Lord Sassoon
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Financial Services Bill
Lord Sassoon Excerpts(12 years, 5 months ago)
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Lord Peston
My Lords, I notice that the Chief Whip is in her place, so when will we who propose to spend quite a lot of time on the Bill and make serious contributions be told of the days on which we will be sitting, and how many days we will be sitting, before the House rises? It would enable some of us at least to get something resembling a life.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the Forthcoming Business will be issued in the normal manner following discussions through the usual channels.
Lord Burns
My Lords, I agree with the noble Baroness, Lady Liddell, that the Bank of England needs a modern and transparent form of governance, the best governance that it can have. I also agree with the noble Lord, Lord Flight, that the form of governance that is best known in this country and is best practice is a unitary board—a board that consists of a majority of non-executive directors. It also consists of executive directors with a non-executive chairman. The present structure of the court seems to me very close to that. We may not like its name, but in terms of structure, it seems it could very easily be turned into such a body. The issue is not what its name is or even the composition of it; it is to do with the powers that the court has.
It has been mentioned that the court has many of the powers that a normal board would be expected to have. Some of those powers that it does not practise at present are contained in the amendment that the noble Lord, Lord Sassoon, will move later today to do with dealing with issues of oversight of policy in the past and the extent to which that should be done.
I would hope that we could retain the present structure of the court. As I said, whether the name should be changed is a matter of taste, but we should concentrate on the powers of that court and the extent to which the powers that it needs to operate as a normal board are contained in some of the other amendments being put forward. Certainly, as I interpret some of those that we have seen already, it begins to come quite close to what I would expect to be a modern, transparent and very good form of governance.
Lord Sassoon
My Lords, it has been an interesting 45 minutes. I really thought that this group of amendments was going to be, in cricketing terms, a loosener from the opening fast bowler from the Opposition Benches, instead of which I have been faced with a number of bouncers and, I dare say, a couple of wide balls on the way through.
I will not respond to all of what I might term the Second Reading points that have been reiterated. I answered all the substantive points at Second Reading and would refer noble Lords back to those debates. I also will not be tempted into discussing clauses yet to come. In answer to my noble friend Lord Eccles about what “micro” means—
Lord Sassoon
I beg my noble friend’s pardon. I think I was looking at the Annunciator, which was misleading at the time. I rather wished we were already where my noble friend Lord Phillips of Sudbury was, on Clause 9, but sadly I looked down and we were still on Clause 1. We will come to all these points in due course.
I will respond to the comments on the form in which the Bill is presented. Although I explained at Second Reading why we are amending FiSMA rather than giving a wholesale rewrite, it is clearly of some concern to noble Lords and I should address the points as I did at Second Reading. Our approach was widely supported by consultation respondents. It will minimise the extent to which regulated firms and other users of FiSMA have to deal with legislative change. I appreciate that there might have been forms that would have made it easier at the margin for your Lordships’ House, but I think the substantive point here is that we are asking a major UK industry to absorb significant and necessary change and it is certainly the watchword of this Government in all that we do to minimise regulatory and administrative burdens; and we listened to what the industry had to say in response to the consultation.
I also believe that the way in which the board is constructed will allow for more focused parliamentary and stakeholder scrutiny of the key changes to the regime rather than open up a full discussion of everything again. The Government recognise that it is difficult. We have well over 300 pages of the Bill before us, which is precisely why we published a consolidated version of the Financial Services and Markets Act, which at some 650 pages was a huge exercise by Treasury officials. It took an enormous amount of time and is available on the Treasury website. I drew noble Lords’ attention to it at Second Reading. A comprehensive amended version, as it would be amended if this Bill goes through, is available for scrutiny on the Treasury website.
Lord Eatwell
The Minister is quite right—it is 658 pages, actually, and extremely difficult to read on a computer screen. Will the Treasury undertake to print a copy and provide it to every Member who has taken part in this short debate?
Lord Sassoon
My Lords, different noble Lords will want to digest the material in different ways. Some of us may find it much easier to focus on what we are interested in on a computer screen. I am certainly conscious of the wasteful expenditure of resources and taxpayers’ money when people do not want printed copies. I will investigate, but it may be that copies are available through the Library. I do not know—let me have a look at that. But it is certainly on the website. I suggest that noble Lords may not want to download all 600 pages but will be interested in particular sections. I underline the fact that a huge effort was gone into that far exceeds anything that would normally go into a Keeling schedule.
The noble Lord, Lord Peston, asked about Keeling schedules. When he asked about them a couple of days ago, I had no idea what they were. So I asked for somebody to have a look on the internet, where there is a very interesting debate. It starts by questioning whether these schedules were named after the stunt woman, Liise Keeling, or the distinguished former Member of Parliament for Twickenham, Mr E H Keeling, later Sir Edward. It was the latter who did it in conjunction with Mr R P Croom-Johnson, later Mr Justice Croom-Johnson. So there was, indeed, a Keeling schedule, but it is something that has fallen out of common use over the past decade and more. I suggest that we have gone rather further than a Keeling schedule in producing a fully amended version of FSMA on the Treasury website. There is not, before I am challenged, an amended version of the Bank of England Act, because the changes that we propose to that Act are relatively straightforward. The major innovations in the Bill, such as Clauses 3 and 5, which we will get to in due course, are drafted as entire new clauses, and may be read and scrutinised very straightforwardly as self-standing provisions.
Lord Peston
This reminds me of the Marx Brothers stuff and the great joke about whether we have an insanity clause. Am I to understand that there is no such thing as a Keeling schedule and that it does not exist? Is that the answer to my question?
Lord Sassoon
It is something that used to exist and the concept is still out there in the ether, but it has fallen out of common use over the past 20 years. For this Bill, there is no Keeling schedule but there is the 658-page, fully amended version of FSMA, which is accessible on the Treasury website. It serves the purpose of a Keeling schedule and does more than that.
Lord Phillips of Sudbury
I am reluctant to intervene on the Minister again, but it is important that even if he does not provide a print-off of this labour of love, hard copies of this mammoth work should at least be available in the Library. Some of us find that the time that it takes to run off 658 pages on our clapped-out machines is itself unnecessary.
Finally, the Minister may find that a Keeling schedule is exactly what has been done by the Treasury in this regard. That is my understanding of a Keeling schedule.
Lord Sassoon
My Lords, it may be the largest Keeling schedule ever known to this House. I will certainly make sure that the Library is aware of where to find the amended version of FiSMA, and I am sure that it will print copies off on request in the normal way.
I turn now to the substance of this clause. The amendments put forward by the noble Lord, Lord Eatwell, seek to convert the court of directors into a supervisory board. We will discuss in detail later—as has already been identified by the noble Lord, Lord Burns, and others—government Amendment 13 and related amendments which, I suggest, address all the points of substance behind the amendments of the noble Lord, Lord Eatwell, by creating a statutory oversight committee. I will have a lot more to say about that when we get to Amendment 13.
The only substantive difference, as the noble Lord, Lord Eatwell, has said, between the Government’s amendments and those in his name appears to be in the name of the Bank’s governing body. The noble Lord’s amendments do not seek to change the structure or membership of the court; it is simply, as he identified, that he does not like the term “court”. I agree with other members of the Committee that simply changing the name is not what we should be focusing on. The name of the Bank’s governing body is largely irrelevant. It is important that it is a body that is fully equipped and prepared to fulfil its role in the new structure effectively and that the non-executives on the court have a clear and explicit remit to oversee the Bank’s performance, both in policy terms and operationally. We will come on to why the Government believe the amendments to the Bill that we have put down are needed.
In answer to the questions about why we put the amendments down when we did, I listened very carefully to all the points on governance and other issues that were made at Second Reading and have come forward, at the earliest practicable date, with amendments ahead of discussion in Committee rather than after it, both in relation to oversight and growth. I make no apology, but your Lordships will appreciate that there was not much time between Second Reading and today to get some important amendments sorted out in detail. I hope that explains what we have done.
Lord Eatwell
My Lords, on that point, it is my understanding that Mr Hoban made the commitment to produce this committee at Third Reading in the other place. It does not seem to me that the noble Lord had to wait until after Second Reading here to formulate his amendment.
Lord Sassoon
My Lords, as I said at Second Reading, I wanted to take full account of the wisdom of this House before we finalised and tabled the amendments. That is exactly what we have done and, as I will explain later, I believe that they meet the concerns of many noble Lords who spoke at Second Reading. The new oversight committee achieves the substance of what is required.
However, as has been said by a number of noble Lords in this debate, if we were to change “court” to “supervisory board”, as suggested by the noble Lord, Lord Eatwell, it would be grossly misleading. What many people, maybe most people, would understand by a supervisory board is that it would be a board of non-executives exercising independent oversight. Actually, as the Committee should be aware, merely changing the name “court” to “supervisory board” would means that it would still be a body made up of executive and non-executive directors, and therefore it would not have the effect that most people would understand by the term “supervisory board”, unlike the oversight committee which the Government are proposing and which we will come on to. I understand the point that the noble Baroness, Lady Liddell of Coatdyke, makes. We want proper, independent oversight, but changing the name of the court is not the way to do it. This has been an interesting debate but, on the basis of that explanation, I ask the noble Lord to withdraw his amendment.
Lord Sassoon
My Lords, when we come to those amendments I will give my view and the view of the Government, but in this group we are talking about the noble Lord’s amendments only.
Lord Eatwell
I mean generically. I raised the question in my opening remarks as to whether it would be appropriate for this House to give the other place the opportunity to discuss the amendments tabled by its own committee. Does the noble Lord think that is appropriate?
Lord Sassoon
My Lords, we have a series of amendments down in the name of my noble friend Lady Noakes and the noble Lord, Lord McFall of Alcluith. The best thing to do is to discuss them when they come up and take them one by one on their merits. If the noble Lord had wanted to discuss all these matters together, he could have grouped a number of amendments together but he, or the usual channels on his behalf, chose not to do so. We had better proceed as per the groupings list.
Lord Eatwell
My Lords, the noble Lord is not answering the question about what he considers to be the generic nature of that set of amendments derived from the Treasury Committee report.
I am very grateful to noble Lords who have taken part in this short debate. As I understand it, the discussion broke into two parts. Many noble Lords were disturbed by the complexity of the legislation before us and felt that this complexity was preventing a satisfactory consideration of the overall implications of the legislation. Having worked on this for some time, I have some sympathy with them. The noble Lord referred to the many hours that Treasury staff had to devote to creating the unified Bill—the Keeling schedule. Similar hours will no doubt have to be devoted to deriving a full understanding of the implications.
Leaving aside the issue of complexity, I turn to the issue of governance, which lies behind the first amendments that I have proposed and which will be before the Committee as we roll through a number of other amendments. Every noble Lord who spoke, with the exception, to a certain extent, of the noble Lord, Lord Burns, felt that there were important issues to be addressed with respect to the governance of the Bank of England and that the court as currently formulated is not fit for purpose. Some of this will be discussed later, in the context of my Amendment 8 and of Amendment 13, which establishes the oversight committee. There are some major questions to be raised about the oversight committee, which we shall deal with at that point. It does not achieve an effective system of clear, transparent governance in the way that one would expect of a major public institution.
With respect to the name, being a bit of a traditionalist myself, I have some sympathy with the noble Lords, Lord Flight and Lord Burns, who felt that the court might as well be called the court. However, when the noble Lord says that the term “supervisory board” is misleading, do we think that the term “court” is not misleading? Whatever does that mean to anybody not steeped in the history of the Bank of England? The Minister has failed to address the generic question about the amendments derived from the Treasury Committee in another place.
This is a significant constitutional development which I think is very valuable, but the noble Lord seems not to want to discuss it. We will return at several points—
Lord Sassoon
My Lords, is the noble Lord, Lord Eatwell, aware that what he describes as the Treasury Committee amendments were debated on Report in another place? Does he accept that, perhaps contrary to the impression which he may not have meant to give, they were indeed debated on Report in another place?
Lord Eatwell
I think that the noble Lord will find that not all the amendments were debated. Indeed, the key amendments relating to the governance of the Bank of England were withdrawn on the basis of Mr Hoban’s assertion that he was going to bring forward some new arrangements. Therefore, the issue before us is whether those new arrangements measure up to the issues raised by the Treasury Committee—a matter that we will discuss in a moment.
Given the nature of our discussion, which I think has got us under way and raised a number of important issues that are yet to be resolved, for the moment I beg leave to withdraw the amendment.
Lord O'Donnell
I support the noble Lord, Lord Flight, in that and pick up on what the noble Lord, Lord Eatwell, was saying about this issue. I completely agree that the problem is whether the governor concentrates on one area to the exclusion of the other. You risk making things worse if you make the governor chair of one of these committees and not the other. I would say that you cannot have a Governor of the Bank of England who is not sitting on the Monetary Policy Committee. I just cannot see how you would have a governor who does not have a vote on the interest rate for this country. It does not seem to make any sense whatever. The Financial Policy Committee is going to take decisions on instruments such as loan-to-value ratios which will have quite an important bearing on macroeconomic issues which also matter to the MPC. I completely accept the issues about concentration of power. They are very important and should be handled through the accountability relationships that we set up. I also agree that the third body is very different and therefore the governor should not chair it, but the MPC and the FPC overlap so much that I do not think it is feasible not to have one person chairing both. If you were governor, and sent your deputy to chair one of these meetings, can you imagine how much time would be spent instructing them on what you thought they should do and getting feedback? It is far more transparent and open that one person chairs both.
Lord Sassoon
My Lords, this has been a very interesting discussion. Let me first deal with Amendments 3 and 4 in the names of the noble Lords, Lord Barnett and Lord Peston, and remind the House of one or two background issues with the deputy governors. First, we are not creating any new positions here. We are talking about two deputy governors who were created in the Bank of England by the Bank of England Act 1998. For the avoidance of doubt, we are not talking about anything new, but about existing deputy governors. Of course, the details of their pay and that of all other members of the Bank’s senior management are set out in the annual report and accounts. If it helps the noble Lord, Lord Barnett, page 41 of the 2011 accounts sets it all out in full detail. We are not talking about something new here.
As to the question of the noble Lord, Lord Peston, about job descriptions, when the role is advertised for a new appointment, a full job spec of the sort that he would expect is indeed produced. If he will forgive me, we will come on to questions of appointment in a further grouping, when no doubt we can come back to that point.
The two amendments open up a discussion about why we have deputy governors and what is their role, so I should say a word or two on that. I suggest that the role of the deputy governors is crucial. It would be enormously challenging for the governor to handle the breadth of policy and operational responsibilities of the Bank without support from the two specialist deputy governors. Each of the existing deputies is responsible for the Bank’s activities relating to one of its two statutory objectives: monetary policy and financial stability. That in itself goes 90% of the way to explaining the job description in very clear terms. The deputy governors run those areas on a day-to-day basis; they take the lead in many cases in international negotiations in those areas; they communicate with the public; and they have a major role in the relationship with the Government and Parliament in their respective areas.
Particularly given the enhanced responsibilities that the Bill will give to the Bank, I see absolutely no reason why we would want to weaken the Bank’s senior executive team by removing the deputy governors. I hope that that is not what the noble Lords who tabled the amendment would want, although that would be its effect. Rather the reverse: the capacity of the Bank’s senior team must be strengthened to equip it for its new responsibilities, which is precisely why Clause 1 creates a new deputy governor post. The third deputy governor will be the chief executive of the PRA and will be responsible for prudential regulation within the Bank. This has been a useful teasing out of what the deputy governors do, and I hope that that explanation has proved useful.
I turn to Amendment 9 in the name of the right reverend Prelate the Bishop of Durham, which would require the court to remove responsibilities from the governor. It will be no surprise to the Committee when I say at the outset that I do not believe that that is appropriate. The governor is the most senior executive in the Bank and is ultimately accountable for all the Bank’s decisions and actions. Of course, a great deal of Bank policy-making is delegated by statute to policy committees, including the MPC and the FPC. Indeed, it could be argued that most of the Bank’s most vital decisions are taken by the FPC and the MPC—and, in future, also by the PRA board.
I largely agree with the three noble Lords who are very distinguished former Permanent Secretaries to the Treasury. The Committee should be very grateful that they are here and able to illuminate this debate with such clarity. However, having heard the noble Lord, Lord Turnbull, in particular, at Second Reading, I suspect that there may be moments later down the track when we may not be in complete agreement. The interventions of the noble Lords, Lord Turnbull and Lord O’Donnell, on the amendment have been illuminating. The noble Lord, Lord O’Donnell, quite rightly highlighted the co-ordinating role and the need for balance and the noble Lord, Lord Turnbull, rightfully made the point about where the buck stops. I suggest that it is right that the governor, as the head of the Bank and being fully accountable for the decisions taken by the Bank’s policy-making bodies, should chair these committees.
I will come on to some rightful concerns about that position in a moment but I add, in parenthesis, that I am also grateful to the noble Lord, Lord O’Donnell, for answering the question that I have had on a number of occasions from the noble Lords, Lord Barnett and Lord Peston, about what the Treasury representative does on the MPC. I was privileged to be there on one occasion; even the Permanent Secretary to the Treasury needs a holiday in August occasionally, so I deputised. I hope that the very clear explanation from the noble Lord, Lord O’Donnell, will mean that we do not get the question quite as often in the next two years, so I am grateful for that.
The substantive concern underlining Amendment 9, about the concentration of power in the Bank and in the governor as an individual, is an important issue. I was not going to argue for one minute, and will not argue, that the oversight committee is the answer to that point. No doubt we will come on to talk at length about the oversight committee which, among other things, responds to the Treasury Committee’s specific recommendation that reviews be retrospective in order to allow enough time to pass to learn the lessons effectively from decisions and actions that are taken by the Bank. We will come on to that but it does not address the issues we have here.
Let me suggest, in answer to the point in Amendment 9, that there are some effective checks and balances in the system. To start with, in each of the governor’s roles—as chair of the MPC, the FPC and the PRA, and as head of the Bank itself—he or she will be both supported and challenged by a group of experts. Those experts will include internal Bank executives such as the specialist deputy governors, who we have talked about; the executive directors and the non-executives of the two governing bodies, the court and the PRA board; and external members of the policy committees, the FPC and the MPC. I certainly agree with my noble friend Lord Sharkey that that challenge is important. It is already there and it will continue in the new construct so that in each area of the governor’s areas of responsibility, he or she will not be responsible for taking decisions alone. In the MPC and FPC, policy decisions are taken collectively, with each member having a voice and a vote.
On the specific issues raised by my noble friend Lord Sharkey, those votes do not always go the governor’s way. Members of the Committee may be aware that the governor has found himself on the losing side of the MPC vote on a number of occasions, most recently in the June MPC meeting. I suggest, first, that there is the right construct of individuals to challenge and that, secondly, we have evidence that challenge takes place and is effective. Equally, on the governing bodies of the Bank and the PRA, decisions will be taken collectively, with non-executive members being in the majority on both bodies. As chair of the PRA board, the governor will ensure strategic co-ordination between the PRA and the rest of the Bank group; that aspect of co-ordination is also important. That will help to ensure an effective and joined-up response to emerging threats to financial stability.
However, the governor will not play a hands-on role in the day-to-day running of the PRA. That will be the job of the deputy governor for prudential regulation in his or her role as chief executive. The governor will therefore be fully supported in all the different roles and will receive effective challenge from both Bank insiders and external members. It is entirely right that the responsibilities of the governor and the arrangements to ensure that he or she is both supported and held properly accountable should be determined and set by Parliament through the legislation we are scrutinising today, rather than delegated to the discretion of the Court of Directors of the Bank. For all those reasons, therefore, I cannot support the amendments in this group. I would ask the noble Lord, Lord Barnett, and the right reverend Prelate to withdraw their respective amendments.
Lord Peston
Before the Minister finishes what he is saying, could I ask him a question which is a sort of question of economics? I entirely agree with the noble Lord, Lord O’Donnell, that it would seem very strange indeed if the Governor of the Bank of England did not chair both the FPC and the Monetary Policy Committee. But then I ask myself, “Does that mean that there is a vast amount of spare capacity in the governor; that he has been twiddling his thumbs looking for other things to do, and this is a way of making use of his skills?”. This is a very serious question. I remember that when I chaired the Economic Affairs Committee—or rather, its predecessor—the previous governor chaired the committee in a way completely different from the way that the present governor chairs the MPC. I could enlarge on that, if the Committee liked. I was given a complete set of papers for the MPC, a vast amount, which I found fascinating. On the basis of those papers, I would have found it a full-time job just to chair that committee. I am therefore at somewhat of a loss as to where the spare capacity comes from. What is the governor not now going to do in order to chair the FPC? That is a very serious question indeed. This would not have been a problem for the previous governor, because he regarded his role as chairman as just chairman. He did not intervene; for example, he always voted last. He was never defeated, and when he used to give me lunch regularly I would say to him, “There is no big deal in being on the losing side”. He said, “It is impossible for me as Governor of the Bank of England ever to be defeated in the MPC. It would be quite out of the question”. I was very impressed with the present governor being willing to be defeated. I am often defeated, but I never think I am wrong; I just shrug and walk away.
Could the Minister therefore tell me where the spare capacity in the governor is to be found, so that he can chair both these committees entirely satisfactorily, in the way the present governor does it?
Lord Sassoon
My Lords, first of all, I am not going to respond to the challenge of how different governors have handled committee chairing. As I have explained, I have sat in on one meeting of the MPC. We have other noble Lords, or at least one, who have sat in on a lot of meetings. I am not sure where the noble Lord, Lord Peston, gets his first-hand experience from, but let us put that aside. I hear now that he has no first-hand experience. Well, I am glad to hear that, but let us put that on one side.
I appreciate that in this Bill, and under the present arrangements, the Governor of the Bank of England has a very challenging job. The essence of what we are putting back into the Bank of England is, of course, leadership in financial supervision, which was part of the historical role of the Bank, except for the last 15 years or so. The Bank has essentially had these responsibilities in the past. The governor is and will be very well supported, partly by the deputy governors, as I have explained, but also, of course, by the whole Bank and PRA executive. This whole construct has been discussed in detail with the present governor, so I am fully confident, without being able to go through the governor’s time and analyse it, that this has been carefully thought about and the new proposed role of the governor is entirely manageable with the support that the governor has and will have.
Lord O'Donnell
Having sat through large numbers of meetings of the Monetary Policy Committee chaired by Eddie George and Mervyn King, I know that the reality is that the chairman has one vote, although they have a casting vote. That dominates the style of the meetings; they are not so much dominated by the style of the individual who is chairing them. Having sat through all those, I do not think that the contrast is as great as the noble Lord, Lord Peston, makes out. It is certainly true that I remember one occasion when the vote was coming round to Eddie George and he was 4-3 down, and he chose to use his vote to make it 4-4 and then used his casting vote to make it 5-4. That was an interesting use of the chair’s power. It is important, though, that the chair has only one vote and that therefore, of the nine, they can be outvoted; indeed, that is a good thing.
As laid down in the previous Act, the governor has always had responsibility for financial stability, so it is a question of how they choose to use it. Like the noble Lord, Lord Peston, I worry about the sheer weight of meetings because it is not just these meetings but the international ones as well. That is an issue, and it may be that one of the things that we got wrong with the Bank of England Act was specifying precisely how many meetings there should be. On occasion, it would be nice if you could go through a period of longed-for financial and economic stability when you might be able to pass on one or two of these meetings and not be forced to have them quite so often when actually there was not that much to do. However, that is a nirvana that we are not that close to at the moment.
Lord Barnett
Name one. Anyway, I do not wish to delay the Committee much longer, and I will withdraw the amendment.
Lord Sassoon
Before the noble Lord sits down, I would point out that very recently Rachel Lomax was a very distinguished deputy governor of the Bank, to name but one, and there are now some very able senior female members in the banking sector, to avoid any doubt on that matter.
Lord Peston
Women comprise half the population of the country, do they not? If we look at ratios, there is not a lot to boast about.
Lord Eatwell
The noble Lord and I are both professional economists and therefore we have disagreement built into our DNA. The role of the Treasury Select Committee in another place is special in this case.
I move on from the amendment tabled by the noble Baroness, Lady Wheatcroft, to Amendment 10, which raises some very difficult issues. Given the new, complex set of conflicting goals that the governor will necessarily need to navigate, the idea that his or her removal from office should be subject to some form of special scrutiny is entirely appropriate. I am not sure whether this is the right form of special scrutiny, but I am certainly going to take this away and think about it and may return to it on Report.
To sum up, Amendment 5 goes a little too far. Consultation is the key in the appointment process. The noble Baroness, Lady Wheatcroft, has identified something very valuable indeed, and we should be grateful to her, as should the Government, who should say so and accept her amendment. A number of very difficult issues have been raised with respect to Amendment 10, which I need to take away and think about at greater length before we come to Report.
Lord Sassoon
My Lords, first, of course the Government place great importance on the suitability and independence of the Governor of the Bank of England. We are all clear that the governor’s role is already a challenging one and that future holders of this post will need to possess an even broader range of skills, experience and expertise. We do not in any way seek to deny that. However, although I fully recognise the great importance of this appointment, I am very confident that there are already robust arrangements in place, which I will go through in a minute.
It is good that we are now focusing in this debate for the first time very directly on the amendments that we are discussing, which makes for a much more productive 35 minutes than we have had on this. In the debate, which has been instructive and interesting, I have heard some voices speaking up for some form of parliamentary veto, some arguing for consultation, some arguing that it should be the Treasury Committee in another place and some suggesting that it should be that committee and/or—I am not quite sure which—the Economic Affairs Committee of this House. Although it is not the subject of an amendment, I heard at least one suggestion that if we were going to change anything, we should go rather more radical and make it subject to a vote of the whole House in another place. That is a rather broad menu. There are many ways to skin this particular cat but I suggest that there are already robust arrangements in place
The governor and the deputy governors of the Bank are appointed by Her Majesty the Queen on the recommendation of the Chancellor and the Prime Minister. Since 2009, this Government and the previous Government have agreed that in principle these appointments will be subject to open public competition. That is what happened with the most recent example of Paul Tucker, who was appointment deputy governor in 2009, and that practice will continue. The Treasury Committee already holds pre-commencement hearings with those who have been selected to become governors and deputy governors. Therefore, I do not believe that Amendment 5 is necessary.
To be absolutely clear regarding something that I think I heard the noble Lord, Lord McFall, say, I certainly agree that Amendment 10 is connected with Amendment 5 but, to be technically right, I would not accept that Amendment 10 is consequential on it. I just wish to be clear on that technical point.
Having been appointed, the governor certainly cannot be removed on a whim. Indeed, the Government have no powers to remove a Governor of the Bank of England. Rather, the Treasury must give its consent if the Bank decides that the governor has met the criteria for removal. However, it is the Bank’s decision to make. The legislation is clear that the governor, a deputy governor or a director of the Bank can be removed only with cause—that is, if the Bank is satisfied that he or she has been absent from meetings of the court for more than three months without the consent of the court, that he or she has become bankrupt, or that he or she is unable or unfit to discharge their functions as a member. That is very clear.
Some commentators have suggested that the fact that the appointments of the chair and independent members of the Office for Budget Responsibility are subject to a Treasury Select Committee veto sets a precedent and that governor appointments should also be subject to a parliamentary veto. However, I agree with the noble Lord, Lord Turnbull, who suggested that these cases are rather different. The role of the governor and the members of the OBR are both characterised by the need for especially talented and independent candidates, but that is where the similarities end. The OBR performs an important function in providing an independent and unbiased forecast on which government policy can be based, whereas the governor carries out executive functions on behalf of the state.
More than that, and more broadly relevant to the amendments, this policy-making role makes the appointment of a prospective governor extremely market-sensitive in a way that appointments to the OBR and many other appointments simply are not. The uncertainty created by a public pre-appointment approval process could, depending on the market conditions at the time, be significantly damaging. The noble Lord, Lord Eatwell, may not like this analysis but I suggest that the person performing the role of governor attracts significant market interest. A huge amount of time and effort is spent examining every scrap of information relating to members of the Bank’s policy committees in order to gain insight into their thinking and determine likely future policy responses, and that will very much be the case with candidates for the post of governor.
Once the candidate is announced, his or her particular leanings can be factored into asset prices. The Treasury Select Committee will then be able to conduct pre-commencement hearings, providing a useful insight into the professional competence and personal independence of the appointee. However, I suggest that pre-appointment hearings of the sort suggested and necessitated by the amendments in this group would exacerbate the uncertainty of markets about who will be appointed, and that would be inappropriate.
I am also sure, and I do not need to point out, that I could apply similar arguments regarding the dismissal of a governor. The uncertainty around any such dismissal would be just as damaging. In addition, I cannot see how the position of a governor whom the Bank had sought to remove for reasons of unfitness for the post could be anything other than untenable if the Treasury Committee reversed the decision, so I simply do not understand how that would work in practice.
I believe that the current arrangement of pre-commencement, rather than pre-appointment, hearings provides the right balance. It gives Parliament an opportunity to question the new appointee on their views and qualifications without bringing into question, or placing doubts over, the appointment itself. A parliamentary veto on appointments and dismissals would introduce uncertainty into these processes, and that would apply whether the veto was given to the Treasury Committee in the other place or to your Lordships own Economic Affairs Committee. For these reasons, I believe it is inappropriate for the Bill to provide that a parliamentary committee must approve governor appointments or dismissals.
Lord Peston
Before the noble Lord moves on to his next point, can he, for my education, explain one aspect of the drafting of the Bill? With regard to what we are discussing, can he tell me whether there is any significance in lines 8, 9, 10 and 11 on page 1, which refer to “a Governor” and “a Deputy Governor”, and line 15, et cetera, where the references are to “the Governor” and “the Deputy Governor”? Is this a fundamental matter of parliamentary draftsmanship, which is beyond me, or is it simply a grammatical error?
Lord Sassoon
My Lords, it relates to the former. I do not think it is fundamental; it just fits in with the construct of the legislation that we are talking about. There is no mystery behind it; it is purely a case of the grammar that the draftsmen have thought appropriate to use in the different lines.
Baroness Kramer
My Lords, the Minister has just put forward an argument for retaining the current process, which excludes the Treasury Select Committee from participating in the appointment of the governor. However, has he ever looked at the idea of allowing the Treasury Select Committee to question pre-appointment, even if there is no veto? I think we can all see a potential scenario—one that we hope never to have—where an appointee who is already in position, although they may not have commenced the role, comes before the Treasury Select Committee and does not win the confidence of the committee or the confidence of Parliament. That would leave us in a particularly dire situation and it is one that I think most of us would wish to avoid.
Lord Sassoon
I attempted to address the pre-appointment versus pre-commencement issue and I shall not repeat my remarks, other than to say that I believe that, for the market reasons I have given, among other reasons, it would be damaging if there were significant doubt over the clarity of the appointment of a particular individual as governor. One can very easily see how such a situation would be damaging and dangerous in present market conditions. Therefore, I repeat that I believe there is a distinction—
Lord Sassoon
Perhaps I may complete the answer to my noble friend Lady Kramer, then I will give way. As I pointed out, I believe that there is a great distinction between pre-appointment and pre-commencement, that we have the balance right, and that with any appointment put forward to the Queen on the recommendation of the Chancellor and the Prime Minister there will be a very high degree of likelihood, approaching certainty, that the figure appointed will have the confidence of the Treasury Committee.
Lord Eatwell
My Lords, following on from the point made by the noble Baroness, Lady Kramer, while I agree with the noble Lord that a veto by the Treasury Committee is not a good idea, I really do not understand his arguments about pre-appointment consultation, whereby a prospective candidate appears before the Treasury Select Committee prior to his or her appointment being confirmed.
The argument about market sensitivity entirely contradicts what the noble Lord told us about the collective decision-making process in the Bank. If there are all these collective procedures in which the governor is challenged and supported by deputy governors, technical staff, and so on, the idea that a new governor arriving would dramatically change the nature of monetary or stability policy seems to be ridiculous. There may be a change of tone or style, but the idea that the governor will somehow be the sole factor who can move markets by the very nature of his character would seem to reinforce all the fears of those who believe that we are appointing a sun king. The noble Lord argued persuasively that there existed a degree of collegiality in the Bank, which some of us were quite surprised to hear, but none the less we understand what he says. However, he cannot argue that and at the same time deny the possibility of pre-appointment consultation because it is market sensitive.
Lord Sassoon
My Lords, the noble Lord, Lord Eatwell, always applies impeccable logic but the way in which the markets look at these things is rather different and not necessarily logical. While I entirely accept at one level the logic of the noble Lord’s argument, it is not the way in which the markets seek to interpret what they can read into every tea leaf, let alone something as important as the appointment and the person of a new governor. I certainly do not accept that my two arguments are in any way at odds with one another.
Lord Eatwell
My Lords, if the markets are so irrational, as the noble Lord says, why will we have our appointment process distorted by these irrational forces? Surely, if they are so irrational we should simply leave them to their own devices and develop a sensible, coherent appointment process that fits the needs for the appointment of this very important figure.
Lord Sassoon
My Lords, I was not going to bring this up, but I am not sure about the logic of the position of the noble Lord, Lord Eatwell. I understand that he was arguing for consultation but not a veto by the Treasury Committee. I am not at all clear why, if he is asking for consultation but not a veto, he is so hung up on whether it be pre-appointment or pre-commencement. Pre-appointment seems to imply some form of effective veto that goes with it. I am genuinely rather confused.
Lord Eatwell
I thought that I had made that clear in my opening remarks on the amendments. An individual who is being proposed by the Government to Her Majesty for appointment may be found by the Treasury Select Committee to be unsatisfactory in various aspects of his skill set or whatever, but while the Government may ignore that, they would at least have to take it into account and justify the appointment. Indeed, in doing so, that would perhaps strengthen the position of the governor thereafter.
Lord Sassoon
My Lords, I have dealt as fully as I can with the arguments. All I would suggest is that it further points out that this is not an easy area. As the noble Lord, Lord Turnbull, said, there are lots of possible solutions. If he were to change it at all, he would go to a solution that is not one of the number on the table at the moment. The Government’s position remains that we have an appropriate balance in all of this.
In answer more specifically to the noble Lord, Lord Peston, since I had the time during that little exchange to do a bit more research into “a”s and “the”s, the point is simple. The first reference is to the creation of “a Governor” and the subsequent reference is to “the Governor” who is at that point in the flow of the legislation being created. I hope that that helps to explain what is going on.
Lord Peston
My concern was with the correct use of English. It does not help but I cannot believe that it matters at all.
Lord Sassoon
Even if it does not matter, I try. I do my best to answer these points, even if it causes more confusion. Sometimes the “a”s and the “the”s could be very important.
I move on to Amendment 6 tabled by my noble friend Lady Wheatcroft, on which, no surprise, I will not be much more accommodating, but it is an important point that should be discussed. As I said, it is vital that the post be filled by the best possible candidate and taken from candidates who have expertise and skills to fulfil the role effectively. The legislation as it stands does not prohibit the Chancellor consulting widely before recommending that a candidate be appointed as governor. In practice, the Treasury and the Bank work together closely to recruit for key Bank of England posts. I am sure that my right honourable friend the Chancellor of the Exchequer will engage with key individuals as appropriate during the process to identify the next Governor of the Bank of England. Indeed, well ahead of the formal process kicking off, the chairman of court, Sir David Lees, and the Chancellor are already in touch on this matter.
However, I suggest that we should keep in mind that the appointment is ultimately for the Queen to make on the advice of the Prime Minister and Chancellor. Many people may be consulted as part of the process to appoint a new governor, but it would be impractical to attempt to define them prescriptively in the Bill. By leaving the legislation broad in this way, the Chancellor will be able to consult whoever he or she feels will add value to the advice. The people consulted may well change depending on the circumstances of the appointment. I suggest that that is how to leave the legislation but I hope that I have given the Committee some perspective on how these things will be handled. I hope that the noble Lord will feel able to withdraw the amendment.
Lord McFall of Alcluith
My Lords, the aim of the exercise is contained in the Treasury Committee report, which said that an amendment was tabled on Report in the other place but that because of “insufficient time” the Minister did not give an answer. This amendment is to elicit an answer. I suggest that the Minister should think again on this issue.
The noble Baroness, Lady Kramer, said that there is a role for Parliament. If Parliament feels excluded, that does not augur well for the stability of the system. I understand that giving a veto to a parliamentary committee is a bold measure, so I understand the concerns being expressed. The noble Lord, Lord Turnbull, made the point that the Treasury Committee could make a recommendation and the House could look at it. There has to be either a formal or an informal way of including Parliament in this. My noble friend Lord Peston said that if the Governor of the Bank of England left, he would leave the country.
Lord Sassoon
My Lords, just before the noble Lord, Lord McFall, sits down it may be worth being clear for the record that when I said the governor can be fired if he or she proves to be unfit to perform the role, that was completely right. In answer to the question from the noble Lord, Lord Peston, about whether the governor can be fired for wrecking the economy, I would suggest that at that point the Bank would probably decide that the governor was unfit. Without getting into a long debate about where unfitness comes into it, it is worth saying that at that point, unlikely though the scenario might be, wrecking the economy might lead the Bank to decide that the fitness test would apply.
Baroness Wheatcroft
I thank my noble friend the Minister for his reply; I confess I found it disappointing and I thank those noble Lords who spoke in support of my amendment. I was trying to find a simple means of showing that the court was held in some esteem and had powers to exercise. I do not doubt that informal conversations go on but I am slightly reluctant to rely on informal arrangements when we are trying to strengthen the corporate governance of the Bank. Not just to strengthen the corporate governance but to strengthen the perception of that corporate governance. I would ask my noble friend to think about this matter and maybe other ways in which he might strengthen perceptions of the corporate governance of the Bank. However, I shall not move my amendment.
Lord Turnbull
My Lords, I direct this question to the noble Lord, Lord Eatwell. Does he regard Amendments 122 and 123—which were tabled by the noble Lord, Lord McFall, and refer to persons representing the constituent parts of the United Kingdom —as helpful or unhelpful to his cause? Are they helpful because they may add to diversity, or unhelpful because you would be choosing people on the basis of their geographical representation rather than their professional expertise?
Lord Sassoon
I hesitate in replying because the noble Lord, Lord Eatwell, might want to answer that excellent question. However, it is up to the noble Lord.
Lord Eatwell
If it is of convenience to the Committee I am quite happy to do that. The noble Lord—indeed, my old pal—Lord Andrew Turnbull, has put me on the spot here by placing me in opposition to some propositions put forward by my noble friend. I was very clear that I was seeking diversity of view. Where someone lives does not seem a basis for that.
Lord Sassoon
My Lords, that illustrates one thing about the amendment—that the ways in which people interpret its words are rather different, which in itself is not ideal.
The noble Baroness, Lady Liddell of Coatdyke, got it right when she said that it is a no-brainer, and we do not believe that it is necessary to make legislative provision for it. My noble friend Lord Phillips of Sudbury said so in vigorous and direct terms which I can only echo. On one level, I feel that I should say no more and sit down. Nevertheless, I should explain to the Committee exactly what is going on.
As the Committee may be aware, the Treasury’s Select Committee report into the accountability of the Bank of England concluded:
“The new responsibilities of the Bank will require its governing body to have an enhanced mix of skills”.—[Official Report, Commons, Financial Services Bill Committee, 21/2/12; col. 21.]
The Government agree with this conclusion and in their response to the Treasury Committee they committed to take it into consideration in relation to future appointments. We understand the concern underlying the amendment and have already taken it into consideration, including in the latest appointments to the court. For example, both Tim Frost and Bradley Fried bring extensive experience of financial services as practitioners to the court. However, I do not believe that it is necessary to make legislative provision for this.
I can assure the Committee that the appointments of non-executive directors to the court are fully regulated by the Office of the Commissioner for Public Appointments, OCPA, which ensures a fair, transparent and competitive process. The practical elements of the appointments process are run by the Treasury, with the most recent interview panel consisting of senior Treasury officials, the chair of court and an independent assessor. The Treasury seeks to find the best candidates for these roles. This means people with a deep and diverse range of experience in relevant sectors. This can be, will be and is achieved without a prescriptive legislative obligation.
Court appointments are advertised openly. Applications are sought from candidates with diverse experience and from a variety of backgrounds. For example, the role profile for the last NED vacancy sought people with substantial experience as board members or heads of functions in a major financial services organisation; and/or someone who had built up a successful enterprise of a significant size; and/or someone who had played a prominent role in a relevant area of public policy, the voluntary sector or a trade union.
I can assure the Committee that the decision is taken with full consideration of the impact on the broader composition of the court and the fit of each candidate within the make-up of the court as a whole. I hope the noble Lord feels that he can withdraw his amendment.
Lord Tugendhat
My Lords, I support the amendment of the noble Lord, Lord Eatwell. He draws the lesson from what happened to the outside directors of the Monetary Policy Committee. It might be said that the Bank has learnt its lesson on that and that the situation will not arise in the future, but as I pointed out at Second Reading, the Bank has behaved unacceptably in relation to having an inquiry into its performance during the financial crisis. Whereas the FSA had an inquiry and the results were published, the Bank of England rather stuck to Montagu Norman’s axiom, “Never explain, never excuse”. The Bank of England is a fine and venerable institution, but it finds it difficult to change. Unless there is some provision of the sort that the noble Lord, Lord Eatwell, suggests, one cannot be sure that the supervisory board—or whatever it is going to be called—will necessarily have the economic, legal and monetary advice and so forth that is required. The role that it is taking on is complex. It will deal with highly competent officials in the Bank. It is essential that the non-executives on the supervisory board have absolute certainty that they have all the back-up they require.
When one looks at the demands being placed on non-executive directors of more normal financial institutions, it is clear that, if they are going to fulfil their functions, they will need much more back-up than non-executive directors were accustomed to in the past. Their responsibilities and accountabilities are greater and they will need absolute certainty and right of access. That applies to the Bank of England and I hope that the Government will take into account that, if we are to have proper governance, it requires proper support.
Lord Sassoon
My Lords, we debated earlier amendments tabled by the noble Lord, Lord Eatwell, which sought to convert the Court of Directors into a supervisory board. Following on from those amendments, Amendment 8 sets out some of the functions of that board. There is little between the noble Lord and the Government on the substance of the amendment, but my key argument is that the amendment is not needed because its most important parts are addressed by government Amendment 13.
Government Amendment 13, which I will talk to at much greater length when we get to it, will give the new oversight committee responsibility for overseeing the Bank’s performance against its objectives and strategy—precisely what the first part of Amendment 8 seeks to achieve. As for the second part of Amendment 8, I appreciate that in the past the Bank was slow to realise that the MPC members needed their own dedicated support. That lesson was learnt a considerable number of years ago, and both MPC and FPC external members now have access to appropriate resources. The point about the FPC is important and relevant because that has been created in shadow form only very recently.
We can see the considerable output that the FPC is already producing, which it could not possibly do without that support. I am wholly confident that the oversight committee will have sufficient support once it comes into being, and I do not believe that it is necessary to put it into the Bill. I ask the noble Lord to consider withdrawing his amendment.
Lord Eatwell
I apologise that I was temporarily distracted by other channels. I am heartened to hear that the Government feel that the Bank has learnt its lesson on the provision of resources. I still feel that it would be appropriate to provide that insurance, particularly legal advice, for independent members. Legal advice is crucial for non-executive or independent directors in any environment because they can so easily be outgunned by the executive in a way that ultimately is not beneficial for the institution as a whole.
By the way, I am heartened by what the Minister had to say about the definitions of the supervisory board’s roles, but we will come on to that issue in our detailed consideration of his Amendment 13.
I am sorry to be so roundabout in this respect, but going back to the issue of resources, I will consider what the Minister has said and decide what I will do on Report. In the meantime, I beg leave to withdraw.
Lord Sassoon
My Lords, it may be helpful if I speak early in this group because there are substantial government amendments here. The Treasury Committee’s report last November concluded that the increased responsibilities given by this Bill to the Bank of England warranted another look at the Bank’s governance arrangements. The Bank’s Court of Directors has been statutorily responsible for managing the Bank’s affairs since nationalisation in 1946, albeit with some modernising changes brought in by the Bank of England Act 1998 and the Banking Act 2009. I expect the court, as it has done over the decades, to adapt and evolve to the Bank’s changing role, which was brought in by this Bill to enable it to continue to operate as an effective governing body.
However, we should not—and I am already clear from our Second Reading debate that we do not as a House—underestimate the court’s task. It must effectively oversee the transition to the new arrangements, ensure that the Bank is adequately resourced to meet its new responsibilities, and at the same time provide a vital link of accountability to Parliament.
Recognising this challenge, in January the court published its response to the Treasury Committee’s recommendations, proposing the creation of a new oversight committee made up of the court’s non-executive directors. The court accepted the Treasury Committee’s recommendation for retrospective reviews of policy, proposing that the oversight committee commission these reviews from expert external bodies. The court also accepted that an ex-post review or reviews be published, subject to the need to maintain appropriate confidentiality. In line with the Treasury Committee’s proposals, the court proposed to give the oversight committee the papers from the meetings of the MPC and FPC.
Some hours ago, the noble Lord, Lord Eatwell, somewhat mischaracterised the Government’s approach to governance. The Government’s position has been that governance is in the first instance for the Bank itself, but we have not sought to distance ourselves. We listened to the Treasury Committee’s and then to the Bank’s response and have come forward, in the light of those responses and the Second Reading debate, with these amendments.
Subsequent to both the Treasury Committee’s and the court’s response, the Chancellor agreed with the governor and the chairman of court that the oversight committee’s remit would be extended to encompass the commissioning of internal reviews of the Bank’s policy performance. Finally, as part of our response to the Treasury Committee and the Joint Committee that scrutinised the Bill in draft, the Government committed to considering further whether the proposed reforms ought to placed on a statutory basis.
My honourable friend the Financial Secretary to the Treasury restated this position in another place. As I said during Second Reading, the Government have now determined that that should be done, and we are tabling these amendments.
Amendment 13 writes the new oversight committee into the Bill, simplifying the governance structure of the Bank by subsuming the role and responsibilities of the existing committee of non-executive directors—the so-called NedCo—into the new oversight committee.
Subsection (2)(a) of new Section 3A provides that the oversight committee will be responsible for keeping under review the Bank’s performance in relation to its objectives and strategy. This includes both monetary policy and financial stability, including the responsibilities of the MPC and the FPC.
Subsections (2)(b) and (c) give the oversight committee responsibility for overseeing the Bank’s financial management and internal financial controls, and subsection (4) lists a number of additional responsibilities in relation to the procedures of the MPC and the FPC and the terms and conditions and remuneration of key posts within the Bank. I hope that when we hear from the noble Lord, Lord Eatwell, he will accept that that provision fulfils the purpose behind his Amendment 29, which would make the non-executive committee of court responsible for overseeing the activities as well as the procedures of the FPC.
The oversight committee will be made up of all the non-executive directors of court, but in some cases it may be inappropriate for particular directors to have an active role in certain of the oversight committee’s functions. For example, a director of court who is also an external member of the FPC—as is the case with Michael Cohrs at present—should not have a role in directly overseeing the FPC’s performance. Subsection (4) of new Section 3B therefore allows the oversight committee to delegate any of its functions to two or more of its members.
New Sections 3C and 3D give the oversight committee an express power to commission and publish external and internal performance reviews. I hope that that satisfies the noble Lord, Lord McFall of Alcluith, whose Amendment 11 is also intended to implement the Treasury Committee’s recommendation for retrospective reviews of the Bank. In fact, in a number of respects, government Amendment 13 in the names of the noble Lord and my noble friend Lady Noakes goes further than that. Amendment 11 relates only to reviews carried out by the court itself; whereas Amendment 13 provides for reviews to be commissioned from an external person, such as an academic or independent expert, or from an officer or employee of the Bank itself.
I also note that Amendment 11 is limited to reviews of past conduct; whereas government Amendment 13 allows reviews of current practice to be carried out that may be appropriate to the functions of the oversight committee in the financial management and internal financial controls of the Bank.
Consistent with the Treasury Committee’s recommendations, subsection (5) requires the oversight committee to ensure that sufficient time has elapsed before commissioning any review, to allow it to be effective and to avoid impeding the ability of the Bank to continue to operate effectively while the review takes place.
In line with the Treasury Committee’s recommendation and the amendment tabled by the noble Lord, Lord McFall of Alcluith, new Section 3D would require the oversight committee to publish its reviews, unless publication would be against the public interest. Published reviews will also be laid before Parliament. Where publication of all or part of a review is delayed, the oversight committee must keep that decision under review and publish that material as soon as the sensitivity has reduced.
New Section 3E requires the oversight committee to monitor the Bank’s response to the report and ensure that it fully implements recommendations that it accepts. That gives the oversight committee an explicit role in ensuring that reviews translate into real action, and that the Bank fully takes on board the lessons learnt.
The Treasury Committee recommended that non-executives have access to all papers considered by the MPC and the FPC. New Section 3F implements that recommendation and goes even further by allowing members of the oversight committee to attend all MPC and FPC meetings in order to observe their discussions.
The remainder of the new clause and government Amendments 28, 30, 33, 91 to 96, 98, 99 to 101 and 145 to 147 make consequential amendments to implement the new oversight committee, and I do not intend to take up the Committee’s time by making any further reference to them.
In conclusion, the Government fully recognise the importance of strong lines of accountability for the Bank, given its expanded responsibility and powers. The amendments represent the most significant legislative reform of the governance arrangements of the Bank of England since nationalisation, and on that basis I hope that the Committee will support them.
Lord Phillips of Sudbury
My Lords, in the provisions setting up the oversight committee, which obviously has a hugely important and wide-ranging job to do, my noble friend mentioned the right of delegation in new Section 3B, but that is limited to two or more of its members. He mentioned under new Section 3C the right of delegation of a review to a person whom the committee can appoint. May there be wisdom in having a slightly wider power of delegation, so that one could under new Section 3B have an outside person or persons as part of that sub-committee and, in new Section 3C, more than one delegated reviewer? There may be occasions when that would be helpful.
Lord Sassoon
My Lords, I think I have covered the point but perhaps I can reflect on that and respond to it, because I suspect that the Committee might want me to respond to other points after we have heard the debate.
Lord Phillips of Sudbury
I see:
“There is to be a sub-committee of the court of directors … consisting of the directors of the Bank”.
It is not all the directors, some of the directors. I have got you.
Lord Sassoon
I have been restraining myself from clarifying a number of other points, but I think that there is perhaps a point that will help the Committee. A director, as defined, is a non-executive director, so the executive members—the governor and the deputy governors—do not, under the definitions here, count as directors. It is only the non-executive directors, which may help my noble friend.
Lord Phillips of Sudbury
I am grateful for that, and I apologise for the error. However, I want to reinforce the importance of extending the power of delegation under new Section 3B. That could be very important to the work of the committee and strengthen it because it would bring in outside voices and give strength to its deliberations. I hope, therefore, that the Government may review this and decide to extend the power of delegation, not just to members but to outsiders as well. Subsection (3) already provides that outsiders can attend and speak at meetings of the committee, but to be members of a delegated body is crucial, as, indeed, in the review structure under new Section 3C, it would be helpful on occasions to have more than a single person appointed to conduct a review. If it is a complex review, there could be a lot of point in having a small team of three. At the moment that is not permitted by the wording of new Section 3C.
Lord Sassoon
My Lords, in most senses I am very grateful for the number of questions. I am also grateful for the general welcome that there has been for the Government bringing forward this very important series of amendments to the way that the oversight and governance of the Bank operate. We are coming to one of the key parts of this Bill. I am grateful, therefore, for the general support from around the Committee for what we are trying to achieve here. Let me reassure noble Lords that a lot of their concerns have been thought about and are adequately dealt with, although there are one or two things on which we have consciously taken a particular course, which not all members of the Committee would agree with.
Let me start by reassuring my noble friends Lord Flight, Lord Hodgson and Lord Tugendhat, and others, that we are certainly not creating any new body here. The committee of non-executive directors of the court, the so-called NedCo, already exists; we are folding that committee’s responsibilities into the new oversight committee, so we are not proliferating committees.
I have considerable sympathy with the position of the noble Lord, Lord Burns. To summarise his position, it is that in fact a mature board can do all of this without effectively throwing the executives out of the room. There is, however, a long tradition within the governance of the Bank of this critical role of NedCo, which has been accepted and not seriously challenged over the years, combined with calls from all sorts of quarters, including the Treasury Committee, to do it in the way that we are doing it. We have had calls for a supervisory board from the noble Lord, Lord Eatwell, and others, which have a similar end. Many, therefore, both in this House and in another place, have been calling for this separation.
Yes, I understand that in the best of all worlds it should not be necessary, but the Government have responded to the calls for this separation between the executives and the non-executives to carry out the oversight role. We believe that we have done it in the most efficient and effective way here by not creating new committees and additional complexity. Neither have we chosen to do it in what I would suggest would be another inappropriate way—namely, to have a supervisory board, which is itself composed only of non-executives. All these considerations, therefore, have been factored into the basic construction here.
In terms of the basic construct, my noble friend Lady Kramer asked whether the Chair of Court would be executive or non-executive. It will be non-executive. I am aware that my noble friend has identified a possible lack of clarity by reviewing the existing legislation, and I know that she has tabled an amendment on this that we will debate later. However, the intention is very clearly that the chair will be non-executive.
I will take some of the other key points. My noble friend Lady Kramer asked whether new Section 3C(5) would mean that the committee should avoid criticising the Bank. That is absolutely not the case. The section only relates to the timing of reviews, and it is sensible to provide that, in deciding when to carry out a review, the committee should consider whether having a review at that time would disrupt the ability of the Bank to do its job properly. My noble friend also went back to questions about why the Bank had been so tardy, and about the scope of the reviews it recently commissioned. I would suggest that that illustrates why this amendment is appropriate and will make the whole position much clearer and different with this remit on the oversight committee. Without debating the rights and wrongs of the timing and the scope of reviews that have recently been commissioned, this amendment very much deals with that concern.
The noble Lord, Lord Eatwell, raised a concern about the scope of the work here, and what is kept under review. As he helpfully clarified, Amendment 29 seeks to require the non-executive committee to oversee the activities of the FPC. That is precisely what the Government believe Amendment 13 achieves as it makes the oversight committee responsible for overseeing the Bank’s performance against its objectives, including the FPC’s pursuit of its objectives. I believe, therefore, that in drafting its scope, that concern is taken fully on board.
My noble friend Lord Phillips of Sudbury asked questions on the ability of the committee to delegate, and on the interaction of new Sections 3B and 3C. These are different points, and therefore the construction here works as it was intended. New Section 3B allows the committee to delegate its own functions to two or more members of the committee. That is a different point from that in new Section 3C, which allows the committee to appoint, not to delegate, others—either an individual or a group—to undertake reviews of Bank performance. Therefore, the drafting works on that point and deals appropriately with the concerns that my noble friend expressed.
As regards the concerns around these processes, a number of points have been raised about possible redaction or disagreement with recommendations and so forth. The noble Baroness, Lady Drake, asked what would happen if the Bank did not accept recommendations that had been made. If that were the case, it would certainly be made public that the Bank had rejected a recommendation. I would expect that any such decision would therefore be subject to very close scrutiny, including appropriate parliamentary scrutiny. That would work in a very similar way to the scrutiny that surrounds government responses to independent and other reviews. There is no way that the Bank could walk away from proper challenge in such circumstances.
Baroness Drake
On that point, I am sure that it would leak or become obvious but what is laid before Parliament is not the report that the Treasury receives but the report that the Bank publishes. This provision allows for the Bank not to publish on the grounds of its view of a public interest issue.
Lord Sassoon
My Lords, it is generally accepted that carve-outs are needed, particularly in relation to the time-sensitivity of reports. As I have explained, this is very tightly circumscribed and the question of when it is appropriate to publish must be kept under review. The publication of the report, or any delay to that publication, can be achieved by the Bank only in those very circumscribed circumstances. They must keep publication under review. Therefore, there will be publication and appropriate challenge at the earliest appropriate time. It is difficult to see what the circumstances might be in which the Bank’s not agreeing with a recommendation would justify non-publication. There is proper but not excessive protection of the position here.
There was also a question from my noble friend Lord Hodgson about the Treasury’s possible ability to step in and in some way redact or hold back reports. The Treasury has no powers here. It merely receives a report. It is up to the Bank, again on public interest grounds, to hold back parts or the whole of a report. I should not say that I quite understand my noble friend’s cynicism about references to the Treasury because I certainly do not. However, I understand why he has properly raised the question.
I think I have already touched on this point but the noble Lord, Lord Eatwell, specifically referred to proposed new Section 3A and whether the government amendment allows the committee to consider the merits of the Bank’s action. Proposed new Section 3A provides that the committee is to keep,
“under review the Bank’s performance in relation to … the Bank’s objectives”.
I reiterate that the main concern here has been addressed.
On the broader question of what the Government have done not only in relation to the Treasury Committee but about the recommendations that the Bank made in January, there is nothing that I can add to what I said in my opening remarks, in which I attempted to be very clear on that point.
Lord Eatwell
Perhaps I can clarify the question for the noble Lord. The question is really about whether the oversight committee could pass judgment on the decisions of policy-makers. As the Treasury Committee put it:
“It is unrealistic to suppose that an oversight body could plausibly be expected to commission an external review of a policy decision without assessing the substance”.
This is what the Bank objected to in the initial form of the oversight committee. Has the Treasury put aside the Bank’s objections, and can the oversight committee now refer to make its assessment of the substance of policy decisions?
Lord Sassoon
Let me address this very directly. The requirement for the oversight committee to ensure that sufficient time has passed before commissioning a review is there precisely to ensure that it does not put itself in the position of second-guessing the Bank’s decisions when those decisions are still playing out. After that point, it will be appropriate to assess the effect of those decisions, but while they are playing out it will not be possible effectively to estimate how they are playing out and it would be inappropriate to do so. The way that the amendment is drafted is precisely consistent with the Treasury Committee’s recommendation that the reviews be retrospective, rather than in any sense contemporaneous.
I hear clearly what the noble Lord says: there is a difficult balancing act here, between allowing the oversight committee the ability to question everything and not boxing it into questioning the judgments that have been made on policy decisions. Yes, it can challenge and review judgments on policy decisions but it should not be boxed into doing so while the consequences of those decisions are playing out. In substance, that is what the Treasury Committee recommended.
Lord Eatwell
Let us focus this by taking a concrete example. It is now generally accepted by everybody except the Bank that the Bank made some calamitous decisions shortly before, or in the process of, the collapse of Northern Rock. Various statements were made by the governor that accelerated the run on the bank. The continuous reference to issues of moral hazard when the bank needed recapitalising did significant damage in that case, and that damage reverberates to this very day.
Now that significant time has passed, suppose we were to commission a review of the Bank’s activities at that time. Would it be permissible for the oversight committee to say, “Look, this decision was made on the wrong analytical grounds and was a serious mistake. The Bank should readjust its perspective to think in a different way. Perhaps it should introduce some other analytical tools so that that mistake is not made again”? Would that be appropriate?
Lord Sassoon
My Lords, without wanting to endorse the conclusions of the noble Lord, Lord Eatwell, from the experience in 2007, yes, of course it would be possible and appropriate for the oversight committee to conduct or commission that kind of review. Without detaining the Committee for much longer, I will address a couple of other points.
Lord McFall of Alcluith
Could the Minister point to where his amendment says that that would be allowed? Looking at proposed new Section 3A(2), I can imagine a very sterile debate between the oversight committee and the Bank or the governor. The function of the oversight committee is to keep,
“under review the Bank’s performance in relation to … the Bank’s objectives”.
If it asked, “Did you stick by your objectives?”, the Bank answered, “Yes”, and the committee said, “We don’t think you did stick by your objectives”, where would it go on that issue? The committee could ask, “Did the Financial Policy Committee do its duty under Section 9C?”. The answer could be, “Yes, it has”, or, “No, it hasn’t”. The Minister needs to point to areas that would allow for the questions that my noble friend Lord Eatwell has asked.
Lord Sassoon
My Lords, I think the critical point here is that the noble Lord, Lord McFall of Alcluith, posited a situation in which this would be, in his words, a sterile debate with the governor. It goes perhaps to the heart of the question that I started with as to why the oversight committee is a committee of the non-executives. It means that it is the oversight committee without the governor or any of the executives of the Bank being members of that committee that takes the decision, under this provision in Amendment 13, to commission reports over a very wide area. So there is no question at the front end of a negotiation with the governor and the executive about whether they would commission a report in those circumstances. That is for the oversight committee to do. We have discussed the timing issue. The report is made and, subject to the issues that we have already discussed, the report is published. I can assure the noble Lord, Lord McFall, that there is no negotiation to be had at that front end. The non-executive oversight committee of the court of the Bank will have a very clear statutory function to take precisely what is proposed in new Section 3A, and it will be untrammelled by any possibility of the sort of sterile debate that the noble Lord suggests might happen. I hope that that reassures him.
I want to address a couple of other points, largely people issues of two kinds here. My noble friend Lord Tugendhat and the noble Lord, Lord Eatwell, questioned the need for the governor to consent to the appointment of an internal reviewer. This is intended to be a perfectly straightforward and practical measure. In practical terms, if the person selected is on the verge of leaving the Bank for another post, going on sabbatical or maternity leave, or whatever, the non-executive directors on the court may not necessarily be aware of this, and it is a practical way of ensuring that the appointment works. It also provides the governor, as the person ultimately responsible for the staff who work for him or her, with the opportunity to determine whether the person selected has the capacity to undertake the review in the timescale envisaged without impacting their other responsibilities. There is no more to it than that.
Lastly, I go back to a point which I believe the noble Lord, Lord McFall of Alcluith, made at the beginning about the size of the court. It is not directly the subject of this amendment, but I think that it is worth answering that point. Given that there will be four executive members—the governor and three deputy governors—if the court were reduced to eight, it would not allow for a non-executive majority because we have four insiders on the court. More generally, if there were such a small number of non-executives, it would be difficult to have sufficient diversity of experience and views, which was a point that we discussed earlier and which I completely agree with. If we had a reduction in size, it would be impossible effectively to have a non-executive majority or indeed, as I say, sufficient diversity.
I hope that I have been able to deal with the very understandable and important questions and concerns on this issue so that the noble Lord, Lord McFall, might see his way to withdrawing his amendment and the Committee will support the Government’s amendments.
Lord Eatwell
My Lords, is the Minister accepting my Amendment 29? He seemed to say that it was referring to the right sort of thing. If he is not accepting it, why is proposed new Section 9B(4) left in the form that it is, referring only to procedures? I have another question, but would he answer that one?
Lord Tugendhat
May I add a question so that the Minister can answer both together? The Minister is dealing with these matters with such grace and elegance that I feel very bad in questioning his or the Government’s motives in any way. Nevertheless, when we were dealing with the question of whether the chairman should be consulted on the appointment of the governor, basically what the Minister said was that reasonable people will behave in a reasonable fashion and there is no need to spell all this out, because it will be done in the normal course of events. Here he is insisting on absolutely spelling it out so that in practice the governor has a block. Of course I agree that in a properly run organisation, as I am sure the Bank would be, an employee would not be appointed contrary to the wishes of the governor; the relationship between the chairman and the governor would overcome that. None the less, to give the governor an absolute block is a sort of belt and braces that is completely at odds with what the Minister said in an earlier discussion. That means that one does look with some suspicion as to why, as I said earlier, there is one sauce for the goose and another for the gander. If he wants to spell it out here, why could he not spell it out earlier?
Lord Sassoon
My Lords, in legislation we come back regularly to this question of what needs to be spelled out and what does not. Elegantly or otherwise, I am not sure what more I can say other than that we have to take each case on its merits. Sometimes there are good arguments for spelling things out and at other times there are not. I know that I will disappoint my noble friend and it is a perfectly fair question, but I am not sure that there is much more that I can usefully add.
On the question from the noble Lord, Lord Eatwell, about Amendment 29, I will be clear. I do not accept Amendment 29 because I do not believe that it is necessary. I believe that Amendment 13, which I thought was helpfully clarified during this debate, more than covers the ground. I refer the noble Lord in particular to proposed new Section 3A(2)(a), which I would suggest makes it clear right at the beginning of the Government’s amendment that the function of the oversight committee and its ability to review performance is very widely drawn in relation to the objectives of the Bank and of the FPC. I believe that new Section 3A enables the oversight committee explicitly to review the activities of the FPC, which are there right at the beginning of this amendment.
Clearly I am having difficulty understanding the noble Lord’s concerns but I am absolutely clear that the substance as he has explained it and the specific example that he gave are completely within the ambit of what is being put in the Bill as the function of the oversight committee.
Lord Eatwell
The point is that the oversight committee is supposed to keep the activities of the Financial Policy Committee under review. There is an amendment among the amendments tabled by the noble Lord, Lord Sassoon, that changes “court of directors” in new Section 9B(4) to the “oversight committee”. So if we accepted his amendment, it would read that the oversight committee,
“must keep the procedures followed by the Committee under review”.
Why do we have that when we have new Section 3A doing all the work for us?
Lord Sassoon
I think that is wrong. It is not the Court of Directors that becomes the oversight committee; the Court of Directors remains the Court of Directors. It is effectively the committee of non-executive directors, or NEDCo, of the Bank, which becomes the oversight committee. The court remains the court. So there may be some misunderstanding of who is doing what here, but the Court of Directors must indeed keep the procedures of the FPC under review, which will be principally done through the oversight committee, which is a committee of the court.
Lord Burns
The references here to the Court of Directors of the Bank in new Section 9B(1) says:
“There is to be a sub-committee of the court of directors of the Bank”.
When it says Court of Directors in that case does it mean the whole court? Earlier we were being told that “directors” simply means the non-executive directors and that the governors are not counted as being directors of the court. That seems to be part of the problem that is causing this ambiguity.
Lord Sassoon
Let me try again. The court of the Bank, which is the executives and non-executives, must keep the procedures under review. The non-executives through the oversight committee have a remit and function that includes procedures but goes wider and is able to review the performance of the Bank and the FPC against its objectives in the full wide way that I believe the noble Lord, Lord Eatwell, is asking for it to do—and I am confirming that it does.
Lord Burns
For clarification, when it says the Court of Directors, does that mean the whole court or does it mean only the non-executives?
Lord Sassoon
Court means the whole court, and that is in relation to the procedures. The oversight committee has the function and ability to look not only at the procedures but also at the question of whether the objectives of the Bank and the FPC are being met.
Lord Eatwell
I am afraid that this does not help, because the amendment tabled by the noble Lord, Lord Sassoon, Amendment 28, says on,
“page 3, line 28, leave out “court of directors” and insert “Oversight Committee”.
So this should actually read, “the oversight committee must keep the procedures followed by the Committee under review”. Why is that there when new Section 3A covers it, we are told? But I shall not pursue this—I shall leave it with the Minister. Either we have just got in a muddle or there is a drafting error.
Lord Sassoon
I think that it is me that has got in a muddle. It is kind to say that we have got in a muddle or that there is a drafting error. I apologise to the Committee, as I am the only person who has got into a muddle on this, as I track through amendments and consequential amendments. New Clause 9B(4) is being amended by government Amendment 28 so that it no longer says “court” but says “oversight committee”. I apologise for my confusion on this, but we may have finally got to what it is intended to say. The two things will be consistent so that the oversight committee, to the substance of the point, will be able to deal with both procedures as envisaged under new Clause 9B(4) as amended and as explained in Amendment 13. So I hope that we are getting there.
Lord Eatwell
We are getting somewhere. What we have here is redundancy. New Clause 9B(4) is redundant, given the Minister’s explanation of new Section 3A.
I apologise to the Minister for raising a quite different question, which I shall just leave on the table. In my earlier remarks, I did not refer to the schedule. In the enthusiasm to replace “court” or “Bank” with “oversight committee”, the Government have gone a bit too far. Perhaps the Minister could check on this later, because the terms and conditions of non-executive members of the Financial Policy Committee are now amended to be determined by the oversight committee. That must be a mistake—it must be the court as a whole. That is in government Amendment 91. In government Amendment 93, the oversight committee can remove appointed members of the Financial Policy Committee. Surely that must be a mistake as well—it must be the overall court. So I think that there has been a great enthusiasm for replacing “court” with “oversight committee” and somebody has got rather carried away. But I am not going to press this issue now. I shall just leave it on the table for the noble Lord and his officials to consider and bring back to us later.
Lord Sassoon
I am grateful to the noble Lord because I think that we are getting into very detailed drafting points. I will certainly have a look at those points and write to the noble Lord and copy the letter to others who have spoken in this debate, just to check that nothing has gone astray in the drafting here. We will take that on board.
Lord Phillips of Sudbury
I hope that my noble friend agrees that the noble Lord, Lord Burns, had quite a point. It harks back to earlier discussions about the complexity of drafting. It is the fact, as I hope my noble friend will confirm, that the definition of Court of Directors in Clause 1 of the Bill includes the four executive directors and “not more than 9” non-executive directors—which makes 13. The interplay of the phrase Court of Directors and the new body that is the subject of the government amendment makes for extraordinary complexity in understanding. One thing that my noble friend might consider for the next stage is that when the Bill and his amendment refer to non-executive directors they say non-executive directors, because there are four executive directors—the governor and three deputy governors. They are directors too.
Lord Sassoon
“Oversight Committee
(1) The Bank of England Act 1998 is amended as follows.
(2) For section 3 substitute—
“3A Oversight Committee
(1) There is to be a sub-committee of the court of directors of the Bank (“the Oversight Committee”) consisting of the directors of the Bank.
(2) The functions of the Oversight Committee are—
(a) keeping under review the Bank’s performance in relation to—(i) the Bank’s objectives (that is, the objectives specified in relation to it in this Act and the other objectives for the time being determined by the court of directors of the Bank),(ii) the duty of the Financial Policy Committee under section 9C, and(iii) the Bank’s strategy as for the time being determined by the court of directors of the Bank (including its financial stability strategy);(b) monitoring the extent to which the objectives set by the court of directors of the Bank in relation to the Bank’s financial management have been met;(c) keeping under review the internal financial controls of the Bank with a view to securing the proper conduct of its financial affairs;(d) the functions conferred on the Oversight Committee by the provisions listed in subsection (4).(3) The Bank may arrange for specified functions of the Bank to be discharged by the Oversight Committee.
(4) The provisions referred to in subsection (2)(d) are—
(a) section 9B (review of procedures followed by Financial Policy Committee);(b) section 16 (review of procedures followed by Monetary Policy Committee);(c) paragraph 14 of Schedule 1 (remuneration of Governor and Deputy Governors);(d) paragraph 5 of Schedule 2A (terms and conditions of office of members of Financial Policy Committee appointed under section 9B(1)(e));(e) paragraph 9 of that Schedule (removal of members of Financial Policy Committee appointed under section 9B(1)(e));(f) paragraph 4(2) of Schedule 3 (terms and conditions of office of members of Monetary Policy Committee appointed under section 13(2)(c));(g) paragraph 9 of that Schedule (removal of members of Monetary Policy Committee appointed under section 13(2)(c));(h) paragraph 15 of Schedule 1ZB to the Financial Services and Markets Act 2000 (terms of service and remuneration of members of the governing body of the Prudential Regulation Authority).3B Oversight Committee: procedure
(1) The chair of the court (designated under paragraph 13 of Schedule 1) is to chair meetings of the Oversight Committee (when present).
(2) The Committee is to determine its own procedure, but this is subject to subsection (1) and subsection (5).
(3) The Committee may invite other persons to attend, or to attend and speak at, any meeting of the Committee.
(4) The Committee may delegate any of its functions to two or more of its members.
(5) If a member of the Committee (“M”) has any direct or indirect interest (including any reasonably likely future interest) in any dealing or business which falls to be considered by the Committee—
(a) M must disclose that interest to the Committee when it considers that dealing or business, and (b) the Committee must decide whether M is to be permitted to participate in any proceedings of the Committee relating to any question arising from its consideration of the dealing or business, and if so to what extent and subject to what conditions (if any).3C Reviews
(1) In the discharge of any of its functions, the Oversight Committee may arrange—
(a) for a review to be conducted under this section in relation to any matter by a person appointed by the Committee, and(b) for the person conducting the review to make one or more reports to the Committee.(2) The persons who may be appointed to conduct a review include an officer or employee of the Bank.
(3) A review under this section is a “performance review” if it—
(a) is arranged by the Committee in the discharge of any of its functions under section 3A(2)(a) and (b), and(b) relates to past events.(4) If the person to be appointed to conduct a performance review is an officer or employee of the Bank, the appointment requires the consent of the Governor of the Bank.
(5) In the case of a performance review, the Committee must have regard to the desirability of ensuring that sufficient time has elapsed—
(a) for the review to be effective, and(b) to avoid the review having a material adverse effect on the exercise by the Bank of its functions.3D Publication of reports of performance reviews
(1) The Bank must give the Treasury a copy of any report made to the Oversight Committee by a person appointed under section 3C to conduct a performance review (as defined by subsection (3) of that section).
(2) Subject to subsection (3), the Bank must also publish the report.
(3) Subsection (2) does not require the publication of information whose publication at the time when the report is made would in the opinion of the Bank be against the public interest.
(4) Where the Bank decides under subsection (3) that publication of information at the time when the report is made would be against the public interest, it must keep under consideration the question of whether publication of the information would still be against the public interest.
(5) Where the Bank decides that publication of any information is no longer against the public interest, it must publish the information.
(6) The Treasury must lay before Parliament a copy of any report or other information published by the Bank under this section.
3E Recommendations resulting from review
(1) This section applies where a report made by a person appointed under section 3C to conduct a review makes recommendations to the Bank as to steps to be taken by it.
(2) The Oversight Committee must—
(a) monitor the Bank’s response to the report, and(b) if or to the extent that the Bank accepts the recommendations, monitor the implementation of the recommendations.3F Oversight Committee: further provisions
(1) The documents to which the Oversight Committee is to have access in the discharge of its functions include documents considered, or to be considered, by the Financial Policy Committee or the Monetary Policy Committee.
(2) One or two members of the Oversight Committee may attend any meeting of the Financial Policy Committee or the Monetary Policy Committee, but a person attending by virtue of this subsection may not speak unless invited to do so by the person chairing the meeting.
(3) Subsection (2) does not affect—
(a) anything done in relation to the Financial Policy Committee by a member of that Committee who is also a member of the Oversight Committee,(b) the powers of the Financial Policy Committee under paragraph 13 of Schedule 2A, or(c) the powers of the Monetary Policy Committee under paragraph 13A of Schedule 3.”(3) In section 4 (annual report by the Bank), in subsection (2), for paragraph (a) substitute—
“(a) a report by the Oversight Committee on the matters for which it is responsible, and”.(4) In section 16 (functions of court of directors)—
(a) in subsection (1), for “court of directors of the Bank” substitute “Oversight Committee”,(b) in subsection (2)—(i) for “the court’s function” substitute “the function of the Oversight Committee”,(ii) for “the Committee” substitute “the Monetary Policy Committee”,(c) omit subsection (3), and(d) accordingly, in the heading, for “court of directors” substitute “Oversight Committee”.”
Baroness Hayter of Kentish Town
My Lords, we support Amendment 21, moved by my noble friend Lord McFall, and his comments on women’s representation. It was within this century that I joined the Board for Actuarial Standards, and I was the only woman there. It is extraordinary for some of us to find that we are still fighting for that goal. Not only did they put lots of women on the board after me, which I think was a good thing, but the new chair who took over yesterday is also a woman.
I shall speak particularly to the three amendments standing in the name of my noble friend Lord Eatwell and myself, which cover two particular issues: one is to correct the composition of the FPC itself and the other is to deal with pre-appointment hearings. On the composition of the FPC, we should first recall that the FPC’s work will impact throughout the economy, on the financial sector itself but also on businesses large and small, and on consumers. The latter categories need to have confidence that there is someone on the FPC who understands their interests and is speaking up for them. As Mark Hoban said in the other place, we need,
“more challenging voices in the board room, not fewer”,
and that must be equally the case with the FPC. So merit is a clear necessity but, as we said on an earlier amendment, so is a range of backgrounds, experience, interest and knowledge, whether from the wholesale markets, insurance, deposit-takers or others. So too, as was mentioned by my noble friend Lord McFall, is the voice of consumers, be they SMEs, businesses or indeed individual consumers. The FPC may have a role in loan-to-value decisions, for example, but the consideration of the FPC of this has to have input from those who are further down the food chain who will feel the impact of any change in policy.
On the question of pre-appointment hearings by the Treasury Select Committee, I argue that there is less market sensitivity over these than could possibly be the case even if we accept it in the case of the governor. There would be much less for these appointments. Indeed, when challenged on this very issue in the other place by Chris Leslie, Mr Hoban was quite unable to give any examples of where this might be an issue. Mr Tyrie made the point in the other place in April that as the Treasury Select Committee intends to hold hearings anyway, and if the person failed to find favour with the Treasury Select Committee, it would probably be pretty untenable for that person then to take up their appointment, because without the confidence of Parliament it is hard to see how they could do their job. It would therefore be sensible to engage with the Treasury Select Committee earlier in the appointment process.
The FPC has a vital public role to play. It acts on behalf of the nation—including Scotland, for the moment, so maybe we could have it there so long as it chooses to stay in the United Kingdom—so it needs the confidence of people’s elected representatives, which the Treasury Select Committee pre-appointment can of course help.
Lord Sassoon
I need every cheer I can get at this hour of the evening—I am very grateful to my noble friend. Let me press on. This group deals with various aspects of FPC membership, and I will address in turn each of the amendments that have been moved.
Amendments 21 and 21A would fundamentally alter the balance of membership of the FPC by adding either two or four additional external members. Following the advice of my noble friend Lord Hodgson, I disagree with these amendments for three reasons. First, the ratio of the FPC between Bank executives and non-Bank members is six to five, which closely mirrors the MPC, where the ratio is five to four. In answer to the noble Lord, Lord Burns, I can confirm that as with the MPC, the FPC members will act as individuals, and that no change to the membership of the MPC is proposed in this. The MPC model has worked well, and is much admired around the world, and we should not fix something that is not broken.
Lord Flight
I thank the Minister for giving way. Is it six or seven members? By my account there are the governor and the two deputy governors, the chief executive and the two members appointed. That makes seven. The whole point of my private amendment, which suggested that there should be eight members, was to give a majority. Are all three deputy governors to be members?
Lord Sassoon
The three deputy governors are to be members—I count that up as a six to five ratio. It is not correct that the Bank has seven insiders. The Financial Conduct Authority is an independent regulator, which is emphatically not one of the Bank members. I doubted whether I could count to six at this hour, but it is six. However, I am grateful to my noble friend for getting that clarification.
Lord McFall of Alcluith
Would the Minister expand on that clarification? At present, the MPC contains two deputy governors, Charlie Bean and Paul Tucker, and there will be a third one, who will take the membership up to six. However, there are only four external members of the MPC at the moment: Ben Broadbent, David Miles, Adam Posen and Martin Weale.
Lord Sassoon
My Lords, no change is being proposed to the membership of the MPC, which will remain with five internal and four external members. The third—the new deputy governor—will not join the membership of the MPC. Let me press on.
Baroness Hayter of Kentish Town
I will not hold the Minister for too long. He has stressed, and it was stressed in the other House, the independence of the Financial Conduct Authority, but of course there is a veto—the financial regulator is able to override the Financial Conduct Authority. It is, therefore, independence up to a point.
Lord Sassoon
My Lords, I am sure that we will come back to that point later on in our discussions. I would, however, absolutely refute any idea that the FCA will not be independent of the Bank of England. It will be completely separately constituted; there will be a number of links, of which the noble Baroness mentions one, but I would not characterise that as in any way impinging on the independence of the FCA.
That was the first reason for rejecting these amendments. The second reason is that the change suggested would create a committee of 13 members, a committee so large that it could prove to be unwieldy, which could obstruct effective discussion and decision-making. There is a genuine risk that having too many external members without sufficient time or space within the meetings to put their points across effectively could undermine their ability to provide an external viewpoint and challenge, which I know the Committee wishes to see. In addition, of course, these points are even more relevant to the amendment proposed by my noble friend Lord Flight, which would increase the size of the FPC to 15 members, or 16, if one includes the Treasury representative.
Thirdly, I do not agree that the Bank executives on the FPC should be in a minority. Ultimately, both the MPC and the FPC must be Bank committees if we are to hold the Bank to account for the decisions that they make.
On the amendments that relate to the experience, knowledge and potential interests of external FPC members, I assure your Lordships’ House that the Chancellor will take great care to ensure that the independent members of the FPC are sufficiently qualified and experienced to provide diverse and effective expertise and challenge to the FPC’s decision-making. Finding strong candidates with breadth as well as depth of experience will clearly aid the committee in achieving its objectives.
Specifically on Amendment 24, the Government recognise the importance of the contribution of the different constituent parts of the UK to the financial services sector. The sector is often wrongly characterised as being confined to the City of London. This is plainly wrong. Regional issues and intelligence already form an important part of the Bank’s policy-making process. The Bank has 12 agencies in a national network across the United Kingdom that assess economic conditions in their regions. This feeds into the policy-making process.
On appointments to the FPC, the Bill already requires the Chancellor to be satisfied that the candidate has knowledge or experience that is likely to be relevant to the committee’s functions. This will include relevant experience within the financial services and regulatory sectors, not only within the constituent parts of the UK but internationally. All four of the current independent members of the interim FPC have experience in financial services as a practitioner or a regulator.
I should add that while we have been having this discussion, my Front Bench has had a ratio of two women to every man. Therefore, I certainly appreciate, as do the Government, the importance of appointments that recognise gender diversity. It will be an important consideration when deciding on external members of the FPC. The Government believe that there are certainly many credible and expert female candidates out there for permanent FPC appointments. We will continue to encourage women to apply for future vacancies on the FPC.
The noble Lord mentioned the importance of having consumer views on the FPC. I agree that it will be vital. I accept that it took a long time with the FSA. It is fully recognised that we must have a broad spectrum of views, experiences and relevant knowledge if the FPC is to deliberate in an even-handed way. However, consistent with arguments over the size of the FPC, it will never be possible to ensure that all interested groups are represented on it at all times. We need to be clear about that.
On Amendment 27A, I reassure my noble friend Lord Flight that, in appointing external members, the Chancellor will be very mindful of the need for those people to offer a genuinely external and independent perspective. However, some familiarity with the workings of the central bank may well prove useful for external members, so I would not want completely to rule out individuals with some experience of working for the Bank becoming members of the FPC. For the sake of clarity, I add that there is no requirement for the FPC’s external members to be members of the court. One current member, Michael Cohrs, was subsequently appointed to the court, but there is no requirement for that to be the case. Nor is it the general case at the moment.
Amendments 26 and 27 deal with the role of the Treasury Committee in appointments to the FPC. As I have said at some length today—I will not labour the point—the Government strongly support the Treasury Committee’s role in holding hearings with individuals who have been appointed as members of the MPC, and now the FPC, before they take up their appointment. However, for the reasons that I gave earlier, those hearings should not take place before the appointment. In one case, just as with the appointment of the governor, the decision is that of Her Majesty on the advice of the Prime Minister and the Chancellor. In the case of the FPC and the MPC, it is rightly a decision for the Chancellor to take. There are risks in the rather febrile environment that we have had for a number of years now—risks that arise from market speculation about the balance of the committee and where the candidates may be coming from. So, yes, there should be pre-commencement hearings, but pre-appointment hearings would create the potential for danger and damage, which we should not entertain.
The Government place paramount importance on finding strong candidates for the FPC. I can reassure the Committee that future appointments of new independent members to the FPC will follow a process similar to that used to appoint MPC members, including an open, public competition. This, in addition to the pre-commencement hearings held by the Treasury Committee, will ensure that qualified and experienced candidates are appointed to the FPC, while avoiding the uncertainty that could arise from holding those hearings before the appointment is finalised.
On the basis of that short and focused debate, I ask the noble Lord, Lord McFall of Alcluith, to withdraw his amendment.
Lord Sassoon
Lord Eatwell
My Lords, I think the noble Lord said that he was going to take Amendment 28 away to consider it with Amendment 29. Surely he is not moving it now.
Lord Sassoon
My Lords, I have no recollection of saying that. I would like to move it formally.
Lord Eatwell
In those circumstances, I think that I should reconsider. The noble Lord did say that he was going to take Amendment 28 away to consider the relationship between Amendments 28 and 29. I do not quite understand why he has now moved Amendment 28.
Lord Sassoon
What I said earlier was that of course I would consider whether there were any consistencies in drafting. I think that the noble Lord asked about a number of areas, and I said that I would look at them, but I certainly did not say that I would withdraw the amendment. I said that I would make sure that there was nothing that he had identified that created any difficulty through oversight in the drafting. Of course I will do that, and if we find anything wrong it can be corrected at a later stage. I certainly did not agree to take away Amendment 28.
Lord Sassoon