Financial Services Bill

Lord Tugendhat Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Tugendhat]

My Lords, I will not follow the noble Lord, Lord Mawson, down the Lea Valley but I should like to revert to the causes of the troubles in 2008, for which I think there were two main reasons. First, by far the most important was the belief in light-touch regulation, to which both main parties, the financial community, most economists and commentators, and I at that time subscribed. To this was linked the near universal view in this country that the lighter the touch, the greater London’s competitive advantage.

The second reason was that in the build-up to the crisis, and after it had struck, the FSA and the Bank of England performed badly as institutions but also in terms of their co-ordination. The story is well known and I will not rehearse it here but I would point to one big difference between those two institutions. The FSA admitted error ages ago and instituted an inquiry while the Bank of England refused to do either until very recently, and then it was very grudgingly.

Clearly, Governor Montagu Norman’s maxim that the Bank should “never explain, never excuse” lives on. Against that background, I find it strange that the Government should feel that the Bank of England’s record before and during the crisis, and indeed since, is such as to warrant it receiving the vast increase in powers that are being lavished on it. I also recall from personal experience as well as anything else that the Bank’s record of financial regulation in the 1990s and the early part of this century was far from ideal. Johnson Matthey, Barings and, of course, the secondary banking crisis all come to mind.

I am glad that the Government have agreed that the Chancellor should have the power of direction over the Bank of England for use in a crisis where public funds are at risk and that they have put the Bank of England and the Treasury under a statutory duty to co-ordinate when managing threats to financial stability. But that does not alter the fact that in normal times during which the conduct of policy will either avoid or provoke possible crises, the Bank of England will wield enormous powers for which it must be held accountable. I will revert to that point in a moment but I want first to deal with another.

Instead of seeking to improve on the institutional structures that they inherited by adapting them and the way they interact in the light of experience, the Government have opted for root and branch organisational change. That is the same choice that they have made on the National Health Service. It is a strategy that always involves very great dangers, because it creates the classic conditions, during the process in which the changes are taking place, of uncertainty, in which risk management, the reconciliation of diverse objectives and keeping reporting lines open can go awry.

I have other worries, too. The burden on the governor will be immense, as other noble Lords have pointed out. He or she will be the master of monetary policy and both micro and macroprudential regulation in the world’s fifth or sixth largest economy and its second largest and most complex financial centre. That is quite simply too much for one person.

In addition to these responsibilities, as again has been pointed out, the governor will have to function effectively at the European and international levels and will have a constant responsibility to justify his or her actions to Parliament and the general public. Finding somebody to fulfil all those roles is going to be very difficult indeed and, however good the person who is chosen, they will bear an immense burden, which I think it is very unwise to create.

I also fear that problems in one area of the Bank of England’s activities will contaminate its reputation and abilities in others. In particular, I fear that any controversy, let alone any errors, in its handling of regulatory matters will contaminate its reputation and render more difficult its handling of monetary policy. Regulation is always a subject of crises and controversy—that is the nature of the beast. So I do not see how this form of contamination can be avoided.

My final fear under this head is of group think, to which a number of noble Lords have referred. Under the tripartite system, co-ordination could and did go wrong. Under the new one, there is the danger that there will not be enough debate, exchange of ideas, free expression and thinking outside the box about issues, dangers and what might be coming down the track. This is not an unfounded fear. If ever there was an institution prone to group think and institutional orthodoxy, it is the Bank of England—and I have already referred to Montagu Norman’s dictum, “never excuse, never explain”. The Bank of England has been going for more than 300 years. It is a very fine institution but, like any great institution, it has faults and other characteristics, which are very difficult to eliminate and are likely to endure. That is why it is very dangerous to put it in such an overwhelming position.

This brings me to the admirable report of the Commons Treasury Select Committee. The Government have chosen the wrong way to reform but, given the route that they have decided to go down, the Treasury Select Committee’s recommendations are absolutely essential to guard against the inherent dangers of the new system and enable it to work properly. I will not enumerate the recommendations in detail, because others have referred to them and we are time-limited. But I attach particular importance to the recommendations relating to the role, powers and composition of its proposed supervisory board. I also think that the role, powers and character of its chairman are a matter of great importance, as are the manner and terms of appointment of the governor and the need for published indicators of financial stability by which the Bank of England’s performance in that field can be assessed. Finally, under that heading, what the report has to say about the role of external members, both of the supervisory board and of the various committees, is very important indeed. I urge the Government to look very closely at this report and accept most of its recommendations.

With this Bill, the Government are creating an overmighty subject, whose decisions will impinge directly on households and businesses. The Treasury Select Committee’s proposals will go a long way to ensuring that it is subject to proper internal control and parliamentary accountability. They will also help it to function better than would otherwise be the case and, perhaps, to overcome some of the fears and doubts that I have expressed.