Bank of England and Financial Services Bill [HL]

Lord Flight Excerpts

Monday 9th November 2015 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank my noble friend Lord Eatwell for this amendment, which takes us to the central problem with the Bill. His words are powerful: he calls the Bill opaque and obscure, and he says that it leaves unclear who makes policy. I thank him for his review of the previous legislation and his assurance that, broadly speaking, it works. I thank him for the concept of an “active entity”, which I shall adopt. However, he comes back to the point: who is doing what?

Perhaps before I go on, I should explain where the Opposition stand on the Bill. We feel that the role of the Bank of England is quite central to the economy and that it needs to be reviewed and probably reformed. We believe that, to do that, we have to have a period of reflection and study. My noble friend the Shadow Chancellor in another place has announced those reviews. Nevertheless, in respect of this Bill, we have a role to review the Bill, ensure that it makes sense and do all that we can to help the Government bring it back to a more sensible position.

Like my noble friend, having read the Bill, I ended up feeling that I understood less about how the Bank works than I did when we were in the very painful position in 2012—I say painful because it took so long to get there—when we created the legislation that created the present situation. Largely speaking, there is a question around why we are changing it from something that is clear to something that is significantly less clear. I thank the Minister for all his help in trying to help me understand the Bill—I wish that he had had more success. I am very grateful for the consolidated document that his staff have produced, and that has made studying the Bill and the Acts that it affects so much more straightforward. I also thank the Minister for the meetings he arranged, with himself and with the chairman of the court.

Those two meetings had an interesting effect: they produced two letters. One was dated 4 November and the other was dated November; noble Lords will have to take my word for it that it came after 4 November. I will quote selectively from the letters and am very happy to circulate them to anybody who is interested. Under a large paragraph labelled “Court of Directors and Financial Stability Strategy”, the Minister says:

“The Court, as the governing body of the Bank, is responsible for managing the Bank’s affairs except for the formulation of monetary policy. The Court is also responsible for determining the Bank’s objectives and strategy, and, in line with the Court’s role overseeing the Bank, the Bill makes the Court responsible for the oversight functions. The Court is therefore ultimately responsible for deciding how power given to ‘the Bank’ should be exercised, and how duties given to ‘the Bank’ should be fulfilled. This includes the Bank’s recovery and resolution powers”.

When I read that, I thought that it was pretty straightforward and sounded like any other company: power rests with the board—we happen to call it “the court”—except for where it is either taken out by statute, which it clearly is in the formation of monetary policy, or where the court has decided to delegate that power.

Unfortunately, after I met the chairman of the court, I got another, shorter letter. Under a paragraph labelled “Powers and duties conferred on the Bank”, it said:

“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”.

That sounds okay. It then goes on to say that:

“These include powers and duties in relation to note issuance, resolution, and supervision of financial market infrastructures”.

It does not quite say that it shall have no other duties, but I put it to noble Lords that they are a pretty thin number of duties, given the tremendous responsibility that the Bank has in our monetary affairs. In the next paragraph, under the heading, “Powers and duties conferred on statutory committees”, the letter states:

“Powers and duties conferred on a statutory committee are for that committee to exercise, according to the terms of their legislation. The Court cannot exercise the powers conferred on a statutory committee”.

Because there was no legislation passed between 4 November and the something of November, I assume that the two letters say the same thing; I just have a lot of trouble seeing how. If the first letter is right, as I read it, then I am relatively comfortable. Unlike the Bill—and we can clear that up with some amendments—it restates my understanding that the court is in charge, except where responsibility is taken out by legislation. The second letter rather implies that there are four entities in the Bank: the Financial Policy Committee, the Monetary Policy Committee and the Prudential Regulation Committee—I think I have got them roughly right—which have clear powers and lots of authority and are all, incidentally, chaired by the governor; and then there is something called “the Bank”, which is left with note issuance, resolution and supervising infrastructure. We all know that no committee is going to have much to do in a resolution situation, since it will happen over a weekend in 48 hours We have moved from a position where the court is central to the Bank to one where it seems almost irrelevant.

There are two points here. First, is that move the Government’s intention and, secondly, is it clear? We are going to worry elsewhere about the standards for senior management in banks. If a bank came along with its roles and responsibilities as obscurely set out as we now have in the proposed legislation, it would be denied a licence to operate. What are we asking from these organisations? It is absolute clarity of who does what, with what authority. This does not meet those standards and it would not get a licence. I hope the Minister will ponder on what my noble friend, Lord Eatwell, and I have said. If he agrees that the Bill produces more obscurity than light, I hope he will pause and bring forward some amendments on Report, first to make absolutely clear what the Bill does.

[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.

--- Later in debate ---

[Lord Flight]

My Lords, I support the points made by the noble Lord, Lord Sharkey. If the number of independent directors on the court is reduced to seven, and is not far off being equal to the number of resident directors, I am not sure what role the court has. I also raise the point as to what should independent directors of the court be. What sort of people should be there and how should they be appointed? I was surprised when exploring this to be told that there was now a ruling that a member of the court must not be any NED of any form of bank. It seems that, by and large, NEDs on the boards of banks are, in today’s world, almost an extension of regulators. One of their prime governance tasks is to make sure that the banks are run properly, in accordance with regulatory requirements. I would have thought that the independent members of the court ought to be a cross-section of NEDs from banks and other financial institutions, and that to say, “Oh no, you mustn’t have anybody who is an NED of a bank because there is a conflict of interest”, is a complete misunderstanding of the role of the court.

Obviously, if the bank of the individual NED were being discussed, they could leave the room and behave as in the normal arrangements when any conflict of interest arises. However, I repeat: if the court is to do a useful job, it should have on it independent representatives who have first-hand experience of the banking system in this country.

[Lord Davies of Oldham (Lab)]

My Lords, I am grateful to the noble Lord, Lord Sharkey, not just for his amendment but for the arguments that he put forward, with which we have a great deal of sympathy. I still find it difficult to understand the Government’s case for reducing the number of the non-executive directors in the Bill from nine to seven. I am sure that this issue will run like a—I almost said a golden thread, but certainly a constant thread throughout our discussions because we are concerned about the issues of accountability and openness, as well as the effectiveness of the Bank. I know that the Government want to achieve all those objectives. At the moment, I am afraid we have not, despite the assiduous work of the Minister. I pay due regard to that and to the meetings we have had identifying aspects of the Government’s case. However, we are still not persuaded of the merits of this argument, although the Minister obviously thought that we would be, and we probably anticipated that we would be.

I am unclear as to why the Government want to reduce the number to seven; they must recognise that that will change the balance of the court. What is the argument for reducing this crucial number of non-executive directors? I hear what the noble Lord, Lord Flight, said about a certain qualification for non-executive directors, but he would be the first to recognise that we need on this body people with a breadth of experience and understanding, not just of banking issues but of the most fundamental aspects of the operation of the economy.

What seems to underpin the Government’s position is the view that plenty of academic evidence exists which indicates that smaller boards are preferable to the more extensive boards that obtained in a great deal of City institutions in the past. I am not against that consideration as I hold academics in some regard. I probably ought to, given the well-informed contribution of the noble Lord, Lord Eatwell, who discussed the preceding Bill to which this one obviously relates, so of course I respect academic opinion on size. However, unless the Government make their case with greater clarity than they have done so far, I am not prepared to accept that the Bank of England is exactly like any other City institution. It is not. It has responsibilities and duties that go beyond those of any other institution and because of that we have to look carefully at the balance of forces on the Bank’s board. I almost use the word “cavalier” with regard to what the Government are doing, although I am not sure that they are being cavalier. However, they are seeking to reduce the size of the court and are claiming that this is good practice on the basis of some fairly thin arguments. We want to see good practice on the part of the Bank. We are well aware that the present position is the product of the legislation that was taken through after the crisis. We are all well aware of the criticisms and failures that occurred during the 2007-08 financial and economic crisis. However, we do not believe that the Government’s proposition for the Bank is based on secure arguments or that it will result in improvements.

We would like to know how the Government reached their decision to reduce the number of executives while increasing the official side of the Bank. We are not sure what consultation was undertaken on these matters, what advice was taken or who the prime mover behind such a striking and significant change was. The Minister is working hard on the Bill. We value that and the expertise he brings to it. This is only a limited aspect of the whole issue of the accountability and effectiveness of the Bank. However, on this point, the Government have thus far not established their case. Therefore, Her Majesty’s Opposition broadly support the amendment in the name of the noble Lord, Lord Sharkey.