Bank of England and Financial Services Bill [HL]

Baroness Noakes Excerpts

Monday 9th November 2015 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I completely support my noble friend Lord Sharkey in this. Although I greatly respect the noble Lord, Lord Flight, I hope that the House will resist his blandishments. I think non-executive directors of banks finding themselves on the Court of the Bank of England would be constantly facing conflicts of interest, and the public perception would be appalling—that the Bank had become the captive of the industry that it is there to regulate. That does not seem to be a sensible principle.

With the changes that are now proposed—for there to be five inside members, if you like, of the court and seven outside—the inside members would need to persuade only one outside member to join them to achieve stalemate. That is an unacceptable balance in any institution which is so important to the economic life of this country. If the argument cannot persuade more than one non-executive director, it cannot have the standing that would allow it to prevail.

Like my noble friend Lord Sharkey, I am still struggling to understand why this change is being made. The only reason that has been presented to me is the issue of transition. If there are only seven members of the board, for a period of time there could be an incoming and an outgoing member on the board at the same time. Perhaps that is a good practice; it sounds reasonably attractive. But for that to be the reason that the board should be reduced on a normalised basis to seven seems extraordinary. I also suggest that an outgoing member might be very hesitant to exercise their rights, knowing that they were about to depart the board. Transitional arrangements could be put into the Bill, and we would be quite supportive of the idea that there might be a period when an outgoing member of the court could remain on the board in certain roles, or perhaps even in a full role, for a brief transitional period to achieve the goals that the Minister is attempting to achieve.

I hope very much that we can resist this set of issues. The Bank of England is sufficiently important and outsiders are absolutely necessary. This House has made sure over the past several years that that is central to legislation and I think we will continue to hold to that importance.

[Baroness Noakes (Con)]

My Lords, I agree with the noble Baroness, Lady Kramer, that the Bank of England is an important institution but I am not sure that that importance needs to translate itself into how the court is constituted. The important activities of the Bank are carried out in what will be the three major committees: monetary policy, financial stability and prudential regulation. The activities carried out by the court are relatively few in number. The question then is: what size of court is going to be efficient for carrying out the functions it is there for?

The model that well serves both the plc community in this country and much of the public sector that is modelled on corporate lines is to have a majority of non-executives. That is being kept in here. I have never heard it suggested that the number of non-executives is somehow important to the quality of governance in plcs. Many have more than a bare majority of non-executive directors but a lot operate strictly within the rules to have just a bare majority. I have not seen any studies anywhere that the ratios have any correlation with the quality of governance that is capable of being exercised.

The noble Lord, Lord Davies, referred to the academic evidence that smaller boards are effective boards—that is one of the things that came out of Sir David Walker’s review into the governance of banks—and that committees should be 4:5 and boards 8:10 or something like that. That is because in a smaller organisation, all members can have a proper voice and there can be a proper discussion, whereas in large boards often it is relatively simple for an inner group to dominate the larger group. That is what the behavioural studies have shown.

[Baroness Kramer]

I respect the views of the noble Baroness, Lady Noakes, very much but is she saying that the current Court of the Bank of England is ineffective because it is too large, and that the effect has been that many of the non-executive directors are not having their voice heard? That is a very serious comment to lay on the table. If that is the case, we really need that evidence because we will want to effect a cure, if this is an answer to a board that the Government have essentially decided is ineffective.

[Baroness Noakes]

My Lords, I have absolutely no knowledge of how the Court of the Bank of England works and have not had that knowledge since 2000, when my tenure on the court ceased. At that time I think that we were a court of 16, of whom 13 were non-executives. I will not claim that we were a very effective board at that. All I am trying to say is that what the Government are proposing is perfectly sensible and in line with general corporate practices. It seems to be entirely defensible.

[Lord Eatwell]

My Lords, the Bill reeks of the feeling that non-executive directors are a nuisance. Everywhere, we find the role of the non-executive directors in the Bank being reduced. This simple numerical reduction is something like arguing about the number of angels who can dance on a pin. None the less, let us remember why legislation was brought to this House and argued for so forcibly by the noble Lord, Lord Deighton. It was because the Bank of England was seen to have significantly failed during the financial crisis: in particular, that the Bank of England had not had sufficient alternative voices or challenge within its decision-making process. That is what underlay the Financial Services Act of, let me remind the Committee, 2012—just three years ago. From its vesting date to today, that Act has been in force for about two and a half years. How, after that period, can it be decided that the experience of the Act and the structures put in place by it were misconceived? This seems to be simply an attempt for the Bank to return to business as usual, ex ante—before the financial crisis. If the size of the court is too large then that should be the subject of a careful review and the evidence should be presented to this House. That has not been done. Where is the evidence?

The noble Baroness, Lady Noakes, said that what the court does is of course not very much. I wonder whether she was listening to the noble Lord, Lord Bridges, just now when he said that the court is responsible for deciding delegation of powers within the Bank. That seems to me to be quite a lot. With respect, perhaps in the day of the noble Baroness the court did not do very much, but the 2012 Act was specifically designed to empower the court and to produce on it a variety of views and the potential for challenge. There is not much of an issue between seven and nine. The issue is: why is this being changed now? What was wrong in 2012 that is now to be righted and what evidence is there that the decisions which this House made in 2012 were misconceived?