Financial Services Bill

Lord Myners Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Myners]

My Lords, it is an honour to speak in this debate after the noble Lord, Lord Lawson of Blaby, and to express my appreciation for the intervention from the noble Lord, Lord Lucas, which was properly respectful of the rights and procedures of the House on Second Reading.

I speak with the experience of having been an independent member of the court from 2005 until 2008 and then a Treasury Minister dealing with the Bank of England, and I will focus primarily on the Bank. I agree that this is not a Bill where partisan issues will be found but one where the House should come together to find good solutions. I share the regret that I think lay behind the question of the noble Lord, Lord Forsyth of Drumlean, about why the Bill is being taken in Grand Committee rather than in the full House. This is a Bill that should be taken through the House rather than Grand Committee, but I understand that that decision has been taken through the usual channels.

Clearly, we must learn the lessons of the past. The tripartite arrangement did not work as well as had been expected in anticipating the crisis, although it is only fair to say that it worked very well during the crisis. In fact, it worked rather better during the crisis than some of the crisis management arrangements that we currently see within the European Union, where they continue to grapple with the problems of the European banks.

Of course, the tripartite arrangement was not the only regulatory architecture to fail to contain the risks to financial stability. Regulatory architectures failed in numerous forms and in various geographies as part of the global crisis. In my belief and experience, no one architecture is assuredly superior to all others. There can be no certainties brought by architecture alone. Failure of architecture tends to be due to a shortcoming of skills, behaviour or culture. That is where the tripartite arrangement fell short of expectation, rather than architecture. Architectural solutions, as proposed by the Bill, involve simply the movement of organisational boxes. The proposals in the Bill might well work, but whether they work or not will be less to do with the architecture of regulation and more to do with the culture and conduct of those who work within regulation. In practice, there is little that the Bill can do to prescribe or guarantee that the right culture and behaviours are promoted, but it is incumbent on us to make the best efforts to secure such outcomes, or be alert to any shortcomings that might exist in the constitutional architecture of the Bill.

That brings me to the issues relating to the powers and responsibilities of the office of governor and the role of the Bank of England’s court. I am sure that we will spend much time on them when the Bill goes into Grand Committee. Your Lordships’ House will need to ensure that adequate internal checks and balances exist on the powers of the Bank and on its officers. My experience of being a member of court from 2005 until 2008 raises considerable concerns about the proposed concentration of power envisaged under the Bill for the governor. There is a very real risk that we might constitutionally perpetuate the current situation in the Bank where there is room for only one point of view—and that has to be the governor’s view. Significant steps to reduce this risk would include: having the deputy governors chair the FPC, the MPC and the PRA rather than having those bodies chaired by the governor; requiring the FPC and the MPC to meet at least twice a year in joint session—a meeting in which the Bank’s internal appointments would be in a minority, and which should be appropriately minuted; and the giving of a power to the Treasury Committee of a statutory right of veto over the appointment and dismissal of the governor, the three deputy governors and the CEO of the PRA, as is already the case for the chair of the Office for Budget Responsibility.

A further area requiring close scrutiny will be the membership and role of the court of the Bank. My own experience of being a member of the court was unsatisfactory. Indeed, in 2007 and 2008 more than one member of the court sought private meetings with Treasury Ministers and the Permanent Secretary to express their anxieties about the Bank’s detachment from and disinterest in issues of financial stability. Much good work was being done in this area by Bank officials, including Sir Andrew Large, Sir John Gieve, Mr Paul Tucker, Mr Nigel Jenkinson and Mr Alastair Clark, but the governor made clear that the primary focus for the Bank was monetary policy. Financial stability was a tertiary issue, de-emphasised in resource allocation and generally given little focus at court. Indeed, at court we tended to spend more time hearing about the governor’s tennis matches with the heads of various other regulatory agencies than about issues of financial stability. In that connection, if my memory serves me right, we were told that one of the governor’s partners was the noble Lord, Lord O’Donnell, whose maiden speech we look forward to hearing later in the debate.

The need for the court to be seriously strengthened and better equipped to engage in constructive challenge of the executive leadership of the Bank must have been very apparent to anybody who read the transcript of the evidence given by the chairman of the court and a number of independent directors to the Treasury Committee last year, in which it was clear that members of the court had a very poor understanding of the resource allocation and budgeting of the bank—and, indeed, of the constitutional differences between the Monetary Policy Committee and the proposed Financial Policy Committee.

Your Lordships’ House will need to give very careful consideration to the membership, statutory powers and responsibilities of the court, to consider whether the Bill should require that the chairman of the court should have experience of financial and prudential issues in order to ensure that debate at court is informed, and to the court also being appropriately resourced. Court minutes should be published and the court should be clearly accountable to the Treasury and the Treasury Committee. The court should also conduct and publish ex-post reviews of the Bank’s performance in the prudential and monetary policy sectors and address these reports to both the Treasury and the Treasury Committee. Her Majesty’s Treasury should also commission and publish annual reviews of the effectiveness of the court.

The extent of the change required by the Bank to bring its performance up to the standard required by this Bill should not be underestimated. I have already spoken of the need to devolve more power from the office of the governor to the deputy governors and the need for a move to a more assertive and accountable court. The bank will also need to review its skills and culture. In respect of the latter, it needs to be more open and less elitist—open both internally, being respectful and welcoming to the views of others even when they differ from the prevailing consensus, and externally, being more willing to engage with those involved in business and public policy. In terms of skills in issues of financial stability, the extent of the challenge is clear if you look at the Bank’s Financial Stability Report published in April 2007. This was the last Financial Stability Report published before the collapse of Northern Rock. In that report, the Bank stated:

“The UK financial system remains highly resilient”.

It also stated:

“Conditions are likely to remain favourable”,

and,

“Financial innovation and the growing use of credit risk transfer markets have increased the risk-bearing capacity of the system”.

This was after the emergence of the sub-prime problems in the United States.

The governor’s Mansion House speech on 20 June 2007 focused on increasing the number of £5 notes in circulation and the need for the Bank to have greater control over the payments system. It said absolutely nothing of any significance about financial stability. This is the body to which we are proposing to give responsibility for financial stability oversight.

In Committee, we are going to have to look carefully at the skills, competencies and culture of the Bank and ask ourselves whether it really makes sense to give as much authority and responsibility to an institution that has exhibited its own shortcomings in the past, and in particular to put quite as much power into the hands of the governor as currently envisioned in the Bill.