Financial Services Bill

Lord Turnbull Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Turnbull]

My Lords, this Bill illustrates much of what is wrong with our legislative process. It has arrived with many major issues unresolved. Worse still, large areas of the Bill have not yet even been considered. It reminds me of those French paperbacks that we used to buy where the pages had not yet been cut.

I agree with the noble Lord, Lord Eatwell, that there is a problem with the way in which the Bill has been presented as amending legislation to three other major Bills. That is totally illogical. If the Government were to argue that they were refining the status quo, that would have been appropriate but they are, of course, claiming precisely the opposite. One of the drawbacks of the amending approach, for example, is that it is very difficult to make comparisons between how the MPC and the FPC operate.

The first question that we face is whether the Bill provides the right solution; it does not in my view. If something fails, one is always faced with the choice of whether to mend it or buy a new one. Of course, the latter is politically expedient as it enables the Government to say that they are sweeping away the faulty structure created by their predecessor. However, that is not necessarily the right answer.

In my view the existing system could have been improved by a number of changes. The first is the creation of a separate macroprudential responsibility located in the Bank, which would allow it to identify when the economy, the financial system or particular markets were running too hot—or even too cold. That would be a natural extension of its monetary policy expertise. It would enable the Bank to bring to bear certain controls or require the FSA to tighten capital requirements of the organisations it regulates. It was not necessary in my view to transfer the detailed prudential regulation of all financial institutions, large and small, insurance as well as banks, to the Bank of England—something for which it has little experience and which will overload it.

Secondly, it is curious that the Chancellor and the Treasury appear so little in the Bill, moving under a kind of invisibility cloak. However, the Chancellor, not the governor of the Bank, is ultimately the most powerful player, partly by his ability to co-ordinate policy at the highest level, partly by being the real lender of last resort and partly by providing the key link of public accountability. A judgment has to be made on when it is appropriate to delegate powers to a non-elected body and when the impact on citizens and organisations is such that a degree of democratic accountability needs to be introduced. In my view the extension of the powers of the Bank and the widening of those subject to its actions means that we have gone beyond what was appropriate for it when it was simply a monetary authority.

Thirdly, the demerger of prudential and conduct of business regulation was unnecessary. It has created a lot of overlap which will produce confusion. A number of processes are effectively shared: business model analysis, enforcement and vetting of key board appointments. My concern, though I need to declare my interest as a director of a regulated insurance company, is that regulated companies will find themselves having to deal with two shops rather than one. So, I would have retained a single FSA but with an enhanced macroprudential function in the Bank, overseen by a Chancellor-chaired council, rather like the US Financial Stability Oversight Council. However, we are where we are and we face the dilemma of the sat-nav lady. Does she tell you to turn round or recalculate your route? Reluctantly, we have to work with what we have and try to improve it.

I would start with the function of the FPC, which has oversight of the macroprudential function. Currently its terms of reference are rather narrowly drawn, emphasising very strongly the avoidance of risk. Alastair Clark, a member of the FPC, in a recent speech noted that there is a need,

“to strike the right balance between encouraging banks to strengthen their position and avoiding any undue constraint on the availability of credit”.

This is important because much of the public debate in this country on the current situation is in terms of an antithesis between the tightening of fiscal policy and the loosening of monetary policy. What this misses is that there is a third point of the triangle—the decision of the FPC about the liquidity and capital requirements of the banks. Clearly one of the lessons of the financial crisis is that the banks were undercapitalised for the risks they were taking. There is international agreement that their capital should be built up, but there is no consensus about the speed at which this should happen. There are many who think that the FPC is pushing this too fast and requiring the liquidity to satisfy highly demanding stress tests, thereby nullifying the expansionary effect of the Bank’s monetary operations.

A mechanism will be needed to ensure that we get the best combination of the different policy instruments, which brings us to the question of how we should design organisations to achieve that. One approach might be called synthesis. We should bring interlocking problems under one roof to allow those at the top to produce the optimal trade-off between them. The danger is that if those at the top have a particular bias, one view may be subordinated to another without full debate.

The opposite approach is the separation of powers or of focus. Organisations will pursue their objectives with a mechanism created above them to resolve differences. The old tripartite system followed this principle but the new arrangements are in the synthesis mould. This means that if the Bank overemphasises the financial stability objective and imposes costs on other functions, there will be nothing to correct it. The cross-membership of the governor and his immediate colleagues on the two committees will be an inadequate substitute and may even exacerbate the problem.

The Bill includes a number of checks and balances, but they could go further. For example, we could create a secondary objective to support the Government’s economic objectives, along the lines of those already provided for the MPC. The latter will have to maintain price stability but, importantly,

“subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment”.

The objectives of the two committees should be made symmetrical.

As with the MPC, the Treasury should be able to set out how the FPC should interpret its remit. We should consider whether the balance of the FPC is correct and perhaps add an additional external member.

I do not have time to go into the provisions relating to the FCA in any detail. I will simply say that I share the concerns that were expressed about how we can ensure that it operates in a way that is proportionate, fair and reasonable. I particularly commend the analysis provided in a paper published jointly by Herbert Smith LLP and the LSE.

It is clear that there is a lot of work to be done on the Bill. I hope that we can create something that will last longer than its predecessors.