Bank of England and Financial Services Bill [ Lords ] (Third sitting)
Harriett Baldwin Excerpts(10 years, 1 month ago)
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The Chair
With this it will be convenient to discuss the following:
Clause 13 stand part.
That schedule 1 be the First schedule to the Bill.
Clauses 14 to 16 stand part.
That schedule 2 be the Second schedule to the Bill.
Clause 17 stand part.
That schedule 3 be the Third schedule to the Bill.
The Committee will see that I have not selected any amendments that would leave out clauses or schedules. That is because the more effective proceeding is simply to vote against the stand part question, but the amendments were a helpful and proper indicator. As clauses 13 to 17 and schedule 1 to 3 are all closely dependent on clause 12, no amendments to any of them were selectable. I propose that it is convenient to consider the clauses and schedules together in debating the question that clause 12 stand part of the Bill. Members will have the opportunity, should they wish, of dividing the Committee on individual clauses or schedules in turn.
The Economic Secretary to the Treasury (Harriett Baldwin)
It is a pleasure to serve under your chairmanship, Mr Brady, on this sunny February morning. The clauses and schedules together end the subsidiary status of the Prudential Regulation Authority and integrate microprudential regulation more fully into the Bank of England. I hope I can make it clear that the changes increase the PRA’s effectiveness, but do not undermine its independence.
First, I will talk about increasing effectiveness. Placing the Prudential Regulation Committee on the same footing as the Monetary Policy Committee—and, with our changes, the Financial Policy Committee—will elevate the status of the microprudential responsibilities of the Bank to the same level as monetary policy and macroprudential policy. That reinforces not only to Bank staff but to the public to whom the Bank must be transparent and accountable that the Bank is not simply an organisation dedicated to setting interest rates, but one with equally important macro and microprudential responsibilities.
The Bank has told us that closer integration has increased the feeling among PRA staff that they are integral to the Bank’s mission and have broader opportunities for progression across the whole Bank. That can only assist recruitment of the best people to the supervisor. Another benefit is increased clarity of governance. As the Parliamentary Commission on Banking Standards noted in discussing the existing regime:
“The accountability arrangements of the new structures are more complex than those of the previous regulatory regime. The PRA is a subsidiary of the Bank, and the FPC is a sub-committee of the Court of the Bank.”
Ending the subsidiary status of the PRA and establishing the PRC, MPC and FPC on the same statutory basis simplifies and clarifies Bank governance.
A further benefit of ending the PRA’s subsidiary status is that it enables the members of the new committee to devote more time to microprudential policy and operations. As the Governor explained at the Treasury Committee, the change will
“liberate…a portion of the time of the members of the PRA Board that is spent duly exercising their responsibilities as directors of a company”,
while noting the important responsibility PRC members will continue to have for ensuring the prudential regulation functions are adequately resourced. The Governor concluded
“that time is freed up to do their core job—what they are there for—which is to provide guidance on judgment-led supervision.”
For example, the PRC will not have to spend so much time discussing IT provision since that will be a concern for the Bank at large, and ultimately for its governing body, the court. Equally, whereas the PRA board had to be involved in discussions on staff terms and conditions and recruitment, the new committee will be able to leave those important concerns to the wider organisation and focus more on supervision.
Secondly, in terms of protecting independence, the PRA is a wholly owned subsidiary of the Bank, staffed by Bank employees. The Bank appoints the non-executive directors of the PRA board, subject to the approval of the Treasury. The transfer of the PRA’s functions to the Bank does not therefore transform the PRA from a body that is independent of the Bank to one that is not.
It may be worth explaining what “independence of the PRA” actually means. The Basel core principles on banking supervision state that legal safeguards should ensure that a regulator has
“operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources”.
The Bill provides for all of those things. It provides that the Bank’s PRA functions may be exercised only through the new Prudential Regulation Committee. The Bank may not exercise its prudential regulation role in any other way.
The Prudential Regulation Committee will have a clear majority of external members. There will be at least seven external members, including at least six appointed by the Chancellor plus the CEO of the Financial Conduct Authority, and five internal members, comprising four Bank officers and one member appointed by the Governor. It is important to note that that is an increase in the weight of external members from the PRA board, on which a majority of only one is required.
Continuing with the protections for the PRA’s operational independence, the Basel core principles call for transparent processes and sound governance. The Bill sets out clear processes for the new committee’s decision making. The core principles also stress adequate resources. Every year, the committee will report directly to the Chancellor on the adequacy of its resources and the independence of its operations. The requirement for the Bank to separate resolution and supervisory functions will ensure that the UK complies with the European Union directives that insist on separation.
Finally, the Bill grants a strong statutory role to the PRA’s chief executive. He or she will be responsible for the day-to-day management and implementation of the prudential regulation strategy, and for determining how resources are allocated, managing policy development and overseeing supervisory decisions that do not reach the level of the committee. Our changes will increase the PRA’s effectiveness without undermining its independence. I commend the clauses to the Committee.
Richard Burgon (Leeds East) (Lab)
It is a great pleasure to serve under your chairmanship on this sunny day, Mr Brady, or indeed on any other day.
The effect of clause 12 will be to demote the PRA from being a separate authority to being a mere sub-committee within the Bank of England. We tabled an amendment to remove the clause and those that are consequential upon it. We think that the Treasury is dismantling another significant part of its regulatory reforms, which came into being through the Financial Services (Banking Reform) Act 2013. The clause would make the Bank of England as a corporate entity responsible for microprudential regulation. Our principal concern is with the manner in which microprudential regulation is to be conducted. We are concerned that the new PRC will be less independent than the PRA.
The risk is that the Government are demoting concerns about microprudential regulation by devolving the functions of the rule-making, free-standing regulatory authority, which is supposed to oversee that, to a sub-committee of the Bank. That is not a minor matter. The PRA is a separate corporate body and a distinct authority. It can be held separately liable and accountable for its actions and interactions. If it becomes merely a committee within a much larger corporate body, it will not be possible to hold it to account in the same way.
In the other place, my shadow Treasury colleague, Lord Tunnicliffe, said:
“The thing that keeps it clean is the fact that the PRA is a subsidiary—an independent company, as mentioned, governed by company law—and, therefore, there has to be an arm’s-length relationship between it and the FPC.”—[Official Report, House of Lords, 1 November 2015; Vol. 765, c. 2005.]
I do not believe that moving the PRA closer to the Bank and, by definition, closer to the FPC is a good thing. The present separation works and should continue.
The former Treasury Committee Chair, Lord McFall, said that the clause is
“downgrading the PRA to a mere committee”.—[Official Report, House of Lords, 26 October 2015; Vol. 765, c. 1059.]
The desubsidiarisation—a bit of a mouthful—of the PRA may simplify the Bank of England’s governance, as its current and outgoing chair, Andrew Bailey, said at the Treasury Committee. But will it make it more competent and more effective in carrying out its work? Our concern is that it will not, and there is no evidence that we are aware of to demonstrate that.
In Mr Bailey’s discussion at the Treasury Committee, the Chair of the Committee, the right hon. Member for Chichester (Mr Tyrie), raised concerns that there will not be sufficient independence owing to the make-up of the committee’s membership. He highlighted:
“the Chairman of the FPC, who will also be the Chairman of the PRC, who will also be the Governor of the Bank.”
Mr Bailey said,
“We have to be very clear in our own roles and thinking which hat we are wearing at any given point in time”.
He also said that the body will be more integrated into the Bank, but that it also has certain functions that it needs to carry out independently. The Governor was also pushed on this, again by a Treasury Committee member, the hon. Member for Wycombe (Mr Baker), who said:
“In addition to being Governor, you chair the Financial Stability Board, you are a member of Court, and you chair the FPC, the MPC and soon the PRC.”
He warned that,
“the institutions are set up in such a way that they strongly depend on the Governor’s capacity to act independently in different contexts.”
Also at the Treasury Committee, the hon. Member for East Lothian asked the Governor whether the overlap of personnel meant there were grounds for conflict
“if we have the PRC reporting on its independence from the rest of the Bank.”
I am sorry to quote the Treasury Committee at such length, but the discussion there threw up contradictions, and it is not clear to me that those contradictions have been sufficiently resolved. So can the Minister say whether the body can be both more integrated and remain independent? We welcome joined-up thinking and ensuring a broad overview. We also heard about the dangers of groupthink in Committee the other day, and the Governor of the Bank told the Treasury Committee that the Bill did not specifically address that. If we have too many key persons juggling too many tasks, is there not a risk of oversight being impaired or conflict of interest setting in?
An authority employs its own staff who are therefore dedicated to the pursuit of its particular goals, in this instance microprudential regulation. By creating a committee of senior figures, microprudential regulation becomes simply another series of talking points among senior executives, as opposed to an ongoing regulatory activity. There are many very important functions that must be performed by a microprudential regulator in the wake of the last financial crisis: first, the conduct of stress tests to ensure that individual financial institutions are putting to one side sufficient capital. That is a microprudential activity that relates to the solvency of the institutions. We are surely not arguing that it is no longer important.
With the creation of new starter banks, there is a greater need than ever for microprudential regulation as those institutions start up in business. If we continue to start new credit unions and new blockchain banks and so on, microprudential regulations remain fundamentally important. Also, there continue to be high street banks in financial difficulties, such as the Co-operative and Britannia. The danger of the Prudential Regulation Committee being appointed as is currently suggested makes it more likely that groupthink will develop.
The strength of having different agencies in existence simultaneously is that there is a useful tension between them as each of them considers the same question from a different angle in terms of the systemic risks, the risks to the solvency of individual banks, and in terms of activity on individual markets. So the political and economic context should be considered elsewhere beyond those regulatory bodies.
It is remarkable that we are witnessing what some commentators would call a downgrading of micro- prudential regulation UK at a time when financial institutions such as the Co-operative Bank and the Britannia, as I have just mentioned, face such serious solvency problems. The PRA was created for exactly that sort of situation. I therefore want to spend time on the arguments raised in relation to that change.
It has been stated that the PRA is being put on the same footing as other activities and that it is being taken back in-house. Taking the PRA back in-house is an odd idea. The PRA is currently a subsidiary of the Bank of England, so it is already in-house. A subsidiary is something that is owned by a parent company; the PRA was already a part of the Bank of England and in any event was answerable, through a statutory scheme, to the Governor.
George Kerevan (East Lothian) (SNP)
Like other Members, I add my delight at serving under your chairmanship on this bright morning, Mr Brady.
There is no best way of constructing the Bank and its regulatory functions. In this instance, however, having set up a structure, I think we should let it work itself out and see what the issues are, rather than tear it up so quickly. From that perspective, I will support the line of argument followed by the hon. Member for Leeds East.
May I remind the Minister and the Committee that we have been here before? There was a long period when the Bank was effectively the prudential authority, and it did not do a good job. One can mention the Bank of Credit and Commerce International. One can mention Barings. The Bank failed at the very simple task of examining the imminent failure of major banking institutions and not ensuring that that did not happen before it became a public catastrophe.
For that reason, in the Bank of England Act 1998, prudential conduct responsibility was taken away from the Bank and invested in the Financial Services Authority. That model, as we saw subsequently, did not work, in the sense that completely separating prudential conduct from the Bank led to a chasm between the two agencies in terms of who was letting whom know and who was responsible for tidying up.
In a sense, the halfway house that we now have, where we have put prudential conduct into the orbit of the Bank but kept it semi-discrete, is better than what we had before. Will it work in the long run? I doubt that any bureaucratic system ever works in all circumstances, but we have set it up; let us test it to destruction before we make another bureaucratic change. From that point of view, we have a model that seems to work.
The issues brought up in the Treasury Committee related particularly to the resources that were deployable to the PRA to conduct its activities and whether the main board of the Bank was providing sufficient financial and staff resources to the PRA to allow it to do its work. My worry is that the change proposed by the Government makes it too easy for the Bank’s main board to ration resources for the soon-to-be PRC. It would be better to leave a degree of independence within the PRC, so that if it comes to a debate over resources, the PRC has some muscle and can go public if it feels that it is not getting the physical and staffing support it needs from the main board.
We may need to come back to the structure of the Bank at some point; the Minister may want to reflect on that. As I said in the previous sitting, we are in danger of creating too many committees of the Bank. We may be in danger of reinforcing a silo mentality, even though the Governor serves on all the different committees. We may have to discuss at some point whether we need to separate the Monetary Policy Committee and the Financial Policy Committee, but we should certainly test the prudential part of the administration in its present form. Changing it now simply because we will get a better and prettier bureaucratic chart is not a sufficient reason.
Harriett Baldwin
As I am sure you are aware, Mr Brady, desubsidiarisation of the PRA is not something they talk about very often down at the Dog and Duck, but it is incredibly important. Committee members have raised important issues, to which I would like to respond.
If one were in the pub discussing the Bank of England, the extent of people’s knowledge of what it does probably would stop with the changing of interest rates; the hon. Member for Leeds East made that point clearly. He said that the change represented a downgrade of the incredibly important microprudential responsibilities of the PRA, but I would argue that it is an upgrade, in the sense that it gives the PRA the status of a committee—the Prudential Regulation Committee—that has the same status as the Monetary Policy Committee. That reinforces to not only Bank staff but drinkers in the Dog and Duck and the public at large that it is an incredibly important function. I completely agree with hon. Members who raised that point.
The microprudential responsibilities of the prudential regulator are extremely important. The hon. Member for East Lothian made the important point that, in the 300 years of history of the Bank of England, until its independence under the Bank of England Act 1998, there were obvious failures. Firms did fail, and no one should be under the illusion that we are in a zero-failure regime for banks.
However, it is clear that the decision to separate that microprudential function and move it to the FSA created a system that was tested to destruction. That separation under the failed regulatory regime of tripartite arrangements meant there was insufficient communication between the microprudential regulation at the FSA and the day-to-day liquidity challenges that banks were experiencing in the markets in the run-up to the crash. That seems to me the strongest possible argument for having moved the microprudential function back to the Bank of England. I am glad that Committee Members have supported that important change. By following the logic of that argument, one is compelled to see that it makes sense to go one step one further, and change the PRA from being a subsidiary into being at the heart of the Bank with the same status as the Monetary Policy Committee.
By making the points he did, the hon. Member for East Lothian has made my argument for me—for having that much closer feeling of all staff being part of one Bank, which is the agenda that the Governor has set out. That not only gives a much higher status within the organisation to the incredibly important function of microprudential regulation but it reinforces the ability of the organisation to communicate with the important other parts of the organisation, and gives them more time to do it. They will not have to worry about all of the responsibilities of being a separate company.
Harriett Baldwin
I am glad to see that the hon. Gentleman, a thoughtful and intelligent man, is nodding vigorously as I make my argument.
The hon. Member for Leeds East asked what prompted the decision. It was very much the one-Bank agenda that the Governor has followed. He argues that it makes sense to have different points of view and not be captured by groupthink. Although I agree with the importance of having a range of views on these committees, I would counter that argument by saying that the tripartite arrangements were so clearly inadequate that that difference meant that no one spoke to each other about what they were seeing.
I hope that the Treasury Committee returns to evaluate how the transition has worked. I want to reassure hon. Members on resources, because they are incredibly important. We want to ensure that the microprudential function does not have to compete for resources or find itself starved of them. It is important to note that the levy will continue to provide those resources. No changes are being made under this legislation to the available resources for microprudential regulation.
The hon. Member for Leeds East mentioned the importance of the role of the Governor. Of course, the Governor is an incredibly important person who sits on all the committees. That is an important function of having a one-Bank organisation. He is obviously a very responsible person. With those responsibilities comes accountability, not only through the Chancellor but to Parliament through the Treasury Committee. I emphasise that that arrangement does not change as a result of these clauses.
Having reviewed all the questions raised against making the changes, I insist that the changes will improve the Bank of England’s governance.
Rob Marris
I was not aware of that statistic, but it does not entirely surprise me. I thank the hon. Gentleman for that.
We have the chair of the FCA’s foreword to its business plan for 2015-16—as I said, the current year. That is John Griffith-Jones, who by the way worked at KPMG from 1975 to 2012; we all know that KPMG has questions to answer about what it was doing in relation to the financial institutions in the lead-up to the meltdown in 2008. I was talking about cosiness; he comes from KPMG, and he said in that foreword:
“In our last Risk Outlook we identified the seven most important forward-looking areas of focus in our view. We do the same again this year. Unsurprisingly, given the long-term nature of these risks and the underlying drivers, the list is largely unchanged. Poor culture and controls continue to concern us, notwithstanding the efforts being made by firms to improve both.”
So there he is, in his foreword to the business plan, less than 12 months ago, stressing again the concerns about “poor culture and controls”. The FCA said in the business plan that would investigate the culture of banking and financial institutions and then, in a whiff of smoke, it was gone—no investigation whatsoever. The Minister says that is nothing to do with the Treasury, but I hope she will recognise that the Opposition are a little concerned about the relationship between the Treasury and the FCA. We are concerned about how much control and direction the Treasury can give the FCA.
The FCA is constitutionally a creature of statute, hence the Bill and previous legislation, but in everyday terms it is somewhat a creature of the Treasury. It would be helpful if, when addressing clause 18 and the minor amendments 37 and 38, the Minister said a little more about the current relationship between Her Majesty’s Government, refracted through the Treasury, and the FCA, and what she foresees that future relationship being in the changed landscape that the Bill introduces.
Harriett Baldwin
Clause 18 is effectively about remit letters, which I think is why the hon. Gentleman took the opportunity to bring a lot of fairly extraneous issues into discussion. I will respond to some of them in the course of my remarks.
It is important that regulation takes account of both the implications of the economic environment for the regulators and of the regulators’ own impact on that economic environment. I am sure all members of the Committee agree with that. That is reflected in the statutory remits of the regulators. For example, both regulators have a duty to have regard to the desirability of sustainable economic growth in the medium or long term. The objectives of both regulators recognise the importance of effective competition, and I trust that members of the Committee do not wish to raise any controversy or have any criticism about that.
Clearly, therefore, both regulators need to understand how the Government’s economic policy may affect their work. I want to be absolutely clear that the recommendations in the letters that the Government will be able to send to the regulators will indicate the Government’s economic policy. They will be recommendations and will not be binding. They will certainly not be what the hon. Gentleman termed “direction”. They will not compromise, modify or override the regulators’ statutory objectives in any way, nor, importantly, will they relate to individual firms or cases.
The hon. Gentleman raised one of his favourite topics: the fact that the FCA had a bank culture review in its business plan for the year ahead. Despite my assurances to him in the Chamber that the first the Treasury heard of that was when it was covered in the media over the new year, he does not seem convinced by what we have said. We have replied to numerous written questions with the same response, and I repeat it for his benefit today.
The FCA is clearly operationally independent. It took an operationally independent decision to change what it is going to focus on over the coming year, and that decision was made completely separately from the Government.
Rob Marris
I take what the hon. Lady says. Is she comfortable that that was the right decision for the FCA to take? It was made by a body that is so incompetent that it could not even monitor the share dealings of its own staff.
Harriett Baldwin
The hon. Gentleman cannot have it both ways. If he thinks that I should have no operational interference in whether the FCA does a cultural review study, obviously I should not have any operational interference in whether it reinstates the study. That is the situation in which operational independence results. Where the Government have a role is through sending these non-binding remit letters and through the power to appoint the chief executive and the board. The hon. Gentleman has described the history of the predecessor organisation, the FSA, and obviously we had to abolish that organisation—that is the power of the Government of the day. His party’s Front Benchers have a range of different and fairly eccentric ideas about the independence of the Bank of England, which are on the public record. I will not entertain the Committee by talking about them.
Harriett Baldwin
The hon. Gentleman is serving in the team of a shadow Chancellor who wants to end the independence of the Bank of England.
Roger Mullin
I hear and accept entirely what the Minister says about not interfering in operational matters. However, I invite her to indicate whether, at some stage, a review of the culture would help the Government.
Harriett Baldwin
I think we can all agree that that would be a fascinating study to read, but I will not get involved in directing the FCA to change its business plan. That would be interfering with the operational independence of the FCA, which I am sure Opposition Members do not want me to do.
Rob Marris
I thank the hon. Lady for being so generous in giving way. Actually, I never said anything about not interfering in operational matters. She rightly says that, in theory, the Government could abolish the FCA. This clause does not cover a directive to the FCA; it talks about a recommendation. A recommendation from the Treasury, a body that could abolish the FCA, is something akin, in everyday parlance, to a directive. Pursuant to proposed new section 1JA(1)(b) of the Financial Services and Markets Act 2000, such recommendations could be on “how to advance” one or more of its operational directives.
Harriett Baldwin
I have outlined some of the things that the Government put in their remit letter, which is not binding on the organisation but provides important context for what the Government, elected by the British people, want to focus on.
Let me now turn to the amendments. Amendment 37 would require the Treasury to publish the recommendations it makes to the FCA within one month, and amendment 38 would require the notice laid before Parliament to be accompanied by a statement to each House. The amendments raise the important issue of transparency, which is at the heart of the Government’s proposals for these remit letters. The remit letters themselves form an important element of transparency, and they provide a transparent and formal means of conveying Government economic policy to the regulators, so it is an important part of the provision that the Treasury must publish its recommendations and lay a copy before both Houses of Parliament.
These probing amendments have been useful to confirm how the process will work. I assure members of the Committee that I cannot foresee any circumstances in which the notification for either regulator would not be published and laid before Parliament within a month. I am happy to commit the Government to that practice. I am not going quite as far as accepting the hon. Gentleman’s amendment, but I am happy to commit the Government on the record to that practice. I hope my assurance will be sufficient.
We need to retain flexibility about the best way of informing the House. For example, the updated recommendations might be issued as part of the Budget statement. In that case, it would be more appropriate and efficient for the House to be informed of the new recommendations in the Budget speech, as has happened when the FPC remit letter is updated at that time.
The hon. Gentleman raised a few other points, and it might be helpful if I respond to them. Without criticising Mr Andrew Bailey in any way, the hon. Gentleman did imply that he thought he was doing too much. However, I can assure the hon. Gentleman that Mr Bailey will stop being the chief executive of the PRA on the day he moves over to be chief executive of the FCA. The hon. Gentleman referred to conflicts. I hope that he is not alluding to any specific conflict of interest, because that would be inappropriate in terms of impugning Mr Bailey’s integrity.
The hon. Gentleman mentioned a “cosy” relationship. There were a lot of allegations relating to the fact that many individuals involved have worked with, and have experience of, other organisations. However, that is where the operational independence, structure and framework of statutory duties and responsibilities, as set out by Parliament, is so important. FSMA, for example, made it clear that the terms of all appointments have to ensure that the appointee cannot be directed by the Treasury or any other person, including the Bank.
When we make appointments, we consider the appointee’s current and previous background—of course we do —including any material conflicts. In our view, it would be entirely appropriate for people who are appointed to these important functions to have extensive experience of a relevant institution. Therefore, I do not think that the hon. Gentleman is right to talk about “cosiness”; he ought to be saying how important it is to have experience and wisdom in the statutory framework that we are discussing.
Without more ado, I hope that my points on the amendment and the clause have been sufficient to satisfy the hon. Gentleman. I am very grateful for his probing amendments. I hope I have been able to address the concerns and that the clause may stand part of the Bill.
Rob Marris
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 18 ordered to stand part of the Bill.
Clause 19
Diversity
Question proposed, That the clause stand part of the Bill.
Harriett Baldwin
The clause shows how valuable it can be for Ministers to have their Bill start in the House of Lords, given that we often find that we benefit from their insights as the Bill proceeds through the other place, particularly on subjects on which their lordships have so much wisdom.
The clause amends the general regulatory principles that apply to both the Financial Conduct Authority and the Prudential Regulation Authority. That is a direct way of ensuring that the regulators fully consider the differences between types of business, including—importantly—mutual institutions, across the breadth of work that they undertake, when it is appropriate to do so. The clause makes it clear that both regulators must take into account the differences between the varying forms of business organisation adopted by firms, including —importantly—mutual societies, where appropriate whenever they are discharging their general functions.
I hope that introducing the clause, which puts consideration of mutuality and other types of business organisation into the regulators’ guiding principles, provides reassurance that the Government strongly support a diverse financial services sector and the part that mutuals play in achieving that. We are building on previous action that the Government have taken to support the sector, including: carving out the building societies from the Independent Commission on Banking ring-fencing regulations; increasing the maximum interest rates that credit unions may charge on loans from 2% to 3% a month; spending £38 million in the credit union sector through the Department for Work and Pensions credit union expansion project; and ensuring that universal credit and pensions payments may be paid into a credit union account.
Moreover, Government support for the Mutuals’ Deferred Shares Act 2015, which received Royal Assent in March 2015, underlined our commitment to fostering growth and competition in the sector by seeking to address mutual insurers’ inability to access external capital without the need to demutualise.
Clause 19 provides a further step to ensure that regulators fully consider the particular issues that relate to mutual institutions and other forms of business across all their work. It highlights the role of mutual financial institutions in the UK’s evolving financial services marketplace and ensures that, where appropriate, the specific challenges that the mutuals sector faces are taken into consideration when the regulators are discharging their general objectives.
Rob Marris
We on the Labour Benches—I do not know about colleagues in the Scottish National party—welcome clause 19. I say that as someone who first joined a credit union more than 40 years ago. Diversity is important in the financial sector, as in many sectors. The parallel that some of us may remember from our schooldays is crop rotation, for which we need ecological diversity. If we go for monoculture with crops, it is seriously bad news if a pest comes, because our one and only crop is gone.
There is a parallel with financial institutions. By and large, the mutuals sector, including building societies, fared better than mainstream, privately owned banks in the crisis. Where there were problems, in particular, was with some former building societies that had demutualised. I say that as someone who voted against demutualisation for at least three building societies. Two of those were the Staffordshire and the Cheltenham & Gloucester. We lost both of those, but we won with the Nationwide building society—it is still a mutual, and I still have an account there. It is a very big mutual—a very big financial institution. At the other end of the spectrum are institutions such as the Wolverhampton credit union—I am not sure what it is called now, because it keeps changing its name—of which I have been a member for many years. Compared with the Nationwide building society, it is a very small institution, but that is part of diversity.
I am pleased that this Government and their predecessor, the coalition Government, have embraced diversity. The Minister mentioned some of the things that have been done: the £38 million for credit unions and the £2 million. I salute the work that the coalition Government did, and that I hope this Government will continue to do, in relation to the mutuals sector. For example, the previous Government supported disclosure of lending data by the main high street banks to understand patterns of lending across the UK. There has been the lowering of barriers to entry to the financial services market to help to increase competition—challenger banks and so on. I do not think that the Minister mentioned the good work on schools-based financial literacy programmes, which were brought in. That is not directly about mutuals, but it has to do with that concept of a broader view to financial services than simply the high street banks.
A few more things need to be done, and if you will indulge me briefly, Mr Brady, I will mention one or two of them. I am indebted to the Community Investment Coalition for some of these suggestions. A review of existing affordable financial tools would assist, as would supporting and encouraging FinTech innovation, which the Government are starting to do—it is likely to be a growing sector—but it needs to be done in a way that will also benefit people on lower incomes. Also needed is a clear direction to economic regulators—something we discussed in our debate on the previous clause—to ensure that the financial services market provides easily understandable and appropriate products. There is a constant battle there, because products keep mutating and so on. Broadening and strengthening the existing voluntary framework for disclosure of lending data would take further what the Government have already done.
It would be useful to have stressed by the Government—practising some of their recommendations to the FCA, not directions—the value and importance of community finance. They need to ensure some competition and diversity in the financial services sector, which should benefit all communities if it works properly. A review of community finance provision across the UK would be very helpful to identify where there are strong and sustainable community finance providers, but also where there are gaps in provision. Again, that would be carrying on the work of the previous Government, which this Government, in their nine months, have carried on with clause 19 on diversity.
The final suggestion is about trying, inasmuch as Government can, and they have a role to play—the Minister mentioned the £38 million for the credit union sector given by the previous Government—to scale up the community finance sector. For example, there could be assistance with investment in IT infrastructure—not the FinTech stuff, just IT infrastructure for the community finance sector. Computers are still quite expensive, let alone programming and so on. If the Government could assist with that, with their push towards diversity, as exemplified in the clause, that would be very helpful.
Harriett Baldwin
I will respond briefly because we are now in an area where harmony is breaking out. I welcome the hon. Gentleman’s comments on diversity in the financial sector and the points he made about community finance. That is something we feel strongly about. He mentioned some of the aspects such as the challenger bank agenda. He did not mention the new bank unit that has just been set up between the FCA and the PRA, shortly to be the PRC.
The hon. Gentleman did mention the importance of affordable financial tools. We have set up the financial advice market review, which is designed to make advice more affordable and accessible. He also mentioned FinTech, and we are enthusiastic about ensuring that the UK remains the best place in the world to locate a FinTech business. We are seeing a dramatic growth in that sector at the moment. He will also be aware of the importance of the peer-to-peer sector in providing community finance across the country, and what we are doing to encourage that.
There is a range of different things and he highlighted some of them. Interestingly, he mentioned a review. I am not convinced by that idea, based on the fact that in the 13 years of Labour government there were 20 reviews into competition in banking, but only one new bank was set up. In the previous Parliament, eight firms got banking licences, and we have set ourselves the ambitious goal of 15 new firms to get banking licences during the course of this Parliament. That is something we are very focused on and I appreciated the hon. Gentleman’s comments on that.
Question put and agreed to.
Clause 19 accordingly ordered to stand part of the Bill.
Clause 20
Extension of relevant authorised persons regime to all authorised persons
Question proposed, That the clause stand part of the Bill.
Harriett Baldwin
I fear that the harmony in the Committee might diminish with clause 20, which introduces schedule 4, making provisions to extend the senior managers and certification regime across the financial services industry to all authorised firms, replacing the discredited approved persons regime.
Before setting out the reasoning for that, it is worth outlining the history and development of the senior managers and certification regime. Currently, individuals who work in the financial services industry are regulated through the approved persons regime. Under that regime, authorised financial services firms may not employ a person to perform “controlled functions”, by which is meant functions specified by the Prudential Regulation Authority or the Financial Conduct Authority in their rules, unless that person has been approved by the appropriate regulator following an application by the firm concerned.
The financial crisis in 2007-08 and more recent events have highlighted concerns about the performance and behaviour of many of the individuals working in the financial services industry. It is clear that the approved persons regime has not been a successful way of regulating individuals working in the industry.
As the Parliamentary Commission on Banking Standards argued, the regime is too broad and insufficiently focused on senior management. In fact, it called it a “complex and confused mess”. Specifically, the commission criticised the approved persons regime for being mostly
“an initial gateway to taking up a post, rather than serving as a system through which the regulators can ensure the continuing exercise of individual responsibility at the most senior levels within banks”.
In addition, the commission noted that there was a lack of clarity around the responsibilities of individuals at the senior level, and that institutions did not take enough responsibility for the fitness and propriety of their own staff at more junior levels. It is clear, therefore, that the approved persons regime is not fit for purpose. It is being replaced from March by the senior manager and certification regime for firms in the banking sector.
This regime requires the regulatory pre-approval of individuals at the top of the firm, along with statements of responsibility setting out the areas of the firm’s business for which they are responsible. It also requires certification for other key individuals upon hiring, and thereafter annually.
This new regime represents a significant strengthening of personal accountability among the top senior management in firms. It will improve corporate governance, thereby advancing the safety and soundness of regulated firms. It also provides a more effective and proportionate means to raise the standards of conduct of key staff more broadly, supported by robust enforcement powers for the regulators.
It is important to recognise, however, that the activities of firms outside the banking sector can pose significant risks to market integrity or to good outcomes for consumers, and the Parliamentary Commission on Banking Standards expected that the deficiencies of the approved persons regime would not be confined to the banking sector.
Consequently, the Government have decided to extend the senior managers and certification regime to all authorised financial services firms in all sectors of the financial services industry. This action is also supported by the recommendations of the fair and effective markets review, which argued that misconduct in fixed-income currency and commodity markets had not been limited to banks. Indeed, the review noted that extending the senior managers and certification regime would emphasise the personal responsibility of individuals working in all firms to observe proper standards of market conduct.
The application of the senior managers and certification regime to all authorised financial services firms will bring in a stronger, more comprehensive regime across the financial services industry. It will enable the effective and efficient regulation of groups with a variety of financial services firms within them, and it will support a level playing field for competition. Therefore, extending the senior managers and certification regime to all authorised firms is covered by clause 20.
Rob Marris
Mr Brady, I seek your guidance. We on the Labour Benches have no problem with a schedule 4 being added to the Bill, which is what clause 20 would do—we are therefore content with clause 20. However, regarding the exact content of schedule 4 and the attendant linked debates, we wish to have an opportunity —in a moment—to put our views, after the stand part debate on clause 20, I would suggest.
Harriett Baldwin
It is important that I take this opportunity to send a strong signal on financial services. The financial services sector is vital to the strength and health of the UK economy. We have seen what the opposite looks like, and we know we do not want that to happen again. I emphasise that we are very committed to effective, strong regulation of financial services, to ensure financial stability, market integrity and strong protection for consumers. There can be no more important element of that regulation than the surrounding conduct. Conduct, and responsibility for conduct, are vital to the financial services sector. I welcome this opportunity to send that strong signal.
I also reiterate, for the Committee’s benefit, that we have done a number of other things outside the scope of the Bill. For example, we have introduced a new criminal offence to ensure that criminal penalties, including imprisonment, can be imposed upon people who manipulate key financial benchmarks such as LIBOR. We have brought in the toughest rules of any major financial centre when it comes to clawing back bank bonuses. Bringing in the senior managers and certification regime for the whole financial sector, which I remind the Committee includes a duty of responsibility to cover all financial services firms, is a very important strengthening of the failed and lacklustre approved persons regime. We are also bringing in new criminal offences so that criminal penalties can be imposed on senior managers whose reckless misconduct in managing a bank results in that bank’s failure.
The group of provisions we are considering cover, in a number of clauses and in one schedule, changes to the senior managers and certification regime, as well as amendments tabled to the provisions relating specifically to the replacement of the reverse burden of proof with the statutory duty of responsibility. I will explain briefly the purposes of the provisions in the group before addressing the amendments tabled by Opposition Members and trying to respond to points raised by the hon. Member for Wolverhampton South West.
Schedule 4 makes detailed technical changes to the Financial Services and Markets Act 2000 that are needed to extend the senior managers and certification regime to cover all authorised financial services firms, including removing the definition of a relevant authorised person. It also makes a small number of consequential amendments to the Financial Services (Banking Reform) Act 2013.
Clause 21 gives the regulators expanded powers to include transitional provisions in their rules when they make rules that create new controlled functions or change the definition of an existing controlled function. They will need those powers when they specify the new senior management functions that will form the basis for rolling out the senior managers and certification regime to all authorised persons. Clause 21 also gives the Treasury a power to make any additional provision needed in connection with those rule changes through regulations.
Rob Marris
I wonder whether the Minister has a chance now or in a moment to deal with a concern I expressed about clause 23(3)(c), which is to omit section 64B(5) of the Financial Services and Markets Act 2000, about the duty to report wrongdoing and so on.
Harriett Baldwin
I fully intend to address that. The hon. Gentleman will have to bear with me, I am afraid. I am getting a little confused with all my different subsections, as he did in his remarks. I will, however, be addressing that.
On the hon. Gentleman’s earlier question about why we did not simply implement the reverse burden of proof, allow time for it to bed down and see how it worked, my colleague in the other place, Lord Bridges, has pointed out that evidence had already started to emerge that unhelpful effects were becoming apparent as firms prepared for its introduction. We were losing the essence of the purpose of the regime, which is to ensure that everyone knows and understands their responsibilities and what they are for. We therefore felt that there was no need to wait before making the changes.
Clause 23 also removes a provision that requires firms to report all known or suspected breaches of rules of conduct to the regulators. That requirement is unnecessary, because the regulators can use their existing powers to require firms to notify them of matters that they want to know about. The provision, which requires notification of all suspected, as well as confirmed, breaches of rules of conducts, is unnecessary because it goes much further than the principles we want to operate. It would be unnecessarily onerous for firms and regulators.
As the hon. Gentleman can imagine, such a provision could effectively force firms to work out a point at which the possible indications of a breach of rules of conduct might amount to a genuine suspicion. Firms would need systems to ensure that the information is captured and transmitted to the regulators, and having been notified of a suspicion, the regulators would have to decide whether to investigate and, if appropriate, consider what action to take. In many cases there would be nothing more than suspicion, so no action would be taken, but meanwhile the regulators would have to consider and prioritise all notifications received. That would be bound to limit their ability to respond appropriately in real cases, thereby imposing costs and burdens on the regulators and using up their time. Similarly, it can be argued that the suspicious activity reports used in the money laundering regime generate many false positives.
The Government thought hard about the provision and decided that removing the requirement would help to ensure that the regulatory system can work proportionately, without putting potentially costly burdens on firms that are disproportionate to any regulatory gain. Regulators will continue to be able to require firms to notify them of matters that they want to know about. The provisions introduced by the 2013 Act as section 64C of the 2000 Act remain. The requirement that firms must report disciplinary action that they take against employees will therefore remain in force. I hope that reassures the hon. Gentleman.
Amendments 31 and 32 would reinstate the reverse burden of proof for banking sector firms—the banks, building societies, credit unions and systemically important investment firms regulated by the PRA. Amendment 33 would allow the definition of the “relevant authorised persons” to remain in the Financial Services and Markets Act, which would be needed for amendments 31 and 32 to work as intended. Amendments 34 and 35 would apply the reverse burden of proof to all authorised persons across the entire industry. I will address the specific problems that each amendment would cause.
It is important that the Committee understands that the reverse burden of proof is simply not necessary to embed senior manager accountability in the senior managers and certification regime. The Parliamentary Commission on Banking Standards clearly established that the approved persons regime was wholly inadequate. We believe that the senior managers and certification regime clarifies the responsibilities of individual senior managers, which is something that any effective regulatory regime must deliver. Moreover, it will deter senior managers from taking a reckless or negligent approach to managing their responsibilities in the first place. I know that the whole Committee will agree with that. The duty of responsibility is a powerful incentive that encourages senior managers to take effective action to prevent such failings.
I have already set out how the new regime will deliver a step change in senior manager accountability. Regulators and firms will have the necessary clarity about who is responsible for what, and there will be no wriggling off the hook. Senior managers will need to take full ownership of their respective areas of responsibility. Each bank will have to submit to the regulators a responsibilities map, which will set out how responsibility for the business of the firm as a whole is allocated and minimise the risk of any responsibilities falling through the cracks between different senior managers.
The new regime places tough obligations on senior managers to act responsibly, and imposes stringent penalties if they fail to do so. For example, under the duty, a senior manager can be found guilty of misconduct by the regulator if a breach of regulation occurs in the area of the firm’s business for which they are responsible and they did not take reasonable steps to avoid the contravention. It does not matter whether they were aware of the regulatory breach. As in the example that the hon. Gentleman raised earlier, ignorance is not a defence. What matters is whether they took reasonable steps to prevent the breach. If they did not, they are guilty of misconduct. They will not be able to avoid liability simply because the email trail has gone cold.
Removing the reverse burden of proof does not change the penalties that can be applied. If found guilty of misconduct under the statutory duty of responsibility, a senior manager will face an unlimited fine or prohibition from working in the industry. As the chief executive officer of the Prudential Regulation Authority, Andrew Bailey, said, introducing the statutory duty of responsibility instead of the reverse burden of proof
“makes little difference to the substance to the new regime…This change is one of process”.
The Government are rolling out the senior managers regime to all authorised firms, including the fixed-income currency and commodities market. In the light of that extension of the regime, we must consider whether it is appropriate to apply the reverse burden of proof to every single firm in the financial services regulated sector, given how rigorous the regime is.
I sense you are getting slightly restless, Mr Brady, but I am nearing the end of my remarks. Amendments 34 and 35 would apply the reverse burden of proof to all authorised persons, the vast majority of which are small firms. It would be simply disproportionate to apply it to senior managers in all of those firms. I have spoken about the overly legalistic approach. We think it could lead to a perverse outcome, leaving senior managers in the largest firms less exposed to legal risk under the reverse burden of proof than those in small firms.
I have spoken at length about the clauses and set out why I strongly disagree with the Opposition’s amendments. I hope I have convinced everyone of the merits of my argument. I ask the Committee to oppose the amendments and accept the clauses.
Ordered, That the debate be now adjourned.—(Sarah Newton.)
Bank of England and Financial Services Bill [ Lords ] (Fourth sitting)
Harriett Baldwin Excerpts(10 years, 1 month ago)
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The Economic Secretary to the Treasury (Harriett Baldwin)
Mr Wilson, it is good of you to come along this afternoon to hear the conclusion of my speech. I reassure the Committee that, having had lunch, I have been able to recollect a couple of other small points that I wanted to mention to the hon. Member for Wolverhampton South West. Earlier, he raised the question of the powers in clause 21, and I said that the Delegated Powers and Regulatory Reform Committee expressed no concerns about those powers. In fact, I can go further and reassure him that the Committee actually thought that the original provision tabled by the Government, which provided for use of the negative resolution procedure, was not ideal, and it recommended the affirmative resolution procedure—that is in the Bill today. The amendment was made after discussion with the Delegated Powers and Regulatory Reform Committee, which I hope reassures him. The Committee was not concerned about the powers.
Before lunch, we were talking about how important it is that this country has a strong and effective regulatory framework. With these clauses we are talking about the importance of conduct and the signals that we, as regulators and parliamentarians, send out about the importance of conduct and responsibility. We have achieved that with the introduction of the senior managers and certification regime across the financial services industry, together with the duty of responsibility. Opposition Members should bear in mind the wise words of Lord Turnbull in the other place, He was a member of the Parliamentary Commission on Banking Standards, and he said of the burden of proof in the original proposal:
“I signed up to its proposal, but I believe that the proposal now in the Bill is superior. Many philosophers have said, ‘Second thoughts are often best’… This is a time to follow that dictum. In this case, second thoughts are best. I hope that the House will reach the same conclusion as I have put forward and not support the amendment.”—[Official Report, House of Lords, 15 December 2015; Vol. 767, c. 2028.]
I agree with those wise words, and I therefore commend these clauses and request that they stand part of the Bill.
Rob Marris (Wolverhampton South West) (Lab)
It is a pleasure to be here with you, Mr Wilson.
I have listened to the Minister’s patient explanation, which has not convinced me. I therefore seek a Division on amendment 33. I appreciate that, to state the obvious, were the amendment for some strange reason not to pass, my other amendments would not proceed because they are consequential upon it—it is up to the SNP to decide on the other amendments.
Question put, That the amendment be made.
Harriett Baldwin
The clause makes some technical corrections to the criminal offence in section 36 of the Financial Services (Banking Reform) Act 2013. The offence is intended to punish, and therefore deter, reckless misconduct that causes a bank to fail. It does not form part of the senior managers and certification regime, although it was included in the same legislation and was also recommended by the Parliamentary Commission on Banking Standards.
For the avoidance of any doubt, I want first to make it clear that the Government are not proposing to extend the offence to the rest of the financial services industry, which would not be appropriate. The offence was designed to deter reckless decision making that causes systemically important financial institutions to fail. The collapse of such institutions could do serious harm to financial stability or impose huge costs on the financial services compensation scheme to protect depositors. The offence was therefore limited to UK banks, building societies, Prudential Regulation Authority-regulated investment firms and large investment banks that happen not to be deposit takers. The offence will not apply to credit unions, and it would clearly make no sense to apply it to the firms that the Government now propose to bring into the senior managers and certification regime.
The clause simply fills some gaps in the coverage of the offence. It makes it clear that the offence could be committed if a building society or an investment bank were to fail by being put into the special insolvency and administration regimes created for them in secondary legislation made under the Banking Act 2009. That was always the intention behind the 2013 Act, and we are taking the opportunity now to make the position clear.
Question put and agreed to.
Clause 25 accordingly ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Sarah Newton.)
Bank of England and Financial Services Bill [ Lords ] (First sitting)
Harriett Baldwin Excerpts(10 years, 1 month ago)
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The Economic Secretary to the Treasury (Harriett Baldwin)
May I say what a pleasure it is to serve under your chairmanship, Mr Wilson? I will speak to clause 1 and why it should stand part of the Bill before dealing with the amendments.
The clause makes the deputy governor for markets and banking a member of the court of directors—an important position that is not currently a statutory member of court. It also provides enhanced flexibility to add or remove a deputy governor or alter the title of a deputy governor, as well as the corresponding ability to make changes to the composition of the court, the Financial Policy Committee, the Monetary Policy Committee or the new Prudential Regulation Committee where a deputy governor is added or removed. Those important provisions will simplify the governance of the Bank.
Following the expansion of the Bank’s responsibilities through the Financial Services Act 2012, a deputy governor for markets and banking was appointed with responsibility for reshaping the Bank’s balance sheet, including ensuring robust risk management practices. That important position is currently filled by Dame Minouche Shafik, who is not a statutory member of court. We have talked about regional diversity this morning, but she ticks many boxes in terms of other forms of diversity, having been born in Egypt, worked a lot in America and being a British citizen. The clause amends the Bank of England Act 1998 to make that deputy governor a member of the court, ensuring equal status for all the Bank’s deputy governors and simplifying the Bank’s governance structure.
It should be noted that the power to add or remove a deputy governor will not permit the Treasury to remove a deputy governor or change his or her title while that deputy governor is in office. The measure will ensure flexibility for future need. At present, changes such as the creation of the new position of deputy governor for markets and banking can only be affected through changes to primary legislation. Instead, as a result of the clause, the Government will in future be able, by order and after consulting with the Governor, to adjust the size and shape of the Bank’s senior management team to meet future requirements—for example, to bring in new expertise if that proved to be necessary.
The hon. Member for Bassetlaw asks why we are changing the number of non-executive directors on the court. To be clear, that change is not being made by the Bill. The Bank of England Act 1998 requires up to nine non-executive directors, and following retirements there are currently seven non-executive directors on the court. A smaller board will be better for the Bank. The strong view of the Bank’s non-executive chair, Anthony Habgood, is that a smaller board makes for more effective challenge and accountability of the executive. When there are fewer non-executive directors, each member has greater opportunity to pose questions to executive members and to debate with them. A larger court might encourage a round table of individual speeches, rather than enabling effective back-and-forth discussions with and challenge to the executive.
Harriett Baldwin
The hon. Gentleman serves as a member of the Treasury Committee, and I believe he was also a member of that Committee in the previous Parliament, so he will remember that it produced a report in 2011 called “Accountability of the Bank of England” which recommended that the court’s membership be reduced to eight—smaller than we propose. It emphasised that a smaller court would allow for
“diversity of views and expertise”
while still being
“an efficient decision-making body”.
He may want to go back and look at the evidence base that the Committee looked at. It is important to emphasise that the Bill does not make a change in terms of the membership, which remains at possibly up to nine.
Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)
Does the Minister therefore believe that the Cabinet should be reduced in size?
Harriett Baldwin
The Cabinet, as the hon. Gentleman knows, has fluctuated in size over the years. On the evidence base, we are obviously talking about the experience of the Bank of England having in the past, particularly in the run-up to the financial crash, had a significantly larger court. I think there were 19 members in the run-up to 2009, and it was thought that that was a very large and unwieldy body. I think it still falls short of the number of people who currently attend Cabinet. There is a range of different views of effectiveness, but the important point to emphasise is that the Bill does not intrinsically make any changes to what is already there, although in practice we currently have seven non-executive directors on the court.
Importantly, the Bill also provides for the continued balance of internal and external members on the MPC, the FPC and the newly formed PRC. Following the addition or removal of a deputy governor, the Government may make a corresponding change to the number of members appointed by the Chancellor in the case of the FPC or PRC or the Governor in the case of the MPC.
New clause 5 would require the court to publish transcripts of its discussions within six months. I agree completely with the hon. Member for Leeds East that transparency is critical. The Bank of England makes decisions that affect all of us and it must be accountable to the public, and enhancing transparency is central to that. That is why I am so pleased to bring this Bill to the Committee: it makes governance of the Bank much more transparent in several ways. First, it makes the entire court responsible for the oversight functions. No longer will an oversight committee oversee the work of an oversight board. Every member of the board, executive or non-executive, will be clearly responsible for oversight of the Bank.
Secondly, the Bill removes a greater barrier to transparency and unnecessary complexity. In 2013, the Parliamentary Commission on Banking Standards noted the complexity of the present regime. It said:
“The accountability arrangements of the new structures”—
that is, the structures that exist now—
“are more complex than those of the previous regulatory regime. The PRA is a subsidiary of the Bank, and the FPC is a sub-committee of the Court of the Bank.”
The Bill will change the FPC’s status from a sub-committee of the court to a committee of the Bank and will end the PRA’s subsidiary status, establishing the Bank’s three policy committees on a common statutory footing.
The final and perhaps most significant means of enhancing transparency is bringing the whole Bank into the purview of the National Audit Office for the first time in its history. Allowing the NAO to conduct value-for-money reviews across the Bank will increase its accountability to Parliament and to the public. In turn, this will build greater public trust in the Bank’s operations and governance, supporting its vital independence role in the UK economy.
I agree with the hon. Member for Leeds East that transparency is important: it improves accountability and ultimately makes the Bank’s governance better. However, I disagree with him that mandating transcripts of court sessions will make governance better. As hon. Members are aware, the court is now required to publish the minutes of every meeting within six weeks. That was not always the case, but I am glad to see that the court has published historical records of its minutes, including those during the financial crisis. Through this, Parliament and the public now have greater insight into the governance of the Bank and the key decisions made. Transcripts are a different matter entirely.
We are fortunate in this debate because the impact of transcripts on Bank discussions has already been examined by Governor Warsh in his review, “Transparency and the Bank of England’s Monetary Policy Committee”. He said:
“Creating a safe space for true deliberations is among the most critical indicia of organisations that make good decisions, according to the leading academic and empirical literature and my own observation”.
I am sure we all want a court that makes good decisions. The alternative would be extremely costly for all of us. Governor Warsh looked at the MPC’s two discussion days and found that the different nature of the day one and day two discussions required different approaches to transcript publication. It makes sense to see which of those days is most like a court session and what Governor Warsh recommended. Day one is when the MPC members deliberate, challenge the evidence before them and question one another—exactly the kind of role that the court performs very effectively. Day two is very different. In Governor Warsh’s words:
“With few exceptions, the deliberations are nearly complete, policymakers are heard, and their judgments tallied.”
I think it is clear that day one is closer to the deliberations and discussions of a board.
Roger Mullin
I thank the Minister for explaining Governor Warsh’s views, but I would like to challenge his view that the academic literature is all one way. In fact, some of the academic literature points out that in more private settomgs, people are more prone to groupthink.
Harriett Baldwin
As a distinguished academic himself, the hon. Gentleman will know that academics often differ in their points of view. It is clear that in this case the distinguished Governor Warsh has come down in one way, and here in our deliberations we have come down in favour of producing a transcript, and Hansard performs that incredibly valuable role for us. I will make some further points, which I hope will convince him of the wisdom of the position that the Government are taking on transcripts.
When Governor Warsh looked at releasing transcripts of the day one deliberations, which he described as “safe space” deliberations, he found that
“Should the transcripts of the Day 1 deliberations be made public, the quality of the deliberative process would risk being materially impaired, to the detriment of sound policymaking.”
He went on to make a clear recommendation that
“the Day 1 policy discussions should no longer be recorded nor should they be transcribed.”
Publication of transcripts of meetings of the court would have a “chilling effect” on discussion and the quality of debate and harm decision making. I therefore hope that the hon. Member for Leeds East will not press his new clause.
John Mann
Having gone through in some detail an analysis of whether transcripts of meetings of the Monetary Policy Committee should be made available, on which there has been a thorough debate, including with members of the MPC, the Minister translates that to an amendment relating to the court. In relation to the court, what is the evidence base that suggests that the hearings or decision making of the court, as opposed to the MPC, would in some way be restricted by a transcript?
Harriett Baldwin
The hon. Gentleman makes an important point. The court oversees the MPC, the FPC, and the PRC under the proposals in the Bill. We have not discussed yet—I will be happy to do so—the fact that on the prudential side of discussions, the people on that committee will looking at material that constitutes, by any judgment, non-public information on the soundness of important financial institutions in this country. I am sure that, as a member of the Treasury Committee, the hon. Gentleman will agree that such material ought to be treated as extremely market-sensitive in any circumstances.
John Mann
The Minister is now jumping to a third body. The amendment relates to the court. The court does not make decisions on interest rates. The court does not delve into the financial situation of individual banks or other financial institutions. The court oversees; the court is strategic. Will she explain the relevance of her case in relation to the court, as opposed to the committee dealing with prudential regulation or with monetary policy?
Harriett Baldwin
I would have thought that it spoke for itself. The fact that the court is overseeing all these different committees, some of which will be considering material that is non-public information—
Harriett Baldwin
If the hon. Gentleman will allow me, I will give way to him when I have replied to his previous point. We are proposing the publication of a record of the court’s meeting, and I agree with him that it is important for that record to be in the public domain. There is a clear difference between that record and a transcript.
Harriett Baldwin
In responding to the hon. Gentleman’s intervention I will be a little bit cheeky, if I may, and highlight the fact that even that august body, the Treasury Committee of this House, sometimes meets in private. There is a need for a safe space for discussions at certain points. We agree with the hon. Gentleman that it is important to have a degree of transparency in terms of the court. We think that the record provided is adequate. I hope that the hon. Gentleman will not press the amendment.
John Mann
I thank the Minister for giving way. Debate is important. The Minister now cites in evidence the Treasury Committee, which is a good example. The reason that minutes and transcripts of Select Committees are available is because of the strategic overview and public accountability that they provide. That is the whole point about the court. It is not making decisions on the minutiae or on the specifics. It is providing an overview and oversight, on precisely the same democratic logic as a Select Committee. That is the point of this excellent amendment. The Minister does not seem to understand the point of the court and what it is there for.
Harriett Baldwin
With great respect to the hon. Gentleman, I do understand that. Perhaps he would like some further examples. The court plays an important role in relation to emergency liquidity assistance at the time of a financial crisis. We have to agree as a Committee that there will be times when the court is discussing something that we do not want to have transcribed and put into the public domain. Personally, I thought that Governor Warsh was very convincing in comparing what happens on day one of the Monetary Policy Committee and what can happen at other times—not necessarily all the time—and how a record will be published. The hon. Gentleman will vote one way and I will vote another. I do not agree with the amendment.
Amendment 9 would require representation on the court of particular sectors, and require the Chancellor to have regard for balanced regional and national representation on the court. Obviously, the Bank of England plays a central role in the UK economy, and its policy decisions are vital to everyone in the United Kingdom. I therefore entirely agree with hon. Members about the importance of the Bank of England giving careful consideration to how its policy decisions affect people throughout the country. This is at the heart of the Bank’s mission of promoting the good of the people of the United Kingdom by maintaining monetary and financial stability—indeed, that is precisely what the Bank does.
I will give a few examples. The Bank has representatives around the country; those agents work from 12 agencies, in Scotland, Wales, Northern Ireland and the regions of England, to gather information from businesses operating across many different sectors, including financial and non-financial firms. The regional agents, often joined by the Bank’s governors and members of the policy committees, regularly meet and hold panel discussions with companies of a range of sizes across the UK to gauge economic conditions and inform the Bank’s monetary policy and financial stability work. I trust that all members of the Committee have had an opportunity to observe that activity in their constituencies. If they have not, I strongly recommend that they do so, because those Bank activities are extensive. To give hon. Members an idea of how extensive they are: in 2014-15 the agents visited some 5,200 companies drawn from firms in all sectors and in all corners of the country; also, panel discussions were held with 3,700 businesses. Undoubtedly, the Bank goes to great lengths to ensure that it develops a detailed understanding of the conditions for businesses in all sectors across the whole United Kingdom.
In addition, the Prudential Regulation Authority’s practitioner panel ensures that the interests of those who must put the PRA’s rules into practice are communicated to the regulator. The panel includes representatives of banks, insurers, building societies and credit unions. The Financial Conduct Authority’s consumer panel has a statutory right to make representations to the PRA, and the FCA chief executive sits on the Financial Policy Committee and the PRA board, and will sit on the new Prudential Regulation Committee.
Through this Bill we are going further in ensuring that the regulators take into account the diversity of business models operating in the financial sector. Specifically, we are making it clear that both the PRA and the FCA must take account of the differences between different types of firm, including mutuals, whenever they are discharging their general objectives. We argue that these amendments are unnecessary and, indeed, unhelpful. They would cloud the appointments process.
George Kerevan
Does the Minister not accept that there is a difference between being consulted and having a right to be consulted and having a right to feel that one is represented on a deliberative body?
Harriett Baldwin
There is, but the purpose of the deliberative body, as we have heard, is effectively to act as the board of the Bank of England, supervising the different committees. Prior to the financial crisis, members of the court were often selected specifically to represent a range of sectoral interests, including many of those proposed in the amendments. The first problem with the amendments is that requiring representatives of different sectors and regard to regional representation will entail a much larger and therefore oversized and dysfunctional court. Before the financial crisis, when the court had non-executives specifically to represent different interests—why stop at the four listed in the amendment?—the court had an incredible 16 non-executives, rendering it far too large to operate effectively and unable to hold the executive properly to account.
Roger Mullin
I think the Minister may have been in error when she implied that the new clauses would introduce a requirement. Our new clause 2 simply says
“the Chancellor of the Exchequer must have regard to the importance”
of balanced representation.
Harriett Baldwin
The hon. Gentleman is right to highlight that difference. Of course, what the Chancellor of the Exchequer would have regard to is the quality and ability of those individuals to perform the function they are asked to perform. The Banking Act 2009 sensibly limited the court to nine non-executives, and in practice we have now reduced the number of non-executives to seven while keeping that non-executive majority, which means that the court is now sufficiently small to form an effective body that can challenge the executive. The amendments before the Committee would inevitably mean a return to a large, inefficient and ineffective court.
A second problem with amendment 9, which would require sectoral representation on the court, is that it would give rise to conflicts of interest. The amendment calls for several practitioner representatives on the court. We have tried that in the past, too. During the crisis, the conflicts of interest meant that some of those on the court who could have been of most assistance to the Bank had to leave the room for the most important decisions, such as on liquidity provision to the markets and on individual firms. That hampered the court’s ability to respond effectively.
George Kerevan
Does the Minister agree that her statement about the ineffectiveness of the board, because of its narrow composition during the crisis, makes our point that we need wider representation across the country, across areas and across industrial sectors?
Harriett Baldwin
I do not think anyone disagrees with the idea that we would want to have a range of different abilities and skills on the court of directors. What we are fighting against in opposing the amendments is the propensity of such amendments to lead to a larger and larger group of individuals on the court. Importantly, in relation to highlighting the potential for conflicts of interest, the conflicts policy now makes it clear that, among other restrictions, members of the court should not accept or retain any interest that is in conflict with membership and should not normally be associated with a PRA or Bank-regulated firm, whether as a director, employee or adviser. That ensures that the wide-ranging expertise—we all agree that that is necessary—appointed to the court can be deployed without obstacles, and leaves the court better equipped to respond to a crisis. The amendment would unravel those arrangements, and I argue that we should oppose it; we should not allow it to take us backwards.
The third and most important concern about the amendments is that they would impose unnecessary and undesirable constraints on appointments to the court. In the past three years, the court has been transformed. The Chancellor has appointed the highest-quality team, with significant experience of running large organisations and deep expertise in matters relevant to the Bank. The Government look far and wide for the best candidates, with roles advertised in the international press. Let me be clear: obviously, there are highly competent and highly qualified individuals who work in the sectors proposed and from all the regions across the UK. The amendments would constrain the appointments process utterly unnecessarily, potentially preventing us from forming the highest-quality, most experienced board for one of the most important institutions in the country.
Harriett Baldwin
Not off the top of my head. I cannot specifically think of anything, other than to highlight the fact, in relation to the previous life of the court, when we were dealing with a much larger organisation, that all the reviews since the financial crash have highlighted the unwieldiness of that organisation and the lack of clarity in terms of conflicts of interest as being among the underlying imperfections in the financial regulation that we inherited in 2010.
John Mann
The decision in Sweden, for example, to move to negative interest rates, the collapse in oil prices, the mistake that the Chancellor made with the timing of the RBS shares sale and the successful prosecution in relation to LIBOR are all issues that have originated within the past three years. Did the court in its wisdom say anything about any of them in giving advice to the Bank?
Harriett Baldwin
As the hon. Gentleman will be aware, a number of different independent reviews have been commissioned by the oversight committee during the past few years. I completely dispute his point about the sale of RBS shares. Given how much lower they are today, I would have thought he would welcome the fact that the Government were able to sell the first £2 billion-worth in the market last August. He and I will clearly vote along different lines on this matter. The Government feel that the amendment would constrain the appointment process, to the detriment of effective decision making in the court and in effect, therefore, to the detriment of the Bank’s overall effectiveness. Undoubtedly the court should have a breadth of experience and knowledge, and we certainly want different perspectives to be brought to bear.
It is also important that the court is able, when necessary, to commission the kind of review about which the hon. Gentleman speaks. There has been the Plenderleith review to increase emergency liquidity assistance capabilities and the Stockton review, which made recommendations on how the Bank communicates its forecasts. We have even spoken this morning about the Warsh review, which has made the very recommendations that we are considering, regarding MPC procedures and the governance of the Bank of England.
The current court contains a remarkable collection of experience and talent. Among the directors are the chief executive of a major telecoms provider.
George Kerevan
The Minister is being very sporting in giving way this morning. Can I take it from the tenor of everything she has said that the place for the trade union representative on the court, which we have had since world war two, is now in jeopardy?
Harriett Baldwin
I do not know where the hon. Gentleman would get that impression from. It is important that we have a chief executive of a major telecoms provider, a chief executive of a major power utility, a private equity specialist, a leader of a global information services group and a leader of a major public sector trade union. The chair, Mr Anthony Habgood, is one of the most experienced and respected company chairmen in the country.
George Kerevan
There has always been, since world war two, a place reserved on the court for a leading trade union figure. That is not written down anywhere, but it has always been accepted. Will it continue?
Harriett Baldwin
Nothing in my remarks this morning has suggested any change whatsoever in that policy, but it is important that the best people are selected for the roles and we do not accept the Opposition amendments, which would further constrain the selection process. I hope we can all agree that every member of the court, wherever they are from, should consider in their decision making the Bank’s impact on everyone in the UK, across the UK, not just in one region or one individual sector.
The amendments call for a different kind of court, made up of representatives from UK regions and representatives of narrow interests, and that would result in a court riven by conflicts of interest. We have tried that kind of court before and we know how the story ends. I hope that members of the Committee agree that we should not allow the amendment to take us back there.
Richard Burgon
We will not seek to divide the Committee on the amendment, but we might, of course, revisit the matter on Report.
On new clause 5, we have heard powerful interventions from the hon. Member for East Lothian, and insightful ones from my hon. Friend the Member for Bassetlaw, who speaks, on this and other matters, not only with great experience because of his role on the Treasury Committee but with great common sense about transparency and representation. I am disappointed, therefore, by the Minister’s lack of support for the new clause. She says that she supports transparency but, with respect, I do not believe that she has offered greater transparency in this regard, not even with the compromise of an above-the-line and below-the-line model for transcripts, which is used by local authorities and school governor boards. On that basis. I will wish to press the new clause to a Division and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The Chair
I remind colleagues that votes on new clauses will be taken at the end of the Bill proceedings.
Clause 1 ordered to stand part of the Bill.
Clause 2
Term of office of non-executive directors
Question proposed, That the clause stand part of the Bill.
Harriett Baldwin
I am glad that you are finding it as confusing as I am, Mr Wilson, that there is a group 2 and a clause 2 and what have you. Clause 2 enables the Government to extend the appointment of a non-executive director. The standard length of appointment for a non-executive director is currently four years, and this will be maintained following the passage of the Bill. However, if necessary, the Government will have the power to extend the appointment by up to six months. If the individual is subsequently reappointed to the court, the length of their new tenure will be reduced by the length of the extension.
The ability to extend a non-executive director’s appointment provides a number of key benefits. First, the ability to extend the terms of appointments by a few months enables the end dates of non-executives to be staggered, which supports smooth transitions in membership, preventing a significant change in personnel at any one time. Secondly, should a member of the court resign or retire unexpectedly, extending the term of one or more non-executive directors can provide resilience during a potentially turbulent time. Finally, enabling this extension will bring the court in line with the FPC and the MPC, whose members can already have their term extended by up to six months.
Richard Burgon
I will be brief, because the Opposition are happy with the proposal to provide for the extension of the term of office of non-executive directors. However, we feel that this is an opportunity to highlight again the important role that non-executive directors can and should play, a point made effectively by my hon. Friend the Member for Bassetlaw in the debate on clause 1. There was a clear suggestion in the other place that the Government believe that a smaller body of non-executive directors on the court would be more efficient, and the Minister has made that clear again. I take this opportunity to reiterate the point that it is necessary to ensure broad representation and the appointment of active and dedicated members. As my hon. Friend has indicated, the world would not come to a stop if there was broader representation, both geographically and in terms of life experience.
John Mann
I warmly welcome—warmly—this clause, as I do the Minister’s confirmation to the hon. Member for East Lothian that the Government have no intention of removing the trade union representative from the court. I warmly welcome that. It is an exceedingly sensible approach that will resonate well beyond this place. This clause should be unanimously adopted.
Harriett Baldwin
Excuse me if I faint from astonishment, Mr Wilson. I do not think that that has ever happened to me before with the hon. Member for Bassetlaw.
Question put and agreed to.
Clause 2 accordingly ordered to stand part of the Bill.
Clause 3
Abolition of Oversight Committee
Richard Burgon
I beg to move amendment 10, in clause 3, page 4, line 5, after “would” insert “materially”.
John Mann
My view is similar to that of the hon. Member for East Lothian, in that I do not object to removing the oversight committee if the functions are effectively outlined. In addition to the example of the stress tests, there are various potential events—some would call them calamities, others opportunities—that would affect the structure and ethos of the Bank of England. They include British exit from the European Union or Scottish independence. They would require the court to act effectively and strategically. If there is a feeling of conflict in direction—direction being what should happen and what people should spend their time on—the ability to draw in external reserves and expertise is key. The power to do that has to be there.
Amendment 12 in particular would be useful to the Government and would complement their approach. I put it to the Minister that it would be helpful, given the direction of travel. I tend to concur with the Treasury Committee’s general view on this point, but only if the court is right and the non-execs have that power. The Treasury Committee, on behalf of Parliament, has made it clear that bringing the non-execs from the court into the Treasury Committee and having that dialogue in public and producing transcripts of it, which has not happened in the past, will be an important feature in the future.
Harriett Baldwin
The line-by-line consideration of this provision in the other place and here this morning has been extremely helpful. Before I speak to the amendments, let me give the Committee an example of the problems in the oversight committee’s current arrangements which I think will inform our debate. The hon. Member for Bassetlaw mentioned the 2013-14 foreign exchange market investigation, which sought to establish whether any Bank officials were involved in or aware of the FX market manipulation. In October 2013, the Bank’s governors initiated an extensive internal review, and they regularly briefed the court at its meetings from November 2013 onwards. In March 2014, it became clear that an independent investigation would be appropriate. The oversight committee took over the investigation and appointed Lord Grabiner QC. That is a very good example of the oversight functions. In practice, the executive needed to join the oversight committee discussions for the oversight functions to work and be effective, both as the investigation progressed and once attention turned to delivering the recommendations. It would be better practice to make the oversight functions the responsibility of the whole court. That is the purpose of the clause.
I welcome the opportunity to speak to the amendments and to explain the improvement in the oversight arrangements at the Bank of England and the power we have ensured for the court’s non-executive majority. The Bill brings the court closer to the model envisaged by the Treasury Committee, which called for a board with powers to conduct ex-post reviews of the performance of the Bank; for board members to be authorised to see all the papers submitted to the Monetary Policy Committee and the Financial Policy Committee; and for the board to be responsible for reviewing the processes of the Bank’s policy committees. Making the oversight functions the responsibility of the whole court makes it clear that every member of the court, executive and non-executive, can be held to account for the use of these functions. No member of court can claim that the oversight functions were not their job, since they will now rightly be the responsibility of all.
That replaces the current arrangement in which there is effectively an oversight committee overseeing the work of an oversight board. That is neither efficient, nor best practice. In fact, on Second Reading my right hon. Friend the Member for Chichester (Mr Tyrie), Chair of the Treasury Committee, put it well when he said:
“The oversight of the executive will be the responsibility of the court itself, rather than a sub-committee. Even though it was not called a sub-committee, it was, in fact, a sub-committee, and a weaker committee than the court.”—[Official Report, 1 February 2016; Vol. 605, c. 668.]
During the Bill’s passage through the House of Lords, we introduced the power, which has been welcomed by members of that House, that this amendment seeks to alter. This part of the Bill ensures that a majority of non-executives can always initiate performance reviews without needing to secure the agreement of a majority of the whole court. If just four non-executive directors want a review, they will be able to initiate it. Under our proposal to give more powers to the non-executive directors to do their job effectively, the initiators of a review would determine who should carry it out. This could be someone external or someone internal, including the Bank’s relatively new Independent Evaluation Office. The amendment would take away their discretion and make the new Independent Evaluation Office irrelevant.
The Bank’s Independent Evaluation Office reports directly to the non-executive chair of court. A few months ago, it published a review into the Bank’s use of forecasting—a clear example of where an internal review is appropriate. In our opinion, Lord Grabiner’s inquiry into Bank officials’ awareness of market manipulation in the foreign exchange market was an example of where an external review was appropriate.
The Bank’s non-executive directors, as we have heard in a previous debate, are selected for their ability to bring new perspectives and experience and to challenge and scrutinise the Bank’s executive. It is right to give them the powers to ensure they are able to fulfil this role. The amendment would send a message that we do not trust the non-executive directors to do their job. For the discretion of those high-quality non-executives to determine what reviews should be carried out and who should carry them out, it would substitute a conveyor belt of external reviews.
Those commissioning a review, whether the court as a whole or the non-executive directors, are best placed to decide whether an internal or external review is most appropriate. The Bill rightly allows that discretion for the whole court and for the non-executives. The amendment would take away that choice, which we think would be bad news for effective oversight. I hope the hon. Member for Leeds East has listened to the arguments. We all agree that the important power in the Bill for the non-executives to act independently to initiate reviews of the banks should not be constrained in this way, and I hope that after due consideration, and after the extremely valuable debate in both Houses, he will withdraw his amendment.
Richard Burgon
We do not intend to divide the Committee on the amendments to clause 3, although I will make one observation. I might get the quote wrong, but I remember a line in Shakespeare’s “Julius Caesar”:
“I come to bury Caesar, not to praise him.”
The oversight committee was praised by the Minister, but now, under clause 3, it is to be buried. It was praised by the Minister in response to an intervention by my hon. Friend the Member for Bassetlaw, and now we see that it is about to be buried, which we regret. We welcome the concessions that have been made. We do not wish to press the amendment, but we reserve the right to return to these issues on Report. I also point out that the Internal Evaluation Office can continue, tasked by the court. The amendment refers to decisions by non-executive directors. Internal evaluation is the Bank marking its own homework, which should worry us all. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
Harriett Baldwin
The clause gives the oversight functions previously delegated to the oversight committee, which has been a sub-committee of the court, to the full court. What do we gain by making the oversight functions the responsibility of the whole court? We want to keep those functions, which we all agree are important, and now every member of the court, executive and non-executive, can be held to account for the use of those functions. Should something go wrong, no member of court could ever claim that the oversight functions were not part of their job. They will now rightly be everyone’s responsibility.
We have heard how that arrangement was endorsed by my right hon. Friend the Member for Chichester on Second Reading, but it is worth harking back to what the Parliamentary Commission on Banking Standards recommended when it set up the oversight committee. In its report, the commission endorsed the Treasury Committee’s recommendation that the Bank’s board should be responsible for conducting the ex-post reviews of the Bank’s performance and we believe that that is precisely what the Bill will achieve. The commission went further—I am sure that hon. Members will have read its report before arriving this morning. On page 482, the commission rejected the oversight committee created in the 2012 Act. The commission denounced the committee and despaired that
“It, rather than the Court as a whole, will be responsible for monitoring the Bank’s response to, and implementation of, the recommendations of any review it commissions.”
It is therefore important to stress that, through the Bill, the court as a whole will be made responsible for ensuring oversight of the Bank.
We have also talked about how the clause will enable full and frank discussion involving both the executive and the non-executive majority on how best to exercise the court’s oversight functions. The non-executives bring challenge, scrutiny and outside experience while the executive minority provides the in-depth knowledge of the Bank’s operations. By abolishing the oversight committee, we bring the court closer to the model envisaged by the Treasury Committee, which called for: a board with powers to conduct ex-post reviews of the Bank’s performance; board members to be authorised to see all the papers submitted to the MPC and the FPC; and the board to be responsible for reviewing the processes of the Bank’s policy committees.
It is important to emphasise that the Bill protects the ability of those non-executive directors to initiate performance reviews. We do not need them to secure the agreement of a majority of the whole court. Should a majority of non-executives wish to initiate a review, the rest of the court will not be able to block it. The initiators of such a review would determine who should carry it out. It should be someone external or internal, including the Bank’s new Independent Evaluation Office.
The clause safeguards the non-executives’ oversight of the Bank and provides additional protection against the emergence of groupthink. I commend the clause to the Committee.
Question put and agreed to.
Clause 3 accordingly ordered to stand part of the Bill.
Clause 4
Functions of non-executive directors
Question proposed, That the clause stand part of the Bill.
Harriett Baldwin
I can canter right through the clause, which requires the court to establish a sub-committee of at least three non-executives to determine the remuneration of the Governor and deputy governors. Clearly, we would not want the executive to set its own pay, so to require that that power be delegated to at least three non-executives brings the legislative requirements for the Bank’s remuneration committee in line with UK corporate governance code. The current remuneration committee has four members.
Richard Burgon
I too will be brief. I will not be cantering as I know very little about horses, but as we have already discussed non-executive directors in the debate on our amendment to clause 1, I have nothing further to add.
Question put and agreed to.
Clause 4 accordingly ordered to stand part of the Bill.
Clause 5
Financial stability strategy
Harriett Baldwin
This will be more of a trot—[Interruption.] There are no Trots opposite me today, obviously.
Clause 5 will provide the court of directors with an express power to delegate the production of the financial stability strategy within the Bank. Subsection (3) makes it clear that the court retains the ultimate responsibility for any delegated duty or power, including its duties in relation to the financial stability strategy. The clause will allow the Bank to utilise its internal expertise to produce the strategy, while maintaining a clear line of accountability to the court. The drafting reflects the discussion in the other place, where it was felt that the Government’s initial proposal lacked sufficient clarity. Those concerns were addressed by the Government amendments that bring us the clause as it stands today. I hope that the Committee agrees that the clause will afford the Bank the necessary flexibility when producing the strategy while ensuring that the court will be held to account for its contents. I commend the clause to the Committee.
Richard Burgon
In the debates on the clause both on Second Reading and in Committee in the Lords, it was argued that it should not simply confer on the Bank the power to set the financial stability strategy. The original proposal was vague, but although it was subsequently clarified by the Government amendment that conferred the power on the court of directors, the Opposition are not convinced that that is sufficient.
The impact assessment says:
“At present, the Bank’s financial stability strategy is set by the Court after consultation with the FPC…and HMT.”
It goes on to say that making the Bank responsible for setting the strategy and allowing the court to delegate its production within the Bank will ensure that the court is responsible for the running of the Bank and the Bank’s policy committees are responsible for making policy. The clause does not make it clear exactly what the financial stability strategy is supposed to be. All it does is create a power and impose the responsibility to create such a strategy relating to systemic risk in the UK financial system.
I shall repeat a concern raised by my colleague Lord Tunnicliffe regarding the financial stability strategy, because the response in the other place was not sufficient. Lord Tunnicliffe highlighted how a five-page strategy document was produced in 2013; it was then revised and published in the 2014-15 report, wherein it had been reduced to one column. In the Bank’s 2015-16 report, there was no mention of a financial stability strategy in the court’s ownership. Will the Minister confirm the importance of the financial stability strategy? It should be clear who is responsible for such a strategy.
Clause 5 creates a problem. A future financial stability strategy will emerge from somewhere within the Bank of England. It would be preferable if the people who are to be directly responsible for its production were identified in the Bill, rather than responsibility being conferred on the court with powers to delegate elsewhere. It would make most sense if the people made responsible for producing the strategy were the members of the Financial Policy Committee, as we have set out in new clause 6, which we will discuss later.
George Kerevan
In itself, the clause is innocuous. It is a tidying-up operation, but lurking beneath it is a danger. Standing back from the restructuring of the policy committees of the Bank, we appear to be ending up with an exercise in bureaucratic symmetry—a committee to do this and a committee to do that, micro, macro, prudential or supervision, and the Monetary Policy Committee. The different committees are not supposed to talk to each other, doing discrete policy. That looks all right—someone is doing it—but what we are in fact ending up with is what I want to underline to the Minister and, through her, to the Treasury team.
The danger is that in creating bureaucratic symmetry, we have not got very far in creating a workable regulatory regime that is robust enough to meet the next crisis. One of the problems is that we are creating a silo for fiscal stability—basically, checking when a bubble arises and stopping it—and a silo for monetary policy, but the two are not talking to each other, so we are in danger of creating conflicts between the two main policy committees.
It is perfectly possible for the Monetary Policy Committee to go in a separate direction. At the moment it is refusing to raise interest rates, but that is leading to the committee in charge of fiscal policy and financial stability starting to discuss whether it should use its financial buffers to slow down a bubble in the housing market. It is possible, but a bit crazy, for the two different committees to take two different stances when the whole point of putting financial stability and monetary policy under the same roof—the Bank—was meant to be a co-ordinated policy.
Assigning responsibility for financial stability to the Financial Policy Committee does not get us off the hook of someone somewhere laying down broad policy objectives. The MPC has broad monetary policy objectives—I think that in the present climate of deflation, they are probably the wrong ones—but the FPC has very vague guidelines as to what it should be doing, and so suddenly we discover, in default, that the only person in the land who is actually overseeing all the different policy options is the Governor himself, and he is not even getting clear enough direction from the Treasury. By all means support clause 5 as a tidying-up operation, but it still leaves big holes in terms of who is actually laying down the major policy directions for the committee.
Harriett Baldwin
Opposition Members have suggested that the Bill, in and of itself, makes a change to the power and importance of the role of the Governor of the Bank of England. I would submit that the Governor of the Bank of England is an incredibly powerful and important appointment, but I would not say that the statutory powers of the Governor are increased from their already elevated level by the Bill. Obviously, he is the one who has a role across all the different committees, but he has always had a very important role.
The hon. Member for Leeds East is absolutely right to highlight the fact that in the other place there was extensive debate on the precise wording of the clause. Convincing arguments were made to change it and the Government tabled amendments to provide the court with an express power to delegate determination of the strategy. That is a change from the original intention after the consultation undertaken in the summer. To be clear, it will be for the court, as the governing body of the Bank, to decide who is best placed to set and review the strategy.
The hon. Member for Bassetlaw asked specifically about the role of the Treasury Committee in continuing to scrutinise the role played by the Bank of England, the Governor and the court. I see nothing before us today that would change the current arrangements whereby the Committee has an important role in taking evidence.
Hon. Members asked about the co-ordination between the Monetary Policy Committee and the Financial Policy Committee. They are independent committees with separate objectives. It is important that the Governor sits on both committees and is able to see what is going on in both committees, but we think it right to strike a balance to ensure that each of the committees remains focused on its individual remit while fostering interaction between monetary and macroprudential policy.
There has been a good debate in both Houses, illustrating the value of line-by-line scrutiny. I think that we have landed in the right place and I commend clause 5 to the Committee.
Question put and agreed to.
Clause 5 accordingly ordered to stand part of the Bill.
Clause 6
Monetary Policy Committee: membership
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss new clause 6—Financial Policy Committee: procedure—
“In paragraph 11 of Schedule 2A to the Bank of England Act 1998, after subsection (7) there is inserted—
‘(7A) The Financial Policy Committee shall inter alia at least each year commission and publish promptly external research into the level of systemic risk to the stability of the financial system in the UK.
(7B) As soon as reasonably practicable after each meeting of the Financial Policy Committee, the Bank shall publish a record of the meeting before the end of the period of 6 weeks beginning with the day of the meeting.””
Harriett Baldwin
It will be useful to consider the new clause, tabled by the hon. Members for Leeds East and for Wolverhampton South.
Clause 6 brings the Financial Policy Committee into line with the Monetary Policy Committee and the Prudential Regulation Committee. It makes the Financial Policy Committee a policy committee of the Bank, rather than a sub-committee of court.
Harriett Baldwin
I would certainly be very concerned if the hon. Member for Leeds East were developing a reputation as a moderate, not least because that might cause him not to be put forward as a Labour candidate at any future election. That would be a very worrying development. My analysis of his political point of view is that no one in this country could describe him as a moderate. This may be the first occasion on which he has been described as such. “Trot” might have been a more appropriate description of some of his political views, but I digress in an entirely inappropriate way.
I want to respond to some of the points raised and indeed to the important speech made by the hon. Member for Bassetlaw about the fact that the UK is an open economy. Therefore, by its very nature, it is open to economic developments in the rest of the world. He highlighted three topics with which the Financial Policy Committee should rightly be concerned. The first was the importance to financial stability in this country of the UK Government being able to receive tax revenues in order to pay for public services. He will know that it is incredibly important in this regard that we work with other countries and, notably, the OECD on the base erosion and profit shifting work, which is an important matter, perhaps not so much for this Committee but for other Committees in this House. That is an incredibly important issue on which we work internationally.
I reassure the Committee that, in terms of the overall resilience of the UK banking sector today, compared with the resilience at the time of the last shock, it does appear to be increasingly resilient. We would like to put that on record. The aggregate capital ratio, the common equity tier 1 ratio, is currently 12% for the banking system as a whole, which is a full 3.7% higher just since the end of 2013. The major UK banks all came through their stress test with the FPC at the end of last year without being asked to raise more capital. The FPC concluded that the UK banking system would have the capacity to support lending to the real economy even in the context of a severe global economic slowdown triggered by a downturn in the emerging economies.
The hon. Member for Bassetlaw also mentioned the housing market. Again, I think that it would be really valuable for the Committee to put on the record that the Government have granted the FPC powers of direction regarding residential mortgages and are also consulting—I hope that Opposition Members will support this—on extending its remit to cover powers regarding buy-to-let mortgages as well. Those are important points.
The hon. Gentleman also mentioned the rise of private sector borrowing. On that point, we argue that progress has been made to improve the personal financial position of households in the UK. Household debt relative to income has fallen from 168% in 2008 to 142% at the last reading. That includes both mortgage and unsecured debt. The FPC does study these numbers very closely. It stated, the last time that it looked through them, that given the actions that it has taken household indebtedness currently does not pose an imminent threat to financial stability, not least because underwriting standards are currently more prudent than in the past. Of course, however, the FPC must and will continue to monitor the household sector and will take further action if necessary.
George Kerevan
I appreciate the Minister’s overview of the financial markets and how stable they are. Obviously, she has not read the financial press this morning. The whole basis of the international bank resolution regime that we have brought in since 2008 is based on convertible bonds. The convertible bond market has gone berserk in the past two days. Constant default rates on commercial paper covering bonds have spiked by a whole number of points. Let me assure the Minister that the markets are not anywhere near as quiescent as she tells us.
Harriett Baldwin
Again, the hon. Gentleman puts words into my mouth that I did not utter. However, I did want to point out that the FPC looks at the financial sector’s resilience. No one would deny that the markets are going through rough and troubled times, but the FPC’s role is important and I hope he will agree that its powers to look at different aspects of the economy have improved the architecture of financial regulation since the last crisis. I highlight the way in which the Bank of England, as part of its monetary policy remit, has kept inflation as low as it has.
The hon. Member for Leeds East pointed to the “spaghetti” of the Bank’s organisation. I agree that we need clarity to be able to tell our constituents about how the architecture works. I share that objective. The Bill improves the pasta-related shapes of financial architecture. I would argue that the current situation, with a subsidiary and so on, is more like spaghetti. When I was trying to think of an appropriate pasta-related analogy for what the Bill does in establishing new architecture that we can explain to our constituents in simple terms, I came up with the idea of three ravioli—independent, but, importantly, in the same bowl.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 7
Monetary Policy Committee: membership
Question proposed, That the clause stand part of the Bill.
Harriett Baldwin
With all this talk of food, I was hoping that we might break for lunch. I am not sure what time we will do that, but I will deal with clause 7, which I think will be quite brief. It makes the deputy governor for markets and banking an ex-officio member of the Monetary Policy Committee. Previously, the only ex-officio members of the committee were the Governor, the deputy governor for monetary policy and the deputy governor for financial stability.
As I set out in my remarks on clause 6, following the expansion of the Bank’s responsibilities, the Government and the Bank made a number of new appointments, including the creation of the post of deputy governor for markets and banking. It is currently held by Dame Minouche Shafik and she sits on the MPC as one of the two members appointed by the Governor of the Bank of England after consultation with the Chancellor of the Exchequer. The clause formalises that arrangement and ensures that expertise for monetary policy operations is maintained on the committee.
The clause also reduces the number of members of the committee who may be appointed by the Governor of the Bank of England from two to one, ensuring that the committee’s current balance is preserved. It provides that anyone appointed as a member of the committee by the Governor must carry out monetary policy analysis in the Bank and it gives that member the title of chief economist of the Bank.
In addition, the clause formalises existing practice in relation to conflicts of interest by introducing a statutory requirement for the Chancellor to take account of the interests of potential appointees in deciding whether they would be able to do the job. I do not think that the clause will be controversial.
Question put and agreed to.
Clause 7 accordingly ordered to stand part of the Bill.
Bank of England and Financial Services Bill [ Lords ] (Second sitting)
Harriett Baldwin Excerpts(10 years, 1 month ago)
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The Economic Secretary to the Treasury (Harriett Baldwin)
The clause is the last one to do with the governance of the Bank of England; the others we covered this morning.
The clause amends the existing statutory requirement to publish the Monetary Policy Committee minutes within six weeks of the occurrence of the meeting so that they will be published as soon as is reasonably practicable. That, too, was a recommendation of the Warsh review, which set out that it would improve “effective communication” of the MPC’s policy judgment and stated:
“Publishing the details of the vote contemporaneously would bolster individual members’ independence and accountability.”
The MPC accepted the recommendation and since last August has published the minutes of its policy meeting at the same time as its policy decision. The clause simply formalises that arrangement, enhancing the transparency and accountability of MPC practices.
The clause also reduces the number of times that the Monetary Policy Committee is required to meet each year, changing the requirement to meet at least once a month to a requirement to meet at least eight times in each calendar year and at least once in every 10-week period. That, too, is implementing a recommendation of the Warsh review, which concluded that the change would bring the Bank’s practice into line with that of
“other leading advanced-economy central banks”
and support effective policy making.
The clause also amends the quorum rules in line with the changes to the MPC membership that I set out in my remarks on clause 7. Finally, clause 8 formalises processes and strengthens procedures on conflicts of interest for the MPC that are already delivered in practice.
Richard Burgon (Leeds East) (Lab)
Clearly, the decisions of the MPC are important for the financial markets. In essence, those markets may react immediately upon seeing the detailed minutes of the MPC meetings. A system in which all discussion between committee members was made public would be the ideal, because financial markets and, importantly, the general public would then understand the discussions being held behind closed doors. Running as a distant second to that is the less desirable policy of simply producing minutes of the meeting. The minutes, however, record only a general sense of the participants’ contributions. However, we have tabled no amendments to the clauses on the Monetary Policy Committee while the former committee member David Blanchflower conducts a review commissioned by the shadow Chancellor. We look forward to returning to debate the MPC in another forum at a future date, when we will be pursuing our amendments on the measure.
Question put and agreed to.
Clause 8 accordingly ordered to stand part of the Bill.
Clause 9
Audit
Richard Burgon
Here we turn to the role of the National Audit Office and the new proposals to afford the NAO power to investigate the functions of the Bank. This is a positive development, which we welcome, but it is important to get the legislation right and to ensure that no loopholes are left to prevent the NAO from conducting its necessary work.
The Comptroller and Auditor General was clearly concerned about the proposals in the Bill as published that would have allowed the court of directors a veto over the new powers for the NAO. There was significant discussion, however, at the Treasury Committee and at all stages in the other place. At the Treasury Committee Andrew Bailey said that the issue was to do with
“getting the boundary right between what is appropriate, in my view, which is value for money in terms of the way we run the Bank of England, and questioning the basis of monetary policy, which would not be in my view appropriate.”
Our amendment fits in with that, though I expect that the Government will disagree with us.
The draft memorandum of understanding that the Minister provided the other day stated that the comptroller does not expect to second-guess expert discussions by Bank officials. The amendment asserts that the comptroller may inquire into the Bank’s success in achieving its policy objectives. We believe that that does not encroach beyond the boundaries of questioning the merits of policy decisions, but would assist the National Audit Office in ascertaining whether the Bank is delivering value for money. Amendment 21, which is consequential on amendment 14, would require that reports by the comptroller into the functioning of the Bank be published promptly to allow relevant Select Committees, should they wish, as well as other Members of the House, to make an assessment of the National Audit Office’s findings.
Harriett Baldwin
We are moving on to the part of the Bill that covers the role of the National Audit Office and the publication of its reports. One of the Bill’s objectives is to enhance the Bank of England’s accountability and clauses 9 to 11, which allow the National Audit Office to conduct value-for-money examinations of the Bank for the first time, are key in that respect.
The independence of the Bank and of the National Audit Office, which are two vital public bodies, was carefully considered in developing the arrangements, and I believe that the clauses in the Bill strike the appropriate balance. It is probably best if I first set out some background on the important role of the National Audit Office’s value-for-money studies in supporting transparency to Parliament and the public.
The National Audit Office scrutinises public spending on behalf of Parliament. It reviews whether public bodies have used public money efficiently, effectively and with economy and makes reports on those issues to Parliament. In carrying out its work, the NAO is precluded by the National Audit Act 1983 from reviewing the merits of policy objectives. That is the case in relation to all the bodies with which it currently engages and the Bill ensures that the same restriction will apply in relation to its oversight of the Bank.
That is an important point in relation to amendment 14, which I believe is unnecessary. The amendment states that
“The Comptroller may enquire into the Bank’s success in achieving its stated policy objectives but shall not enquire into the desirability of such objectives having been set.”
The Bill as drafted will have that exact effect. The comptroller will be free to question the Bank’s success in achieving its policy objectives, but not the merits of the objectives. The Bill reinforces that by setting out specific areas in which the NAO cannot question the merits of the Bank’s policy decisions. That extra protection, which has been agreed to by both the Comptroller and Auditor General and the Governor, reflects the crucial importance of protecting the independence of the Bank’s policy decisions.
In all of those areas, the Bill will allow the NAO to examine the economy, efficiency and effectiveness of the implementation of policy decisions and of the resources underpinning them, but not the merits of the decisions themselves. Specifically, the Bill carves out the merits of policy decisions taken by the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Committee, the merits of policy decisions taken by the body within the Bank responsible for the supervision of financial market infrastructures and the merits of policy decisions taken by the body within the Bank responsible for the exercise of its resolution functions, but where the Bank has used its statutory resolution powers in relation to a financial institution in difficulty, the NAO would be able to consider any resolution policy decisions relating to the institution concerned. That is particularly important given that the Bank is now the resolution authority for the UK and has primary operational responsibility for financial crisis management. In future, therefore, the NAO will be able to examine the role of the Bank in interventions like Northern Rock—it is a shame that the hon. Member for Bassetlaw is not in his place to hear that exciting news. That bespoke arrangement recognises the unique and crucial role that the Bank plays in UK economic policy. I believe that it strikes the right balance and will bring about a significant improvement in the Bank’s accountability.
The second part of amendment 14 would require the comptroller to publish reports promptly, unless the Treasury Committee judges that publication was likely to have a material adverse effect on financial stability. Again, I submit that that is unnecessary. Adequate protections are already built into the legislation to prevent the disclosure of certain types of sensitive information. Proposed new section 7H of the Bank of England Act 1998, inserted by clause 11, will ensure that the comptroller is subject to the same limitations on disclosure as the FCA in relation to information received by the Bank. Those limitations are set out in the Financial Services and Markets Act 2000 and will restrict the NAO from disclosing information held by the Bank for the purposes of monetary policy; financial operations intended to support financial institutions for purposes of financial stability; and the provision of private banking services.
Furthermore, the subject of sensitive information is covered by the memorandum of understanding between the NAO and the Bank, which ensures that there is a codified agreement between them on how sensitive information should be treated. It makes it clear that there may be instances in which the Bank is prohibited from disclosing information. Where that is the case, it will explain why that is the case to the comptroller. The memorandum also makes it clear that there may be situations in which the Bank is able to disclose information to the comptroller but legal restrictions apply to onward disclosure or publication.
In terms of the timing of publication, Parliament has rightly delegated to the comptroller discretion over the content of NAO reports and the timing of their publication. He acts independently on Parliament’s behalf, and it is important that he is able to use his judgment on how Parliament and the public are best served.
I hope that I can reassure the Committee by saying that once the comptroller has signed off a report for publication, there is an in-built incentive to lay it in Parliament and publish it within a short timeframe. Prompt publication mitigates the risk of the report’s conclusions being overtaken by events. Moreover, the process from completing the report to publication is very simple. Typically, it takes between two and four days, but it can be speeded up if required.
Amendment 21 seeks to disapply the restrictions on the disclosure of specially protected information that the National Audit Office has received from the Bank for certain reports by the Comptroller and Auditor General. As I have said, information is specially protected from time to time if it is held by the Bank for the purposes of monetary policy or for financial operations supporting financial institutions to maintain financial stability. A good example, which we heard about this morning, is emergency liquidity assistance.
The reason why restrictions are placed on the disclosure of such information is that its publication could harm the financial stability of the UK or adversely affect the Bank’s monetary policy operations. A report by the NAO on the extent to which the Bank has achieved its financial stability objective could, in fact, be destabilising if, for example, it revealed market-sensitive information about financial operations undertaken by the Bank to preserve financial stability in a particular period.
I trust that all Committee members will agree that those restrictions on disclosure are entirely appropriate and, indeed, vital. I urge the hon. Gentleman not to press his amendment.
Richard Burgon
My colleagues and I have listened to what the Minister has said. She went, with characteristic detail, into the Government’s position on this matter. My hon. Friend the Member for Bassetlaw, who is not in his place, scolded or praised me—I do not know which—for moderation earlier. We did not press our amendment to a Division on that occasion, but having listened to what the Minister has said, and because transparency is a key principle when it comes to the work of the Bank of England and we want to expand that transparency, we seek a Division on amendment 14.
Question put, That the amendment be made.
Harriett Baldwin
If I may, I will speak to clause 10 at the same time as speaking to amendment 15. Clause 10 obviously defines the process which will deliver greater oversight of activities undertaken by the bank or a company of the bank, where that activity has been indemnified by the Treasury. In such circumstances, the Treasury takes on the risk of the activity and will bear any associated losses. It is right that the Bill allows for full NAO oversight of these activities.
The occasions on which the Treasury grants an explicit indemnity to the Bank of England are very rare. Examples include the provision of emergency liquidity during the financial crisis and, more recently, the asset purchase facility, which is the vehicle by which the Bank of England has purchased £375 billion of Government bonds to deliver the Monetary Policy Committee’s quantitative easing policy. Clearly, these are very different examples. The former relates to an operation undertaken on the Bank’s balance sheet to provide assistance to an institution in distress. The latter case is an example of an activity undertaken by a subsidiary company of the Bank. Given the Bank’s varied role, it is difficult to predict every circumstance in which an indemnity of a Bank activity might be considered necessary in the future. Clause 10 allows for discretion to be applied to each case of indemnified activity. In some circumstances a financial audit may not be required. However, the objective of this clause is clear. It will facilitate greater accountability of indemnified activities where this is appropriate.
Amendment 15 would require the Treasury to lay a report on activity indemnified by the Treasury before Parliament one calendar month after receiving it from the Bank. Let me say first that Treasury indemnities of specific Bank activities are very rare. I have cited a couple of examples. In the example of the provision of emergency liquidity during the financial crisis, clearly the information being shared between the Bank and the Treasury would have been extremely sensitive. It would have included commercially confidential material and potentially information that put at risk the stability of the wider financial sector. It is clear from just that one example that publishing a report of this kind could really work against the public interest in the future, especially if the Treasury were bound by a specific statutory deadline. The Treasury must retain that flexibility over whether and when such reports should be published. I urge the hon. Gentleman to think hard about that and withdraw the amendment, while urging the Committee to agree that clause 10 stand part of the Bill.
Richard Burgon
I mentioned earlier the possibility of compromise on the part of the Government when it comes to balancing the protection of information they believe needs to be confidential because of financial risk with the requirement for transparency. I mentioned the practice of having some matters under the line and some over the line in local authorities and on boards of school governors. I encourage the Government to think further about that possibility in relation to the areas where transparency has been requested. We reserve the right to return to the matter on Report but I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 10 ordered to stand part of the Bill.
Clause 11
Examinations and reviews
Harriett Baldwin
I beg to move amendment 1, in clause 11, page 9, line 11, at end insert—
“(b) the economy, efficiency and effectiveness with which a Bank company has used its resources in discharging its functions.”
Amendments 1, 2 and 3 extend inserted section 7D of the Bank of England Act 1998 to enable the Comptroller and Auditor General to examine the economy, efficiency and effectiveness of Bank companies, as well as the Bank itself. “Bank company” is defined by amendment 3.
Harriett Baldwin
Mr Wilson, you will have to bear with me, because we have quite a few Opposition amendments to this clause to cover and I will seek your guidance on when you would like me to touch on those. I will start with Government amendment 1 and move on to Government amendments 2 to 6.
The Chair
Can I just ask you to stick to the first group of the Government amendments? We can then move on after that debate.
Harriett Baldwin
Thank you, Mr Wilson. That is what I am trying to do. I am just buying some time while I go through great wodges of paper here, to ensure that I do not rush ahead.
I will speak to Government amendments 1 to 6 on National Audit Office oversight of Bank subsidiaries. As we know, the Bill makes provision for the first time for the NAO to initiate its value-for-money studies of the Bank of England. As we have discussed, that delivers an important increase in the accountability of the Bank and its operations. The intention in the Bill was to grant the NAO these powers to the Bank in the broadest sense, subject to the bespoke policy carve-out, which also features in the Bill, protecting the independence of the Bank’s policy decisions, but as the Bill is drafted, the NAO’s powers to conduct value-for-money examinations in relation to companies owned by the Bank differ from its powers to conduct value-for-money examinations of the Bank itself. That was not the Government’s policy intention. The amendments will ensure that the NAO’s value-for-money powers apply on the same terms to the Bank, its subsidiaries and other Bank companies that are indemnified by the Treasury.
I will briefly outline the inconsistencies that arise through the current drafting. First, the NAO would have powers to conduct value-for-money examinations of Bank companies that have been indemnified by the Treasury only where the Treasury has directed the company concerned to send its accounts to the NAO, as provided for in section 7C of the Bank of England Act 1998, inserted by clause 10 of this Bill, and the NAO’s examination would be made under the powers given to it in section 6 of the National Audit Act 1983. Those NAO examinations would not, therefore, be subject to the bespoke policy carve-out that has been defined in the Bill. Secondly, under the Bill as drafted, subsidiaries or companies of the Bank that do not benefit from a Treasury indemnity would not be within the scope of NAO examination.
I hope that the Committee agrees that we should make the NAO’s power to initiate value-for-money examinations applicable on the same terms across the Bank, its subsidiaries and other companies indemnified by the Treasury in which the Bank has a minority interest. The amendments seek to do just that.
Richard Burgon
Having considered this matter and listened to the Minister’s detailed explanation, I can confirm that we will not oppose amendment 1.
Amendment 1 agreed to.
Amendments made: 2, in clause 11, page 9, line 12, leave out
“of the Bank (however described)”
and insert
“(however described) of the Bank or the Bank company”
Amendment 3, in clause 11, page 10, line 3, at end insert—
““Bank company” means—
(a) a company which is a subsidiary undertaking of the Bank, within the meaning of section 1162 of the Companies Act 2006;
(b) a company not within paragraph (a) in respect of which a direction under section 7C(2) has effect;”
Amendment 4, in clause 11, page 10, line 16, at end insert “or a Bank company” —(Harriett Baldwin.)
This amendment extends inserted section 7D(11) of the Bank of England Act 1998 (which provides that section 6 of the National Audit Act 1983 does not apply to the Bank) to Bank companies. Section 6 provides for economy, efficiency and effectiveness examinations by the Comptroller and Auditor General.
Harriett Baldwin
I thank the hon. Member for Leeds East for his good summary of the deliberations so far on this. As I said in my letter to him last week, I did push both the Comptroller and Auditor General and the Governor on whether or not they would allow the draft memorandum of understanding to be shared with this Committee. I confirm that yesterday we were able to send copies of that draft memorandum of understanding to all members of this Committee, the Chair of the Treasury Committee and the Chair of the Public Accounts Committee, which of course scrutinises and works most closely with the National Audit Office. That is the extent to which the draft memorandum of understanding has been shared at this point.
The expectation, as I understand it, is that the court will meet on Thursday, and that is the forum in which amendments to the current draft may be suggested or approved. I assure hon. Members that as soon as we have the final version, the memorandum can be more widely disseminated—certainly in time for Report and Third Reading. Amendments 16 and 18 are therefore not necessary.
Amendments 17 and 19 would give the Treasury Committee express powers to consider various aspects of the memorandum. I am sure that the hon. Members for East Lothian and for Bassetlaw know that the Treasury Committee already has the power to examine all matters connected with the policy and administration of the Bank of England and can choose what inquiries it undertakes. In addition, the National Audit Office works closely with the Public Accounts Committee, so one can imagine conversations taking place between the Chairs of those two very important Committees about what aspects they want to look at. If the Treasury Committee or indeed the Public Accounts Committee determines that it would be appropriate to conduct an inquiry into the memorandum of understanding, it could do so. The amendments might suggest that the powers of the Select Committees to conduct inquiries are in some way limited to those powers that have expressly been given to them in this primary legislation. That would be an unfortunate suggestion, so I hope that the amendments will not be pressed.
The hon. Member for Leeds East asked about arbitration in a dispute resolution process. The memorandum of understanding sets out the dispute resolution process, as required by the Bill, but we should not expect that process to be called upon. We expect that the Comptroller and Auditor General would be able to reach an agreement with the Bank regarding his work, in the same way that he does with all the other public bodies with which he engages. The dispute resolution process set out does not call upon any independent arbiter. The draft document simply indicates that the Bank and the Comptroller and Auditor General are both content with attempting to resolve any disputes between themselves, and that they commit to the publication of their difference of view where any disputes remain unresolved. If this is a framework with which they are both content, I do not see any need to involve a third party in that process. When we have received the final version of the memorandum of understanding and are considering the Bill again on Report, I am sure that we will return to this question. On that basis, I urge the hon. Gentleman to withdraw the amendment.
Richard Burgon
I beg to move amendment 20, in clause 11, page 11, line 6, after “must” insert “promptly”.
We wish to make the point that we need the report to be published promptly. Otherwise, for example, the Treasury Committee, with all its expertise, cannot review using its powers, as the Minister has just referred to.
Harriett Baldwin
With regard to amendment 20 and the Treasury value-for-money reports, new section 7F of the Bank of England Act 1998, which is inserted by clause 11, preserves the existing power for the Treasury to commission value-for-money reviews of the way the functions of the Prudential Regulation Authority are exercised by the Bank. There is an equivalent power for the Treasury to commission such reviews of the functions of the Financial Conduct Authority. Taken together, these important powers ensure that the Treasury can carry out cross-cutting reviews of the operation of financial regulation in this country.
Amendment 20 would require the Treasury promptly to lay before Parliament any reports it receives following reviews into the PRA. It is, of course, vital that those reports are made available to Parliament to inform its deliberations into the regulation of financial services. Indeed, the Treasury is already required to lay reports into the operation of the PRA and the FCA before Parliament and to publish them. I assure the hon. Gentleman that the Treasury takes its obligations to this House very seriously and is concerned to fulfil them in good time. I am happy to confirm that any such reports will indeed be promptly laid before the House. There is no need for that requirement to be in the Bill.
Richard Burgon
I welcome the Minister putting on the record her desire for the reports to be published promptly. I would welcome it even more if she would, therefore, accept the amendment in order to insert the word “promptly” into statute. That would be one of many pieces of history that I am sure she will make in her role of shadow City Minister.
Richard Burgon
I do apologise for the role reversal. I was even called a moderate today so we are getting confused, although I am most moderate. I invite the Minister to reconsider her position on the amendment. Or shall I assume, unless she intervenes, that the matter is closed?
Harriett Baldwin
I am afraid the hon. Gentleman has not convinced me at this stage. I am sure we will return to this on Report.
Richard Burgon
Like the Minister, we have put on record our thoughts on this matter. Although we reserve the right to return to it at a later stage, we will not be pushing for a vote, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: 5, in clause 11, page 11, line 20, leave out “only”.
Amendments 5 and 6 amend inserted section 7G of the Bank of England Act 1998 to provide that where the Comptroller is examining a Bank company under inserted section 7D, he will have access to documents and information held by that company and its auditors.
Amendment 6, in clause 11, page 11, line 24, at end insert—
‘( ) In the case of an examination under section 7D(1)(b), subsection (1) also applies to documents in the custody or under the control of—
(a) the company to which the examination relates;
(b) the auditor or auditors of that company.”—(Harriett Baldwin.)
Question proposed, That the clause, as amended, stand part of the Bill.
Harriett Baldwin
At this point I will simply commend clause 11 to the Committee. I cannot be certain of the Committee’s enthusiasm, but I cannot imagine that anyone disagrees with a clause that will increase the Bank’s accountability while protecting its independent status and recognising the complex nature of its activities. The clause, as amended, will achieve that.
Question put and agreed to.
Clause 11, as amended, accordingly ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Sarah Newton.)
Treasury
Harriett Baldwin Excerpts(10 years, 1 month ago)
Ministerial CorrectionsRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Harriett Baldwin
My right hon. Friend the Member for Cities of London and Westminster spoke up for his constituency. He mentioned a problem with interest rate swap claims running out of time, which I would like to take up with him on a separate occasion, if I may. I want to clarify that the power to appoint deputy governors is not the Governor’s alone; it is actually an appointment of the Queen, with the consent of the Chancellor.
[Official Report, 1 February 2016, Vol. 605, c. 699.]
Letter of Correction from Harriet Baldwin:
An error has been identified in my winding-up speech on the Second Reading of the Bank of England and Financial Services Bill [Lords] on 1 February 2016.
The correct response should have been:
Harriett Baldwin
My right hon. Friend the Member for Cities of London and Westminster spoke up for his constituency. He mentioned a problem with interest rate swap claims running out of time, which I would like to take up with him on a separate occasion, if I may. I want to clarify that the power to appoint deputy governors is not the Governor’s alone; it is actually an appointment of the Queen, on the advice of the Chancellor.
Financial Conduct Authority
The following is an extract from the debate on the Financial Conduct Authority on 1 February 2016:
Harriett Baldwin
The FCA has established a redress scheme for small businesses that were mis-sold interest rate hedging products to ensure that eligible businesses are compensated. So far the scheme has paid out on 18,000 cases, and more than £2 billion has been paid in redress, including £464 million to deal with consequential losses.
[Official Report, 1 February 2016, Vol. 605, c. 747.]
Letter of correction from Harriett Baldwin:
An error has been identified in my response to the debate on the Financial Conduct Authority.
The correct response should have been:
Harriett Baldwin
The FCA has established a redress scheme for small businesses that were mis-sold interest rate hedging products to ensure that eligible businesses are compensated. So far banks have sent more than 18,000 determination letters, and more than £2 billion has been paid in redress, including £464 million to deal with consequential losses.
Real-time Credit Scoring
Harriett Baldwin Excerpts(10 years, 2 months ago)
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The Economic Secretary to the Treasury (Harriett Baldwin)
I congratulate the hon. Member for Islwyn (Chris Evans) on securing this very interesting debate. I want to assure him that my key priority as Economic Secretary is to ensure that financial services are on the side of people who work hard and who want to do the right thing and get on in life. Financial services should help people to achieve their aspirations at every stage of their lives, whether they are saving for their first home, taking out a mortgage, buying a car or saving and investing for their retirement.
This Government have fundamentally reformed the regulation of the consumer credit market to deliver our vision of one that is well functioning and sustainable and, vitally, can meet consumers’ needs. That is why we created a more robust regulatory system and transferred regulatory responsibility for consumer credit from the Office of Fair Trading to the Financial Conduct Authority in April 2014. The regime was designed to strike the right balance between proportionality and consumer protection. The FCA thoroughly assesses every single consumer credit firm’s fitness to trade as part of the authorisation process, and it has put in place binding standards. It proactively monitors the consumer credit market, focusing on the areas most likely to cause consumers harm. This Government have ensured that the FCA has robust powers to protect consumers.
It is very important that lenders act responsibly when deciding whether to grant credit and how much to give. The FCA makes it clear that a firm should lend responsibly, and that it should take reasonable steps to assess the customer’s ability to meet repayments in a sustainable manner, without having to borrow further. The hon. Gentleman is right that, ultimately, credit should only be extended to a consumer if they can afford it. Improving creditworthiness assessments will help to deliver a lower risk and a more affordable credit market.
When the responsibility for regulating consumer credit was transferred, the FCA turned key elements of the OFT’s “Irresponsible lending” guidance into binding rules. The rules set out that a firm should assess the customer’s creditworthiness with regard to the potential for the commitments to impact adversely on the consumer’s financial situation, and the consumer’s ability to make payments as they fall due. Although the FCA requires firms to undertake a creditworthiness assessment, including on the affordability of credit, it does not require firms to share or use all available credit data, whether real-time or otherwise, as the hon. Gentleman pointed out.
Providing lenders with a broad spread of information on which to base their lending decisions facilitates better decisions. The UK has a competitive credit information market that delivers this function. Credit data are shared by lenders through private credit reference agencies—the hon. Gentleman mentioned the three main ones—and lenders of all types provide credit reference agencies with information, including about traditional and non-traditional lenders. Providers of non-credit services, such as utilities, share data with credit reference agencies.
There are no specific FCA rules regarding the sharing of credit data in real time and there is no standard definition of what constitutes real-time data sharing, but the general principles that lenders follow when sharing data are set out in the “Principles of Reciprocity”, as drawn up by the credit industry in collaboration with the Information Commissioner. The principles mean that lenders can access only the same type of data that they share with other lenders. For real-time data sharing, they would need to report data in real time to each other if they wanted to access such data to inform creditworthiness assessments from other firms. Nothing currently prevents them from doing so. The Government have made it clear to lenders that appropriate real-time credit data sharing can greatly assist in making more accurate affordability assessments. Real-time credit data sharing allows firms to see whether an individual has credit agreements with other providers, and gives them a much better understanding of their burdens.
As I am sure the hon. Gentleman would agree—he mentioned this a few times—these issues are particularly salient in the high-cost, short-term credit market. Owing to the nature of that market, the availability of accurate and up-to-date data is all the more important. The FCA has said that there has been substantial recent progress by the industry in real-time credit data sharing for high-cost, short-term lenders. In fact, over 90% of high-cost, short-term lenders by market share currently meet the FCA’s expectations to share data in real time. The FCA expects the proportion of high-cost, short-term credit firms using real-time data sharing to increase further by the time the authorisation process is complete for most high-cost, short-term credit firms. However, it will continue to press for further improvements to ensure that up-to-date information is available to enable lenders to make more accurate affordability assessments that deliver better outcomes for consumers.
That reflects the Government’s general approach to regulation, which focuses on the areas that are most likely to cause harm. There is obviously a particular risk in the payday market, which is why we capped the total cost of payday loans and why the FCA has placed expectations for real-time data sharing on this market.
It is worth noting that real-time data sharing is not a panacea. While credit reference agencies are a key part of the consumer credit market and are regulated by the FCA, the information record does not necessarily provide a complete picture of the consumer’s financial situation. Therefore, improving the depth and breadth of the data, rather than the timing, is more important to the affordability of credit.
The decentralised nature of the UK’s system of credit referencing means that credit reference agencies are well placed to respond to this challenge. Unlike some other markets that are highly centralised, credit reference agencies in the UK compete on the extent and timeliness of their data coverage. As such, it is in their interest to provide as much relevant data about consumers in the most timely manner possible in order to assist lenders in making the most accurate affordability assessments possible. One credit reference agency recently launched an initiative that will enable the use of social rent, as well as utilities data. That could assist consumers with thin credit files to access more affordable credit.
The FCA will continue to challenge payday lenders, as part of its ongoing authorisation process, about the robustness of their affordability assessments and their use of real-time data. It is currently considering the responses to a consultation that includes its approach to real-time data sharing. More widely, the FCA is looking into how firms assess creditworthiness and affordability, including how consumers may be protected from taking on unmanageable debt.
The Government are committed to developing the FinTech sector so that this country becomes the global hub for financial innovation, giving consumers greater choice and access to credit in the process. The hon. Member for Islwyn mentioned the potential for jobs and economic activity, as did the hon. Member for Strangford (Jim Shannon) when he was here. The FinTech industry will be crucial in meeting these objectives, particularly in fostering a climate that encourages data sharing and gives consumers greater choice in the process.
I assure the hon. Member for Islwyn that our FinTech industry is a world leader. In 2014, it contributed £20 billion to GDP and employed 135,000 people. Its development has kept our financial services sector at the cutting edge of innovation, increased competition and choice for consumers, and helped businesses to get better services. I see the developments that we are discussing very much within that context. The Government have taken a range of actions to support alternative lenders and the digital currency sector. We have appointed Britain’s first special envoy for FinTech, Eileen Burbidge, to support our engagement with the sector. We have worked with the FCA to create the right regulatory environment for the sector to flourish, while protecting consumers.
The Government are working with industry to deliver a framework for the open application programming interface. In plain English, that will mean that the banks’ data and computer languages are much more accessible to other computers and FinTech firms. That will deliver greater competition and innovation, particularly in the personal and business current account sectors, by enabling innovative third-party firms, such as FinTechs, to make use of bank data in the interests of customers. Within this innovative space, there is scope for FinTechs to shape the consumer credit market positively and to do more on real-time credit information. For example, the FCA is considering opening access to consumers’ credit card usage data to other market participants.
I thank the hon. Member for Islwyn and congratulate him once again on raising a very interesting subject for debate this evening. I stress that the Government and the FCA understand the importance of this matter to his constituents and to the country.
Question put and agreed to.
Bank of England and Financial Services Bill [Lords]
Harriett Baldwin Excerpts(10 years, 2 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (Harriett Baldwin)
I beg to move, That the Bill be now read a Second time.
Following the financial crisis, the Government fundamentally reformed the UK’s system of financial regulation, replacing the failed tripartite system with a set of regulators with clear responsibilities and objectives. We have also taken concerted action to improve conduct across the banking sector, and to deal with the abuses and unacceptable behaviour of the past. The Bank of England has rightly been put back in charge of financial stability, and the Financial Conduct Authority is a watchdog protecting consumers from sharp practices and making sure bankers comply with the rules. Quite rightly, the powers and governance of those important organisations are reviewed closely and the Bill makes some modest changes to them.
The Bill has three main aims. The first is to further strengthen the governance, transparency and accountability of the Bank of England so as to put it in the best possible position to fulfil its vital role in delivering monetary and financial stability. It allows the National Audit Office into the Bank for the first time in its centuries-old history. The second aim is to build on concerted action the Government have already taken to drive up standards in financial services by extending the senior managers and certification regime across the sector, including a tough new duty of responsibility for senior managers. The third aim is to support the creation of a secondary market for annuities, protecting consumers by extending the remit of the Pension Wise guidance service and introducing a requirement which, in effect, ensures that certain individuals who are seeking to sell their annuities have received appropriate financial advice.
Mr Barry Sheerman (Huddersfield) (Lab/Co-op)
Does the hon. Lady agree that one of the real problems in the culture of banking, which we all want to get right, is the role of auditors? Auditors should have been there, should have spotted the dangers and should have blown the whistle, but they did not. Is it not the case that the Bill still does not address the accountancy profession and auditors?
Harriett Baldwin
The hon. Gentleman is right to highlight the importance of auditors. Others in this place will consider the role of auditors in the crash, but I think what he will welcome in the Bill is the fact that the National Audit Office, for the first time, will have the ability to do value-for-money studies within the Bank of England.
Kelvin Hopkins (Luton North) (Lab)
Following on from my hon. Friend’s intervention, does the Minister not agree that one of the fundamental problems with auditors is that they are always employed, effectively, by the managers of banks or companies when they should be representing shareholders? If they want their contracts renewed, time and again private auditors provide a soft option for managers so they get the contract next time. As she says, the great thing about the National Audit Office is that it is independent and in the public sector.
Harriett Baldwin
The hon. Gentleman is absolutely correct that the Bill focuses specifically on the role of the National Audit Office, one independent arm of government, and the Bank of England, another independent agency. The Bill does not particularly focus on the role of auditors in private companies, but I am sure other parts of Parliament will consider that in this Session.
I turn first to the reforms that the Bill will make to the Bank of England. It introduces evolutionary changes to its governance, transparency and accountability to put it on the best possible footing to discharge its expanded responsibilities. These changes complement those taken by the Bank itself as part of its “One Mission, One Bank” strategic plan. The Prudential Regulation Authority will stop being a subsidiary of the Bank and instead be run by a committee of the Bank; another deputy governor will be able to join the court, the Bank’s governing body; and the Treasury will be able to send a remit letter to the Prudential Regulation Committee.
To strengthen the Bank’s transparency and accountability to Parliament and the public, we will give the National Audit Office the power to conduct value-for-money studies. Following debates in the other place and with the NAO and the Bank, we have made sure that that important change is implemented in a way that protects the independence of the Bank’s policy-making functions and of the NAO.
Kelvin Hopkins
I welcome the fact that the NAO will be looking at the Bank, but it will need extra resources to do that big job. Will the Minister guarantee that the extra people employed will represent the shareholders—us and the people we represent—and will not simply come from the banking sector and be soft on banks?
Harriett Baldwin
The hon. Gentleman rightly points out the importance of the NAO’s having the right resources. I have not had any representations about this particular move, but I am sure it will make its feelings known, should it require those resources.
The Bill also makes changes to the court. We will simplify and strengthen the governance of the Bank by transferring to the whole court the powers previously given to the oversight committee to oversee the Bank’s performance. Following discussions in the other place, to help guard against group-think, we have amended the Bill so that a majority of non-executive directors on the court will still be able to initiate reviews of the Bank’s performance without needing to secure the agreement of the whole court.
We will integrate prudential regulation more fully into the Bank by ending the PRA’s status as a subsidiary of the Bank. The PRA board will be replaced by a new Prudential Regulatory Committee with sole responsibility within the Bank for the PRA’s functions. That is modelled on the Monetary Policy Committee and the Financial Policy Committee. We will make these changes while still protecting the PRA’s operational independence, and we will continue to ensure transparency on the amounts raised by the levy and what the Bank spends in relation to its functions as the prudential regulator.
In order to strengthen governance and make the structures of the Bank more consistent, the Bill harmonises the legislation underpinning the Bank’s three policy committees: the MPC, the FPC and the proposed PRC. It moves the MPC to a schedule of at least eight meetings a year, from the current 12, and updates requirements for the timing of MPC publications, implementing the remaining recommendations of the Warsh review, entitled “Transparency and the Bank of England’s Monetary Policy Committee” and published in 2014.
Alongside these changes, the Bill builds on the existing arrangements and the strong working relationship between the Bank and the Treasury by updating the formal framework for how the Bank and the Treasury should engage with each other on the public funds risks and the financial stability risks of firm failure. These changes will improve co-ordination while maintaining the existing clear and separate roles of the Bank and the Treasury in the event of a crisis.
Mr Sheerman
I am slightly concerned that the Bill moves us towards a system of less tension and a cosier relationship between the Bank and the Treasury. That would worry me and other Members. Is it true? I always thought that that tension was healthy.
Harriett Baldwin
The hon. Gentleman is right to highlight the importance of the Bank’s operational independence, which Gordon Brown introduced in 1997—it was his greatest legacy to our country—but he will note that his colleagues’ motion calls for a stronger role for both the Treasury and Parliament and arguably for less independence for the Bank. It is popularly known as the people’s quantitative easing, and I hope that the hon. Gentleman will not support his Front-Bench team on the reasoned amendment.
Kelvin Hopkins
Following the point made by my hon. Friend the Member for Huddersfield (Mr Sheerman), it would be even more worrying if there were a cosy relationship between the NAO and the Treasury. The NAO should be responsible to this House, and the Treasury should not be able to get its tentacles on the NAO.
Harriett Baldwin
The hon. Gentleman is right to recognise that the NAO is completely independent of the Treasury. Although I have a nominal role on the Public Accounts Committee, the NAO is rightly accountable to Parliament.
Stewart Hosie (Dundee East) (SNP)
I very much welcome the move to turn the PRA into the PRC on a par with the MPC and the FPC. Does the Minister not have any anxiety, however, that that leaves the FCA, the consumer protection conduct of business element, out on a limb, with a different status from the other three committees?
Harriett Baldwin
The hon. Gentleman is right to highlight the fact that the FCA is set up completely differently. However, I stress that the similarity lies in the operational independence. When it comes to the FCA, the Treasury is obviously able to appoint the chief executive and the board, but the operational decisions are for the FCA board, as we have made clear in recent weeks.
Let me move on to the second element of the Bill, which will make changes to the senior managers and certification regime. As hon. Members will know, the Government are committed to driving up standards of conduct across the financial sector, and to tackling the abuses and unacceptable behaviour of the past. That is why the Government are replacing the discredited approved persons regime with a much more robust new system, the senior managers regime, legislated for by the previous Government in the Financial Services (Banking Reform) Act 2013.
I find it quite extraordinary that, in the amendment they have tabled, Opposition Members have seen fit to claim that
“the Bill reduces regulation of financial services”.
This Bill is a vital opportunity to remove what the Parliamentary Commission on Banking Standards described as the “complex and confused mess” of the approved persons regime for 60,000 financial services firms, all insurers, FCA-regulated investment firms and all consumer credit firms, and to replace it with the more targeted and robust senior managers and certification regime.
Let me set out the benefits of the new regime; perhaps the Opposition will then reconsider their position. The approved persons regime is a relatively broad, unfocused regime in which all individuals who were considered to hold significant influence functions in the firm, or who dealt with customers would be subject to the regulators’ pre-approval in a tick-box exercise. Crucially, clarity of responsibilities at the top of firms was woefully inadequate. Firms could pass the buck for ensuring the fitness and propriety of their staff to the regulators, and the regulators could take enforcement action only against the individuals they had pre-approved.
The senior managers and certification regime tackles those problems head on. First, it focuses regulatory pre-approval on senior managers, the key decision makers at the top of firms. It enhances the accountability of these individuals through statements of responsibilities, documents that give clarity on which senior manager is responsible for each area of the firm’s business, and through the proposed statutory duty of responsibility that requires senior managers to take reasonable steps to prevent breaches of regulations in their areas of responsibility.
Mark Garnier (Wyre Forest) (Con)
Does the Minister agree that the senior managers regime will cut through the accountability far more, as the Parliamentary Commission on Banking Standards discovered? The regulatory regime at the time had the effect of forcing senior managers to create ignorance of what was going on within their institutions. The Bill will now absolutely reverse that, so that senior managers must know what is going on within their institutions so that they can take responsibility for infringements of the rules.
Harriett Baldwin
My hon. Friend, who was a distinguished member of the Parliamentary Commission on Banking Standards, is right to say that the commission highlighted the fact that the approved persons regime made it very difficult to pin down responsibility. The new regime, with its duty of responsibility clearly articulated —every organisation will have that set out when managers are first appointed and on an annual basis thereafter—is a much stronger regime. It also delivers more flexibility in the regulators’ enforcement powers, enabling them to impose high standards of conduct through rules applying to individuals, including those whom they have not approved. The expansion of the new regime to all authorised financial services firms will enhance personal responsibility for senior managers, as well as providing a more effective and proportionate means of raising the standards of conduct of key staff more broadly.
Given the improvements that the senior managers and certification regime with the statutory duty of responsibility delivers in terms of senior accountability, the reverse burden of proof is simply not necessary. In extending the new regime to all authorised financial services firms, it is important to consider whether, under these new circumstances, the application of the reverse burden of proof to any or all firms is appropriate. Most of the firms to which the regime will now apply are small, and it simply would not be proportionate to apply it to those firms. By retaining it for the banking sector alone, we would raise serious questions of fairness and competition.
George Kerevan (East Lothian) (SNP)
Can the Minister explain what has happened in the two and a half years since the 2013 Act was passed—essentially, by a Conservative Government—to change the reverse burden of proof?
Harriett Baldwin
As the hon. Gentleman knows, the measures in the 2013 Act are due to come into force on 7 March this year. The position in relation to the reverse burden of proof is becoming increasingly clear. Andrew Bailey said in his evidence to the Treasury Committee, of which the hon. Gentleman is a member:
“I support the change, because what the change does is it turns the process round and puts the judgment back on to us”
—that is, the regulator.
“I would rather it does that than have us heading down this tick-box regime with legal questions around it over human rights.
I do not want to come back or have one of my successors come back to you in the future and have to say, ‘I am sorry; we could not use this regime in the way that was intended, because it was always a bit doubtful that we could make it stick’. It is far better we come at this point to you and say, ‘I do not think this has a sufficient probability of being effective’.”
I could supply further quotations, from members of the Parliamentary Commission on Banking Standards in the other place, but I must make fairly rapid progress now.
Mr Andrew Tyrie (Chichester) (Con)
Will the Minister give way on that point?
Mr Tyrie
It surprised a number of members of the Committee when both the Prudential Regulation Authority and the Financial Conduct Authority told us that they supported the removal of the reverse burden of proof. I think that many of us would be in a different place had they not given that evidence.
The Minister has just placed great emphasis on the need for the senior managers and certification regime. Has she asked the regulators for a report on progress in its implementation? If so, will she tell us what it said and put it in the public domain? I have to say, on the basis of what we have heard, that progress is inadequate.
Harriett Baldwin
I appreciate my right hon. Friend’s contribution, because he has been examining the issue for longer than most. He will know of the points that were made about this topic in the other place. The regime is due to come into force on 7 March 2016, which is pretty soon. The rolling out of the implementation will focus on the larger organisations first, but the Committee and, I am sure, the Treasury will want it to apply in particular to the large, systemically important firms by 7 March.
The third element of the Bill relates to the extension of the important new freedoms that the Government are granting to allow people to take control of their retirement savings. It will help to ensure that consumers who will be able to sell their annuity incomes through the secondary market in annuities are sufficiently supported. There are two key measures. The first will extend the Pension Wise guidance to those who, from April 2017, will be eligible to sell their annuity incomes through the secondary market in annuities. That will include the offer of guidance to those who have a right to an income under the annuity, such as any dependants and beneficiaries as well as the primary annuity holder.
The second measure will require the FCA to make rules to ensure that specified firms check that individuals with annuities above a threshold value have received appropriate financial advice. On 19 January, the Chancellor set out the Government’s intention to legislate to place a new duty on the FCA to cap excessive early exit charges. I should like to take this opportunity to announce that that new duty will be introduced as a Government amendment in Committee.
Stewart Hosie
The Minister has used the words “guidance” and “advice” almost interchangeably in her last few sentences. Many of us across the House are concerned that it is advice that will be required, particularly by those with rather modest annuities. Can she give a guarantee that what is being offered is advice and not merely guidance?
Harriett Baldwin
The hon. Gentleman is absolutely right to highlight that semantic distinction. His constituents and mine want help; they do not know whether they are asking for regulated advice or guidance. He will also be aware that we have carried out a consultation—the financial advice market review—which closed in December. We are now studying the responses to that consultation with a view to seeing whether the current distinction is linguistically, and indeed legally, appropriate. He will hear more on this interesting topic in due course.
The Bill also makes a number of smaller changes. We are legislating to give the Treasury the power to make recommendations to the PRA and the FCA about aspects of the Government’s economic policy. Those will be non-binding remit letters. We are also allowing the Treasury to make regulations implementing a more competitive framework for insurance-linked securities business. That will help to preserve London’s position as a centre for specialist insurance and reinsurance. Following debates in the other place, we are also making a change that will support our ambitions for a diverse financial sector by putting consideration of mutuality and other types of business organisation into both regulators’ guiding principles. There will also be changes within an existing banking group to authorise a bank to issue banknotes in Scotland and Northern Ireland.
Illegal moneylenders prey on the most vulnerable people in society, causing their victims immense misery. That is why we will act now in the Bill to ensure that illegal moneylending teams have the funding they need to continue to protect consumers and prosecute loan sharks. We will introduce an amendment in Committee to give the Treasury a power to provide financial assistance to persons involved in taking action against illegal moneylending. The amendment will also give a power that allows the FCA to collect a levy from consumer credit firms in order to fund their financial assistance.
In conclusion, the measures that I have outlined today build on reforms to financial regulation and contribute to the Government’s commitment to deliver a new settlement for financial services. I see that the hon. Member for Hayes and Harlington (John McDonnell) is now on the Opposition Front Bench. By indicating that they do not support the Bill, the Opposition have put themselves on the wrong side of the argument on a range of sensible measures. By voting against the Bill, they will be voting against stronger governance and transparency in the Bank of England and in particular against making the Bank more accountable to Parliament and the public by giving the National Audit Office the power to conduct value-for-money studies of the Bank. They will be voting against extending the benefits of greater accountability for the senior managers and certification regime to all authorised financial services firms.
By voting against the Bill, the Opposition will be voting against ensuring that consumers who can sell their annuity income through the new secondary market have access to Pension Wise guidance and, where appropriate, take financial advice to support their decision. As well as that, they will be voting against proposals to place new duties on the FCA to cap early exit charges for those eligible to access the pension freedoms and to ensure that illegal moneylending teams have the funding they need to continue to protect consumers and prosecute loan sharks. The Labour party has been wrong on financial services regulation in the past and it is wrong again today. I commend the Bill to the House.
Richard Burgon
I thank the hon. Gentleman for putting that necessary point so powerfully. People outside this place will be shocked to hear that, as a result of this Bill, senior bankers in the top firms will have less guards on their personal responsibility.
Richard Burgon
I do wish to make some progress. [Hon. Members: “Give way!”] I will give way.
Harriett Baldwin
I thank the hon. Gentleman for giving way. Further to that point, the measures that he seems to object to so much are in clause 22. Why is he voting against Second Reading when there are many other excellent measures to which he presumably does not object?
Richard Burgon
It may be that others can explain to the Minister the real purpose of a reasoned amendment in these circumstances. I think our action is entirely right.
The presumption of responsibility is so reasonable and necessary that the policy was introduced with cross-party support. That should not be forgotten. It was originally proposed by the Parliamentary Commission on Banking Standards, led by the Conservative right hon. Member for Chichester (Mr Tyrie) and Labour’s Lord McFall of Alcluith, and it was the Liberal Democrat Lord Newby, a Minister in the Conservative-Liberal Democrat coalition, who moved its introduction into law. I have to echo a point previously made by the hon. Member for East Lothian (George Kerevan), sitting on the SNP Front Bench, that it was passed as recently as December 2013, and the presumption of responsibility has yet to come into effect. It was meant to come into effect in March this year, and it remains untested. We must remember that this was a safeguard brought in by the very same Chancellor who is now seeking to scrap it.
John Mann
I have said many times in the past and repeat it briefly now that there should be a differential in the risk for retail banking.
We know what is going on here. The Chancellor has a problem—his accounts do not add up. I confidently predict that he will not get the surpluses he wants, as we will find out with the OBR report at the time of the Budget. He is therefore desperate to sell off the shares in Lloyds and RBS. That is what is going on. That is why all this is happening. That is why he wants a new settlement with the banks. He wants to maximise the price in order to create the surplus that he has created in his head and in his Budget for all of us. That is what is going on politically.
John Mann
I shall end now; there is plenty of opportunity to join the debate.
We have heard about Google in the past week, but we have not heard enough about the bank take. We keep being told that the banks are the engine of the British economy. Well, they are certainly not the engine of tax receipts because most of them are not paying tax. We see that with the overseas banks. We know that seven out of the biggest 10 investment and commercial banks are paying zero tax. We see Lloyds paying zero UK corporation tax. We see Citigroup paying zero UK corporation tax and Credit Suisse paying zero. We see HSBC paying £160 million out of its £11.3 billion worldwide profits. That is all the tax they are paying. Perhaps the example that sums up the problem the most is Goldman Sachs, which generated £2 billion in UK profits last year, but what tax has it paid on that? It is less than it pays to the individual partners—so less to the state and the Exchequer for the defence of the realm, the health service, broadband, the infrastructure, education and the welfare state. It paid less than it paid to one individual—a measly £27 million.
That is not good enough. That is what this Bill is missing. I look forward to contributing further.
Harriett Baldwin
With the leave of the House, Mr Deputy Speaker, I would like to speak for a second time.
I commend the fact that we have had a wide range of speeches, with 12 by Back Benchers from, I am pleased to say, almost across the country. We heard from my right hon. Friends the Members for Chichester (Mr Tyrie) and for Cities of London and Westminster (Mark Field), the hon. Members for East Lothian (George Kerevan) and for Bassetlaw (John Mann), my hon. Friend the Member for South West Devon (Mr Streeter), the hon. Member for Carmarthen East and Dinefwr (Jonathan Edwards), my hon. Friend the Member for Havant (Mr Mak), the hon. Member for Bishop Auckland (Helen Goodman), my hon. Friend the Member for Yeovil (Marcus Fysh), the hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin), and my hon. Friends the Members for Newark (Robert Jenrick) and for Dudley South (Mike Wood). I will deal with some of the questions they asked later.
This has been a very revealing debate. We have just heard the hon. Member for Wolverhampton South West (Rob Marris) say that he is not satisfied with the creation of the system of regulation that was rightly criticised in 2005 and resulted in the financial crash on Labour’s watch. In fact, Labour Members, by declining to give this Bill a Second Reading tonight, are showing once again that they would be a risk to the livelihoods of everyone, most especially the poorest and the oldest, if they were ever to return to power, because their shadow Chancellor opposes giving a Second Reading to this entirely sensible Bill due to his opposition to the independence of the Bank of England—Gordon Brown’s best decision. His reasoned amendment says that
“the Bill fails to increase oversight and accountability of the work of the Bank of England”.
I thought it might be interesting to see exactly what the shadow Chancellor means by that. In 2012, he said:
“In the first week of a Labour Government democratic control of the major economic decisions would be restored by ending the Bank of England’s control over interest rates and bringing the nationalised and subsidised banks under direct control”.
That is what his reasoned amendment implies. In setting up his review of monetary policy, he said:
“Perhaps we should be even bolder, creating a national investment bank and using newly printed money to fund it.”
He does not need me to criticise that as a terrible idea that would cause inflation—he should look no further than his predecessor as shadow Chancellor, the hon. Member for Nottingham East (Chris Leslie), who said:
“Printing money and ending Bank of England independence would push up inflation, lending rates, squeeze out money for schools and hospitals and mean spending more on debt servicing. Higher inflation and a higher cost of living would hit those on the lowest incomes, the poorest people who couldn’t afford those goods and services.”
That is the reality of the Opposition’s economic policies with regard to the Bank of England. Inflation is a tax on the poorest, and they would hit the poorest hard.
Helen Goodman
Surely the hon. Lady knows that it is the current Chancellor who has printed, as she puts it, £175 billion of money, and in doing so has increased the wealth of the top 5% in this country by £185,000 each.
Harriett Baldwin
I do worry about the hon. Lady sometimes, because she is again criticising the decisions of the independent Bank of England.
That is before we get to the Opposition’s other policies, such as bringing back secondary picketing, banning dividends, and nationalising businesses without compensation. Even Danny Blanchflower, the head of the independent review that the shadow Chancellor has set up to look at the remit of the Bank of England—
Harriett Baldwin
Danny is what he seems to like to go by. He said in a recent article for the New Statesman:
“We are in search of good ideas…the new Labour Party still doesn’t have many economic policies to speak of...The new Labour leaders are not economists and are going to have to learn fast.”
This debate shows that they have not learned anything.
While the SNP’s reasons for opposing the Bill’s Second Reading show some common ground with Labour’s, the SNP is at the other end of the spectrum in thinking that the Bill fails to provide sufficient independence from direct political interference for the Bank of England. They cannot both be right; indeed, they are both wrong. The Bill strikes the right balance on operational independence at the Bank of England and the FCA, and scrutiny by the people in the form of the Treasury Committee and the elected Government.
I will now address some of the points raised in the debate. I noticed that the hon. Member for Leeds East (Richard Burgon) did not point out that we now have the toughest rules on bankers’ pay of any major financial centre and that we have brought in new criminal offences in terms of financial crime, and that he did not welcome the fact that we are widening the duty of responsibility to the whole of the financial services sector. He asked one reasonable question, which was about the memorandum of understanding between the BOE and the NAO. He knows that I have written to the Governor and to the Comptroller and Auditor General, Sir Amyas Morse, and they will endeavour to try to publish the memorandum during the course of the Bill’s passage through the House.
My right hon. Friend the Member for Chichester, who made a superb, sweeping masterclass of a speech on the history of financial regulation, came up with some interesting suggestions about making PRA rulings public. Obviously that would involve some issues of commercial sensitivity in some of the things that it deals with. He said that he wanted to rename the court “the board of the Bank of England”. He pointed out, quite rightly, that the concept of “too big to fail” is still in the banking system, not least in that the Government continue to own large chunks of it. He mentioned the timetable, and emphasised competition, which is very important.
The hon. Member for East Lothian, in an erudite speech, pointed out that responsibility is what we need, and we believe that we are delivering it through the duty of responsibility. He rightly highlighted the importance of changing the culture. I like his analogy with the captain of the ship, and we believe that setting out the responsibilities of senior managers achieves that balance.
My right hon. Friend the Member for Cities of London and Westminster spoke up for his constituency. He mentioned a problem with interest rate swap claims running out of time, which I would like to take up with him on a separate occasion, if I may. I want to clarify that the power to appoint deputy governors is not the Governor’s alone; it is actually an appointment of the Queen, with the consent of the Chancellor.[Official Report, 4 February 2016, Vol. 605, c. 7MC.]
The hon. Member for Bassetlaw, who is not in his place, wants more transparency and competition. I gently point out to him—perhaps he will read this in Hansard—that the building society sector has welcomed the fact that the reverse burden of proof is no longer in the Bill.
My hon. Friend the Member for South West Devon made an excellent point about debt management, and I share his enthusiasm for free debt advice and organisations such as PayPlan, Christians Against Poverty, StepChange and, of course, Citizens Advice. I am keen to hear more detail from him about what more we can do to make sure that, as the FCA takes on responsibility for debt management, the fee structure works well for consumers.
The hon. Member for Carmarthen East and Dinefwr mentioned Welsh bank notes, which is an interesting idea, and proposed a sterling central bank. He will, of course, be aware that the North and South Wales Bank was bought by Midland Bank in 1908 and lost the ability to issue Welsh bank notes.
My hon. Friend the Member for Havant made a wide-ranging and supportive speech, but the hon. Member for Bishop Auckland and I are never going to see eye to eye on this Bill. On the sale of the Royal Bank of Scotland, how can she think that it is not in the wider interests of the economy for the Government not to own it? She is the one complaining about socialising losses, so she should be congratulating the Government on having started on the sale of RBS last August.
My hon. Friend the Member for Yeovil made a very good speech about competition and systemic risks. He is right that the investment firms and their systemic risk must be addressed by the regime. So far, eight investment firms have been identified as important in that regard.
The hon. Member for Kirkcaldy and Cowdenbeath made a very good speech about the importance of culture. We agree with him on that.
My hon. Friend the Member for Newark made a Nottinghamshire-based speech about the bellwether for the British economy. He made some excellent points. I reassure him that supervision and resolution will continue to be operationally separate under different deputy governors at the Bank of England. I also endorse his point about the regions. He will be pleased to know that Mr Andrew Bailey is, in fact, from Leicester, which is another important bellwether for the British economy. I was also glad to hear my hon. Friend make supportive comments about Pension Wise.
My hon. Friend the Member for Dudley South said how popular Pension Wise is in his area, and the hon. Member for Wolverhampton South West has clearly done his legal research.
In conclusion, the Bill brings National Audit Office scrutiny into the Bank of England for the first time. It protects its independence on decisions and extends a duty of responsibility, via the senior managers and certification regime, to change the culture of financial services firms. It brings extra help for consumers in the secondary annuity market and in capping exit charges, and ensures that the most vulnerable in society are protected from illegal loan sharks.
All those excellent measures will be lost if the Opposition have their way and tonight’s Second Reading is opposed. We cannot take irresponsible risks with financial regulation, which is what the Labour party wants to do. This is a good and sensible Bill, and I urge right hon. and hon. Members to back its Second Reading.
Question put, That the amendment be made.
Financial Conduct Authority
Harriett Baldwin Excerpts(10 years, 2 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Rebecca Long Bailey (Salford and Eccles) (Lab)
I congratulate the hon. Member for Aberconwy (Guto Bebb), my hon. Friend the Member for Bassetlaw (John Mann) and the hon. Member for East Renfrewshire (Kirsten Oswald) on securing such an important and topical debate, and I thank them for their excellent contributions. It is also a delight to debate opposite the Minister for the first time.
We have had some fantastic contributions from hon. Members. Transparency seems to be the key theme running through the debate. Members referred numerous times to Connaught and interest rate hedging products, and we heard some interesting case studies from the hon. Member for North Warwickshire (Craig Tracey), who shared his experiences of running his own insurance firm and how regulation affected his business. The hon. Member for Wyre Forest (Mark Garnier) highlighted the positive things the FSA was doing—for example, in supporting innovation in “fintechs”—and said that, although there were failings that needed to be addressed, it was important not to throw the baby out with the bathwater.
Operators in the finance sector, commentators, hon. Members and Members of the other place have recently expressed concern over the FSA’s ability to carry out its operational objectives—consumer protection, integrity and competition. Sadly, these concerns overshadow some of the fantastic work the FSA has carried out to date in the finance sector.
Many argue that the Chancellor’s Mansion House speech last year sent a clear message to the financial services sector that the UK was returning to business as usual. In outlining his new settlement for the finance industry, he stated that we must become
“the best place for European and global Bank HQs”.
That was widely interpreted by many in the finance industry to mean that there would be a softening of the FSA’s approach to banks. In fact, as an ode to the Prime Minister’s “hug a hoodie” period, which still tickles me when I think about it, I would suggest that many felt the Chancellor was entering his own love-in—the “hug a banker” period.
The bankers’ Chancellor had finally got his mojo back, and what a mojo it was! A string of concessions was handed to the banks: changes to the bank levy that significantly benefited large international banks; watered-down proposals for implementing the ring fence between retail and investment banking; a time limit on claims relating to the mis-selling of payment protection insurance; and confirmation that banks would not be asked to hold significantly more capital.
In January, however, in a complete U-turn from the autumn statement and the “never had it so good” euphoria, the Chancellor warned us of the risks to the UK from the shaky global economy, citing a
“dangerous cocktail of new threats”
and highlighting the dangers of “creeping complacency”. He failed, however, to address his creeping return to business as usual in our finance sector and the FSA’s role in dealing with the same.
Several factors have brought us here. The first is the feeling that the FSA’s independence has been compromised and that its agenda is being set by political pressure from the Government. Such independence was called into question by a recent external review that said the FSA board’s powers
“with respect to making independent decisions”
were limited and that external interventions
“can have dramatic effects on the organisation”.
This coincided with stories in the media that the Bank of England was directly involved in the highly criticised decision by the FSA to axe the review into the culture at some of the UK’s biggest banks.
Then there is the Chancellor’s influence over sacking or appointing chief executives to the FSA. [Hon. Members: “FCA!”] I mean the FCA. Martin Wheatley, who had been hired by the Chancellor as a tough guy, and a key figure in pursuing misconduct in the financial sector, was removed and replaced by Andrew Bailey. Many are concerned that the Chancellor’s new appointment, who is seen as more of a pragmatist, heralds a decisive shift towards greater leniency on the banking system.
I have no doubt that the new appointment seeks to be completely impervious to the Chancellor’s charms, but as one Treasury Select Committee member eloquently stated recently,
“there is a subliminal desire if you like, to please the masters by taking some of these decisions where the inference has been that potentially if you do not play ball you will lose your job.”
I turn now to transparency. I seek to highlight to the Minister a few examples of where achieving transparency has been a struggle. The conclusion of the FCA’s work on HSBC’s Swiss bank tax evasion and the decision not to take action led many FCA critics to ponder whether this had come as music to HSBC’s ears, given the bizarre coincidence that at the same it was considering whether it should relocate its headquarters outside London. Little detail was provided regarding the rationale for this decision and the FCA simply stated that such a major tax investigation was a matter for HMRC.
That highlighted two issues—transparency and the sharpness of the FCA’s teeth as a regulator. Those issues aside, I would welcome the Minister’s assurance that a thorough investigation will be carried out as a matter of urgency, that HSBC will pay the appropriate tax to the Treasury and that we will not see a repeat performance of last week’s Google tax debacle. Perhaps the incident will encourage the Minister to consider a U-turn on the Government’s proposed cuts to HMRC. If the FCA has no teeth in such situations, surely the Government must ensure that HMRC is adequately resourced—but I digress.
On the same theme of a lack of transparency, I must refer to the industry scandal surrounding the mis-selling of interest rate hedging products, as outlined by my hon. Friend the Member for Bassetlaw today. The FCA rightly launched a full review, resulting in the publishing of a set of rules. What remains worrying is that the FCA had to be pushed by the Treasury Select Committee to publish the rules at all; and, even now, we await details of the methodology agreed with each bank so that we can be satisfied that all banks are in fact complying.
Similar calls for more FCA transparency surrounded the review of the collapsed Connaught Income Funds, as highlighted by the hon. Member for Aberconwy. Here, the FCA faced criticism from the Under-Secretary of State for Wales, the hon. Member for Vale of Glamorgan (Alun Cairns), who set up the all-party parliamentary group on the Connaught Income Fund, and who cited a “generally defensive approach” from the FCA and lack of “transparency”.
Then there is the highly criticised scrapping of the review into banking culture. The Treasury Select Committee recently found that there was no FCA board consultation on this issue. Even the Chairman was not privy to the decision. It is also important to note that no public statement was made regarding the decision—it was simply leaked. When pushed, the FCA commented that
“we decided that a traditional thematic review would not help us achieve our desired outcomes and we would therefore take forward our work on culture through other routes.”
That hardly explains the position at all, but essentially these “other routes” refer to “self- regulation” underpinned by the FCA’s new conduct rules, which centre largely on a presumption that those at the top simply do all that is “reasonable” to ensure good governance.
As we heard in the earlier debate on the Bank of England and Financial Services Bill, the removal of a reverse burden of proof further diminishes any legal recourse that could be pursued. The Chair of the Treasury Select Committee has himself warned that much of the responsibility for implementation is left to banks. He stated that
“the spirit is willing at the top, but the flesh is weak…The board may will the change and culture, but not enough happens lower down.”
Now the FCA’s new direction on this issue deserves close examination, but unfortunately we do not have the time to debate this today. The point is that such a radical step change away from what the public believed would be a root-and-branch banking culture review should arguably not have happened without—at the very least—board approval and transparent consultation.
In conclusion, although I applaud much of the FCA’s work and many of its achievements to date, the issues raised today ring some very loud alarm bells. I hope that the Minister realises that the British public are still paying the price for a financial crisis that they did not cause and that they require an FCA that truly holds the banking system to account—an FCA that ensures that financial productivity does not come with an immoral price tag that ignores the principles of fairness and fair play on which British society is built.
I look forward to hearing the Minister’s comments, and I hope she will confirm that my concerns will be addressed—otherwise, I am afraid that the so-called bankers’ Chancellor will be letting down the British public who bailed the banks out and sending out a clear signal of a return to “business as usual”.
Mr Speaker
Order. Before the Minister speaks, let me make it clear that I intend to call the hon. Member for Aberconwy (Guto Bebb) at no later than 9.58.
The Economic Secretary to the Treasury (Harriett Baldwin)
I am left with very little time to cover such a wide-ranging debate. I congratulate the Backbench Business Committee and my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this debate.
I think we can all agree that it is important that in the Financial Conduct Authority we have an organisation to keep financial markets honest for our constituents and for markets, which play a crucial role in our economy. We all want financial services to be on the side of our constituents—the people who want to work hard, do the right thing and get on in life. It is therefore vital that financial services display and uphold the highest standards of behaviour and treat their customers fairly.
The House will no doubt be aware that most small business lending is not regulated. Obviously, when an independent regulator is involved, we need to ensure that the right people are doing the job. Last week the Chancellor announced a number of new appointments to the FCA board, including an excellent new chief executive. As the Chancellor said, Andrew Bailey was the outstanding candidate to be the next chief executive. He brings with him a wealth of experience of financial services regulation in the United Kingdom. He is simply the most respected, most experienced and most qualified person in the world to do the job. However, I want to put on record the Government’s gratitude to Tracey McDermott, the acting chief executive, for all her hard work over the past four months.
Last week we also appointed four new non-executive directors: Bradley Fried, Baroness Hogg, Ruth Kelly and Tom Wright. The new directors provide a balanced mix, on the gender front and in terms of their public and private sector experience and their experience of politics, as well as a wealth of knowledge of consumer issues and the financial services sector more generally, adding an invaluable independent challenge to the board. We believe that the new appointments will strengthen the organisation, and, by ensuring that it has the best possible leadership, will help the FCA to remain a strong, tough regulator that protects consumers and ensures that financial markets work for the benefit of the whole economy.
There are clearly still challenges ahead for the FCA, but it is worth remembering the positive steps that it has already taken. It is in the process of implementing the new senior managers and certification regime, which includes applying enforceable conduct rules to anyone who is involved in the financial services activity of a bank. It has introduced improved whistleblowing requirements, and a new remuneration code that will ensure that individuals are not rewarded for taking excessive risks. It has taken action to protect consumers, such as the regulation of consumer credit, which has included capping the cost of payday lending to protect consumers from unfair costs.
FCA regulation is already having a dramatic impact on the payday market. Indeed, the FCA found that the volume of payday loans had fallen by 35% in the first six months since it took over regulation in April 2014. There has been a new focus on competition in banking and other markets, such as excellent work on Fintech and the innovation hub. Last year the Treasury and the FCA jointly launched a financial advice market review, which is designed to make financial help more accessible and affordable for all our constituents. It is also worth highlighting the role of the Financial Ombudsman Service, to which Members may wish to refer their constituents when they have problems with financial services firms.
The Government are as keen as those who are present tonight to resolve the matters that have been raised by a range of Members. We heard from not only my hon. Friend the Member for Aberconwy, but from the hon. Member for Bassetlaw (John Mann), my hon. Friend the Member for Wyre Forest (Mark Garnier), the hon. Member for Motherwell and Wishaw (Marion Fellows), my hon. Friend the Member for North Warwickshire (Craig Tracey), the hon. Member for Ceredigion (Mr Williams), my hon. Friend the Member for South West Devon (Mr Streeter), the hon. Member for Brentford and Isleworth (Ruth Cadbury), my hon. Friend the Member for Hazel Grove (William Wragg), the hon. Member for East Renfrewshire (Kirsten Oswald), my hon. Friend the Member for North East Somerset (Mr Rees-Mogg), the hon. Member for Edinburgh West (Michelle Thomson), my hon. Friend the Member for South Suffolk (James Cartlidge) and the hon. Member for Ross, Skye and Lochaber (Ian Blackford), as well as the hon. Member for Salford and Eccles (Rebecca Long Bailey).
A number of points have been raised, and I shall deal with them in turn. The issue of the banking culture review was raised by the hon. Member for Salford and Eccles, my hon. Friend the Member for Aberconwy, and the hon. Member for Bassetlaw. The first time I personally heard about the FCA’s decision to discontinue the review was when the story broke in the media on new year’s eve. We have made it abundantly clear to the House that no Treasury Minister or official was involved in the FCA’s decision, and the FCA has made it clear that it did not inform the Treasury before the decision was made public.
Harriett Baldwin
No, because the hon. Gentleman was not even present for the debate.
The hon. Member for Edinburgh West, my hon. Friend the Member for Aberconwy, the hon. Member for Ceredigion, my hon. Friend the Member for South West Devon and the hon. Member for Brentford and Isleworth also mentioned interest rate hedging products and businesses that were suffering as a result of interest rates that were lower than expected. The Government have made it clear from the beginning that mis-selling of financial products is unacceptable, and that businesses affected by it should be compensated. The FCA has established a redress scheme for small businesses that were mis-sold interest rate hedging products to ensure that eligible businesses are compensated. So far the scheme has paid out on 18,000 cases, and more than £2 billion has been paid in redress, including £464 million to deal with consequential losses.[Official Report, 4 February 2016, Vol. 605, c. 8MC.]
As we have heard tonight, there are still some cases outstanding. As at year end, these include 700 cases in which full refunds have yet to be accepted. Businesses that are considered larger and more sophisticated are not covered by the redress scheme, but they can of course take advantage of the first-class brains in our legal profession. The FCA considers that there is merit in holding a review of how the scheme has worked when these legal cases have been concluded.
The question of Connaught was raised by the hon. Member for Motherwell and Wishaw, my hon. Friend the Member for Aberconwy, the hon. Member for East Renfrewshire and my hon. Friend the Member for South Suffolk. The Government and the FCA understand the serious financial difficulty and distress that this issue has caused to many investors. As hon. Members might be aware, the FCA published an update to investors on its website this week on Connaught Income Fund, series 1. The update highlights that a settlement agreement has been reached between the liquidators of the fund and Capita Financial Managers Ltd. The FCA has asked the liquidators of the fund to distribute the settlement sum to investors as soon as possible. The investigation that the FCA is pursuing will continue independently of the settlement.
The Global Restructuring Group was mentioned by the hon. Member for Edinburgh West and my hon. Friend the Member for Hazel Grove. Let me reassure the House that I expect to see the conclusions of the FCA’s investigation into this matter in the first quarter of the year. On the point made by the hon. Member for Ross, Skye and Lochaber and my hon. Friend the Member for Wyre Forest on Treasury Select Committee scrutiny of FCA appointments, we have agreed that the Committee will be able to carry out a pre-commencement hearing before the new CEO starts at the FCA.
A number of questions have been raised about FCA independence. The FCA is of course operationally independent of the Government. We appoint the chief executive and the board, and the FCA’s objectives and duties were voted into statute during the last Parliament. I firmly believe in the independence of the FCA. It is vital that consumers and firms know that regulatory decisions are being taken in an objective and impartial way. Contrary to what the hon. Member for East Renfrewshire seems to think, I have met the acting chief executive of the FCA and her predecessor from time to time. I regret the fact that the hon. Lady has formed a different impression.
The hon. Member for Salford and Eccles raised the question of operational matters. I am afraid that she cannot have this both ways. If she wants the Treasury to interfere in operational decisions at the FCA, she is asking for something that completely contradicts the spirit of independent regulation that I have supported this evening. No one is denying that the FCA has a tough job ahead. That is why it is essential that it is well prepared, well staffed and well equipped to do that job, and that it has the best leadership possible. I am confident that the FCA has the right mandate and team.
Like my hon. Friend the Member for North East Somerset, I believe that today’s motion is neither well founded nor well timed, given that a new chief executive and a new team are in place. I strongly urge hon. Members to ignore the motion before us tonight.
Securitisation Framework: Justice and Home Affairs
Harriett Baldwin Excerpts(10 years, 2 months ago)
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The Economic Secretary to the Treasury (Harriett Baldwin)
The Government have decided not to opt in to the justice and home affairs (JHA) provisions within the European Commission’s proposal for laying down common rules on securitisation and creating a European framework for simple, and transparent and standardised securitisation.
Article 19(2) of the proposal requires that where member states have chosen to pursue a criminal sanctions regime for breaches of elements of the proposals, those member states must ensure that information can be shared between competent authorities across the EU. As the provision requires co-operation involving law enforcement bodies, the Government believe these are JHA obligations and therefore our JHA opt-in is triggered and we have informed Council of that fact.
The Government have decided not to opt in to these provisions as there are no significant benefits to be gained from doing so. The obligation to share information will fall on member states who have a relevant criminal sanctions regime, and UK competent authorities will be in a position to access this data irrespective of the decision to opt in. The Government have no intention to introduce a criminal sanctions regime in a way that would lead to this regulation imposing an obligation on the UK or on our competent authorities.
[HCWS496]
Financial Services
Harriett Baldwin Excerpts(10 years, 2 months ago)
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The Economic Secretary to the Treasury (Harriett Baldwin)
The Chancellor has this morning announced that Andrew Bailey has been appointed as the next chief executive of the Financial Conduct Authority.
Andrew will succeed Tracey McDermott, interim CEO, and bring his extensive skills and experience of regulation to ensure that the UK financial services sector is the best regulated in the world.
The Chancellor has also announced the appointments of Bradley Fried, Baroness Hogg, Ruth Kelly and Tom Wright as non-executive directors.
These appointments are being made by HM Treasury under, and in accordance with, the Financial Services and Markets Act 2000 as amended.
[HCWS490]