Financial Services (Banking Reform) Bill

Lord Turnbull Excerpts

Tuesday 15th October 2013 Lords Chamber

[Lord Turnbull (CB)]

I speak to Amendments 89 and 90 in my name. A recurrent theme in the reforms to which we have come back several times this afternoon and this evening has been to increase competition in the banking system. This should engage not just the banks but their regulators too. We tabled these two amendments, Amendment 89 relating to the FCA and Amendment 90 relating to the PRA.

The proposal for the PRA is to add an additional objective to promote competition in a way that is as far as possible consistent with its main duty of providing financial stability. The difference between the amendment tabled by the Government and my amendment is sufficiently small that I think we can accept their measure as taking us forward on that front. However, the parliamentary commission also believed that a change was needed to the architecture of the FCA’s objectives. I wish to put the other side of the case. A fear, which many in the financial world share, is that the FCA will give too much emphasis to bringing about change through enforcement, will wait until something goes wrong and then intervene heavily. However, the FCA, when properly directed, can be a very powerful force for improving competition.

As the Minister has set out, the present architecture has the overall strategic objective of ensuring that relevant markets function well, and has three operational objectives below that: namely, the appropriate degree of protection for consumers; enhancing the integrity of the UK financial system; and promoting competition in the interests of consumers. We queried whether the strategic objective did anything or even whether it could be unhelpful and could be used to trump or confuse the clarity of the operational objectives. Our preferred solution was to drop the strategic objective and promote the other three to primary objectives by deleting the word “operational”, thus ensuring that the competition objective comes into the front rank along with the other two. I am rather surprised that the Government have not supported this, particularly as they accepted the pro-competition logic in the PRA case. I was not convinced by the Government’s response with regard to providing a mission statement. My riposte to that is that the chief executive of the FCA thought the strategic objective,

“added little or nothing to the three operational objectives”.

He continued:

“You could argue that promoting effective competition in the interest of consumers and the market, enhancing the integrity of the system and ensuring an appropriate degree of protection encompass everything that is in the phrase ‘ensuring markets work well’”.

Therefore, if you can achieve something in fewer words and with fewer objectives, and the other one is largely redundant, I would dispose of it.

In my view the aspect of FCA culture that most people feel needs to be bolstered is competition. The current architecture is weaker in that respect than the proposed amendment. We have heard the opposing view from the Minister, but that is the logic behind the position which the commission took.

[Lord Eatwell]

My Lords, I remember discussing this at length during the passage of the previous Financial Services Bill. At that time, I commented that one could often detect whether a proposition made any sense by proposing a negative outcome. If we suppose that the duty is to make the markets work badly, that does not make any sense at all. Therefore, it seems to me that the strategic objective is entirely redundant and serves no useful purpose. Indeed, the idea of changing what were previously operational objectives into prime objectives places competition at that prime level and achieves the objectives which the Government themselves have argued are necessary. For some reason, this issue was never satisfactorily explained previously and has not been satisfactorily explained now. We should apply Occam’s razor and take it out.

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Moved by

[Lord Turnbull]

83: Before Clause 15, insert the following new Clause—
“Court of directors to become board of directors
(1) The court of directors of the Bank of England shall become the board of directors of the Bank of England.
(2) Accordingly, in the Bank of England Act 1998—
(a) in sections 1(1), (2) and (4), 2(1), 4(2), (3) and (4), 9A(1), (4) and (5), 9B(1), 9G(2), paragraphs 8 to 12A and 13(1) and (3A) to (6) of Schedule 1 and paragraphs 5 and 14 of Schedule 3, for “court” substitute “board”,(b) in section 2(2) to (4) for “court’s” substitute “board’s”, and(c) in paragraph 14(2) of Schedule 1, for “court” substitute “board of directors, or former members of the court of directors,”;and any reference to the court in any other enactment or instrument is to be read as (as appropriate) being or including a reference to the board.”

[Lord Turnbull]

I shall speak also to Amendments 84, 85 and 86. I believe that my colleague, the noble Lord, Lord Lawson, may speak to Amendment 87.

For those who took part in proceedings on the Financial Services Bill in 2012 these clauses will be Groundhog Day—fighting old battles all over again. The arguments about accountability are familiar, were set out in great detail in the Treasury Committee’s report Accountability of the Bank of England, and rehearsed again in the report of the banking commission. This is not surprising, given the overlap in membership of the two groups.

The dispute can be briefly summarised. The Bank of England’s responsibilities have been hugely enhanced, and its accountability has changed—one has to concede that—but not kept pace. Not only has the scope of the Bank’s responsibilities grown but so has its nature. It is now not just responsible for generic policies such as monetary policy or financial stability; it also has powers over the lives and livelihoods of individual citizens and individual businesses. It is therefore important that its accountability keeps pace with those changes.

Just as important as the Bank of England’s accountability to Parliament is its ability to be self-critical. This is the key feature about which people were dissatisfied. The Bank should be ready to review what it has done, consider how successful it has been and draw lessons from that. One can see that at some time in the not-too-distant future, the Bank will need to review the whole exercise of QE, which involves the spending of billions and billions of pounds, and be able to review the policy candidly, even when the results may not be entirely satisfactory or the Bank thinks that it can make improvements.

Amendment 84 would abolish the Court of the Bank of England and replace it with a board of directors. This is the most eye-catching measure—after all, the court has existed for 319 years—but not the most important. In a sense, it is what you would do last, having made the other changes to signify that the Bank’s governance had conclusively changed. The court has some desirable features, which were noted in earlier discussions. It is a unitary board and is no longer chaired by the governor. When I worked for the Treasury, I had to recommend appointments to the court. However, it has come a long way from the old 16-member court, which was like an in-house focus group on which every region or interest imaginable was represented. It has been replaced by a 14-member court with five executives and nine non-executives.

The Financial Services Act 2012 genuflected in the direction of improving internal review by creating an oversight committee of non-executives. I would contend that that still does not go far enough. The central recommendation in Amendment 86 is not about whether the court should be a supervisory board or a board of directors; it concerns the abolition of the oversight committee and the transfer of its responsibilities from a committee of non-executives to the whole board—as I will call it—of the Bank.

We are seeking this change because we believe that the responsibility to be self-critical should not reside solely with the non-executive directors but should be fully embraced by the whole board, including the governor and deputy governors. Looking critically at one’s own work should be something that the governors embrace enthusiastically and not have imposed on them. It is illogical to praise the court for being a unitary board but with regard to this particular function —the function of review—to assign self-examination to the non-executive directors.

I should make it clear that, as with the oversight committee, it is not implied that the commissioning of a review is to be done internally. The board should determine in each case how best to conduct it—whether it is to be done internally with help or to be done externally.

The next important element of the amendments relates to expertise. The chairman of the Bank has hitherto been a highly experienced, highly respected, all-purpose FTSE chairman with an industrial rather than a financial background. Amendment 84 requires that whoever is appointed should have experience in financial matters and financial markets. However, looking at the advertisement that has just been issued for the new chair, I wonder whether it has really caught up with the change in the nature of the work that the Bank is now involved in. The words “prudential” and “macro” do not appear in the advertisement; nor do the words “central bank” or “knowledge of central bank work” or “knowledge of international financial policy”—for example, familiarity with the work of the Financial Stability Board. It still looks pretty old fashioned. Therefore, we are trying to change the nature of the people who are appointed to this organisation to reflect the new, wider role that it is taking on.

With regard to the new arrangements, this proposal is not meant to trample over current operations. The review work would always take place at a time when the operation was no longer critical, so there would be a clear difference between reviewing performance in the past and day-to-day operations.

Finally, the Treasury Committee and the parliamentary commission recommended that the board, or whatever it is called, should be smaller than the current one of 14 members. It was recommended that there should be a board of eight, including three internal members—the governor and two deputy governors—and four external members. Although the governance of the Bank has moved somewhat, my contention is that it still does not fully reflect the change in the nature of the work that it has to do.

[Lord Eatwell]

My Lords, we had a considerable discussion about the creation of the rather unfortunately named oversight committee, given the dual meaning of the word “oversight”, during the passage of the Financial Services Bill, now an Act. I am broadly in sympathy with the argument that the noble Lord, Lord Turnbull, has made, which carries through the logic from the ICB or the Treasury Committee—I cannot remember which had the initial discussions—through the banking commission, looking at the overall problem of Bank of England governance in the 21st century, particularly now, given its greater responsibilities.

I should like to make only one major point, which the noble Lord, Lord Turnbull, and his colleagues, including the noble Lord, Lord Lawson, might like to consider, and that is the business of expertise. I entirely agree that the chairman should be a non-executive with considerable experience of prudential or financial matters. That is fine. However, Amendment 84 then says:

“The persons appointed to be non-executive members of the Bank must have—

(a) experience in the running of large organisations and financial institutions”.

That would exclude a lot of people who would be highly desirable. It would exclude Sir John Vickers, for example, and that seems to me to be undesirable. I am very much in favour of academics being in these organisations, such as Sir John Vickers, and I would not like that area of expertise to be ruled out.

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[Lord Newby]

My Lords, I will answer that question. The principal role of the Financial Policy Committee and its principal area of responsibility is to maintain the stability of the financial system. That is very different from any of the other committees established by the Bank. As for people on the FPC who have any understanding of financial crises, at the moment, Dr Donald Kohn, for example, clearly falls into the category of people with that ability. The former governor believed that he had extensive knowledge of financial history, and therefore there was and is no lack of it on the relevant committees, even without the provision on the face of the Bill.

[Lord Turnbull]

I listened to the responses to my intervention and divide them into two categories. One is points made by the noble Lord, Lord Eatwell, the Minister and the noble Baroness, Lady Noakes, on specifying expertise and skill. I can see some force in those points. If we are going to have the opportunity, I will try to improve on it. My main area of disagreement is that I just do not agree with the idea that the oversight committee—the repository of who is responsible for reviewing what the Bank has done—should be hived off to a committee of non-executive directors. It should be built into the DNA of the whole organisation. However, I can see I am not going to be able to persuade noble Lords of that, so—

[Lord Lawson of Blaby]

Before the noble Lord withdraws the amendment, I would like to correct the Minister on what he said before about the noble Lord, Lord King—the former Sir Mervyn King. He is a very old friend of mine, and I can assure the House that in advance of this crisis, he had no knowledge whatever: it was not his interest. He was interested in two things: monetary policy and microeconomics. He was very good at microeconomics, but he had no knowledge or interest in past financial crises at all. He mugged it up later, of course, after the crisis broke. Of course he mugged it up: he is a clever man and able to do so, but I am afraid that the Minister was briefed by his officials to say something totally false and misleading.

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[Lord Turnbull]

I beg leave to withdraw the amendment.

Amendment 83 withdrawn.