Bank of England and Financial Services Bill [HL]

Lord Bridges of Headley Excerpts

Monday 9th November 2015 Lords Chamber

[Lord Flight (Con)]

My Lords, when the Bill was published, I wrote to the Economic Secretary to the Treasury on this territory, because I could not really understand how the reorganisation of the Bank was intended to operate, or what it intended to achieve. Part of the reply I got was:

“The Governor has said that: ‘Our strategy will be to conduct supervision as an integrated part of the central bank and not as a standalone supervisory agency that happens to be attached to a central bank’. De-subsidiarisation, together with the organisational changes being put in place by the Bank as part of its ‘One Bank’ strategy, is an important element of this, and will help to break down any remaining barriers that could stand in the way of a unified culture and impede flexible and coordinated working across the Bank”.

I thought about this and looked at the structure. In answer to the points raised by the noble Lord, Lord Eatwell, what struck me was that “the Bank” actually means “the Governor”.

[The Parliamentary Secretary, Cabinet Office (Lord Bridges of Headley) (Con)]

I begin by thanking noble Lords who have spared the time to meet and discuss aspects of the Bill. I am grateful to the noble Lord, Lord Tunnicliffe, for his kind words, but it was clear that some of my epistles have caused more confusion than I would wish. I will try and address that, and the points made by the noble Lord, Lord Eatwell. I am conscious that the noble Lord, Lord Eatwell, like so many others in your Lordships’ House, has a lot more experience in this, so bear with me as I set out the Government’s case on this specific point.

It is a good point to start with because we are, as a Committee, seeking to answer the question, which the noble Lord posed very eloquently, of “What is the Bank of England?”—which is a good place to start with in a Bank of England Bill. As he rightly said, during Second Reading he worried that this definition might be an amorphous entity and I completely agree that a full answer to his question is overdue. Let me try to answer it.

The noble Lord referred to the 1998 Act. The Bank of England is defined in the Interpretation Act 1978, which tells us:

“Bank of England means, as the context requires, the Governor and Company of the Bank of England or the bank of the Governor and Company of the Bank of England”.

Acts amended by this Bill either refer to “the Bank” and define that expression as “the Bank of England”, or refer initially to “the Bank of England”, so that it is clear what the subsequent references to “the Bank” mean.

This is all well and good for making sure that the corpus of legislation functions neatly, but I know that it does not quite get to the nub of the noble Lord’s question, which is: what does it mean when legislation such as this Bill names “the Bank”, who does the work and, as the noble Lord rightly said, who is responsible? Legislation generally confers powers and duties on the Bank of England in two ways: either directly on the Bank or on a statutory committee of the Bank. Sometimes legislation grants roles directly to court, and we will get on to what that means when we discuss Clause 5.

However, for now I want to focus on the question of what it means when powers and duties are conferred on the Bank. Who is responsible for the Bank in relation to these powers and duties? The answer is: the court is. As the governing body of the Bank, the court is responsible for deciding how powers given to the Bank should be exercised and ensuring that the Bank fulfils its duties. Powers and duties granted to the Bank include, as the noble Lord said, those in relation to note issuance, resolution and supervision of financial infrastructures. As he rightly said, he should take the first letter he received as the position on this.

The court may delegate these powers and duties within the Bank as it deems fit, a situation the noble Lord’s amendment would try to replicate. However—this is the heart of the matter—the court remains responsible for that delegation, and where it decides to delegate powers and duties the court still retains ultimate responsibility for the exercise of those powers and duties. I hope that gives some shape to what the Bank is and who is responsible within the Bank for determining how it fulfils the responsibilities conferred on it.

Some powers and duties are not conferred on the Bank but on statutory committees. Powers and duties conferred on a statutory committee are for that committee to exercise according to the terms of its legislation. The court cannot exercise the powers conferred on a statutory committee. That said, even when powers and duties are conferred on a statutory committee, the court still has responsibilities. As the governing body of the Bank, the court is responsible for ensuring that the statutory committees exercise their statutory roles and responsibilities effectively, including that they are adequately resourced and supported to do so.

The Bill reinforces this role of court by making the oversight functions the responsibility of the whole court, a point we will come on to. For example, the oversight functions include keeping under review the Bank’s performance in relation to the duty of the FPC.

I am conscious that the noble Lord may have further questions in regard to what I have said. Let me pick up on one point. He asked about the FPC and who is doing the consulting. It is for the court to approve changes to the code of practice for, I think it is, the MPC because it is responsible for managing the affairs of the Bank. I hope that addresses his point.

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[Lord Bridges of Headley]

My Lords, we will come to address that. Responsibility for these functions still rests with the court, and I think that is perfectly clear. I am happy to meet the noble Lord to address these points in more detail, and we will come to the FPC in due course. I hope I have begun to provide further clarity on the Bank’s governance, but I can see from the noble Lord’s face that I may not have done. Even so, I hope he will withdraw his amendment.

[Lord Eatwell]

My Lords, I am grateful to those noble Lords who have spoken, and in particular to my noble friend Lord Tunnicliffe for his exposition of yet further confusion in letters from the Bank of England, or from whoever, attempting to explain what the Bill is really about. I must say that I am sympathetic to the suspicion in the mind of the noble Lord, Lord Flight, that “the Bank” means “the governor”.

The noble Lord, Lord Bridges, has said that the answer is that the court is responsible for deciding what “the Bank” means, and the court may delegate those purposes how it might wish. This House spent many hours working carefully with the noble Lord, Lord Deighton, who I am delighted to see in his place, to define precisely the roles of different committees within the Bank of England and their responsibilities. It is very striking that in the crucial role of financial stability, this definition is lacking. For the Monetary Policy Committee the definition is clear and, in respect of other activities within the Bank, if one reads the Bank of England Act 1998, one can see that the responsible entity is clear. In respect of the vital role that arose from the financial crisis and the failures of the Bank of England during that crisis, however, there is to be no clarity or clear definition of role.

I think it will be necessary to amend the Bill to make the position clear, because if it is not amended, parliamentary scrutiny has less insight than it requires to perform the role of ensuring that the Bank is democratically accountable. At this time, I will say that unless the noble Lord amends the Bill appropriately on Report—he may be encouraged to do so—I will produce appropriate amendments myself. In the mean time, I beg leave to withdraw the amendment.

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Our related amendment, Amendment 4, would add another opportunity for scrutiny. Ideally, reasons would be published before any legislation was moved, giving Members of both Houses an opportunity to examine the proposal. I hope the Minister will seize this opportunity to clarify that which lacks clarity at present. I assure him that the moment he says these amendments are poorly drafted, I will be the first to concur.

[Lord Bridges of Headley]

My Lords, the noble Lord does himself a great injustice by saying that these amendments are not epoch-making. I see this process as a form of legislative acupuncture—not that I have ever gone through acupuncture, but I am reliably informed that every needle makes a difference. I am delighted to answer these points.

Clause 1 makes the deputy governor for markets and banking a member of the Court of Directors. Following the expansion of the Bank’s responsibilities through the Financial Services Act 2012, a deputy governor for markets and banking was appointed, as noble Lords will know, with responsibility for reshaping the Bank’s balance sheet, including ensuring robust risk-management practices. This important position, currently filled by Dame Minouche Shafik, is not a statutory member of court. This clause amends the Bank of England Act 1998 to make this position statutory, ensuring equal status for all the Bank’s deputy governors and simplifying the Bank’s governance structure.

In addition, Clause 1 provides enhanced flexibility to add or remove a deputy governor or to alter the title of a deputy governor. Correspondingly, it provides the ability to make changes to the composition of the court, the FPC, the MPC or the new PRC where a deputy governor is added or removed. It should be noted that this power will not permit the Treasury to remove a deputy governor or change his or her title while that deputy governor is in office. This is a measure to ensure flexibility for future need. The Government will be able, by order—a point I will return to—to adapt the size and shape of the court to bring in new expertise when necessary. Thus the Bank’s senior management team can be easily adjusted to meet future requirements.

The Bill also provides for the continued balance of internal and external members on the FPC, the MPC and the PRC. When a deputy governor is added or removed from a policy committee, the Bill enables a comparable change in the number of appointed members to that committee. In a little more detail, if one or more deputy governors is added to the FPC or the PRC, there may be an equal increase in the number of members appointed by the Chancellor. Similarly, if one or more deputy governors is removed from the FPC or the PRC, an equal number of members appointed by the Chancellor may be removed. The situation is comparable for the MPC. If one or more deputy governors is added to or removed from the MPC, then there may be an equal increase or decrease in the number of members appointed by the governor of the Bank. External expertise on these committees is important to ensure a range of views are considered. This provision is necessary to facilitate a diversity of opinion and counter the risk of groupthink.

The noble Lord raises a number of issues in the amendments and I will try to address them. The first issue is where the responsibility for adding, removing or altering the title of a deputy governor lies. In the Bill, this power is conferred on the Treasury rather than specifying, as the noble Lord’s amendment wishes, the Chancellor of the Exchequer. This does not mean that the Chancellor is not consulted. Obviously the Chancellor would be kept fully informed of anything as important as adding or removing a deputy governor, but where a more minor administrative change is made, such as the title of a deputy governor, it may be more appropriate for a junior Treasury Minister to take the lead. Retaining the existing drafting provides this element of flexibility but—I think this is the key point—the Chancellor remains accountable, whatever the phrasing of the Bill, to the public and to Parliament for the decisions and actions in his department.

Secondly, the noble Lord proposes that the Treasury should publish the reasons for making changes to the composition of the FPC, the MPC or the PRC. This gives me the opportunity to clarify the process of making changes to the membership of these bodies following a change to the deputy governors. If the need to alter, add or remove the position of a deputy governor is identified, the Treasury will discuss this with the governor of the Bank. The need for the change could initially be identified by either the Treasury or the Bank. If, following these discussions, the Treasury believes that the change is required, along with any associated changes to the membership of the MPC, the FPC and the PRC, the Treasury will present secondary legislation to Parliament. It will then be for Parliament, as the noble Lord said, to determine whether the change goes ahead. I therefore hope it is clear that Parliament plays a key role in this process. It is the ultimate decision-maker and, in passing an order on the membership of these committees, the Government will need to outline their reasoning to this House and the other place in order to pass our and their acute scrutiny and debate. It is in this context that the reasoning will inevitably be published.

In short, it seems that the noble Lord’s amendments, while worthy of debate, are unnecessary, and I hope that he will feel able to withdraw them.

[Lord Davies of Oldham]

As I indicated, my Lords, we tabled these amendments in order to clarify the thinking behind these proposals, and I am reassured on the crucial aspect that the answerability to Parliament is contained accurately within the Bill. It therefore gives me great pleasure to beg leave to withdraw the amendment.

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[Baroness Kramer]

My Lords, I will make just a few comments, if I may. I join my noble friend Lord Sharkey, and the noble Lords, Lord Tunnicliffe and Lord Eatwell, in their concern about the changes being proposed and the implications that would follow from them.

Will the Government confirm that, under the arrangements to reduce the number of non-executive directors to seven and increase the number of officials on the board to five, it would take co-operation from only one non-executive director with those officials to effectively prevent any investigation into any area of Bank activity? That is, I feel, a completely unacceptable balance that is being proposed today. The Government will have to come up with a very great justification for why the hurdle must be so low—four current officials—to prevent investigation of historical activity.

Clause 4 effectively falls if Clause 3 falls. Clause 4 makes the situation yet worse, because it contemplates not that the whole court will act as an oversight committee but that a sub-committee can be created in order to carry out that work, comprised of as few as two non-executive directors. For two non-executive directors to be considered sufficient for the important work of investigation, review and oversight of the Bank of England strikes me as completely extraordinary. It is also noticeable that the number two applies to the sub-committee responsible for the remuneration of officials at the Bank.

We are moving into a “two best friends” provision here, and I find it exceedingly disturbing. The Government will have to come up with some justification for why a sub-committee of two NEDs is sufficient to carry out a crucially important task that was absent during the many years in which the Bank of England essentially failed to meet the necessary standards to prevent a systemic crisis in finance in this country. I would like to hear their justification for the number two.

[Lord Bridges of Headley]

My Lords, I thank all the noble Lords who have made very powerful contributions and thoughtful points.

I will not detain your Lordships with lots of history; you know it much better than I do. However, to remind the Committee how this came about, I will repeat something that has already been said. The Financial Services Act 2012 gave rise to the Oversight Committee, largely in response to recommendations made in the report Accountability and the Bank of England from the Treasury Select Committee in the other place. That report recommended that the court should be reformed into a board, with powers to conduct ex-post reviews of the performance of the Bank; that board members should be authorised to see all the papers submitted to the MPC and FPC; and that the board should be responsible for reviewing the processes of the Bank’s policy committees.

The Treasury Select Committee argued that the new board should be called the Supervisory Board of the Bank of England but, despite this name, the structure that was proposed was in fact a unitary board. As has been said, the Financial Services Act 2012 took steps to implement these recommendations, by creating a set of statutory oversight functions. However, instead of conferring powers on the court itself, the powers were conferred upon a new statutory Oversight Committee, made up exclusively of the non-executive directors.

[Lord Sharkey]

Would the Minister agree that it was the Bank itself that suggested that?

[Lord Bridges of Headley]

That is my understanding. If I am wrong, I will correct myself.

The noble Lord, Lord Sharkey, made his points very forcefully and I fear we may still have to have further discussions—if he can bear it—but let me restate the Government’s position. The problem now faced by the Oversight Committee is simple. As the noble Lord said, for the non-executives to hold the executive to account effectively, they need to meet together, not separately. There needs to be full and frank discussion between the governors and the non-executives on how best to exercise the court’s oversight functions. I am sure the noble Lord would agree that the challenge and recommendations of the non-executives need to be informed by in-depth knowledge of the Bank’s operations. Effective oversight needs to be carried out by the executive and non-executives in partnership, not in silos.

It bears repeating that the key powers of oversight, which are necessary and working, are not lost as a result of their transfer to the whole court. The court will continue to be able to commission reviews as it sees fit. Moreover, the non-executives will continue to be a majority on the court and will also continue to meet together as a group after each meeting of court, in line with best practice. As was discussed earlier today, court contains a high quality non-executive majority and is therefore well placed to oversee the work of the Bank.

It is entirely appropriate that court, as the governing body of the Bank, should be responsible for exercising these oversight functions.

[Baroness Kramer]

I hate to stop the noble Lord, Lord Bridges, in his flow, but could he confirm that, under the proposed structure, if the officials of the Bank collectively believe that an area is not appropriate for investigation, they need the support of only one non-executive director?

[Lord Bridges of Headley]

As the noble Baroness points out, that would obviously be the maths. We will probably have to have further discussion on this, but I would like to come back to the powers.

It is entirely appropriate that court, as the governing body of the Bank, should be responsible for exercising these oversight functions. The Bill is putting in place a model which is widely regarded as best practice in the United Kingdom. It also completes the model that the Treasury Select Committee recommended in 2011, and was subsequently endorsed by the PCBS in 2012. That model is a streamlined unitary board, with express powers to commission performance reviews. Parliament would still see copies of the reports of any performance review published by the court, just as would be the case for reports published by the Oversight Committee. Parliament’s powers are not being reduced and the Treasury Select Committee can summon any non-executive director to give evidence.

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[Lord Tunnicliffe]

Surely there is a world of difference between the phenomena of groupthink in either one of the policy committees or on the court than the phenomena of the seven NEDs meeting alone. If they do produce a piece of groupthink, the most harm they will do is require a part of the activities of the Bank to be examined. It is very unlikely that they would do that, but it would do no great evil and cause little inconvenience. We are talking about a radical difference in balance when it comes to the powers of the NEDs to question the executives of the Bank.

[Lord Bridges of Headley]

My Lords, it is clear that I still have some persuading to do. I would argue that those powers have not changed in the sense that they have been transferred from the committee to the court.

[Baroness Kramer]

The Minister said that the powers have not changed, but would he agree that who exercises the powers has changed significantly? Officials had no opportunity to exercise those powers; they were the powers only of non-executive directors. Now they can be easily exercised by the officials plus one NED.

[Lord Bridges of Headley]

As the noble Baroness rightly points out, obviously her maths is correct and there would be robust discussion. This comes back again to the quality of those who are on the court and their ability to persuade people that such a review is necessary.

That is all I wish to say on this matter.

[Lord Eatwell]

The noble Lord, having not been present at our discussions, sadly, three years ago, has not appreciated the loss of confidence in this House in the general accountability of the Bank of England.

Given the structure of the Bank of England and its role in national and international life, the position of the governor is extremely powerful, and quite rightly so. He needs to carry the gravitas and status of his or her office. However, in those circumstances, it is important that an Oversight Committee, charged with retrospective evaluation of the performance of the Bank with respect to its objectives, should not include the governor or the deputy governors. That is a crucial element of our thinking which underpinned the 2012 Act. In repeating that powers have now been simply transferred but still remain, the noble Lord has failed to take that aspect into account and has failed to reflect on the experience of the financial crisis of 2008 and the Bank of England’s performance during that crisis.

[Lord Bridges of Headley]

Once again the noble Lord makes a powerful intervention. I am sorry that I was not here for what were obviously those interesting debates and I heed what he has to say. I would simply repeat that I am more than happy to meet with him if he so wishes to discuss these points in more detail. Clearly the court would continue to be able to delegate and to meet as a sub-group of non-executives to look into matters as they see fit, but I believe that this Bill will put in place a more transparent, accountable, effective and recognisable board structure for the Bank, and I hope that I have been able to convince noble Lords that this clause should not stand part of the Bill.

[Noble Lords]

It should stand part.

[Lord Bridges of Headley]

I am sorry. It should stand part of the Bill.

Clause 3 agreed.