Bank of England (Economic Affairs Committee Report)

Lord Blackwell Excerpts

Thursday 2nd May 2024 Lords Chamber

[Lord Blackwell (Con)]

My Lords, I welcome the opportunity to contribute to this debate on the report from the committee of which I am honoured to be a member. I am also very honoured to follow the speech by the noble Lord, Lord King, who has a very distinguished record, and the excellent maiden speech by the noble Lord, Lord Moynihan.

Although much in the report is critical of the Bank of England, I will start, as others have, by recognising that the Bank is staffed by public servants who endeavour to do their best in the role that we have given them. The problem is ours, in that we have delegated responsibilities to them with expectations that are beyond what unelected officials can properly deliver.

The actions of the Bank in its control of monetary policy have huge implications for the state of the economy and the welfare of British citizens. Monetary policy has been given the sole target of controlling inflation, but it is an illusion to think that it can just act on inflation in isolation. By acting on interest rates and aggregate demand, the decisions of the Bank can create economic booms or recessions, can inflate or deflate asset prices with resultant changes in the distribution of wealth, and has a huge impact on the daily mortgage costs, interest payments and living standards of everyone in the country. Since independence, those critical decisions have been entrusted to a small group of unelected officials, who, because they are independent, are not subject to significant challenge or accountability from government or Parliament. It is the issue of accountability on which I will focus.

Putting such important economic decisions in the hands of expert officials might make sense if economics were a precise science. Unlike science, where the variables are inert agents that can be reliably modelled, the movement of the economy reflects the decisions and interactions of human beings and their expectations and state of mind, as the noble Lord, Lord Lamont, said. There is no equation that can reliably predict the kinetics of how an economy in disequilibrium will respond to specific policy initiatives or anticipate the impact of unknown world events. The search for a perfect forecasting model is doomed to failure.

In the absence of a perfect forecast, the decisions of the Bank of England require judgments about not just the forecasts but the potential risks and benefits of alternative actions on the population and its standard of living. One would think that such important trade-offs are properly the preserve of democratic institutions that are answerable to the public for their political choices. What is more, it is fanciful to suggest that monetary policy can operate completely independently of government fiscal policy, because, in the short term, the two economic policy levers impact on the same economic variables, either stimulating or contracting the real economy. The Bank of England’s actions can work either with or to counteract the fiscal policy of the Government. If the two are not co-ordinated, we will not get the optimal outcome.

The Bank of England’s decisions are therefore in many respects ultimately political rather than just technocratic judgments. It is not fair to ask unelected officials to take responsibility for political judgments, nor right or proper in a democracy with an elected Government. Government and Parliament exercise power over many other important policy areas, including national defence and the ability to declare war, so it is not clear to me why we entrust our elected Government with those decisions but feel it uniquely necessary to exclude them from this one component of economic policy.

Nevertheless, I accept that the doctrine of central bank independence is now hard to row back from, and I recognise that the idea that independence protects the economy from irresponsible government policies has been welcomed and is baked into the bond markets. Even so, it is not sensible or necessary for the two economic levers of monetary and fiscal policy to be decided at arm’s length. We heard evidence in the committee that working-level engagement between the Bank and the Treasury is carefully controlled to avoid any impression that the Government and the Treasury are seeking to influence the Bank. That is an unnecessary constraint.

During the 1990s, before Bank of England independence, I was fortunate to have been the Prime Minister’s representative in the regular working meetings between the Bank of England and Treasury officials in the office of the then Permanent Secretary to the Treasury, now the noble Lord, Lord Burns. These allowed all the economic issues to be debated openly between the Bank and the Treasury, with all the relevant information. Although, as the noble Lord, Lord Burns, described, the final decision on monetary policy then rested on agreement between the governor and the Chancellor, any attempt to push the then governor, Eddie George, into going along with something he thought was improper would have been halted in its tracks by the threat of resignation, and I am sure the same would have been true of his successor, the noble Lord, Lord King. One step we can take is to break down the unnecessary Chinese walls and recreate sensible, open engagement between the Bank and the Treasury. I hope that my noble friend the Minister will take this on board.

I remind the House that, as the noble Baroness, Lady Noakes, pointed out, the era of low inflation was initiated during this period before Bank of England independence rather than being a consequence of independence. If we are unable to unwind the Bank of England’s independence, we should consider how we can make the appointed officials more accountable to Parliament for their decisions.

As others have set out, the Bank has not had a glorious record in recent years, underlining the need for greater scrutiny and accountability. I argue that, based on the previous governor’s theory of excess global savings, interest rates were kept too low for too long in the years before the pandemic, which, together with a huge increase in money supply through QE, led to unsustainable increases in asset prices. The messaging that low interest rates were the new norm also led individuals to take on borrowings that left them cruelly exposed. As a result, it is arguable that the delayed high-scale increase in rates that the Bank then had to adopt was also more damaging than it needed to be. Like any system, the reaction of the economy to a sudden, large shock is more violent and damaging than a gradual change that gives people time to adjust their finances.

Since the trigger for inflation was the massive increase in external prices from the pandemic and the war in Ukraine, real incomes and aggregate demand had already been depressed. If the inflation was not initially caused by excess demand, although facilitated by the money supply, the conventional theory that a further squeeze on living standards was required is itself open to debate. We no longer include mortgage costs in the favoured consumer prices index, but the rapid, steep rise in interest rates, by contributing to pressures on household incomes, may itself have been a factor in increasing pressure for higher wage increases. In short, the Bank of England’s actions may well have been responsible for a larger, longer and more painful drag on the economy and living standards than could have been achieved with different policies and different judgments.

Since the Government cannot be the judge for the actions of an independent Bank, that task must fall to Parliament. As set out in the report, there is a strong case for more effective parliamentary scrutiny, including a five-yearly review and perhaps a Standing Committee of both Houses, with permanent technical support that can engage in a more timely way and satisfy itself that the full range of options and implications have been properly considered. I would go further and suggest that in holding the Bank to account for its actions, such a committee could have the remit to report to Parliament if it no longer has confidence in the Governor of the Bank of England. The structure of parliamentary accountability may not be within the control of my noble friend the Minister, but I hope the Government will lend their support to such proposals.

In conclusion, I accept that these suggestions may not be welcomed by those who hold Bank of England independence as an act of faith, but the extent of the delegated powers now exercised by unelected officials without proper accountability cannot be right. If we cannot reverse that decision, we must take action to enable it to operate with a framework that provides better democratic control.

Financial Services and Markets Bill

Lord Blackwell Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, this is not just a good amendment, it is a very important and timely one. Noble Lords will recall that after the death of Robert Maxwell and the exposure of the way in which he had looted the Mirror Group pension funds, the Government introduced a new pensions structure to protect defined benefits pensions, as well as new accounting standards which needed to be obeyed by pension funds. The effect of this protective barrier placed around defined benefits funds has been that they have adopted extremely conservative investment strategies and the return on investments has correspondingly been extremely low compared with what could be achieved by quite modest amendments of investment strategy.

These issues are now a matter of widespread discussion where the unfortunate unintended consequences of the post-Maxwell legislation have been revealed. It is necessary quite rapidly to take account of the discussions, to assess the performance of pension funds since the last significant pensions legislation, and to come up with sensible proposals for reform. That is why this amendment is crucial, for both the pensions funds industry and the wider economy. I encourage the Minister to support this amendment because by doing so the Government would make a major contribution to the future prosperity of a whole raft of pensioners in this country and to the success of pension funds as investment vehicles within the UK economy.

[Lord Blackwell (Con)]

My Lords, I am concerned that, while seemingly innocuous, this amendment might turn out to be the thin end of the wedge of government intervention in pension investment. Clearly, the obligation on pension trustees should be to do their best to get the right returns for their investors. Once we start incentivising trustees to take decisions based on incentives offered to them, that raises the question of who then bears the consequences and the responsibility if those investments turn out in the long term not to be the right thing for their pensioners to be invested in.

I do not dispute the point that pension fund investments have not been optimal in the past, but to my mind that is to do with regulatory restrictions that have been placed on pension funds and the requirements to meet those restrictions. I think there is a case to look at the regulations around pension funds that restrict their investment choices and to enable them to invest in a wider set of assets, but I do not think the right way to do that is to start proposing incentives that would turn into the Government mandating the way that pension funds should be invested.

[Lord Davies of Brixton (Lab)]

My Lords, I support the amendment. I still think of myself as a relatively new Member of the House, so it is useful to remind the House of my lifetime spent working in the pensions industry, broadly in support of scheme members. I have been a scheme trustee, I have chaired the Greater London Council investment panel and I have advised trustees of pension schemes as the scheme actuary. I am just stating my expertise here.

I support the amendment because I think a review is required. I take on board the remarks about the thin end of the wedge, but unless we have the review those concerns cannot be addressed. As the noble Baroness, Lady Bowles, said, there is now a big conversation about using pension scheme money to promote the British economy. There is actually a long history of that sort of proposal going back over many years, but it seems to have reached a crescendo over the last year or so.

It is essential that we have a review. What is also essential, of course, is that the review is undertaken by those who know what they are talking about, but that has not necessarily been true about all the comments made so far. For example, I draw the attention of the House to the recent useful report produced by the Pensions and Lifetime Savings Association—not a body that I consistently agree with—on supporting pension investment in UK growth and thinking up quicker and simpler ways to promote pension fund investment in our economy.

I was going to raise two issues. One has already been explained clearly by my noble friend Lord Eatwell: the funding standards that have been established work against the principles that I am sure we all support. Another problem that we have is the Conservative Government’s introduction of freedom and choice. It is difficult to oppose freedom and choice but, when you come to pensions, which are long-term arrangements depending on long-term investment, giving people freedom of choice weakens the very basis upon which they are being organised. It is all very well saying to pension funds, “You’ve got to invest in infrastructure”, but if the members of that scheme have the right to pull their money out at any time, it is very difficult to take the long-term view. That is a fundamental incoherence behind the so-called policy of freedom and choice. Those issues need to be addressed in the review.

I also hope that the list of consultees for the review is not a complete list; to the extent that it is possible to consult the scheme members, they should be consulted as well. I also hope that the issues can go somewhat broader than those listed in the amendment.

In general terms, a review is needed, and I hope it will lead to the objective being clearly set out of promoting the UK economy.

Financial Services and Markets Bill

Lord Blackwell Excerpts

Committee stage
Tuesday 7th March 2023 Grand Committee

[Baroness Bennett of Manor Castle (GP)]

My Lords, I rise briefly to offer the Green group’s support for the general sense of direction here on both the provision of cash and the review of resilience. It is not an accident or a convenience that those two things have been brought together, as the noble Baroness, Lady Twycross, just made clear.

We come back to a fundamental question: what is the financial sector for? If it is there to serve the real economy and real lives, it must meet people’s needs in both good and bad times. That applies at the individual level and the national one. The system must be able to stand up to not just financial shocks but the kinds of shocks that we know about in this age of the climate emergency, the nature crises and the threat of pandemics.

As the noble Baroness, Lady Twycross, was speaking, I was reflecting on being in Lancaster in 2016 about a week after Storm Desmond. I saw a city in shock. I saw what happened when they lost electricity for a day and a half or so. Digitisation and the disappearance of cash have come a long way since 2016 but people were absolutely desperate. They were not able to meet their basic needs, which surely must be part of the financial sector’s responsibility.

I broadly agree with the general tenor of everything that has been said but I want to make one strong point of disagreement with what most people have said. There is an idea that this is a transitional phase and that, once we have gone past the generation where people have not had digital in the prime of their life, the phase will end and everybody will then be able to use digital. I was going to tell exactly the same story as the noble Lord, Lord Hunt of Kings Heath, did. I will not repeat it but I will draw a further lesson from it. It is a story about a 91 year-old lady. She may have been able to cope with the telephone system and the buttons at 70 or even 80. I know someone in this situation; he is an older gentleman who finds it harder and harder each year to navigate the complications of digital.

None of us in this Room knows what our capabilities will be in 10, 20 or 30 years’ time. Just because you can do something now, you cannot guarantee that you will be able to do it in 20 years’ time. In terms of national resilience and meeting everybody’s needs, we genuinely have to make sure that, long into the future—potentially for ever if we look at that kind of scale—there will always be somewhere where you can walk up to a person and say, “This is my problem. I need you to help me sort it out”. That person needs to have the resources, knowledge, skills and power to sort out that situation for you because, ultimately, only having a person who looks you in the eye, sees the problem and deals with it will really meet everybody’s needs.

I have one final thought. There is sometimes a feeling that we have to have maximum efficiency and meet the needs of the majority, and tough luck for the rest. If we have a system that meets the needs of the most vulnerable people in our society—this is often said about public transport systems but it applies far more broadly—we have a system that is good for everybody in our society.

[Lord Blackwell (Con)]

My Lords, since I have not spoken in Committee so far, I should remind noble Lords of my interest as a former chairman of a bank and a current shareholder. However, I am not going to defend the service levels of banks, which I recognise need improvement.

On these amendments, I point out that, while I understand the rationale behind the desire to maintain access to cash, everything has a cost. We need to consider the cost of what is proposed as well as the benefit. My noble friend Lady Noakes is right that the shift towards digital and away from cash has snowballed over the past few years. It is not just customers who prefer not having to carry cash around. Many small businesses, clubs, associations and societies find it much easier now to have a low-cost terminal with which they can process membership dues, fees or even small transactions. It makes the accounting so much easier and avoids having to deal with collecting and disbursing large amounts of cash.

The move towards digital is happening across the whole economy. People talk about keeping branches open but there are many branches where only a handful of people come in during the week. When you think about the cost of maintaining the building infrastructure, as well as the staffing, security and systems, the cost per transaction becomes astronomical. Those costs have to be borne by somebody; they are borne by the other bank customers in higher fees, charges and interest rates. Nothing comes without a cost so we have to consider what the appropriate cost-benefit answer is.

As many noble Lords have said, clearly there are people who find it difficult to use digital technology and need access to cash, but there are other ways of—

[The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab)]

My Lords, I apologise for interrupting the noble Lord but I am afraid that there is another Division in the Chamber. The Committee will adjourn for 10 minutes and we will resume with the noble Lord, Lord Blackwell, when the moment comes.

--- Later in debate ---

[Lord Blackwell (Con)]

I was making the point that maintaining open bank branches as a solution to this problem is potentially a very expensive way of solving the problem and that the cost would be borne by other bank customers. We need to accept that there may be better ways of serving the genuine needs of those who cannot cope well with the digital economy and may need access to cash. Clearly there are potential solutions using other shops or post offices in localities to provide access to cash where that can be done, but another solution that many banks are adopting is the development of mobile banking branches. A mobile branch that visits a village once week may not be as good as a permanently open branch but at least it gives access to cash and the costs become much more affordable and socially acceptable.

We need to be cautious about assuming that maintaining the structure of the past is the right way to meet the genuine needs of those who have difficulties. We need to avoid fossilising a structure that is no longer fit for purpose. If this debate had been happening 20 years ago about telecoms, we might have wanted a law that said there had to be a telephone box in every high street. If we had had this debate 100 years ago, we would be requiring there to be a horse trough in every high street. There have to be other ways in which we can meet the genuine needs of those who have special needs without the blanket approach of insisting that highly costly and inappropriate branches remain open in places where there is no demand for them.

Financial Services and Markets Bill

Lord Blackwell Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[Lord Blackwell (Con)]

My Lords, it is a great pleasure to follow the excellent maiden speech of my noble friend Lady Lawlor, and to welcome her to the House. I have had the great good fortune to collaborate with her on policy issues over what now amounts to several decades in her role as founder and head of a major think tank with a well-deserved reputation for well-researched and detailed reports—perhaps the hallmark of somebody who started her career as an academic historian. I know that she has wise but spirited and forthright views on many topics, and I have no doubt she will bring that sharp intellect and independent mind to the business of the House. We look forward to her future contributions.

Before I speak on the Bill, I should note my role as a former chairman of Lloyds Bank, but I have no current interests other than as a continuing shareholder. I welcome the Bill, in particular the proposal to add competitiveness to the objectives of regulators, but my fear is that the Bill does not go far enough to redress the overly burdensome nature of the regulatory system that has built up over the last decade. I am not proposing that we turn the clock back to the inadequate regime prior to 2008—many of the reforms introduced then were necessary and are effective—but as my noble friend Lord Hunt of Wirral argued, the excessive regulatory burden on the financial services industry comes not so much from the regulation itself as from the overly bureaucratic way it has been implemented by the UK regulators.

This culture stems from the regulators’ overriding internal objective to avoid the risk of being blamed for failing to do something, with little incentive to balance that against the costs that their intervention may impose on the industry. I fear this tendency to gold-plate is fuelled by the current superficial nature of the parliamentary scrutiny by the Treasury Select Committee in the other place, which tends to focus on naming and shaming someone for anything that has gone wrong. Furthermore, the growth in staff numbers means that much of the regulation of major institutions is undertaken by relatively junior staff who are more likely to stick to a rigid interpretation of the regulatory rules because they simply do not have the confidence or experience to make balanced supervisory judgments.

The senior managers regime, for example, is, in principle, a sensible safeguard to ensure appropriately qualified people are in key industry roles and are held accountable. However, when a major institution has gone through a responsible and exhaustive recruitment process involving an external search firm, it is simply unnecessary and damaging to then have the appointment held up for further lengthy scrutiny by often far less experienced staff at the PRA and FCA. The overly forensic attempt by regulators to pin every mistake on some individual and require consequential penalties has had a corrosive impact, discouraging individuals from making difficult decisions or taking on difficult roles that carry a risk of failure. It has led to a huge increase in bureaucratic processes and documentation, as managers seek to syndicate responsibility and cover their backs.

Another example is the tendency of the regulators to apply a one-size-fits-all approach, unwilling to recognise this may be disproportionate for some sectors or firms. The FCA’s fair pricing review is a case in point: in seeking to address certain consumer pricing practices, the review spread across the whole industry and imposed burdensome data collection on sectors such as the wholesale insurance market, where the participants are skilled professionals. Ring-fencing is another example where the overly rigid application of something which is in principle a sound idea has had a disproportionate impact on banks with relatively small non-ring-fenced activities. The FCA’s worthy objective of protecting the customer has been developed under the customer duty approach to the point where firms fear that even negligent or unreasonable customers will claim redress for buying a financial product that, after the event, causes them a loss. As a result, many products and helpful financial guidance have been withdrawn or repriced out of many people’s reach. This overly protective approach to customers needs to be replaced by a more even-handed objective of simply ensuring fair trading. Caveat emptor has been replaced too much by caveat venditor.

The downside of this overly intrusive regulatory approach is not just the direct costs but, more significantly, the diversion of management time and IT resources away from transforming businesses to better serve their customers. The introduction of competitiveness as a regulatory objective may be helpful to provide a counterbalance. I also welcome the provisions in this Bill for the Treasury to require regulators to review their activities and to set up independent cost-benefit panels, but these measures will not solve the problem without a fundamental shift in attitude, skills and culture within the regulators. I welcome the Chancellor’s commitment in Edinburgh to bring forward further measures to address some of these issues, including reviews of ring-fencing, the senior managers regime and the boundary between advice and financial guidance, but even then, I am not sure we will transform the regulatory approach without a more fundamental reshaping of the organisations and their accountability.

I think it is worth considering whether smaller regulators with fewer and more experienced staff would do a better job of providing supervision, with more considered judgments, and whether the benefit of having two separate regulators outweighs the burden of having two overlapping supervisory teams for major institutions. Finally, while I support the Bill, as other noble Lords have argued, given the powers it transfers to regulators it is important that it is accompanied by a more informed and balanced structure of parliamentary scrutiny that can also hold regulators to account for their new objective of the competitiveness of the industry. I ask my noble friend whether the Leader of the House has any plans to bring such proposals before the House.