Bank of England and Financial Services Bill [ Lords ] (Sixth sitting)
Harriett Baldwin Excerpts(8 years, 8 months ago)
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Richard Burgon (Leeds East) (Lab)
I would like to express my hearty support for new clause 3. Select Committees have routinely held pre-appointment hearings for a number of public appointments since 2008, with a number of candidates not approved. The previous coalition Government did develop the scrutiny agenda somewhat when the Chancellor agreed to the Treasury Committee having a power of veto over appointments to the Office for Budget Responsibility in 2010.
The Public Accounts Committee has a veto over the appointment of the Comptroller and Auditor General. Appointments to the Monetary Policy Committee and the Financial Policy Committee of the Bank of England are made by the Chancellor of the Exchequer and are then subject to a confirmation hearing by the Treasury Committee. The Treasury Committee has power over the chair and board members of the Office for Budget Responsibility, an arrangement that the Chancellor told the Treasury Committee he would put in place
“because I want there to be absolutely no doubt that this is an independent body”.
The Minister will be aware that, when it examined the proposals for the future Financial Conduct Authority in 2013, the Treasury Committee made a number of recommendations on the accountability of the new body to Parliament, including that the legislation provided that the chief executive of the FCA be subject to pre-appointment scrutiny by the Treasury Committee. The Treasury Committee was disappointed by the Government’s response, particularly in view of the deficiencies in the accountability mechanisms for the Financial Services Authority.
I would like to express support not only for the new clause tabled by the Scottish National party, but for the view of the Treasury Committee, as set out by its Chair, the right hon. Member for Chichester (Mr Tyrie), in his letter to the Chancellor of the Exchequer on 26 January, following the appointment of the current Prudential Regulation Authority chief executive, Andrew Bailey, to be the next leader of the FCA. In that letter the right hon. Gentleman set out his Committee’s view that it should have a veto over the appointment and dismissal of the chief executives of both the FCA and the PRA. Indeed, the letter said that the FCA’s chair, John Griffith-Jones, told the Committee that there was merit in that proposal when he met its members on 20 January.
It would be helpful to know whether the Chancellor has responded to that letter, and whether the Minister can share with us now the Treasury’s thinking on extending pre-appointment hearings and the power of veto to those two positions. I thank the hon. Member for East Lothian for flagging up this issue with his new clause, which we support and will consider returning to on Report, if the Government are not on board with it.
The Economic Secretary to the Treasury (Harriett Baldwin)
I am going to convince Opposition Members that this new clause is not necessary. I will give them an updated response on the Chancellor’s views and the process of recruitment for the new chief executive of the PRA, the deputy governor for prudential regulation. That newsworthy notification to the world is taking place in front of a large crowd, as we can see.
My understanding of the proposed new clause is that it would give the Treasury Committee a statutory veto over the appointment of the chief executive of the PRA, which is soon to be the Prudential Regulation Committee. I am well aware that the Treasury Committee, of which the hon. Members for East Lothian and for Bassetlaw are members, has proposed this measure. Last month, following the announcement of the appointment of Andrew Bailey as chief executive of the FCA, we received a letter from my right hon. Friend the Member for Chichester (Mr Tyrie), in which he argued that the Treasury Committee should have a veto over both the appointment and the removal of the chief executives of the FCA and the PRA. The Chancellor has replied to the Treasury Committee in a letter, which normally would be published by the Committee—I imagine that it has been published already. We believe that such an arrangement is neither necessary nor appropriate for the financial regulators, and I will articulate the reasons why.
First, such an arrangement is not necessary to protect the independence of the FCA and the PRA or of their chief executives. The model of independent regulation that we have in the UK gives the regulator a clear statutory framework of objectives and duties and ensures that regulatory decisions are taken in an objective and impartial way. Importantly, this legislative framework protects the independence of the PRA and the FCA chief executives. It includes provisions that require the terms of appointment to be such that the appointee is not subject to the direction of the Treasury or of any person.
We agree that it is important that the Treasury Committee holds a pre-commencement hearing before the new PRA CEO takes up their post. However, we believe that it is important that the Chancellor remains the person who is fully accountable for deciding on the right person for the job. Pre-appointment hearings are not common for chief executive posts. Hon. Members will understand that such a process would potentially introduce scope for delay and public disagreement, which would not help to recruit good candidates. For example, candidates who are otherwise very good might not want to disclose their interest to their current employer in advance of confirmation of the appointment.
The hon. Member for East Lothian has argued that the arrangements for the appointment of the chief executives of the FCA and PRA should mirror those for the senior leadership position at the Office for Budget Responsibility; that appointment requires the consent of the Treasury Committee. However, the financial regulators are materially different from the OBR. The OBR was established to examine and report on the sustainability of public finances and, by doing so, to help Parliament hold the Government to account for their fiscal policy decisions—the same argument applies to the Comptroller and Auditor General—and as such the OBR has a unique model of dual accountability to the Government and to Parliament.
The previous Government proposed the statutory veto of the Treasury Committee over appointments to provide an assurance of independence and to ensure that those individuals at the OBR have the support and approval of the Select Committee. However, we do not believe that that model of dual accountability is appropriate when regulators are independently carrying out executive functions of the state, such as regulating and supervising the financial services industry. As I have said before, I would welcome the Treasury Committee holding a pre-commencement hearing with the chief executives of the PRA and the FCA. That would provide an important opportunity for Parliament to scrutinise new appointees to those offices before they take up their posts.
Let me update the Committee on the process for appointing the next chief executive of the PRA, who will take over from Andrew Bailey. The Government are running an open competition. The post was advertised on Friday 19 February, which was last week, and the closing date for applications is 4 March—the window is still open should any members of the Committee wish to apply. The appointment is made by the Queen, on the recommendation of the Prime Minister and the Chancellor. Interviews will be conducted in mid-March by a panel chaired by Sir Nicholas Macpherson, together with the second permanent secretary, the chair of the court and one of the other deputy governors. It is expected that the new chief executive will take up the position as soon as possible, but by 1 July 2016 at the latest. You see, Mr Brady, we have all the breaking news after 2 pm in this Committee.
There is another argument that is not in my speaking notes, but which I strongly believe is the case. Let us hypothesise that whoever is appointed through that process then goes through the pre-commencement hearing with the Treasury Committee that we have agreed, and that Committee produces a report that is extremely unfavourable to the person nominated by the Government. I think we can all see that, from a practical point of view, that would be as powerful as having a pre-appointment hearing.
Let us look back at the recent examples of Andrew Bailey’s move to the FCA and, for those of us with slightly longer memories, the appointment in the previous Parliament of Mark Carney as the new Governor of the Bank of England. The Chancellor invested a lot of personal time in those appointment processes, persuading individuals to come across. Imagine if he had had to say, “It is not actually in my power to offer you these jobs; it is in the power of the Treasury Committee.” Would we have seen candidates of such quality prepared to put their names forward? I submit that we would not.
I therefore think that the Government have made the right judgment in agreeing to a pre-commencement hearing. I hope that I have explained to the Committee why I do not believe it would be appropriate to accept the new clause, and I hope that the hon. Member for East Lothian will withdraw it, or that the Committee will vote it down.
John Mann (Bassetlaw) (Lab)
Dear, oh dear. Democracy only goes so far. The United States, with all its systems, must be appointing terrible people, seeing as elected politicians there have a whole range of conferments or otherwise, from the top of the judiciary downwards. Not to give an august body such as the Treasury Committee, which is elected on a cross-party basis by Parliament, the ability to reject an unsuitable applicant demonstrates the fundamental weakness of the last few Chancellors and of the current one, in the style of his predecessor but one—Mr Brown was an example, and Mr Osborne closely mirrors him in every way. Chancellors perceive that they have all the wisdom, yet they are not confident enough to trust a cross-party Committee that would rarely even contemplate criticising, never mind vetoing.
Having sat on that Committee at four different times with a range of Members—indeed, I seem to recall that you, Mr Brady, were one of its leading members when I was first on it—I know that there has never been an instance when it has misused its powers on a partisan basis. Of course, there may be exchanges, particularly with Chancellors and Ministers, where one senses and smells more of a partisan element. However, there has never once been an inkling of that in decision making.
For the Executive to hold in these powers is dangerous for the Executive and for Parliament. The power is simply with a single name; there is no choice or selection process. The proposal from the hon. Members for East Lothian and for Kirkcaldy and Cowdenbeath, which is the same one unanimously put forward by the Treasury Committee in this Parliament, is for the ability to interview and, if necessary, vote against an applicant. That focuses on what the Government want from the post holder and the skills that the post holder will bring. It scopes out precisely how that remit is seen by Parliament. We are the elected representatives. Therefore, in exactly the same way, very successfully, Parliaments past brought in the Select Committee system and further democratised that process through elections to Select Committees. That is popular inside the House and, as time will show, it is increasingly popular outside, as the general public understand how it has strengthened our democracy.
Harriett Baldwin
If I may, I will come back on some of the points made by the hon. Member for Bassetlaw, who seems, I submit, to prefer American democracy to British democracy. I do not know whether this is a preference he has publicly stated, but it certainly seems to be his revealed preference, judging by his comments before lunch on the second Chamber and his comments now. American democracy is very different from ours, it is true, and I am sure that each has different advantages and disadvantages. In America, the judges are elected, for example. That is not something that we have chosen to do in this country. In America, obviously, their second Chamber is directly elected. That is not something that this Parliament has yet chosen to do.
Obviously, the power of the Executive in the British system of democracy is considerably greater when it comes to Budget matters than in America, where for a long time they were unable actually to pass a Budget. In America, where the Senate must confirm presidential nominations for many public appointments, there have been significant delays in filling vacancies. At the end of 2010, for example, 22%—over one fifth—of Senate-confirmed positions remained unfilled or temporarily filled by acting officials. Introducing scope for delay and public disagreement could impede the recruitment of good candidates to these positions. These are Executive posts and, as I said previously, candidates may not wish to reveal their interest to a current employer in advance of being confirmed in the appointment process.
George Kerevan (East Lothian) (SNP)
I remind the Committee that for most of last year the Treasury Committee was in touch with the Chancellor, who was very dilatory in making a fresh appointment to the head of the FCA. Delays can occur even when the Executive are in charge.
Harriett Baldwin
Again, I have to disagree with the hon. Gentleman. There has been a very capable and competent acting chief executive at the FCA throughout this time. I submit that the hon. Member for Bassetlaw would rather that Bassetlaw were in America, from what he has said.
John Mann
The Minister should know her history. The Pilgrim Fathers and the pilgrim contract that created western democracy in the style of the United States originate from Bassetlaw, as does the Great Reform Act of 1832. The writer of the Great Reform Act lived in my house at the time. Bassetlaw and American democracy therefore go together, but we are English. We are part of the United Kingdom. We want our Parliaments to be confident enough to make decisions. If it is not good enough for the Monetary Policy Committee and the OBR, is the Minister really saying that we are not getting people of suitable calibre for those posts?
Harriett Baldwin
The Minister really is saying that. I am saying that these are Executive roles, which the Executive should continue to be able to appoint, obviously with a pre-commencement hearing by the Treasury Committee. I fear that the hon. Member for Bassetlaw’s ancestor’s ticket for this voyage must have got lost, but it was very interesting to hear about the connection with his constituency. Without more ado, I urge the Committee to reject this amendment.
George Kerevan
I normally have a great deal of respect for the Minister’s judgment, but I detected something in her tone which said that even she did not fully agree with her position. On the first point, she argued that statute guarantees the independence of the regulators. If there is anyone is this room, including the Minister, who can put their hand on their heart and truly say that no regulator has ever been leant on by a Minister of any party, then I will accept where the Minister is going. I am a tiny, wee bit cynical that sometimes, despite statute, Ministers of all parties and all jurisdictions tend to lean. We should try to tempt them away from that by giving a parliamentary underpinning to the role and the position of the regulator. That is at the heart of this.
The Minister also cites the problem that might arise from dual accountability to the Executive and to Parliament. If there is conflict, I am always happy for Parliament to triumph over the Executive, but maybe the Minister wants this to be the other way round—indeed, she has said as much. My point is that we already have a degree of dual accountability. The Treasury Committee, standing for Parliament as a whole, questions the regulators on a regular basis to make sure that they are fulfilling their brief. The Committee is not questioning them on policy, but to make sure of their independence. The actual accountability already exists. We are just making it clearer here.
The Minister says that as an alternative there could be a pre-commencement interview. If there is a problem with confusion of lines of responsibility, that is actually a worse way to go than making it clear that the Committee, standing in for Parliament, does have the role of confirming the appointment.
My final point is that this would interfere with the quality of the candidates we might get. I remind the Minister that every single member of this Bill Committee had to stand for election. We put ourselves before the electorate; that is democracy. All we are arguing for is the principle of democratic accountability. If there are candidates for senior Executive positions who are frightened of democracy, they do not deserve the job.
Question put, That the clause be read a Second time.
Harriett Baldwin
Members on the Opposition Benches have highlighted in a nutshell the essence of this debate and made some of the points I was going to make. The Bank of England as an entity predates the United Kingdom itself: it was founded in 1694, before the Union, and in the intervening 322 years it has built a globally prestigious brand, if I dare call it a brand. It is well known around the world and has a worldwide reputation as a strong and independent central bank, although independence obviously came quite a bit later. The hon. Gentleman’s amendment would not change this and it is not something we should dismiss lightly, but I think that people would still carry on referring to it as the Bank of England.
The Bank exists to serve the entire population of the United Kingdom. Its mission statement is:
“to promote the good of the people of the United Kingdom by maintaining monetary and financial stability”,
but I can understand from his political allegiance why the hon. Gentleman did not propose in his amendment that it be renamed the Bank of the United Kingdom, because his party’s aspiration is that we become a disunited kingdom, although we all sincerely hope that that never comes to pass.
I remember that in the referendum campaign there was some talk, not only of whether the euro would become the currency of Scotland, but of the groat becoming the currency of Scotland. I think that not answering that question was one of the real problems that the nationalists encountered in the 2014 referendum. It is worth reminding the Committee that the Bank has a clear framework for ensuring it understands the economic picture across England, Scotland, Northern Ireland and Wales, through 12 agencies located in the regions and countries of the UK. Naturally, Scotland, Northern Ireland and Wales all have their own individual Bank agencies, as do the regions of England, and the agents in these branches and across the rest of the country meet with some 9,000 contacts a year from a range of sectors, which provides a wealth of economic and financial intelligence to the Bank’s policy committees.
That vital source of information helps the Bank’s policy committees to understand both the financial and non-financial conditions for businesses in all four parts of the United Kingdom, whether it is a business’s ability to access credit, the condition of the housing market or the level of output. The Bank actively seeks to understand economic and financial conditions in all corners of the United Kingdom in order to set appropriate monetary policy in the United Kingdom.
It is not only the Bank’s agents who are the external face of the Bank. Members of the MPC, the FPC and the PRA board regularly make speeches and meet with businesses across the United Kingdom. In fact, in 2014-15, members of those three organisations conducted 54 visits in different parts of the UK. Engagement in the different countries and regions of the UK is clearly important at the highest levels of the Bank.
The Bank of England is known as the central bank of the United Kingdom. The hon. Gentleman’s new clause would make no practical difference on the ground. He himself referred to the name being a “minor irritation”. Changing a name steeped in more than 300 years of history, particularly to the name that he suggests, would be to the detriment of the institution. It has become internationally renowned and respected with that name, and the value of that recognition should not be underestimated. International confidence in the Bank of England helps to support international confidence in our economy. Changing the Bank’s name would undermine that international recognition of it as a world-class central bank, and I therefore gently urge the hon. Gentleman to withdraw his new clause.
George Kerevan
Any change to the Bank’s name would not affect coins because the Bank’s name does not appear on coinage, as far as I remember. It does, however, appear on notes. If there was ever an agreement to change the name of the Bank of England, that would have a knock-on effect on notes, but a sensible solution would be simply to let the notes wear out, as they do quickly, and then change them. I am certainly not proposing any name change that would have a major cost; I would not want that.
Members on both sides of the Committee raised the issue of what would happen if Scotland were to become independent. If I gather correctly the drift of the contributions, Members are worried that if Scotland becomes independent post Brexit, the name would have to be changed back. I am glad that Members are still alive to the fact that the independence issue is alive and well north of the border. I will not tempt the Chair’s patience by going too far into that; we will cross that road when we come to it, but I am glad Members are aware that the issue has not gone away.
The Minister’s final suggestion was that if there were to be a name change, it would be better to change it to something such as the Bank of the United Kingdom, and that I am being in some way devious by proposing this longer name. There was discussion about what the new name would be. I have tried to alert Members that that debate is going on in other parties within the House. I have heard suggestions such as the Sterling Central Bank. It seems to me that the longer form I propose is the least change and is therefore most able to encompass the Minister’s last point—we want to retain some of the tradition of the Bank, which was founded initially by a Scots person.
This is a live issue. The name will be changed at some point. Once a debate such as this emerges, it can only go in one direction. It would be better to choose a name that we can all agree on in the here and now. If the Minister rejects that on the basis of some grand tradition of the Bank of England, that undermines the essence of the Bill, which is to modernise the Bank and make it one that works for the whole of the nation as it is presently constituted. She and her Government are hiding behind the notion of modernity but they actually want to maintain a Bank which is run by the Executive, and which is not anywhere near as efficient as she thinks it is in terms of managing the prudential aspects of the economy.
Question put, That the clause be read a Second time.
Harriett Baldwin
What is in a word? The hon. Gentleman has set out the case for changing the name of the court. I do not know about you, Mr Brady, but I rather like some of our old traditions in this country.
The court has existed since the Bank’s inception in 1694. The composition and structure have obviously changed over its long history. Initially, there were 26 individuals on the court, while today it is much smaller, with the executives and non-executives, and is much more characteristic of a modern, unitary board. The term supervisory board, used by the hon. Gentleman, is more redolent of the German approach to corporate governance than the British one. I am sure he will provide me with examples. It is not the Americans this time, but the Germans.
For me, there is charm in the term “court”, which is rooted in this long history. It has no particular mystery about it; it merely refers to the Bank’s governing body, which does indeed operate like a modern board. I do not feel we should argue over semantics. We should look at how the court functions. As the Committee has already heard, the court is now far smaller and far more effective than it was historically. There is a clear division between the role of the chief executive and the non-executive chair. The court is comprised of a majority of independent non-executive directors, and there are formal, transparent appointment procedures for executive and non-executive directors alike.
The changes in the Bill, which we have discussed at such great length, will further enhance the role of the court, making it a stronger decision-making body. In particular, to remind the Committee, we are making the oversight functions the responsibility of the whole court, ensuring that every member of the court—executive and non-executive—can be held to account for the use of these functions.
This brings the court into line with the recommendations in the Treasury Committee report. My view and that of the Government on the amendment is clear. Changing the name of the court would make absolutely no difference to how it operates in practice. It is the provisions in the Bill that will do that. I oppose the suggestion to change the name from the rather quaint and old-fashioned term of “court”, which has for me some charm.
Richard Burgon
That was indeed a charming oration from the Minister about how things were done in the past and continue to be done to this day. As much as I like many aspects of the history of this country, I am not persuaded that we should not press the matter to a vote. In the name of modernity, I seek to divide the Committee on this issue.
Question put, That the clause be read a Second time.
Harriett Baldwin
Mr Brady, as we come to the final question of our proceedings, I put on record the Committee’s gratitude to you and Mr Wilson for having chaired our sittings so effectively. I also thank the Clerks and the Hansard reporters. For their incredibly diligent work behind the scenes—so often it is unsung—I also thank the Treasury officials, the Treasury legal team and, in this case, the Bank of England’s legal team. I put those thanks and that gratitude on the record. I also thank all members of the Committee for the care and attention that they have given to the line-by-line scrutiny of the Bill.
Richard Burgon
I echo the sentiments expressed by the Minister. I thank you, Mr Brady, and Mr Wilson, the co-Chair of the Committee, for your chairmanship. I thank the Clerks and the staff. I thank the Minister for her patience and courtesy and for the detailed responses she has given throughout our proceedings. I also thank my hon. Friends and all members of the Committee. We have no objection to the Bill being reported to the House.
Question put and agreed to.
Bill, as amended, accordingly to be reported.
Bank of England and Financial Services Bill [ Lords ] (Fifth sitting)
Harriett Baldwin Excerpts(8 years, 8 months ago)
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The Chair
If the Committee wishes, I am happy to take all the clauses individually. I propose that we take clause 26 on its own, and then perhaps clauses 27 to 37 as a group.
The Economic Secretary to the Treasury (Harriett Baldwin)
I am happy either way, Mr Brady. It might also be worth touching upon Government amendment 7 to clause 38 as I go through the provisions.
The Chair
Thank you, Ms Baldwin. That amendment comes separately in any case. Shall we see how we go?
Clause 26
Enforceability of agreements relating to credit
Question proposed, That the clause stand part of the Bill.
Harriett Baldwin
It is a delight to be back here, again on a sunny Tuesday, to continue our scrutiny of the Bill under your chairmanship, Mr Brady.
The Government have fundamentally reformed consumer credit regulation, transferring responsibility from the Office of Fair Trading to the Financial Conduct Authority with effect from 1 April 2014. Clause 26 supports the effective operation of the FCA’s regime through minor amendments to the Financial Services and Markets Act 2000 in relation to the regulation of consumer credit. It is a technical clause and concerns the application of provisions relating to the enforceability of credit agreements. It makes it clear that when a person acting on behalf of a lender can lawfully undertake the relevant credit-related regulated activity in relation to the agreement, either by administering the agreement in relation to section 26A(4), or by taking steps to procure the payment of debts under it in relation to section 26A(5), they are also able to enforce the agreement.
Rob Marris
It is a pleasure to be here with you again, Mr Brady. I thank the Minister for her explanation—that is great.
Question put and agreed to.
Clause 26 accordingly ordered to stand part of the Bill.
The Chair
We now come to clauses 27 to 37. I suggest that we allow all of them to be commented upon as a group.
Clause 27
Enforceability of credit agreements made through unauthorised persons
Question proposed, That the clause stand part of the Bill.
Harriett Baldwin
For the benefit of the Committee, I will highlight each of the clauses as I go through them, while grouping my speaking notes.
Clause 27 also supports the effective operation of the FCA’s regime by amending section 27 of the 2000 Act, which deals with agreements made through unauthorised persons, to ensure that it has a proportionate effect on consumer credit and consumer hire providers. Section 27(1) of that Act provides that an agreement made by an authorised person carrying on a regulated activity is unenforceable when it is made in consequence of something said or done by a third party in circumstances in which that third party should have had, but did not have, permission. The clause narrows the circumstances in which a credit agreement or consumer hire agreement is unenforceable under this section and ensures that this will only be the case when the provider of credit knows, before the agreement is made, that a third party had some involvement in the making of the agreement or in matters preparatory to it being made.
Clause 28 introduces a power into the 2000 Act for the Treasury to make regulations relating to transformer vehicles. Transformer vehicles—you may be wondering, Mr Brady—are used for risk mitigation purposes in insurance markets, particularly in the insurance and reinsurance industry. The Government plan to use this power to implement a new framework for insurance-linked securities business. Insurance-linked securities are now an important and growing part of the global specialist reinsurance market. The Government are working closely with the London market and the financial regulators to implement a fit-for-purpose regulatory regime for insurance-linked securities business. This will help the UK to maintain its competitive edge as a global reinsurance hub.
Clause 29 extends the definition of pensions guidance within section 333A of the 2000 Act to include the provision of guidance to consumers interested in assigning or surrendering—in other words, selling—rights to payments under an annuity on the secondary market. It also closes an unintended gap in guidance provision, ensuring that individuals whose schemes have transferred into the pension protection fund are able to access Pension Wise guidance—the free and impartial Government- supported guidance service.
In the March 2015 Budget, the Government announced our intention to remove the tax restrictions that deter pensioners from selling their annuities. This reform will enable retirees who were unable to take advantage of the Government’s new pension freedoms to convert their annuity into a lump sum, or another investment product if they choose, giving those who have worked hard and saved for their retirement choice over their financial arrangements.
The Government are committed to implementing the new secondary market in annuities in April 2017. The new market will offer consumers new freedoms but will involve potentially complex choices for them. The Government want to ensure that consumers are empowered and equipped to make the most of their assets. The offer of free, high-quality and impartial guidance through Pension Wise is a key part of providing the consumer with the relevant information to make the necessary decisions. That is why the Government are extending the Pension Wise service to provide guidance to those who will be able to sell their annuities on the secondary market, and to any dependants or beneficiaries with rights to payments under an annuity contract.
Pension Wise was launched in March 2015 to give impartial guidance to individuals with new flexibilities under pension freedoms. It has been a successful service, with high levels of consumer satisfaction, more than 2.2 million visits to the website and more than 50,000 individual appointments. In response to the Government’s consultation on allowing consumers to sell their annuities, there was strong support for expanding Pension Wise, both from consumer groups and from industry.
The expanded service will be similar in nature to the existing Pension Wise service, but it will need to be adapted to ensure that the content and service delivery are appropriate for this new group of consumers. By legislating at this time, the Government are ensuring that there is enough time to implement the expansion of Pension Wise before the secondary market in annuities opens in 2017. At present, Pension Wise can provide guidance only to a member, or the survivor of a member, of a pension scheme. As the pension protection fund is a compensation fund, not a pension scheme, individuals whose schemes have transferred into the pension protection fund are currently unable to obtain guidance from Pension Wise. Pension Wise should be available to all those who wish and are able to take advantage of pension freedom reforms, so it is right that we are taking action now to ensure that all have equal access to the service.
Clause 30 places an obligation on the Financial Conduct Authority to set rules requiring specified firms to check that relevant annuity holders have received appropriate advice before processing the transfer of an annuity. In practice, this will introduce a requirement for individuals to receive financial advice before selling their rights to an annuity income stream, where that annuity is valued higher than a threshold to be set in secondary legislation. The Government are committed to implementing the new secondary market in annuities in April 2017, removing the barriers that prevent people from making their own choices over how they use their retirement savings. However, we recognise that the regular income stream provided by an annuity is a valuable asset and that for the majority of individuals it will be in their best interests to keep their annuity. It is therefore important that annuity holders understand the value of their annuity and are informed about their options.
The Government have consulted on the consumer support measures that should be introduced for the secondary market in annuities. Elsewhere in the Bill, the Pension Wise guidance service is expanded to provide information and guidance for those with a relevant interest in an annuity that can be sold in the secondary market. As a further measure to support consumers, the Government believe that, for those with a higher value annuity, there is a real benefit to having a bespoke recommendation before they make the decision to sell their annuity income. By introducing a requirement to receive financial advice, the Government are ensuring that those consumers receive a recommendation tailored to their individual circumstances and risk appetite.
However, although the Government believe that all individuals would benefit from financial advice, we recognise that the cost of advice for those with small annuities might be disproportionate. That is why, in legislating for this advice requirement, the Government have taken a power to specify in regulations which annuities will be subject to the requirement, for example by introducing a threshold. That would mean that only individuals with higher value annuities will be required to take financial advice. That approach was broadly supported by both industry and consumer groups in the Government’s consultation last year. The Government will determine the threshold, along with other details of the advice requirement for this market, through secondary legislation, which will be consulted on later this year.
Clause 31 is technical in nature and allows appointed representatives of authorised financial advisers to advise on the conversion and transfer of safeguarded benefits. Safeguarded benefits are the special valuable features of certain pensions, such as defined-benefit pensions, and pensions with guaranteed annuity rates, which are defined for the purposes of the advice safeguard established in sections 48 and 51 of the Pension Schemes Act 2015. The changes to sections 48 and 51 amend the definition of authorised independent adviser to include appointed representatives. As a result, they will be able to give appropriate independent advice in order to satisfy the advice safeguard. The clause also makes changes to the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001, to the same end. Subsection 3 of the clause extends the change to Northern Ireland.
Around two thirds of financial advisers are appointed representatives who have a specific contract to provide services on behalf of their principal, who will be an authorised financial adviser regulated by the FCA. That measure puts the eligibility of appointed representatives to advise on these transactions beyond doubt. The clause extends eligibility to advise on these transactions only to the appointed representatives of financial advisers. What it will not do is reduce consumer protections or weaken the accountability of financial advisers or their appointed representatives. Where an appointed representative advises on these transactions, the directly authorised firm, as the principal, takes full responsibility for the quality of the advice and compliance with FCA rules. The pension freedoms that came into effect in April have given people real freedom and choice in how they access and spend their income at retirement. This change will help to ensure that they operate as intended for customers with safeguarded benefits.
Clause 32 refers to the duty of the Bank of England to provide information to the Treasury. As hon. Members will know, the financial crisis of 2008-09 exposed significant failures in the old tripartite system of regulation. Since then, the Government have implemented, and continue to implement, major reforms to address those problems of the past and make the financial sector safer and more stable. These include a number of measures designed to ensure that bank failure can be managed in a way that protects the wider economy and financial sector, without relying on taxpayer bail-outs.
Under the old tripartite regime of regulation, there was no single institution with responsibility, authority or powers to oversee the financial system as a whole. The Banking Act 2009 addressed that by putting the Bank of England firmly in the driving seat for managing a financial crisis, and the Financial Services Act 2012 overhauled the regulatory architecture in the UK, including making provision for collaboration between the Treasury and the Bank of England in relation to crisis management. Clause 32 builds on those important reforms while, crucially, leaving unchanged the clearly defined roles of the Treasury and the Bank, as established in the 2009 and 2012 Acts.
The clause also seeks to ensure that the correct arrangements are in place for the Bank and the Treasury to fulfil their respective roles as effectively as possible. It does that by providing the Treasury with two new powers to receive information from the Bank, as part of understanding the public funds risk associated with firm failure. First, it creates a duty on the Bank to provide the Treasury with the resolution plans and certain supporting information for firms that the Bank considers it may need to resolve using the stabilisation powers in the 2009 Act. That will ensure that the Treasury can understand well in advance of a crisis scenario the public funds risk associated with a firm failing. Secondly, it gives the Treasury the power to obtain any extra information from the Bank that it considers material to the Bank’s assessment of that risk.
The clause relates solely to information sharing and co-ordination between the Bank and the Treasury, as part of their fulfilling their respective roles. It serves to formalise the productive working arrangements that have developed between the two bodies since the 2012 Act, and it ensures that the framework for co-ordination reflects developments in best practice, both domestically and internationally.
Clause 33 corrects an error in the National Savings Regulations 2015. The regulations revoked a number of statutory instruments with effect from 6 April 2015 and the Financial Services and Markets Act 2000 (Consequential Amendments and Repeals) Order 2001 was included by mistake. The 2001 Order was used to make most of the consequential amendments and repeals that were required to give effect to the 2000 Act. It amended a range of primary and secondary legislation, including the Companies Acts, the Bank of England Act 1998, the Building Societies Act 1986, pensions legislation and other legislation relating to financial services. Some of the amendments made by the 2001 Order have been superseded by subsequent legislative developments, such as the consolidation of the various Companies Acts in the Companies Act 2006, but in many cases the amendments are still necessary and the repeal of the instrument making them has left the law in a state of considerable uncertainty. The clause removes that uncertainty by providing that the revocation shall be treated as not having been made, restoring the law to what it was before the accidental revocation of the 2001 Order.
Clause 34 makes changes to the legislative framework governing the issuance of Scottish and Northern Ireland bank notes. It gives the Treasury power to make regulations authorising a bank in the same group as an existing issuer to issue bank notes in place of that issuer. That will increase banks’ flexibility to restructure their operations, while preserving the long-standing tradition of certain banks in Scotland and Northern Ireland issuing their own notes. This is a particular issue at the current time, as some banking groups will be adjusting their group structure in order to ring-fence their retail banking operations.
Clause 35 enables the Treasury to make amendments consequential to the Bill, and any statutory instruments made under it, to other primary and secondary legislation. For example, the power is likely to be used to amend references to the PRA in other legislation where necessary to reflect the fact that the authority is no longer a separate legal entity from the Bank. The power can be used only in certain circumstances. The Treasury can make regulations under the power only if it is necessary to do so as a consequence of a provision in the Bill. Furthermore, the power applies only to legislation that is made before the Bill is passed, or in the same parliamentary Session.
George Kerevan (East Lothian) (SNP)
I just want to make some remarks about clause 28, on transformer vehicles, which is one of the most important elements of the Bill, even though it is somewhat technical.
I commend the Minister on her rapid and very clear presentation of the clauses, but she said something about clause 28 that caused me to worry, and I would like to press her on it. She seemed to imply that the clause is being introduced to ensure that the regulation of transformer vehicles will maintain, and in fact increase, the City’s competitive edge. I worry that we are enacting regulatory provisions that could be used to facilitate transformer vehicles, which are rather toxic.
Transformer vehicles have been around for a while—since the start of the millennium—but they began to grow rapidly in the reinsurance market in the past decade. The danger is that they are under-capitalised. The existing reinsurance market is well capitalised, and the risks are well catered for. The existing major insurers traditionally do not reinsure all of their risk. They keep some of it and capitalise for it, which is good, and pass on the bulk, but not all, to separate or wholesale reinsurers, which are heavily capitalised in case anything goes wrong. The companies use actuarial tables to make profit and invest, but if anything goes wrong—if there is a systemic crisis in the market—they are capitalised in both the insurance and the reinsurance parts of the market to cover that risk.
The point about transformer vehicles is that in the past decade we have moved away from a capitalised reinsurance market to one in which the risks are hedged by selling credit default swaps. If used sensibly, that is not a problem, because if an individual insurance policy runs into trouble a credit default swap can be called in. But as we saw with the mortgage-backed securities at the end of the first decade of the millennium, if there is a systemic crisis and the entire mortgage market goes, the credit default swaps cannot be up because everybody loses money. The worry is that if our reinsurance model is based wholly on hedging, individual transformer vehicles can pay up, but if there is a general crisis—if there is a massive weather crisis or a nuclear power station, such as Hinkley Point C, blows up—the credit default market will not be able to repay everybody. That is why we need to regulate it.
If we are introducing these regulations to put in place an easier approach to hedging, rather than a properly capitalised reinsurance market, and to ensure that the hedging is here rather than New York, we are creating a problem. The Minister could become famous. If she ensures that the regulations that are introduced by the Treasury, the PRA and the FCA are used to make the market work sensibly, we will avoid a crisis. But if we introduce regulations that move the market further towards hedging and away from proper capitalisation, her name will be on the crisis when it occurs.
I want to clarify what these regulations are for. Are they for ensuring discipline in the market and the capitalisation of reinsurance, or are they a way of evading capitalisation? That is where the problem would begin.
Harriett Baldwin
I will try to keep my response in order, Mr Brady, but forgive me if I occasionally slip out of order. The hon. Member for Wolverhampton South West started by asking about clause 27, which he described as “see no evil”. I want to reassure him that the change addresses an issue that arises as a result of the transfer of the regulation of consumer credit from the Office of Fair Trading to the Financial Conduct Authority and the consequent application of the Financial Services and Markets Act 2000 to the consumer credit market. The issue addressed by the clause, whether relating to a chain or third party, arises particularly in the context of consumer credit and the activity of credit broking.
We are confident that the change to section 27 of the Financial Services and Markets Act addresses the issue with regard to consumer credit, ensuring that the section is more proportionate on consumer credit firms, without unduly affecting the protections available to consumers in the market. That is in line with our broader policy intent for the consumer credit market, where the reforms that the Government have made balance the need to provide strong consumer protections with ensuring that the burdens placed on a diverse market that includes thousands of small businesses is proportionate. I reassure the hon. Member for Wolverhampton South West that firms remain under a regulatory duty, imposed by the FCA, to take reasonable steps to satisfy themselves that the firms that they deal with are authorised, where that is appropriate. The clause strikes the right balance between protecting consumers and placing a proportionate burden on firms that are lending to consumers.
We share with the hon. Gentleman an aspiration to simplify some of the legislation. I very much welcome his words of support for my dream goal in this post, which is to simplify and reduce some of the complexity not only of this regulation but of the FCA’s own rulebook, which has become quite a significant barrier to entry to sensible organisations that may want to move into, for example, the debt advice space. I welcome his support for any progress I am able to make to simplify some of that.
Clause 27 simply narrows the circumstances in which a credit agreement or a consumer hire agreement is unenforceable. I think that the hon. Gentleman will welcome that. Both he and the hon. Member for East Lothian mentioned transformer vehicles, which are not those fun toys that appeal to consumers but something completely different that, I assure Members, are not for the consumer market. Only sophisticated or institutional investors will be permitted to invest in insurance-linked vehicles.
From a policy perspective, it is important that London have the ability to establish insurance special purpose vehicles. London is the largest insurance market in Europe and is a centre for specialist insurance activity. Whether we like it or not, all Members face risks in their lives—indeed, all businesses face a range of risks. Insurance is a way to bring that risk down to a manageable level. London should be able to compete and innovate in new forms of risk mitigation. If London is able to offer a full range of innovative solutions, insurance entities will continue to come to London to meet their risk mitigation needs. I heartily hope that all Committee members support that.
Insurance-linked securities use a range of specialist skills and services to arrange the deals, including underwriting, risk modelling, brokerage, legal and capital market expertise. Nevertheless, Members are right to express concerns about the transparency and manageability of the risks, as well as about the importance of their being arranged by regulated entities, so it is important that I set out that insurance-linked securities business will be prudently regulated in the UK.
All special purpose vehicles will require Prudential Regulation Authority authorisation. All the wording in terms of the contracts must be clear and robust, and importantly risks cannot be bundled together in the way that the hon. Member for East Lothian feared. We require all special purpose vehicles to be fully funded to cover the full extent of the risk they take on, so we are not talking about the kind of very leveraged structures that he rightly said were so instrumental in the last financial crash.
I have said that only sophisticated or institutional investors will be permitted to invest in the vehicles. Of course, if they are arranged prudently—when someone is able to manage their risks prudently—those transactions will contribute to financial stability. They increase the capacity of the reinsurance markets. They provide investments that are not correlated with the economic cycle, and therefore they provide investors with good diversification characteristics. I hope that I have reassured hon. Members of the importance of clarifying the rules on transformer vehicles, but I sense that the hon. Gentleman has a further question on the issue.
Rob Marris
I am somewhat reassured by what the Minister has said. However, I would caution her about her remarks about innovation and the attractiveness of London, because I sat—either in this room or Committee Room 10—on the Finance Bill Committee when her predecessor, Ed Balls, was saying the same thing in 2006 and saying, “We are grateful that London is now the financial capital of the world, over New York, because we don’t have the millstone of Sarbanes-Oxley.” Look where that ended. Therefore, yes to innovation, and yes to London being the major financial centre in Europe, if not the world, but I urge the Government to be careful that we do not go round the same crazy merry-go-round that my Government let us go round in the past.
Harriett Baldwin
The hon. Gentleman and I agree on the importance of making sure that we try to strike the right balance. We must ensure that the UK retains the ability to innovate. I am sure that none of us would want to see that ability being reduced, but it should do that within the boundaries of sensible and prudent regulation, so that we do not commit the alternative policy error, which would be to throw up our hands in horror at the kinds of innovations that have happened and so harm consumers by not allowing that kind of innovation. It would harm jobs in the UK if such innovation were not allowed to happen here. I welcome hiss questions—he is absolutely right to ask them—but I hope that I have convinced him that, in this instance, we have got the balance right and that these are simply useful instruments that will be well regulated and certainly available only to sophisticated institutional investors.
Although there are no Government proposals to consolidate the Financial Services and Markets Act at the moment, consolidated versions—for the ease of reference of members of the Committee and members of the public who are following our discussions with such avid interest—are available on commercial databases, such as LEXIS, and the Government statute law database—legislation.gov.uk—is working to make up-to-date Acts of Parliament available free of charge on a consolidated basis to everybody.
I will move on to the questions that were asked about Pension Wise and pension guidance, and the important steps that we are taking to bring pension freedoms to those who are no longer required to buy an annuity but to extend them to people who have bought an annuity and who may decide in retrospect that it was not the right thing for them. We are promoting a secondary market in those pension freedoms.
To be clear, regarding the rules on beneficiaries—I am thinking of a situation where a spouse remains a beneficiary and there is a remaining annuity after the death of the primary annuitant—there might need to be the ability to provide Pension Wise guidance and other support to people in that circumstance. The exact characteristics of who is entitled to use the service will be set out in regulation in due course, as will the definition of a “relevant interest” and what a relevant annuity is.
Rob Marris
I am grateful. The statistics might be available on the website, but although I am an averagely competent user of websites I could not find them. They are therefore not readily available.
Harriett Baldwin
We have made huge strides with the gov.uk website, which is a lot clearer and simpler than it used to be, but let me be the first to agree with the hon. Gentleman that such things can always be made clearer. I have put on the record the most recent example of management information available, which is that 2.2 million people have clicked on the website, with more than 50,000 people having some sort of face-to-face interaction. Also, in the summer Budget last year we extended the ability of people from 50 onwards to use the face-to-face service.
Harriett Baldwin
The website is well used. The feedback on face-to-face interactions has also been positive.
John Mann (Bassetlaw) (Lab)
Is not the clause a huge wasted opportunity? I can confidently predict that this will be the next major mis-selling scandal, which in five to 10 years’ time will come to haunt us for failing properly to enact effective legislation. People will have thrown away their pensions, mis-sold to them by the industry for short-term gain. The advice, people have told me, is that they are liable to die so they had better get the money quickly in order to spend it before it disappears. That is the kind of mis-selling that is going on. The clause is a huge missed opportunity, is it not?
Harriett Baldwin
I sense that the hon. Gentleman does not welcome the freedoms that the Government are proud to have given British retirees. We no longer require them—this was the case for so long—to purchase an obligatory product that might not be right for them at the time. Indeed, the evidence suggests that two thirds of people were not shopping around to get the right price, so I accept that awareness and education are an important part of the reforms. I cannot agree with him that the reforms have not made a huge step forward in trusting people who have worked hard all their lives, saving their money, and they now have more freedom to do what they want with it.
Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)
I have some sympathy with the comments of the hon. Member for Bassetlaw. May I press the Minister on the numbers she quoted? She said that 2.2 million people have accessed the website, leading to in excess of 50,000 to follow through with more detailed face-to-face guidance. If my arithmetic is correct, that is a conversion rate of only 2%. That is a matter of concern to a lot of people. The type of advice being made available at a detailed level means that we are not adequately helping the numbers of people seeking to use the freedoms. There is concern that many people are cashing in early for different reasons with a lack of understanding of the long-term implications.
Harriett Baldwin
Again, I could not agree more that we need to take a long, hard look at the provision of advice in this country. As the hon. Gentleman is aware, the financial advice market review was launched last summer and the consultation closed at the end of December. A large range of people have been supportive of the aspirations set out in the review to make advice more widely available and more affordable for all our constituents. It is an ongoing piece of work, and he should wait for more exciting announcements—[Interruption.] He and I share excitement about many things, including the leptokurtic distributions that came up the last time we were on a Committee together. Clause 27 is narrowly focused on extending the Pension Wise service to those who are going to be accessing the additional freedoms that will come into force next April in relation to the secondary market in annuities.
People have rightly asked me about scams, and I want to put it on the record that there is absolutely no complacency about the potential for scams. However, the numbers thus far do not support the case that there has been an increase. Some people have a constant desire to take advantage of people, particularly the vulnerable elderly, in many ways. Nobody should ever accept a telephone call about pensions from anybody unless they have a pre-booked appointment for such a discussion. The single most important thing that we can do to alert people to the horrendous activities of people who prey on the elderly is to get that message out in our constituencies. The over-65s are the victims of some 80% of all attempts at financial crime. They are less familiar with the technology and more vulnerable when someone sounds plausible on the telephone. If any Member wants to work with me to spread the message more widely in their constituencies, I will be wholeheartedly in favour.
Harriett Baldwin
I will give way in a moment, but I first want to mention the National Crime Agency’s Project Bloom, a taskforce that includes the regulators, anti-fraud groups, Action Fraud and police forces. The FCA also runs ScamSmart and the Pensions Regulator has its Scorpion campaign, both of which give advice to businesses and consumers in writing about how to protect against scams. Action Fraud is the UK’s national reporting centre for fraud and internet crime. I am keen to work with hon. Members to see how we can get information disseminated widely in our areas.
John Mann
I thank the Minister for the offer to help her get the word out. We may be occupied with other things over the next four months, but, even beyond then, is it not Parliament’s role to legislate for regulation? Anyone who is a conduit to information or puts out information should be effectively regulated. Instead of hoping that the word will somehow get out, the Minister should be introducing legislative changes in regulation to improve the system. A gentleman came to see me and said that he had less than a year to live and wanted to get hold of his pension. He came back a year later, having survived through the NHS, and was doubtless reassured that he did not need to fritter his pension away, hoping to spend it on trips around the world because he was about to die. We do not need to get the word out; we need regulation. Will the Minister come back with additional proposals?
Harriett Baldwin
Clearly, it is regrettable that although we often pass regulations in this House—this is a very regulated area—people still choose to prey on the vulnerable, particularly older people, and do things that are illegal and completely against the regulations. We ought to combine regulation with informing people about the regulations and when they should have their antennae twigged to the fact that something might not be a good idea.
The hon. Member for Wolverhampton South West raised a range of important points about auto-enrolment, the reports in The Times today and master trusts. I can let him into a little secret on that: the Government will bring in legislation on master trusts and on the points he raised as soon as practically possible. We had considered bringing it in as part of this piece of legislation, but we felt that since the Bill had gone through the House of Lords it would be very late on in the legislative process to introduce something as extensive as that. That was my judgment, and I hope that he will support me on that. However, we aspire to find very soon the first appropriate vehicle that could be scrutinised by both Chambers to bring in the regulations relating to master trusts and auto-enrolment.
Rob Marris
I thank the Minister very much for that swift response to my plea. It is perhaps one of my first successes, and now she has indeed set my pulse racing.
Harriett Baldwin
No comment, Mr Brady, on that. I am making sure that I cover all the points that were raised by members of the Committee. I am shocked—deeply shocked—that the hon. Member for Wolverhampton South West is not aware that the Royal Mint is in Cardiff and that it continues to produce all our coins. Indeed, Wales plays a very important role in the issuance of our currency. It does not play a role at the moment in the production of bank notes. Obviously, that lapsed when the last issuing bank in Wales was taken over by either HSBC or Lloyds—I cannot remember which—and got subsumed into that bank, and the bank lost this ability at that point.
To answer the hon. Gentleman’s other questions about clause 31 and the reason for subsection (7), this provision is included in order to confirm that the amendments to the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001—a very catchy title—can be subject to further amendment by the Treasury if it comes to revise those regulations. That is to say that the fact that this secondary legislation is amended in the Bill does not narrow the scope of the Treasury’s powers in the Financial Services and Markets Act. I hope that that is as clear as day for the hon. Gentleman. I would also like to clarify that the amendments set out in clause 31 are intended to remove any doubt on this question by making it clear that financial advisers who are appointed representatives of authorised firms are eligible to advise on the conversion or transfer of safeguarded benefits.
The hon. Gentleman also asked some extensive questions about what the definition of a bank in insolvency should be. The wider fact is that here we are establishing a gateway for the transfer of what might be extremely sensitive material—non-public information about the financial health of a particular bank—into the Treasury to ensure that the Treasury can fulfil its important public role of understanding where or when there might be a risk to public funds. That is what we are trying to establish here. It is right to probe the word “insolvency”, because what we are really talking about is a bank in trouble. “In trouble” is a rather difficult phrase to define in legislation, but I think we both know it when we see it.
I was also asked whether the Treasury can request information in advance of a bank failing. The answer to that is clearly yes. The only condition would be that the Treasury considers the information to be material to the Bank’s assessment of the likelihood of a bank, building society, credit union or investment firm failing. This assessment would be done in advance. It influences the resolution plan that the Bank adopts in preparation for a possible failure of the institution in future.
I think that I have now touched on all the points that were raised about this section. I hope that I have satisfied hon. Members of the wisdom of these clauses and that they will join me in supporting their inclusion in the Bill.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
The Chair
I propose that, with the leave of the Committee, we take clauses 28 to 37 stand part as a single opportunity.
Clauses 28 to 37 ordered to stand part of the Bill.
Clause 38
Short title
Harriett Baldwin
I beg to move amendment 7, on page 33, line 25, leave out subsection (2).
The amendment removes the privilege amendment set out in subsection (2). As hon. Members will be aware, this provision is inserted into any Bills that start in the other place and have implications for taxes or public funds. This recognises that it is the right of this House to control any charges on the people and on public funds. By providing that nothing in the Bill imposes such a charge, subsection (2) ensured that the House of Lords did not infringe the financial privilege of this House. However, that is no longer necessary when the Bill passes to this House, so the usual practice is for the provision to be removed by amendment in Committee in this House—I love this job; I learn something new every day. I commend the amendment to the Committee.
The Chair
We now come to new clauses, some of which have already been debated in our proceedings, but new clause 1 has not.
New Clause 1
Illegal money lending
(1) The Financial Services and Markets Act 2000 is amended as follows.
(2) After Part 20A insert—
“Part 20B
Illegal Money Lending
333S Financial assistance for action against illegal money lending
(1) The Treasury may make grants or loans, or give any other form of financial assistance, to any person for the purpose of taking action against illegal money lending.
(2) Taking action against illegal money lending includes—
(a) investigating illegal money lending and offences connected with illegal money lending;
(b) prosecuting, or taking other enforcement action in respect of, illegal money lending and offences connected with illegal money lending;
(c) providing education, information and advice about illegal money lending, and providing support to victims of illegal money lending;
(d) undertaking or commissioning research into the effectiveness of activities of the kind described in paragraphs (a) to (c);
(e) providing advice, assistance and support (including financial support) to, and oversight of, persons engaged in activities of the kind described in paragraphs (a) to (c).
(3) A grant, loan or other form of financial assistance under subsection (1) may be made or given on such terms as the Treasury consider appropriate.
(4) ‘Illegal money lending’ means carrying on a regulated activity within Article 60B of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544) (regulated credit agreements) in circumstances which constitute an authorisation offence.
333T Funding of action against illegal money lending
(1) The Treasury must, from time to time, notify the FCA of the amount of the Treasury’s illegal money lending costs.
(2) The FCA must make rules requiring authorised persons, or any specified class of authorised person, to pay to the FCA specified amounts, or amounts calculated in a specified way, with a view to recovering the amount notified under subsection (1).
(3) The amounts to be paid under the rules may include a component to recover the expenses of the FCA in collecting the payments (‘collection costs’).
(4) Before the FCA publishes a draft of the rules it must consult the Treasury.
(5) The rules may be made only with the consent of the Treasury.
(6) The Treasury may notify the FCA of matters that they will take into account when deciding whether or not to give consent for the purposes of subsection (5).
(7) The FCA must have regard to any matters notified under subsection (6) before publishing a draft of rules to be made under this section.
(8) The FCA must pay to the Treasury the amounts that it receives under rules made under this section apart from amounts in respect of its collection costs (which it may keep).
(9) The Treasury must pay into the Consolidated Fund the amounts received by them under subsection (8).
(10) In this section the ‘Treasury’s illegal money lending costs’ means the expenses incurred, or expected to be incurred, by the Treasury—
(a) in connection with providing grants, loans, or other financial assistance to any person (under section 333S or otherwise) for the purpose of taking action against illegal money lending;
(b) in undertaking or commissioning research relating to taking action against illegal money lending.
(11) The Treasury may by regulations amend the definition of the ‘Treasury’s illegal money lending costs’.
(12) In this section ‘illegal money lending’ and ‘taking action against illegal money lending’ have the same meaning as in section 333S.”
(3) In section 138F (notification of rules), for “or 333R” substitute “, 333R or 333T”.
(4) In section 138I (consultation by FCA)—
(a) in subsection (6), after paragraph (cb) insert—
“(cc) section 333T;”;
(b) in subsection (10)(a), for “or 333R” substitute “, 333R or 333T”.
(5) In section 429(2) (regulations subject to affirmative procedure), for “or 333R”
substitute “, 333R or 333T”.
(6) In paragraph 23 of Schedule 1ZA (FCA fees rules)—
(a) in sub-paragraph (1) for “and 333R” substitute “, 333R and 333T”;
(b) in sub-paragraph (2ZA)(b) for “section 333R” substitute “sections 333R and 333T”.—(Harriett Baldwin.)
This new clause gives the Treasury power to make grants and loans, and provide other financial assistance, for the purpose of taking action against illegal money lending. It provides for certain Treasury costs relating to illegal money lending to be recovered from authorised persons by a new levy, administered by the FCA.
Brought up, and read the First time.
Harriett Baldwin
I beg to move, That the clause be read a Second time.
The new clause gives the Treasury a power to provide financial assistance to bodies for the purpose of taking action against illegal money lending. It also gives the Financial Conduct Authority an obligation to raise a levy, which will apply to consumer credit firms, in order to fund that assistance. Illegal moneylenders prey on some of the most vulnerable people in society. The new clause will ensure that the perimeter of the consumer credit market continues to be enforced effectively, and that vulnerable consumers remain protected from loan sharks.
The Government have fundamentally reformed consumer credit regulation, transferring the responsibility from the Office of Fair Trading to the Financial Conduct Authority, and we have ensured that the FCA has a wide enforcement toolkit to take action where its rules are breached. The FCA regime is already having a substantial positive impact, which is helping to deliver the Government’s vision for an effective and sustainable consumer credit market that meets consumer needs. However, the FCA is not best placed to investigate and enforce certain types of illegal money lending such as the type practised by loan sharks.
Loan sharks are currently investigated and prosecuted by the England and Wales illegal money lending teams and the Scottish Illegal Money Lending Unit. Those teams are made up of local trading standards officers who accordingly have broader powers than the FCA to prosecute the particular criminality that loan sharks are involved with, and relevant expertise in educating vulnerable consumers. They are also able to draw on geographically dispersed community intelligence officers who are crucial in identifying localised illegal lenders. The teams work alongside the FCA in policing the regulatory perimeter specifically to target loan sharks and to provide support and advice to the victims of illegal moneylenders. They also help educate local communities about the dangers of borrowing money from loan sharks.
The teams have been identified as the most efficient and effective way of combating loan sharks and they have a proven track record. The England and Wales teams have secured hundreds of prosecutions for illegal money lending and related activity and have written off £55 million-worth of illegal debt, helping nearly 24,000 people in the process.
Funding will be provided by the Treasury via a levy on consumer credit firms, which will be collected by the FCA. The Government believe that all participants in the consumer credit market benefit from the teams’ work and the credibility that comes from keeping illegal moneylenders out of the market. The current cost of the enforcement regime is about £4.7 million a year, so the cost to individual firms in the £200 billion consumer credit market is anticipated to be small. The FCA will consult on how the levy will be collected in its annual fees consultation.
The Government want a safe and fair regulatory framework for consumer credit that protects consumers from harm. As part of that, it is important that the market’s boundary is adequately policed. The illegal money lending teams provide crucial support to the FCA’s work in effective enforcement in the regulatory perimeter, which boosts confidence in the market. The new clause will ensure that funding for the enforcement of rules against illegal money lending is given a sustainable framework for the future and that the illegal money lending teams will continue to receive the funding they need to do their work. I hope that all hon. Members will support this move
John Mann
This is a most excellent new clause, which I hope my hon. Friend the Member for Leeds East and I will be able to use against those who may be doing illegal money lending in sports in the Leeds area. It prompts an interesting question, because the powers on claims handlers—the other side of consumer protection—are not vested in the Treasury. We would not expect them to be. They are vested in the Ministry of Justice, but here we see a power grab by the Treasury. We have the Chancellor versus the Justice Secretary, with the two battling for power. I appreciate that that may cause some concern and divided loyalty. It is essential, in supporting this new clause, that I give my wholehearted support to the Chancellor in his power grab. The Treasury, not the Ministry of Justice, is the best place for powers such as this to be vested in.
Should the Bill become law, I hope that the Minister will go back to the Treasury team and look at other powers that have been grabbed by the Ministry of Justice under previous Governments and used appallingly badly in protecting the people, from my experience—the coalminers’ compensation claim scandal being the prime, but certainly not the only, example. Let us have the Treasury take on those who fleece our constituents out of money, with the full might of the Chancellor, strongly supported by his party’s Back Benches—he is even more strongly supported on some matters these days by the Labour Benches. On this occasion, he has my entire endorsement in his battle against the Justice Secretary.
Harriett Baldwin
Mr Brady, you were here when the hon. Member for Bassetlaw agreed with something that I said. I am sure you will go home and remark on that historic moment in your diary tonight. He is absolutely right in his support for this approach to putting the funding for these important teams on a more sustainable footing. I do not want to be in the least bit confrontational on this historic occasion, but I will gently correct him.
The funding for the teams that tackle illegal money lending has previously come, because it is a trading enforcement matter, through BIS, so they were paid for out of general taxation through the BIS budget. We took the view, as we went through the different alternatives in terms of the comprehensive spending review for the autumn statement, that that meant the funding for a very important activity was constantly being questioned. One year it was funded from the Treasury reserve as well. So the levy is a way of putting the funding for this important activity on a sustainable footing in a way that will be spread judiciously across the wide range of different consumer credit firms. The hon. Gentleman argues that it does not seem fair, given that they are regulated, for them to have to pay the costs of enforcement against illegal moneylenders, but all regulated firms benefit from the fact that they are within the regulated perimeter, and that the perimeter itself is robustly enforced.
We do not anticipate that there will be anything other than widespread acclaim, as we have heard this morning in Committee, for putting these incredibly important and valuable teams out of that perennial uncertainty that they have had in terms of funding and into a more sustained and clear source of funding. I commend the new clause.
Question put and agreed to.
New clause 1 accordingly read a Second time, and added to the Bill.
New Clause 7
Early exit pension charges
(1) The Financial Services and Markets Act 2000 is amended as follows.
(2) After section 137FBA (as inserted by section 30) insert—
“137FBB FCA general rules: early exit pension charges
(1) The FCA must make general rules prohibiting authorised persons from—
(a) imposing specified early exit charges on members of relevant pension schemes, and
(b) including in relevant pension schemes provision for the imposition of specified early exit charges on members of such schemes.
(2) The rules must be made with a view to securing, so far as is reasonably possible, an appropriate degree of protection for members of relevant pension schemes against early exit charges being a deterrent on taking, converting or transferring benefits under the schemes.
(3) The rules may specify early exit charges by reference to charges of a specified class or description, or by reference to charges which exceed a specified amount.
(4) The rules made by virtue of subsection (1)(a) must prohibit the imposition of the charges after those rules come into force, whether the relevant pension scheme was established before or after those rules (or this section) came into force.
(5) In relation to a charge which is imposed, or provision for the imposition of a charge which is included in a pension scheme, in contravention of the rules, the rules may (amongst other things)—
(a) provide for the obligation to pay the charge to be unenforceable or unenforceable to a specified extent;
(b) provide for the recovery of amounts paid in respect of the charge;
(c) provide for the payment of compensation for any losses incurred as a result of paying amounts in respect of the charge.
(6) Subject to subsection (8) an early exit charge, in relation to a member of a pension scheme, is a charge which—
(a) is imposed under the scheme when a member who has reached normal minimum pension age takes the action mentioned in subsection (7), but
(b) is only imposed, or only imposed to that extent, if the member takes that action before the member’s expected retirement date.
(7) The action is the member taking benefits under the scheme, converting benefits under the scheme into different benefits or transferring benefits under the scheme to another pension scheme.
(8) The Treasury may by regulations specify matters that are not to be treated as early exit charges for the purposes of this section.
(9) For the purposes of this section—
‘charge’, in relation to a member of a pension scheme, includes a reduction in the value of the member’s benefits under the scheme;
‘expected retirement date’, in relation to a member of a pension scheme, means the date determined by, or in accordance with, the scheme as the date on which the member’s benefits under the scheme are expected to be taken;
‘normal minimum pension age’ has the same meaning as in section 279(1) of the Finance Act 2004;
‘relevant pension scheme’ has the same meaning as in section 137FB;
and a reference to benefits includes all or any part of those benefits.”
(3) In section 138E(3) (contravention of rules which may make transaction void or unenforceable)—
(a) omit the “or” at the end of paragraph (a);
(b) at the end of paragraph (b) insert “or
(c) rules made by the FCA under section 137FBB.”.—(Harriett Baldwin.)
This new Clause requires the Financial Conduct Authority to make rules prohibiting specified charges from being imposed on members of pension schemes who take, convert or transfer pension benefits after they have reached normal minimum pension age but before their expected retirement date.
Brought up, and read the First time.
Harriett Baldwin
I beg to move, That the clause be read a Second time.
Government new clause 7 places a duty on the Financial Conduct Authority to limit early exit charges, which act as a deterrent to people accessing their pensions early under the new pension freedoms, thus fulfilling a commitment that the Chancellor of the Exchequer made recently.
The Government introduced the pension freedoms in April 2015 because we believe that people who have worked hard and saved their entire life should be free to spend their retirement savings as they want. At that time, the Government wanted to ensure that everyone who was eligible could access their pension flexibly under the new freedoms, and they therefore strengthened the statutory right of members in defined contribution schemes so that people could, in all cases, transfer their pension savings from one scheme to another.
Following the introduction of the freedoms, it became increasingly clear that other barriers, including early exit charges and long transfer times, were preventing some people from using them. Evidence gathered for the Government by the FCA has shown a small but nevertheless significant cohort in contract-based schemes for whom early exit charges pose a barrier to their use of the freedoms. Some 670,000 people in FCA-regulated schemes face an exit charge, and for 66,000 of them—one in 10—the charge would exceed 10% of the value of their pension pot. In some cases, the charges could be high enough to make it uneconomical for an individual to access their pension flexibly, while in others the presence of an early exit charge could act to discourage individuals from accessing their pension, when that might be the best thing to do in their circumstances. It is therefore clear that the Government’s objective of ensuring that everyone who is eligible is able to access their pension savings flexibly is not being met, and that action is needed to ensure that all consumers are able to make use of the freedoms.
To ensure that the cap benefits current consumers who are eligible to use the freedoms now, the Government will ensure that any cap applies equally to existing arrangements and to those entered into in the future. The Government have not taken the decision to pursue legislation with retrospective effect lightly, and we recognise industry concerns about interference with existing contractual agreements. We have already made it clear that market value reductions should not be subject to the cap on early exit charges. However, in the Government’s view it is unfair that a significant minority of individuals have been deterred from accessing their pensions flexibly because of contractual terms they entered into long before the freedoms were introduced. Indeed, some providers have conceded that industry practices have moved on, and that the introduction of the pension freedoms means that the charges pose a much more significant barrier now than when they were first agreed. Fairness is not determined solely by reference to whether it was acceptable to include a term in a pension contract many decades ago; it should also be assessed in light of the reforms and changes in market practice over time.
In the context of the new pension freedoms, it is unfair that some individuals are being deterred from accessing their pensions flexibly because of terms in contracts from before the pension freedoms were introduced. Those people would not have been in a position to make an informed decision about potential early exit charges when they signed up, and that is why we have introduced the clause, to limit the charges and remove the deterrent.
In giving the FCA, as the relevant regulator, the flexibility to determine the precise level of the cap, we are ensuring that fairness is built into the setting of any cap. The FCA is best placed to determine how best to apply any cap, to ensure that early exit charges are not a deterrent to individuals using the freedoms. The new clause will provide consumers in contract-based pension schemes with genuine protection when exercising the pension freedoms, by ensuring that they are not deterred by early exit charges. Alongside that measure, which will apply to FCA-regulated pension schemes, the Department for Work and Pensions and the Pensions Regulator will work to ensure that any relevant concerns are appropriately addressed for trust-based schemes. We will ensure that all pension scheme members are protected against excessive early exit fees, regardless of the type of pension scheme they are in. I commend the new clause to the Committee.
Rob Marris
I am glad that the Chancellor has come on board fully. The Prime Minister did so yesterday; he came on board with Labour’s manifesto commitments on the European Union—good for him. The 2015 Labour manifesto said:
“We will reform the pensions market so that pension providers put savers first, and protect consumers from retirement rip-offs. We support greater flexibility for those drawing down their pension pots, but there must be proper guidance for people to avoid mis-selling.”
We have already discussed pension guidance and the welcome amendments on Pension Wise.
I have several issues to raise with the Minister. Paragraph 2.16 of the Government’s response to the consultation document on pension transfers and early exit charges referred to “further cost-benefit analysis” from the FCA
“in relation to the appropriate level of any cap.”
Can the Minister tell me—my research has not extended this far—whether the FCA has done that research? I gather from her remarks that it has not yet done so, but I may have misunderstood her. If it has done it, when was it done and published? If it has not, when does she anticipate that it will be done?
Can the Minister say something—again, I may have missed this in her remarks—about what she anticipates the level of the cap will be? She referred to the shocking 10% charges that some people have unfortunately been asked for on requesting a transfer. A press release from a couple of weeks ago referred to speeding up the process and to things being done “quickly and accurately”. I do not see any reference in new clause 7 to the timescale, although there is a reference to the cap, so I hope the Minister can elucidate that.
The bigger issue—again, this may be my reading of new clause 7—is that the Government seem to be conflating two things in the wording of the new clause. The Minister’s remarks did not reassure me about that. The first is the penalty for moving. One of the reasons why I signed up to Equitable Life years ago—what a great deal that was—is that it had what was then called an open-market option, which was unusual in defined purchase schemes at that time. It was attractive because it meant that decades down the road I would have the option of buying an annuity from a provider other than Equitable Life. It was not the only provider to offer such a scheme, but it was unusual; it was in the minority. That was back in the ’80s, when I was a very young man. Some schemes had a ban on moving—that has effectively been statutorily overridden—and others had penalties.
The other thing, which I fear that the Government have conflated with the first in their wording—perhaps the Minister can reassure me about this—is what in the trade used to be called an actuarial reduction. In other words, if the normal retirement age for the pension scheme is 65, as it is in the House of Commons scheme, to which many hon. Members have signed up, but someone takes it at 60—above the statutory age of 55; it used to be 50—in round terms they take a 50% reduction in the annual pension. Keeping it simple, instead of getting £10,000 a year from the age of 65, they get £5,000 a year from the age of 60 because they are getting it for an extra five years. It is not exactly 50%, but as a rule of thumb it is about 5% a year for taking it early, so if someone takes it at 55 they lose 50% of their pension. That is not, to most people’s minds, a penalty. Because people get the dosh for longer, they get a smaller annual amount. We could have a debate about whether 5% a year is mathematically accurate, with life expectancy and so on, but in terms of the principle and the concept that people lose pension because they have started to take it below the normal retirement age there is that actuarial reduction.
John Mann
May I disagree with my Front-Bench colleagues on their analysis? I have exactly the same question, but I am anticipating that this is a listening Chancellor—not least to the very point I made to him in the Treasury Committee three years ago, which he rebuffed in his stylistic way in giving a non-answer. I am seeking to clarify whether he is the listening Chancellor and that this is a bit of a roll, so that I can back him again, because he has listened to me on the issue, which I raised in some detail, including in correspondence and in other questions. At the time I did not get a sufficiently satisfactory response. This could be a significant moment. I am hoping that the Minister will clarify that the power being given to the FCA will be all-encompassing and include all ways of ripping off our pensioners, including the couple from Clayworth in Bassetlaw who first raised the issue with me some three and a half years ago.
Harriett Baldwin
I want to put on record that of course the Chancellor is a listening Chancellor. I am delighted that some of that listening includes listening to the hon. Gentleman, whose views on pasties I remember the Chancellor also listened to at one time. I see why his Whips put him on the Committee—because of his extensive and deep knowledge of so many of these things.
Let us face it, the topic of pensions can cause people’s eyes to glaze over—not of course those of hon. Members in Committee, but potentially those of people avidly reading the record in Hansard—so I want to clarify that the pension freedoms apply to defined contribution schemes. Those regulated by the FCA are covered by the new clause. The hon. Member for Wolverhampton South West asked about actuarial reductions, but schemes such as those that most Members of Parliament are members of are in the defined benefit section of the market. That is presumably why he has not found the language clear enough; the new clause does not apply to defined benefit schemes. In cases where actuarial reductions might be applied unfairly, we think it is important for the FCA to be given flexibility in the new clause.
The hon. Gentleman asked about the level of the cap. It is important to emphasise how well and constructively the industry has been working with the new pension freedoms to enable hundreds of thousands of people to take advantage of the freedoms. It is worth citing how excellent, innovative and adaptive many firms have been with the new freedoms, which came in with a degree of rapidity. However, there were some cases—I cited the example of a 10% cap—where charges were clearly egregious. The FCA will do further work in this area, in terms of its cost-benefit analysis process, but there have been efforts to collect evidence of the scale of the charges. In the vast majority of cases—I think that I am right in saying, off the top of my head, more than 90%—the charges have been under 2%. The industry, by and large, has worked very well with the reforms; I do not want people to get the impression that it has not. However, we think that where there are unreasonable barriers, in terms of charges that we would all regard as outrageous, the FCA is right to have these powers.
There will be cases in which, when someone removes their pension, the provider is right to apply a market value reduction, to readjust the value of the fund properly to reflect the performance of the market. Not all funds mark to market on a daily basis. We would not regard that as an early exit charge. It is right that market value reductions are specifically excluded from the new clause.
I hope that by answering all those questions, I have satisfied the Committee that this is another excellent clause from a listening Chancellor, and I commend it to the Committee.
Question put and agreed to.
New clause 7 accordingly read a Second time, and added to the Bill.
New Clause 3
Nomination of the Chief Executive Officer of the Prudential Regulation Authority: parliamentary oversight
“The Chancellor of the Exchequer shall not nominate a person as Chief Executive Officer of the Prudential Regulation Authority without the consent of the Treasury Committee of the House of Commons.”—(George Kerevan.)
Brought up, and read the First time.
George Kerevan
I beg to move, That the clause be read a Second time.
We on the SNP Benches believe that senior regulators and those charged with supplying independent advice to Government should be independent of the Executive and that the best way of achieving that is to have their appointments confirmed by Parliament. In the case of the PRA, we are suggesting that that should be done through the Treasury Committee. The principle has already been conceded by Government. The head of the Office for Budget Responsibility is confirmed by the Treasury Committee, so in a sense we are simply trying to widen that remit. We have chosen to begin with the head of the PRA, because major changes in the Bill involve the Bank and its relationship to the PRA. Also, Mr Andrew Bailey, the current head of the PRA, is moving on to the FCA, so sometime this year we will indeed be appointing a new head of the PRA.
The principle is simple. This is about the way in which we guarantee the independence of the regulator from the Executive. We accept that the Executive—the Chancellor, in this case—is the correct person to make the nomination, but the way we guarantee the independence of the regulator is to give them a wider base through confirmation by Parliament. Then, if there is ever a conflict between the regulator and the Executive, the regulator can fall back on the fact that they are there, having been confirmed by Parliament. That simple principle is accepted all round the world and, as I said, is already accepted with regard to the OBR.
I hope that the Government will accept this proposal; I hope that the principle is a broad enough one, but I stress that the aim is not to make the regulator in any sense a political figure, but to go in the opposite direction.
We have had some concerns in the last few months regarding the independence of the FCA. We will say no more about that. The point is that the issue of the independence of regulators is in the public arena. The best way for the Government to allay some of those fears is to accept the new clause.
Andrey Lugovoy and Dmitri Kovtun Freezing Order 2016
Harriett Baldwin Excerpts(8 years, 8 months ago)
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The Economic Secretary to the Treasury (Harriett Baldwin)
I beg to move,
That the Committee has considered the Andrey Lugovoy and Dmitri Kovtun Freezing Order 2016 (S.I. 2016, No. 67).
It is a pleasure to serve under your chairmanship, Mr Pritchard. I would like to make the Committee aware that some minor errors were made when the order was laid; they did not impact on the substance of the order and have now been corrected by way of a correction slip.
The order was laid before the House on 22 January, in response to the Litvinenko inquiry report published on 21 January. As Members will be aware, Alexander Litvinenko was a former officer of the Russian Federal Security Service and a British citizen. He was killed in London in 2006, and the Litvinenko inquiry was the independent inquiry into his death. I am sure Members will echo my right hon. Friend the Home Secretary’s thanks to Sir Robert Owen, the chairman of the inquiry. His conclusions were clear yet deeply disturbing, and I would like to highlight some of those conclusions today, as they provide essential background to this debate.
One of the inquiry’s key findings was that Mr Litvinenko was deliberately poisoned by two Russian nationals: Andrey Lugovoy and Dmitri Kovtun. Those individuals killed him using polonium-210, a radioactive isotope. The Litvinenko inquiry also found that the killing of Mr Litvinenko was probably authorised by Nikolai Patrushev, head of the Russian Federal Security Service at the time, and by President Putin.
In response to those conclusions, the Treasury imposed an asset freeze on Mr Lugovoy and Mr Kovtun, the two individuals directly implicated in Mr Litvinenko’s tragic death. That was done by making an order under the Anti-terrorism, Crime and Security Act 2001. The order was debated in the other place on 10 February. I would like to set out again why that was an appropriate and proportionate response and why this House should also approve the order.
The Metropolitan police launched a murder investigation shortly following Mr Litvinenko’s death. Mr Lugovoy and Mr Kovtun are the prime suspects in that investigation. The Crown Prosecution Service has sought extradition of the chief suspect, Mr Lugovoy, from Russia, but Russia has consistently refused to comply with that request. There are now Interpol notices and European arrest warrants against them, and the Metropolitan police investigation is still open.
However, in response to Sir Robert Owen’s unequivocal finding that Mr Lugovoy and Mr Kovtun killed Mr Litvinenko, the Government took the view that it was appropriate to take further steps. That is why the Home Secretary wrote to the independent Director of Public Prosecutions, asking her to consider whether further action could be taken. That is also why, following the inquiry’s report, the Treasury moved swiftly to impose an asset freeze on the two individuals responsible for Mr Litvinenko’s death. The Treasury was satisfied that Mr Lugovoy’s and Mr Kovtun’s roles in Mr Litvinenko’s death clearly fulfilled the criteria under the 2001 Act that give the Treasury powers, including making a freezing order, when a threat to the life of a UK national has been or is likely to be taken by non-UK residents.
We believe that the order will be a deterrent and a signal that this Government will not tolerate such activity on British soil. The asset freeze prohibits UK persons from making funds available to Mr Lugovoy and Mr Kovtun and denies the men access to the UK financial system. In circumstances where it is necessary for frozen funds to be used, those wishing to do so must seek a licence from the Treasury.
I am sure all hon. Members will agree that the ideal response to the killing of a British citizen on the streets of London is to bring those responsible to trial in a British court. However, until that can be done, the asset freeze, together with the other measures that the Government have already taken, sends a clear message that we will defend our national security and rule of law.
Some people responded to the inquiry’s conclusions with calls for us to radically reform our relationship with Russia, yet as the Home Secretary set out, the findings of the report do not come as a surprise. Indeed, the roles of Mr Lugovoy and Mr Kovtun and the probable involvement of the Russian state are consistent with the long-held assessments of successive UK Governments. Those assessments informed the response by the then Government in 2007, which included visa restrictions and the expulsion of certain officials from the Russian embassy in London. The conclusions of the inquiry confirm that successive Governments have been right to keep those measures in force to date.
This is not business as usual with Russia; our relationship with the Russian state is heavily conditioned. The Government have reinforced that message. Following the publication of the inquiry’s report, we made very clear to the Moscow Government our profound concerns, and the Russian ambassador was summoned to the Foreign Office in London. We will continue to demand that the Russian Government do more to co-operate with the investigation into Mr Litvinenko’s death. Such co-operation must include the extradition of the main suspects and the provision of satisfactory answers, and Russia must account for the role of its security services.
We are clear about the wider threats that Russia poses, which the Government have outlined in the national security strategy. In particular, we have long been aware of Russia’s disregard for international norms and principles, which is why we led the call in the EU for sanctions in relation to Russia’s actions in Crimea and eastern Ukraine. That is why, when we engage with Russia on a variety of issues, including the fight against Daesh, we do so guardedly and with our eyes wide open.
Stephen Doughty (Cardiff South and Penarth) (Lab/Co-op)
The Minister is making a strong case for the order, which I completely support. She mentioned the EU and political co-operation on targeting some of Russia’s behaviour in Europe, but the order refers to actions on European economic area firms and relevant institutions. Will she explain how we are going to co-operate across Europe to deal with these two individuals and prevent them from behaving as they have been throughout Europe, not just in the UK?
Harriett Baldwin
My right hon. Friend the Home Secretary has written to her counterparts in all 27 EU member states, so that they are also aware of the conclusions in this important report and are able take action accordingly should these gentlemen appear in their jurisdictions.
I hope that my words have assured the Committee that the asset freeze imposed on Mr Lugovoy and Mr Kovtun is an appropriate and proportionate response to their role in Alexander Litvinenko’s death. The Government believe that, in addition to the steps taken in 2007, the order is a proportionate measure that is necessary to send a clear message to those who might wish to undertake similar acts in future. I commend the order to the Committee and hope that all Members support the motion.
Harriett Baldwin
I am grateful to the Opposition for their support. They rightly asked a range of questions that I will be happy to update them on.
The hon. Member for Leeds East asked about the order’s impact. I think its primary impact is to send a strong message to deter people from taking such steps on UK soil. The specific impact of the freezing order is to prohibit UK persons from making funds available to the two gentlemen named in the order. The order effectively freezes any assets that individuals hold in the UK, or any UK-incorporated entities. It also prevents them from any effective links with the UK financial system.
In terms of the duration of the order, the hon. Gentleman is absolutely right that it lasts for two years and it will be subject to potential renewal at that point. He also asked whether there is any evidence of asset flight. So far we have not received any reports from the financial sector about funds frozen under the order or about movement of funds immediately before its implementation.
The hon. Gentleman and the hon. Member for Cardiff South and Penarth asked about other related matters concerning the EU. It is probably worth highlighting that EU sanctions related to action in eastern Ukraine cover almost 150 individuals.
The hon. Member for Leeds East asked about the letter that Mrs Litvinenko sent to the Home Secretary asking whether she will consider extending such measures to other individuals. I can confirm that, at this point, the Government have not responded to Mrs Litvinenko’s letter. The Home Secretary met Mrs Litvinenko with the Foreign Office Minister and her legal advisers on 28 January, and she is now giving detailed consideration to the issues raised in Mrs Litvinenko’s letter. I anticipate that she will respond soon, but I do not have a precise date for that.
I think I have answered all the hon. Gentleman’s questions. I am glad that everyone here seems to support our case for imposing the order. Until such time as the individuals responsible for Mr Litvinenko’s death are brought to justice, freezing their assets sends a clear signal about how profoundly we disapprove of their actions. I believe that we met both the tests required under the Anti-terrorism, Crime and Security Act 2001 in introducing this order. I am grateful for hon. Members’ constructive engagement with this matter. I commend the order to the Committee.
Question put and agreed to.
Financial Services
Harriett Baldwin Excerpts(8 years, 8 months ago)
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The Economic Secretary to the Treasury (Harriett Baldwin)
I can today confirm that I have laid a Treasury minute informing the House of a reduction in HM Treasury’s contingent liabilities to NRAM plc (formerly Northern Rock (Asset Management) plc).
The Treasury minute concerns the guarantee arrangements announced on 8 December 2009 that put in place arrangements in relation to certain borrowings and derivative transactions of, and certain wholesale deposits held in accounts with, NRAM plc. At March 2015 the maximum contingent liability to HM Treasury on this guarantee arrangement was £6.5 billion.
The reduction is a result of the sale announcement on 13 November that UK Asset Resolution (UKAR), the holding company of NRAM (formerly Northern Rock Asset Management) had sold £13 billion of mortgages, consequently HM Treasury’s contingent liabilities have reduced as securities associated with the Granite securitisation vehicle have been extinguished. As a result of this the HM Treasury exposure under this guarantee arrangement has fallen to around £270 million.
I will update the House of any further changes to UKAR associated guarantee arrangements as necessary.
If the remaining liability is called, provision for any payment will be sought through the normal supply procedure.
[HCWS538]
Bank of England and Financial Services Bill [ Lords ] (Fourth sitting)
Harriett Baldwin Excerpts(8 years, 8 months 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 ] (Third sitting)
Harriett Baldwin Excerpts(8 years, 8 months 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 ] (Second sitting)
Harriett Baldwin Excerpts(8 years, 8 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
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.)
Bank of England and Financial Services Bill [ Lords ] (First sitting)
Harriett Baldwin Excerpts(8 years, 8 months 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.
Treasury
Harriett Baldwin Excerpts(8 years, 9 months 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(8 years, 9 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
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.