Financial Services Bill

Baroness Noakes Excerpts

Tuesday 6th November 2012 Lords Chamber

[Lord McFall of Alcluith]

My Lords, I agree with my noble friend on this issue. Anyone with experience of the Court of the Bank of England would say that its impact has been less than useful over past years. Given the powers that we have given to this Governor for an eight-year period, it is important that the sentiments expressed in the other place as regards accountability are satisfied, because, paradoxically, if that is not the case, it will make the role of the Governor even more political and members of the court will come under pressure.

I had personal knowledge of this during the height of the financial crisis. My concern at that time was to ensure both the political and the financial stability of the situation. It is therefore important that that is adhered to. There needs to be, as the Treasury Committee said, proper records of the court’s proceedings. If transparency is not available, the accountability element will not be pursued. The Government are making a big mistake by establishing what is, in effect—although some people may disagree—a multinational corporation with one person at its head, with little corporate governance best practice.

There needs to be a stage at which the Government can listen to Parliament on this, make the Bank truly accountable to Parliament and ensure the best outcome for the country. We have the Financial Policy Committee and the Prudential Regulation Authority, but there is no doubt that there will be conflicts of interest there. There will be one individual responsible, while the Government and Parliament are spectators and bit players. That should not be the case, and the Government really need to think very clearly and seriously about this issue.

[Baroness Noakes]

My Lords, as a former member of the court, I feel slightly under attack this afternoon, but I was long gone before the financial crisis. In the context of the previous amendment, my noble friend Lord Flight pointed out that the important way to express accountability is on an ongoing basis, not at the point of appointment. The most important thing, going forward, is whether or not the new oversight committee will do its job and who will make sure that it is held to account. It seems to me that it should be the Treasury Select Committee in another place and it is not something for which we need to legislate. The Treasury Select Committee is well apprised of the need to ensure that there are proper accountability mechanisms to act as a counterweight against significant additional powers for the Governor of the Bank of England; and that there are proper checks and balances within the Bank of England and then from the Bank to Parliament.

[Lord Sassoon]

My Lords, I am grateful to the noble Lord, Lord McFall of Alcluith, and to my noble friend Lady Noakes. My noble friend was an estimable member of the court and I am sure that she brought great distinction to its deliberations. As she reminds the House by referring to the oversight committee, the noble Lord, Lord McFall is right to say that the court has not always necessarily done everything that Members of Parliament would have wished in recent years. Critically, that is why the oversight committee that we are introducing changes the way that the court and particularly non-executives on the court will operate. I am grateful to be reminded of this critical background to our discussion. The other background point to make is that the noble Lord, Lord Eatwell, has made a number of references in this and earlier debates about politicisation and transferring powers from elected politicians to the Bank. This is a red herring. I am sure that I should not say it is nonsense, but I simply do not accept this background analysis.

Powers are not somehow being moved from elected politicians to the Bank. The Bank is being granted a range of powers which are regulatory in nature. Financial regulation has been undertaken by independent regulators for over a decade in the UK and before that, of course, large swathes of it were not in any way carried out by elected politicians or even properly constituted regulators. They were done in a self-regulatory way. So this idea that somehow we are transferring stuff from politicians to the Bank, as if some heinous crime was being committed and that we need lots of belts and braces, is the wrong background.

Let me specifically address the amendments here and the role of Parliament in key appointments. As we have heard, they are different in some respects from the previous amendment about appointing the Governor. The appointments of non-executive directors of the court are not currently subject to a pre-commencement hearing by the Treasury Select Committee. As with the Governor, the appointments of non-executive directors are made by Her Majesty and governed by the OCPA code. As I explained earlier, this stipulates certain practices in terms of a robust and fair appointment process, with appointments made principally on merit. Members of the court are accountable to Parliament and it is right that the Treasury Select Committee can and does invite them to give evidence at the appropriate juncture. However, the non-executive directors are not policymakers. Their role is to oversee the running of the Bank and it would be highly unusual to make such appointments subject to the consent of the Treasury Select Committee. The Government therefore believe that the current appointments process for non-executive directors of the court remains the right one. Similarly, the appointment of external FPC members will be subject to a robust process that seeks qualified and experienced candidates. External members of the FPC will be subject to pre-commencement hearings—as was the case with the appointees to the interim FPC. The FPC will be accountable for its actions to the Bank’s oversight committee and directly to the Treasury Select Committee, which we expect to take regular evidence from the external members of the FPC, as it does already from the MPC and the interim FPC.

As with the roles of governor and external members of the MPC, the market-sensitive nature of these roles means that the combination of pre-commencement hearings and Treasury Select Committee scrutiny in-post offers an appropriate balance in terms of parliamentary scrutiny. Again, the Government welcome the ongoing role played by the Treasury Select Committee. I hope that I have provided sufficient reassurance for the noble Lord to withdraw his amendment.

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[Lord Eatwell]

Then I am sure that the noble Lord, having given the amendment such mature consideration, will be able to accept it.

I hope that, at the very least, the Government will agree to take this proposal away and think about it. After all, if we are going to have an oversight committee it should oversee; otherwise perhaps the Government should simply change the committee’s name. I beg to move.

[Baroness Noakes]

My Lords, I am a bit puzzled by these amendments and I should say that while the Minister’s officials may have had them since last Friday, those of us who are trying to take part in this Report stage saw them only first thing this morning, which comes of when the party opposite chose to table its amendments.

The noble Lord says that there is no oversight in the new section dealing with the oversight committee. If I were to define oversight I would say it is about reviewing and monitoring; that is the very nature of what is involved. The noble Lord suggests it means some real-time involvement by the non-executives in what happens on a daily basis within the Bank. That simply cannot be—it seems to me the noble Lord misunderstands the role of non-executive directors.

This group of amendments also contains the concept of the non-executive directors, via the oversight committee, approving the strategy. The oversight committee is a sub-committee of the Court of Directors and is not there to approve what the court should be doing. This is correctly formulated in that it is the court that is preparing the strategy. The oversight committee has no role in relation to that except by virtue of the membership of the individual non-executive directors who are also members of court. I really do not understand this sequence of amendments.

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[Lord Eatwell]

My Lords, I am afraid it is me again. These amendments refer to the decision to publish performance reviews. Let me remind the House that the performance reviews referred to in the particular clauses which are to be here amended are reviews that the oversight committee has commissioned or conducted. The amendment removes the Bank’s veto over the oversight committee: a veto which the Bill gives to the Bank—otherwise known as the governor—over the publication of such reviews.

Again, the Bank has form in this respect. As Members of your Lordships’ House will be aware, the Bank of England is the only major public institution directly involved in the financial crisis that has not seen fit to conduct and publish a full assessment of its own activities, procedures and policies during the crisis and to own up to the contribution it made to the crisis. The Financial Services Authority has done that as has the Treasury. The Bank has not seen fit to do that. The three reviews published last week have been very carefully circumscribed in their terms of reference to prevent proper consideration of the Bank’s record. You only have to read the Bank’s tepid response to the reviews—it did not refer at all to the comments on the Bank’s excessively hierarchical structure—to realise there is still a deep-seated cultural failing in this respect in the Bank. Where other organisations review what they have done, think through and learn from their experiences, the Bank seems to be unwilling to do this.

In these circumstances, it would be quite wrong to give the Bank a veto over the publication of the oversight committee’s reports. If this serious committee of non-executives—a majority of the court—put together a report and decide that it should be published, then why should there be a veto over them? The oversight committee is quite capable of taking the advice of the Bank, the governor or whoever on whether the publication is against the public interest. If the Government really want effective performance reviews and not whitewash I am sure they will support these amendments.

[Baroness Noakes]

My Lords, I share many of the frustrations that the noble Lord, Lord Eatwell, has exposed in relation to the reviews that were commissioned, late and inadequate, and I completely accept that the Bank’s response did not seem fulsome. However, I think we have to give the new Government’s arrangements within the Bank a chance. While the Bill says that the Bank will decide about publication, that should be the Court of Directors and, as we know, the Court of Directors has a majority of non-executives. I hope that they will be invigorated by the new context provided by the separate oversight committee. If we keep trying to make functions of the Bank be carried out by the oversight committee we will undermine the court. We need to ensure that the court is strengthened and takes its responsibilities seriously. I also sincerely hope that the Treasury Select Committee in the other place becomes more active in seeking to engage with the non-executives via the oversight committee on how things work in practice.

[Lord Barnett]

My Lords, I agree with my noble friend very strongly indeed. He has made a very strong point. I should declare an interest, I suppose. Until very recently I was probably the oldest living non-executive chairman of a plc. I hope I was a very active chairman. However, I know through many experiences of my own that some non-executive directors do not play a very constructive part, they just take their money and go and do very little—so there are two different kinds of non-executive directors.

I hope my noble friend manages to persuade somebody to change the name from the oversight committee. It is, as my noble friend Lord Peston said, a very strange name to have in the Bill, but it is not the only strange thing in the Bill. I hope the officials who advise the noble Lord, Lord Sassoon, will perhaps come up with a new name but on the whole I would like to commend the officials, particularly those headed by Mr Whiting. He has been extremely diligent in the job he has done on all sides of this Bill, sending things and meeting people. He has been excellent.

I wish I could say the same about the Minister. I like him personally but I cannot say the same about his response to the amendments. My noble friend has made a very important point that an important committee here—whatever we call it, it is now called the oversight committee—can be overruled by the governor. I find that quite unacceptable. I do not know whether the noble Lord, Lord Sassoon, shaking his head means he cannot overrule it. I would be glad to hear that, but that is what it seems to be saying. I would like to hear how he puts that given the wording of the Bill, but for the moment I strongly support my noble friend Lord Eatwell.

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Moved by

[Baroness Noakes]

4: Clause 4, page 6, line 25, leave out “2 members” and insert “one member”

[Baroness Noakes]

In moving this amendment, I will also speak to Amendment 5 in this group. In so doing, I hope to give the noble Lord, Lord Eatwell, a break from his obsession with the difference between the court and the Bank.

The amendments concern membership of the Financial Policy Committee. In Committee, the noble Lord, Lord McFall of Alcluith, and I tabled an amendment that reflected the conclusion of the Treasury Select Committee in another place that there should be a majority of external members on the FPC to mitigate against groupthink. The Joint Committee that examined the Bill had reached a similar conclusion.

The Bill prescribes 12 members of the FPC in total. There should be six from the Bank, the chief executive of the FCA, four external members and a representative from the Treasury. I will ignore the Treasury in my remarks because the Treasury person cannot vote and his views can be ignored quite a lot of the time according to Schedule 1. I will talk about the 11 active and voting members.

The Government like to portray this composition of the FPC as a 6:5 split, putting the chief executive of the FCA in the external-to-the-Bank category, with six internal to the Bank and five outside. But the chief executive of the FCA, while he is external to the Bank, is not a completely independent member because of the many and varied associations and interactions between the FCA and the PRA which are envisaged in this Bill. While the chief executive of the FCA will have independent responsibilities in relation to the FCA, he will inevitably be susceptible to the kind of groupthink that the Treasury Select Committee warned against. The de facto ratio in the Bill is 7:4, because seven members have custodianship of the financial system as part of their day jobs and only four would be independent of that. I do not believe that that ratio is a healthy one.

In Committee, my noble friend the Minister argued against having external members in the majority because it would interfere with the holding of the Bank of England to account in some way. I think that that is a highly arguable position but my noble friend will be relieved that I am not going to argue with it this evening. Instead, I propose with Amendment 4 a more modest rebalancing of the FPC and I am delighted that my noble friend Lady Wheatcroft and the noble Baroness, Lady Kramer, have added their names to this amendment.

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So where does this leave me? Given the importance placed on this issue by the House, reluctant though I am to agree on many things, although I agree on some, with the noble Lord, Lord Myners, and even though I would go a different route—the noble Lord, Lord Eatwell, clearly shares the view of the House about the desirability of rebalancing—I accept the thrust of my noble friend’s amendments. If my noble friend will permit me, I would like to reflect on the debate, and particularly on the wording of the amendments, to make sure that we have got it right. If my noble friend will consider withdrawing her amendment now I will commit to tabling a government amendment at Third Reading to rebalance the membership of the FPC by removing a Bank executive as provided in Amendment 4 and the following consequential amendments.

[Baroness Noakes]

My Lords, I thank all noble Lords who have taken part in this important debate and I thank the Minister for his welcome remarks. I believe the technical response in this situation is “bingo”. With that, I beg leave to withdraw my amendment.

Amendment 4 withdrawn.

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[Lord Phillips of Sudbury]

My Lords, I will add a rather mundane legal point. I do not believe that the amendment tabled by the noble Lord, Lord Peston, would achieve anything, even if it were accepted. Subsection (1), whose two limbs cover the matters to which the Financial Policy Committee must have regard, is quite clear about the stability objective. However, in a situation where the Government had no objective for growth, it would not bite, even if you took the words “subject to that” out of the clause. That is, as I said, a very mundane lawyer’s point.

[Baroness Noakes]

My Lords, I recall that when the previous Government set up the Monetary Policy Committee, they formulated its secondary policy objective in precisely this form, “Subject to that”. Can the Benches opposite explain when they had a damascene conversion on this topic?

[Lord Sassoon]

No? Sometimes silence speaks volumes. We can all—

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Moved by

[Baroness Noakes]

7: Clause 4, page 12, line 13, at end insert—
“(1A) If the Treasury considers it appropriate to proceed with the making of an order under section 9L, the Treasury may lay before Parliament—
(a) a draft order, and(b) an explanatory document.(1B) The explanatory document laid under subsection (1A) must—
(a) introduce and give reasons for the order,(b) explain why the Treasury considers that the order serves the purpose in section 9L, and(c) be accompanied by a copy of any representations received from the FPC or the Governor of the Bank.(1C) Subject as follows, if after the expiry of the 40-day period the draft order laid under subsection (1A) is approved by a resolution of each House of Parliament, the Minister may make an order in the terms of the draft order.
(1D) The procedure in subsections (1E) to (1H) shall apply to the draft order instead of the procedure in subsection (1C) if—
(a) either House of Parliament so resolves within the 30-day period, or(b) a committee of either House charged with reporting on the draft order so recommends within the 30-day period and the House to which the recommendation is made does not by resolution reject the recommendation within the period.(1E) The Minister must have regard to—
(a) any representations,(b) any resolution of either House of Parliament, and(c) any recommendation of a committee of either House of Parliament charged with reporting on the draft order, made during the 60-day period with regard to the draft order. (1F) If after the expiry of the 60-day period the draft order is approved by a resolution of each House of Parliament, the Minister may make an order in the terms of the draft order.
(1G) If after the expiry of the 60-day period the Minister wishes to proceed with the draft order but with the material changes, the Minister may lay before Parliament—
(a) a revised draft order, and(b) a statement giving a summary of the changes proposed. (1H) If the revised draft order is approved by a resolution of each House of Parliament, the Minister may make an order in the terms of the revised draft order.
(1J) For the purposes of this section, an order is made in the terms of a draft order or revised draft order if it contains no material changes to its provisions.
(1K) In this section, references to the “30-day”, “40-day” and “60-day” period in relation to any draft order are to the periods of 30, 40 and 60 days beginning with the day on which the draft order was laid before Parliament.”

[Baroness Noakes]

My Lords, this has taken me a little by surprise—I thought I had another few minutes’ rest before we got to my amendment.

Amendment 7 deals with the parliamentary procedure for approving the Treasury’s direction to the FPC setting out the macroprudential measures that the FPC can impose on the PRA and the FCA. Under proposed new Section 9N of FiSMA, as inserted by Clause 4 of the Bill, the procedure is to be the draft affirmative one. My amendment seeks to convert that into a super-affirmative procedure.

The draft affirmative procedure requires parliamentary approval of the draft of an order before the final order is actually made. It gives slightly more opportunity for parliamentary scrutiny than an ordinary affirmative order, but the end result of the parliamentary procedure is binary—it is either approved or not. Such an order is not amendable and the only option available to either House would be to reject the whole order. The political composition of the other place effectively means that an order is always passed, whether draft or not. It does not matter whether the debate is in a Committee Room or, as has been suggested by the Chancellor of the Exchequer, on the Floor of the House. The end result is the same. In this House, technically we can reject an order but by convention we do not do so. It has happened only very rarely and is rightly regarded as a nuclear option.

Like the Joint Committee that scrutinised the draft Bill, the Treasury Select Committee in another place concluded that the content of an order setting out macroprudential measures deserves an enhanced level of parliamentary scrutiny. The Treasury Select Committee believes that the situation satisfies the Erskine May formula that talks of the super-affirmative procedure being used where,

“an exceptionally high degree of scrutiny is thought appropriate”.

The super-affirmative procedure in my amendment would require the Treasury to set out, in some detail, why the order is to be made. It would allow either House of Parliament to make recommendations on the draft order, which the Government would have to have regard to before returning with the final version of the order. Neither House would have any power of amendment but would have the power to recommend amendments, which the Government would have to consider.

It was suggested in Committee that macroprudential measures are very technical and not amenable to amendments—the noble Baroness, Lady Kramer, made this point. That may or may not be correct, depending on the particular measure. It is certainly true that the wider economic impact of the use of macroprudential tools is a proper subject for parliamentary debate, and either House may well want to say to the Government that their chosen tools are perhaps too wide or not wide enough. In contentious cases, Parliament may well say that the tools should be sunsetted or should be subject to additional reporting to Parliament on the impacts of the measures over time. Many important things could come out of a proper parliamentary debate that may or may not represent suggestions for amendment.

I have no particular concerns about the initial macroprudential toolkit. The FPC has been open about what it wants and why, and the Government are consulting transparently on their draft order. However, the initial tools are probably the easy ones because they largely align with international developments, and my amendment is directed at the development of the measures over time. For example, the FPC deliberately held back from asking for loan-to-value or loan-to-income powers, recognising that these should be decided by Parliament and that a full public debate would be necessary before such measures were introduced. If enforced, loan-to-income or loan-to-value rules could have a massive impact on the availability of mortgage credit and therefore raise wider societal issues as well as financial stability ones. Without the backstop of the super-affirmative procedure it is far from clear how Parliament could ensure that its—or anyone else’s—voice would be heard.

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[Lord Sassoon]

My Lords, of course, this is another issue that was discussed at some length in Committee. The Government recognise the importance of proper public and parliamentary scrutiny and accountability for macroprudential tools. That is why the Bill requires that macroprudential orders be subject to the affirmative procedure.

The Government have given a number of undertakings to further demonstrate our commitment to ensure transparency and effective scrutiny of macroprudential orders. In another place the previous Financial Secretary to the Treasury, Mark Hoban, clearly stated the importance that the Treasury places on taking a consultative approach to policy-making, and that he expected this to apply to macroprudential tools. In addition, my right honourable friend the Chancellor of the Exchequer has said that he would be happy for debates on tools to take place on the Floor of the House, subject to arrangement through the usual channels.

The Government have also committed to consult on their proposals for the FPC’s initial toolkit. I note that my noble friend has no complaint on that score. Nevertheless it is important to recognise that the consultation document containing the Government’s proposals, a draft order and an impact assessment on those proposals was published on 18 September. The consultation will run for a full 12 weeks. In Committee a number of noble Lords highlighted the 90-minute restriction on debates and the inability for orders to be amended. However, I believe that consultation and the statement made by the Chancellor address these concerns effectively. I encourage noble Lords to read the consultation and respond if they feel able to improve the drafting of the order. I also hope that the relevant parliamentary committees will make their views on the Government’s proposals known.

Importantly, the Government’s stance on the parliamentary control of these macroprudential orders has been endorsed by the Delegated Powers and Regulatory Reform Committee. Maybe I did not notice it, but I do not think that my noble friend referred to the DPRRC. I know that she regards the committee, in her words, as an early warning system of problems for Parliament to address. In this instance, it has considered our proposed procedure and determined that there is not a problem to address.

As I suspect my noble friend knows, the DPRRC has stated:

“The importance of the power is recognised by the application of the draft affirmative procedure or, in urgent cases, the 28-day ‘made affirmative’ procedure … The Joint Committee on the Draft Bill and the House of Commons Treasury Select Committee have recommended an enhanced affirmative procedure for the non-urgent orders, based on that in the Public Bodies Act 2011. But the affirmative procedure provided for in the Bill should be a sufficient safeguard against inappropriate use of these powers”.

It is also important to remember that orders made under new Section 9K will not always be major pieces of legislation. It could be the case that minor technical amendments need to be made to the tools over time. Under such circumstances, requiring the super-affirmative procedure would be a disproportionate use of parliamentary resources. I note that my noble friend has made some adjustments to the super-affirmative procedure that would make it less onerous, and she has addressed those at some length in her remarks. I still feel that her proposal would require a disproportionate amount of parliamentary time and resource.

The bare minimum amount of time to pass an order under these proposals is 40 days, which can be increased to 60 days by resolution of either House or by recommendation of a committee of either House. The time taken to make an order where the consultation process shows that substantial changes are required is even greater. Even once the 60-day period has elapsed, this amendment would require the Treasury to obtain prior approval to the amended instrument before it could be made. This would introduce a significant amount of uncertainty around the time it would take to amend the FPC’s macroprudential toolkit.

I have stated many times that the Government place great importance on public and parliamentary scrutiny of the macroprudential tools. Given the steps already in the Bill and the commitments made by this Government, I ask my noble friend to withdraw her amendment.

[Baroness Noakes]

My Lords, I am disappointed with my noble friend’s response on this. He has repeated that in the other place there can be a debate on the Floor of the House, but the location of a debate on a statutory instrument is completely irrelevant. The outcome is exactly the same. He has rested on the full process for the early order but, as I said, those ones, with a high degree of international agreement on what the early phase of macroprudential tools should be, were easy to do. That is not really an issue. My noble friend rightly raises the Delegated Powers and Regulatory Reform Committee, for which I have the highest respect. I have equally the highest respect for the Joint Committee which scrutinised the draft Bill, and high regard in particular for the Treasury Select Committee in another place, which has been tireless in its scrutiny of this legislation. I have two committees to play one.

The best parliamentary procedure would in this instance be the super-affirmative. I can only say that I am extremely disappointed with my Government for hiding behind the easiest option of parliamentary procedure, but I will accede to my noble friend’s request and beg leave to withdraw.

Amendment 7 withdrawn.