Bank of England and Financial Services Bill [HL]

Lord Eatwell Excerpts

Monday 26th October 2015 Lords Chamber

[Lord Eatwell (Non-Afl)]

My Lords, I thank the noble Lord, Lord Bridges of Headley, for introducing the Bill, and welcome him to our debates on financial regulation.

For those of us who spent many hours in your Lordships’ House examining, clause by clause, what were to become the Financial Services Act 2012 and the Financial Services (Banking Reform) Act 2013, achieving creative compromises with the then Minister, the noble Lord, Lord Deighton, and generally advancing the cause of effective regulation, this Bill makes depressing reading. That is not because of the proposals concerning the status of the PRA and consequential amendments, which are entirely sensible; nor because of the extension of the authorised persons regime to all authorised persons—in a seamless financial services industry that is obviously a sensible development. What is depressing is the Government’s back-pedalling on the governance of the Bank of England, and their spineless surrender to industry lobbying on the issue of the burden of proof in the senior persons regime.

First, on governance of the Bank of England, noble Lords will recall that the Treasury Select Committee of another place recommended in its report on the accountability of the Bank of England, published in November 2011, that there be established a supervisory board, replacing the Court of the Bank. The supervisory board would have a wide-ranging oversight role, including ex-post reviews of the Bank’s performance in prudential and monetary policy, and it should be provided with proper staff to perform that review function.

I remind the House why this proposal was made. First, it was argued that there was clear evidence of groupthink in the Bank during the financial crisis, and that it was important that there be appropriate challenge within Bank policy-making. Secondly, it was clear at the time that some of the groupthink emanated from an intellectually powerful and dominant Governor. While there is in this House the greatest respect for the noble Lord, Lord King, and, indeed, for Mr. Carney, we should all remember the maxim of Lord Keynes:

“It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics”.

For both these reasons, the Treasury Select Committee and, I recall, almost all who spoke on the matter in this House, agreed that an independent review body of considerable weight and influence should be established. After all, as the Treasury Select Committee put it:

“The Bank is a democratically accountable institution and it is inevitable that Parliament will wish to express views and, on occasion, concerns about its decisions. Our recommendation that the new Supervisory Board have the authority to conduct retrospective reviews of the macro-prudential performance of the Bank should, if operating successfully, provide the tools for proper scrutiny”.

So there is the third reason for the establishment of a supervisory board—that its reports will enable Parliament to do its job properly.

Noble Lords will recall that the Court of the Bank was hostile to the creation of a supervisory board, but instead proposed the establishment of the oversight committee, consisting entirely of non-executives who would perform the retrospective evaluations that the Treasury Select Committee felt were so necessary. Your Lordships’ House accepted the proposal as a reasonable compromise. Now, without ever having had the chance to prove itself, the oversight committee is to be abolished, and its functions handed back to the Court of Directors, the very body the activities of which it was supposed to oversee. Of course, there is reference in Clause 4 to an oversight function being delegated to a small sub-committee of the court. However, as noble Lords will be aware, a sub-committee, however talented, is not the same as a full non-executive director committee.

The impact assessment performed by the Treasury argues—and the noble Lord echoed this argument—that abolishing the oversight committee will,

“bring the Bank’s governance arrangements in line with normal best practice of a unitary board”.

All I can say is that whoever wrote that has not had much experience of unitary boards of major companies. The oversight committee was never intended to replace the court, as the impact assessment also erroneously suggests; it was intended to be a powerful instrument of non-executive director review—an instrument that the financial crisis revealed to be desperately needed.

In Clause 5, we find that the Court of Directors is taken out of its policy-making role and replaced by an amorphous entity called “the Bank”. The result is that Clause 9A of the Bank of England Act now reads: “The Bank must carry out and complete a review of the Bank’s financial stability strategy before the end of each relevant period”. That is typically called marking your own homework. The impact assessment says:

“Making the Bank responsible for setting the strategy … within the Bank … will ensure that Court is responsible for the running of the Bank and that the Bank’s policy committees are responsible for making policy”.

How do we know? We do not know. This Bill renders the governance structure of the Bank of England opaque and not fit for purpose. We do not know what “the Bank” is. Is it the court? If so, why the amendments? Is it the executive? Is it the governor? Where does authority really lie? We do not know.

Nor can any comfort be drawn from the section of the Bill on audit referred to by the noble Lord. Consider Clause 11. There we are told that:

“The Comptroller and Auditor General … may carry out examinations into the economy, efficiency and effectiveness with which the Bank has used its resources in discharging its functions”.

However, it is also in Clause 11 that:

“An examination under this section is not to be concerned with the merits of the Bank’s general policy in pursuing the Bank’s objectives”.

Moreover, Section 7E describes how the court may forbid the comptroller from proceeding with the examination if,

“the court of directors … is of the opinion that an examination under section 7D, or any part of it, is concerned with the merits of the Bank’s general policy”.

No wonder that Sir Amyas Morse who heads the National Audit Office—he is the Comptroller and Auditor-General—told the Financial Times on 15 October:

“The legislation proposed by the government includes a statement about my role. … However in departing from the existing legislative parameters governing my role it imposes unacceptable restrictions that, if enacted, would create an impression of increased public accountability without the reality”.

An impression of increased public accountability without the reality—that is what we are being asked to endorse.

Now I turn to the other major retreat in this Bill—the reversal of the proposal from the Parliamentary Commission on Banking Standards that in the case of senior managers the burden of proof with respect to the performance of their roles should rest with the managers themselves. The noble Lord, Lord Newby, the then government Minister, put the case clearly—what a shame he is not here this evening to enlighten us further. He said:

“The Parliamentary Commission on Banking Standards concluded that the current system for approving those in senior positions in banks—the approved persons regime—had failed … The commission’s central recommendation in this area is for the creation of a senior persons regime applying to senior bankers. The regime for senior managers in banks will … reverse the burden of proof so that senior bankers will have to show that they did what was reasonable”.—[Official Report, 15/10/13; col. 386.]

The most powerful speech in favour of the Government’s proposal was made by the noble Lord, Lord Lawson, who made it clear that he had wearied of the excuses paraded by senior bankers before the commission, including, “It wasn’t me; it was a collective board decision, so no individual is responsible,” or “It wasn’t me: I had no idea what the traders in my bank were doing; it was all them,” or blaming the regulators or monetary policy or anyone but themselves. The noble Lord, Lord Lawson, concluded:

“The standards in the City of London should be the highest in the world. The whole thinking behind the commission on banking standards was that we wanted to clean up banking … Personal responsibility is not the whole of the solution, but personal responsibility of the senior management is a vital and necessary element”.—[Official Report, 15/10/13; col. 398.]

I agree with the noble Lord, Lord Lawson.

So how is the Minister to explain Clause 22, which reverses the reversal? Can he explain in detail exactly why what was at the very heart of government policy two years ago is now to be abandoned before it has even been tried? Will the Minister also spell out in detail the rationale for ignoring the carefully considered arguments of the parliamentary commission?

Turning again to the Treasury’s impact assessment, we read that the “duty of responsibility”, as contained in the new Bill,

“will maintain the same tough underlying obligation on the individual to ensure that they take reasonable steps to prevent regulatory breaches”.

These words were also echoed by the noble Lord in his introduction. If it is the same, why bother to amend it? Clause 22 is unnecessary; but if it is necessary then the “underlying obligation” cannot be the same. The Government cannot have it both ways. Which is it?

Fortunately, the impact assessment gives the game away. It tells us:

“One of the unintended consequences of the enforcing this obligation using a ‘reverse burden of proof’ has been that firms will have to incur greater costs than originally envisaged in preparing the documentation required by the regulators setting out the allocation of responsibilities in firms”.

So there we have it: the Bill will result in less comprehensive documentation and hence less awareness of responsibilities and less detailed examination of the relationship between responsibility and risk. That is what the Treasury’s own impact assessment says. Is that what we want? Less clear responsibility and less appreciation of risk? The requirement to fully document was not an unintended consequence. We knew that effective regulation of individual responsibility would cost more, and so it should when the failure to exercise individual responsibility imposes heavy costs on the community as a whole.

So for the—let us call us—regulatory old lags among us who worked late into the night to get regulation right, this is a seriously defective Bill. It must be amended.