Bank of England and Financial Services Bill [HL]

Debate between Baroness Noakes and Baroness Kramer

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.

Bank of England and Financial Services Bill [HL]

Debate between Baroness Noakes and Baroness Kramer

Monday 9th November 2015 Lords Chamber

[Baroness Kramer]

My Lords, I will briefly join in the debate. We have two very highly regarded independent organisations—the Bank of England and the NAO. I say to the Government that it is unfortunate that legislation has come forward without resolving the relationship between the two of them. This House should not be in this position today, and neither should either of those two institutions. I very much hope that the Government will take the advice proffered and bring these various parties together to get a resolution here. Both are key institutions that need to have their independence appropriately protected.

In answer to the question asked by the noble Lord, Lord Higgins, the two lines about which he was concerned a moment ago, which are taken out and replaced by what he read as almost two identical lines, almost get to the crux of this matter. The amendment strengthens that assurance that the NAO and the Comptroller and Auditor-General do not in any way seek to question the merits of policy objectives. It is trying to make that absolutely clear by putting in a stronger statement to that extent. The problem the NAO has, as the noble Lord, Lord McFall, said, is that due to the way in which the language is now drafted, the Bank effectively now has a veto over which studies are undertaken. Frankly, that is, I think, unacceptable to every party.

We in Parliament depend very much on the NAO and the reports it provides to us. It is very important for us to be able to receive that information, knowing that it is impartial and independent, for us to be able to perform the role we play. All the discussions today have talked of the importance of oversight. While we very much respect the Bank of England, we are all incredibly conscious that it has made very serious mistakes in the past which have cost us dear, and that we all need to play a role in interacting and making sure that we understand and are appropriately taking on our responsibilities toward that institution. Frankly, it is very hard to see how we in this House or in the other place can do that without effective reporting from the NAO.

I hope that the Government will take this matter away for reconsideration because these are significant concerns. I take great heart in hearing from the noble Lord, Lord McFall, that the Federal Reserve board in the United States is one of the bodies on this globe that most asserts its independence and integrity. The Federal Reserve accepts a similar kind of oversight from the US Government Accountability Office, and it seems to me that we have a template there. If it works for the Federal Reserve, surely it can work for the Bank of England.

I hope that these amendments will be taken exceedingly seriously. While the noble Lord, Lord Bichard, is not in a position to speak himself, there are many in this House, including the noble Lord, Lord Higgins, and the noble Baroness, Lady Noakes, who will be able to appreciate the importance of the points that he would have made had he had the opportunity.

[Baroness Noakes]

My Lords, I support the amendments. I was deeply shocked to see that the Government proposed to give the Bank of England a veto over whether the Comptroller and Auditor-General could undertake a particular value-for-money study. I have believed for a long time that it has been an anomaly that the Bank of England has not been within the remit of the Comptroller and Auditor-General. I do not believe that any public body, however great and however independent, should be able to stand on that greatness and independence and say, “I do not want the National Audit Office or the Comptroller and Auditor-General to examine what I have been doing”. Public audit can be effective only when it is unfettered, and the concept of fettering the Comptroller and Auditor-General is, frankly, unacceptable.