Lord Tunnicliffe
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Financial Services Bill
Lord Tunnicliffe Excerpts(11 years, 8 months ago)
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Baroness Noakes
It might help those Members of the Committee who did not hear my opening remarks if I say that my amendment is designed to ensure that the power of direction can be used for all of the functions of the Bank of England not simply those listed in Clause 57(2). I also said that it probably ought to exclude the functions related to monetary policy.
Lord Tunnicliffe
I spent some years sitting on the Benches opposite facing the noble Baroness, Lady Noakes, and it comes as a refreshing new experience to find myself so frequently in agreement with her on this Bill. I am sure that will distress her as much as it is distressing me. Unfortunately, her caveating remarks are every bit as important as the lead remarks recommending the amendment.
We would not be able to support the amendment as drafted because, as she rightly points out, it could involve a direction to the MPC. This part of the Bill is a limiting list. The noble Baroness may want to consider either extending the list—we would look at that with great interest—or reversing it and extending the powers to the whole of the activity as her present amendment does and then caveating it with a number of areas where this power could not be used. This is a very useful amendment to develop the debate. I look forward to the Minister’s reply and thank the noble Baroness for proposing it.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, first let me be clear that I do not believe that it would be appropriate to extend the scope of the power in the way that is suggested by this amendment. It would make the power unusable. I was going to remind my noble friend, but she already made the point, that the Treasury already has a very broad power of direction over the Bank. As my noble friend pointed out, Section 4 of the Bank of England Act 1946, which continues and will continue to be operative, as my noble friend says, allows the Treasury to,
“give such directions to the Bank as ... they”,
the Treasury,
“think necessary in the public interest, except in relation to monetary policy”.
I think we are all agreed that the amendment was not intended to cover monetary policy.
Lord Tunnicliffe
Does the noble Lord agree that every Committee that has looked at this and reported and all professional commentators take the view that the power is so wide and so nuclear that no Chancellor would ever use it?
Lord Sassoon
My Lords, the noble Lord, Lord Tunnicliffe, is getting ahead of me. That was precisely what I was going on to explain. He is absolutely right that the power has never been used. Even at the height of the recent financial crisis, the then Chancellor felt unable to use this power to direct the Bank. Indeed, Alistair Darling’s book is rather interesting on this point. He explains in it that he was told,
“that it might be legally possible”,
to direct the Bank, but that,
“there would be wider implications of such an action. We had set great store by making the Bank independent and a public row between myself and Mervyn would have been disastrous, particularly at this time”.
The 1946 Act direction power is considered, and was considered by a Chancellor very recently, to be such a nuclear option because it is so broad that it would be very difficult to use. This means that any use of the power would likely be interpreted as the Chancellor overruling decisions and judgments that should rightly be for the Bank. This would be seen as a direct challenge to the Bank’s independence and a judgment on the competence of the Bank’s senior executives, which could cause a crisis in leadership in the Bank and a serious loss of public confidence. That line of thinking has prevented Chancellors from using the 1946 Act power in the past, as the fallout could be more damaging than the situation that they might be trying directly to address.
That risk was recognised by the Treasury Committee. That is why their report recommended that,
“the Chancellor should be granted a power to direct the Bank in a crisis which is free of the problems associated with the power under the 1946 Act”.
That is why the new power of direction in Clause 57 is designed to be a targeted and usable power. There will still be the power in the 1946 Act, for the reasons that underlie what my noble friend and the noble Lord, Lord Tunnicliffe, said. It is probably worth maintaining that reserve power somewhere in the system, albeit with the caveat that it is difficult to see the situation in which it might be exercised.
On the other hand, and going to the heart of who is in charge and who is responsible for what is in the new system, it was muddled and confused under the tripartite system but we want to make it much clearer in the new system that the Chancellor and the Treasury are principally there as guardians of public funds. That is why the specific direction in Clause 57 is designed that way. It is targeted. It does not allow the Treasury to overrule the Bank’s decisions and judgments; it allows the Treasury to take the decisions that are rightly for the Government to take. It is designed to allow the Chancellor to intervene to require the Bank to take specific action in a crisis management situation where public funds are at risk. That is why the power covers only the Bank’s crisis management functions, specifically the provision of liquidity and the operation of the special resolution regime. Again, I hope that that helps the noble Lord, Lord Peston, with the intended scope of this.
Lord Tunnicliffe
“Duty of coordination: early warning
In furtherance of collaboration under this Part, the Bank of England, FPC, FCA or PRA must provide the Treasury or the Secretary of State with an early warning of the possibility that a notification of a material risk to public funds may be given under any provision of this Part, and must provide full information about circumstances.”
Lord Tunnicliffe
My Lords, the intention behind this amendment is twofold. It is to bring more players into the decision about an early notification and to bring in the requirement for early notification. Touching first on bringing new bodies into this, the clause effectively brings the FPC, the FCA and the PRA into the early notification procedure advocated in this clause. The essence of our concern has been rehearsed around the House. It is that the Bill gives enormous power to the Governor of the Bank of England and, in a crisis, he effectively ends up as the gatekeeper of information flowing from the Bank to the Government. We believe that there should be ways of making this gate wider and that where the FCA and the PRA—I shall talk about the FPC in the next amendment—believe that an early warning is required, they should have a duty to consider the circumstances; and where they believe that it makes sense, they should have a duty to communicate that to the Treasury or the Secretary of State. This would clearly require them, as part of their function, to be proactive in their stance when they are horizon-scanning or looking forward at various risks.
The second part of the amendment is about the essence of an early warning. The concept of an early warning is that it is a warning short of a formal notice. The amendment lowers the bar from the form of words in the Bill that implies the “probability” of a material risk or the requirement of the use of public funds to the “possibility”. It echoes the concerns of the Treasury Select Committee in its 21st report which was published on 8 November 2012. Its recommendation at paragraph 166 was:
“We are concerned that the formal notification of a material risk to public funds may still not give the Chancellor enough time to consider other policy options. The Treasury needs to know as early as reasonably possible when it might receive a notification. We therefore recommend that the forthcoming legislation also require the Bank to give the Chancellor an early warning of the possibility that a notification of a material risk to public funds may need to be given, and full information about the circumstances”.
We very much agree with that recommendation and in this amendment we seek to give effect to it.
The process of crisis that we are debating will probably involve protecting the activation of the proactive intervention framework. The noble Baroness, Lady Noakes, knows what I am talking about because she is familiar with the document, The Bank of England, Prudential Regulation Authority: Our Approach to Banking Supervision, published in May 2011. The PIF is described on page 18. It describes five stages of escalation, which presumably are the key stages that lead up to a crisis. There is almost a presumption that there is a clear difference between normal business and a crisis. I hope it never happens, but if it did, it would be an escalating situation. Some of the stages of the proactive intervention framework will be in private. Some will not want to be the subject of a notice, as the final notification as envisaged in the Bill should be. The ability and duty of the Bank to give a notice of possibility would allow those private activities, in the early stages of the PIF, to take place, alerting the Government that they have to start thinking about the possibilities and how they may develop.
The counterargument often revolves around the fact that the Chancellor and the Governor of the Bank of England talk to each other. Of course, at the moment we have two most charming individuals and I am sure that they have useful conversations. However, once again, if you go into the evidence of the Select Committee and its comments, clearly this has not always been true. I am rather sorry that the noble Lord, Lord Lawson, is not in his place so that he could reflect on the events of 1984 when he had to find a great deal of money to save a failing bank and, according to the Select Committee, was advised of that requirement on the morning of the crisis. Equally, one cannot read Alistair Darling’s book without a clear feeling that the day-to-day communication between the Governor of the Bank of England and the Chancellor was less than warm. Certainly, it was not enough to leave one comfortable that the necessary preliminary warning that this amendment envisages would take place at an informal level.
As this crisis gathers, one has to presume a situation that relationships could really be quite bad. They could be in seven years’ time. The new governor might turn out to be less charming than the present one. The Chancellor of the day could well be less charming and communicative than the present one. In fact, there could have been a total breakdown of trust between them. It has happened in the past. This amendment would require a preliminary notice and there would be a dereliction of duty if the Government did not provide this preliminary notice. This mechanism would allow the Government to start their preliminary thinking and consider mitigation measures other than the expenditure of public money—as envisaged in the Bill —and give the lead times necessary. Crucial is a situation of no surprise. We are very uncomfortable about the sense behind some of the remarks, and the extent to which the governor is the gatekeeper of information to the Government. We believe the Government should be equally sensitive and concerned and I commend the amendment to the them.
Lord Sassoon
My Lords, I am genuinely puzzled about this amendment. I know that it was put forward in another place by Mr Leslie, the colleague of the noble Lord, Lord Tunnicliffe, and that it is designed to implement a Treasury Select Committee recommendation to create an early-warning mechanism of a risk to public funds. No one would be keener than me to have such a mechanism in place if I believed that it was necessary because I thought that the Treasury would not, under the provisions of this Bill, get sufficient early warning.
However, this provision and the question of an early warning do not rely on what I think we all agree is very important; namely, that there is constant dialogue about a whole range of things between the Treasury and the authorities, including the Bank. The question of an early warning does not rely on that, although we would expect it to carry on because it is working well at the moment.
I believe that the amendment is unnecessary and inappropriate. Therefore, let me carefully go through why. First, as the Government made clear in their response to the Treasury Select Committee, the duty on the Bank to notify the Treasury of risks to public funds already achieves this aim. The existing duty is already designed to give the Treasury an early warning of a potential risk to public funds. That is because Clause 54 sets an extremely low bar for notification; for example, when the Bank or the PRA looks at the position of a firm or a group of firms, if it thinks that a possible future scenario could lead to a situation in which the Treasury might reasonably be expected to decide to use public money to protect stability or the public interest, a notification must be made.
I do not think that the bar could be set much lower than that. For example, in the type of scenario described by the noble Lord, where the Bank is aware that at some point in the future a risk to public funds could arise, the Bank should be making a notification of a risk to public funds under the existing duty in Clause 54. I am happy to put that on the public record again. The Bank completely accepts that and there is no debate about the interpretation of the duty under Clause 54.
With this amendment, the noble Lord also risks undermining the clarity and force of the statutory duty to notify the Chancellor of risks to public funds by broadening the grounds on which it could be triggered to include risks to the FCA’s objectives which do not involve public money. Just as in the previous debate we were talking about issues which related to the line between risk to public money and other matters, again, in relation to this particular early warning, the duty is drafted very deliberately with the line drawn, which is not reflected in the noble Lord’s amendment.
Lord Tunnicliffe
I feel that the words used by the Minister are quite a shift. He referred to a “possible future scenario”. As I read Clause 54, it is much closer to a probable future scenario. Will he explain to me—I am sure that he is much more familiar with the Bill than I am, much as I have tried to study it in the past few days—where in statute I can draw the comfort that a possible very low bar to notification is emphasised.
Lord Sassoon
My Lords, the fact is that a regulator would have to look at future scenarios when it is thinking of its duty under Clause 54. The clause refers not to a situation that has arisen but to,
“a material risk of circumstances”,
which links it, as I have said, to the provision of financial assistance. It is clear and simple. There is a lot of other stuff in Clause 54(1), but the key things are,
“that there is a material risk of circumstances within any of the following cases”,
which are then explained in detail. As understood by the Government and the Bank, this is a forward-looking statement and requirement, which obliges them to think about possible future scenarios that could lead to the situations that are then developed in Clause 54. Of course, the duty in Clause 55 is to notify any changes to that.
Lord Tunnicliffe
I think that some of what the Minister has just said is quite a shift from what Clause 54 says. I would be delighted if he came forward on Report with some amendments that contained a duty to look at scenarios and a duty to bring forward a notification at the point of a possibility. There has been considerable debate in another place and in various committees, as to what “a material risk” means. There is a commitment in Clause 61 that it must be in the MoU, but as I search the MoU I cannot find it coming readily out to me—I shall be asking about that later. I invite the Minister to consider what he has said and see whether he can improve the legislation so that there will be no ambiguity about the test that the Bank has to apply in bringing forward a notification.
Lord Peston
My Lords, perhaps I can help the Minister—it is not a question of persuading him to say yes or no at the moment. Looking at Clause 54, I take “material risk” to mean a significant probability; “possible” is much less than that. I think that my noble friend suggests in his amendment that Clause 54 would be strengthened if we went down the “possible” line, the technical point being—and I do not press it—that there is deep philosophical argument, particularly within probability theory, about the difference between possible and probable.
I interpret the amendment to mean that if the relevant body—whether the Bank of England or another regulator—is looking at a specific part of the financial services sector, or even a specific firm within it, it should let the Government know that it is doing so and that one definitely possible outcome is a need for the use of public funds. The amendment, as I understand it, is simply an attempt to be helpful to HMG when it comes to the control of public money. The Minister may say, “We do not want to know about possibles; we only want to know when the real demand for the money is coming”. That may be his argument, but that is the difference—am I not right?—as to what we are talking about here.
Lord Sassoon
My Lords, there are some points where, frankly, I have to take the advice of the legal experts here, which I have done. Frequently Bills, this one included, contain constructions which follow some sort of drafting formula and are sometimes difficult to understand. As I say, my starting point is that if I really thought that the Treasury was not going to get the sort of early warning which the noble Lord, Lord Tunnicliffe, and the Treasury Committee rightly ask for, I would propose a government amendment. I take the point that “possible” appears in a heading and not in Clause 54(1) but it is very clear from the heading that we are talking about the material risk in the context of the possible need for public funds. I assure the Committee that all the advice that I have been given is to the effect that this will achieve the purpose that the noble Lord, Lord Tunnicliffe, desires. Finally, I draw the noble Lord’s attention to paragraph 13 of the draft MoU to find the interaction between the MoU and these issues. On the basis of those explanations, I hope that the noble Lord will feel able to withdraw his amendment.
Lord Tunnicliffe
My Lords, this has been a useful debate. However, members of the Treasury Committee are concerned that there is confusion about material risk. We will come to the extent to which the MoU does or does not define that. I believe that a Prime Minister once said, “Circumstances, old boy, circumstances”. As I said, I am happy to accept the Minister’s assurance that the legislation will work under the present charming governor and charming Chancellor, but it needs to be future proof. The words that the Minister used in connection with this important point were reassuring but they need to be in the Bill if they are to persist beyond the tenure of the present Government. I hope that he will consider bringing forward an amendment to achieve that. In the mean time, I beg leave to withdraw the amendment.
Lord Tunnicliffe
“Collaboration under this Part: power to make regulation
(1) The Secretary of State may, by order subject to affirmative resolution in each House of Parliament, add to the list of bodies specified in section 54(4).
(2) The first such order made under this section shall add the FPC to that list.”
Lord Tunnicliffe
My Lords, I apologise to the Committee for this extraordinarily clunky amendment. I give a prize to anybody who really understands what we are trying to do. Those who are committed members of the conversation on the Bill will know that at the end of the previous sitting, the Chair, as is typical or traditional, or whatever the right word is, swept through a whole series of clauses which we approved. Unfortunately, that destroyed about five amendments which we had tabled that day.
I am not suggesting malpractice on any part, but it rather ruined the arguments that we wanted to make today, and we have had to find a way around it. The first amendment slipped around it quite comfortably but the second one looks rather difficult to understand.
For the avoidance of doubt, this amendment puts the FPC into the notification process; it is as simple as that. Indeed, if we bring the amendment forward on Report, we will make sure that it is very clear, straightforward and in the right place and that the Committee does not plough it out by accident.
The FPC is at the centre of this Bill. In many ways the FPC is the new activity that will give force to the consideration of stability. I could not find any one place where it is nicely described. The best that I could find is in the Explanatory Notes to the Bill, where paragraph 35 states:
“New section 9C provides that the objective of the FPC is to contribute to the achievement by the Bank of the financial stability objective provided for in section 2A of the BoE Act … Subsection (2) provides that the FPC is to contribute to that objective primarily by identifying, monitoring and taking action to remove or reduce systemic risks (such as those set out in subsection (3)) with a view to protecting and enhancing the resilience of the UK financial system”.
In the FPC, we are seeking to put together the people who are the most able in the country to monitor, consider and mitigate financial instability. We are requiring them to opine on it and to make directions on it. We are requiring them to be the best informed people in the country and the FPC to be the most important body in the country in terms of financial instability. It is therefore strange that the new body is not able to pull what I would call the Clause 54 trigger. The Bill leaves this entirely in the hands of the Governor of the Bank of England. The presumption is that the governor will always provide the best information and the best notification of where a risk is likely to come about.
It is difficult to understand that, because at first sight of the Bill you would expect it to be a narrative about setting up structures and organisations to address the whole issue of financial instability. You would expect it to give those institutions the appropriate powers to understand, to control and to mitigate financial instability. Broadly speaking, the Bill does that; and, broadly speaking, the Bill is not opposed by these Benches in how it seeks to do that.
However, suddenly the narrative stops. The FPC, watching instability occur in the economy, is expected to take actions—quite powerful actions. It is able to instruct the PRA to take certain actions with respect to banks, perhaps to consumer credit, and so on. Yet suddenly, once the deteriorating situation is labelled a crisis, there is no involvement by the FPC. There is the presumption that the Bank of England Governor will be all-knowledgeable, that the FPC will no longer have any role, and that it should not opine on whether the Clause 54 trigger is pulled.
The facts of life are that real organisations have a diversity of opinion, and the FPC, if it is doing its job well, will have interesting and difficult discussions about a gathering storm. We contend that it should be able to decide that, as a result of those discussions, it can advise the Chancellor that a situation is deteriorating and that there may well be a situation in which public funds would be required. If we require this body to have that role, then the FPC will be a safeguard against the possibility that voices that should be heard by the Chancellor are not heard. I beg to move.
Lord Newby
My Lords, amendments to probe the role of the FPC in triggering a public funds notification under Clause 54 were also laid in Committee in the other place. They were inaccurate then and they remain inaccurate now, primarily because these amendments would have no legal effect. The FPC does not have any powers under Parts 1 to 3 of the Banking Act 2009. So in referring to the powers of the FPC under those provisions, the amendment refers to powers that simply do not exist.
The thrust of the noble Lord’s amendment is that the FPC should be able to give notification of risks to public funds separately from the Bank itself. As we have explained previously, the new system that the Government are putting in place is based on making the Bank a single point of accountability for financial stability. Consistent with this, we are making the Bank, and the Bank alone, responsible for notifying the Chancellor of risks to public funds. This is because, as we have seen so strikingly with the tripartite system, the risk of splitting responsibilities over various institutions is that each one thinks that one of the others is responsible, or blames another, when things go wrong, thereby allowing serious risks to fall through the gaps. This will require the Bank and its senior management team to identify and evaluate risks emanating from all parts of the financial sector, working closely with the PRA, the FCA and the FPC.
However, the statutory responsibility for formally notifying the Chancellor must be clear and unequivocal. It is not that the FPC is going to be separate somehow from the Bank and, given that the governor in his new enhanced role is going to chair the FPC, if the governor, representing the Bank, goes to speak to the Chancellor under the terms of Clause 54 he, of necessity, will also be representing the views of the FPC.
We therefore think that the amendment is unnecessary and inappropriate, and ask the noble Lord to withdraw it.
Lord Tunnicliffe
My Lords, the essence of this situation was caught in the last part of the noble Lord’s response. If the governor goes to see the Chancellor and, say, does not represent the FPC’s view, that would to some extent be unthinkable. However, our concern is if he does not go to see the Chancellor—that he listens to the debate at the FPC and may find himself in a minority, but still concludes that he has no responsibility to share FPC’s doubt with the Chancellor. We are not talking about competing roles where it is not clear who is responsible. We are not in any way challenging the split of responsibilities set out in the Bill. We accept that the Bank has the executive responsibility to take action in a crisis. We accept that there need to be rules about where the Chancellor comes in and has executive responsibility.
This is not about who is responsible, other than the points raised by the noble Baroness, Lady Noakes, earlier in the debate, where we may think the line has to be moved about a bit on direction. We are not, broadly speaking, challenging the thrust of the Bill and the division; we are challenging the idea that only the Governor of the Bank of England can advise the Chancellor that there is a gathering crisis that may involve the use of public funds. We believe that it is safer to have more bodies involved in that situation and we particularly believe the best qualified body in the land should have a duty to consider whether there is a crisis situation developing and should have a right, if it considers that to be true, to advise the Chancellor.
I can see that I am not persuading the noble Lord but nevertheless the point is important and valid. We may come back to it on Report but in the mean time I beg leave to withdraw the amendment.
Lord Tunnicliffe
Lord Tunnicliffe
My Lords, I shall refer to the memorandum of understanding, particularly paragraph 20. I am mindful that people reading Hansard may wonder which memorandum of understanding it is and where it is. It is Annexe E to A New Approach to Financial Regulation: Securing Stability, Protecting Consumers, Cm 8268, from January 2012.
Paragraph 20 of that document states:
“During a potentially fast-moving crisis, it will become especially important to ensure close and effective coordination so as to maintain coherence in the overall crisis management process. At the heart of institutional coordination during a live crisis will be frequent contact between the Chancellor and the Governor. However, the Chancellor and the Governor may agree to establish ad hoc or standing committees at other levels to support this process”.
That is fine as far as it goes. Our amendment seeks to require in the MoU more detail of how a temporary stability committee—as we have called it but we do not mind what the Government call it—would be convened and how it would function in a crisis. We are essentially saying that we would like a commitment in the Bill to emergency preparedness—to planning how the crisis might be handled.
I have a very strong relationship with the concept of emergency preparedness. It has been part of my whole professional life. My first job was as an airline pilot—third class; I struggled up to second class. We spent our time hurtling down runways with engines on fire and so on and coping with it—not for real, I hasten to add, or there would be piles of burning metal all over the place, but in simulators. It was a crucial part of our role. The public who use those services have every right to expect that people in that critical position spent a great deal of time preparing for emergency.
The next phase of my career in which this was particularly important was when I was managing director of London Underground Ltd. A year before I came into that office we had 31 people at Kings Cross. We got more or less everything wrong that could possibly have been got wrong. Emergency preparedness was part of the series of errors. If we had had good emergency preparedness processes and all other things had gone wrong, in probability nobody would have died. Later in my career I was chairman of the United Kingdom Atomic Energy Authority, which has the potential of course to release radioactivity into the atmosphere and we took the whole issue of emergency preparedness right up to what the role of the non-executive chairman would be in such circumstances.
In the airline business, London Underground and UKAEA, we had the potential to kill tens or hundreds of people—in LU, it was thousands of people. I am happy to reassure anyone reading this debate that we engineered out the scenario that involved thousands of people and London is much more secure for that. Nevertheless, they were grave and important consequences and we took them very seriously. Yet the damage that we could cause through our failure in that mode pales into insignificance compared with the pain the country is suffering in this double-dip recession.
I do not want to go into the causes of where we are today. There is not the slightest chance of the Minister and I having any serious common ground in such a debate. Despite the time we have in front of us this afternoon, it would be rather fruitless to start such a discussion. Yet I do not believe that we would disagree that the banking crisis made a significant contribution. We might argue over what came first or so on, but if the banking system had remained stable through the circumstances as they developed in the last part of the previous decade and the first part of this one, we would be in a much better position. A banking crisis does absolutely enormous damage to an economy—and to the world economy—and needs to be prevented, avoided or handled at all costs.
This amendment invites the Government to set out, at least in terms of duties or some such way, how they do the necessary emergency preparedness for such a crisis. For anybody who has been through a crisis—I have been through some modest ones in my professional career—there is absolutely no question that the extent of emergency preparedness has a significant impact on the ability to handle that crisis. Knowing who to talk to, who to bring together for skills and how to communicate with appropriate external agencies, and the effort put into developing scenarios and looking at the various tools that can be addressed by them, is massively repaid in those scenarios happening.
In my previous professions, very serious scenarios were very improbable. Very serious scenarios in the banking world have proved all too probable. They really happen and cause enormous damage. This amendment seeks to encourage the Government to set out what planning they are doing, how they would convene the committee envisaged in paragraph 20, what functions it would have and how it would involve the main players. In our experience, you have to have the top players involved. I am sure that, for instance, in contemplating a possible unfavourable military situation in the Middle East, the Prime Minister spends part of his time working through how the Government would respond to that and how the process of debate, analysis and so on would take place. I put to the Committee that exactly those sorts of capabilities ought to exist within Government for a possible future banking crisis. I am reasonably confident that they are in place. As a minimum, I hope the Minister can outline what preparedness is envisaged. I ask him to accept the amendment, which would require him to set out that preparedness in a memorandum of understanding. I beg to move.
Lord Newby
My Lords, we have stated many times during this debate that the Government place great importance on effective co-ordination between the relevant authorities. We accept that this will be particularly important with regard to crisis management. That is why the Bill places a legal duty on the Treasury, the Bank and the PRA to co-ordinate their functions, and requires that they prepare a memorandum of understanding setting out how they intend to co-ordinate in a crisis management situation.
Obviously in such a situation the Treasury, Bank and PRA will need to be in regular contact. These events are often by their nature fast-moving or take place outside office hours. The protocols in place for ensuring co-ordination need to be flexible to accommodate this uncertainty. A committee is not necessarily the most appropriate way to deal with every crisis. For example, setting up a formal committee for a crisis event that lasts the duration of a weekend would be overly bureaucratic and cumbersome if the event required a particularly swift and flexible response.
These crises require that. They require frequent and immediate contact between Ministers and senior officials at the Treasury and senior executives at the Bank of England. Each financial crisis situation is different, and sometimes the circumstances will mean that a formal committee process would not be appropriate. If you look at three events which have either been, or had the potential to trigger, a financial crisis, without going into the details you can see how greatly they differ. There was for example BCCI, which was referred to earlier. There were the concerns in the immediate aftermath of the 7/7 bombings. There was the RBS crisis. These happened at different times of the day and at different points in the week. Some were put to one side relatively quickly while others have had long-term consequences. In those circumstances, it is difficult to imagine how you could set out in a memorandum of understanding either how a committee might be formed—we do not think that you always need one—or, if one is formed, how it will be convened and would function.
The memorandum of understanding is currently 39 paragraphs long. I do not know whether, when the noble Lord, Lord Tunnicliffe, was doing his training on the plane or when he was at London Underground, they had instruction manuals and crisis manuals. From working in humble PR, I recall that crisis management plans there ran to page after page. An MoU would not be the right place for these plans. This is not to say that the authorities do not plan. I can reassure the noble Lord that the authorities now have regular war games to prepare for a range of financial crises and participate in a range of cross-governmental operational crisis war games. This is to try to make sure that when a crisis explodes its participants have some preparedness for how they can respond.
That is different from saying that you need a committee in every case, even though we have said in the memorandum that in some cases you might. Certainly it is different from saying that in a memorandum of this scope and length you could set out how a committee could be convened and function. I hope that the noble Lord will be reassured that officials are spending quite a lot of time in crisis management planning and that that is the appropriate way of making sure that we are ready to deal with a crisis, rather than having the formal structure that his amendment would require.
Lord Tunnicliffe
My Lords, I thank the noble Lord for his response. I am reassured to a degree about the issues. We are not likely to press this further. The Committee might be reassured if he could flesh out some stronger sense of the preparedness and if he could write us a note that sets out the levels at which people are involved. I am not asking him to make a commitment now. He does not have to do anything as dangerous as that.
The thoughtfulness that has gone into the pre-crisis preparation is crucial. So many organisations fail to do it properly. British Petroleum successfully wrote off something like a quarter of its value through not having an adequate level of preparedness. In the defence sphere, for instance, the committee systems within government for national security and so on are documented as part of the strategic defence plan. Anything the Minister can do to add to our understanding of the depth and height of this preparedness and who is involved would be reassuring. With that request, I beg leave to withdraw the amendment.
Lord Tunnicliffe
“(7) The memorandum is a measure prescribed by the Treasury by order which shall not be made unless a draft of the order has been laid before and approved by resolution of both Houses of Parliament.”
Lord Tunnicliffe
My Lords, the MoU is an important document. We believe that it is incomplete. Earlier, we suggested that it should have some additions relating to what I will call, more generally, emergency preparedness, if only to acknowledge that there should be an acknowledgement that there is a duty to do that. There is a real question mark over whether the commitment to explain material extent is fulfilled in Clause 61(2)(a). I have read the memorandum with care and I do not see in which paragraph that commitment is discharged. I should be grateful if the noble Lord could bring that out in his response. I see curiosity spreading across the faces of the Government.
Lord Newby
For clarification, will the noble Lord repeat which duty he is referring to?
Lord Tunnicliffe
Clause 61 is entitled “Memorandum of understanding: crisis management”. Clause 61(2) states:
“The memorandum must, in particular, make provision about—
(a) what the Treasury and the Bank regard as a material risk for the purposes of section 54(1)”.
We have had quite a debate about material risk but I cannot see which paragraphs of the memorandum address that duty. I should be grateful if the Government would flesh that out. I do not want to cause the Government undue problems. We would be very happy to see a letter setting that out, although a response now would be delightful. The memorandum is important. It will change because, in my view, it already has question marks over it as it stands, but also because the world will change and, as the world changes, the Government, the Bank and the Treasury will want to change the memorandum. It is crucial that Parliament is involved in such an important document.
This MoU deserves to be a formal document and it deserves to be approved by both Houses. The amendment is a standard amendment such as we find in these situations. It requires an affirmative resolution, first, to register the document and, secondly, to allow for when it might change. I cannot see why it is being resisted. The concept of an MoU is entirely sound but the document, frankly, should be more formal than it is at the moment. Its alteration in the future should be by affirmative resolution of both Houses. I beg to move.
Lord Newby
My Lords, I shall start by answering the noble Lord’s question as to where in the memorandum of understanding the question of material risk appears and where it is defined. The principal paragraphs dealing with this matter are paragraphs 8 to 18, but paragraphs 13 to 16 set out the matters that the Bank should take into account in determining the material risk.
The Bill does not actually say that the memorandum of understanding has to define material risk. It says that it must,
“make provision about … what the Treasury and the Bank regard as a material risk”,
which is a slightly different requirement. The paragraphs in the memorandum of understanding to which I have just referred do exactly what the Bill requires the Treasury to do.
Lord Tunnicliffe
Forgive me—the noble Lord was going faster than my brain. Will he repeat the paragraph numbers that cover the point?
Lord Newby
The whole section is headed “Notification by the Bank of a risk to public funds” and it runs from paragraph 8 to 18. It explains the background and sets out, particularly in paragraphs 13 to 16, the matters that the Bank needs to take into account in determining whether the material risk test is met.
The amendment would transform the MoU into a statutory instrument. In our view, that would severely limit the usefulness of the MoU as secondary legislation is, like primary legislation, extremely prescriptive. It sets out what must and must not be done and confers powers that have legal effect. Although we agree that clear responsibilities are important for effective crisis management, we believe that the Bill sets out the framework for this extremely clearly and the MoU then fleshes that out. That is the role of an MoU. It goes beyond what must, in all cases, be done or not done. It allows the authorities to set out what is likely to happen in given situations and why that is the case and provides an insight into the aims of the authorities involved. We do not believe that it would be possible for the MoU to fulfil this purpose effectively if it were required to be in the form of secondary legislation. That is because it is difficult to impose clear legal constraints on how a crisis is managed because of the wide variety of situations that could be considered as a crisis, each requiring bespoke handling that suits the characteristics of that particular event. Earlier I talked about the different kinds of financial crises we have had in recent years which I think exemplify that point.
It is our view that the MoU should be a living, responsive document, able to change as is needed. Requiring that it should be a piece of secondary legislation would severely curtail the authorities’ ability to change the MoU as circumstances change. As things stand, the MoU can be changed within a matter of days. That requires no huge amount of legal input because it is a working document about how to handle a crisis. That is very different from dealing with a statutory instrument which goes through a different formal process. It would be difficult to deal with a statutory instrument when the House is not sitting and that would be inappropriate.
The Bill already provides for the MoU to be laid before Parliament. It will then be open to scrutiny. The Treasury Select Committee will be able to scrutinise it, as will the Economic Affairs Committee in this House if it decides to do so. In my view, that is the best way to get parliamentary input rather than through an overprescriptive and inappropriate statutory instrument. In view of those arguments, I hope that the noble Lord will withdraw his amendment.
Lord Tunnicliffe
My Lords, my experience is that statutory instruments do not have to be that inflexible. Statutory instruments that have to have early effect can be laid and come into effect immediately, if that is appropriate. However, they do require formal scrutiny by Parliament. I have not won many points today and I am not going to win this one. I beg leave to withdraw the amendment.