Bank of England and Financial Services Bill [HL]

Lord Tunnicliffe Excerpts

Monday 9th November 2015 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank my noble friend Lord Eatwell for this amendment, which takes us to the central problem with the Bill. His words are powerful: he calls the Bill opaque and obscure, and he says that it leaves unclear who makes policy. I thank him for his review of the previous legislation and his assurance that, broadly speaking, it works. I thank him for the concept of an “active entity”, which I shall adopt. However, he comes back to the point: who is doing what?

Perhaps before I go on, I should explain where the Opposition stand on the Bill. We feel that the role of the Bank of England is quite central to the economy and that it needs to be reviewed and probably reformed. We believe that, to do that, we have to have a period of reflection and study. My noble friend the Shadow Chancellor in another place has announced those reviews. Nevertheless, in respect of this Bill, we have a role to review the Bill, ensure that it makes sense and do all that we can to help the Government bring it back to a more sensible position.

Like my noble friend, having read the Bill, I ended up feeling that I understood less about how the Bank works than I did when we were in the very painful position in 2012—I say painful because it took so long to get there—when we created the legislation that created the present situation. Largely speaking, there is a question around why we are changing it from something that is clear to something that is significantly less clear. I thank the Minister for all his help in trying to help me understand the Bill—I wish that he had had more success. I am very grateful for the consolidated document that his staff have produced, and that has made studying the Bill and the Acts that it affects so much more straightforward. I also thank the Minister for the meetings he arranged, with himself and with the chairman of the court.

Those two meetings had an interesting effect: they produced two letters. One was dated 4 November and the other was dated November; noble Lords will have to take my word for it that it came after 4 November. I will quote selectively from the letters and am very happy to circulate them to anybody who is interested. Under a large paragraph labelled “Court of Directors and Financial Stability Strategy”, the Minister says:

“The Court, as the governing body of the Bank, is responsible for managing the Bank’s affairs except for the formulation of monetary policy. The Court is also responsible for determining the Bank’s objectives and strategy, and, in line with the Court’s role overseeing the Bank, the Bill makes the Court responsible for the oversight functions. The Court is therefore ultimately responsible for deciding how power given to ‘the Bank’ should be exercised, and how duties given to ‘the Bank’ should be fulfilled. This includes the Bank’s recovery and resolution powers”.

When I read that, I thought that it was pretty straightforward and sounded like any other company: power rests with the board—we happen to call it “the court”—except for where it is either taken out by statute, which it clearly is in the formation of monetary policy, or where the court has decided to delegate that power.

Unfortunately, after I met the chairman of the court, I got another, shorter letter. Under a paragraph labelled “Powers and duties conferred on the Bank”, it said:

“As the governing body of the Bank, the court is responsible for deciding how powers given to the Bank should be exercised and ensuring that the Bank fulfils its duties”.

That sounds okay. It then goes on to say that:

“These include powers and duties in relation to note issuance, resolution, and supervision of financial market infrastructures”.

It does not quite say that it shall have no other duties, but I put it to noble Lords that they are a pretty thin number of duties, given the tremendous responsibility that the Bank has in our monetary affairs. In the next paragraph, under the heading, “Powers and duties conferred on statutory committees”, the letter states:

“Powers and duties conferred on a statutory committee are for that committee to exercise, according to the terms of their legislation. The Court cannot exercise the powers conferred on a statutory committee”.

Because there was no legislation passed between 4 November and the something of November, I assume that the two letters say the same thing; I just have a lot of trouble seeing how. If the first letter is right, as I read it, then I am relatively comfortable. Unlike the Bill—and we can clear that up with some amendments—it restates my understanding that the court is in charge, except where responsibility is taken out by legislation. The second letter rather implies that there are four entities in the Bank: the Financial Policy Committee, the Monetary Policy Committee and the Prudential Regulation Committee—I think I have got them roughly right—which have clear powers and lots of authority and are all, incidentally, chaired by the governor; and then there is something called “the Bank”, which is left with note issuance, resolution and supervising infrastructure. We all know that no committee is going to have much to do in a resolution situation, since it will happen over a weekend in 48 hours We have moved from a position where the court is central to the Bank to one where it seems almost irrelevant.

There are two points here. First, is that move the Government’s intention and, secondly, is it clear? We are going to worry elsewhere about the standards for senior management in banks. If a bank came along with its roles and responsibilities as obscurely set out as we now have in the proposed legislation, it would be denied a licence to operate. What are we asking from these organisations? It is absolute clarity of who does what, with what authority. This does not meet those standards and it would not get a licence. I hope the Minister will ponder on what my noble friend, Lord Eatwell, and I have said. If he agrees that the Bill produces more obscurity than light, I hope he will pause and bring forward some amendments on Report, first to make absolutely clear what the Bill does.

[Lord Flight (Con)]

My Lords, when the Bill was published, I wrote to the Economic Secretary to the Treasury on this territory, because I could not really understand how the reorganisation of the Bank was intended to operate, or what it intended to achieve. Part of the reply I got was:

“The Governor has said that: ‘Our strategy will be to conduct supervision as an integrated part of the central bank and not as a standalone supervisory agency that happens to be attached to a central bank’. De-subsidiarisation, together with the organisational changes being put in place by the Bank as part of its ‘One Bank’ strategy, is an important element of this, and will help to break down any remaining barriers that could stand in the way of a unified culture and impede flexible and coordinated working across the Bank”.

I thought about this and looked at the structure. In answer to the points raised by the noble Lord, Lord Eatwell, what struck me was that “the Bank” actually means “the Governor”.

--- Later in debate ---

[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.

--- Later in debate ---

I strongly believe that there is nothing gained from having an oversight board as well as an oversight committee.

[Lord Tunnicliffe]

Surely there is a world of difference between the phenomena of groupthink in either one of the policy committees or on the court than the phenomena of the seven NEDs meeting alone. If they do produce a piece of groupthink, the most harm they will do is require a part of the activities of the Bank to be examined. It is very unlikely that they would do that, but it would do no great evil and cause little inconvenience. We are talking about a radical difference in balance when it comes to the powers of the NEDs to question the executives of the Bank.

[Lord Bridges of Headley]

My Lords, it is clear that I still have some persuading to do. I would argue that those powers have not changed in the sense that they have been transferred from the committee to the court.