Financial Services Bill

Lord Hodgson of Astley Abbotts Excerpts

Tuesday 3rd July 2012 Lords Chamber

[Baroness Noakes]

My Lords, in moving Amendment 42A, I shall also speak to Amendment 62A in this group. These are probing amendments. Amendment 42A deletes line 38, on page 5. New Section 9F of the Bank of England Act 1998 sets up the functions of the FPC, and subsection (1)(c) creates the function of making recommendations. Amendment 42A deletes this function.

Amendment 62A deletes a lot of lines, but in practice deletes the whole of new Sections 9N to 9Q, inclusive, which detail the functions created by new Section 9F. The purpose of tabling these amendments is to probe why the FPC needs the power to make recommendations, and what the legal significance of this function is in practice.

When I first saw the Bill, I was mystified by the need to create a statutory power to make recommendations. I was not familiar with that being a requirement, so I did a little research. I seemed to find that this statutory power of recommendation-making is a relatively new phenomenon in legislation, with similar provisions in a handful of laws, all of which have been created since the Government came to power in 2010. I am beginning to think that this might be one of those constitutional innovations for which we have to thank our colleagues on the Liberal Democrat Benches, although I may be wrong on that.

The Minister wrote to noble Lords with an interest in this Bill yesterday, following the first Committee day, which I was unable to attend. In the letter he said that the Treasury has a common law power of recommendation, but that bodies created by statute need a specific power. I find that pretty odd, given that bodies created before 2010 managed perfectly well without a statutory power of making recommendations. Indeed, the Bank of England has managed perfectly well for over 300 years without any kind of power to make recommendations.

It may be just a matter of legislative fashion. One has to go with the times. The main purpose of my amendment is to probe what is meant in practice by the ability to make recommendations.

New Section 9N allows the FPC to make recommendations within the Bank. I found it difficult to get my head around making recommendations within the Bank. The FPC is a committee of the Bank’s court, and that is under Section 9B. Under new Section 9N, this committee can tell the corporate body in which it is housed what it thinks that body should do. What is the purpose of that? More to the point, what is the effect? The Bank, which acts through its court, fulfils its own function, and as far as I can see, those functions do not include paying any particular attention to what one of its committees says. I do not believe that the functions of the Bank or its court are changed by the Bill in this respect. If I am wrong on this, I know that the Minister will correct me. However, I am completely mystified about what making recommendations within the Bank means in practice. The Committee discussed the circularity of this in the context of the financial stability strategy under proposed new Section 9A, which covers the FPC making recommendations to the court. I must say that I was no wiser after reading both Hansard and the Minister’s letter on this point.

Proposed new Section 9O—9 Oscar—would allow the FPC to issue recommendations to the Treasury. However, while the FPC has to take notice of any recommendations made to it by the Treasury and has to respond to them—that is set out in proposed new Section 9D—there does not appear to be any reciprocal provision requiring the Treasury to respond to the FPC’s recommendations. If that is the case, why on earth do we have to provide in legislation for the FPC to make recommendations to the Treasury?

Proposed new Section 9P covers the FPC making recommendations to the FCA and the PRA—and does contain requirements for the FCA or the PRA to comply or explain their non-compliance. This seems to be the only part of the Bill dealing with the FPC’s recommendations that makes sense and has any real-world impact.

Will the Minister explain why, in drawing up the functions of the FCA and the PRA, no reference is made to their duties in respect of the FPC recommendations? If it is necessary as a matter of law to set up a power to make recommendations, why is there no requirement to set up a reciprocal duty or requirement of compliance with the recommendations?

Finally, proposed new Section 9Q allows the FPC to make recommendations to the whole world. The justification for this is that it may make recommendations to bodies such as the Financial Reporting Council. However, since the recipients of these recommendations can—as far as I am aware—do what they like with them, I fail to see the point of the provision.

I looked at the June 2012 FSR, which has been referred to already this evening. The executive summary makes either six or seven recommendations, depending on how one interprets “recommendation”. In six instances it states that the committee “recommends” that other people should do things, but in one instance it states that banks “should” continue to do something. I have no idea whether that constitutes a recommendation. In any event, most of the recommendations were addressed to the FSA—which will be the PRA and the FCA in due course—and two or three, depending on one’s interpretation, were addressed to banks. That is interesting because making recommendations to banks was not mentioned at all in the extraordinary recommendation-making powers, although clearly this will be an important part of their activity.

Perhaps I ought to be less worried about the scope of the recommendation-making power that is not bounded by space or time, because it appears to be of little substance. If my noble friend tells me that it does have real substance, we would look to constrain it in some way so that it did not include the ability to tell the whole world how to act.

In summary, this is a set of largely one-sided recommendation-making powers that might amount to something of importance—or alternatively, not much more than window dressing. We should be told. I beg to move.

[Lord Hodgson of Astley Abbotts]

My Lords, I have some sympathy with my noble friend’s amendment. When the Minister replies, perhaps he will focus some remarks on proposed new Section 9Q, which is the declaratory piece about the whole world. It seems that either the parliamentary draftsmen are saying, “Because you said certain people were included, you must include everybody else”, or it is otiose.

It would also be helpful to have some suggestions about the sort of events and recommendations that might fall under new Section 9Q, so that the Committee gets some understanding of the purpose behind this clause, if it is anything other than declaratory, to avoid, for parliamentary draftsmen’s reasons, the view that, because certain parties have been suggested, by definition they could make recommendations to nobody else.

--- Later in debate ---

The nature of the recommendations to the Treasury will be rather different, because they are going to be aimed at the Treasury’s use of its powers to make secondary legislation. The decision as to whether or not to use those powers of secondary legislation must be for the Treasury alone. Of course, any recommendation from the FPC will be taken into account but it is not appropriate to require the Treasury to respond formally in the way that the regulatory bodies would be required to.

[Lord Hodgson of Astley Abbotts]

Just to be clear, the FPC is going to make recommendations within the Bank, so that the governor of the Bank, wearing his hat as chairman of the FPC, writes to himself as governor—is that what will happen? Have I got this right? I presume that the two deputy governors will also join in and send it in one door and walk next door to receive it—is that right?

[Lord Sassoon]

My Lords, that is broadly right. [Laughter.] We should remember that the FPC will be made up of a different group of people, including independent members, who will be making recommendations. Taking the example I gave of the supervision of payment systems, the FPC, with its independent members and statutory responsibilities, could be making recommendations to the Bank regarding its supervision of payment systems. It would therefore be a mischaracterisation—it really does not matter who signs a letter to whom, it would be the FPC making a recommendation to the Bank. To reduce it to a suggestion that the governor will be writing to himself would be a mischaracterisation of an important power that should have a degree of formality around it, in the same way that the FPC will be required to exercise its powers of making recommendations for other regulatory bodies.