Financial Services (Banking Reform) Bill

Baroness Noakes Excerpts

Tuesday 15th October 2013 Lords Chamber

Similarly, other distinguished people who have worked for the Bank for International Settlements, or other central banks without actually running them would be appropriate in this case. While the notion of having financial expertise and expertise in prudential regulation is entirely appropriate, the issue of running large organisations as an exclusive characteristic of those non-executive members is probably undesirable.

[Baroness Noakes (Con)]

My Lords, I shall not take much of the Committee’s time. Most of these amendments are pretty marginal to this Bill, and, as the noble Lord, Lord Turnbull, said, it feels as if we are refighting the battles that we so much enjoyed on the previous Financial Services Bill.

I should like to make a small contribution on the expertise point. I believe that it is a matter of principle; it is not good to specify in legislation the characteristics that holders of particular offices should have. Things change over time and rapidly become out of date. They are useful things to debate but not in the context of writing legislation. In particular, the non-executive community should be a balance of skills and expertise. To follow the formula here, they have all to be this impossible person in having experience of running large organisations and financial institutions, and expertise in prudential policy. The gene pool is pretty limited on those, and to write that into legislation is a recipe for not being able to fill the posts as they come vacant. I am sure that it is really enjoyable to go back over all those debates that we had and to relive the points that have been raised by the Treasury Select Committee in another place, but for my purposes they are not necessary for this Bill.

[Lord Newby]

My Lords, as noble Lords have said, the governance of the Bank of England was debated at great length just a year ago during the passage of the Financial Services Act. As a result of those debates, the Government accepted that the additional responsibilities for financial stability transferred to the Bank would put strain on its governance structures, and as a result we provided for a powerful new oversight committee, which has been established as a sub-committee of the Bank’s court.

These changes were introduced as recently as April this year and should be allowed time to develop. Making further changes now would serve only to introduce uncertainty into the Bank’s governance at a time of significant change in its senior management. It would also prevent the new system having time to prove itself. Moreover, it is the Government’s view that the amendments would weaken rather than strengthen the Bank’s governance structures.

I shall deal with the amendments in turn. Amendment 83 proposes that the name of the governing body should change from the court to the board of directors. Our view is simple: changing the name of the court would make no difference to how it operates in practice. Indeed, in substance the court now operates along the same lines as a modern plc board. It has a clear division between the role of the chief executive and non-executive chair; it is made up of a majority of independent non-executive directors; and there are formal, transparent appointment procedures for executive and non-executive directors alike.

Amendment 84 proposes that the number of non-executive directors should be reduced from nine to four and would require the appointment of a non-executive chairman. The reduction in the number of non-executive directors would drastically alter the balance of membership of the Bank’s governing body, resulting in an equal number of executive and non-executive members. It is our view that this would significantly reduce the level of independent advice and challenge available to the governors and increase the risk of decision-making becoming dominated by a small group. The court already has a non-executive chair, so we believe this proposal is unnecessary.

Amendments 85 and 86 propose abolishing the new oversight committee and rolling its powers into the proposed new board of directors. This would be a backward step for the accountability of the Bank. The oversight committee, which is made up exclusively of non-executives, was established to provide stronger challenge to the Bank’s executive. It has a clear remit to monitor the Bank’s performance against its objectives and strategy, including the Bank’s monetary and financial policy objectives. In order to deliver these responsibilities, the committee has the power to appoint any person to review any matter. These powers cover not only the Bank’s operational performance but also its policy decisions. These responsibilities are very important to the accountability of the Bank, and the Government believe they must continue to be carried out by a non-executive body independent from the policy-making process. These amendments would transfer the powers of the oversight committee to a board of directors whose membership included the governor and three deputy governors of the Bank. It cannot be right for the governors to have a role in scrutinising the policy processes that they themselves are responsible for administering, especially when the processes in question are of such vital national importance.

These amendments also seek to introduce more specific legislation to govern how the performance of the Bank’s policy functions are monitored. This is unnecessary. The oversight committee already has wide-ranging powers to review the Bank’s performance in relation to any matter, including specific provision to review the procedures of the MPC and Financial Policy Committee. The Government also believe that it is unnecessary to introduce legislation covering requests for information. The current arrangements are effective, and historically the Bank has been very co-operative with both the Treasury and Parliament. Moreover, Parliament already has wide-ranging powers to hold public authorities to account, including the power to call any witnesses to appear in front of any of its committees, as the governors of the Bank of England know only too well.

Amendment 87 would require the Chancellor to appoint an additional external member to the FPC with experience of financial crises. The FPC’s objectives—

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[Lord Higgins]

As I understand it, the Government are proposing to remove the provision that on demutualisation people had to have held the shares for two years beforehand. Is there not some argument in favour of that? Otherwise, if it seems possible that a demutualisation will take place, there will be a sudden rush for people to benefit and obtain a purely short-term gain, as against those who have invested in the mutual for some time.

[Baroness Noakes]

My Lords, I am probably one of the few Members of your Lordships’ House who does not wear rose-tinted spectacles when it comes to the mutual sector. I am usually filled with slight horror when people tell me that they are going to modernise this wonderful sector and I am not particularly interested in the fact that it was in the coalition agreement. That is because we have seen a major failure of the mutual sector in recent years—namely, in relation to the Co-op Bank—and the history of the building society sector is one of failed building societies. However, many of the things in these amendments are not terribly important. Electronic versions of documents and the like may well help to reduce the cost of servicing very large member bases. My only concern is the liberalisation of the amount of funding that building societies can have, which potentially exposes the sector to greater risks. I would want to be assured by my noble friend the Minister that the Prudential Regulation Authority has no intention of relaxing its normal prudential approach to building societies, as there is no evidence that given greater freedoms they will use them wisely.