Financial Services Bill

Baroness Liddell of Coatdyke Excerpts

Tuesday 26th June 2012 Lords Chamber

[Lord Phillips of Sudbury]

My Lords, I would like to make one comment on the amendment moved by the noble Lord, Lord Eatwell, and then make some comments on the remarks of the noble Lord, Lord Peston. On the way in which the amendment is drafted, I am not at all clear about how the notion of a supervisory committee fits with the language of new Section 9B of the Bank of England Act 1998 in Clause 3(1), which talks about the Financial Policy Committee being,

“a sub-committee of the court of directors of the Bank”.

I am a very long-in-the-tooth lawyer, and the normal language of sub-committees is to make them clearly subsidiary and subject to not just the oversight but the decision-making of the body of which they are a sub-committee. I put that to the Minister because we have enough confusion in the Bill already and, as has been mentioned, the name “supervisory committee” has many connotations from other jurisdictions that frustrate his desire to make this clearer.

Given that the issue of clarity and comprehensibility has been raised by the noble Lord, Lord Peston, and others, this is probably the only chance I have to add to that and ask my noble friend if he will take profoundly seriously the way in which the Bill is being put to us. I venture to suggest that not one Peer in 50, however learned or experienced they are, will be able to get their head around these 168 pages. It is not just those pages, of course, since they cross-refer to hundreds and hundreds of other pieces of statutory legislation and instruments.

I hope that my noble friend will take back the undertaking that I thought I got two years ago to the effect that where we had a Bill of this nature with, as I say, constant cross-references, those of us who wanted to get our heads around it would be given the legislation that was amended by the Bill, with the amendments shown on the face of that legislation so that we could relatively quickly—I use the word “relatively” advisedly—get our head around it. I have to tell noble Lords that if they go to the Library and pull down the 1998 statute, they will find that subsequent amendments have not been incorporated into it and they will have to go off elsewhere to find them. The whole thing is totally counterproductive to the work of this House. Most of us have neither secretaries nor research assistants of any sort. It really is scandalous—I use that word—that as legislators we are not assisted as far as possible to do our job effectively.

If the Minister is having sleepless nights, I urge him to look at subsections (1), (4) and (5) in new Section 9B, where the language is so—I nearly used an Anglo-Saxon expression, which would have been much more colourful—hyper-complicated. New Section 9B(1) says that this particular sub-committee is to be called,

“the ‘Financial Policy Committee’”.

However, new Section 9B(4) says,

“The court of directors must keep the procedures followed by the Committee under review”.

Given that the Bill has just said that the way to describe the new sub-committee is as the “Financial Policy Committee”, which committee is meant in subsection (4)? Then new Section 9B(5) says that:

“The court’s function under subsection (4) is to stand delegated to the sub-committee”,

which is not supposed to be referred to as that at all, so perhaps that is another sub-committee that we have not heard of and which is defined 63 pages later. And so it goes on. I do not know about anyone else, but I think that I have spent eight hours so far in trying to understand Clauses 5 and 6. I may be becoming an old f—no, I may be losing my sharpness, but I urge the Minister, not only with this Bill but with so many other Bills that we are called upon to deal with, to make the task for us legislators as readily accessible and easy as possibly can be.

[Baroness Liddell of Coatdyke]

My Lords, I am delighted that cleverer people than me have found this Bill incomprehensible, because I have real fears that we will get very lost in the detail of this Bill, and we will certainly get lost in the alphabet soup of acronyms contained within the Bill. However, I will return to the substantive issue.

The Bank of England is to be the pre-eminent financial services regulator. A regulator has to be transparent, consistent, and readily understood internationally. I would be delighted if, when the Minister replies, he will explain to us why it is necessary to vest such untrammelled power in the Governor of the Bank of England. The governor becomes much more powerful than the Prime Minister, who is, after all, only primus inter pares. The governor becomes completely unchallengeable. That is why the idea of a supervisory board in the amendment proposed by my noble friend is sensible.

I will not get tied up on titles. The court concept is anachronistic, and it is not readily understood by our main competitors. I am much more interested in the substance of supervision. One of the key elements of the work of the Bank of England as financial regulator will be to insist upon the best kind of corporate governance that we can get in our financial institutions. It should, therefore, be an example in itself in how it is governed. I have no confidence that that level of modern, transparent, corporate governance is in the model that is outlined in this Bill, as I understand it.

If people are tied up with the history of the Bank, which is long and distinguished, we can still have chaps running around in pink coats, and we can still have a wonderful collection of silver. However, at the end of the day, if we, as a nation, are to remain a leader in the financial services industry, we have to have a system of governance of our financial regulator that stands up to very tight scrutiny. I therefore urge the Minister, when he replies to this amendment, to give us some explanation as to why the Government have not come up with a model of corporate governance that gives that kind of confidence.

We will come to other elements when we talk about the role of the governor. I am extremely concerned about a repetition of what happened in the run-up to the run on Northern Rock. Some ill advised, perhaps unintentional, comments by the governor contributed to the run on that bank. We cannot allow ourselves to get into a situation where something like that could happen again.

[Lord Stewartby]

My Lords, I do not want at any length to add to what many noble Lords have said, except to record that this is one of the most incomprehensible Bills that I have had business with. Several times I started on what I thought was a trail of decisions, and at the end of it I could not work out who did what and how they knew what they should do.

I have one small technical question for my noble friend that is along those lines. I know that “macro” means “long” in Greek. I do not know what is meant by “micro”—which means small—so far as it is applicable to prudential regulation. Is the micro bit about the size of the body being investigated or about the scale of the activities of the regulator? I am not at all clear about this. Having come across these terms “macro” and “micro” regulation, I found myself unable to work out what quite a lot of these fundamental things mean.

Unfortunately, under the old regime there was a lack of clarity about who did what and who was responsible. However, I am not sure that we are getting away from that, as we ought to. It is a difficulty, and I hope that my noble friend can shed a little light on it. Many who have spoken in this short debate have pointed out that the Bill is not very easy to follow, to put it mildly. I would strongly welcome anything that would make it easier.

--- Later in debate ---

[Lord Eatwell]

My Lords, I beg to move Amendment 7, which as noble Lords will see from the Marshalled List refers to the experience and knowledge of individuals appointed to the court; that the Chancellor should be satisfied that they have appropriate experience and knowledge; and that their presence would enhance the diversity of the composition of the court.

The immediate reaction to this amendment might be yes, of course, it is unnecessary; anyone who makes sensible appointments would do that sort of thing. However, if it is accepted, a statutory responsibility to ensure that the supervisory board or the court, whichever we have, has a diverse range of appropriate talents will be a crucial guideline that Chancellors must follow and when necessary justify.

The importance of this amendment lies in its combination of expertise and diversity. The crisis should have taught us all of the dangers of conventional wisdom. Conventional wisdom underpinned the decision-making in central banks and treasury departments throughout the world and Mr Greenspan’s confession of the way in which his decisions were distorted by a conventional view of risk analysis has already been cited by my noble friend Lord McFall. In building a successful court or supervisory board, we need the contrary, the awkward and the different to be part of the debate. This will not guarantee that we get it right but at least we will be more likely to than if we appoint a committee of well intentioned sound thinkers who all think the same way.

Diversity here is a reference to diversity of view of analysis and of opinion. There is no doubt that often diversity of view is correlated with other aspects of diversity, maybe of gender or of ethnicity. This is not what I am trying to get at here, it is diversity of view that I would like to suggest. It would be pointless, for example, to appoint a racially diverse, gender-diverse board, all of whose members happened to share the same analysis and views. The degree to which diversities are correlated will perhaps provide some guidance and inspiration for a Chancellor. This amendment is designed to be a permanent challenge to the Chancellor in the very important task that he or she has of deciding on the composition of the court and particularly the non-executive members of the court.

[Baroness Liddell of Coatdyke]

My Lords, I support Amendment 7. Looking at this amendment the casual observer might wonder why it is necessary. It makes perfect sense that you would not leave governance of the Bank of England—and therefore governance of the economy and our financial institutions—to a bunch of interested amateurs. Frankly, however, we have occasionally seen that happen with some of our financial institutions—we need only look at the trails of chaos over the years from banks such as Barings and onwards to the catastrophe of Lehman Brothers. If noble Lords wish to read a horror story they should read Michael Lewis’s The Big Short. I confess that I did not understand some of the complex derivatives being talked about until I read The Big Short, and I have spent most of my life in and around the world of economics.

It is critically important that there is a balance of knowledge, experience and expertise on the supervisory board, or whatever we choose to call it. It will need people with a wide range of competence, with experience ranging from macroeconomics to prudential regulation. It is a wide mix to put together.

The other side of the coin—a matter to which my noble friend referred—is diversity of opinion. In this case, as he pointed out, we are not talking about gender or ethnic diversity, although that would be very good to have. We heard an exchange within the past hour between two distinguished economists—my noble friends Lord Peston and Lord Eatwell—and there will undoubtedly be differences of view among any number of economists. I would love to throw behaviouralists into the mix of any supervisory board of the Bank of England. Quite apart from behavioural economics, it is how people react that can bring economic chaos.

The amendment may seem unnecessary because it is a no-brainer that you would seek to do this anyway. We have learnt along the way, however, that it is better to get such things written down. Then you will have a wee bit more of a chance of achieving them. I therefore support Amendment 7.

[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.