Financial Services Bill

Baroness Wheatcroft Excerpts

Monday 11th June 2012 Lords Chamber

[Baroness Wheatcroft]

My Lords, I shall begin, if I may, by congratulating my noble friend Lord O’Donnell on his masterful maiden speech. I hope that it is not the prospect of speedy abolition of this House that is making him contemplate another full-time job so quickly when he could be such a great asset to the work of this House.

No one can doubt the need for change in the way in which we regulate financial services. Even if the euro had not imploded, the huge build-up of debt in the UK in recent times would have ensured that a messy denouement was inevitable. Regulation that was supposed to be light touch had become not only light touch but blind. The Bill should improve the way in which we regulate although we should never lose sight of the fact that regulation is only ever as effective as those who apply it. The regulatory structure, whether it be twin peaked, three peaked or, as my noble friend Lady Kramer suggested, an entire mountain range, is not as important as the quality and attitude of the regulators themselves.

The structure of regulation set down in the Bill is already being implemented. The crucial point is that we are moving from a rules-based system to a judgment-based system of regulation. That has to be right. Judgment should have told any regulator that to allow a bank to lend 120% of value on a property to an individual on the basis of self-certified earnings would be potentially catastrophic, and so it proved. I applaud the general direction of the Bill and as a member of the pre-legislative scrutiny committee, which made many recommendations for amending the legislation, I am pleased that the Government accepted many of our suggestions. However, there are still areas where I believe there is scope for further improvement.

I should declare that I am on the board of a regulated entity and hold a small—very small—shareholding in another.

Much has been said about the governance of the Bank of England. The governor’s role is no sinecure at the best of times but now with his—or perhaps, at some stage, her—powers and duties significantly enhanced under this legislation, it is indeed an onerous role. It has not always seemed that the court at the Bank provided any foil to that power and we have heard much along those lines today, not least from the noble Lord, Lord Myners, whose recollections of his time on the court do nothing to allay one’s qualms. I must say that his recollection of the Mansion House dinner in 2007 leads me to believe that I must have been at a different Mansion House dinner in 2007 because, at the dinner I attended, the governor voiced great qualms about what was going on in the debt markets, particularly on the CDO front, and he talked of a real threat to global financial stability.

Those qualms over the governance of the Bank exist. It has responded to some extent by establishing an oversight committee to review the work of the Bank and its committees and to summon outside assessment and advice. This is progress. While I am not overly concerned about whether the non-executive directors of the Bank are called a court or a statutory body, I feel that there is scope for them having increased accountability. Clearly, this is something that will be discussed at some length in Grand Committee. If the court is to have sufficient clout, there should be provision for the Government to consult the chairman of the court or the statutory board on the identity of the next governor.

This brings me to the make-up of the Financial Policy Committee—a committee of the Bank. The Bill lays down that there will be only four truly external members on this vital committee. However, there is a strong case for having a majority of non-executives—and not just people with experience of the financial services sector. We want people there who know what is going on in the real world of manufacturing and construction. This is a crucial committee; we must get the membership right.

The remit of the committee is, and has to be, very clearly to protect and enhance the stability of the financial system of the UK. Nothing should be allowed to detract from that. As the Minister pointed out, we do not want the stability of the morgue, and many noble Lords talked about the need for a growth objective. The Bill requires the FPC to have an eye on growth, but the wording is strangely negative. The FPC’s responsibilities,

“do not require or authorise the Committee to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term”.

I suggest that we might be able to improve on that triumph of drafting. A secondary growth objective seems a logical thing to impose in the Bill. While never jeopardising the primary objective of the Financial Policy Committee, we must have regard to growth.

We must look also at relationships between the Treasury and the Bank, which have been the focus of much attention. The Bill makes it clear that when the Bank tells the Chancellor that there is a financial crisis, the latter is in charge. However, as my noble friend Lord Lawson pointed out, there must be regular communication between the Chancellor and the governor. This should happen naturally in the course of events, but occasionally there might come a time when the odd psychological flaw gets in the way and communication will not work as effectively as we would like. This is another thing that the Grand Committee should look at.

I turn to the quality of information. Noble Lords will recall that banks were decreed by auditors to be perfectly healthy—until it became apparent that they were not. The Joint Committee recommended that the PRA and the FCA should meet regularly with auditors to ensure that the dialogue would continue. We need to go further, and the Bill gives us the opportunity. My noble friend Lord Lawson of Blaby pointed out the need to recognise the flaws in bank accountability and accounts. The executive director of the Bank of England, Andrew Haldane, pointed to the problems with bank accounts and described getting an accurate view of them as like trying,

“to pin the tail on a boisterous donkey”.

As we have seen, bank accounts are full of numbers that tell us nothing. It should be incumbent on auditors to spell out the risks that lie behind the numbers. This would enable regulators to monitor and limit risk-taking even more than they will do by their own efforts. Auditors need to shine a light on the risks that banks are taking rather than to obscure them.

Finally, we must acknowledge, for the time being at least, that Europe will shape much of our financial regulation. We need to be clear that we have the right structures to properly liaise and influence such regulation. In particular, we need to hold on to the right to set our own minimum requirements on capital ratios rather than be put in a straitjacket by European minima.