Financial Services Bill

Lord O'Donnell Excerpts

Monday 11th June 2012 Lords Chamber

[Lord O'Donnell]

My Lords, as this is my maiden speech, I would like to take the opportunity to thank all the Members of your Lordships’ House, and all its officers and staff, for making me so welcome. I have had the privilege to serve and collaborate with many noble Lords on all sides of the House, not least our previous speakers, and I look forward to working with them again. As an ex-Cabinet Secretary and Permanent Secretary to the Treasury, I want to pay particular homage to my predecessors. Their advice has always been wise, their criticisms constructive and, thankfully, private. It was a particular privilege to work with the Prime Minister and Deputy Prime Minister as they took on the challenges of making the coalition work effectively, and I have been privileged to serve with other Prime Ministers. The strength of purpose of Sir John Major and Tony Blair over Northern Ireland; the decisive action of Gordon Brown at the London G20 summit during the financial crisis; and the coalition’s actions to help the people of Libya—all these examples demonstrate one clear principle. Strong leadership can transform situations that look almost impossible. This is a message that I would like to get across to the leaders of the eurozone.

I have been blessed with a highly supportive family. The O’Donnells have had an interesting journey from Roscommon in Ireland via the coal mines of Durham to the south-east of England, which explains my passion for improving social mobility. There are many other areas where I hope to contribute in this House, but today it is right to concentrate on economic and financial issues.

As someone who was heavily involved in the five tests analysis on UK membership of the euro, published nine years ago, I will be observing very closely how the euro crisis unfolds. The nature of the resolution will have profound effects on our economy, and particularly our financial sector. No one can be sure what will emerge, which is why the changes proposed in the Bill need to be robust across a range of outcomes.

Before I turn to my specific comments on the Bill, I need to register two interests, one actual and one potential. Having obtained the approval of the business appointments committee, I will be working as a strategic adviser to Ed Clark, the chief executive of Toronto-Dominion Bank in Canada. Mr Clark is one of the most respected bankers in the world, and the regulatory regime in Canada has enabled its banks to weather the financial storms remarkably well. Mr Carney is, interestingly, both governor and chair of its Financial Stability Board.

There has also been press speculation that I may be a candidate to take over from Sir Mervyn King as Governor of the Bank of England. As I have already made clear, I will decide whether to compete for the job when it is advertised. However, I have already noted two issues from today’s debate. First, the noble Lord, Lord Eatwell, has made it clear that whoever takes this job will be driven mad within a few short weeks. Secondly, I have realised that whatever experience I may have, the right reverend Prelate the Bishop of Durham has far more financial experience in trading.

Coming back to the banks, Sir Mervyn has been a governor during a very stormy time for the world economy. He worked successfully with the Government to limit the damage of the global financial crisis and established the Monetary Policy Committee, which is envied in many parts of the world. His intellectual leadership has proved invaluable. In short, he will be a very hard act to follow. I have to plead guilty to the suggestion of the noble Lord, Lord Myners, that the governor and I had been collaborating on the tennis court. This is certainly true but it was very important from a policy point of view that we demonstrated to our US counterparts that fiscal/monetary co-ordination in the UK exceeded that in the US—and we won.

It is fair to say that the financial crisis has inevitably exposed some weaknesses in our current structures, as it has for a very large number of countries around the world. I believe that it is right to give the Bank control over macroprudential regulation, but this is not without severe dangers for the Bank, the governor and the economy. The new arrangements concentrate a lot of power in the Bank. With power goes the need for accountability. The Treasury Select Committee, under Andrew Tyrie, has done an excellent job of holding the Bank to account. The Joint Committee has also done a good job of pre-legislative scrutiny. As a result, the Bill overall contains much that I strongly support. However, I believe that we should make one further change to the accountability structure. We should set up a new standing joint committee, under the chair of the Treasury Committee, to assess the effectiveness of the new arrangements once they are established. The new committee would combine the advantages of the democratic legitimacy of the Commons with the undoubted expertise that lies in this House, as we have already heard. In particular, it would look at how well the Bank’s proposed oversight committee was operating. I agree very much with the right reverend Prelate the Bishop of Durham on that point.

As a number of speakers have said, it is important not to lose sight of the overall objective, which is to enhance the well-being of the country by having a financial system that is both stable and supportive of the whole economy. This will inevitably involve judgments on how to balance the need to have enough capital to withstand shocks with the need to support British industry. As the noble Lord, Lord Turnbull, said, the Bank of England Act calls on the Bank to hit an inflation target but, subject to that, to support the Government’s economic policy,

“including its objectives for growth and employment”.

Similarly, I believe that the Financial Policy Committee should have the objective of financial stability but, subject to achieving that, it should be required to support sustainable growth and employment. A healthy financial sector that makes a fair contribution to the tax base, supports all sectors of the economy and has a sensible, more symmetric remuneration system would be a real asset to this country—we have a comparative advantage in this area—but never again should taxpayers pay for the consequences of failure when the rewards of success are concentrated in the hands of so few.

There is one important imbalance that the Bill cannot correct: that is, the imbalance between the resources available to the financial sector, the Bank and the Treasury respectively. The Treasury is a brilliant department and I was proud to be its Permanent Secretary, but it is in danger of being swamped by the pressures placed upon it. As Sharon White’s excellent report makes clear, the Treasury’s turnover rate is far too high and its pay levels too low.

It is in the interests of all of us that the Treasury is able to continue attracting the best and retaining their skills and experience. To avoid this being at the expense of the taxpayer, perhaps the part of the Treasury dealing with financial services and stability should be funded in the same way as the Bank and the FSA, namely by the financial industry which benefits from their work. Otherwise, the Treasury is in danger of cutting off its arms as well as its nose to make its hair shirt fit.

Finally, can I urge the Government and all Members of this House to try to write legislation that will endure for the long term? We should not be fixated by today’s problems, important as they are. We need a principles-based system that is not overprescriptive. It must allow the accountable individuals to have the freedom to tackle crises in what might be a very different and fast-changing environment. That is why we should concentrate on getting the objectives right and sorting out the accountabilities for those whose job it is to handle whatever this dynamic and volatile world throws at them. This Bill will have a profound impact on the well-being of our nation, and it has been an honour to be able to contribute to what has so far been an excellent debate.