the chair should be approved by the chairman of the Treasury Select Committee. That would certainly alleviate some of my concerns. Nevertheless, the main point is that if we have an independent regulator, we should trust that regulator to do the job we have asked it to do. That does not prevent Parliament, or any Select Committee of Parliament, conducting its own reviews at any time it wishes, or appointing other reviewers if the circumstances require it.
I must just add that my concerns on that would be even greater if this was required to happen at two-yearly intervals, as suggested by the noble Lord, Lord Eatwell, rather than at five-yearly intervals, because the task of the regulator with a permanent body looking over its shoulder would then become almost untenable.
Lord Turnbull
My Lords, in responding to the points that have been made, I want to make it clear that the commission is not seeking to use this Bill to reopen the position we have reached and try to get us back to a policy of separation. What we have is a policy of ring-fencing plus safeguards plus vigilance. I listed some of those safeguards at the start. If that is the policy we are on, we have to make the safeguards and vigilance work. In response to the Minister, I do not think that a process in which the reviewing is done by one of the key players in it, which is the Prudential Regulation Authority, carries any credibility whatever. Its work is important and it should be a contribution to a wider study, and the wider study should be undertaken by someone who is independent of it.
The other argument used by the Minister was that we do not want a state of permanent vigilance. I do not think that it is possible, in an industry which is highly innovative—reference has been made to the term “half-life”—that you can find one system that will last for ever and therefore you need to be able to keep an eye on what you have created and make sure that you are taking steps to keep to that policy until such time—which may be the point of the amendments we shall come to in another group—that you conclude that it is not working. But the search for something which you can just do and then simply routinely maintain is an illusion. If ring-fencing is to be the policy, it is absolutely essential that it is backed by maximum vigilance and some high-powered mechanisms for review. I really do not think that what the Minister has promised us today meets that requirement.
The Minister pointed out that there are of course two reviews here. The other one is much less important and serves a completely different purpose. It is to safeguard a bank that has been threatened with separation against the arbitrary behaviour of its regulator. You could ask why that is needed because there are other safeguards, but if you do not have it, you come to the question of whether the Regulatory Decisions Committee, which is a step on towards the tribunal, should be beefed up. However, that is a recommendation we will come to, which the Government have not accepted. I do not think that the lesser review, the Amendment 10 review, can be taken off the table. If you do that, you increase the case for Amendment 91, recommending a new RDC. My conclusion is that we have not reached an agreement in this area. The debate is interesting, but what it means is that a lot more work has to be done between the opposition, the commission, other members and the Treasury to get to a point of resolution. However, it is essential that the point we reach has a much more high-powered review mechanism in it than is currently set out in subsection (6). I am content to withdraw the amendment on the basis that further discussions between now and Report will take place and that there will be flexibility on the part of the Government in their consideration.
Lord Eatwell
My Lords, as I have tabled an amendment to the amendment moved by the noble Lord, Lord Turnbull, I believe that it is for me to withdraw my amendment first and for him to follow. The noble Lord, Lord Deighton, has two objections to the process of review, both of which have, I think, been demonstrated to be false. He said that the first was to secure consensus. From the discussion today, he should be effectively disabused of the idea that the ICB has secured consensus. People have settled around the ICB as the best that can be obtained under the current circumstances, but there is a considerable degree of uncertainty about whether the ring-fence is actually a good idea.
The noble Lord also said that he wanted certainty, but he absolutely does not get certainty in this way because we are very uncertain as to whether this system will actually work. That is why his second objection—that time should be given for the system to settle down and work—is a very dangerous one. As we go through the process of implementation—if eventually Parliament agrees to these ring-fence proposals and implements them—we will discover by sheer practice where the lacunae may be, where things simply go wrong with unintended consequences, and so on. Unfortunately, we will be conducting an experiment and under those circumstances, it is very important that the sort of expert committee that the noble Lord, Lord Turnbull, has proposed, focusing on the particular question of whether this works, with growing expertise and experience, should be in place to review what is happening as the process unfolds.
That is why in particular I was very nervous about one aspect of the proposals of the noble Lord, Lord Turnbull, with respect to the review not taking place for four years and then taking place at five-year intervals thereafter. Although it is “up to” four years, I would be willing to bet that the “up to” will turn out to be about two. None the less, my amendments were intended to ensure particularly that we have the expert committee proposed by the noble Lord, Lord Turnbull, virtually in place as a standing committee with the expertise to guide us through what is going to be a very difficult and uncertain process.
Given the debate, and the views expressed around the House, this is a matter to which we certainly must return after significant negotiations have occurred between Committee and Report stages to try to achieve something of a consensus—at least on the issue of the nature of review. In the mean time, I beg leave to withdraw Amendment 4.
Lord Turnbull
I very much welcome this simplified process. It took two steps for the Government to get there, but the prodigal son is welcome at any time. Let us pocket that. I said we would look again at this special review that the commission suggested inserting into the process. I noticed that the Minister was drifting on to the next group, and I thought I was going to introduce it, but let us come to that at the appropriate time.
Lord Eatwell
My Lords, I echo the words of the noble Lord, Lord Turnbull. I think this is a significant improvement on the procedures that were previously outlined. I have a number of exploratory questions about this procedure. First, the regulator essentially seems to be judge and jury in this respect. It was the role of the old Regulatory Decisions Committee and, I believe, the ambition of the commission with respect to its development of the Regulatory Decisions Committee to ensure that there was an independent step in any major regulatory enforcement. The main reason why that was introduced into FiSMA was because it was felt that otherwise it would contravene human rights legislation. Are the Government confident that this procedure does not contravene such legislation?
Secondly, with respect to the publication of notices, in the very thorough and welcome briefing that the Minister’s staff provided on these amendments, the Government argued that they would not accept the commission’s proposal that the existence of a preliminary notice or of various stages be publicised. Instead, it was felt that these matters should be kept “secret” until such time as any impact on Stock Exchange listing rules demanded publication that the group was being subjected to such a procedure. It seems to me that this is a slightly dangerous structure. It is a traditional structure of central banks. It has always been strongly opposed by securities regulators which believe much more in transparency in this respect. This lack of transparency is likely to produce rumour and false information in the marketplace. Consequently, if we are going to have this procedure—which I think is well thought out, apart from the one issue that I raised, on which I would like to have assurances—we should make it a transparent procedure because rumours and false information are really damaging to markets. Transparency is always to be preferred, even if that transparency may be extremely uncomfortable for the firm being subjected to this process.
Lord Turnbull
“Full separation142VA General requirement of separation
(1) Where the members of any group include one or more ring-fenced bodies and one or more other bodies, the members of the group must, before the end of the period of 5 years beginning with the relevant commencement date, take steps to secure that there are no members of the group that are ring-fenced bodies.
(2) If in the case of any group steps to secure that there are no members of the group that are ring-fenced bodies are not taken within the period specified in subsection (1)—
(a) at the end of that period the Part 4A permission of each member of the group that is a ring-fenced body shall be treated as having been cancelled to the extent that it relates to a core activity, and(b) after the end of that period the appropriate regulator must refuse to give any member of the group a Part 4A permission to carry on a core activity.(3) At the end of the period specified in subsection (1)—
(a) in section 142H, subsections (1)(b) and (4) to (7) and, in subsection (8), the definition of “specified”, and(b) sections 142K to 142V,cease to have effect.(4) In subsection (1) “the relevant commencement date” means the day appointed for the coming into force of section 4 of the Financial Services (Banking Reform) Act 2013 so far as it inserts this section.”
Lord Turnbull
I referred to the second reserve power, which would allow that where, in the commission’s view, it was felt that not just a single bank but the banking sector as a whole was not respecting the constraints of ring-fencing and the scheme was basically not working, it could move by steps to full separation. Of course, this second reserve power was predicated on the assumption that there will be a fundamental review of the kind that some of us have been arguing for. If all that we have is the PRA-led review of the kind that the Government have been seeking, we would certainly not have a sufficiently strong basis. However, the review we are seeking is based on a view of the world in which, first, there is continuous innovation and, secondly, other jurisdictions are making changes—notably in the EU. At some point that, combined with the behaviour of a banking sector, may lead to the conclusion that there should be a further change. Deciding that this scheme is not working does not necessarily lead you to full separation; it could lead you to something else, such as tightening the regime or some other modification.
We have had this argument about the review. However, then you get to the real crunch, which is that even if there is agreement on the review, and the review says that ring-fencing needs to be changed in some way, this amendment says that the further action that has been identified and recommended by a son of Vickers could be implemented under the powers of this Bill. That is the fundamental disagreement. The Government argue that that means that you are doing something completely different. I argue, first, that getting legislation is not an easy thing to do—you have to compete for time; and, secondly, that not being able to implement the conclusions of such a review reduces the effect of the deterrence and increases the opportunity for lobbying. In any case, the Government would have the last say in the scheme that we have devised. Therefore, if there was a recommendation from a Vickers mark 2, the Government would not be forced to act on it: they could decide that they did not want to act on it and did not have to accept it. Equally, if they wanted to, they would be able to. The position is asymmetrical. Since the Government have a veto, they cannot be railroaded into a policy that they do not want. However, if it is a policy that they do want, they have the power to accept it and act accordingly. That is the basis of Amendment 23, which refers to this power, and of Amendment 117, which states that you cannot exercise this power until a fundamental review has taken place.
Lord Blackwell
Could the noble Lord explain the drafting of Amendment 23? As I understood his explanation, it was that this would be a contingent power that the regulator could enforce if necessary. The way the amendment is drafted, proposed new Section 142VA gives the impression that it would be a requirement regardless of any other condition. Perhaps the noble Lord will clarify how it will become contingent on the regulator deciding that it is necessary.
Lord Turnbull
If the drafting does not say that, we will have to amend it. The clear intention is for this to be a power and not a requirement. I beg to move.
Lord Lawson of Blaby
Perhaps I may say something about this. As the noble Lord, Lord Turnbull, mentioned, we retrenched on this in discussions on earlier groups. This is something to which I attach great importance. The noble Baroness, Lady Cohen, said that the commission had got it all wrong, that ring-fencing could not possibly work and that there would have to be complete separation. I agree with her—and this is no surprise. I was speaking out for complete separation long before almost anybody else I can think of, certainly in this country. For five years I have been writing and speaking on this: before the parliamentary commission and before the Vickers report. It remains my view that this is most unlikely to work, partly for reasons that the noble Baroness gave and partly for others.
Of course, as the noble Lord, Lord McFall, pointed out, we on the commission decided that it would be sensible to have a unanimous report. There was no majority on the commission—and certainly not unanimity—for complete separation. Therefore, we proposed what we proposed. One thing we proposed, which is what this group of amendments is about, was a route to complete separation. This is what the amendment is about: a process by which, if it is seen, and events prove, that the noble Baroness and I are correct, along with many others who think the same, this procedure, which the Government at the present time refuse to accept—something I regret—is a way in which we might get there.
When I asked the Minister what the great advantages were of universal banking, from which we should in no way depart, his main argument was that diversity was a form of strength. I am old enough to remember when industrial conglomerates were extremely popular. In the late Lord Hanson’s group, and others, there were a whole lot of disparate industries in the same holding company, and the argument was that this diversity was a form of strength. In fact, of course, it was a disaster and nobody argues the case for industrial conglomerates any more.
Lord Deighton
Yes, there would be a review, but not a proper parliamentary process. The argument I am making is that this is such a switch from ring-fencing to full separation that it should benefit from that full process. While I obviously bow to the experience of my noble friend Lord Lawson, these things, if the circumstances dictate, can be done extremely rapidly, where the circumstances demand that kind of urgent move.
I think it is instructive to compare the process of developing the ring-fencing policy to that of this proposal for full separation. The ICB went through an extensive process of deliberation and analysis, carefully collected data, prepared a full cost and benefit analysis and compared that to full separation. It found that a robust ring-fence will insulate essential retail banking services from shocks originating elsewhere in the financial system. It will enhance the authorities’ ability to manage the failure of a ring-fenced bank, or its wider corporate group, in an orderly way. It will, therefore, deliver the financial stability benefits of separation. Ring-fencing will also preserve some of the benefits of universal banking. I made the argument of diversification and scale, not simply diversity. Customers will be able to access the full range of services from a single group: that is a marketing advantage as well. The frictional costs to the economy of ring-fencing are therefore lower than those of full separation. That is, of course, the reason we did not go for full separation. Further, in the event that the ring-fenced bank runs into trouble while the rest of the group is doing well, other group members can support it. That, of course, would not be possible under complete separation.
On a comparison of the costs and benefits, the ICB chose ring-fencing as the superior policy. The PCBS did not provide any new evidence to contradict this position. In this respect, the noble Lord’s proposal for an independent review of ring-fencing is an admission that the evidence base for full separation does not yet exist. The amendment asks us to put a policy into law and then establishes an independent review process in the hope that it might justify it. For us, this is lawmaking done backwards.
That brings me to the Government’s second and perhaps more powerful reason for rejecting this amendment. Let us imagine that a future Government decided that not ring-fencing, or full separation, but a third policy was appropriate. Imagine, for example, that it decided that a Volcker rule was the right policy, or a shift to full-reserve banking. In either case, a review that was limited to deciding whether to enact a reserve provision for separating ring-fenced banks from their groups would be no use at all, and the power would need to be repealed, along with much of the rest of the Bill. Coming back to Parliament would be the only way to give a future Government wanting to change policy the full range of options.
Therefore, on grounds of both substance and of proper legislative process, the Government continue to oppose a reserve provision for a move to full separation and I therefore urge the noble Lord to withdraw his amendment.
Lord Turnbull
I think the Minister has erected a straw man here. The straw man is that there is a quite lightweight review, possibly of the kind that he is recommending, rather than the kind others are recommending, and then there is a day in the Commons and a day in the Lords and, bingo, this huge change takes place. What the commission envisages is a resurrection of the ICB. It is not a coincidence that the number five was chosen, as that was the number that worked on the ICB. The ICB went through all the steps that he claimed, of looking at the options, the cost benefits and so on, and evidence was taken in various Select Committees. Therefore, there would be an enormous amount of public discussion, inside and outside Parliament, before this was enacted. That seems to me to be the process and I cannot see what is wrong with it.
The other point is that the Minister downplays the incentive effect. If you have one bank which has no incentive to test the system and is very happy with its niche in the market and it sees another bank pushing very hard at the limits, what is its incentive? Does it simply turn a blind eye? Under this arrangement it has an incentive to support suggestions that the other bank should be reined in, otherwise it then brings big change on the sector as a whole. So it produces, it seems to me, the right incentive set for all the players in the banking sector.
The Minister has heard a lot of quite strong opinions on this. As I said at the start, the prior condition of all this is a proper review arrangement. If that is in place, this is, in the opinion of many, a sensible power to have. It can be enacted, but if the view is that some alternative to separation is better, there is no problem; the Government can go down a different channel. If they want to extend separation, they have the power to do so. As with the first reserve power, further discussions need to take place. I think the divisions here are more fundamental, but, equally, I think the strength of opinion is also more fundamental. None the less, I beg leave to withdraw the amendment.
Financial Services Bill
Lord Turnbull Excerpts(12 years, 2 months ago)
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Lord Peston
My Lords, I support my noble friend’s amendment, but I would like to place it in context. I start from the position that the Minister started from when he reminded us that the Bill and these regulators have not been picked like a rabbit out of a hat. There was a problem to be solved and this, even though I do not like aspects of it, is the Government’s best attempt to solve it. There was a problem in this sector of the economy, the public demanded that something be done to prevent it from happening again and the solution is regulation. Since the only alternative solution that I know about would be to nationalise the whole of the financial sector, which I would not favour, the Government are clearly doing the right thing in broad terms—even though, I repeat, there is a lot of this Bill that I do not like.
The second aspect of the context is the old adage, “Quis custodiet ipsos custodes?”. The trouble is that once you go down that path, you get an infinite regress; whoever you set up to regulate the regulators, you then ask, “Who’s going to regulate them?”, and it goes on for ever. We ought to bear that in mind.
My general point is that, while I hope that the Government will either agree precisely to my noble friend’s amendment or come up with a suitably tweaked amendment of their own, we should not be naive about this. The moment the regulator starts looking at any particular organisation—and certainly when it starts considering, suggesting or indeed issuing a warning notice—the idea that this will not leak out is a bit on the naive side, to put it bluntly.
Although I support my noble friend’s amendment, I think she will agree that it does not protect us from the world in which we live, a world in which there is, in a sense, money to be made by leaking secrets. I believe that the Government ought to go down the line suggested by my noble friend and respond sympathetically, but whether or not I live long enough to see the first case that arises, I would not be in the least surprised if the first warning notice gets leaked within minutes of being sent. That should not stop my noble friend from going ahead with this, but it illustrates that some of us are rather cynical when it comes to what happens in the world in which we live.
Lord Turnbull
Can the noble Baroness clarify for me what right the accused has to make representations to this committee? Does it simply take the presentation of a case from the FCA and examine that for its strengths and weaknesses, or is representation from those accused of the regulatory breach built in? To answer the noble Lord, Lord Peston, it is a criminal offence to leak the existence of a decision notice before its appropriate time.
Lord Sassoon
My Lords, I go back to the overall picture on this and to the previous group of amendments. This is a necessary area of additional powers that must be in the authority’s armoury. We will take a power to look at the whole thing again if it does not operate properly. However, on this specific amendment, we are probably all agreed—this is where I can be sympathetic if not positive in response to the challenge by the noble Lord, Lord Peston—that it is necessary for there to be appropriate checks and balances. The question is whether we can rely on the judgment and good sense of the successor regulators to do appropriate things without having the stick of legislation on them. In this specific area, everyone seems to have plenty of criticisms of the FCA, many of them justified. However, the Regulatory Decisions Committee was established by the FSA, although it is not required in statute.
I understand why people are nervous about what the successor bodies will be putting in place, but it is important to recognise that the RDC structure—which everyone this afternoon seems to love and wants to hard-wire into the legislation in some form—was put in place by a regulatory body that was given a broader remit, used its judgment as to how best to have this independent challenge and scrutiny of decisions, and put that in place. Now we are saying, which I do not agree with, “Well, the FSA did such a good job in putting it in place that we are not going to trust it to exercise appropriate judgment on your successor’s shape, so we need to hard-wire that in”.
My starting point is that the authorities will establish appropriate procedures. This afternoon we are very much talking about the FCA side of it. What is appropriate for one authority is not necessarily appropriate for the other successor authority. While I am of course sympathetic to the end objective here, the question is what it is necessary to put in place that goes beyond the current framework within which the FSA established the RDC, which people like. I believe that it is appropriate to leave the successor authorities to make their own decisions on this point.
Financial Services Bill
Lord Turnbull Excerpts(12 years, 5 months ago)
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Viscount Trenchard
My Lords, I had considerable sympathy with the amendment of the right reverend Prelate, which I found rather clearer and easier to understand than I did the explanation of the noble Lord, Lord Barnett. I am not convinced that appointing an additional two deputy governors is necessary because I believe these three sub-divisions of the Bank could be rationalised. However, appointing deputy governors will tend to make the governance of the Bank of England more rather than less level in that if you have a governor and one deputy, only one person comes close to challenging the governor’s authority. As proposed in the Bill, there will be three deputy governors, which will mean that the perception of the balance of power will be more level than before.
It is completely unnecessary for the governor to chair the Financial Stability Committee, because the governor chairs the court and the Financial Stability Committee is a sub-committee of the court. It is not right that the chairman of the court—that is, the governor—should also chair one of its own committees. That is highly illogical.
Viscount Trenchard
I apologise to the noble Lord and I stand corrected. Perhaps the governor should chair the court. However, where possible, the deputy governors rather than the governor should chair the sub-committees.
Lord Turnbull
My Lords, I am not in favour of the amendments. First, there is the post of the deputy governor for prudential regulation. This is the old head of the FSA, in so far as it deals with macroprudential regulation, who is given the status of deputy governor in order to bring him into the councils of the bank. No extra posts or salaries are being created here. One might have been created by the creation of the FSA, but that is not here.
Secondly, as to the checks and balances on the governor, I do not think that a committee as important as either the NPC or the FPC being chaired by his deputy is a good way of exerting supervision of the governor. You cannot work for someone and supervise them at the same time.
At the moment, the governor chairs these committees and brings their thinking together; and, as we discussed earlier, there are other mechanisms around the court or the oversight committee—whatever it is called—that check the over-mighty power of the governor. Using one of his deputies to do this does not make sense.
Lord Peston
My Lords, I shall not talk about the Treasury representatives because we have an amendment relating to them later in the list and I shall save my vitriol for then.
I did not understand Amendment 9 until the right reverend Prelate the Bishop of Durham spoke. I am grateful to him because I now understand it. In essence, he is saying that three different people ought to chair the three different committees, which makes perfectly good sense. Chairing a committee is an important task and would involve a great deal of work, and I am sympathetic to the amendment.
However, going back to my and my noble friend Lord Barnett’s amendment, these appointments are only titular. It is not for your Lordships’ House to decry those who like titles. In other words, if there are three people, men or women—although I am afraid that these days it seems to be all men in the Bank of England—who want to be called deputy governor, it is no big deal. If it turns them on, and if a wife refers to her husband as the deputy governor and that cheers her up, why not? However, I am concerned as to whether it is more than that in two ways. First, do you get paid more for being a deputy governor? The Minister keeps telling us that we have to be economical, so we have to ask whether this is the correct way to spend money.
More specifically, the amendment is also about the following. First, can we have a full job description in each case? Does a full job description for these three posts exist, and if so can we see it? Secondly, how are the three of them appointed? For example, are the three jobs advertised, and can someone from outside apply to be a deputy governor with appropriate references, experience and so on? Thirdly, who appoints to this post? Those are the questions that I wanted answering. In the transparent, modern world in which we live, the answers should be that anyone can apply for these jobs, that the jobs should be advertised, and that there should be a precise job description and a proper appointing panel. That is the world in which we live, so I hope that the answer to all my questions is yes.
Lord Turnbull
My Lords, the amendment raises a very important question, largely unresolved, about what responsibility the Executive and the legislature have for public appointments. The truth is that we have not found a definitive solution to it.
There is a case for the status quo, which involves the candidate being interviewed by the Treasury Select Committee and, if the Minister ultimately decides that he wishes to go ahead with an appointment, the Minister being free to make the appointment. However, the bar has been raised and it has been made more difficult to bring forward a candidate of poor merit. There are also advantages to the candidate of the kind that the noble Lord, Lord McFall, has just mentioned.
The second option is for the candidate to be interviewed but for the committee to have a veto. At the moment we are still talking about appointments, and that is what we have with the OBR.
The third option is the scheme that was the subject of a report by the Institute for Government, under the chairmanship of a much beloved Member of this House, the noble Lord, Lord Adonis. It suggests dividing candidates into two tiers. These are unambiguously tier-1 appointments. The Chancellor of the Exchequer or the Government propose someone and the candidate is then interviewed. If the committee is dissatisfied, it then summons the Minister to defend their case. If there is still no resolution, the matter goes to the whole House; it does not simply go back to the Select Committee. The OBR case, which I may have voted for at the time, is a bit of an anomaly. You either stay where you are or go for the wider power. If there is a serious disagreement, the whole House should be involved.
As for dismissal, this is in some ways even more important. If the Government are to remove the Governor of the Bank of England, the issue is so big that it should go beyond the Treasury Select Committee and be a matter for the whole House. However, there is one caveat. Did he jump or was he pushed? I can think of many instances, including that of the Commissioner of the Metropolitan Police, where someone might resign because their position has been made untenable. The Minister may say, “I did not sack him. It had nothing to do with me. He decided to go”, yet all the time he has been pushing away, undermining his position. We do not really have very much control over that as that has to be a question of conduct. I have some sympathy with the principle that this post, particularly if it comes to a dismissal, needs some very powerful protection. However, if it is that important it should be referred to the whole House and not simply to the committee.
Lord Phillips of Sudbury
My Lords, I am afraid to say that I agree with the final remarks of the noble Baroness—it is a no-brainer.
I speak as a weary lawyer who is tired unto death of our legislation getting more and more prescriptive and complex as well as longer. If we cannot trust the Chancellor of the Exchequer to exercise sensible judgment in a matter of this kind then, frankly, he or she should not be Chancellor of the Exchequer. If, as it says in the amendment, the member has to add to diversity, what about integrity and independence? You could go on and on adding to and subtracting from the characteristics. I know that that is reflected in other parts of the 1998 Act but the amendment, for all its good intentions, is unnecessary and potentially disruptive.
If you want to play legalistics with this, you might ask what will happen if you have a full diversity of opinion on your board or court. Do you still have to add further diversity when you have got a full hand of diversity? As the provision is drafted here, you would. It is unpoliceable. For all those reasons, and despite its excellent intentions, I am against the 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 Turnbull
My Lords, we have a great deal of common interest here that would advance the position of the court. We have two rival schemes, one in Amendment 11 in this group, the other tabled by the Government. We can mix and match here. The sense is that we prefer the Amendment 11 reference to the court, but we prefer the amendments in the government group, particularly about whether these amendments are made using internal or external resources, or whatever. If we put these two things together, we have a rather good scheme.
Lord Phillips of Sudbury
My Lords, I want to enlarge on the question I asked my noble friend just before he sat down. The point has been made from different quarters of the House about the desirability or otherwise of having yet another committee. However, whichever way that argument goes—and I note the rather odd situation that this oversight committee is to be a sub-committee of the court, and the composition of the court and the composition of the oversight committee are precisely the same—
Financial Services Bill
Lord Turnbull Excerpts(12 years, 6 months ago)
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Lord Turnbull
My Lords, this Bill illustrates much of what is wrong with our legislative process. It has arrived with many major issues unresolved. Worse still, large areas of the Bill have not yet even been considered. It reminds me of those French paperbacks that we used to buy where the pages had not yet been cut.
I agree with the noble Lord, Lord Eatwell, that there is a problem with the way in which the Bill has been presented as amending legislation to three other major Bills. That is totally illogical. If the Government were to argue that they were refining the status quo, that would have been appropriate but they are, of course, claiming precisely the opposite. One of the drawbacks of the amending approach, for example, is that it is very difficult to make comparisons between how the MPC and the FPC operate.
The first question that we face is whether the Bill provides the right solution; it does not in my view. If something fails, one is always faced with the choice of whether to mend it or buy a new one. Of course, the latter is politically expedient as it enables the Government to say that they are sweeping away the faulty structure created by their predecessor. However, that is not necessarily the right answer.
In my view the existing system could have been improved by a number of changes. The first is the creation of a separate macroprudential responsibility located in the Bank, which would allow it to identify when the economy, the financial system or particular markets were running too hot—or even too cold. That would be a natural extension of its monetary policy expertise. It would enable the Bank to bring to bear certain controls or require the FSA to tighten capital requirements of the organisations it regulates. It was not necessary in my view to transfer the detailed prudential regulation of all financial institutions, large and small, insurance as well as banks, to the Bank of England—something for which it has little experience and which will overload it.
Secondly, it is curious that the Chancellor and the Treasury appear so little in the Bill, moving under a kind of invisibility cloak. However, the Chancellor, not the governor of the Bank, is ultimately the most powerful player, partly by his ability to co-ordinate policy at the highest level, partly by being the real lender of last resort and partly by providing the key link of public accountability. A judgment has to be made on when it is appropriate to delegate powers to a non-elected body and when the impact on citizens and organisations is such that a degree of democratic accountability needs to be introduced. In my view the extension of the powers of the Bank and the widening of those subject to its actions means that we have gone beyond what was appropriate for it when it was simply a monetary authority.
Thirdly, the demerger of prudential and conduct of business regulation was unnecessary. It has created a lot of overlap which will produce confusion. A number of processes are effectively shared: business model analysis, enforcement and vetting of key board appointments. My concern, though I need to declare my interest as a director of a regulated insurance company, is that regulated companies will find themselves having to deal with two shops rather than one. So, I would have retained a single FSA but with an enhanced macroprudential function in the Bank, overseen by a Chancellor-chaired council, rather like the US Financial Stability Oversight Council. However, we are where we are and we face the dilemma of the sat-nav lady. Does she tell you to turn round or recalculate your route? Reluctantly, we have to work with what we have and try to improve it.
I would start with the function of the FPC, which has oversight of the macroprudential function. Currently its terms of reference are rather narrowly drawn, emphasising very strongly the avoidance of risk. Alastair Clark, a member of the FPC, in a recent speech noted that there is a need,
“to strike the right balance between encouraging banks to strengthen their position and avoiding any undue constraint on the availability of credit”.
This is important because much of the public debate in this country on the current situation is in terms of an antithesis between the tightening of fiscal policy and the loosening of monetary policy. What this misses is that there is a third point of the triangle—the decision of the FPC about the liquidity and capital requirements of the banks. Clearly one of the lessons of the financial crisis is that the banks were undercapitalised for the risks they were taking. There is international agreement that their capital should be built up, but there is no consensus about the speed at which this should happen. There are many who think that the FPC is pushing this too fast and requiring the liquidity to satisfy highly demanding stress tests, thereby nullifying the expansionary effect of the Bank’s monetary operations.
A mechanism will be needed to ensure that we get the best combination of the different policy instruments, which brings us to the question of how we should design organisations to achieve that. One approach might be called synthesis. We should bring interlocking problems under one roof to allow those at the top to produce the optimal trade-off between them. The danger is that if those at the top have a particular bias, one view may be subordinated to another without full debate.
The opposite approach is the separation of powers or of focus. Organisations will pursue their objectives with a mechanism created above them to resolve differences. The old tripartite system followed this principle but the new arrangements are in the synthesis mould. This means that if the Bank overemphasises the financial stability objective and imposes costs on other functions, there will be nothing to correct it. The cross-membership of the governor and his immediate colleagues on the two committees will be an inadequate substitute and may even exacerbate the problem.
The Bill includes a number of checks and balances, but they could go further. For example, we could create a secondary objective to support the Government’s economic objectives, along the lines of those already provided for the MPC. The latter will have to maintain price stability but, importantly,
“subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment”.
The objectives of the two committees should be made symmetrical.
As with the MPC, the Treasury should be able to set out how the FPC should interpret its remit. We should consider whether the balance of the FPC is correct and perhaps add an additional external member.
I do not have time to go into the provisions relating to the FCA in any detail. I will simply say that I share the concerns that were expressed about how we can ensure that it operates in a way that is proportionate, fair and reasonable. I particularly commend the analysis provided in a paper published jointly by Herbert Smith LLP and the LSE.
It is clear that there is a lot of work to be done on the Bill. I hope that we can create something that will last longer than its predecessors.
Sovereign Grant Bill
Lord Turnbull Excerpts(13 years, 2 months ago)
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Lord Turnbull
My Lords, I am a member of a select band of brothers, most of whom are clustered in this corner of the Chamber, who worked on the last major change to the Civil List. That was the announcement in July 1990 of a 10-year settlement—or, more accurately, the reintroduction of the 10-year settlement envisaged in the 1972 Act that collapsed after three years under the weight of runaway inflation. The briefing produced by the parliamentary Library, whose briefings are normally impeccable, has an important omission. There is no mention of the Civil List Act 1975, which shored up this failing system with an annual supplement to the Civil List. The effect of this was that the Palace’s finances were run on a hand-to-mouth basis. It also introduced an annual opportunity for mischief-making in Parliament and the media, producing misleading and undignified headlines such as “£200,000 Pay Rise for Queen”. Therefore, the first lesson in all this is that we need an arrangement that provides some distance between the monarchy and the hurly-burly of politics.
Our aim in 1990 was to get back to a 10-year framework, with a flat-rate annual sum that was the average requirement over the period. Any surpluses that accumulated in the first five years were to be run down in the second five years. Clearly, that required an assumption about inflation. I and my Permanent Secretary Peter Middleton went to see the then leader of the Opposition, the noble Lord, Lord Kinnock. Naturally, he quizzed us on the inflation assumption. I said that it was 7.5 per cent, which was the average of the preceding 10 years. He said: “You can’t do fairer than that”. Inflation at the time was 9.8 per cent. Neither of us knew that by the spring of the following year, inflation would fall below 7.5 per cent and go on to average about 3.5 per cent over the subsequent 20 years. The result was that the reserves built up had not even begun to be drawn upon by the 10-year mark, and the system lasted for 20 years.
The fall in inflation was not the only reason that the life of the scheme was twice as long as expected. Here we should pay tribute to the two keepers of the Privy Purse, Sir Michael Peat and Sir Alan Reed, for getting the costs of the monarchy and the Palace under control. In its own terms that scheme was pretty successful but all schemes are capable of improvement and the new proposals before us introduce a number of welcome changes.
First, it is not just a 10-year arrangement; in principle it could last in perpetuity and can be renewed periodically, and it avoids the need to renegotiate new arrangements in the first six months of a new reign when I am sure a new monarch has better things to do. Secondly, the consolidation of four grants into one will enable this whole consolidated grant to be better managed, which the Palace has demonstrated its capability to do. Thirdly, it resolves a long-running argument about the role of the C&AG in Parliament in the oversight of spending.
There is only one false note in an otherwise excellent scheme, as has been hinted at by two previous speakers: the link with the Crown Estate. In my view, this link is pretty artificial as there is no relationship between the net income of the Crown Estate and the funding of the monarchy, and there has not been since 1760, when the hereditary revenues of the Crown Estate were first surrendered. The Treasury’s briefing note makes it clear that the sovereign grant surplus is not being taken out of the Crown Estate; that will be paid into the Exchequer as it has been for the last 250 years. In effect, the growth in the Crown Estate surplus is being used as the index to uprate the grant. The Treasury’s note describes the Crown Estate revenues as,
“an appropriate benchmark … in the expectation that it will deliver similar sums in real terms to the amount the Crown receives now”.
However, the revenues of a property company, albeit an unlevered one that is run very conservatively, seems an odd benchmark to determine the appropriate level of funding for the monarchy. It is unlikely that this index will maintain the value in real terms at its current level. In the past two decades, the revenues of the Crown Estate have increased by 6.5 per cent a year, against 3.5 per cent of inflation, so it is a significant increase in real terms, which over a decade will produce an increase in the sovereign grant of a third, which I am sure the Palace neither needs nor is seeking. There is no necessary reason why this index would produce the best guide, particularly as we are now at a relatively low point in the property cycle.
In practice, this grant, as the Minister has told us, is so hedged about by caps, floors, reviews, in-year Treasury controls and parliamentary scrutiny that not much damage is going to be done in either direction, of making the grant too small or too large. However, if maintaining the grant in approximately real terms is the true objective, which seems reasonable to me, it would have been better to use some index of inflation, pretty much as we have done for decades with the BBC licence. We would thereby avoid perpetuating or even entrenching the confusion between the Crown Estate and the Crown itself. It all looks like someone being a bit too clever by half. So rather than 10 out of 10, I give these proposals in an otherwise excellent Bill nine out of 10.
The final, highly commendable feature of the Bill is the change in the rules on the Duchy of Cornwall which allow a grant to be made to an heir to the throne who is not a Duke of Cornwall, so that in future daughters of the monarch as well as younger sons could benefit. One can only hope that this is a precursor to a change to the male-only succession and when that has been done we can move on to the next step in the modernisation of the monarchy by redrafting the outdated and, to many, unacceptable language of the various oaths sworn by a new monarch.
Budget Responsibility and National Audit Bill [HL]
Lord Turnbull Excerpts(14 years ago)
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Lord Eatwell
My Lords, Amendment 36 refers to Clause 6(1)(b) and seeks to remove the attempt to qualify Clause 5(2). I begin by confessing that, on close inspection, my amendment is imperfectly drafted. I did not wish to eliminate any guidance that the charter might provide with respect to the beleaguered Clause 5(3) because guidance is certainly needed there. However, if Amendment 31—or something like it—appears on Report, the qualification of Clause 5(3) will be unnecessary. The core purpose of the amendment is to remove the ability of the Government to use the charter to qualify Clause 5(2).
Noble Lords may think that the terms “objectively”, “transparently” and “impartially” are perfectly well defined by the Oxford English Dictionary and that no further guidance or qualification is required and, if they examined the draft charter, they would find that they were absolutely right to think that. Taking just one of the words which one would think would be easy to understand, I invite noble Lords to consider the charter definition of “objectively”. Paragraph 4.7 of the charter states that this means that,
“the OBR should not analyse or comment on the particular merits of Government policy”.
The problem is that the philosophical issue has been pushed on to another word because we now need a definition of the word “merits”, as I will illustrate.
In Clause 5(3), which we have toiled over for some time, the OBR is required—as we all agree—to consider government policies that are relevant to its forecasting duties. Let us suppose that the OBR demonstrates that a particular government policy results in an increase in unemployment—and one must give credit to the Government and to the OBR for now publishing unemployment forecasts—then, as it is universally accepted that unemployment is a bad thing, such an assessment will inevitably reflect on the merits of the policy. If it increases unemployment, that is a bad aspect of the policy and is a comment on its merits; it cannot be anything else. Therefore the definition of “objectively” has been qualified in such a manner that it no longer has the generally accepted meaning of the word.
If we accept the guidance of the charter, the OBR could not comment on what is happening to unemployment because employment and unemployment are universally accepted as merits and demerits. Trying to define these words is simply an exercise in exclusion and limitation. The words have clear, commonsense meanings. Moreover, as the noble Lord, Lord Turnbull, told me earlier, the word “impartiality” in government circles has already been defined by the Committee on Standards in Public Life. A definition of the word exists in government life and it does not require another one. If the Treasury definition were contrary to that of the Committee on Standards in Public Life, that would be very disturbing.
The question is: why do we need this? The fundamental danger in Clause 6(1)(b) is the possibility of further guidance distorting the normal meaning of words that are fully understood in common parlance. It is far better to rely on common sense in understanding these words. The lack of qualification gives them strength; any qualification would seriously weaken their value. I beg to move.
Lord Turnbull
I support the amendment, at least in so far as it relates to Clause 5(2), for much the same reasons as those set out by the noble Lord, Lord Eatwell. These words are meant to be drawn either from the seven tenets of public life set by the Committee on Standards in Public Life, or from the synonyms for them in the Civil Service Code. If there is any amendment to be made it is that Clause 5(2) should bring the words used into line with the accepted vocabulary that is used in these other documents. You would then dispense with Clause 6(1)(b) as it relates to subsection (2).
At Second Reading, the most telling criticisms that were made on an occasion where this initiative was largely welcomed, was the sense that independence was being granted with one hand by the Treasury and that another clause subtly began to claw it back, and that this somehow undermined the sense of true independence. We can dispense with this and, if any changes are desired, the wording of Clause 5(2) can be brought into line with the vocabulary that is used in these other statements of the values of public life.
Lord Sassoon
My Lords, I find this interesting because what the noble Lords, Lord Eatwell and Lord Turnbull, have said exemplifies why we need some back-up explanation of these terms in the charter. That must be the right place for it because the noble Lord, Lord Eatwell, started by saying that we could rely on the Oxford English Dictionary definition of the three terms but then went on to refer to the usage given to the terms by the Committee on Standards in Public Life. That in itself points out that, even on his construction of how these words should be used, there are at least two sources. I have neither the OED nor the committee’s statement in front of me, but I would be surprised if they were precisely the same. Then the noble Lord, Lord Turnbull, referred to the Civil Service Code.
In arguing for the amendment, the noble Lords have precisely explained the difficulty that we are in: however you do it, you go back to different sources for the meaning of these important terms. It is therefore important in the charter to try to tease this out. I agree that this could be done in a number of ways; it could refer to the OED, the Civil Service or a number of other things. However, this discussion has reinforced my view that somewhere we need to provide some guidance.
I shall give the Committee another example, very much in this space, about the kind of difficulty that we can otherwise get into, and this relates back to one of our previous discussions. The US Congressional Budget Office has an impartiality remit, but it defines “impartiality” to mean that it has to include analysis of policy proposals made by all political parties. I think that we all agreed earlier that that is precisely what we do not want the OBR to do, and that suggests to me that it is a reason why we need to give a bit of guidance in the charter for what the three critical terms mean. Indeed, Robert Chote himself, following questions on impartiality, told the Treasury Select Committee:
“I think you want to make sure that the remit of the OBR is agreed ex ante, rather than the subject of a contentious debate ex post on whether it is doing what people want it to do … if it is left to the OBR on its own to draw the line, there will always be people just below the line who will be disgruntled … which will reflect on the OBR”.
That was in the context of a wider discussion about the virtues of, and the need for, clarity.
Nothing is set out in the charter that can undermine the Bill. The guidance can relate only to functions conferred by the Bill; it cannot add to or distort them. Further, as we have noted, the charter must be approved by another place before it can come into effect. I have listened carefully to the debate, which has suggested to me that even those who say that we do not need the interpretation of the charter are actually using different definitions. I think that the charter is the right place in which to provide the OBR with the clarity that it quite rightly seeks. For that reason, and because the noble Lord admits that the amendment does not quite work technically, I ask him to withdraw it.
Budget Responsibility and National Audit Bill [HL]
Lord Turnbull Excerpts(14 years ago)
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Lord Sassoon
My Lords, in answer to the first question, to be clear again, it is certainly the case that there is a group which is executive and expert and then there is a second group, described at the moment in the Bill as “non-expert”, which is also non-executive. That second group could be experts, there is nothing to rule that out, but the point is that they do not have to be experts; they should, however, be sufficiently independently minded, supportive and challenging of the executive expert members.
We have put in “two or more” because at the moment we think that the remit of the OBR and the construct should be perfectly sufficient and workable for robust government arrangements. That is the minimum number. To have one non-exec would put that individual in an impossible position; two gets you to the minimum. If the OBR’s remit were somehow to develop in an unanticipated way, it might be appropriate to modestly expand the number of non-exec non-experts, but that is not the intention at the moment.
Lord Turnbull
I suggest to the Minister one possible use of this third post: at some stage, it might be thought helpful to recruit someone who has experience in a different country of how this kind of arrangement has worked. The two non-executives—I really do not know why we do not just settle on that as a description, because they are expert at being non-executives—could well be supplemented by someone who brings some other dimension to the affair.
Lord Sassoon
That is a very helpful thought. I shall in another context say that the parallel with the MPC is not at all inappropriate. For example, in the MPC or the board of the FSA there is a good record in the UK in recent years of bringing in relevant experts from overseas. I entirely agree with the noble Lord’s thought.
The Lord Bishop of Chester
My Lords, it would be a great mistake to regard being opposed to sin as the sole prerogative of the Church of England. I hope that the whole Committee is opposed to sin.
I have some sympathy with the Minister on this. My problem with this part of the schedule is that it feels too in-house to me—too much the same. The Chancellor of the Exchequer is involved in the appointments and perhaps the Select Committee will be involved. I should have thought that the office needs a certain amount of diversity; its independence requires a greater diversity. It strikes me that the schedule is too tightly constrained as it is and to constrain it further by saying that the Select Committee of the other place has to be involved each time feels odd. I would almost expect the Governor of the Bank of England to nominate a member. We need a greater sense of diversity and independence in what is supposed to be an arm’s-length body. This body is in danger of not being sufficiently arm’s length from government. On that ground alone, I support the Minister’s resistance. However, I have a problem in that the whole thing seems a bit too in-house as it is.
Lord Turnbull
The noble Lord, Lord Higgins, referred to making this more acceptable to the committee. I remember reading the report of the committee in another place: it did not actually ask for this. It asked for powers on appointment, and for powers of dismissal, which are built in here. Members of that committee did not think this was necessary and I am prepared to back that judgment.
Lord Sassoon
I am grateful to the right reverend Prelate. I hope that he will forgive me if I do not offer any thoughts on sin. I know my limitations. I am grateful to the noble Lord, Lord Turnbull, for reminding us that the Treasury Select Committee has not asked for this. We need to get back to the substance of this. Yes, the OBR is a critically important entity. I would not characterise its role quite in the way that the noble Lord, Lord Peston, did, as being involved in economic policy-making, but we had that discussion two days ago. The OBR is critically important. It has a role which it has already begun by producing the official economic forecast. Because that is such an important role, we have as a Government, in agreement with the Treasury Select Committee, come forward with a most unusual role for the committee in respect of appointment of the executive members of the OBR. That in itself emphasises the special nature of this entity.
We have recognised the special role of this body in the executive appointment process, but as to the non-execs, we should not get too excited and think that their role is very different. Are we really saying that the non-execs here have a completely different role to the non-execs on, say, the UK Statistics Authority board, which is another critically important part of the architecture? We risk over-engineering this.
Another point that no one has made is that all public sector appointments are subject to an independent process and a series of safeguards. We must not forget that this is not part of a closed process. I believe that the overall construct is appropriate and we should not over-engineer it, particularly in a way that the Treasury Select Committee has not asked for.
Lord Newby
My Lords, the provision in paragraph 8(2) of Schedule 1is sensible. It states:
“Staff are to be employed on such terms as to remuneration and other matters as the Office may, with the approval of the Minister for the Civil Service, determine”.
Surely that is the sensible way of doing it, with the chairman deciding which staff he wants. It would be slightly surprising if none of them came from a Civil Service econometrics background, which would bring strength to the office. Just because they have come out of Whitehall does not mean that they are somehow tied hand and foot to Treasury thinking. No doubt, people will come in from academia and elsewhere. It is for the chairman himself to decide who the best people are to do the job.
Lord Turnbull
I support the noble Lord, Lord Newby. As I understand it, the number of staff would be around 20. Some may be seconded from the Treasury, some may be brought in from academia, and some may come from somewhere else. It is basically for the chairman of the OBR to assemble the best team that he wants, and we should not fetter that discretion, because there is a safeguard in Clause 5(2), which states:
“The Office must perform that duty objectively, transparently and impartially”.
In other words, anyone who is on loan from another government department is subject to that duty, which should ensure that the right degree of independence is maintained. If you say that someone with a Civil Service career must resign from the Civil Service in order to go and work for the OBR, you will raise all sorts of issues relating to pensions, seniority, this, that and the other. You will make it difficult to assemble the best-quality team, and that should be paramount.
Lord Myners
I agree with those comments. However, the duties described in Clause 5(2) are subject to guidance given under Clause 6(1)(b), which slightly diminishes the confidence and reliance we can place on Clause 5(2).
I support the intention of this clause, but cannot bring myself to support the wording of the amendment. The majority of the staff of the OBR, certainly until quite recently, were former Treasury officials, and the majority are doing work that is very similar to the work that they were doing before the establishment of the interim OBR—work that they are now allowed to appear to criticise through the OBR. They are still in the Treasury building, they are still going to the excellent Treasury canteen for their subsidised lunches and they are still entitled to belong to the Treasury choir and the Treasury glee club. They have not left the Treasury. What we are seeking to achieve is appropriate distancing—but not at the cost of denying the OBR the best people to do the job. It is not unreasonable to assume that currently at least some of them will be working in the Treasury.
The difficulty that I have with the drafting of the amendment is the reference to “transferred temporarily”. “Temporarily” assumes some knowledge of the future. I see a situation in which somebody may go from the Treasury to the OBR and later return to the Treasury without that necessarily having been planned. There must be clear severance in employment terms: it must be quite clear that staff have left the Treasury and are now employed by the OBR. The independent, non-executive directors should keep a particularly close focus on where people are recruited from and where they go afterwards, in order to make sure that the effectiveness and credibility of the body is not diminished by a greater flow between the Treasury and the OBR than common sense might justify. However, I cannot bring myself to support the amendment as it is drafted.
Baroness Noakes
My Lords, I profoundly disagree with the noble Lord, Lord Peston. I do not know what the initial position might be in the OBR in that they might all be initial employees. But we would restrict the OBR’s access to a pool of talented people if we insisted that they could work in the OBR only if they became its employees and severed any employment connections with other organisations. The OBR will be a small organisation, so in order to get good people it may well need to attract them through shorter secondments, whether to handle specific issues or to be part of the staff more generally. Over time, we have to allow the OBR that flexibility, and there is nothing wrong with that. People move in and out of all sorts of organisations throughout Whitehall and are brought in whenever it is necessary.
Lord Turnbull
My Lords, I am amazed at the sheer unrealism of the proposition of the noble Lord, Lord Peston. If this is enacted, there will be a major crisis in the organisation. Around 20 people will have to take a decision whether to resign from the Treasury or quit the OBR and go back to the Treasury. That is something we could absolutely do without. The initial staff in large majority are secondees. We have not complained about their work. We did not say that the report produced last week was ineffective or that we did not trust it because the staff are seconded. The noble Lord is imposing something that will be damaging to the credibility of the organisation and will make it much more difficult to attract people of the quality it needs. As I have said, a major problem will be created immediately if such a proposition is enacted.
Lord Peston
I did not create this problem. I did not set this body up. Unlike all other noble Lords present, I do not happen to be much in favour of it, but that is another matter. The fact is that our duty in this House, when a piece of legislation is going through, is to make it better. That is our role. So this is not my responsibility, but my point is that if we are going to have such a body, whose essence is its independence, if it turns out that the staff are secondees, that undermines its independence. It will not be independent any more.
Lord Barnett
I shall say a word about Amendment 34. It seeks to provide that:
“The Office will place in the public domain a record of all meetings with the Chancellor … and other ministers”.
When I tabled a Question for Written Answer on this matter for the noble Lord, Lord Sassoon, he asked Robert Chote to answer it. Mr Chote has duly written to me and I shall quote from it:
“We will be publishing a list of contacts between the OBR and ministers, special advisers and their private offices shortly after each autumn and Budget forecast, beginning with our forthcoming forecast on November 29th”.
I do not know when the list is going to be published and I have not seen it, but it is clear that regular formal or informal meetings with the Chancellor and other Ministers are a very important matter for an independent forecaster, one that is not available to our other 50-odd forecasters. So I hope we will have an answer to this very soon. That is the whole purpose of Amendment 34.
I shall not add to my remarks because I am trying hard to curtail my contributions so that we get to the target figure of amendments that the Government want to see dealt with. But far be it from me to prevent Members of the Committee speaking.
Lord Turnbull
My Lords, it seems that an analogy is being drawn with the Monetary Policy Committee, whose minutes are produced. What happens at the Bank is this. On the preceding Friday of the week in which the committee meets, the members spend the whole day going through virtually every possible economic indicator and receive reports from the agents around the country. That is a meeting, but no minutes are taken. I think the members then meet on the Tuesday afternoon and hold discussions during which they try to sift out what the main measures are to be. Again, there are no minutes, or certainly none that are published. The members then come together at the formal meeting, which is where they take decisions and where the minutes for the record are produced.
In other words, they do not produce a running commentary. We are told here that the BRC has more than 40 challenge meetings with officials from other departments, in addition to numerous meetings at staff level. That is complete overkill and, I would say, a false analogy with the Bank to assume that each of those meetings has to be minuted and published. This thing is published—there are 150 pages of it—and it is produced twice a year. Everything else is work in progress, which leads to the production of the report. We should be satisfied with the fact that it is produced, eventually, after talking to whomever the committee wants to and whatever progress it wants to make. Some of that will include what is or is not in the Budget; some of it goes to the nature of fiscal policy. What is eventually produced is this report. Those are the minutes and I do not think that we need anything beyond them.
Lord Sassoon
I am very grateful to the noble Lord, Lord Turnbull, who, I think, gets it absolutely right. There is a further point, which he did not stress, which is that the Monetary Policy Committee is a policy-making committee. It is therefore important to understand how policy, and the thinking behind the policy, is being made. The OBR is not making policy; it is producing forecasts. They are very important forecasts and that is a critical function, but it is not policy-making that requires minutes to understand.