(12 years, 4 months ago)
Commons ChamberI rise to support new clause 1 briefly. I had the privilege of sitting on the Joint Committee on the draft Bill and of being a member of the Treasury Committee, which is chaired by my hon. Friend the Member for Chichester (Mr Tyrie)—colleagues have noted that he is not a Privy Counsellor, but as far as many of us are concerned he is right honourable in spirit.
The main purport of new clause 1 is to establish a duty on the court of directors to conduct retrospective reviews of the Bank’s performance. The Governor of the Bank of England, in giving evidence to the Joint Committee and the Treasury Committee, has argued that it would be a bad idea to have a review into anything other than the processes by which certain policy decisions are reached. In other words, he does not want there to be a duty on the Bank to scrutinise retrospectively how good its decisions—meaning the decisions of the Financial Policy Committee or the Monetary Policy Committee—turned out to be. One of the reasons he gave was that there are lots of external commentators, such as outside economists in the City and the commentariat in the fourth estate, but it is fairly obvious that those entities are under no statutory duty to crawl through every decision of the FPC or the MPC and decide with hindsight whether they were good or bad.
The second reason the Governor gave is that the Treasury Committee holds the Bank to account, a point alluded to by the hon. Member for Nottingham East (Chris Leslie). The Treasury Committee, packed with talent though it is on a yearly basis, still has a huge amount of work to do and, not for the want of trying, does not have the amount of technical expertise or the number of macro- and micro-economists needed to conduct work month after month, tracking back and looking at how good or bad the judgment calls of the FPC, as constituted by the Bill, and the extant MPC turned out to be. My word, don’t we need such backward-looking analysis? If it had been present in 2007 and 2008, we might have avoided the difficulties of which we are all too well aware.
The Bill gives the Bank of England unprecedented powers. As a result of it, we will have a Governor of the Bank of England, whomever he or she is in the future, who will be chair of the Monetary Policy Committee, have a place on the court of directors of the Bank of England, chair the Financial Policy Committee and chair the Prudential Regulation Authority. With the creation of the FPC, alongside all the work that the Bank does on monetary policy, a lot of decisions are going to be made.
Not since the creation of the Bank of England in the late 17th century has its senior management and Governor had so much power, and, from even a cursory glance, the Joint Committee’s evidence and the evidence taken by the Treasury Committee in recent months all leads to one thing: one cannot have enough scrutiny of this big beast that the Bank will become as a result of the Bill coming into force.
The Treasury Committee argued forcefully for a severe new set of accountability and scrutiny powers. We advocated the creation of a new supervisory body inside the Bank of England in order to replace the court of directors, because the court, as everybody knows, is packed full of amateurs—well-meaning amateurs, but people who simply are not, by any stretch of the imagination, able to hold the Bank of England’s senior executive members, who are on the MPC and will soon be on the FPC, to account.
The court includes has-beens in the City, or “never-was’s”, and people with indifferent reputations in the trade union movement, in manufacturing and in all aspects of public policy. But the evidence shows that remarkably few of them have any expertise in central banking matters, in fiscal policy, in macro-prudential policy or in monetary policy. The court is desperately under-geared, and its intellectual horsepower is not what it should be.
A supervisory body, with a majority of external members, overseeing the FPC’s and MPC’s judgments and undertaking retrospective reviews is the best-case scenario; it is what the Treasury Committee thought would be the best solution for scrutinising this very powerful—all-powerful, I might add—Bank.
I understand why Ministers have concluded that they do not want to go into battle with the Governor and the senior executives about a supervisory body, because it is way too radical, but it is absolutely incumbent on this House to look at the purport of new clause 1 to see that it actually imposes more scrutiny than the Bill currently provides on the policy decisions of not just the MPC, but the FPC. Let us not forget that the MPC has recently acquired, or arrogated to itself, certain very significant discretionary powers over monetary policy—not in setting the bank rate, but in quantitative easing.
How many debates have we had in this Chamber about QE and its merits or relative de-merits? The answer is relatively few. The Monetary Policy Committee is held to account only by the Treasury Committee. It is my suggestion that the Treasury Committee, marvellous and wonderful though it is—I am a member of it, so I would say that—will need the assistance of ex-post reviews to look retrospectively at the quality of the decisions that the Bank, with its new powers, makes. I therefore urge colleagues to support new clause 1.
I congratulate the Chairman of the Treasury Committee on new clause 1. I disagree with what was said about him becoming a right hon. Member. In my experience of this place, somebody as independent and straightforward has little chance of becoming right honourable.
On a more serious note, I follow my colleague on the Treasury Committee, the hon. Member for Bury St Edmunds (Mr Ruffley), in saying that the Minister would be well advised to accept the amendment or to indicate that further thought will be given to it. I agree with my colleague that the amendment could and should have been much harder. The problem is with the behaviour of the court of the Bank of England. It is not that it has not been given power; it is that it has accepted the boundaries and the servile role imposed on it by the Governor and the executives of the Bank of England. As I have said in this Chamber and as has been said to the Treasury Committee in all but terms, the court is allowed to count the paperclips, but that is about it. Anything serious or to do with policy is nothing to do with it. If its members had any dignity or self-regard, they would not be part of it, because apart from receiving a nice little stipend for going, one wonders what on earth they do.
The discussion in the Treasury Committee, and even in the Joint Committee on the draft Financial Services Bill, has been about bringing the corporate governance of the Bank of England into the 21st century with a proper board, and about stopping it being the fiefdom of one person. If I were the Minister, I would accept the new clause in spirit and say that I would speak quietly to people about it to strengthen the proposals and move on. He could well find himself having a much stronger position forced upon him, which would be good for the Bank of England in the long run.
I congratulate my hon. Friend the Member for Nottingham East (Chris Leslie) on amendments 22 and 23. I will deal with them briefly because many Members want to speak. This is not a political point, but the response to those amendments from Government Members is interesting, because my hon. Friend has raised a matter that deserves discussion and thought. The powers being given to the Financial Policy Committee will affect people, industries and firms, and there must be accountability. The problem arises from the fact that there is no consensus on the definition of financial stability, but the House is setting up a Financial Policy Committee, the objective of which is financial stability. The Chancellor of the Exchequer raised the most pertinent point before the Joint Committee, which was that although we do not want it to, the FPC could define financial stability as the “stability of the graveyard” and reach it. My hon. Friend the Member for Nottingham East raised that point today.
If the FPC had the responsibility for making the definition and wanted to do it without much fuss, it could set the required level of economic activity so that it neither pressed the ceiling nor went through the floor, but would that give us the growth and employment that the Government might want? Should not the FPC be asked to work towards the Government’s policy, whichever party is in government?
(12 years, 6 months ago)
Commons ChamberMay I first align myself with the remarks that my right hon. Friend the Member for Newcastle upon Tyne East (Mr Brown) made about the Chairman of the Joint Committee on the Bill, the right hon. Member for Hitchin and Harpenden (Mr Lilley)? The fact that I was still on the Committee at the end of its sittings shows that he was indeed tolerant and patient. I would like also to put on record my admiration for, and thanks to, the Chairman of the Treasury Committee, who is in China at the moment. We have had an arduous 18 months on the Committee going through the regulations. The fact that there are three members of the Committee here today is nothing to do with our being unable to get on the plane to China; it is more that we are so dedicated to regulation that we chose to be here.
I want quickly to raise three matters. I welcome the Chancellor’s open-mindedness—it was not a U-turn; that was an unfair description—in accepting the point about secondary legislation being inappropriate for the macro-economic tools. I hope that he will show the same open-mindedness on the three matters that I will raise, because so far the Government have not accepted the Joint Committee’s or the Treasury Committee’s views on them.
The first issue is the objective of the Financial Policy Committee, which is to ensure the financial stability of the financial sector. One difficulty raised by many of the witnesses before the Treasury Committee and the Joint Committee was that no one can come up with a definition of “financial stability”. That clearly presents those responsible for oversight of the FPC with obvious difficulties. On what basis do they judge the committee’s activities and performance? Is the issue stability alone? As the Chancellor himself stated in evidence, we should not be seeking the “stability of the graveyard”. I think of the unfortunate individual in hospital who is seriously ill in the high-dependency unit, but whose relatives are assured that he is in a stable condition. Just as in that example, stability in economic terms does not equal a healthy economy.
Arising from that—and equally important—the relevant question for all sectors to emerge from our witnesses was: in exercising its power to seek financial stability in the financial sector, will the Financial Policy Committee ignore the effect that that might have on the other sectors, in the real economy? To be fair, the original suggestion that the Government advanced was that the Financial Policy Committee could not take decisions to achieve financial stability if it believed that those decisions risked medium to long-term economic growth. An interesting and important point is that it was originally left to the FPC to make that judgement itself, with no mechanism for the Chancellor to have his say. The negativity of that formulation led HSBC, the British Bankers Association and several other witnesses to the Joint Committee to suggest that the relevant clause be redrafted, to give the FPC a positive duty to support economic growth.
I would like to put on record what was said by Stuart Gulliver of HSBC and Bob Diamond, neither of whom would immediately be recognised as friends of mine, or otherwise. Stuart Gulliver said:
“the…Treasury should be setting out what the Government’s goals are for growth, employment and job creation and saying to the FPC, ‘Use your macro-prudential tools to ensure that you achieve the Treasury’s goals.’”
Just as interestingly, both he and Bob Diamond cited the experience of the Pacific economies that actively manage the flow of credit and even its sectoral allocation, using a variety of macro-prudential tools. The people in small businesses and medium-sized enterprises would be very interested in that. The Joint Committee agreed a recommendation that the Bill be redrafted so that, like the MPC, the FPC must have regard to the Government’s growth objectives and other economic objectives. The Government have responded to the Joint Committee’s points on other related items in this area, but have not responded in favour of the more positive and widely supported suggestion that the FPC should be given a brief to have regard to the Government’s growth and economic policies. That is a real worry, and I hope that the Government will approach it with an open mind in Committee.
I am following the hon. Gentleman’s argument closely. Does he agree that it is imperative for the Governor of the Bank of England to return to Parliament to explain in detail the indicators that he thinks should be used in the attempt to get a handle on the definition of financial stability, and that we need a full and frank debate on what those indicators should be?
That is an important point. I think that it was Charles Goodhart who raised the question of indicators. They are certainly interesting, but on a wider scale, I think it more important to establish that, given that the Monetary Policy Committee is linked to a target of 2% inflation, the Financial Policy Committee should be linked to growth employment measures that ensure that there is no “safety low level” of stability, and be forced to have a look at the problems of the real world out there.