Financial Services Bill

Lord Hodgson of Astley Abbotts Excerpts

Tuesday 26th June 2012 Lords Chamber

[Lord Hodgson of Astley Abbotts]

My Lords, I found this amendment attractive because it seemed to be very direct and to provide a very important check. Having served on the boards of companies, it is extraordinary how often you find in the post-investment assessment report, which is what we are talking about here, that you have not quite landed up where you thought you were going when you set the policy and made the decision in the first place. That is a very important issue. As my noble friend Lord Flight has just said, the court is the body responsible, and it is perfectly possible when dealing with a matter that may be sensitive, such as individual directors’ conduct, for appropriate arrangements to be made to avoid that. I am not entirely convinced of the need for an oversight committee, and I am not sure that it cannot be carried out within the arrangements of the court as it stands.

I am very grateful to my noble friend for the extensive answer that he gave. Perhaps I might raise one point about proposed new Section 3D, on publication. Subsection (1) of the proposed new section says:

“The Bank must give the Treasury a copy”.

I do not want to sound cynical, but one wants to be able to ensure that this can come out unimpeded. One does not want to find that the hidden hand will be able to say, “Actually, it’s most inconvenient if you say this. We’d like this to be doctored, monitored, removed or dealt with in one way or the other”. The “public interest” referred to in proposed new Section 3D(3) is always a useful cosh to avoid things that are not necessarily against the public interest but may be simply embarrassing at the time. When he comes to speak further, can my noble friend give an assurance that my cynicism is unfounded and can he address the point made by my noble friend Lord Flight about the proliferation of committees?

[Baroness Kramer]

My Lords, I join with the comments made by the noble Lord, Lord McFall, and I have a couple of quick comments to make on this very substantial proposed new section. I have two queries on it, which I wonder whether the Minister can clarify. The oversight committee, as he conceives it, is to be chaired by the chair of the court. Am I correct in understanding that he expects this to be a non-executive chair? Although there is currently a non-executive chair of the court, the Minister will know that I have concerns about the Banking Act 2009. In Part 7 of that Act, Section 241 seems to be quite ambiguous about whether that is a requirement or merely in the gift of the Chancellor. If I am right, I hope that that can be corrected at some later stage of the Committee.

My second set of comments concern proposed new Section 3C(5), on performance reviews. When the cynics among us—I am afraid that I confess to being one—read a phrase that says:

“In the case of a performance review, the Committee must have regard to the desirability of ensuring that sufficient time has elapsed … for the review to be effective”,

the Minister will understand that there is an element of thought that that could mean the long grass, if we are not careful. Paragraph (b) of that proposed new subsection,

“to avoid the review having a material adverse effect on the exercise by the Bank of its functions”,

could be read as “no serious criticism required”. I would like some assurances from the Minister that that is not a possible reading.

The Minister will understand that some of those concerns are reinforced by widespread criticism of the delay, under the current banking structure, of the three reviews that were started in May this year. Seeing those reviews now in place, it seems an awfully long time since the financial crisis. There are also real questions about the scope of the reviews, particularly the review looking at the provision of emergency liquidity assistance in 2008-09. Many of us would have asked, “Why did this not start in 2007?”. Notwithstanding the fact that the Treasury Select Committee has looked at that, it is surely not a substitute for the Bank of England or the court doing the work itself. There are concerns in that area, and I look for reassurances from the Minister.

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[Lord Flight]

My Lords, my two amendments follow those in the name of the noble Lord, Lord McFall, and are essentially probing. They up the stakes from having six members appointed by the Chancellor of the Exchequer to having eight and require that all members of the FPC are,

“sufficiently independent of the Bank of England”.

To me, the issue is this: the FPC will be crucial. Its job is to detect things going wrong in the financial system and to direct institutions to put things right if they are in trouble. My view is that if the FPC is just part of the Bank of England, it runs the risk of being overdominated by what I will call the Bank of England establishment. It is important that FPC members are independent and, if they can be persuaded, may be people with central bank experience from other economies, who are the sort of people who will be good at the job for which they are chosen.

That gives rise to another issue which I have only just appreciated. The wording is slightly ambiguous. The implication is that members of the FPC must be directors of the Bank of England, members of the court. That seems to be slightly questionable. I am not sure that all members of the Monetary Policy Committee are members of the court. The FPC is parallel to the MPC in its role, and it would not be satisfactory if the Court of the Bank of England got to such a size that it was unwieldy. I question, therefore, and think it might be worth considering, whether there should be the requirement that FPC members are directors of the Bank of England. That does not seem to add anything.

However, the main point is to achieve a body of people that delivers the job it is there to do. It is not directly relevant, but I am mindful that the one banking system that entirely escaped all the troubles of 2007-09 was that of the Lebanon. The governor of the Central Bank of Lebanon, who is a very wise old bird and has seen many things before, spotted the trouble coming in terms of mortgage instruments and kept the banks of the Lebanon out of it all in good time. We want an FPC that, whatever the next problem is that faces us, will be capable of steering in that sort of direction. The wider the experience it has, the better.

[Lord Hodgson of Astley Abbotts]

My Lords, I do not wish to upset the noble Lord, Lord McFall, or my noble friend Lord Flight, but I urge my noble friend to resist these amendments. If we look at the objectives of the Financial Policy Committee, it needs to be a pretty focused, pretty small body. Having 14 people, or 12 people, depending on which of those amendments one is addressing, seems not to lead to the operational focus and directness that this particular policy committee will need. Having four external members will give a perfectly adequate external perspective; more would be more likely to confuse than to illuminate.

[Lord Burns]

I argued at Second Reading that it would be very useful if we were able to get some balance between the way the MPC is formed and behaves and the way that this new FPC works. The MPC has existed on the basis of four internal members, four external members and the governor, which is a total of nine. The other important principle that has always been emphasised is that each member of the committee had to act as an individual. They were not there to behave as a collective body; indeed, we have often seen, in the case of the internal members of the Bank of England, that they have voted in different ways. I would see great merit in carrying over the principles of the MPC into the FPC, which is that there should be a governor plus equal members, excluding the governor, from inside the Bank and outside the Bank.

I have two questions to add. The first is, does the Minister understand that the arrangement will be the same as for the MPC, which is that the members of this committee are being asked to behave as individuals, and to have individual, rather than collective, responsibility? That is important. The second question is that, as I read this, there is scope for all three deputy governors to be on this committee. Will all three deputy governors be on the MPC? I cannot remember what happens. If that were the case, it would change the balance of the Monetary Policy Committee. The membership includes the chief executive of the FCA. I can quite see that he would wish to be present at the meeting, but it does not seem to me that he needs to be a voting member of the FPC, given that his responsibilities are somewhat distant from the FPC’s main tasks.

My main point is about individual accountability as far as the people are concerned, not an expectation that the internal members would be acting as a group. As far as possible, we should hold some kind of symmetry between how the MPC and the FPC are set up, otherwise I can see that, over time, there would be constant pressure, with one saying, “Well, the other one is set up in a different way—shouldn’t we move to that?”.

--- Later in debate ---

[Lord Sassoon]

My Lords—

[Lord Hodgson of Astley Abbotts]

Hear, hear!

[Lord Sassoon]

I need every cheer I can get at this hour of the evening—I am very grateful to my noble friend. Let me press on. This group deals with various aspects of FPC membership, and I will address in turn each of the amendments that have been moved.

Amendments 21 and 21A would fundamentally alter the balance of membership of the FPC by adding either two or four additional external members. Following the advice of my noble friend Lord Hodgson, I disagree with these amendments for three reasons. First, the ratio of the FPC between Bank executives and non-Bank members is six to five, which closely mirrors the MPC, where the ratio is five to four. In answer to the noble Lord, Lord Burns, I can confirm that as with the MPC, the FPC members will act as individuals, and that no change to the membership of the MPC is proposed in this. The MPC model has worked well, and is much admired around the world, and we should not fix something that is not broken.