Financial Services Bill

Lord Eatwell Excerpts

Wednesday 28th November 2012 Lords Chamber

Moved by

[Lord Eatwell]

107AA: Clause 57, page 141, line 8, at end insert—
“( ) The first case requires the Bank of England, FPC, FCA or PRA to provide the Treasury or the Secretary of State with an early warning of the possibility that a notification of a material risk to public funds may be given, and full information about the circumstance.”

[Lord Eatwell]

My Lords, this set of amendments is inspired by the words of the noble Lord, Lord Sassoon, in Committee. He said:

“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”.—[Official Report, 10/7/12; cols.1051-2.]

The noble Lord’s words are an important warning to us all, in considering this part of the Bill, on the relationship between the Treasury and the Bank of England at times of crisis. That relationship will depend not only on the personalities involved, but on the statutory responsibilities which the Bill places on those personalities. This group of amendments is intended, in some parts, to extend the statutory responsibilities of the Bank and the Treasury; but, most especially, to clarify those responsibilities, so that the failures which we saw under the previous arrangements, which were due to the principals in the tripartite structure not actually meeting for a decade, will not recur.

Amendment 107AA requires the Bank to give early warnings to the Treasury of a threat to public funds. At the moment, the Bill refers to the possibility of a threat to public funds, which must be immediately notified. However, I think that this notion of possibility is far too vague. Suppose that the Bank thinks there may be a catastrophic event, with a probability of 5%. Is that a possibility? But then, what if the probability is 1%—is that a possibility? What if the probability is only 0.5%—is that a possibility? In our view, a full, continuous exchange of information between the Bank and the Treasury, and the addition of a requirement of an early warning, does just what is needed. It ensures that the Bank is required to convey the information when it first has any indication of a threat—let alone any notion of possibility, whatever “possibility” might mean. If we incorporate the idea that the Bank must give early warning to the Treasury as soon as it knows what is going on, or has some inclination of a threat, without fussing about whether it is “possible” or not, then information will flow in an appropriate way.

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[Lord Newby]

My Lords, this group of amendments was debated at length in Committee. I am sure that, like the noble Lord, Lord Eatwell, many of us were indeed inspired by the way that my noble friend Lord Sassoon sought to reject them. Amendments 107AA and 107AB, and Amendments 107AD and 107AE, attempt to create an early warning system for public funds notifications. I understand that this reflects a concern on the Benches opposite that the drafting of the Bill—specifically, the legal effect of the term “material risk”—does not require the Bank to notify the Treasury in enough cases, even those in which there is a very low probability of public funds interventions being required.

After our debate in Committee, my noble friend Lord Sassoon asked Treasury officials and legal advisers to look again at the material risk wording to make absolutely clear that it delivers the low bar that we are looking for: a possibility test rather than a probability test. Our officials have concluded that the legal effect of the existing wording is indeed to require the Bank to notify the Treasury where there is a realistic possibility of circumstances arising in the future in which public funds could be put at risk. I do not think it would be appropriate to lower the bar even further from “material risk”. The result of doing so would be to require the Bank to notify relatively trivial and implausible risks, which could mean the Treasury receiving a large number of notifications of far-fetched risks that require no action or engagement from the Treasury whatever. I am satisfied that the material risk terminology will give us the right result.

Let me reassure the House that I agree entirely that the Treasury must be informed well in advance of a risk to public funds crystallising in order fully to consider and evaluate different options for managing or mitigating the risk and, ultimately, with a view to avoiding entirely any recourse to public funds. As my noble friend Lord Sassoon said in Committee, no one would be keener than us to have an early notification mechanism in place if we believed it necessary to achieve this aim. However, I am confident that the existing trigger in Clause 57 already sets the very low bar that we need.

The other aspect of these amendments is to extend the duty to notify to the PRA, FCA and FPC. I feel strongly that diluting accountability in this way would be a mistake. As we saw with the failed tripartite system, the clear disadvantage of spreading responsibility across several different organisations is that each can blame the others when things go wrong and risks can fall between the gaps. I believe that the system set out in the Bill, which makes the Bank the single point of responsibility for financial stability and crisis management, is the correct approach to eliminate confusion and overlap and ensure that the Treasury is always informed of risks to public funds.

In a similar vein, Amendments 107AC and 107AF seek to add references to risks to the objectives of the PRA and FCA into the notification duty. I can reassure the noble Lord that any risks that arise in the spheres of responsibility of the PRA and FCA that could potentially pose a threat to public funds must be notified to the Treasury by the Bank in the normal way. As was made clear in Committee, the duty to notify the Treasury of risks to public funds will require the Bank and its senior management to identify and evaluate risks emanating from all parts of the financial sector, working closely with the PRA and the FCA. The Bill itself places duties on the PRA and the FCA to co-ordinate with the Bank in this work. New Section 3P(1)(b) of FiSMA, as inserted by Clause 6 of the Bill, requires the regulators to take steps to co-operate with the Bank in connection with its duty to notify the Treasury of risks to public funds. We believe that that is an adequate provision.

Amendment 107AG would add “comprehensive” to the requirement that the crisis management MoU make provision regarding the obtaining and sharing of information. I do not quite see what “comprehensive” would add. Surely the most sensible approach here is for the Treasury and the Bank to agree between themselves what information the Treasury would find useful, including the format of the information and its frequency. That is exactly the approach taken in the MoU. Paragraph 18 makes it clear that the Treasury and the Bank will determine between themselves a suitable frequency for updates on each different risk, reflecting the severity and immediacy of the risk to public funds. Paragraph 21 states:

“The Bank will provide the Treasury with information needed on the options for managing the situation, including on options commissioned by the Treasury”.

I therefore do not think that Amendment 107AG is necessary.

Amendment 107AH attempts to turn the MoU into a piece of secondary legislation, subject to parliamentary approval via the affirmative process. I agree with the noble Lord that the MoU is a very important document, which sets out how the Bank and Treasury will interact in a crisis, to a level of detail and in a style that simply would not be possible in legislation, either primary or secondary. Having looked again at the MoU, I continue to believe that its content and style make it unsuitable for inclusion in secondary legislation. I would be loath to lose the level of nuance and detail that is currently included in the draft MoU but which is not legislative in nature. It would also make the MoU less flexible and make it more difficult for the Bank and Treasury to adapt or change the MoU to reflect changing circumstances. On the basis of these explanations, I hope that the noble Lord will feel able to withdraw his amendment.

[Lord Eatwell]

Will the Minister explain why he always qualified the notion of “threat” as a threat to public funds and failed to accept the argument of serious threats to the financial system that do not necessarily pose a direct threat to public funds?

[Lord Newby]

The reference in the Bill to public funds goes to the heart of the Treasury’s responsibility vis-à-vis the regulators in managing the financial services sector, and we have been very clear that we want to do that. On the more general issues that the Bank may want to raise with the Treasury, which go beyond a risk to public funds, the Bank and the Treasury are in regular contact via non-statutory routes, as it were, which give ample opportunity for the two to discuss at great length and with great frequency any emerging issues that they feel the other should be aware of.

[Lord Eatwell]

My Lords, we have seen a display of remarkable complacency from the Minister, even in his final remark suggesting that the Bank and the Treasury can informally arrange regular contact. I remind him that the head of the FSA and the head of the Bank did not meet for a decade within the tripartite structure. Now we are going to have a structure of not just three regulators but five or six regulators and he is not even willing to contemplate ensuring a statutory requirement for them to provide a suitable exchange of information.

I am sure that the noble Lord’s officials assured him that the term “material risk” was satisfactory. It would not be surprising as they drafted the legislation. It would be nice to hear that some independent opinion had been taken. He said that our amendments would lead to the Bank notifying “trivial and implausible risks”. Yes, trivial and implausible risks, such as credit default swaps, might fail to transfer risk. Those were trivial and implausible. There was the trivial and implausible risk that an economy of just 2% of the eurozone—the Greek economy—would lead to stagnation in the whole zone. There is another trivial and implausible risk.

The extreme complacency being displayed by the Government over these arrangements really beggars belief. With respect to the amendment which would insert the word “comprehensive” before “sharing of information”, “Oh, it’s unnecessary. We know that they will exchange all the necessary information”—just like they did not do in the past. Why can we not create a proper statutory requirement when there has clearly been such a deficiency in these procedures in the past? That, after all, is what this Bill should be for.

Having said that, and I hope having established some matters for discussion at Third Reading, I beg leave to withdraw the amendment.

Amendment 107AA withdrawn.

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Moved by

[Lord Eatwell]

107AG: Clause 64, page 145, line 3, after “and” insert “comprehensive”

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[Lord Eatwell]

My Lords, Amendment 107AG is very simple. It seeks to insert the word “comprehensive” before “sharing of information”. The very least we can do to ensure that there is proper exchange of information between the Bank and the Treasury, particularly given the comments by the Treasury official that such information exchange does not take place, is to take this amendment seriously. I should like to test the opinion of the House.