Financial Services (Banking Reform) Bill

Lord Lawson of Blaby Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Newby]

My Lords, as noble Lords have said, the governance of the Bank of England was debated at great length just a year ago during the passage of the Financial Services Act. As a result of those debates, the Government accepted that the additional responsibilities for financial stability transferred to the Bank would put strain on its governance structures, and as a result we provided for a powerful new oversight committee, which has been established as a sub-committee of the Bank’s court.

These changes were introduced as recently as April this year and should be allowed time to develop. Making further changes now would serve only to introduce uncertainty into the Bank’s governance at a time of significant change in its senior management. It would also prevent the new system having time to prove itself. Moreover, it is the Government’s view that the amendments would weaken rather than strengthen the Bank’s governance structures.

I shall deal with the amendments in turn. Amendment 83 proposes that the name of the governing body should change from the court to the board of directors. Our view is simple: changing the name of the court would make no difference to how it operates in practice. Indeed, in substance the court now operates along the same lines as a modern plc board. It has a clear division between the role of the chief executive and non-executive chair; it is made up of a majority of independent non-executive directors; and there are formal, transparent appointment procedures for executive and non-executive directors alike.

Amendment 84 proposes that the number of non-executive directors should be reduced from nine to four and would require the appointment of a non-executive chairman. The reduction in the number of non-executive directors would drastically alter the balance of membership of the Bank’s governing body, resulting in an equal number of executive and non-executive members. It is our view that this would significantly reduce the level of independent advice and challenge available to the governors and increase the risk of decision-making becoming dominated by a small group. The court already has a non-executive chair, so we believe this proposal is unnecessary.

Amendments 85 and 86 propose abolishing the new oversight committee and rolling its powers into the proposed new board of directors. This would be a backward step for the accountability of the Bank. The oversight committee, which is made up exclusively of non-executives, was established to provide stronger challenge to the Bank’s executive. It has a clear remit to monitor the Bank’s performance against its objectives and strategy, including the Bank’s monetary and financial policy objectives. In order to deliver these responsibilities, the committee has the power to appoint any person to review any matter. These powers cover not only the Bank’s operational performance but also its policy decisions. These responsibilities are very important to the accountability of the Bank, and the Government believe they must continue to be carried out by a non-executive body independent from the policy-making process. These amendments would transfer the powers of the oversight committee to a board of directors whose membership included the governor and three deputy governors of the Bank. It cannot be right for the governors to have a role in scrutinising the policy processes that they themselves are responsible for administering, especially when the processes in question are of such vital national importance.

These amendments also seek to introduce more specific legislation to govern how the performance of the Bank’s policy functions are monitored. This is unnecessary. The oversight committee already has wide-ranging powers to review the Bank’s performance in relation to any matter, including specific provision to review the procedures of the MPC and Financial Policy Committee. The Government also believe that it is unnecessary to introduce legislation covering requests for information. The current arrangements are effective, and historically the Bank has been very co-operative with both the Treasury and Parliament. Moreover, Parliament already has wide-ranging powers to hold public authorities to account, including the power to call any witnesses to appear in front of any of its committees, as the governors of the Bank of England know only too well.

Amendment 87 would require the Chancellor to appoint an additional external member to the FPC with experience of financial crises. The FPC’s objectives—

[Lord Lawson of Blaby (Con)]

It has not been moved yet.

[Lord Newby]

I believe it is in this group. I hope that noble Lords will not mind if I deal very briefly with it, and we will come back to it if that is the wish of the House. Amendment 87 would require the Chancellor to appoint an additional external member with experience of financial crises. The FPC’s objectives are to exercise its functions with a view to contributing to the achievement of the Bank of England’s financial stability objective and, subject to that, support the economic policy of Her Majesty’s Government, including their objectives for growth and employment. The Government agree with the commission on the importance of ensuring that the FPC has the necessary expertise and experience to understand and draw lessons from history. The current membership of the FPC equips it to do so. In the Government’s response to the PCBS we will take this into account, alongside other relevant factors, when making future appointments to the FPC. However, I do not think it is either necessary or desirable to include a provision of this nature in legislation. It risks constraining the Government’s flexibility, as the noble Baroness, Lady Noakes said, to appoint the best candidates by placing particular emphasis on only one of a number of criteria relevant to the appointment process.

I am also not persuaded that the balance of the FPC should be changed by the addition of a fifth external member. The current composition strikes the right balance between ensuring that there is sufficient input from the Bank, as executive, and internal Bank of England expertise, while supporting the role of the external non-executives in providing a challenge to members’ thinking. Furthermore, the oversight committee, a sub-committee of the Court of Directors consisting of the non-executive directors of the Bank, is able to undertake or commission reviews of the FPC’s performance, ensuring that it is held to account for its decisions. The oversight committee also monitors the processes of the FPC to ensure that all members have the required information and to tackle any emergence of groupthink. In view of these arguments, I hope the noble Lord will withdraw his amendment.

[Lord Lawson of Blaby]

My Lords, my noble friend the Minister has just pathetically addressed Amendment 87. None of his arguments stack up. We are saying here that it would be desirable—I cannot understand why the Government are opposing this—that there should be an additional external member who would have great knowledge and he might even be an academic, which would enormously please the noble Lord, Lord Eatwell. However, he need not be an academic; he could be someone who had a great knowledge of past financial and banking crises.

I think it was the philosopher Immanuel Kant who first observed that the only lesson of history is that no one ever learns the lessons of history. Financial crises are not unique; there have been a series of them over the years, both in this country and in the western world more generally. We commissioned a study of past financial crises. It was conducted by an excellent man, Mr John Sutherland of the Bank of England. It is remarkable how the same mistakes were made time and again. Everyone knows now about the crisis of 2008, but the time will come when that generation will have learnt the lessons of their own lifetime but not of the past, and it would be extremely useful to have someone on the Financial Policy Committee with such knowledge and expertise. It may not prevent a further substantial crisis but it will, at trivial cost, reduce the risk significantly. I cannot understand why the Government object to this.

My noble friend the Minister said that there should not be this guidance; that the Government should be able to appoint the best people. In other words, they should be able to appoint people who have no knowledge of past financial crises. Why do they want to do that? Why on earth is the reason they should want to do that when they have been given this opportunity to buttress all the other excellent measures in the Bill with someone on the FPC who has some knowledge and understanding of previous financial crises? Such knowledge is not widespread among the great majority of people. I have known this neck of the woods for a long time and there is very little knowledge of previous financial crises, yet there is a lot to be learned from them. It seems to me that the Government could easily accept having someone on the FPC who has this knowledge and I cannot understand why they do not do so.

[Lord McFall of Alcluith (Lab)]

My Lords, I support the noble Lord, Lord Lawson, on that point. The historical issue is extremely important. If all MPC members had a copy of Adam Smith’s The Wealth of Nations—Adam Smith was a professor of moral philosophy in Glasgow University 250 years ago—we would not be in this crisis. If we could give them something from the 20th century, it would be John Kenneth Galbraith’s treatise. As he said, all financial crises have leverage at their core. In many ways, as the City historian David Kynaston said, the banking community has to come into the rest of society; it has been an island apart from it.

I remember when I was chairman of the Treasury Select Committee and Sir Richard Lambert was appointed to the Monetary Policy Committee. All flutters were let loose because he was not an economist and therefore could not know about or have an intelligent opinion on the MPC. He proved that he was efficient and in fact the banking community is now calling on him to chair a committee so that it can re-engage with the rest of society.

I remember when Professor Danny Blanchflower was appointed to the Monetary Policy Committee. He was resident professor of economics at Dartmouth College but those with the closed-shop mentality did not want such an individual because he was in America. However, we were in the jet age and he came across every couple of months for the MPC. He gave us an insight into the US labour market and US housing.

My plea to the Minister is to get rid of the mentality that it is only economists and those who are in the system who understand it. This crisis has had a hugely detrimental effect on society. If the economists again do not engage with society, then that is where problems will arise.

Professor Larry Summers, who was a contender for the Treasury Secretary’s job and is the Charles W Eliot Professor at Harvard, said:

“The financial crisis has made me rethink everything about economics”.

That is what he has done. The link between economics and society is so important. Let us get rid of the elitism; let us get rid of the closed shop; let us let in people with experience who understand society and can impart to people who have the great gift of economics the knowledge that they are part of society and that the consequences to society will be dire if they do not have a wide perspective on the implications of their actions.

--- Later in debate ---

[Lord Turnbull]

I listened to the responses to my intervention and divide them into two categories. One is points made by the noble Lord, Lord Eatwell, the Minister and the noble Baroness, Lady Noakes, on specifying expertise and skill. I can see some force in those points. If we are going to have the opportunity, I will try to improve on it. My main area of disagreement is that I just do not agree with the idea that the oversight committee—the repository of who is responsible for reviewing what the Bank has done—should be hived off to a committee of non-executive directors. It should be built into the DNA of the whole organisation. However, I can see I am not going to be able to persuade noble Lords of that, so—

[Lord Lawson of Blaby]

Before the noble Lord withdraws the amendment, I would like to correct the Minister on what he said before about the noble Lord, Lord King—the former Sir Mervyn King. He is a very old friend of mine, and I can assure the House that in advance of this crisis, he had no knowledge whatever: it was not his interest. He was interested in two things: monetary policy and microeconomics. He was very good at microeconomics, but he had no knowledge or interest in past financial crises at all. He mugged it up later, of course, after the crisis broke. Of course he mugged it up: he is a clever man and able to do so, but I am afraid that the Minister was briefed by his officials to say something totally false and misleading.

[Lord McFall of Alcluith]

The noble Lord, Lord King, whom I know as well and for whom I have tremendous respect, told me on many occasions that he attended MIT for his PhD. He shared an office with Ben Bernanke, who was an historian of financial crises in the 1930s. He assured me that he learned quite a lot in those three years.

--- Later in debate ---

Moved by

[Lord Lawson of Blaby]

91A: After Clause 15, insert the following new Clause—
“Excessive lobbying by banks
(1) If the Governor thinks that the way in which banks are lobbying about regulation or policy is creating a risk to the stability or effective regulation of the banking sector, the Governor must lay a report before Parliament.
(2) In subsection (1) “lobbying” means activities designed to influence Her Majesty’s Government, the FCA or the Bank of England.
(3) In this section “bank” has the meaning given by section 2 of the Banking Act 2009.”

[Lord Lawson of Blaby]

My Lords, I shall be brief; the hour is getting late. Like the amendment that I spoke to earlier about the desirability of having somebody on the Financial Policy Committee who had some knowledge of past financial crises, which I regret that the Government have not accepted, this amendment is also a proposal of the Parliamentary Commission on Banking Standards. It is about lobbying. The context of this applies to all bank lobbying, but it is particularly important in the context of what we were discussing last week in Committee, namely the ring-fence. We were very concerned, as my noble friend the Minister will recall, that this should be strengthened and kept under review. We had various proposals to that end.

In the United States, the parallel was the separation through the Glass-Steagall Act of 1933. That, as my noble friend the Minister will be aware, was gradually eroded over time. It was eroded in two ways. First, the banks found ways round it to some extent. More importantly, by extensive lobbying, the banks were able to get the Government of the day to do a little amendment here and a little amendment there, which created loopholes which did not previously exist. We know that, following the recommendation for the ring-fence in the Vickers commission and report, the banks only accepted it with gritted teeth. They were not happy; they accepted it very reluctantly. They will clearly be seeking any way they can, including through lobbying, to get a change here and a change there over time which will enable them to undermine the ring-fence. That is natural; they feel it to be in their interest.

Times have changed. When I became Chancellor 30 years ago, the Bank of England had no responsibility for monetary policy, which was my responsibility. It did however have the dual responsibility of the regulation and supervision of the banking sector, and being the sponsoring department for banks, representing the interests of the banks to the Chancellor of the day. If the banks had points to make in those days, they would go first and only to the Governor of the Bank of England. The governor would assess whether he felt there was merit in what they were saying, and if there was he would go and see the Chancellor and put the banks’ points to him. That has all changed. Now, the banks go directly to the Government of the day. Indeed it is no secret that the carpets in Number 10 and Number 11 Downing Street have been worn almost threadbare by the lobbying of the banks. That caused great concern to the previous Governor of the Bank of England, and we had some concern about it in the commission. We felt that the best remedy was encapsulated in this amendment: that if the Governor of the Bank of England of the day feels concerned, he should be able to flag it up in a public way. The hope is that that deterrent will keep the amount of lobbying within reasonable bounds. There is the opportunity to do that, and indeed there is a requirement to do that.

That is what we are suggesting in this amendment. Even though the hour is late, I hope that my noble friend will reflect seriously on this proposal and the merit of accepting it.

[Lord Newby]

My Lords, I agree with my noble friend that the Governor of the Bank of England should never hesitate to speak out should he have concerns about the influence of lobbying by the financial services industry. However, we do not believe that there is a problem. Indeed, I fully expect that the governor would raise the alarm to both the Government and Parliament if he believed that any particular factor or circumstances, including lobbying by a bank, seriously put at risk the Bank’s ability to meet its objectives.

However, the Government do not believe that it is either necessary or desirable for this specific requirement to be placed on the statute book. The Financial Services Act 2012 brought together responsibility for all aspects of financial stability within the Bank of England group. As a result, the Bank has a statutory objective to protect and enhance the stability of the financial system. The Government are confident that the governor will act appropriately if he believes that excessive lobbing is impeding the Bank’s ability to meet that objective, which would obviously be the case if there was lobbying with the intention of undermining the ring-fence. Indeed, the Bank has already committed to raising the alarm in such circumstances in its response to the Commission on Banking Standards.

Therefore, while we fully accept that one of the roles of the governor is to raise the alarm if he believes that bank lobbying or indeed anything else creates a risk of undermining the stability or regulation of the banking sector, it is simply not necessary to have such a requirement in the Bill.

[Lord Lawson of Blaby]

I have heard what my noble friend has said and I am slightly reassured. I hope that the present Governor of the Bank of England will read those words and will realise that, without it being on the statute book, he has been charged by the Government with a duty to raise the alarm if there is any case of excessive lobbying. I am very glad to have that on the record, and I beg leave to withdraw the amendment.

Amendment 91A withdrawn.