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

Roger Mullin Excerpts

Tuesday 9th February 2016 Public Bill Committees

[Harriett Baldwin]

The hon. Gentleman serves as a member of the Treasury Committee, and I believe he was also a member of that Committee in the previous Parliament, so he will remember that it produced a report in 2011 called “Accountability of the Bank of England” which recommended that the court’s membership be reduced to eight—smaller than we propose. It emphasised that a smaller court would allow for

“diversity of views and expertise”

while still being

“an efficient decision-making body”.

He may want to go back and look at the evidence base that the Committee looked at. It is important to emphasise that the Bill does not make a change in terms of the membership, which remains at possibly up to nine.

[Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)]

Does the Minister therefore believe that the Cabinet should be reduced in size?

[Harriett Baldwin]

The Cabinet, as the hon. Gentleman knows, has fluctuated in size over the years. On the evidence base, we are obviously talking about the experience of the Bank of England having in the past, particularly in the run-up to the financial crash, had a significantly larger court. I think there were 19 members in the run-up to 2009, and it was thought that that was a very large and unwieldy body. I think it still falls short of the number of people who currently attend Cabinet. There is a range of different views of effectiveness, but the important point to emphasise is that the Bill does not intrinsically make any changes to what is already there, although in practice we currently have seven non-executive directors on the court.

Importantly, the Bill also provides for the continued balance of internal and external members on the MPC, the FPC and the newly formed PRC. Following the addition or removal of a deputy governor, the Government may make a corresponding change to the number of members appointed by the Chancellor in the case of the FPC or PRC or the Governor in the case of the MPC.

New clause 5 would require the court to publish transcripts of its discussions within six months. I agree completely with the hon. Member for Leeds East that transparency is critical. The Bank of England makes decisions that affect all of us and it must be accountable to the public, and enhancing transparency is central to that. That is why I am so pleased to bring this Bill to the Committee: it makes governance of the Bank much more transparent in several ways. First, it makes the entire court responsible for the oversight functions. No longer will an oversight committee oversee the work of an oversight board. Every member of the board, executive or non-executive, will be clearly responsible for oversight of the Bank.

Secondly, the Bill removes a greater barrier to transparency and unnecessary complexity. In 2013, the Parliamentary Commission on Banking Standards noted the complexity of the present regime. It said:

“The accountability arrangements of the new structures”—

that is, the structures that exist now—

“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.”

The Bill will change the FPC’s status from a sub-committee of the court to a committee of the Bank and will end the PRA’s subsidiary status, establishing the Bank’s three policy committees on a common statutory footing.

The final and perhaps most significant means of enhancing transparency is bringing the whole Bank into the purview of the National Audit Office for the first time in its history. Allowing the NAO to conduct value-for-money reviews across the Bank will increase its accountability to Parliament and to the public. In turn, this will build greater public trust in the Bank’s operations and governance, supporting its vital independence role in the UK economy.

I agree with the hon. Member for Leeds East that transparency is important: it improves accountability and ultimately makes the Bank’s governance better. However, I disagree with him that mandating transcripts of court sessions will make governance better. As hon. Members are aware, the court is now required to publish the minutes of every meeting within six weeks. That was not always the case, but I am glad to see that the court has published historical records of its minutes, including those during the financial crisis. Through this, Parliament and the public now have greater insight into the governance of the Bank and the key decisions made. Transcripts are a different matter entirely.

We are fortunate in this debate because the impact of transcripts on Bank discussions has already been examined by Governor Warsh in his review, “Transparency and the Bank of England’s Monetary Policy Committee”. He said:

“Creating a safe space for true deliberations is among the most critical indicia of organisations that make good decisions, according to the leading academic and empirical literature and my own observation”.

I am sure we all want a court that makes good decisions. The alternative would be extremely costly for all of us. Governor Warsh looked at the MPC’s two discussion days and found that the different nature of the day one and day two discussions required different approaches to transcript publication. It makes sense to see which of those days is most like a court session and what Governor Warsh recommended. Day one is when the MPC members deliberate, challenge the evidence before them and question one another—exactly the kind of role that the court performs very effectively. Day two is very different. In Governor Warsh’s words:

“With few exceptions, the deliberations are nearly complete, policymakers are heard, and their judgments tallied.”

I think it is clear that day one is closer to the deliberations and discussions of a board.

[Roger Mullin]

I thank the Minister for explaining Governor Warsh’s views, but I would like to challenge his view that the academic literature is all one way. In fact, some of the academic literature points out that in more private settomgs, people are more prone to groupthink.

[Harriett Baldwin]

As a distinguished academic himself, the hon. Gentleman will know that academics often differ in their points of view. It is clear that in this case the distinguished Governor Warsh has come down in one way, and here in our deliberations we have come down in favour of producing a transcript, and Hansard performs that incredibly valuable role for us. I will make some further points, which I hope will convince him of the wisdom of the position that the Government are taking on transcripts.

When Governor Warsh looked at releasing transcripts of the day one deliberations, which he described as “safe space” deliberations, he found that

“Should the transcripts of the Day 1 deliberations be made public, the quality of the deliberative process would risk being materially impaired, to the detriment of sound policymaking.”

He went on to make a clear recommendation that

“the Day 1 policy discussions should no longer be recorded nor should they be transcribed.”

Publication of transcripts of meetings of the court would have a “chilling effect” on discussion and the quality of debate and harm decision making. I therefore hope that the hon. Member for Leeds East will not press his new clause.

--- Later in debate ---

[Harriett Baldwin]

There is, but the purpose of the deliberative body, as we have heard, is effectively to act as the board of the Bank of England, supervising the different committees. Prior to the financial crisis, members of the court were often selected specifically to represent a range of sectoral interests, including many of those proposed in the amendments. The first problem with the amendments is that requiring representatives of different sectors and regard to regional representation will entail a much larger and therefore oversized and dysfunctional court. Before the financial crisis, when the court had non-executives specifically to represent different interests—why stop at the four listed in the amendment?—the court had an incredible 16 non-executives, rendering it far too large to operate effectively and unable to hold the executive properly to account.

[Roger Mullin]

I think the Minister may have been in error when she implied that the new clauses would introduce a requirement. Our new clause 2 simply says

“the Chancellor of the Exchequer must have regard to the importance”

of balanced representation.

[Harriett Baldwin]

The hon. Gentleman is right to highlight that difference. Of course, what the Chancellor of the Exchequer would have regard to is the quality and ability of those individuals to perform the function they are asked to perform. The Banking Act 2009 sensibly limited the court to nine non-executives, and in practice we have now reduced the number of non-executives to seven while keeping that non-executive majority, which means that the court is now sufficiently small to form an effective body that can challenge the executive. The amendments before the Committee would inevitably mean a return to a large, inefficient and ineffective court.

A second problem with amendment 9, which would require sectoral representation on the court, is that it would give rise to conflicts of interest. The amendment calls for several practitioner representatives on the court. We have tried that in the past, too. During the crisis, the conflicts of interest meant that some of those on the court who could have been of most assistance to the Bank had to leave the room for the most important decisions, such as on liquidity provision to the markets and on individual firms. That hampered the court’s ability to respond effectively.