Bank of England (Appointment of Governor) Bill

Debate between Matt Hancock and Mark Hoban

Friday 6th July 2012 Commons Chamber

[Matthew Hancock]

I agree with my hon. Friend in one respect, which is that changing the separation between the Executive and the legislature that scrutinises them would have great constitutional implications. I ask Members to draw their own conclusions on the contrast between that and merely changing the form of appointment to one of the two Houses of the legislature. That is a matter simply within the legislature, rather than to do with the role of the Crown in Parliament, which is the basis of our constitutional monarchy.

Let me bring the debate down to more practical considerations. If the Treasury Committee were to reject the Government’s preferred choice of Governor, a small number of MPs would effectively have vetoed a Crown appointment. The whole House would not have made that rejection; a small number of MPs would have done so. I do not think that there is any precedent for such a challenge, whereby a small number of MPs who are not Ministers challenge, through the power vested in them, the authority of our Executive—at least not since the days of Charles I, and we all know how that turned out.

Where would the Bill leave the royal prerogative? That question needs to be addressed. What would it mean for the role of the Crown in Parliament? In this jubilee year, as we celebrate 60 glorious years of Her Majesty, these are questions to which we need answers. It is perhaps no coincidence that the original proponent of this broad constitutional change was himself an avowed republican, with a history of great hostility to the Crown’s role in government: Tony Benn. Indeed, I understand the heartfelt and strongly held republican position of the hon. Member for Hayes and Harlington. He does not contradict me, so I presume that is his position. The Bill directly challenges that question of parliamentary accountability.

The Governor of the Bank is already accountable to the Treasury Committee for his or her decisions on monetary policy and financial stability, but I turn to the question of the increasing role of the Bank, because there is no doubt that under the Financial Services Bill it will have a bigger role than hitherto. The separation of bank regulation from monetary policy is a flaw and a mistake that has had grievous consequences, not least because the banking system is the conduit for monetary policy’s impact on the real economy.

I therefore strongly and passionately support the relevant change in the Financial Services Bill, but it does not follow directly that, under it, the position of the Governor is stronger than hitherto, because up until and including today in matters of financial stability the Governor has been imperial within the Bank of England. Executive powers over the areas of financial stability for which the Bank is responsible are the sole responsibility of the Governor in person, accountable to the court of the Bank and to the Treasury Committee.

Under the new proposals, the Governor will chair the Financial Policy Committee, and it is in that committee, rather than in the individual, that powers over financial stability will be vested. So on matters of financial stability not only will there be accountability externally, but decision making will be conferred on a committee that the Governor chairs, rather than on the person of the Governor himself.

[Mr Hoban]

Does my hon. Friend, who served with me on the Financial Services Bill Committee, not share my view that we risk over-personalising the debate by suggesting that the Governor exercises all judicial power? My hon. Friend is right to highlight the fact that the Governor will be chairman of the Financial Policy Committee, is chairman of the Monetary Policy Committee and will have three deputy governors to work with. These powers are and will be vested in the institution, not in the person of the Governor.

[Matthew Hancock]

I am grateful to the Financial Secretary to the Treasury for making that clear, and I agree wholeheartedly. In the debate about accountability under the Financial Services Bill, one fact often overlooked is that, whereas previously a power vested in the Bank of England involved a decision by the Governor alone, for which the Bank’s deputy governors would take collective responsibility, it will now formally involve a decision by a committee, of which the Governor will be chair. That is an important distinction. Despite concerns about increased power going to one individual, in fact the increased power goes to an institution, but the internal arrangements at the institution are being changed in order to reflect that increased power. That is why I strongly support the Financial Services Bill not only in principle but in the design of the system that we are discussing.

To whom would the Treasury Committee be accountable if it had this Executive power? In the words of Juvenal, “Who watches the watchmen?” Under this proposed amendment to the Bank of England Act 1998, the Treasury Committee could stall or reject the appointment of a perfectly qualified candidate for whatever reason it chose— perhaps, heaven forfend, even in order to raise the personal profile of a member of the Committee. Given the powerful investigations by Select Committees over recent months—for instance, into phone hacking—I am sure that we would all be sceptical about the idea that any member of a Select Committee could possibly try to change the way in which an inquiry went forward in order to raise their own personal profile. I am absolutely certain that that does not happen.

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[Matthew Hancock]

It was, but I would not wish to return to private subscription for the ownership and governance of the Bank of England, because of its role in our political economy. My hon. Friend the Member for North East Somerset might wish to push for that, but I believe that the settlement reached after nationalisation in 1946, whereby the Bank of England has its own capital base but is effectively part of the national political economy and one of the national institutions of economic governance, is the right one, rather than having private shareholders.

Since the Bank Charter Act 1844, other banks have been able to issue notes in sterling, and I believe that nine other banks do so in Scotland and Northern Ireland, but they have to be 100% backed by Bank of England banknotes held in the vaults of either the Bank of England or the issuing bank. That ensures that control of the money supply is within the grasp of the Bank of England rather than any other bank. I know that there are some Members who would prefer to return to the system from before 1844, not least my hon. Friend the Member for Wycombe (Steve Baker), with whom I regularly debate the point. I did so yesterday. However, the broad and settled view of the House is that we should retain the current situation.

Because the central bank is the monopoly provider of money and the lender of last resort, it must share a common strategy with the Government even though it is vital that its operational decisions on interest rates and financial stability are independent. The current appointment process fulfils well the twin objectives of operational independence and broad agreement on strategy. It also means that the Government can appoint a Governor who broadly shares their philosophy of economic management, even if the Governor is kept at arm’s length from party political machinations, the 24-hour news cycle, headline grabbing, tweeting and retweeting, and the Westminster bubble culture, which is the special discourse of the modern political set-up.

Economic history shows us the importance of the broad strategic agreement between the Governor and the Government of the day.

[Mr Hoban]

The Treasury and the Bank currently work together on the funding for lending scheme. Is my hon. Friend aware of any instances in which the sense of co-operation between the Government and the Governor was not quite as strong?

[Matthew Hancock]

Absolutely, and the Minister will be delighted to hear that he has anticipated the next section of my speech.

The nine years war, which the Bank of England was set up to finance, was the first example of successful co-operation on a strategy between the Governor and the Government of the day. The first Governor was a man called Sir John Houblon—his face appears on a modern £50 bank note, so hon. Members will know him well. Like many of his successors, Sir John dealt with the City but was not part of it. He was a grocer by trade and rose through the East India company—he was a business man who came to the City to oversee the Bank. At that time, the Governor, deputy governors and directors of the Bank were voted for by private shareholders, who had to have a £500 shareholding—a huge amount in those days. The Governor had to have a £4,000 shareholding.

We can only speculate who would get the job now if the late 17th century equivalent of the Treasury Committee had a veto over candidates. The House of Commons was, back in the day, notoriously corrupt and vice-ridden, unlike today. By way of illustration, the prospective parliamentary candidate for a by-election in Bath laid on a meal before polling day. There were 32 voters, but the meal consisted of two boiled haunches, two chines of mutton, four geese, four pigs, 12 turkeys, plain chickens, rabbits, an abundance of claret and sherry, and—my favourite—two venison pasties. A ball to persuade the voters’ wives followed. Glasses were broken and windows shattered at the end of it.

The modern system of corporate governance is similar to chief executive officers having skin in the game in financial organisations. As my hon. Friend the Member for Spelthorne (Kwasi Kwarteng) pointed out, when the Bank was given operational independence in 1997, it was returning to the independence it had enjoyed for 200-odd years until it was nationalised in 1946.

There are examples of when the Bank and the Government have agreed broadly on strategy and prosecuted it effectively, but there are also historical examples of how things can go wrong. The Bank was founded before the first Governor took office by an initial loan made by a Scottish banker called William Paterson. Founding the Bank was not Paterson’s only contribution to economic history; he was also the main instigator of the infamous Darien scheme, which involved a Scottish colony in Panama that was supposed to replicate the success of the English colonies in north America. With a monopoly company facilitating trade between the new and old worlds, the Scottish public went wild for the scheme and invested a quarter of the country’s gross domestic product in the embryonic New Caledonia. Of course, the reason the Panama canal is not called the firth of the Pacific is that the colony was a disaster—thanks to poor leadership, endemic diseases and weak demand for Panamanian goods—bankrupted Scotland and led, indirectly, to the Act of Union in 1707. Although William Paterson was not the last Scot to drive a country to the brink of financial ruin, he might have been the first.

I shall cite another example of the Bank and the Government having separate strategies that shows why the Bill would be a mistake. In 1716, a man named John Law, another Scottish gambler-turned-economist, managed to persuade the Government of France that, having defaulted on their debts four times between 1648 and 1715, they could create a scheme to end the national debt by enabling them to take control of the money supply and replace gold and silver, whose price was ruled by the markets, with something that he said would be more stable. He suggested creating a central bank in France along the lines of the Bank of England. In return for the deposits on gold and silver, there would be paper money deposited in a state-owned scheme that would turn it into something more valuable. This proved irresistible to the French people.

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[Mr Hoban]

The Treasury Committee already has a role—it conducts, for example, pre-commencement hearings for members of the Monetary Policy Committee. Paul Tucker and Charlie Bean, the two deputy governors, have been through that process, which we envisage will continue.

Even the Labour Front-Bench spokesman in the House of Lords was wary of the proposed increase of authority for the Treasury Committee. Although there has been a broader debate on the role of the House in appointments and whether there should be pre-appointment hearings, this is not the time to make those broader points. If there is to be such evolution, we need a much broader debate. Alighting on the appointment of the Government as a peg for that debate is not the right way to go about things. If I make more progress, I shall highlight the Government’s response to the Liaison Committee, which has discussed increasing the role of Select Committees.

[Matthew Hancock]

Will my hon. Friend take into account the views of Back Benchers who are not on the Treasury Committee, and note that a majority of hon. Members who have spoken today spoke against Second Reading?

[Mr Hoban]

That is a fair point. The weight of opinion has been to oppose the Bill. I gave a list of hon. Members who have spoken—I forgot to add my hon. Friend the Member for Spelthorne (Kwasi Kwarteng), who was the last Back-Bench speaker—but the balance of views has been against the proposal. There has been some discussion of the fact that the debate has continued until almost 2.30 pm, but the hon. Member for Hayes and Harlington, despite his three e-mails, could not get the 100 hon. Members required for the closure. The House has expressed its view today.

The appointment veto was proposed by the Treasury Committee. There was a consultation on, and pre-legislative scrutiny of, the Financial Services Bill prior to its Second Reading but, except for the Treasury Committee, no one called for the appointment of the Governor to be subject to its approval.

We need to recognise the changes being made to the accountability and governance of the Bank. It is facing pretty significant organisational change, and it is right that the arrangements for its governance and accountability be thoroughly debated as part of that process. In November, the Committee published its report on the accountability of the Bank and in it made several recommendations on governance. As a consequence, we have tabled amendments in the other place to strengthen and modernise the Bank’s governance arrangements.

Those amendments will replace the current committee of non-executive directors of the Bank with a non-executive oversight committee that will have a broad remit to oversee the Bank’s performance against its objectives and strategy, and provide for explicit powers to commission and publish internal and external reviews of the Bank’s policy-making process. In the Bank’s annual report and accounts, published on Monday, the Governor said in the foreword that the Bank must carry out its new responsibilities with

“openness and transparency, and be held accountable for them to Parliament and the public, just as”—

it is “for monetary policy”—an important signal from the Bank about its role.

Since the Bank’s nationalisation in 1946, appointments have been made by Her Majesty the Queen on the recommendation of the Chancellor and the Prime Minister. The Bill would require that the appointment be made by Her Majesty with the consent of the Treasury Committee as well. The current legislation states that the Bank may, with the Chancellor’s consent, remove the Governor from office in certain circumstances, but again the Bill would require that the Treasury Committee consent to that removal. We have made our position clear: we do not believe that giving the Treasury Committee a statutory power over appointments or dismissals is either necessary or appropriate.

Banking Reform

Debate between Matt Hancock and Mark Hoban

Thursday 14th June 2012 Commons Chamber

[Mr Hoban]

Strong banks that are in a position to lend to businesses are absolutely vital to the long-term future of our economy. We have seen that the mistakes of the past eventually catch up with people. They have led to a weakening of bank balance sheets, which are now being strengthened. We need not only strong banks, but schemes in place to sustain bank lending and to ensure a supply of credit to SMEs.

[Matthew Hancock (West Suffolk) (Con)]

In the week we discovered that a plan put forward to the last Government to prevent the run on Northern Rock was ignored, I warmly welcome these proposals. How will the Minister ensure that as finance changes in the years ahead, the Vickers proposals to ensure separation will always stay up to date with new technology and new techniques?

[Mr Hoban]

My hon. Friend makes two important points. He is right to highlight Hector Sants’s comments this week about how the previous Government ignored his proposals, leading to a run on Northern Rock that triggered widespread financial instability. If his proposals had been listened to, we could have had more financial stability, which would have been to the benefit of the economy.

My hon. Friend is also right that finance changes. Part of the problem of the previous Government’s regime was that it did not keep pace with changes in the markets. The previous Government clearly did not understand what was going on in the banking sector, despite the many meetings between the City Minister and the banks, but I think the regime that we are putting in place is forward looking. We will have the Financial Policy Committee looking at emerging threats to financial stability, and both our introduction of the Vickers reforms and the rules of the Prudential Regulation Authority will help to ensure that the ring fence is kept up to date and meets not just the needs of business, but the need for a strong and stable economy.

Oral Answers to Questions

Debate between Matt Hancock and Mark Hoban

Tuesday 24th January 2012 Commons Chamber

[Mr Hoban]

The NAO’s report this morning was based on guesswork. The scheme has not been fully implemented and there are no published figures as yet on the out-turn for the scheme. Let me just say that private sector providers expect that this scheme will be more effective than the schemes put in place by previous Governments.

[Matthew Hancock (West Suffolk) (Con)]

Given the increasing private sector employment levels, have the Government made any assessment of the impact on those levels if we lost all credibility of economic policy by having the sort of incoherence proposed by the Opposition?

Royal Bank of Scotland (FSA Report)

Debate between Matt Hancock and Mark Hoban

Monday 12th December 2011 Commons Chamber

[Mr Hoban]

That is an important question. I referred earlier to the pressure under which Tony Blair put the FSA to adopt a proportionate regulatory regime. One of the examples put to the then Prime Minister about the light-touch quality of the regime was the fact that there were only six people supervising HSBC, and even fewer have been supervising RBS. I understand that there has been almost a fourfold increase in the number of RBS supervisors, and I think that that is a much better approach. We must ensure that there is intrusive, intensive supervision, and that requires not just more resources, but a higher quality of resources.

[Matthew Hancock (West Suffolk) (Con)]

I warmly welcome the report. I think that the proposal to debar directors from high office in future should be implemented so that we can ensure that rewards are not received for failure at the top, but will the Minister also consider the proposal to debar others mentioned in the report who were culpable?

[Mr Hoban]

I think that we should give careful consideration to the idea of debarring people who have been incompetent and mismanaged their leadership of institutions. That applies to the directors of those institutions, but it may also apply to the politicians who designed the system in the first place.

Northern Rock

Debate between Matt Hancock and Mark Hoban

Monday 21st November 2011 Commons Chamber

[Matthew Hancock (West Suffolk) (Con)]

Is not the argument that we should hold on to Northern Rock for a few more years in the hope that the price will go up just a punt on the stock market, and is that not exactly the sort of attitude that got us into this mess in the first place?

[Mr Hoban]

My hon. Friend is right. The mentality that, hopefully, something will turn up seemed to guide the Labour party when it was in government, and we are now trying to pick up the pieces of the mess they left behind.

European Summit

Debate between Matt Hancock and Mark Hoban

Thursday 24th March 2011 Commons Chamber

[Mr Hoban]

The only reason that this country is in a different place from Greece, Ireland and Portugal is the action that this Government have taken to sort out the mess left by Labour.

[Matthew Hancock (West Suffolk) (Con)]

Will the Minister confirm that the contingent liability under the scheme was set up after Labour had lost the election by the then Labour Chancellor? Does what is happening in Portugal, where interest rates have today risen above 8%, not provide the most eloquent lesson on what would happen here if we did not get a grip?

[Mr Hoban]

My hon. Friend is absolutely right. The decision taken by the previous Chancellor meant that we became part of the ESFM, and that is why the liability exists today. My hon. Friend is absolutely spot on: we have taken difficult decisions in this country. This Government have decided to tackle the deficit that Labour left behind, and we have a clear plan to do it. The Opposition have no ideas. Under a Labour Government, this country would be running out of steam.

Oral Answers to Questions

Debate between Matt Hancock and Mark Hoban

Tuesday 8th February 2011 Commons Chamber

[Mr Hoban]

My hon. Friend makes an important point. Of course, under the old regime, there was no clawback when bonuses were paid out in cash, and no lock-up. The new code on remuneration introduced by the Financial Services Authority, which is ahead of international practice, has clear rules on deferral, requires that bonuses be clawed back for poor performance, and requires that bonuses for significantly highly paid members of staff—those who take risks—be paid out principally in shares, not in cash. That will ensure that the interests of bankers are aligned with those of shareholders.

[Matthew Hancock (West Suffolk) (Con)]

How much has the Minister been constrained in his dealings with the majority state-owned banks by the contracts on payments that were signed by the Labour party before the election?

[Mr Hoban]

My hon. Friend puts his finger on the problem. When the previous Government entered into arrangements to bail out RBS and Lloyds, they limited the period of their involvement in the bonus regime. That is why we had to take action this year and why we have engaged with banks through project Merlin to achieve restraint on bank bonuses. We will make an announcement in the next week.

Finance Ministers’ Meeting (Ireland)

Debate between Matt Hancock and Mark Hoban

Wednesday 17th November 2010 Commons Chamber

[Mr Hoban]

We have taken action in the UK to tackle our fiscal position to avoid a sovereign debt crisis. [Interruption.] Opposition Members need to recognise that the problems facing Ireland stem from a banking crisis—the banking sector was poorly regulated. We are learning lessons from that in the UK, but it is very clear that because we are outside the euro we have the flexibility to engage in economic policy by setting interest rates that meet our economic needs, and we have the flexibility that our exchange rate brings in stimulating exports. We are in a much better position as a consequence of being outside the euro.

[Matthew Hancock (West Suffolk) (Con)]

Would it not be a grave error if we took from this episode the lesson that we should weaken our resolve to deal with our debts and keep our house in order?

[Mr Hoban]

My hon. Friend is absolutely right. It is noteworthy that Opposition Members have made yet another call for us to put off making difficult decisions. We see in Ireland what will happen if we do not make difficult decisions now and sovereign debt ratings come under pressure.

Oral Answers to Questions

Debate between Matt Hancock and Mark Hoban

Tuesday 13th July 2010 Commons Chamber

[Mr Hoban]

The hon. Gentleman forgets the measures in the Budget that will increase employment opportunities —the cut in national insurance contributions, the tax break for new businesses, which will benefit businesses in his constituency, and the reduction in red tape. All those measures are geared towards improving the prospects of private sector growth in our economy. We need the economy to be led by the private sector.

[Matthew Hancock (West Suffolk) (Con)]

Given that sustainable employment can be supported only by dealing with the deficit, was the Minister grateful for the support of the shadow Chancellor, who said at lunchtime on the subject of raising VAT:

“I don’t have a philosophical problem with that”?

[Mr Hoban]

It is interesting to hear about views expressed after the election, which were kept silent before the election. We took the difficult decision in this Budget to lay the foundations for growth in the future and make sure that we pay the bills of the past. Sadly, that included the increase in VAT.