Bank of England and Financial Services Bill [ Lords ] (Third sitting)

Richard Burgon Excerpts

Thursday 11th February 2016 Public Bill Committees

[The Economic Secretary to the Treasury (Harriett Baldwin)]

It is a pleasure to serve under your chairmanship, Mr Brady, on this sunny February morning. The clauses and schedules together end the subsidiary status of the Prudential Regulation Authority and integrate microprudential regulation more fully into the Bank of England. I hope I can make it clear that the changes increase the PRA’s effectiveness, but do not undermine its independence.

First, I will talk about increasing effectiveness. Placing the Prudential Regulation Committee on the same footing as the Monetary Policy Committee—and, with our changes, the Financial Policy Committee—will elevate the status of the microprudential responsibilities of the Bank to the same level as monetary policy and macroprudential policy. That reinforces not only to Bank staff but to the public to whom the Bank must be transparent and accountable that the Bank is not simply an organisation dedicated to setting interest rates, but one with equally important macro and microprudential responsibilities.

The Bank has told us that closer integration has increased the feeling among PRA staff that they are integral to the Bank’s mission and have broader opportunities for progression across the whole Bank. That can only assist recruitment of the best people to the supervisor. Another benefit is increased clarity of governance. As the Parliamentary Commission on Banking Standards noted in discussing the existing regime:

“The accountability arrangements of the new structures are more complex than those of the previous regulatory regime. The PRA is a subsidiary of the Bank, and the FPC is a sub-committee of the Court of the Bank.”

Ending the subsidiary status of the PRA and establishing the PRC, MPC and FPC on the same statutory basis simplifies and clarifies Bank governance.

A further benefit of ending the PRA’s subsidiary status is that it enables the members of the new committee to devote more time to microprudential policy and operations. As the Governor explained at the Treasury Committee, the change will

“liberate…a portion of the time of the members of the PRA Board that is spent duly exercising their responsibilities as directors of a company”,

while noting the important responsibility PRC members will continue to have for ensuring the prudential regulation functions are adequately resourced. The Governor concluded

“that time is freed up to do their core job—what they are there for—which is to provide guidance on judgment-led supervision.”

For example, the PRC will not have to spend so much time discussing IT provision since that will be a concern for the Bank at large, and ultimately for its governing body, the court. Equally, whereas the PRA board had to be involved in discussions on staff terms and conditions and recruitment, the new committee will be able to leave those important concerns to the wider organisation and focus more on supervision.

Secondly, in terms of protecting independence, the PRA is a wholly owned subsidiary of the Bank, staffed by Bank employees. The Bank appoints the non-executive directors of the PRA board, subject to the approval of the Treasury. The transfer of the PRA’s functions to the Bank does not therefore transform the PRA from a body that is independent of the Bank to one that is not.

It may be worth explaining what “independence of the PRA” actually means. The Basel core principles on banking supervision state that legal safeguards should ensure that a regulator has

“operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources”.

The Bill provides for all of those things. It provides that the Bank’s PRA functions may be exercised only through the new Prudential Regulation Committee. The Bank may not exercise its prudential regulation role in any other way.

The Prudential Regulation Committee will have a clear majority of external members. There will be at least seven external members, including at least six appointed by the Chancellor plus the CEO of the Financial Conduct Authority, and five internal members, comprising four Bank officers and one member appointed by the Governor. It is important to note that that is an increase in the weight of external members from the PRA board, on which a majority of only one is required.

Continuing with the protections for the PRA’s operational independence, the Basel core principles call for transparent processes and sound governance. The Bill sets out clear processes for the new committee’s decision making. The core principles also stress adequate resources. Every year, the committee will report directly to the Chancellor on the adequacy of its resources and the independence of its operations. The requirement for the Bank to separate resolution and supervisory functions will ensure that the UK complies with the European Union directives that insist on separation.

Finally, the Bill grants a strong statutory role to the PRA’s chief executive. He or she will be responsible for the day-to-day management and implementation of the prudential regulation strategy, and for determining how resources are allocated, managing policy development and overseeing supervisory decisions that do not reach the level of the committee. Our changes will increase the PRA’s effectiveness without undermining its independence. I commend the clauses to the Committee.

[Richard Burgon (Leeds East) (Lab)]

It is a great pleasure to serve under your chairmanship on this sunny day, Mr Brady, or indeed on any other day.

The effect of clause 12 will be to demote the PRA from being a separate authority to being a mere sub-committee within the Bank of England. We tabled an amendment to remove the clause and those that are consequential upon it. We think that the Treasury is dismantling another significant part of its regulatory reforms, which came into being through the Financial Services (Banking Reform) Act 2013. The clause would make the Bank of England as a corporate entity responsible for microprudential regulation. Our principal concern is with the manner in which microprudential regulation is to be conducted. We are concerned that the new PRC will be less independent than the PRA.

The risk is that the Government are demoting concerns about microprudential regulation by devolving the functions of the rule-making, free-standing regulatory authority, which is supposed to oversee that, to a sub-committee of the Bank. That is not a minor matter. The PRA is a separate corporate body and a distinct authority. It can be held separately liable and accountable for its actions and interactions. If it becomes merely a committee within a much larger corporate body, it will not be possible to hold it to account in the same way.

In the other place, my shadow Treasury colleague, Lord Tunnicliffe, said:

“The thing that keeps it clean is the fact that the PRA is a subsidiary—an independent company, as mentioned, governed by company law—and, therefore, there has to be an arm’s-length relationship between it and the FPC.”—[Official Report, House of Lords, 1 November 2015; Vol. 765, c. 2005.]

I do not believe that moving the PRA closer to the Bank and, by definition, closer to the FPC is a good thing. The present separation works and should continue.

The former Treasury Committee Chair, Lord McFall, said that the clause is

“downgrading the PRA to a mere committee”.—[Official Report, House of Lords, 26 October 2015; Vol. 765, c. 1059.]

The desubsidiarisation—a bit of a mouthful—of the PRA may simplify the Bank of England’s governance, as its current and outgoing chair, Andrew Bailey, said at the Treasury Committee. But will it make it more competent and more effective in carrying out its work? Our concern is that it will not, and there is no evidence that we are aware of to demonstrate that.

In Mr Bailey’s discussion at the Treasury Committee, the Chair of the Committee, the right hon. Member for Chichester (Mr Tyrie), raised concerns that there will not be sufficient independence owing to the make-up of the committee’s membership. He highlighted:

“the Chairman of the FPC, who will also be the Chairman of the PRC, who will also be the Governor of the Bank.”

Mr Bailey said,

“We have to be very clear in our own roles and thinking which hat we are wearing at any given point in time”.

He also said that the body will be more integrated into the Bank, but that it also has certain functions that it needs to carry out independently. The Governor was also pushed on this, again by a Treasury Committee member, the hon. Member for Wycombe (Mr Baker), who said:

“In addition to being Governor, you chair the Financial Stability Board, you are a member of Court, and you chair the FPC, the MPC and soon the PRC.”

He warned that,

“the institutions are set up in such a way that they strongly depend on the Governor’s capacity to act independently in different contexts.”

Also at the Treasury Committee, the hon. Member for East Lothian asked the Governor whether the overlap of personnel meant there were grounds for conflict

“if we have the PRC reporting on its independence from the rest of the Bank.”

I am sorry to quote the Treasury Committee at such length, but the discussion there threw up contradictions, and it is not clear to me that those contradictions have been sufficiently resolved. So can the Minister say whether the body can be both more integrated and remain independent? We welcome joined-up thinking and ensuring a broad overview. We also heard about the dangers of groupthink in Committee the other day, and the Governor of the Bank told the Treasury Committee that the Bill did not specifically address that. If we have too many key persons juggling too many tasks, is there not a risk of oversight being impaired or conflict of interest setting in?

An authority employs its own staff who are therefore dedicated to the pursuit of its particular goals, in this instance microprudential regulation. By creating a committee of senior figures, microprudential regulation becomes simply another series of talking points among senior executives, as opposed to an ongoing regulatory activity. There are many very important functions that must be performed by a microprudential regulator in the wake of the last financial crisis: first, the conduct of stress tests to ensure that individual financial institutions are putting to one side sufficient capital. That is a microprudential activity that relates to the solvency of the institutions. We are surely not arguing that it is no longer important.

With the creation of new starter banks, there is a greater need than ever for microprudential regulation as those institutions start up in business. If we continue to start new credit unions and new blockchain banks and so on, microprudential regulations remain fundamentally important. Also, there continue to be high street banks in financial difficulties, such as the Co-operative and Britannia. The danger of the Prudential Regulation Committee being appointed as is currently suggested makes it more likely that groupthink will develop.

The strength of having different agencies in existence simultaneously is that there is a useful tension between them as each of them considers the same question from a different angle in terms of the systemic risks, the risks to the solvency of individual banks, and in terms of activity on individual markets. So the political and economic context should be considered elsewhere beyond those regulatory bodies.

It is remarkable that we are witnessing what some commentators would call a downgrading of micro- prudential regulation UK at a time when financial institutions such as the Co-operative Bank and the Britannia, as I have just mentioned, face such serious solvency problems. The PRA was created for exactly that sort of situation. I therefore want to spend time on the arguments raised in relation to that change.

It has been stated that the PRA is being put on the same footing as other activities and that it is being taken back in-house. Taking the PRA back in-house is an odd idea. The PRA is currently a subsidiary of the Bank of England, so it is already in-house. A subsidiary is something that is owned by a parent company; the PRA was already a part of the Bank of England and in any event was answerable, through a statutory scheme, to the Governor.