Financial Services Bill

Lord Bilimoria Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Bilimoria]

My Lords, it is a privilege to follow noble Lord, Lord O’Donnell, and I am sure that I speak for all your Lordships in congratulating him on the most superb maiden speech. I have known Gus O’Donnell from the time he was Permanent Secretary to the Treasury, going back 10 years. I can honestly say that not only did I always like him as an individual but I never ceased to be impressed by him. After the Treasury, he was at No. 10 Downing Street, Cabinet Secretary, Head of the Home Civil Service, and Secretary to the Cabinet Office. In fact, he followed exactly in the same footsteps as our noble friend, the noble Lord, Lord Turnbull, who also went from being Permanent Secretary to the Treasury to holding those three positions at Downing Street. Now the jobs of the noble Lord, Lord O’Donnell, are being performed by three individuals. Let me emphasise that I am not saying that any of his successors are one-third the man that the noble Lord, Lord O’Donnell, is. He also had the distinction of serving three Prime Ministers—Tony Blair, Gordon Brown and David Cameron—in his six years at No. 10. Talk about high-flyers—you do not fly any higher than the noble Lord, Lord O’Donnell. No wonder people call him “GOD”—not just because of his initials but because of the huge respect that we all have for him. He has achieved all this as a youngster—he is still in his fifties; he has not even hit middle age yet. That will start when he turns 60 in October.

The noble Lord was an Oxford Blue in football, and I think that by now he must be realising—football being a game of two halves—that our Chamber, unlike the other place, is not just about the Government and the Opposition; we have the added dimension of the Lords spiritual and the Cross-Benchers. We, the Cross-Benchers, are so proud and happy to have the noble Lord in our fold. He has already said that he could be in the running for the position of the next Governor of the Bank of England. Watch this space. We look forward to many more fabulous expert contributions from the noble Lord in the years to come.

I have always said that one of the best things that Gordon Brown ever did was create the independent Monetary Policy Committee when he took over as Chancellor in 1997. It was able every month to set interest rates on an independent basis, proactively and reactively—and transparently. However, one of the worst things he did was create the tripartite arrangement of the Treasury, the Bank of England and the FSA. In the good times—the boom times—until 2007, this tripartite system was a happy merry-go-round. When we hit the crisis, this happy merry-go-round became a hopeless blame-go-round, and we realised that the tripartite system was not fit for purpose, as the Minister said. It was disastrous, and I am so happy to see that with this Bill, the buck will now stop firmly and squarely with the Governor of the Bank of England.

We know that the Governor of the Bank of England, Eddie George, was extremely concerned when the tripartite system was set up, and he voiced his concern that the Bank of England was having its powers taken away and transferred to the FSA. We now know that this was the most foolish thing to have done. The FSA has the joint remit of financial services in the consumer market, protecting consumers and promoting competition, and was so focused on that consumer-facing aspect that its role of supervising and regulating the banks was ignored and neglected. Frankly, the FSA was out of its depth and ignored the most crucial aspect of its job. I could say that the FSA stood for “fairly sleepy agency”. I remember taking part in debates in the House in the run-up to the Northern Rock nationalisation in 2008, four and a half years ago. I remember finding out at that point that the FSA had researched Northern Rock and in 2006 had marked it as “high impact” and as requiring close supervision. It also marked it for a review in three years’ time. That was an organisation that was on top of things and wanted to act quickly, but of course it was all too late. By September 2007, Northern Rock was bust and £26 billion was required to bail it out—the largest amount required for any company in the world at that time. Of course, following the sub-prime crisis that led to the credit crunch, which led to the financial crisis, which led to the great recession, which led to the sovereign debt crisis, which has now led to the eurozone crisis, we now know that £26 billion is pocket money.

I welcome many of the Bill’s provisions but I am concerned that there is too much focus on the new bodies being created and on the theme of stability. No one would dispute the need for these bodies—and I congratulate the Government on introducing them—but I worry about the implication of leaving the Monetary Policy Committee pretty much as it is. No one could dispute the requirement for stability and prudence but, as many noble Lords have said, these must go hand in hand with growth in the economy.

In the spring of 2008, when Northern Rock and Bear Stearns had already gone to the wall, seeing the writing on the wall the MPC sat idle. It was so obsessed with its inflation targeting and so afraid of having to write to the Chancellor that it kept interest rates at 5% for six months after the collapse of Bear Stearns. Instead of bringing them down straight away, it waited too long and then had to bring them down sharply from October 2008 onwards. We must change the myopic, blinkered approach that the MPC has been forced to take, focusing solely on inflation and not, as in America, and as the noble Lord, Lord Lamont, suggested, on maximising employment and, as my noble friend Lord O’Donnell said, looking at the overall state of the economy. Through this Bill, the Government must consider revising the MPC’s mandate to ensure that it plays its part in securing recovery for the long term.

Talking about new bodies, the FPC’s mandate is seemingly pulled from the Hippocratic oath. Its mandate is to do no harm to the economy. It seems to have left out the rest of the oath, as there is no real mandate to cure the economy of the ills from which it may be suffering. I ask the Minister whether the mandate of the FPC—as well as the general system of financial and monetary regulation, including the MPC, which does not really seem to fall under the Bill at the moment—can be expanded to target growth and full employment and not just stability.

The acid test of the Bill is: if this new structure had been in place five years ago, would it have prevented the scale and effect of the crisis that we had? Would it have been able to anticipate things—to hear the warning bells and react to them in time? Would it have been able proactively to see things coming? That is the test, and I should be interested to hear whether the Government have assessed that, even in a simulation exercise.

When I chaired the UK India Business Council, of which I am president, I would boast to our counterparts in India about the wonderful light-touch regulation that we had in Britain. Of course, we now know that it was flawed. It is not about light touch; it is about the right touch. Do the Government really think that this new system strikes the right balance of regulation that this country so desperately needs?

What about the structure of the Bank of England? Much power has been given to the Bank but, as has been said, cannot the court be restructured to have a more supervisory role, reporting directly to Parliament? Not enough non-executive directors are proposed. Can the Government say that they have the balance right on all the boards—the FPC, the PRA and the Court of the Bank of England—with enough non-executive directors? Are they going to be properly resourced in terms of access to information in order to perform their roles properly? Also, the MPC publishes information every single month and is very transparent. Will the FPC, the FCA and the PRA also publish regular reports in a transparent manner?

I go back to the point that the MPC is neglected in the Bill. The only crossover seems to be the governor himself. I do not have too much of a problem with the buck stopping with the governor and with the governor having all these roles. However, I am worried about whether there is a mechanism for co-ordinating all these, which the noble Lord, Lord Myners, who is not in his place, spoke about. There could be conflict between boards. There are dual roles and there could be duplication. If there is a problem, things will fall between the cracks and we will go back to the old blame-go-round. This clarity of co-ordination where the cultures are concerned is not clear and we need to work on that in Committee.

What about the powers of the PRA? It is important to get this figured out. It is focused too much on large institutions; but the Australian Prudential Regulation Authority implemented the whole of Basel II through guidance alone and shows how general guidance can sometimes be given. This whole area of guidance is completely missing in the Bill.

To conclude, this Bill is wonderful news. We are actually putting power back into the hands of the Bank of England and I welcome that very much. However, I think that we are missing a key aspect—the role of the MPC and the co-ordination between the MPC and the FPC in making sure that the new structure is focused on achieving stability, preventing crises, generating maximum employment, generating low inflation and moderate interest rates, and, most importantly, on generating and sustaining growth in the economy.