Bank of England and Financial Services Bill [HL]

Lord Sharkey Excerpts

Monday 9th November 2015 Lords Chamber

Moved by

[Lord Sharkey]

2: Clause 1, page 1, line 7, at end insert—
“( ) In section 1(2) (court of directors), in paragraph (e) omit “not more than”.”

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[Lord Sharkey (LD)]

My Lords, I start by thanking the Minister and his officials for meeting us to discuss the provisions in the Bill. It was helpful and I look forward to further meetings between Committee and Report. The purpose of the amendment is to set the number of non-executive directors of the court of the Bank to nine. The helpful Treasury briefing note to the Bill is a little ambiguous in this area. It states on page 1 that, alongside these changes, the number of NEDs on the court will be reduced from nine to seven, although the legislation will leave flexibility for up to nine NEDs. But as far as I can see, there is no measure in the Bill to reduce the number of NEDs from nine to seven. I understand that this reduction is within the gift of the governor, who has simply decided that the number should be seven and not nine. As far as I know, there has been no consultation on this measure.

According to the Bank’s website as of this afternoon, the court has four executive members and nine non-executive members. The governor proposes to reduce the number of non-execs to seven, while at the same time the Bill proposes to increase the number of Bank officials on the court from four to five. Together, this would radically change the composition of the court. As I say, at the moment the court consists of four Bank officials and nine NEDs. The new structure would mean that there are five Bank officials and seven NEDs. This seems unsatisfactory and possibly even dangerous. The Bank’s tendency to groupthink is well known, and of course the Bank is famous for its intellectual humility and capacity for self-doubt. It is important that the tendency to groupthink and arrogance is resisted. The last two financial services Acts gave much more power to the governor than to the Bank but, at the same time, they provided for more robust oversight. The officials/non-executive director balance on the board is a critical part of that. It is absolutely critical if the court succeeds, later in the Bill, in abolishing the oversight committee and assigning its functions to the court itself, which I hope it will not. We will look at that later.

I pressed the Minister at Second Reading, and in a subsequent meeting, to explain why the number of non-executive directors is to be reduced, and I have had no real answer. I have heard something about administrative convenience and transition arrangements, whatever they may be, but that is certainly not a proper answer. I again ask the Minister why the number of non-executive directors on the court is being reduced.

A lot in the Bill seems to be aimed at reducing the influence of non-executive directors, and we will come to discuss the composition of the various sub-committees. A lot in the Bill seems aimed at reducing external influence on the Bank’s processes and deliberations. There is also a lot in the Bill that weakens the supervisory regime that the Bank is charged with enforcing, and we will come to all that. For now, our amendment seeks to maintain the balance of NEDs and officials on the court of the Bank. That is obviously vital if we are to avoid a repetition of groupthink and introspective and arrogant behaviour. The Bank will have five officials on the court—one more than it has now. We need to retain nine non-executive directors to be certain of strong, uncaptured, independent voices on the court. I beg to move.

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[Lord Ashton of Hyde]

So clearly it was not a burning issue. As my noble friend Lord Flight said, no member of the court is from a regulated firm—that is absolutely true—which ensures no conflicts of interest. We think that that is the correct way forward. Of course, they bring a wide amount of experience and there are many members of the court whose description is a “former” director of relevant parties, including banks.

Finally, who made the decision to reduce the number from nine to seven? That was made by the Chancellor, on the advice of the non-executive chairman of the Bank. The proposed composition of the court, as recommended by the Treasury Select Committee, was a total of eight: the governor, two deputy governors, an external chair and four other external members.

[Lord Sharkey]

Does that not make the point that it would give a clear majority to the external members?

[Lord Ashton of Hyde]

It would also be considerably smaller than what we propose today—which is one of the problems brought up by noble Lords. We are not going with that exact number but we will have a majority of externals with the flexibility to increase those by two—something the noble Lord’s amendment would remove.

We agree that the ability for independent scrutiny and challenge should not be compromised. We think that with seven high-quality non-executive directors this will not change. There will still be a majority of external members on the court, well equipped to scrutinise the actions of the Bank and hold the executive to account. My noble friend Lord Bridges and I are happy to meet with the noble Lord, Lord Sharkey, if he would like to discuss this further, but in the mean time I hope that my explanation of the Government’s thinking will allow him to withdraw his amendment.

[Lord Sharkey]

I am afraid we have not heard any kind of compelling explanation as to why this reduction should take place or what its benefits might be. It is simply not enough to pray in aid, as the Minister did, the alleged size and efficiency ratio of commercial company boards. That is simply a category mistake. The Bank is not a commercial company. It has duties that no commercial company has, and it is more important in our national life than any private sector company.

The reduction proposed in the number of non-execs would completely change the culture in the court. But what is worse, as the noble Lord, Lord Eatwell, has said, there is simply no evidence to support the case for the reduction. Evidence may arise out of the consultation, but I am not quite clear about that—and that may need at some later stage a little more explanation. I am happy to take up the Minister’s offer to meet, but I am certain, too, that we will want to return to this issue on Report. In the mean time, I beg leave to withdraw the amendment.

Amendment 2 withdrawn.

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Debate on whether Clause 3 should stand part of the Bill.

[Lord Sharkey]

My Lords, I do not believe that Clause 3 should be part of the Bill. Clause 3 abolishes the oversight committee and transfers its functions and responsibilities to the court itself. This is a significant weakening of the oversight of the Bank. The oversight committee consists only of the non-executive directors of the Bank; there are quite deliberately no bank officials on the committee. Parliament arranged this in order to be certain that oversight was truly independent and to avoid the possibility of undue bank influence in assessing the performance of the Bank itself in its various roles.

There is an irony in the proposal to abolish the committee. As the noble Lord, Lord Eatwell, pointed out at Second Reading, the Court of the Bank was opposed to the original proposal to create a supervisory board. It was the Bank itself that proposed an oversight committee composed exclusively of non-executive directors.

The reasons given by the Government for the abolition of the oversight committee are extraordinarily weak. The Minister’s letter to me, received last Thursday, says about the oversight committee:

“The new oversight functions and transparency measures have been successful, but the extra layer of governance imposed by the oversight committee has proved unnecessary”.

It goes on to say:

“There is effectively an oversight committee overseeing the work of an oversight board”.

That is emphatically not the case. It was precisely because Parliament found oversight by the board to be unsatisfactory and defective that it introduced the non-executive director-only oversight committee.

In exercising oversight of the Bank there is a completely obvious difference between having that oversight carried out by the Bank itself sitting as five officials and seven NEDs, and having it carried out by an oversight committee composed only of non-executive directors. Anyone with experience of corporate governance in the commercial world would immediately recognise the difference and the danger to independent scrutiny in the current proposal.

The Minister also says:

“The non-executive chairman of the Court has found the division of responsibilities between the Court and the Oversight Committee difficult to operate and unnecessarily complex since, to ensure that the meetings are effective, the Oversight Committee has often required the presence and engagement of the executive members of the Court”.

As a reason for abolishing the oversight committee, this is very feeble. Does the chair of the court imagine that the oversight committee could function without calling on the executive directors? How could any oversight committee function without evidence from the executives it is charged with overseeing? Does the chairman not understand the obvious and critical difference between court executives being called to give account to a committee of nine non-executive directors, and these same court executives giving an account of their actions and decisions to a full court meeting of five bank executives and seven non-executives? When you come right down to it, the main reason advanced by the Government for abolishing the oversight committee seems to be that the chair has diary and scheduling issues.

Perhaps I should remind the Committee—although seeing those present in the Chamber this afternoon, I probably do not need to—that Parliament considered the oversight committee a vital part of the reform of the Bank’s structure of governance. It was intended to prevent a recurrence of groupthink and as a check on the tendency to arrogance. It was intended as a means of ensuring a cool, independent view of the Bank’s operation, as a means of ensuring proper scrutiny and transparency and, as the Minister says, it has been successful in doing exactly this.

The Government have made no meaningful case for abolition. Abolition would reduce oversight and transparency and reinstate the Bank’s influence over oversight itself. It would ignore all the reasons Parliament advanced for the establishment of the oversight committee in the first place and, in common with other measures in the Bill, it would increase the influence of the governor and the Bank in areas where Parliament has taken deliberate steps to decrease it. Abolition is a retrograde and dangerous measure. The Government have given no compelling reasons—in fact, hardly any reason at all—for abolishing the oversight committee. This clause should not stand part of the Bill.

[Lord Tunnicliffe]

My Lords, I support the noble Lord, Lord Sharkey, in his contention that the clause should not stand part of the Bill. This whole issue is about holding the executive to account. In these situations it is very difficult to make a speech which does not sound as though you are criticising the current executive and governor. Oversight mechanisms are in place for when things go wrong. They are largely irrelevant when things are going right but they are there in case they go wrong. I contend that the Government’s proposals significantly reduce the power of the non-executives to hold the executives to account.

Those of us who sat through those long days of Committee on the Financial Services Act 2012 will remember that the Government stated that they,

“fully recognise the importance of strong lines of accountability for the Bank, given its expanded responsibility and powers”.—[Official Report, 26/6/12; col. 184.]

I am not sure whether the Government took that view immediately in the debate, but it was the consensus in the Chamber at the time, after an enormous amount of discussion.

Anybody doing what you have to do in the modern world to see how the Bank functions and looking it up on the Bank’s website will find a very good page—except that we are about to change it all—labelled “How we are governed”, which says:

“The Oversight Committee of Court, consisting solely of non-executive directors and supported by an Independent Evaluation Office, reviews and reports on all aspects of the Bank’s performance”.

That is very convincing for anybody with a proper interest in the banking structure and all the various banking responsibilities. There is a process whereby people who know what is happening can call the executive to account.

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[Lord Bridges of Headley]

My Lords, I thank all the noble Lords who have made very powerful contributions and thoughtful points.

I will not detain your Lordships with lots of history; you know it much better than I do. However, to remind the Committee how this came about, I will repeat something that has already been said. The Financial Services Act 2012 gave rise to the Oversight Committee, largely in response to recommendations made in the report Accountability and the Bank of England from the Treasury Select Committee in the other place. That report recommended that the court should be reformed into a board, with powers to conduct ex-post reviews of the performance of the Bank; that board members should be authorised to see all the papers submitted to the MPC and FPC; and that the board should be responsible for reviewing the processes of the Bank’s policy committees.

The Treasury Select Committee argued that the new board should be called the Supervisory Board of the Bank of England but, despite this name, the structure that was proposed was in fact a unitary board. As has been said, the Financial Services Act 2012 took steps to implement these recommendations, by creating a set of statutory oversight functions. However, instead of conferring powers on the court itself, the powers were conferred upon a new statutory Oversight Committee, made up exclusively of the non-executive directors.

[Lord Sharkey]

Would the Minister agree that it was the Bank itself that suggested that?

[Lord Bridges of Headley]

That is my understanding. If I am wrong, I will correct myself.

The noble Lord, Lord Sharkey, made his points very forcefully and I fear we may still have to have further discussions—if he can bear it—but let me restate the Government’s position. The problem now faced by the Oversight Committee is simple. As the noble Lord said, for the non-executives to hold the executive to account effectively, they need to meet together, not separately. There needs to be full and frank discussion between the governors and the non-executives on how best to exercise the court’s oversight functions. I am sure the noble Lord would agree that the challenge and recommendations of the non-executives need to be informed by in-depth knowledge of the Bank’s operations. Effective oversight needs to be carried out by the executive and non-executives in partnership, not in silos.

It bears repeating that the key powers of oversight, which are necessary and working, are not lost as a result of their transfer to the whole court. The court will continue to be able to commission reviews as it sees fit. Moreover, the non-executives will continue to be a majority on the court and will also continue to meet together as a group after each meeting of court, in line with best practice. As was discussed earlier today, court contains a high quality non-executive majority and is therefore well placed to oversee the work of the Bank.

It is entirely appropriate that court, as the governing body of the Bank, should be responsible for exercising these oversight functions.