Financial Services Bill

Lord Lamont of Lerwick Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Lamont of Lerwick]

My Lords, it is a great pleasure to follow my noble friend Lord Sharkey. He made extremely important points about the availability of finance to the economy, which is crucial. We look forward to seeing how he pursues the issue in Committee, as he said he will.

I speak on the Bill with some hesitation because I have not taken part in the extensive consultation process and nor was I a member of the Joint Committee. Many people who are present today have done sterling work in that respect. I welcome the Bill, which is necessary and sweeps away the discredited, fractured, tripartite system that failed its very first crisis. Instead, we are to have two new arms of the Bank, which will handle both macro and microprudential supervision, so that a single institution is in charge of keeping the system safe. At the same time, we will have a free-standing, independent consumer body, the Financial Conduct Authority.

My main point this afternoon relates to what several noble Lords have said and the relationship of the macroprudential side to the current regime of inflation targeting. As Chancellor of the Exchequer, I introduced the inflation objective for the Bank of England in 1992. That was broadly the same framework that was carried forward when the Bank became independent, although two changes were made at that time. Originally, the inflation target was defined in terms of the retail prices index. Thus, it gave greater weight to housing—rather an important difference. Secondly, the inflation target that I set up was accompanied by a requirement for the Bank to monitor different definitions of the growth in the money supply. This was later removed and the inflation target was much more narrowly defined to give less weight to housing and asset prices.

Inflation targeting received quite a good press in general, although I took trouble to say that I did not believe that it was the end of monetary history. Indeed, before 2008 I went out of my way to say in various speeches that we were not paying enough attention to asset prices and the growth of credit, and that the Bank was concentrating on too narrow a definition of inflation. Therefore, in light of that and what subsequently happened, it is right that the Bank should be given a specific and enhanced stability objective. Of course, writing it down is one thing. As the noble Lord, Lord Myners, reminded us, Gordon Brown, as Chancellor of the Exchequer, talked a lot about stability and each year we saw a huge, glossy tome called the Financial Stability Report. Having stability as an objective is one thing; making it happen is another.

I am not entirely convinced that the new, separate Financial Policy Committee is the best way to achieve financial stability. It might be better if macroprudential responsibility was handed to the existing MPC, which would then have a broader remit to stabilise the economy, not just consumer prices. After all, interest rates are an important tool for stabilising the economy. They are important for controlling leverage and the growth of credit. Other tools, such as how far the banks could use their buffers of capital and liquidity, could go to the MPC rather than the FPC. Other duties of the FPC, such as making the financial network safer, could be carried out by the Prudential Regulation Authority.

Views on stability will often have implications for interest rates. Having two committees whose views might go in completely divergent directions does not seem the most obvious way to achieve stability. The fact that the governor sits on both committees, as has been referred to by several noble Lords, underlines the point. Only one committee can ultimately take the interest rate decision and some body at some point—not just the governor but the MPC—has to measure the trade-off and balance stability and the inflation objective. My noble friend Lord Lawson said that perhaps the three committees should become two. I would say a similar thing, although I would choose a different two from the two that he chose.

I hope the fact that we are to have a separate Financial Policy Committee does not mean—this is one reason why I chose to go in the direction that I did—that we are going all the way back to the 1950s with more emphasis being laid on quantitative controls of credit. That would be a step backwards. Interest rates are the most flexible and the best way to control credit and leverage.

In some ways, the Bill recognises the problem by laying down some extremely detailed provisions about how one regulator must consult another. Acres and acres of the Bill are about the PRA consulting the FPC, the FPC liaising with the PRA and one giving orders to the other. One could be forgiven for forgetting that they are meant to be parts of the same organisation. These provisions remind one of Burke’s dictum that,

“laws reach but a very little way”.

As the noble Lord, Lord Eatwell, said, regulation is not just about structure; it is about culture and judgment.

Many noble Lords will remember that a previous deputy governor responsible for stability said in front of a Select Committee of the House of Commons that it was not his job to look at the accounts of financial institutions. I am not making a criticism of him. Of course, he was quite right. That was how the system was set up. But it shows how the macroprudential and the microprudential sides are intertwined.

As several noble Lords have said, the Bill has great implications for the Court of Directors of the Bank of England, which will have to change. At the moment, the Court of Directors is what Bagehot would have called the dignified rather than the efficient part of the constitution. The directors are to be more involved in the stability objective than they are in the current inflation objective. Perhaps I may remind the House that the Bank of England’s website currently says that the court’s,

“functions are to manage the Bank’s affairs other than the formulation of monetary policy, which is the responsibility of the Monetary Policy Committee”.

We will now have quite a different stability objective relationship for the court. Clause 3, which will insert new Clause 9A into the Bank of England Act, states:

“The court of directors must … determine the Bank’s strategy in relation to the Financial Stability Objective”.

As the noble Lord, Lord Turner, said, there is no symmetry between the relationship of the court to the inflation objective and the relationship of the court to the stability objective.

It must be remembered that the Financial Policy Committee is exactly what its name suggests. It is a policy committee and not a regulatory committee. That has implications for where it should be accountable and to whom it should be responsible. Undoubtedly, the Bill requires the direct involvement of the Court of Directors, which will be in a way that has not been the case in the past. That will require very different sorts of persons to be directors of the Bank. If the Bill comes out as presently structured, it will require real banking and financial experts.

The Joint Committee suggested that the court should be replaced with a supervisory board, which I am sure we will consider in Committee. The Bank needs to be accountable but it seems to me that it should be accountable in a different way for its regulatory activities. There must be an appeals procedure and it must be subject to regular scrutiny. Its policy work needs to be done by an independent bank, but to be accountable in a retrospective and periodic way to the House of Commons.

One important aspect of the Bank’s role will be representation in Europe, where the regulatory regime seems likely to alter very quickly. I assume that the PRA will represent the Bank at the European Union’s banking and insurance authorities. Perhaps the Minister will confirm that the FCA will deal with the European Securities and Markets Authority. It is vitally important at this of all times that the Bank has heavyweight representation in the European Union. Many people outside are calling for the PRA to set up practitioner panels in the same way as the FCA will be required to do. That is a sensible recommendation, which I am sure will be discussed further in Committee.

I support this Bill, subject to two qualifications. First, it must be emphasised that the Bill must have regard to international competitiveness. I know that the chief executive of the London Stock Exchange has suggested that that should be written into the Bill. Secondly, we must pay due and careful regard to the overall cost, because as well as the new twin peak system adding to costs, costs on financial institutions are already going up very quickly, not least due to contributing to the Financial Services Compensation Scheme. No one organisation has responsibility under the Bill for reviewing the cumulative impact of these costs.

Subject to those provisions, I support the Bill and hope that we will never again see the paralysis and confusion that did so much harm in 2008.