Lord Eatwell
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Lord Eatwell
Lord Eatwell
My Lords, I shall address Amendment 54, in my name and that of my noble friend Lady Hayter. I will also speak to Amendments 55, 57, 58 and 61. I apologise to the Committee if there is some confusion over the grouping with respect to these amendments. We asked this morning for this amendment to be degrouped from the amendment tabled by the noble Lord, Lord Flight, which deals with something rather different.
I will preface my remarks by saying that over the next several groups we will examine the exceptionalism of the Financial Policy Committee. This committee is an experiment, and it has powers transferred from persons who have the authority of election behind them and are part of the executive, to an administrative function. These powers are substantial: they manage the supply of credit, and possibly, if particular measures were handed over to the FPC, they will manage the demand for credit. Hence, it will have a major impact on the overall macroperformance of the economy.
There is also the potential for the FPC to be in conflict with the Monetary Policy Committee—the MPC—which controls the price of credit. That contradiction could be a serious element in the overall operation and management of the economy. The exceptionalism of the FPC, in our view, requires exceptional scrutiny and consultation as this experiment unfolds. I call it an experiment because we do not as yet know how effective these administrative measures are going to be. We do not as yet know even what they will be in content, so a degree of extra scrutiny and consultation is required at every stage to ensure that major mistakes are not made and that we design effective procedures and secure public acceptance for the role of the Financial Policy Committee.
Amendment 54 introduces a minor element, which has wider significance than might at first appear. It simply introduces the expression “and the public” into those who must be consulted with respect to the makings of an order. The public here is a term of art, meaning those who have a direct interest in this area. It would essentially involve the industry and perhaps a few specialist academics or others who have a particular interest in the field. Amendment 54 seeks, as does Amendment 55, to introduce the possibility of that wider consultation, which I believe is vital if this experiment—and it is an experiment—is to succeed.
Amendment 57 simply adds to the requirements for consultation by providing a back-up. When there is some failure to consult, perhaps because of the urgency of a particular measure, that failure should be,
“subject to scrutiny by the Treasury Select Committee”,
in a way which has been recognised in other parts of the Bill. Amendment 61 adds to the conditions associated with urgency that there should be a statement published within 10 days of an urgent measure on which consultation has not taken place. Those four amendments provide a wider framework of consultation for this experiment than is provided in the Bill. It seems to me that they are entirely unexceptional and would be widely welcomed throughout the financial services industry, and indeed the policy community.
Amendment 58 is a little different and really should have been degrouped, but we feel we should not go too far in our enthusiasm for degrouping. Here we have a slightly different element that focuses, however, on the exceptionalism of the Financial Policy Committee because that committee has a particular responsibility for measures that are specific macroeconomic controls. I simply do not see how that responsibility can be in any way transferred to the FCA or the PRA, which do not have such a responsibility in their objectives or their specification of roles. This seems to be a major mistake in the drafting of the Bill. It is also unnecessary with respect to the directions by the FPC, since the ability of the FPC to authorise the exercise of discretion is covered in proposed new Section 9G(5). This part is therefore going too far, as the necessary role for the FPC is already covered.
This is a dangerous amendment—no, it is a dangerous position, not a dangerous amendment. It is a very beneficial amendment, which would remove a potential danger in the sense that the provision, as drafted, takes these experimental powers which we are handing to the FPC and allows them to be generalised outwith that very special framework that we are creating in the Bill. I urge the Government to accept Amendment 58. All the powers that the committee needs are covered by proposed new Section 9G(5) and this position is entirely unnecessary.
In dealing with the exceptionalism of the Financial Policy Committee, therefore, the amendments I am discussing in this group enhance the underpinning of consultation that will provide validity and acceptance to the powers of the FPC and remove what was perhaps an unwitting extension of those powers, which might undermine the entire project. I beg to move.
Lord Sassoon
I am sure that we will not have to wait for very long. I shall address what is more directly the subject of these amendments and the question about possible conflicts between the FPC and the MPC. While it is conceivable that the two committees might seemingly appear to be taking conflicting action, I do not actually believe that that is likely to be the case as each committee’s actions will be designed to address very different aspects of the economy and the financial system. That said, there are mechanisms in place to ensure that conflict does not arise. The committees will share information and briefing in order to aid co-ordination, and the Bill makes provision for joint meetings of the two policy committees if at any time that is required. The Bank has also said that it agrees with the Treasury Committee’s recommendation on this question and that the governor should consult the chairman of court if a conflict arises. It is unlikely, but the Bill makes provision through joint meetings and the consultation with the chairman of court.
I turn to the specifics of Amendments 54 and 55. These amendments seek to require the Treasury to consult the public before making any order which makes macroprudential tools available to the FPC. I agree with the noble Lord, Lord Eatwell, that effective consultation on macroprudential tools is essential, but this amendment is not the best way to achieve it. The practice of public consultation on important matters of policy and legislation is now well established and is engrained in good government practice. My honourable friend the Financial Secretary said in another place:
“As a matter of course and as part of the usual statutory instrument process, I expect that the Treasury will consult on macro-prudential tools”.—[Official Report, Commons, 28/2/12; col.46.]
The Government have already committed to a consultation on their proposals for the FPC’s initial toolkit and will produce a draft statutory instrument as a part of that consultation. The Bill as currently drafted does not prevent the Treasury from consulting the public. The Government have already shown their willingness to consult on macroprudential tools and demonstrated their commitment to transparency by asking the interim FPC to make public recommendations regarding its tools.
I do not quibble with the term “public”. From what the noble Lord said, I suspect that he might have been expecting me to come back and say that this is not for the public, but for consultation with the industry. I accept the context in which he uses the word “public”. That is not my objection. It is good practice to do it. We are doing it. The FPC has been asked to make public its recommendations regarding tools. However, it may not always be appropriate to consult the public, which is why this requirement should not be in the legislation. Not all macroprudential orders will make large changes to the FPC’s direction powers. It is possible that some orders will contain only minor and technical changes and in this instance a three-month public consultation would be unnecessary. The previous Government rightly recognised the risks of undertaking full public consultation in cases where it is not necessary. Their own code of consultation listed seven criteria, one of which stated:
“Keeping the burden of consultation to a minimum is essential if consultations are to be effective and if consultees’ buy-in to the process is to be obtained”.
The Government have stated that they will, in compliance with the principles of good government, consult the public when material changes to the FPC’s direction powers are proposed and in non-urgent cases. I hope that that provides reassurance which the Committee seeks.
Lord Eatwell
My Lords, while we are on this point and before the noble Lord, Lord Sassoon, moves on to other elements, I am grateful for his clarification on this issue of consultation. I heard that we expect the Treasury to consult and there is nothing to prevent it consulting. I was seeking that the Treasury be required to consult.
Turning to the point which the noble Lord has just raised about the consultation criteria, which is enormously helpful, would it not be appropriate to write the criteria in to the conditionality with respect to when the Treasury should consult? Then we will not have simply an expectation or a desire and we will not be saying that there is nothing to prevent consultation. We will be saying that the Treasury should consult in all circumstances other than those specified under the consultation criteria. Would that not be helpful?
Lord Sassoon
My Lords, of course that could be done, but I make the point again that it is now engrained in the principles of good government that there should normally be three months’ public consultation. There is a code of consultation that the previous Government put out. It sets it all out very clearly, including the point about burdens and so on that I read out. In its full richness, it cannot easily be drafted in legislation. Indeed, if we were going to do it in this Bill, I imagine there could be hundreds of other Bills in which it could be spelled out. I suggest that the Committee should not only take comfort from the standard governmental practice but from the fact that we have already indicated what we are going to do with the FPC toolkit. I believe we have covered it all and do not need to burden this Bill with a lot of detail any more than other Bills are burdened with it.
Amendment 57 seeks to provide that the reasons for making an order without consulting the FPC or the public be subject to scrutiny by the Treasury Select Committee. While I agree that accountability to Parliament will be important and the provisions within the Bill reflect that, I believe, as I have said on other occasions, that it is for parliamentary committees themselves to decide what they will scrutinise. I would expect the Treasury Committee to take a great interest in any circumstances where the Treasury felt it necessary to create a new macroprudential tool on an urgent and therefore possibly not-consulted basis.
I suggest to the Committee that it would be inappropriate for the Government to use primary legislation to force the Treasury Select Committee to scrutinise something. It must be a decision for the committee itself. The committee has already taken great interest in the interim FPC and I hope that this will continue. For those reasons I believe that Amendment 57 is neither appropriate nor necessary.
We then get to Amendment 58—I was going to say “the dangerous amendment”. It seeks to deal with what the noble Lord says is a potentially dangerous situation. He was entirely clear in his reasoning. The amendment seeks to remove the FPC’s ability to confer discretion on the PRA and the FCA as part of a direction.
Lord Sassoon
The noble Lord says that it is the Treasury’s ability to confer discretion. Whoever’s ability to confer discretion it is—I am just turning back to the drafting of the amendment, which really means looking at the clause as well. I will do that as I speak. I believe it is the FPC’s ability to confer discretion, but whether it is the FPC or the Treasury, the purpose of the provision is to allow the direction-making entity to take advantage of the expertise of the PRA and the FCA. Indeed, the noble Lord is completely right. I have now checked the text and it is the Treasury. However, the point is the same. We need to take advantage of the expertise of the PRA and the FCA which hold the expert knowledge relating to the supervision of individual firms. This provision allows the Treasury to take advantage of that expertise in its directions. For example, if the direction required the PRA to require firms with large exposures to hold additional capital, it would be for the PRA to decide which firms had large exposures. That would be something for the supervisor—the regulator—to do. Therefore, I believe that the amendment would unnecessarily hamper the ability of the direction to have proper effect.
Lord Eatwell
Shall we deal with it as I go along? It would be easier for the Committee if we deal with Amendment 58.
There is a mistake here. The text of the Bill says that the Treasury may make an order which,
“may confer a discretion on … the FCA or the PRA”.
In other words, the Treasury has direct macroprudential tool access to the FCA or PRA, not via the FPC. Proposed new Section 9G(5) describes the correct procedure, in that a discretion that could be given to the PRA or the FCA comes via the FPC. In other words, it comes via the macroprudential authority—the institution that is responsible for macroprudential measures. The example given by the noble Lord is particularly pertinent in this case. If there were a requirement to increase the capital that is relative, let us say, to large exposures or to other risk-weighted measures, then that must be a decision of the FPC. I do not see how the Treasury could give that macroprudential role in any shape or form directly to the FCA or the PRA.
If the provision’s wording was that an order may confer a discretion on the Financial Policy Committee, which may then be transferred to the FCA or the PRA at the will of the Financial Policy Committee, the point that the noble Lord has just made about expertise would be entirely well taken. However, if we are to maintain the integrity of this experiment, or indeed project, then we must maintain the FPC as the focus for macroprudential regulatory management. That is why I referred to this element as dangerous, in the sense that it undermines that clear structure within the Bill.
Lord Sassoon
My Lords, according to these provisions, when the Treasury specifies what macroprudential measures the FPC may exercise, the Treasury may, in relation to those macroprudential measures, confer functions on the regulator. It is intended that this is likely to be used for minor matters such as definitions. For example, the Treasury could provide that the FPC may impose additional capital requirements on exposures to residential property, and that the PRA, as the microregulator, would define the meaning of “residential property”.
There is, therefore, a web of interlocking provisions here, which I fear I did not do justice to in my first attempt to cut through this. Would it help the noble Lord if I take this one away, write to him and copy it to the other Members of the Committee who are here, to try to explain how these provisions will work together? I do not believe that there is any gap here, because it is ancillary to the basic directions that will come via the macroprudentials of the FPC. But there may be some ancillary matters, particularly definitional ones, where the expertise of the PRA or the FCA would be operative and for which we need therefore to keep this element and not to close this off in the way that Amendment 58 seeks to do. I will write to try to set that out more clearly. I am grateful to the noble Lord for that.
Amendment 61 would require the FPC to publish a policy statement within 10 days of a direction being made in relation to a measure made before the FPC had been able to issue a statement of policy under new Section 9L to be inserted into the Bank of England Act 1998 under Clause 3. Again, the Government agree that transparency and openness will be vital to ensure sufficient accountability for the FPC and the use of its tools. However, I believe that this amendment is not appropriate.
The Bill already provides that a policy statement is produced and maintained for each of the Bank’s macroprudential tools. This would also apply to those measures granted using the emergency procedure. However, if a situation were urgent, it would be counterproductive to require the FPC to wait until it has drafted and published a statement of policy before it could use that tool.
We would expect the FPC to produce a statement of policy for the tool as soon as reasonably practical afterwards, assuming that the tool remains in the FPC’s toolkit. I suggest that the requirement in Amendment 61 would be excessively restrictive.
Lord Sassoon
My Lords, the requirement is there for the statement to be made. Indeed, it would be the full expectation that a statement would be made. We believe that the Bill does not need any extra amendment in relation to statements that relate to macroprudential measures where they are exercised as a matter of urgency. The statement has to be made in any case.
Lord Eatwell
Perhaps I may help the noble Lord. I think that there was a slight misunderstanding in what he said in his initial answer on this amendment. He said that if there were an urgent situation, it would be inappropriate to wait for a statement to be made. That is not what this amendment says. It in no way prevents urgent measures being taken immediately. It simply says that if that is the case—as the noble Lord said, as soon as possible, and as I say, within 10 days—a statement should be produced. Surely, it is appropriate to give confidence and comfort to the markets that they can have some degree of expectation that a measure taken in urgency would be subject to a statement within a timeframe which is known to the markets and therefore provides them with appropriate comfort.
Lord Sassoon
My Lords, I do not believe that any additional requirement needs to be put in. The FPC already has transparency requirements at the heart of what it does. I completely agree that in certain cases, if it was an urgent matter, 10 days would not be the answer. It would make a statement based on the merits of the case either immediately, or on some other timescale. The Treasury would need to lay secondary legislation on an urgent basis to create the new tools required. Regardless of this provision, the laying of this secondary legislation would involve a public statement about the need for the tool and how it would be used. There is another backstop. If the new tool was required to be created, Parliament would immediately have a statement in front of it to back up the secondary legislation.
For a variety of reasons, Amendment 61 is redundant. On the basis of some partial explanations, and my commitment to write to him—particularly to explain in more detail how I believe the matters around Amendment 58 will operate—I ask if the noble Lord will withdraw his amendment.
Lord Eatwell
I am grateful to the noble Lord. Having a committee process where we go backwards and forwards on each particular amendment is helpful and removes the need for me to make a long summing-up speech. I will simply focus on Amendment 58, which has been the main matter of substance within this group which has exercised us, especially after the noble Lord clarified the issues of the consultations so well. Amendment 58 is still a serious problem, and I look forward to the noble Lord writing to me about it. Once I have his views in writing, perhaps we can consult further to find an appropriate way of sustaining the position of the FPC in the way that I have described. In the mean time, I beg leave to withdraw the amendment.
Lord Eatwell
Lord Eatwell
And now, my Lords, for something completely different. One of the objects relating to the governance of the Bank of England which we discussed in the first two days in Committee, and which is now coming up again, is to increase the collegiality of decision-making within the Bank, particularly with respect to this project. It seems that the deputy governor for financial stability is going to have an important role in the development of the FPC, the development of its activities and, indeed, its overall credibility and acceptance. It therefore seems entirely appropriate in these circumstances that the deputy governor for financial stability should be given a special status within the legislation, both in respect to consultation with the Treasury when an emergency order is introduced, and with respect to the discussions with the Chancellor of the Exchequer after the publication of the Financial Stability Report.
Amendment 56 seeks to place the deputy governor for financial stability within the framework of consultation when there is an emergency order. Overall responsibility rests with the governor. However, surely the deputy governor, who has the prime responsibility, should be consulted when there is likely to be an emergency order. Moreover, when the Treasury and the Bank have their formal discussions, which are required by the Bill, following the publication of the Financial Stability Report, it is surely appropriate that the person responsible for that report—the deputy governor for financial stability is the acting element in this respect—should be part of those conversations, as we require in Amendment 79.
If the Government accepted these amendments, we would feel much more comfortable about the overall governance structure of the Bank. It would acquire a more collegial framework, which we strongly feel is very appropriate to the development of these new measures. I beg to move.
Lord Sassoon
My Lords, these amendments reprise an argument that was raised by the shadow Chancellor during the Bill’s Second Reading in another place.
As the noble Lord, Lord Eatwell, said, Amendment 56 would require the Treasury to inform not only the governor but the deputy governor for financial stability when it considers that there is insufficient time for the FPC to be consulted on the introduction of a new macroprudential tool.
Amendment 79 would place in the Bill a requirement for the deputy governor for financial stability to attend the biannual meetings between the Chancellor and the governor following the publication of the FPC’s annual stability report.
Clearly the Bank plays a crucial role not only in relation to the management of the UK’s economy but specifically, under the Bill, in relation to macroprudential and microprudential regulation. In fulfilling these very important responsibilities, we expect the Bank to act as the serious and respected organisation that it is. This means that the senior executives of the Bank will work as a team to determine the best course of action to achieve the Bank’s objectives and comply with the legal obligations placed upon it. The governor is the leader of that team and, working closely with his senior executives, will ultimately take the key decisions within the Bank.
It is clear that the success of the new regulatory structure, which, rightly, we are spending so much time debating, relies heavily on the relationship between the Treasury and the Bank of England, and I believe that the Bill provides the necessary clarity of responsibilities. However, it also depends on the personal relationships at play here, particularly between the most senior leaders of the two bodies—the Chancellor of the Exchequer and the Governor of the Bank of England. One of the major problems leading up to the financial crisis was that the tripartite committee did not meet at principals level during the previous decade.
Therefore, there are clearly things that need to be legislated for, and this is not what the noble Lord is in any way seeking to argue against, but it is important background to this discussion. The Chancellor and the governor must meet regularly to discuss financial stability. That is why the Bill and the regulatory structure that it establishes place at the heart of the matter the institutional relationship between the Treasury and the Bank, and the personal relationship between the Chancellor and the governor.
I do not see any reason to attempt to insert into that relationship a further statutory channel of communication. First, I just do not believe that it is needed. The Treasury ministerial team regularly meets the current deputy governor for financial stability and the chief executive of the FSA. There is also a constant dialogue between the deputy governor and senior Treasury officials via meetings, phone calls and e-mails. The same was true under the previous Government, as I know, since I was part of it for three years, and it was very effective at working level. That has not changed and it will not change under the new structure. In practice, the deputy governor may well attend the biannual meetings between the two principals. If the Treasury notified the governor that a new macroprudential instrument needed to be introduced on an urgent basis, the deputy governor would be well aware of that.
I will just point out one slight correction that is relevant to this, which is that the FPC is responsible for the financial stability report to the deputy governor. That is relevant to the discussion of this amendment because it shows that we should not excessively personalise the relationships or draw attention to particular individuals if that risks, as it may do in this instance, causing confusion about who is responsible for what. I agree that the relationship with the two leaders of the bodies, the Treasury and the Bank of England, should be hard-wired in, as we have done. In practice, the deputy governor is, and will be, very much involved in all the relevant discussions. Amendments 79 and 56 are not necessary and go too far.
There is a strong argument here that such a provision could be positively unhelpful by opening the door to the possibility that the Bank may be divided and encouraged to speak with more than one voice. There is a risk of recreating elements of dysfunctionality that were in the system as it used to exist. I do not want to overplay this, since the main argument is the earlier one. However, I do see a slight but secondary danger that this provision could be built on in the wrong circumstances. On the basis of the earlier explanations, I hope the noble Lord, Lord Eatwell, will withdraw this amendment.
Lord Eatwell
My Lords, the noble Lord’s comments have been very valuable. The Government have continuously argued that the tripartite system set out by the previous Government did not work because of its structure. He has now admitted that it did not work because the principals did not work it and did not meet. That is a very different issue. The fact that the principals did not meet, and that we now find the need for them to meet in primary legislation, illustrates that it was not the structure that was wrong but the people working in it that went wrong.
I agree with the noble Lord that the Bank should work as a team. I am very much in favour of that. However, we have to distinguish between the captain of the team and those who take the penalty kicks. We may want Martin Johnson to be the captain but we want Jonny Wilkinson to take the kicks. In those circumstances, the particular specialist role of the deputy governor for financial stability seems to be an important element in effective communication between the Treasury and the Bank. Moreover, the noble Lord expressed, in a careful way, that this might expose differences in the Bank’s position and suggested that this might create dysfunctionality. There are differences in this Committee, but this Committee is not dysfunctional. It is making progress. The differences between us are highlighting, as it is their role to highlight, some problems in the Bill that can make it a better Bill, which is our entire objective. I do not accept that differences within a reasonably run organisation necessarily lead to dysfunctionality. That seems to be Sir Humphrey rampant, determined that there is a singular position.
The whole issue of governance of the Bank is still somewhat in the air. This is one element that we wished to put in the Bill and felt would be enormously helpful. Now the noble Lord has recognised that the tripartite system did not fail because of its structure, but because of the personalities who failed to work it, I hope that he will consider the value of these amendments when we return to them on Report.
Lord Barnett
We are talking about possible serious financial crises and stability. At the end of the day, the Chancellor will be held responsible if something goes wrong with financial stability. There could be as many teams as we liked, but the Chancellor would ultimately have to accept responsibility, even if he knew nothing about it. I am sure that any Chancellor—I am looking at one now—would know everything that was going on in his team.
I am confused about what the clause or the Bill will do to help us in this matter. My noble friend’s amendment might help, although we are told by the Minister that it could “excessively personalise”. I am blessed if I know what that is supposed to mean, but no doubt the Minister will tell us. At the moment, I am more confused than ever. I thought that I understood a few things about financial matters but, listening to the exchange between my noble friend and the Minister, I am confused more than ever.
Lord Eatwell
Perhaps before I sit down I can help my noble friend. We are discussing what is perceived to be an essential failure of the previous system. The failure was that the people responsible for working it did not take advantage of the tools that were provided. Here in the Bill, as the Minister pointed out, the Government have rightly insisted that the Treasury and the Bank convey information to each other, consult each other and act collectively when necessary. That is appropriate, and I commend the Government in that respect. I simply think that they have not gone far enough.
Lord Peston
If my noble friend were to ask himself who would know most about a macroprudential measure in the Bank, surely that would be the deputy governor, because that is his job. My noble friend is saying that the Treasury should consult. I would argue that the Treasury is sensible enough to know that it should consult the one person who would know what was going on.
Lord Eatwell
Just to reinforce what I said, neither the Government nor this side have entire confidence in the consultation procedure between the Bank and Treasury as it has taken place in the past. The Government are seeking to reinforce that confidence, and I wanted to reinforce it further. But at this stage I beg leave to withdraw the amendment.
Lord Eatwell
My Lords, I, too, support the noble Baroness, Lady Noakes, in her amendment. I also commend the Treasury Select Committee on having done such a good job in presenting the arguments for appropriate scrutiny of elements in the Bill.
As the noble Baroness, Lady Noakes, pointed out, the measures which the Financial Policy Committee is to have in its hands are extremely powerful. Let us consider introducing a leverage ratio in British banking. That notion has not existed within the structure or organisation of British banking. It would change entirely the relationship between the liability side and the asset side of the balance sheet of British banks. It is a major measure which thereby deserves appropriate consideration of the sort set out in the amendment.
Let us consider also the other tool which the FPC is claiming as appropriate for itself: pro-cyclical provisioning. Pro-cyclical provisioning involves enormously complicated decisions, both in the banking sector and in accountancy. Accountants tend to be very hostile to the notion of provisioning since it can be used to hide profits. It is a standard procedure which was common in the Enron case. If we are going to formulate a structure of pro-cyclical provisioning which not only achieves the goals that the FPC and all of us want but satisfies the complex needs of appropriate accounting—we have seen recently how accounting can be misused in the banking sector—these measures require very careful scrutiny. As the noble Baroness said so clearly, a 90-minute debate, which is then a rubber stamp, is entirely inappropriate. The procedure set out in the amendment would not only provide that level of scrutiny but contribute to the public confidence in these procedures which is vital if we are to achieve the goals which we have set out for the FPC.
Lord Peston
My Lords, I remind the Committee by way of background that we are discussing adverse, exogenous shocks to the financial intermediation process. Those shocks are impossible to forecast and extremely hard to recognise even when they hit the system. My understanding of why we require macroprudential measures is that it improves the way in which the system works so as to be able to cope with those shocks. It is partly to protect the system of financial intermediation and partly to improve its effectiveness and efficiency—so we have no difficulty about that.
However, if we need these instruments, it follows that in a democracy—and I still include your Lordships’ House as part of our democracy—Parliament must be able to scrutinise them appropriately. As the noble Baroness, Lady Noakes, is well aware, I am not an expert on all the different kinds of orders, and she simply lost me on them, but I ask her whether the measures set out in her amendment give Parliament, including your Lordships' House, a full right to scrutinise the introduction of the macroprudential measures and—here I got a bit lost—to amend them in the sense of saying to the Government, “We think that what you are doing is right, but you can do it in a rather better way.”? If that is what the amendment says, and I see the noble Baroness nodding, the Minister has a duty to the House to say, at the very least, that he will take it away and think it through.
Lord Myners
As I listened to the Minister, it seemed to me that he was implying that there may be times when the FPC has no recommendations outstanding. Surely, however, the FPC will always have recommendations outstanding. It will always have a preferred leverage ratio or a gearing ratio or a deposit to loan or some other of the macroeconomic tools that it has to apply to the banking sector. I am not sure how keeping recommendations under review and reporting on them actually works in a situation in which there will always be recommendations in place. I cannot envisage a situation in which the FPC will say, “We have no views on anything, and therefore there is nothing that we need to be reporting and monitoring”. I may have misunderstood the point; if I have, I apologise, but I would appreciate some guidance from the Minister.
Lord Eatwell
My Lords, we broadly welcome these amendments, in the sense that they are adding to the overall scrutiny and assessment of the activities of the FPC and thereby reinforcing, we believe, its general acceptability and strength of purpose. However, I want to raise a warning flag with respect to new Section 9QA(3), in which it is argued that the FPC will have to prepare,
“an estimate of the costs and an estimate of the benefits that would arise from … the direction or recommendation in question”.
These are macroeconomic measures. It is virtually impossible to provide a simple numerical estimate of the cost or benefit of a macro measure. There will be either a tendency to overestimate the costs, or a tendency to overestimate the benefit, in this particular case. Presenting an assessment in quantitative terms will give spurious precision and, indeed, spurious credibility to a particular measure. I assure the Minister that for any macro measure, I could write an entirely credible report saying that the costs exceeded the benefits and an equally credible report saying that the benefits exceeded the costs. This is simply extending the whole notion of cost-benefit analysis beyond the range in which it can effectively operate. It would be valuable to take account of an attempt to describe in broad qualitative terms the costs and benefits. However, please let us not have the spurious precision of numerical calculations of variables which, by their very nature, cannot be expressed in precise terms.
Lord De Mauley
My Lords, I am grateful to noble Lords for those questions. The noble Lord, Lord Myners, says that effectively there will always be a recommendation that is extant. He is probably right about that. The requirement is to review regularly any recommendations that have a continuing effect, and that includes any recommendations to set or maintain any particular level of leverage or capital, as the noble Lord suggests. I broadly agree with him, actually.
The noble Lord, Lord Eatwell, is right to say that a cost-benefit analysis is a difficult thing to do. That does not mean that the committee should not attempt it, so that at least interested parties have an opportunity to review it and make their comments.
Lord Eatwell
“9WA Financial Stability Advisory Panel
(1) There will be a Financial Stability Advisory Panel.
(2) The membership of the Panel will be—
(a) the Deputy Governor for Financial Stability;(b) 6 members appointed by the Treasury, subject to approval by the Treasury Committee of the House of Commons;and the members appointed under paragraph (b) will be academics, members of staff of international organisations, practitioners, or others with particular skills in the analysis of systemic risk. (3) The Financial Stability Advisory Panel will—
(a) provide written advice to the Financial Policy Committee concerning the analysis of systemic risk;(b) once a year prepare a report assessing the analysis of systemic risk by the Financial Policy Committee over the preceding 12 months (the first report to be twelve months after this section comes into force);(c) assess the effectiveness of measures prescribed under section 9K in the attainment of the financial stability objective of the Bank;(d) assess the effectiveness of directions and recommendations of the Financial Policy Committee under sections 9G and 9N in the attainment of the financial stability objective of the Bank;(e) prepare an annual report on matters referred to in section 9WA(3) to be presented by the Supervisory Board of the Bank, and subsequently published on the Bank website.”
Lord Eatwell
My Lords, the development of macroprudential regulators, the instruments for introducing macroprudential regulation, is a common theme in the UK, the European Union and the United States. Different models have been developed for the institution that is to be responsible for macroprudential regulation. In our own model, the Financial Policy Committee, we see what could be called a “central bank model”, where the alternative voices being brought to the table are to be represented by the independent members of the FPC. It will fall to them to challenge Bank of England house thinking and provide alternative perspectives. There is only a very small number of external members on the FPC and finding members with the experience and skills necessary to perform the role that we demand of them is, as has already been seen, very difficult, although at the moment we have an excellent group in the shadow FPC. An alternative model, which has been adopted by the United States Financial Stability Oversight Council, pursues a more stakeholder-oriented approach in which the appropriate voices from stakeholders actually have a direct role in the organisation of macroprudential measures within the United States.
Both the central bank model that we have pursued, which also applies to the European systemic risk board, and the stakeholder model have disadvantages. The key disadvantage of our central bank model is that we do not have enough diversity of opinion or access to new research and critical assessments of FPC measures that the stakeholder model might have. The problem with the stakeholder model is that the United States may find that its Financial Stability Oversight Council becomes mired in differences of opinion from different stakeholder interests and has difficulty in pursuing the coherent macroprudential policy that is required of it.
As we know, this whole area is, as I said earlier, an experiment—or, if the Minister prefers, a project. We are dealing with areas and matters that at present are uncertain. There is little agreed analysis or clear empirical assessment of how some of these tools will actually work. We will find out. We are going to experiment. We therefore need to harvest the widest possible spectrum of analysis. The amendment proposes that there should be a financial stability advisory panel, not a panel that is intimately involved in designing and implementing the measures. Those independent voices are provided by the independent members of the FPC but they are necessarily compromised by their role in dealing with very sensitive matters as they might have conflicts of interest if they have a wider role in the financial services industry. The financial stability advisory panel could contain individuals with such conflicts of interest because they would not have a role in actually managing the macroprudential organisation of the FPC.
The amendment suggests that we have this financial stability advisory panel providing that diversity of view from academics, perhaps from members of staff of international organisations such as the Bank for International Settlements, which is making a lot of the running in the development of macroprudential tools, and potentially from others who have particular skills in the analysis of systemic risk. It will be their responsibility to provide written advice to the FPC, prepare an annual assessment of the FPC’s performance, look at the effectiveness of individual measures and assess the effectiveness of particular directions and recommendations in the context of an annual report or assessment. This cannot do anything but good. It is simply an institutionalisation of the detailed examination, the variety of voices and the consideration of effectiveness that are so necessary in providing both coherence to the FPC and its general acceptance. A panel of this sort, given the responsibilities that are set out in the amendment, would add significantly to the effectiveness of the Financial Policy Committee. I beg to move.
Lord Stewartby
My Lords, I was interested to hear the comments from the noble Lord, Lord Eatwell, on the nature of the work that will face the panel. It sounds like something that overlaps considerably with the Board of Banking Supervision in the late 1980s. Obviously that was working in different circumstances, but each of the bodies require, or required, people of an unusual stripe who combine a practical experience of banking, and the difficult areas that it brings with it, with a particular canniness in identifying areas where they think that things are not as they should be, particularly in cases where that is not always evident until later when events have already taken place.
Are the would-be members of the panel now shadowing the work that will be theirs in statutory form as a result of the Bill? It is terribly important to get the people involved carrying a great deal of weight and clout but at the same time having inquiring minds—something that will help us to ferret out areas that have been unsatisfactorily dealt with. I will not say more now, but I am pleased that some of the reasons for having a panel such as this—20 years ago or more it was called the Board of Banking Supervision, or the BoBS—have been recognised as important in today’s different but difficult circumstances.
Lord De Mauley
I will, if I may, respond on that point. The noble Lord, Lord Myners, is right, and my noble friend Lord Sassoon acknowledged earlier, that previously the Bank was slow to recognise the MPC external members’ need to have access to dedicated support. The Bank has learnt its lesson.
Lord Eatwell
Gosh, that is a bold statement. In replying to the comments made by the noble Lord, Lord De Mauley, I would point out that he has overlooked two crucial elements that underpin the logic of this amendment. First, there are indeed highly skilled and independent members of the Financial Policy Committee, but they are involved in making the decisions and the recommendations. They are the organised part of the organisation which will in due course be responsible for what happens. They are not in any sense an evaluative mechanism. They are adding grist to the mill of a decision-making mechanism; an evaluative mechanism is a different thing altogether.
Secondly, the noble Lord referred to the role of the new oversight committee. I would remind Members of the Committee that the oversight committee will be composed of members of the court; it will not be anybody outwith the internal structure of the Bank. I am enormously disappointed—the most disappointed I have been with anything I have done in relation to this organisation—that the Government have not taken this on board. We are trying to formalise a continuous process of debate, review and assessment by people who have high levels of skill in this area but who are not otherwise involved. That is what a truly effective advisory panel should do. I was struck by my noble friend Lord Liddle’s comments on what is happening at the European Systemic Risk Board. As the noble Lord, Lord Stewartby, said, we want people with the right sort of skills doing this sort of assessment. He is absolutely right.
I ask the Government to think again on this issue. This area can contribute significantly to the overall success of the FPC. I assure the Government that I will return to this matter at later stages, but for now I beg leave to withdraw the amendment.
Lord Eatwell
My Lords, I have an amendment in this group of a slightly different variety but I have enormous sympathy with what the noble Baroness, Lady Noakes, has said about the strategic objective. When I first read the Bill, my note in the margin said “vacuous”. This notion that “relevant markets … function well” really is gamma minus stuff. It is pathetic and does not mean anything at all. One immediately asks for a definition of “function well”. We find that the objectives for competition, integrity and consumer protection are all defined, but there is no definition of what “function well” might mean.
Moreover, not only is this expression vacuous but it has no separate life. Whenever the FCA’s objectives are referred to in the Bill, it is the other objectives—the consumer objective, the integrity objective, the competition objective and the operational objectives—that are referred to. This strategic objective only has coherent life in other references in the Bill in so far as it lives through these more concrete proposals. If it is to be left as it is, it adds nothing other than spurious solidity and real complexity to the structure of objectives for the FCA. I have tried to give it some life. In our Amendment 101D in this group, my noble friend Lady Hayter and I have added the phrase,
“in the best interests of society as a whole”,
to the term “functions well”. That phrase captures the concept of the social optimum as defined in classical welfare economics. One does not want the technicalities of welfare economics within the definition of the Bill, but serving the best interests of society as a whole is the sort of expression that is used by Professor Amartya Sen in his discussions of evaluations of philosophical propositions relative to the social good. By adding,
“in the best interests of society as a whole”,
I would hope to provide this previously vacuous statement with some structure that could be referred to as a mission statement. Although I take on board the objections of the noble Baroness, Lady Noakes, to mission statements, I must say that I tend to agree with them. A mission statement could provide some framework within which the other operational objectives could be seen. For example, on the competition objective, one would look at the objective of stimulating competition in terms of the best interests of society as a whole. There may be circumstances in which the stimulation of competition is not in the best interests of society as a whole perhaps because it causes some distortion to the operation of the market, but, more generally, we would expect the encouragement of competition to act in the best interests of society as a whole.
We have a simple binary choice. Either we must give this vacuous statement some substance or we should remove it from the Bill, as proposed by the noble Baroness, Lady Noakes. What we should not do is leave this statement, which can do no good other than cause a bit of innocent amusement about how silly some clauses in the Bill might be.
Lord Sassoon
My Lords, I was not quick in getting to my feet because I am not sure whether Amendment 101D was moved, taken separately, or where we are.
Lord Eatwell
Will the noble Lord indulge me? What does function well mean? “Function well” for whom? Does it mean functioning well for a consumer? Does it mean functioning well for a trader? Does it mean functioning well in terms of working smoothly without any hiccups but not allocating resources terribly well? Does it mean allocating resources efficiently? All those things come under the term “function well” but contradict one another. What does it mean, and for whom?
Lord Sassoon
My Lords, in giving those four examples the noble Lord knows very well that the first and fourth of his examples very much fit the bill, and the second and third very much do not. This is all about markets that work essentially to assist the end user of those markets. It has nothing within it to do with working well for a trader or something superficial that all looks smooth on the surface but does not provide the end result of liquidity, price discovery or choice for consumers. The noble Lord knows very well that it would be impossible within the compass of such a piece of legislation to try to define the well working of a market, but the Bill spells out the main ways in which the FCA will seek to promote the well functioning of markets—those operational objectives that I touched on.
Those operational objectives give clues and pointers to the FCA. It will be for the FCA’s board to consider if and when it needs to consider these questions of well functioning markets. I believe that it will be well equipped with its expertise to consider market by market what well functioning means. I see absolutely no problem with this. However, there needs to be something that brings together the FCA’s very diverse and individual functions, roles and responsibilities.
That relates to one of the questions asked by my noble friend Lady Noakes, who asked why the FPC and the PRA do not have strategic objectives. It is precisely because they have much more narrowly focused objectives that they do not need the overall strategic objectives that the FCA needs because of the breadth of its responsibilities. I agree with my noble friend and others that we have not provided this strategic objective for the FCA on some whim. We have not put it in for the FPC and the PRA because it is not necessary. It is precisely because of the diversity and the potentially conflicting nature of the objectives of the other bodies that we believe it is right to have it in the case of the FCA.
By the same logic, the strategic objective will act as a check and balance. If, say, the FCA seeks to advance its consumer protection objective by placing detailed requirements on firms, we want it always to ask itself whether what it is doing contributes to the ultimate end goal of ensuring that markets function well. What functioning well means will be determined with some commonality across all markets, but some of it will be market-specific, particularly depending on whether it is a consumer or a wholesale market. This is no afterthought. It reflects the Government’s desire to enshrine regulation which seeks to ensure that markets can do their job.
My noble friend also asked a question about how the FCA could act in a way that was not compatible with its objectives. There are examples which we need to take into account, one of which might be a short-selling ban which is, arguably, in the interests of end-consumers but is a measure which is not normally thought to be compatible with a well functioning market.
Lord Eatwell
Before the Minister sits down, did I hear him correctly when he said that the choice of the benefit to society as a whole was not a matter for the regulator but a matter for the governor? Or did he say Government? I did not quite hear him properly.
Lord Sassoon
I said the Government. I hope he would agree that it was for the Government, not the governor. Good.