Financial Services Bill

Lord Newby Excerpts

Wednesday 17th October 2012 Lords Chamber

[Lord Newby]

My Lords, amendments to probe the role of the FPC in triggering a public funds notification under Clause 54 were also laid in Committee in the other place. They were inaccurate then and they remain inaccurate now, primarily because these amendments would have no legal effect. The FPC does not have any powers under Parts 1 to 3 of the Banking Act 2009. So in referring to the powers of the FPC under those provisions, the amendment refers to powers that simply do not exist.

The thrust of the noble Lord’s amendment is that the FPC should be able to give notification of risks to public funds separately from the Bank itself. As we have explained previously, the new system that the Government are putting in place is based on making the Bank a single point of accountability for financial stability. Consistent with this, we are making the Bank, and the Bank alone, responsible for notifying the Chancellor of risks to public funds. This is because, as we have seen so strikingly with the tripartite system, the risk of splitting responsibilities over various institutions is that each one thinks that one of the others is responsible, or blames another, when things go wrong, thereby allowing serious risks to fall through the gaps. This will require the Bank and its senior management team to identify and evaluate risks emanating from all parts of the financial sector, working closely with the PRA, the FCA and the FPC.

However, the statutory responsibility for formally notifying the Chancellor must be clear and unequivocal. It is not that the FPC is going to be separate somehow from the Bank and, given that the governor in his new enhanced role is going to chair the FPC, if the governor, representing the Bank, goes to speak to the Chancellor under the terms of Clause 54 he, of necessity, will also be representing the views of the FPC.

We therefore think that the amendment is unnecessary and inappropriate, and ask the noble Lord to withdraw it.

[Lord Tunnicliffe]

My Lords, the essence of this situation was caught in the last part of the noble Lord’s response. If the governor goes to see the Chancellor and, say, does not represent the FPC’s view, that would to some extent be unthinkable. However, our concern is if he does not go to see the Chancellor—that he listens to the debate at the FPC and may find himself in a minority, but still concludes that he has no responsibility to share FPC’s doubt with the Chancellor. We are not talking about competing roles where it is not clear who is responsible. We are not in any way challenging the split of responsibilities set out in the Bill. We accept that the Bank has the executive responsibility to take action in a crisis. We accept that there need to be rules about where the Chancellor comes in and has executive responsibility.

This is not about who is responsible, other than the points raised by the noble Baroness, Lady Noakes, earlier in the debate, where we may think the line has to be moved about a bit on direction. We are not, broadly speaking, challenging the thrust of the Bill and the division; we are challenging the idea that only the Governor of the Bank of England can advise the Chancellor that there is a gathering crisis that may involve the use of public funds. We believe that it is safer to have more bodies involved in that situation and we particularly believe the best qualified body in the land should have a duty to consider whether there is a crisis situation developing and should have a right, if it considers that to be true, to advise the Chancellor.

I can see that I am not persuading the noble Lord but nevertheless the point is important and valid. We may come back to it on Report but in the mean time I beg leave to withdraw the amendment.

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[Lord Newby]

My Lords, we have stated many times during this debate that the Government place great importance on effective co-ordination between the relevant authorities. We accept that this will be particularly important with regard to crisis management. That is why the Bill places a legal duty on the Treasury, the Bank and the PRA to co-ordinate their functions, and requires that they prepare a memorandum of understanding setting out how they intend to co-ordinate in a crisis management situation.

Obviously in such a situation the Treasury, Bank and PRA will need to be in regular contact. These events are often by their nature fast-moving or take place outside office hours. The protocols in place for ensuring co-ordination need to be flexible to accommodate this uncertainty. A committee is not necessarily the most appropriate way to deal with every crisis. For example, setting up a formal committee for a crisis event that lasts the duration of a weekend would be overly bureaucratic and cumbersome if the event required a particularly swift and flexible response.

These crises require that. They require frequent and immediate contact between Ministers and senior officials at the Treasury and senior executives at the Bank of England. Each financial crisis situation is different, and sometimes the circumstances will mean that a formal committee process would not be appropriate. If you look at three events which have either been, or had the potential to trigger, a financial crisis, without going into the details you can see how greatly they differ. There was for example BCCI, which was referred to earlier. There were the concerns in the immediate aftermath of the 7/7 bombings. There was the RBS crisis. These happened at different times of the day and at different points in the week. Some were put to one side relatively quickly while others have had long-term consequences. In those circumstances, it is difficult to imagine how you could set out in a memorandum of understanding either how a committee might be formed—we do not think that you always need one—or, if one is formed, how it will be convened and would function.

The memorandum of understanding is currently 39 paragraphs long. I do not know whether, when the noble Lord, Lord Tunnicliffe, was doing his training on the plane or when he was at London Underground, they had instruction manuals and crisis manuals. From working in humble PR, I recall that crisis management plans there ran to page after page. An MoU would not be the right place for these plans. This is not to say that the authorities do not plan. I can reassure the noble Lord that the authorities now have regular war games to prepare for a range of financial crises and participate in a range of cross-governmental operational crisis war games. This is to try to make sure that when a crisis explodes its participants have some preparedness for how they can respond.

That is different from saying that you need a committee in every case, even though we have said in the memorandum that in some cases you might. Certainly it is different from saying that in a memorandum of this scope and length you could set out how a committee could be convened and function. I hope that the noble Lord will be reassured that officials are spending quite a lot of time in crisis management planning and that that is the appropriate way of making sure that we are ready to deal with a crisis, rather than having the formal structure that his amendment would require.

[Lord Tunnicliffe]

My Lords, I thank the noble Lord for his response. I am reassured to a degree about the issues. We are not likely to press this further. The Committee might be reassured if he could flesh out some stronger sense of the preparedness and if he could write us a note that sets out the levels at which people are involved. I am not asking him to make a commitment now. He does not have to do anything as dangerous as that.

The thoughtfulness that has gone into the pre-crisis preparation is crucial. So many organisations fail to do it properly. British Petroleum successfully wrote off something like a quarter of its value through not having an adequate level of preparedness. In the defence sphere, for instance, the committee systems within government for national security and so on are documented as part of the strategic defence plan. Anything the Minister can do to add to our understanding of the depth and height of this preparedness and who is involved would be reassuring. With that request, I beg leave to withdraw the amendment.

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[Lord Tunnicliffe]

My Lords, the MoU is an important document. We believe that it is incomplete. Earlier, we suggested that it should have some additions relating to what I will call, more generally, emergency preparedness, if only to acknowledge that there should be an acknowledgement that there is a duty to do that. There is a real question mark over whether the commitment to explain material extent is fulfilled in Clause 61(2)(a). I have read the memorandum with care and I do not see in which paragraph that commitment is discharged. I should be grateful if the noble Lord could bring that out in his response. I see curiosity spreading across the faces of the Government.

[Lord Newby]

For clarification, will the noble Lord repeat which duty he is referring to?

[Lord Tunnicliffe]

Clause 61 is entitled “Memorandum of understanding: crisis management”. Clause 61(2) states:

“The memorandum must, in particular, make provision about—

(a) what the Treasury and the Bank regard as a material risk for the purposes of section 54(1)”.

We have had quite a debate about material risk but I cannot see which paragraphs of the memorandum address that duty. I should be grateful if the Government would flesh that out. I do not want to cause the Government undue problems. We would be very happy to see a letter setting that out, although a response now would be delightful. The memorandum is important. It will change because, in my view, it already has question marks over it as it stands, but also because the world will change and, as the world changes, the Government, the Bank and the Treasury will want to change the memorandum. It is crucial that Parliament is involved in such an important document.

This MoU deserves to be a formal document and it deserves to be approved by both Houses. The amendment is a standard amendment such as we find in these situations. It requires an affirmative resolution, first, to register the document and, secondly, to allow for when it might change. I cannot see why it is being resisted. The concept of an MoU is entirely sound but the document, frankly, should be more formal than it is at the moment. Its alteration in the future should be by affirmative resolution of both Houses. I beg to move.

[Lord Newby]

My Lords, I shall start by answering the noble Lord’s question as to where in the memorandum of understanding the question of material risk appears and where it is defined. The principal paragraphs dealing with this matter are paragraphs 8 to 18, but paragraphs 13 to 16 set out the matters that the Bank should take into account in determining the material risk.

The Bill does not actually say that the memorandum of understanding has to define material risk. It says that it must,

“make provision about … what the Treasury and the Bank regard as a material risk”,

which is a slightly different requirement. The paragraphs in the memorandum of understanding to which I have just referred do exactly what the Bill requires the Treasury to do.

[Lord Tunnicliffe]

Forgive me—the noble Lord was going faster than my brain. Will he repeat the paragraph numbers that cover the point?

[Lord Newby]

The whole section is headed “Notification by the Bank of a risk to public funds” and it runs from paragraph 8 to 18. It explains the background and sets out, particularly in paragraphs 13 to 16, the matters that the Bank needs to take into account in determining whether the material risk test is met.

The amendment would transform the MoU into a statutory instrument. In our view, that would severely limit the usefulness of the MoU as secondary legislation is, like primary legislation, extremely prescriptive. It sets out what must and must not be done and confers powers that have legal effect. Although we agree that clear responsibilities are important for effective crisis management, we believe that the Bill sets out the framework for this extremely clearly and the MoU then fleshes that out. That is the role of an MoU. It goes beyond what must, in all cases, be done or not done. It allows the authorities to set out what is likely to happen in given situations and why that is the case and provides an insight into the aims of the authorities involved. We do not believe that it would be possible for the MoU to fulfil this purpose effectively if it were required to be in the form of secondary legislation. That is because it is difficult to impose clear legal constraints on how a crisis is managed because of the wide variety of situations that could be considered as a crisis, each requiring bespoke handling that suits the characteristics of that particular event. Earlier I talked about the different kinds of financial crises we have had in recent years which I think exemplify that point.

It is our view that the MoU should be a living, responsive document, able to change as is needed. Requiring that it should be a piece of secondary legislation would severely curtail the authorities’ ability to change the MoU as circumstances change. As things stand, the MoU can be changed within a matter of days. That requires no huge amount of legal input because it is a working document about how to handle a crisis. That is very different from dealing with a statutory instrument which goes through a different formal process. It would be difficult to deal with a statutory instrument when the House is not sitting and that would be inappropriate.

The Bill already provides for the MoU to be laid before Parliament. It will then be open to scrutiny. The Treasury Select Committee will be able to scrutinise it, as will the Economic Affairs Committee in this House if it decides to do so. In my view, that is the best way to get parliamentary input rather than through an overprescriptive and inappropriate statutory instrument. In view of those arguments, I hope that the noble Lord will withdraw his amendment.

[Lord Tunnicliffe]

My Lords, my experience is that statutory instruments do not have to be that inflexible. Statutory instruments that have to have early effect can be laid and come into effect immediately, if that is appropriate. However, they do require formal scrutiny by Parliament. I have not won many points today and I am not going to win this one. I beg leave to withdraw the amendment.

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[Lord Davies of Oldham]

My Lords, I rise briefly to say that it gives me considerable and indeed a rare pleasure to agree with the noble Lord, Lord Flight, and we support his amendment.

[Lord Newby]

My Lords, what we are talking about here is how we make sure that all those who should be consulted are consulted in respect of the work of the European supervisory authorities, the EU institutions and other international organisations. We are talking about the international dimension of the work of the financial services authorities as opposed to the domestic work that we have been looking at up to now.

We agree absolutely that consultation is an important part of the formulation of policy at the international level as well as the domestic level. It is perhaps worth starting by saying a bit about the way in which the international bodies themselves have sought to consult. The EU, following the Lamfalussy report in 2001, has increasingly appointed expert groups comprising industry, academics and consumers as the first stage of formulating policy. The UK has provided many distinguished members of those working groups. For example, the Commission set up a financial services user group, whose members included Mick McAteer, who was a founder director of the Financial Inclusion Centre, and Robin Jarvis, professor of accounting and head of SME affairs at Brunel University. We have therefore had strong UK representation on those European bodies for a long time.

One of the other main pillars of the international regulatory framework is of course the Basel Committee on Banking Supervision. It has consulted widely on its proposals for Basel III, and the Financial Stability Board’s charter clearly states:

“In the development of the FSB’s medium- and long-term strategic plans, principles, standards and guidance, the FSB should consult widely amongst its Members and with other stakeholders including private sector and non-member authorities”.

So at the international level, there has been growing recognition that the board itself needs to consult, and in many ways that will be the most effective level of consultation in respect of provisions that the board is making.

National regulators also have an important role to play in the consultation and feed their views through to the European supervisory authorities. The FSA already takes that responsibility extremely seriously, and the PRA and the FCA plan to do the same.

The regulators will be required to consult on any proposed new rules that are required to implement EU or international regulatory initiatives, except in cases of urgency. The FSA already does that. For example, in July this year, the FSA published a consultation asking for views on how to transpose Solvency II into the UK rulebook. In addition, the FCA and PRA’s contributions to international policymaking processes will be informed by engagement on an ongoing basis with the industry and other relevant bodies. That means that the views of affected parties will be considered at all stages of the policymaking process.

The UK practice has been a mixture of formal and informal consultation, which has meant that the regulatory bodies—the FSA and the Treasury—when going into negotiations in Brussels or at Basel, have taken a lot of trouble to gauge the views of the UK financial services sector and have sought to reflect them effectively. I may be wrong, but I think that the sector feels that that is the case.

Regarding the question asked about why the MoU does not deal with PRA-FCA co-ordination with the ERAs, the PRA-FCA memorandum of understanding is covered in new Section 3E(3)(a) on page 31 of the Bill. I am afraid that I cannot read that out at the moment, but I refer noble Lords to it.

My noble friend Lord Sharkey asked an extremely good question but, as I have explained regarding the way that the authorities are approaching co-ordination, even though not every last detail will be set out in a memorandum of understanding—and some clearly are—the authorities plan to take consultation extremely seriously. Apart from anything else, they have learnt through harsh experience that unless they have done that and are able to carry the industry with them, it just stores up more problems for the future.

I am convinced that the culture of the regulators is that they consult widely with relevant stakeholders and will continue to do that, and that it is not necessary to have an explicit provision in the Bill to ensure that that continues well into the future.

[Lord Flight]

My Lords, I made the point that it had worked pretty well so far. However, we are dealing with new regulatory bodies being set up, and I just repeat the point that this Bill is pretty prescriptive in what it requires. I have, I regret to say, encountered some criticism that the FSA has not gauged the views and criticisms of the different bits of the industry adequately with regard to MiFID 2. We have some MiFID 2 proposals from the EU that are likely to be wholly unworkable and could be very damaging to this country by penalising trading between a London-based party and an overseas party. Although the record is pretty good, it is a little disappointing that on an important recent matter I found criticism of the consultation.

I cannot see why we should not put it in the Bill rather than just relying on it happening automatically. It is not a very great issue, but perhaps the Government might think a little further about this. I do not think it is an onerous requirement. In the mean time, I have raised the issue and beg leave to withdraw the amendment.