Appendix: Response from the Court of the
Bank of England
Response from the Court of the Bank to the recommendations
made by the Treasury Committee and Joint Committee on the Draft
Financial Services Bill on the Accountability of the Bank of England
KEY POINTS
- The new responsibilities for
the Bank of England in the area of financial stability will need
to be accompanied by new accountability mechanisms. As with the
mechanisms for monetary policy, at the centre of these should
be direct accountability to parliament through the Treasury Committee.
- Building on the recommendations of the Treasury
and Joint Committees, we propose that this is supplemented by
establishing an Oversight Committee, with direct access to the
policymaking processes and papers in the Bank, and formed of non-executive
directors.
- The role of this Committee should be to assess
whether the processes employed in making financial stability policy
decisions have considered a full range of options and have taken
reasonable account of the relevant information, analysis (including
of the lessons from the past), differing views amongst policymakers,
and challenges from outside the Bank.
- The Oversight Committee should also commission
reviews from experts outside the Bank of the performance of the
Bank's financial stability policymakers. These reviews would recommend
lessons for them. And the Oversight Committee would assess the
Bank's response to those recommendations.
- The Bank's financial stability role gives it
operational responsibility for managing a financial crisis. All
decisions in a crisis involving public funds, regardless of the
amount, are however, for the Chancellor. So the forthcoming crisis
management Memorandum of Understanding between the Bank and the
Treasury should establish a clear framework for co-ordination.
It should also establish a power for the Chancellor, when public
funds are at risk and there is a serious threat to financial stability,
to direct the use of the Bank's tools of crisis management.
- We support the Treasury Committee's recommendation
that future Governors of the Bank should be appointed for a single
eight-year term.
Background to our Response
1. The proposals set out in the Government's
Financial Services Bill envisage major new roles and responsibilities
for the Bank of England, and it is accepted that with those new
powers must come new, stronger forms of accountability and governance.
The Bank must be able to demonstrate to Parliament and the wider
public that it has the expertise required to carry out those tasks,
has been reasonable and proportionate in the decisions it has
taken, and is subject to regular and searching democratic scrutiny.
So we, the Court of the Bank, welcome the recommendations from
both the Treasury Committee and Joint Committee on the draft Financial
Services Bill regarding the governance and accountability arrangements
of the Bank of England.
2. The Bank faced a similar challenge in the
1990s when it was asked to take operational responsibility for
monetary policy. Legitimate concerns were raised at that time
about whether it was appropriate to delegate such significant
powers to the Bank. In response, the Bank played a leading role
in helping to establish a framework for accountability that has
over time delivered substantial assurance to Parliament, to the
public and to the financial markets. The Treasury Committee concluded
that the accountability processes for monetary policy, built around
published minutes, individual votes, regular evidence sessions
at the Treasury Committee and pre-appointment hearings, showed
that "it is possible to create effective accountability structures
while at the same time removing politicians from day-today decisions"[42].
We aspire to put in place a framework to support the Bank's financial
stability responsibilities that can be judged as positively.
3. The defining feature of the accountability
mechanism for the Monetary Policy Committee (MPC) is that the
Committee as a whole, and its individual members, are held to
account by the Treasury Committee at regular evidence sessions,
We hope that accountability to Parliament through regular appearances
before the Treasury Committee will form the core of the mechanism
for accountability in financial stability policy. Ultimately,
only Parliament can evaluate whether the policy decisions made
by the Bank are aligned with the wishes of the electorate. So
it is important that the structures of, and processes around,
financial stability policymaking allow that. But there are important
differences between monetary policy and financial stability policy,
and these pose a challenge to designing the appropriate accountability
mechanism.
4. Monetary policy decisions are made regularly
and generally monthly; the set of policy instruments is very small;
the information on which they are based is in the public domain;
policy decisions are made public immediately; and there is a single
objective against which outcomes can be judged—the inflation
target. This abundance of information means that it is possible
for a group outside the Bank—the Treasury Committee—to
give effective challenge and questioning to individual monetary
policymakers.
5. Financial stability policy is different. Even
excluding the Prudential Regulation Authority (PRA), which will
be a subsidiary, the Bank will be responsible for a wide range
of policy instruments including macroprudential policy, regulation
of systemically important financial infrastructure, use of the
Bank's balance sheet, and the operation of the Special Resolution
Regime. Although, for macroprudential policy, it is expected that
the Financial Policy Committee (FPC) will meet on a fixed timetable,
many other financial stability policy decisions not taken by the
FPC, covering the Special Resolution Regime, infrastructure regulation
and the Bank's balance sheet, must often be made irregularly and
sometimes in a crisis situation. They must on occasion remain
undisclosed for a time after they are made and can often be based
on information that will remain undisclosed for some time. Moreover,
although the FPC will publish, and report against, indicators
of financial stability, there is no fixed quantitative objective
against which to measure performance.
6. Together, these differences will make it more
difficult for an authority outside the Bank, like the Treasury
Committee, to challenge and question individual financial stability
policymakers. Because of this, Court is of the view that an Oversight
Committee for financial stability is needed within the Bank to
supplement the direct accountability of the Bank to the Treasury
Committee.
7. Finally, the Bank's role gives it operational
responsibility for managing a financial crisis. Some policy decisions
in a financial crisis will, however, have implications for public
funds. Those decisions, no matter how small the amount, must be
made by the Chancellor, so a clear framework for co-ordination
between the Bank and the Treasury in a financial crisis will be
required. And in a fast-moving situation where there is a serious
threat to financial stability and public funds are at risk, it
is important that the Chancellor has a power to direct the Bank
in the use of its tools of crisis management. These tools are:
the provision of liquidity support, and the operation of the Special
Resolution Regime. A clear framework for cooperation and a direction
power should be encapsulated in the forthcoming crisis management
Memorandum of Understanding (MoU) between the Bank and Treasury.
8. Direct accountability to the Treasury Committee,
a new Oversight Committee for financial stability, and the Crisis
Management MoU. form the core of our proposed framework for accountability
in financial stability policy. The first two sections of this
paper, on the Oversight Committee and on crisis management, describe
these in more detail. In doing so, we note where we agree with,
and occasionally differ from, the recommendations of the Treasury
Committee and the Joint Committee on the draft Financial Services
Bill.
9. The final three sections, on the Court of
the Bank of England, the role of the FPC, and on appointments
and conflicts of interest, respond to the recommendations of the
parliamentary committees in these other areas.
An oversight Committee for Financial
Stability
10. The Treasury and Joint Committees recommended
that Court, renamed as a 'Supervisory Board', should oversee the
Bank's policy functions. We consider a unitary board, like Court,
composed of both executive and non-executive directors, to be
the best structure for dealing with the governance and management
of the Bank. But for conflict of interest reasons, it is our view
that oversight of the Bank's processes is best performed by non-executive
directors. We therefore propose to create an Oversight Committee
for financial stability that does not include Bank financial stability
policymakers, such as the Governors, although they may be invited
to contribute to its meetings. This Oversight Committee would
be a sub-committee of, and have its detailed terms of reference
determined by, Court. And its members and chairman would be appointed
by the Nominations Committee of Court.
REMIT
11. Court's view is that the Oversight Committee's
remit should cover the processes around: the FPC; the Bank's regulation
of systemically important financial infrastructure; the use of
the Bank's balance sheet for financial stability purposes; the
Special Resolution Unit; and the links between the PRA and these
functions.
12. The Oversight Committee should be responsible
for assessing whether the processes employed in making policy
decisions in these areas can be reasonably judged to have considered
a full range of options and to have taken account of the relevant
information, analysis (including of the lessons from the past),
differing views amongst policymakers, and challenges from outside
the Bank.
13. It is vital that the Oversight Committee
does not seek to second guess the decisions of policymakers themselves.
The passing of such judgements could threaten the relationship
of trust that is necessary between policymakers and the Oversight
Committee. Were the Oversight Committee to be seen to 'take sides'
in the policy debate, those policymakers from whom it differed
would be less likely to trust as independent its judgement of
whether proper processes were followed. And if the Oversight Committee
can give assurance that the processes followed took proper account
of the relevant information, options and challenges, there would
be little to be gained from knowing whether its members differed
from the policymakers in their resulting policy judgement.
COMMISSIONING OF EXTERNAL REVIEWS
14. Building on the recommendations of the Treasury
Committee we do, however, think that the Oversight Committee should
commission periodic reviews of policymaking performance from expert
authorities outside the Bank. Such reviews would consider in detail
specific periods or issues in financial stability policy. They
could cover both the processes followed in making the decisions
as well as, with the benefit of some hindsight, the merits of
the decisions themselves. An obvious example of the sort of body
to provide assessment would be the International Monetary Fund
(IMF). The main output would be recommended lessons about the
way policymakers had gone about their functions.
15. The purpose of such reviews would be to supplement
the role of external members of policy committees in bringing
outside challenge and ideas into the Bank's financial stability
policymaking. The reviews would allow the Oversight Committee
to challenge the Bank to consider fully in its policymaking processes
the lessons from particular episodes or issues. The Oversight
Committee would assess whether the Bank had properly thought through
and responded to the conclusions of the reviews that it had commissioned.
16. Court's view is that the Oversight Committee
should decide when and how to commission such reviews and that
those reviews should take place no less than one year after the
period being reviewed. The terms of reference of such reviews
would be made available to the Treasury and Treasury Committee
and, once completed, the reviews would be made available to them.
Our strong presumption is that the reviews would also be made
public.
REPORTING
17. Whether or not the Oversight Committee has
chosen to commission any external reviews, it would produce a
regular annual report on its work. That report would cover the
Committee's assessment of the processes followed to reach financial
stability policy decisions, and its assessment of the way the
Bank had responded to any external reviews it had commissioned.
18. That report would be published as part of
the Bank's own Annual Report. We expect that the Treasury Committee
would wish to question members of the Oversight Committee on it.
So we expect members of the Oversight Committee to give evidence
to the Treasury Committee as least once a year.
19. The impact of the Oversight Committee will
be strengthened if it conducts its business in a transparent way.
As a sub-committee of Court, the Oversight Committee will report
to it. And following the recommendation of the Treasury Committee,
we propose in future to publish a record of Court meetings. The
record will be published, as recommended by the Treasury Committee,
two weeks after the Court meeting, and would incorporate the regular
reports of the Oversight Committee.
ACCESS TO INTERNAL POLICYMAKING
PROCESSES
20. It is clear that, to fulfil its remit, the
Oversight Committee will need direct access to the Bank's policymaking
processes. Court's view is that three things, in particular, will
be necessary. First, the Oversight Committee will need periodically
to be able to question each of the Bank's financial stability
policymakers.
21. Second, members of the Committee should have
access to the information and analysis on which policy decisions
were made. The Oversight Committee should have access to all papers
from the policy process that are necessary for it to complete
its reports or to commission reviews.
22. Third, we also agree with the recommendation
that members of the Oversight Committee should have the right
to attend meetings of the Bank's statutory policymaking committees.
Members of the policy committees have expressed some reservations
about this proposal, which we suggest can be met by: (1) allowing
a maximum of two members of the Oversight Committee to attend
any given meeting; (2) allowing attendance only with the consent
of the chairman of the policy committee (but such consent would
not be unreasonably withheld); (3) establishing clearly that any
attendance by a member of the Oversight Committee was on the basis
that members of the Oversight Committee are responsible not for
passing judgement on policy decisions but instead for monitoring
the process by which they were made.
23. We note that, to the extent members of the
Oversight Committee attend policymaking meetings, and have access
to recent policy papers, they will also need to be subject to
the same financial dealing rules as apply to members of the Bank's
policymaking committees.
ROLE IN THE OVERSIGHT OF THE PRA
24. Court itself will be responsible for approving
the PRA's budget and financial management, for its remuneration
policies, and (with the Treasury's approval) for appointments
of nonexecutive directors to the PRA Board. Court's view is that
the Oversight Committee for financial stability should monitor
the processes around the links between the Bank's financial stability
functions on the one hand and the PRA on the other.
25. The PRA Board should be responsible for commissioning
regular peer reviews of its microprudential supervisory activities.
The Oversight Committee would be responsible for approving the
terms of reference of such reviews and for ensuring that the PRA
Board had responded to the conclusions of those reviews. Some
reviews would have implications for the financial stability work
of parts of the Bank other than the PRA. The Oversight Committee
would monitor and assess the Bank's response to these.
26. The draft Financial Services Bill also states
that the PRA will need to investigate and report on instances
of possible regulatory failure. Such investigations will be commissioned
by the PRA Board, possibly at the direction of the Treasury. In
our view, those investigations should normally be led by an external
authority.
PEOPLE
27. Given the role of the Oversight Committee
we have described, we very much agree on the need for its members,
as a group, to have a rich mix of skills. In our view, we start
from a rather stronger position than suggested in the Treasury
Committee's Report, with current Non-executive Directors including
three bankers (one of whom has also been a supervisor), two insurers,
two industrialists with long financial and governance experience
and a trades unionist. Our aim is to maintain and strengthen further
this range of skills and experience as opportunities arise mindful
always of the commitment of time and focus that will be required
to perform this oversight role, and the need to avoid conflicts
of interest (described below).
Crisis Management
28. Some of the most far-reaching recommendations
in the Treasury Committee's Report relate to the lines of responsibility
and accountability between the Chancellor, Treasury and the Bank
at times of financial crisis. We strongly agree with the need
for a clear framework to establish who is in charge of what instruments
and when. That should be encapsulated in a Memorandum of Understanding
between the Bank and the Treasury, to be published alongside the
Financial Services Bill.
29. Three key principles, based on the Treasury
Committee's Report, should guide the Bank's approach to establishing
such a framework. The first is that the Bank and the Treasury
have clear and separate responsibilities. At the most general
level, the Bank has operational responsibility for financial crisis
management; the Chancellor and Treasury should have sole responsibility
for decisions on all uses of public money, however large or small
the amount.
30. The second principle follows from this and
is that there should be a clear framework for cooperation between
the Bank and Treasury when there is a material risk of circumstances
arising in which public funds might be used. We agree with the
Joint Committee that both parties have a duty to co-ordinate.
The Bank should alert the Treasury to increasing risks of a use
of public funds and must always notify the Treasury immediately
when there is a material risk of circumstances arising in which
public funds might be used. The Treasury must take decisions involving
public funds in a way that does not hinder operational management
of the crisis.
31. The third principle is that the Chancellor
should have a power to direct the crisis management operations
of the Bank. That power should be triggered when there is a material
risk to public funds and the Chancellor, having consulted the
Governor, is satisfied that there is a serious threat to financial
stability. The power of direction should cover the instruments
of crisis management available to the Bank, and Parliament should
be notified of any use of the power.
32. It is our view that the Oversight Committee
for financial stability should not play a direct role in crisis
management but, consistent with its overall objectives, it should
monitor two things: first, whether the Bank could reasonably be
assessed to have notified the Treasury of a risk to public funds
at the appropriate time; and second, whether the processes followed
in the Bank's operational management of a financial crisis were
conducted appropriately.
The Court of the Bank of England
33. The work of Court, detailed in the appendix,
has changed considerably since 2003. Its work today, in the governance,
management and oversight of the Bank is detailed and intensive.
The Bank's new responsibilities, and the proposed new Oversight
Committee, mean that the workload of Court, having already risen,
will increase significantly. That increased workload will probably
make necessary an expansion of the resources supporting Court.
The Bank stands ready to provide whatever support is necessary
for Court and its committees to discharge their responsibilities
effectively.
COURT'S ROLE IN THE BANK'S BUDGET
PROCESS
34. We agree with the Treasury Committee that
Court should continue to be responsible for coming to an explicit
view about the level of, and changes to, the allocation of resources
for all areas of activity, as it does now with its scrutiny of
the Bank's budget. That will include the financial stability and
monetary areas of the Bank's work—but will crucially also
include responsibility for the budget of the PRA, which we will
begin scrutinising from 2013. More broadly, we will expand our
monitoring of the budgetary, value for money, risk control and
performance reporting processes of the Bank as its responsibilities
grow. These issues are already core to the work of the Bank's
Audit and Risk Committee and Court intends to continue to conduct
at least one Value for Money review a year, focused on a particular
operational activity. Court will report on all of these activities
in the Bank's Annual Report and will stand ready to appear before
the Treasury Committee to give evidence on its role in this area
when asked to do so.
SIZE OF COURT
35. The Treasury Committee recommends a further
reduction in the size of Court. As the Committee notes, Court's
membership fell from nineteen to twelve following the Banking
Act 2009. That has considerably improved the nature and effectiveness
of Court discussions. With the introduction of a new Deputy Governor
for Prudential Regulation, Court would need a minimum of nine
members to ensure that non-executives were in the majority.
36. We do not believe, however, that a further
reduction in size is either desirable or feasible. It would divide
the increased workload among an unworkably small number of people,
and would complicate, if not make impossible, the staffing of
the sub-committees through which much of Court's detailed oversight
work is conducted. In our view that would make it unrealistic
to expect that the Treasury would be able to continue to attract
to the Court of the Bank high-calibre individuals to what are
intended to be part-time roles.
NAME
37. The Treasury Committee Report suggests that
Court should be re-named the 'Supervisory Board of the Bank of
England'. Court is not a supervisory board as commonly recognised,
it is a unitary board because (rightly in our view) it includes
several members of the Bank Executive, in the form of the Governor
and the two (ultimately three) Deputy Governors. One alternative
would be simply to rename Court the 'Board of the Bank of England'.
38. Whether or not to rename Court is a matter
for Government. We simply note that Court itself is divided on
the balance of the arguments. On the one hand, renaming would
recognise the considerable changes in Court's actual and prospective
responsibilities in the past decade. On the other hand, it could
give rise to serious misunderstandings, since amongst central
banks 'Board' is often used to refer to an executive and/or policy
making committee, as exemplified by the Federal Reserve Board
and the Executive Board of the European Central Bank.
The Role of the Financial Policy
Committee (FPC)
OBJECTIVES AND INSTRUMENTS
39. We agree with the recommendation of both
parliamentary committees that appropriate time should be granted
for scrutiny of macro-prudential tools set out in secondary legislation.
As with monetary policy, the FPC can operate effectively and credibly
only under delegated authority from elected politicians. Its tools
must have democratic legitimacy, both as a matter of constitutional
propriety but also in the interests of operational effectiveness.
It is of the essence of macro-prudential policy that, from time
to time, the FPC may judge it necessary to tighten requirements
at a time of buoyant economic and financial conditions in order
to safeguard medium-term financial stability. Such decisions will
not always be popular, and will therefore be feasible only if
carried out under close democratic oversight and using tools that
have been agreed with Government and Parliament. The precise mechanics
for achieving this are for Government and Parliament to decide.
40. As well as establishing an effective relationship
with Parliament, the FPC will also need to ensure a good understanding
of its objectives, analysis and decisions amongst market participants
and the broader public. When it was given operational responsibility
for monetary policy the Bank embarked on a major campaign to build
a public constituency for low inflation. A similar exercise is
now required to build and strengthen the constituency for financial
stability, and the Bank has therefore established a new unit in
its Public Communications Division to lead this work. The FPC
has already published two six-monthly Financial Stability Reports
(FSR), accompanied by a newly-introduced press conference involving
both Bank and FSA officials. FPC members have made frequent speeches,
public appearances and media contributions; and FPC members and
Bank staff have had regular dialogue with businesses and financial
market participants from around the UK. A range of simple introductory
material has been provided on the Bank's website, or is under
development, and the new unit will investigate other innovative
ways to get the FPCs messages directly to the public.
41. As the reports of both the Treasury and Joint
Committees highlight, accountability for financial stability matters
is complicated somewhat by the fact that the policy objective
cannot be reduced to a target as simple as that for monetary policy.
With that in mind, we agree with the recommendation made by both
parliamentary committees that it would make sense to have an exchange
of letters between the FPC and the Treasury in the context of
the Treasury's 'remit' for the interpretation of the financial
stability objective.
42. We agree too on the merits of the FPC setting
out the indicators it will use to gauge financial stability. The
Governor wrote to the Treasury Committee setting out his preliminary
thoughts on a suitable list on 10 August 2011 and these data are
now routinely provided to the Treasury Committee ahead of evidence
sessions. As the Governor noted, the precise nature of a more
formal set of indicators, and their role in the policy process,
will require careful thought, since there would clearly be risks
in 'hard wiring' an excessively narrow set of measures into legislation.
The FPC has already begun to set out its quantitative analysis
in some detail in its FSR, the latest of which was published on
1 December 2011. The FSR will, we believe, provide an important
tool for holding the FPC accountable, as the Inflation Report
has for the MPC. But the FPC can, and should, go further in setting
out its view on the most important indicators of financial stability,
and we expect it to revert to the Treasury Committee on this issue
in due course.
THE STATUS OF THE FPC
43. We agree with the recommendation of both
parliamentary committees that the status of the FPC as a Committee
of Court should be reviewed. Court's view is that there is merit
to the FPC, like the MPC, being a committee of the Bank. This
would serve to highlight the distinction between the role of Court,
which is focussed on governance and oversight, and the role of
the Bank itself, which is focussed on policymaking and operations.
CONFLICTS BETWEEN MPC AND FPC
44. We agree with the conclusion of both parliamentary
committees that such conflicts are unlikely to arise: the MPC
and FPC have different policy objectives, and different tools
with which to achieve them. It is conceivable that the FPC might
occasionally choose to 'tighten' its policy instruments (for instance,
to slow the expansion of the financial system) at a time when
the MPC might wish to 'loosen' its own policy stance (for instance,
because the medium term outlook for inflation had fallen). But
far from reflecting a conflict between the two frameworks, this
shows the value of extending the policy toolkit. By itself, monetary
policy could not achieve both objectives simultaneously. Equipping
the FPC to pursue macro-prudential stability reduces the constraints
on monetary policy, and vice versa.
45. It will, however, be important to ensure
that both MPC and FPC are aware of the thinking of the other committee.
In this regard, we take considerable comfort from the provision
for cross-membership of the FPC and MPC. Currently there are four
members of both Committees—the three Governors and the Executive
Director for Markets. In addition, we see no reason to prohibit
some cross-membership amongst external members too, providing
they are suitably qualified for both roles.
46. We do not believe that it is necessary or
desirable to make statutory provision for a joint meeting of MPC
and FPC. Although of course an informal meeting of this kind is
always open to the two Committees, a formal meeting would be large
and unwieldy, and would not have well-defined rules of procedure.
But we do agree with the recommendation of the Treasury Committee
that, in the very unlikely event of a conflict arising, the Governor
should consult the Chairman of Court about the process to be followed
to deal with it.
Appointments
GOVERNORS
47. Court is not responsible for appointing the
Bank's Governors. Nevertheless, we welcome the proposal from the
Treasury Committee that future Governors should be appointed for
a single term of eight years. Our assumption is that Deputy Governors
would continue to be appointed for renewable five-year terms.
It is also our view that Governors should continue to be expected
to take part in appointment hearings in front of the Treasury
Committee. Whether the Treasury Committee should have a veto over
the appointment of the Governor is, however, a matter for Government
and Parliament. And whether, as the Joint Committee suggests,
the Chancellor should consult the Chairman of Court over the appointment
of the Governor, is a matter for Government. Whatever framework
is put in place it is of fundamental importance that it should
continue to safeguard the Bank's independence.
POLICY COMMITTEES
48. A high priority for the FPC (and in due course
the PRA Board) is to be accountable to parliament through the
Treasury Committee. A number of in-depth appointment hearings
and evidence sessions have already been held, and we expect FPC
hearings to become a regular part of the Treasury Committee's
work.
49. Our view continues to be that members of
the MPC and FPC should give evidence to the Treasury Committee
before they take up their post. Whether or not to adopt the Treasury
Committee's proposal to hold pre-appointment hearings with candidates
for membership of the FPC (and MPC) is a matter for Government.
We would note only the importance of ensuring that these hearings
are held early enough in the appointment timetable to ensure that
the Bank's policy committees are not required to operate with
gaps in membership.
50. Decisions about the relative numbers of internal
and external members of the MPC and FPC are ultimately for Parliament.
But we are not persuaded that having a majority of external members,
as proposed by the Treasury Committee, is either necessary or
desirable. Neither internal members nor external members vote
as a block. Sustained dissent has come from internal as well as
external members. And diluting internal membership to the point
where the Committees could not be presented as distinctively Bank
Committees would undermine the Government's purpose of asking
the Bank to undertake these activities in the first place.
CONFLICTS OF INTEREST
51. We strongly agree with the emphasis that
both parliamentary committees place on the need for the FPC to
have people with financial sector experience amongst its members.
The Treasury Committee Report recommends that the Bank may need
to vary its approach to conflicts of interest to make it easier
to appoint industry practitioners in the future. But, as that
Report notes, there is no evidence that the Bank's approach, set
out in the FPC Code of Conduct, proved a barrier in the appointment
of the FPC's current members. The two members with extensive experience
in the private sector, Michael Cohrs and Bob Jenkins, have already
proved themselves to be strong members of the Committee, and we
are very glad that the Treasury has been able to appoint people
of this calibre and experience.
52. The same is true for Court where it will
be important to continue to operate a flexible approach to assessing
potential conflicts of interest, led (as now) by the non-executive
Chairman, working closely with the Treasury. Court already applies
best-practice standards to potential conflicts. The Nominations
Committee of Court is responsible for monitoring whether likely
conflicts of interest are sufficiently severe to prevent someone
becoming a member of Court or continuing to serve as such. Court
also maintains a record of members' external involvements and
can require members to withdraw from agenda items in which they
have a direct interest.
53. In addition, Court also puts in place financial
dealing rules, covering members of the Bank's policymaking committees,
the executive and the staff of the Bank. As we note above, these
dealing rules should also apply to members of the Oversight Committee
who have access to the same information as members of the Bank's
policymaking committees.
54. We are not persuaded that any dilution in
these standards would be an appropriate response to the Bank's
new responsibilities. The actions of the Bank's policy committees
will have significant implications for all parts of the UK economy.
The credibility and legitimacy of the Bank can be preserved only
if the taking of those decisions and the monitoring of the processes
that were followed in making them were not, and were not even
perceived to be, influenced by a conflict of interest.
55. The Bank Rate Tribunal of the late 1950s[43]
illustrates how seriously conflicts of interest, or perceptions
of such conflicts, can harm the credibility of policymaking bodies
such as the Bank. If such circumstances were to recur, Parliament
would ask how the Bank, obliged to act in the interest of the
UK public as a whole, had allowed this to happen. In this regard,
the best practice standards required of public sector policy-making
bodies are, and must be, very different from those applied to
private sector boards. A central bank's reputation for acting
unambiguously in the public interest, once lost, can be very hard
to rebuild.
56. The Bank would, however, welcome a broader
debate on how conflicts of interest should be dealt with in public
policymaking. Such a debate might then allow a universal framework
for dealing with conflicts in public positions to be established
and policed by the Government. Members of the MPC and FPC could
be covered by such a universal agreement.
Conclusion
57. The Court of the Bank shares the aim of Parliament
to build accountability and governance mechanisms for the Bank's
new responsibilities in financial stability that will ultimately
be judged to be as successful as those put in place after 1997
for the Bank's monetary policy responsibilities. The core feature
of all those mechanisms has to be the direct accountability of
policymakers to Parliament through the Treasury Committee. But
we recognise that, due to differences in the nature of financial
and monetary policy, it will be more difficult for the Treasury
Committee to hold financial stability policymakers directly to
account than monetary policymakers. It is our hope that the proposals
we put forward, building on the recommendations of Parliament,
for an Oversight Committee for financial stability, on a crisis
management Memorandum of Understanding, on the Court of the Bank,
the structure of the FPC and on appointments, will enable Parliament
to be as effective in holding the Bank to account for its financial
stability policy as it has been for its monetary policy.
Signed, on behalf of the Court of the Bank of England:
Sir Mervyn King
Governor
Sir David Lees
Chairman
Appendix: The role of Court as
at December 2011
58. The role of Court has changed considerably since
2003. It comprises 12 members of which 9 (including the Chairman)
are Non-Executive and 3 are Executive (the Governor and two Deputy
Governors). This compares with a Court of 19 before the 2009 Banking
Act of which 16 were Non-Executive. The lower number results in
stronger participation and more structured discussion.
59. Some of Court's functions arc similar to those
carried out by the Board of a public company. Its principal role
is governance, which it exercises through surveillance designed
to ensure adequacy of resources and a rigorous approach to process.
As with a public company Court delegates appropriate tasks to
sub-committees, in particular Audit and Risk, Remuneration, and
Nominations. It forms ad hoc sub-committees to oversee specific
tasks, a recent example of which has been to determine the future
accommodation of the PRA.
60. Again as with a public company, Court approves
the annual budget and financial forecasts of the Bank, which involves
the allocation of resources, and regularly monitors actual performance
against budget. Court approves the Annual Report and Accounts.
It also oversees the setting of personal objectives for the Executive,
promotes value for money initiatives, participates in succession
planning and induction programmes for new entrants and annually
reviews its own effectiveness.
61. Court also has specific responsibilities for
a range of activities that are peculiar to the Central Bank. It
has a 'catch all' responsibility for managing the affairs of the
Bank which includes determining the Bank's objectives and strategy.
This responsibility is discharged partly by delegation to the
Governor and partly through specific matters that it reserves
to itself. These are carefully documented and reviewed annually.
The aim of Court is to ensure the effective discharge of the Bank's
functions and to ensure the most efficient use of the Bank's resources.
62. Court approves the Bank's strategic priorities
for the year ahead under the headings of Monetary Stability and
Financial Stability and, on a regular basis, monitors progress
against them. Court also reviews risks to the Bank's balance sheet
on a regular basis and monitors closely the risk map of the Bank
through the Audit and Risk Committee which in turn receives regular
reports from the internal audit function.
63. A specific responsibility of Court, undertaken
by the Chairman but with a report back to Court, is to review
with individual MPC members the processes and procedures followed
by the MPC. Informal meetings are held by the Non-Executive Directors
with external members of the MPC and the Non-Executive Directors
are invited to attend pre-MPC meetings to familiarise themselves
with current monetary policy issues. Visits around the UK with
the Bank's Agencies are also encouraged. The Chairman plans to
extend these activities to the FPC.
64. More recently, Court and the Audit and Risk Committee
have been closely involved in monitoring the PRA transition project
both as regards costs and timing. This is probably the largest
project the Bank has undertaken and involves considerable Bank
resources.
42 HC (2010-12) 874, para 29 Back
43
Report of the Tribunal appointed to Inquire into Allegations of
Improper Disclosure of Information relating to the Raising of
the Bank Rate, January 1958 (Cm. 350) Back
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