Financial Services Bill
The Committee consisted of the following Members:
James Rhys, Marek Kubala, Committee Clerks
† attended the Committee
‘(2A) The Bank shall also be under a duty to minimise, as far as possible, the use of public funds to support or rescue parts of the UK financial services industry.’.—(Chris Leslie.)
Mark Garnier (Wyre Forest) (Con): I do not want to take up a huge amount of time, as we have only started page 2 of 312 and we need to move on. I will repeat one or two of the points made this morning by the hon. Member for Solihull and others. The amendment discusses the bank’s duty to minimise as far as possible the use of public funds. I want to make three points. The first is that the entire Bill is all about minimising the use of public funds. The purpose of this great long process is to prevent another situation in which we must use huge public funds to bail out the banks and rescue the financial system. The whole thing is about mitigating the use of public funds.
My second point is this. The hon. Member for Nottingham East said that the Governor of the Bank of England should be considering a limit on the use of public funds, but since the Treasury Select Committee reported in November on the Bank of England’s accountability, the process has moved on somewhat and the Treasury has come back with a draft memorandum of understanding between it and the Bank with regard to crisis resolution. In that respect, although it is incredibly nice to see that Labour Members are unreservedly backing the Treasury Committee—I suspect that they see an opportunity to split the coalition with the members of the Treasury Committee and others on the Government side—the fact is that it will probably be a little tricky for him to find a fault line between us, on the basis that things have moved forward.
On that point, the crisis resolution introduces an ability for the Chancellor of the Exchequer, who is accountable to Parliament, to step in and make guidance when public funds are at risk. That is an incredibly important and welcome development.
Mark Garnier: I certainly speak on my own behalf. I hesitate to say necessarily that we have all gathered together, but as we keep hearing from all sorts of people, as events change, one’s opinions change. As far as I am concerned—I will wait to see whether any other members of the Select Committee come forward to agree with me—I feel reassured that we are in a much more stable position now that the Chancellor of the Exchequer can step in and protect public funds.
Another important point about the Bank of England is this. One thing I do not want in a crisis is for those involved in dealing with the crisis, particularly those who deal on an executive level within the Bank, to sit there wondering what on earth constitutes a significant risk to public funds. Earlier, when the hon. Gentleman took an intervention, we discussed his definition of where the limit should be. The limit is incredibly important. What is an acceptable or an unacceptable limit on the use of public funds? My hon. Friend the Member for West Suffolk raised that point.
My final point might sound contradictory, but it is not meant to be. If we start writing a specific limit into legislation, even if we discover collectively in one way or another what that limit should be, will it necessarily help the financial stability objective? At the end of the day, markets will look at the financial system and the regulatory regime in the UK and ask whether the system will ultimately be protected and underwritten by the Government. We are trying to get away from having the Government underwrite every single financial crisis, but many financial institutions are coming to the area and people are investing their money in the UK. If we were to set an absolute limit on the amount of money, by any definition on which I am sure the hon. Gentleman will put his undoubtedly impressive brainpower to work in order to come up with, at some point, the markets may turn around and say, “Other countries do not have a limit, but this country does. It is less stable.”
Chris Leslie: I want to be clear about what the hon. Gentleman is saying. [ Interruption. ] It is important that my brain can understand the even more impressive statements of the hon. Member for Wyre Forest. I do not think that he disagrees with the spirit of the amendment. Does he think that the Bank should have regard to the need to minimise the use of taxpayers’ funds in any rescue arrangement? It seems that he is disagreeing with the drafting of the amendment. He said earlier that he did not want the banks sitting and thinking about what the impact on public funds would be. I am sure that that is not quite what he meant.
Mark Garnier: It is a fair point, and I ought to clarify mine. We, collectively, go through a great deal of trouble to ensure that people who are involved in the court of the Bank of England, the MPC, the PRA and the rest of the three-letter mnemonics that we can come up with
It does not set a limit. Does he accept that that would be a perfectly reasonable amendment, which simply adds to that duty to not exacerbate the amount of public funds going in? “A duty to minimise” is all the amendment says.
Mark Garnier: I will wind up now, because we could go on all afternoon about the issue. The problem is that the amendment is subjective. It does not give any clear definition. We have heard from my hon. Friend the Member for West Suffolk that the amendment does not come up with any sort of hard idea. As such, it would not add to the Bill.
Mark Durkan (Foyle) (SDLP): Taking up some of the points made by the hon. Member for Wyre Forest, as the hon. Member for Leeds North East pointed out, the amendment does not refer to any limits and would not require a limit to be fixed, either in absolute terms or in the event of any particular circumstance. The amendment seeks to make good a clause that changes some of the handles that are used in the existing financial stability objective. We have had the experience of the past few years. In essence, the clause will leave the financial stability objective to stand as was. I know that we have been told that there are some changes later in clause 3, but, in primary terms, the clause before us basically changes
to “protect and enhance” and “systems” to “system”. It changes those words to refer to the two new vehicles that will take over the Financial Services Authority. The message seems to be that the financial stability objective stays the same. All that changes is some of the terminology.
The amendment of my hon. Friend the Member for Nottingham East, to which I have added my name, deals with the fact that over the past few years, many people have questioned whether the financial stability objective puts the financial system and the players within the financial services sector above the national and public interest. This amendment tries to ensure that part of the financial stability objective is not just to stabilise the financial system against all sorts of
Many people think that the financial stability objective is all about ensuring that the whole state system—the whole apparatus of Parliament and the Bank of England—is there to bail out the excesses and inadequacies of the financial system and that the public purse should be at the call of that system. For exactly the reasons that the Treasury Committee has identified––that this clause should be made more complete and more balanced and that people should know that we were carrying the experiences of the last few years with the heavy exposure that there has been in relation to the taxpayer––the amendment is simply showing that Parliament has learned that lesson, is wise to the risk and is mandating the Bank of England in its job description. I take on board the Minister’s point. In essence, he is saying that if we look at the Bill as a whole, we will see that it is trying to ensure that the risk is minimised, but that is a bit like the old story of everyone and no-one. We cannot say that the financial stability objective is there in the whole Bill. It is either in the key job description of the Bank of England or it is not. Currently, it is not, and this amendment would put such a measure into the key job description of the Bank of England. What is wrong with that?
Chris Evans (Islwyn) (Lab/Co-op): It is a pleasure to serve under your chairmanship, Mr Howarth. I was not going to speak because I have a blinding migraine, which has meant that it has been quite quiet in Committee today.
I speak in support of this amendment. The Government have accused it of being quite narrow, but I see it as going towards the first step. If this Bill is about anything, it is about protecting the banking industry. I do not want to go into any detail about why we have ended up in the place that we are in now. The key is protecting the taxpayer in the future. We do not want to be faced with a situation in which we are in deficit and have to bail out the banks again, because that has a knock-on effect on the wider economy. That is why we need some protection to say that there is a limit. If the banks end up in trouble again, we do not want the taxpayer bailing them out. We have heard both sides of the House saying that the banks failed because they thought that they were too big to fail. It is always dangerous from a market-driven point of view if we say to a company that it does not matter how it runs its business. It would be dangerous to say, “If you run your business into the ground, we will protect you.” It would be like saying, “You can do whatever you want; you will always be bailed out.” It is important to have some measure in place. [Interruption.] When the Government look at this, we can talk about definable measures, but this is the first step. That is all I will say because the lights are bright and my head is banging.
The Financial Secretary to the Treasury (Mr Mark Hoban): It is a pleasure to serve under your chairmanship this afternoon, Mr Howarth. The hon. Member for Islwyn, who is suffering from migraine, got to the heart of this debate. It is about the cost of failure, how that cost is borne, who bears the cost and who decides what
No one should be in any doubt about the importance placed by both Government and Parliament on the need to protect taxpayers’ money when there are problems in the financial system. The events of the financial crisis of 2008-09, during which billions of pounds of public money were needed to prop up failing banks, were unacceptable. One of the Government’s overriding priorities is to take steps to ensure that we never find ourselves in that position again. We set up the Vickers commission to examine some of these issues. I will not go into detail about that now—I will save that delight for another day and another Bill—but changing the structure of the banking sector is clearly one of the ways in which we are trying to make the system more stable and to reduce the risk posed to taxpayers by failure in the banking sector. Part 4 makes fundamental changes to the way in which financial crises will be managed in the future.
The legislative provisions, together with a detailed crisis management memorandum of understanding, will for the first time provide absolute clarity about the respective roles of the Bank of England and the Treasury in a situation in which public funds might be put at risk by a problem in the financial sector. A key element of the clarification of those roles is that the Bill creates a new power for the Treasury to direct the Bank where public money is at risk. That power will underpin and underline the overriding principle that it is the Chancellor of the Exchequer who takes decisions involving public funds. It is that principle and the need to avoid diluting or obscuring it that makes me uncomfortable about the amendment proposed by Opposition Members.
Before I deal with the detail of the amendment, I should like to explain in more detail why the Government believe that it is vital to maintain absolute clarity of responsibilities between the different bodies in the regulatory system and the distinct roles that they fulfil within it. This is the first of a number of Opposition amendments that would blur those clear responsibilities. It is therefore important, in order to avoid repetition of the argument in Committee, to say a few words about that.
One of the main flaws in the system that we inherited from the previous Government was the blurring of the boundaries of responsibility. That problem was particularly acute in the area of crisis management and financial stability. As the Treasury Committee pointed out:
“The biggest failings of the Tripartite’s handling of Northern Rock were that it was not clear who was in charge, and, because the Tripartite took a minimalist view of their respective responsibilities, necessary actions fell between three stools.”
Mr Hoban: I will deal with that question in due course. I will not duck answering it, but I want to build my argument first. It is because of the lack of clarity on responsibilities that the Government are adamant that it is vital in the new system that the respective roles of each of the bodies in the financial system are clearly delineated. That will ensure that the system is based on mutual respect and mutual recognition of the expertise of each body. It will avoid duplication of work and provide clarity and certainty for firms.
This morning, we talked about the Financial Policy Committee as the macro-prudential regulator. Its remit is to focus on systemic risks, which are the risks that affect the entirety or a significant part of the financial system. Its job is to focus on the big picture and the big risks. The Prudential Regulation Authority and the Financial Conduct Authority will be responsible for the regulation of individual firms, from a prudential and conduct perspective respectively. Their remit is to focus on the safety, soundness and conduct of individual firms. Their job is to deal one-on-one with firms, questioning their business models, their levels of risk and their behaviour towards customers and other firms.
In constructing the new bodies provided for by the Bill, we have emphasised that each body should have a clearly defined remit, and the tools and expertise that it needs to be expert within that remit. It would be inconsistent with that approach to confer overlapping remits on the FPC and the regulators, or to allow the FPC, which will not have micro-regulation expertise, to trump the judgments of regulators on micro-regulatory matters. That would take us back to the bad old days of the tripartite system, where the lines of responsibility and accountability were blurred. We are also concerned about the impact that that type of overlap would have on the regulated community and their relationship with the regulator. We would not want the FPC to encroach on or second-guess the decisions and judgments of regulators when it comes to the regulation of individual firms. That would be disastrous for the regulators and for the companies that they regulate, which would never be certain whether a firm, specific decision by the regulator was the last word or whether the FPC could overrule that decision at a later date.
If we allow the FPC to spend its time duplicating or second-guessing the work of the regulators, which will be looking at the bigger picture, that would be problematic too. We need the FPC to play the vital role that everyone agrees was missing in the run-up to and during the financial crisis; that of a strong and expert macro-prudential authority, with the remit to look at rifts across the system and to take action to mitigate those risks. That is why the powers of the FPC are constrained. It cannot make directions or recommendations that are targeted at individual firms. Instead it must refer to classes or types of firm or activity when making directions or recommendations.
Let me come back to amendment 4. As the Government set out in our response to the TSC’s report, we agree entirely that protection of public funds should be the core priority for the new regulatory system, and clearly the Bank of England has a fundamental role to play in that system. As part of its objective to protect and enhance financial stability, the Bank will be responsible for reducing the likelihood of serious threats to stability that might have the potential to put public funds at risk.
However, the principle that I have already set out about the importance of the responsibilities and remits of each body being clearly delineated applies in the same way to this matter as it does to the relationship between the FPC and the regulators. Once there is a material risk of circumstances where public funds might be needed, the Bank is under a statutory duty to notify the Treasury. Effectively, from that point onwards, the ultimate responsibility, including any use of public funds, passes to the Chancellor. Giving the Bank an explicit duty to minimise recourse to public funds would risk diluting and undermining the principle that it is ultimately the Government’s responsibility to protect public funds. As I have set out, ensuring clarity of responsibilities is a central tenet of the reforms set out in the Bill and we are not willing to compromise that tenet by giving the Bank a statutory duty for something that ought to be the exclusive responsibility of the Government of the day, who are accountable to Parliament.
Chris Leslie: I want to get this matter absolutely clear, because the Minister’s elaboration will henceforth prove very useful. We will call this his compartmentalisation speech. We will consider this idea of clear delineations in little boxes as the Fareham doctrine.
Is the Minister saying that the Bank of England’s decisions need to disregard any impact on public funds and instead, when responsibilities pass to the Chancellor, the Bank should rely entirely on the Chancellor to be the guardian of public funds? I ask because that is how I heard his description.
Mr Hoban: There are two points that I will make in response to that question. First, the Bank of England is the guardian of financial stability and, as I have said, what it should be doing in its role of tackling financial instability is minimising the risk that a firm will fail. That is not to say there will be no failures. Also, through the work that the PRA will do, and its interventions, the safety and soundness of individual firms will be looked at. So there is a clear role to be played.
However, a question arises: when there is recourse to public money, or if there is a risk of recourse to public money, who should be making decisions about how it is spent, and the nature of the resolution? I think hon. Members would expect the Chancellor of the Exchequer and the Government of the day to be responsible for making the decision.
I will address in a moment the point made by my hon. Friend the Member for West Suffolk in an intervention, because that also suggests a wider responsibility on the part of the Government. It is for the Government to take decisions about public money and how it should be spent. If we had said that the Bank should decide, the Opposition and Parliament more broadly would say that it is surely the Government’s responsibility—and it is.
The Government are there to decide how public money is spent and what is the best use of it. The Bank has a role in managing financial stability and minimising the risk of failure, but ultimately, when there is a risk to public funds, the Government should be in the driving seat.
Mark Durkan: The amendment would not alter the role of the Government or the Chancellor in that regard. It would simply make it clear that the Bank of England would have a duty, in its pursuit of the financial stability objective, to have regard to ensuring that there was no undue recourse to public money. Is the Bank of England now being told that that is not its job and it does not have to worry about it?
Mr Hoban: Hon. Members need to reflect for a moment on the fact that plenty of legislative and non-legislative provisions already make it clear that the Bank has a responsibility to act in a way that minimises the need for public funds. The amendment is not right because it creates confusion about the responsibility—about who is accountable for the use of public funds.
Matthew Hancock (West Suffolk) (Con): Is the Minister surprised, as I am, that the proposition from the Opposition that we discussed this morning pushed for more clarity about who is responsible for things, whereas the amendment before the Committee muddies clarity about that? Is not there some inconsistency in the amendments?
Mr Hoban: My hon. Friend is right. The problem that the Opposition have is that whereas previously lines of accountability were blurred, confused and obscured, the reforms are intended to clarify responsibilities; but the Opposition seem almost desperate to return to those days of obscurity and blurred lines of responsibility, where no one was felt to be in charge. We are being very clear about who is responsible for which parts of the process.
The hon. Member for Nottingham East asked earlier, from a sedentary position, where the legislative and non-legislative means of ensuring the Bank is aware of its responsibilities in relation to public funds are set out. I draw his attention to paragraph 22 of the draft memorandum of understanding on crisis management, which makes it clear that the Bank must
Chris Leslie: The Minister may need a little inspiration at this point. He has quoted from the draft memorandum of understanding, which is not a legislative provision. In draft form it currently states that the Bank should have some regard to public funds. I suppose that that is a step in the right direction. The Minister has grasped an opportunity to accuse us of blurring the arrangements, but it appears that the draft memorandum is guilty of a sin similar to that committed by our amendment.
Mr Hoban: The Bank’s financial stability objective gives it a clear remit for identifying and addressing risks to stability, which would include those with the potential to require public funds. [ Interruption. ] Hold on. The hon. Gentleman and the hon. Member for Foyle said that the amendment would just require the Bank to have regard to the use of public funds.
I want to tease out the broader issue that my hon. Friend the Member for West Suffolk highlighted. He asked a question about how public funds would be defined in this context. The hon. Member for Nottingham East did not have a substantive answer. It is a genuinely difficult issue to resolve. It is not a technical drafting question; it is a question that goes to the heart of the effect of the amendment. Clause 54 of the Bill places the Bank under a duty to notify the Chancellor of risk to public funds. It sets out the circumstances in which public funds should be taken as being at risk. They range from the special resolution regime to a national loans fund to support payment by the Financial Services Compensation Scheme.
The Bank will have an important role to play in relation to such cases, but it is clearly not responsible for all the decisions or for ensuring that interventions are handled effectively. Ultimately, that is the responsibility of the Government. As my hon. Friend suggested, there are other elements of a wide-ranging policy to take into account—for example, the overall management of the economy in a financial crisis and the impact of a crisis on economic growth and the fiscal position. Those would also come into play under such a duty. Those are clearly the responsibility of the Treasury as the UK’s finance and economics ministry directly accountable to Parliament. They are not matters for the Bank of England.
The proposal would impose a duty on the Bank that it does not have the tools to discharge. Contrary to the view that he expressed before lunch, the Government consider that such a duty would give rise to litigation. There is no reason why a person with sufficient interest, who thinks that the Bank has failed to discharge such a duty, could not bring judicial review proceedings. No doubt a court would give a wide margin of appreciation to the Bank’s judgment in this area. However, I do not
Chris Leslie: This is one of those times when a Minister opens a box of arguments to resist amendments, but he is scraping the bottom of that box at the moment. He doubts that “minimise” can be quantified or enforced, but in the change that he makes in his own clause, he talks about enhanced financial stability. How are we to measure whether the Bank is enhancing? How is that not justiciable? He contradicts himself in his own clause.
Mr Hoban: I am not sure whether the pot is calling the kettle black in bringing in other arguments. There is a fundamental point here. The amendment imposes a duty on the Bank of England to minimise the use of public funds. My argument, contrary to that of the hon. Gentleman, is that it is a matter that could go through the courts. This morning he thought that it would not. My legal advice suggests that it would. The point of substance is this: it is the responsibility of the Treasury, which is accountable to Parliament for the use of public money, to make decisions about the best use of public money. I am thinking not only about the actual cost of intervention, but the wider social, economic and fiscal effects of that intervention. I am sure that would have been the thought process that went through the mind of the right hon. Member for Edinburgh South West (Mr Darling) when he was Chancellor of the Exchequer and having to deal with the Royal Bank of Scotland and Lloyds Banking Group, and weighing up the conclusions. The Bank has a narrow focus.
I have an example of one of the responsibilities under legislation. The Bank has to minimise the use of public funds under the Banking Act 2009, under the special resolution regime. One of the objectives is to minimise the use of public funds in operating a resolution regime. However, this is a narrow area of debate. The Bank should not ignore the impact of its decisions on the use of public funds. As I said, financial stability and the MOU clearly have implications, but to impose a duty on the Bank to minimise such use ignores the fact that responsibility actually rests with the Treasury, which is accountable to Parliament. That responsibility should not be borne solely by the Bank of England.
The hon. Gentleman raised a legitimate point of debate about the use of public funds and where responsibility should lie, but he must recognise that the pressure from Parliament has been that decisions about public funds should rest with the Treasury, not the Bank. That is what we are implementing in the Bill. There is a clear set of responsibilities through the Bill and previous legislation. Imposing a duty on the Bank opens it up to making decisions beyond its capability and remit. It also opens it up to court action, which is not what we want.
Mr Hoban: I was just about to wind up. I hope that the hon. Member for Nottingham East will see the light and withdraw his amendment. It would create confusion where the current regime has clarity and go back to the days before the reforms, when it was clear that no one was in charge.
Chris Leslie: May I also welcome you, Mr Howarth, to the Chair? It is a pleasure to serve under your chairmanship. The Minister finished his remarks by hoping that we would see the light after having dared to ask that the Bank of England should have a duty to minimise, as far as possible, the use of public funds to support or rescue parts of the UK financial services industry. He then went for the Fareham doctrine, as I call it, of compartmentalisation. His approach, as I see it, is essentially to draw little boxes and walls and say, “That’s your duty; that’s not your duty. Thou shalt not think about these questions. It’s all got to be very circumscribed and precise.” In another context, he castigates the current regulatory regime for underlap problems, but I suppose there are dangers that his own doctrine could cause those problems to happen yet again.
The Minister quoted the Banking Act 2009, saying, “Well, actually, yes, that Banking Act”—which, by the way, we do not propose to amend in this respect—“does allow for the Bank to have a duty to minimise the use of public funds in special resolution regimes.” He does not disagree with the provision being in that legislation. In that context, it is not a blurring, yet it would be to put it into the Bank’s financial stability objective.
I accept that the grandiose objectives of big institutions, whether the Treasury, the Bank of England or others, are broad statements. Currently, the clause seeks to change the statement, as my hon. Friend the Member for Foyle said. Instead of reading “contribute to protecting and enhancing”
Those are similarly qualitative concepts and phrases that are not quantified in the way that the hon. Member for West Suffolk called for. Ultimately, they are just as subjective as “minimise the use of public funds”. The Government are saying, simultaneously, that a duty to minimise the use of public funds would be impossible because it is subjective, but that it is okay to say “protect and enhance” financial stability. I find their logic difficult to see at this point.
It is absolutely right that the Treasury, as the guardian of public funds, is where primary responsibility should rest. I do not have a problem with the concept, as set out in the draft memorandum of understanding, that the bell should be rung when the Bank makes decisions or takes steps that might have an impact on public funds, but I do not see why that is incompatible with a general statement at the top of the objectives of the Bank of England that says, “If you don’t mind, please minimise the impact of the use of public funds to support or rescue parts of the UK financial services industry.”
We are amending the Bank’s financial stability objective at a time when, as my hon. Friends the Member for Foyle and for Islwyn pointed out, a great deal of taxpayers’ money has been used to save the banking system. Our constituents would expect nothing less than for us to say, “Under the new regulatory regime, those in charge have a duty to minimise the use of public funds in supporting or rescuing parts of the financial services sector.” It is almost the top thing that they would want us to do.
I am totally baffled that coalition Members—the Conservative ones at least—have said that they wish to vote against the amendment. I would have been happy if the Minister had said, “I’m kind of interested in doing this, so if you withdraw the amendment, we will look at it on Report, because I understand where you are coming from.” I do not think that this needs to be a party political point. Ultimately, how we frame and describe the financial stability objective of the Bank is important. On Bill Committees, I sometimes get the sense that we are wasting our time a little—the Minister has “Resist amendment” all the way through his folder—but I hope that is not the case, because trying to improve legislation through scrutiny ought to transcend party political debate. Making suggestions about how to enhance the text is the job that we are here to do.
Fabian Hamilton: As long as the Treasury and the Chancellor have the final say on the use of public funds, surely there is no contradiction in putting a duty on the Bank to minimise the use of public funds and the ultimate decision being with the Treasury and the Chancellor.
Chris Leslie: Absolutely, and there is a danger in the Minister’s statements today, which are in many ways contradictory. It felt as though he was saying at one point that the Bank must disregard questions of public funds because those are ultimately the responsibility of the Chancellor and it would blur the lines, and that therefore it should put forward recommendations no matter what the cost or impact on the taxpayer. It is for the Chancellor to spot the impact and ensure that he is the sole guardian, rather than ensuring that public bodies generally, which include the Bank, have an eye on it.
Mark Durkan: Further to that point, does my hon. Friend agree that the danger is that the Minister’s argument today is that the Bank of England will essentially be told, “Worry about the system for its sake. Worry about the bankers. The taxpayers are not your concern”?
Mr Hoban: I think that I made it clear. The hon. Gentleman may recollect that I referred to paragraph 22 of the memorandum of understanding and to the Banking Act 2009. The point I was trying to make is that when it comes to the decision about how much public money is used and who is responsible for that decision, the duty rests with the Chancellor, not the Bank. The amendment puts the duty on the Bank, not the Chancellor. The final decision should be with the Chancellor.
There are provisions in legislation and elsewhere that mean that the Bank has regard to the amount of public money spent, but the ultimate decision rests with the Chancellor. We have done that to avoid the confusion of the previous regime—the Chancellor is accountable, not the Bank.
I cannot see any way in which inserting a duty on the Bank of England to minimise the use of public funds would dilute or water down the Chancellor’s responsibilities. It is as if the Minister is suggesting that there can be only one guardian of public funds. Why not have two in this context? Can only one institution play such a role? Of course not; that is nonsense.
If the Minister were in the mood to be constructive about how to improve the Bill, I would be happy to suggest that we come back to the matter on Report. If he prefers “have regard to” or thinks that the provision should be of second order compared with the Treasury’s primary responsibility, I would be happy to look at that. There is deep confusion and danger if the Government feel that a Bank of England that dares to have regard to taxpayer protection will in some way challenge the role of the Chancellor or be a bad or retrograde step. I completely disagree with the Minister about that, and many of our constituents would be surprised to hear such an argument.
On occasion, Governments have to rebut amendments or ask the Opposition to withdraw them and so on. However, the Minister should be careful about deploying arguments that could be construed outside the Committee as saying that what happens with the use of public funds has nothing to do with the Bank of England.
Mr Hoban: Let me repeat again—for the third time, I think—that there are provisions in legislation, and things such as the MOU, that shape the Bank’s thinking on the use of public money. The hon. Gentleman is wrong to suggest that we would allow that focus to become blurred if we had multiple guardians of the use of public money.
Ultimately, decisions about public money are the responsibility of the Chancellor, who must take into account his wider responsibilities as a Finance Minister and an Economic Minister, and look at the broader context. The Bill, the MOU and the Banking Act 2009 ensure that the balance of responsibilities is right between those of the Bank and, crucially, those of the Chancellor.
We need clarity and focus regarding who is to make big decisions about the use of public money, and what considerations should be behind such decisions, and the Bill provides that where it was previously lacking.
Chris Leslie: I appreciate that, Mr Howarth. We may feel—the Minister certainly does—that we are reiterating certain points, but they are incredibly important. The Minister asks whether we realise that the 2009 Act already states that the use of public funds should be
The Minister almost implies that that is enough blurring of the line and we do not want any more, and that if this measure were to be put in the Bill it would cause too much blurring and too much care and attention would be paid to public funds, which would be a step too far. His logic suggests that he needs to go and have a word with the Chancellor and talk the measure through. The Treasury Committee and the pre-legislative scrutiny Committee also looked at this issue.
Mark Durkan: My hon. Friend is encouraging the Minister to think again about this issue. Following on from that, perhaps the Minister will also think about some of the wording used. The amendment refers to
and that could cause the complication since the use of public funds would fall to the Chancellor. The Minister referred to recourse to public funds. Perhaps there should be an amendment that gives the Bank a duty to anticipate and minimise possible recourse to the use of public funds, which would not interfere with the Chancellor’s jurisdiction over the use of public funds.
Chris Leslie: My hon. Friend is correct, and I swear by my cub scout oath that, if the Minister wants to bring something back on Report that is framed in a more modest, precise and measurable way, I will not crow from the rooftops on the Floor of the House; I will welcome it and congratulate him, and I will say that it is part of the scrutiny process. I make that solemn pledge to him today. I think it is possible to achieve that. There are probably very few external press organisations listening to our proceedings today, although I am not necessarily sure of that, but on the Floor of the House I would be happy to congratulate him and be the first to say that the change would be useful.
I really think that the Minister needs to look at the logic of his arguments to rebut the amendment. He needs to recognise that, as a financial stability objective setting out at the top of the Bill the goals and aspirations for the Bank of England and how it should operate, it is important that we signal to our constituents that the use of taxpayers’ money or public funds, however we describe it, is an issue to which the Bank of England should show some care and attention. That is all we are asking.
Chris Leslie: Our previous debate began to stray into some of the wider provisions of the subsections of clause 2, which, as my hon. Friend the Member for Foyle said, seeks to amend section 2A of the Bank of England Act 1998 so that the new objective is to “protect and enhance” the stability of the financial system, rather than
The Government’s choice to vest the task of protecting and enhancing the financial system so comprehensively in the hands of the Bank of England raises a set of questions, not entirely different from the discussion that we just had about protecting public funds.
If we are to take literally the move from contributing to protecting and enhancing, there is the implication—perhaps we are back to that Fareham doctrine of compartmentalisation—that Her Majesty’s Treasury or other bodies may not have as strong a duty to contribute to protecting and enhancing the stability of the system. I think it is possible for the Treasury to do that at the same time as the Bank of England. I would not expect the Treasury not to have a role in protecting and enhancing the financial system.
My first question to the Minister is this. As he thinks that the use of public funds is entirely in the permit of the Chancellor of the Exchequer, is the change he is making to the financial stability objective for the Bank in any way diluting or diminishing the role of Her Majesty’s Treasury and the Chancellor of the Exchequer in contributing to the protection or enhancement of the stability of the financial system?
Chris Leslie: I was asking the Minister my first question about how his doctrine of compartmentalisation applied equally, or not, to the role of Her Majesty’s Treasury in having a duty to protect and enhance stability in the financial system. We were discussing the semantic change in clause 2 in relation to the Bank’s objective becoming to protect and enhance the stability of the financial system.
I want to know to what extent the Treasury feels that it has a duty and an obligation to take steps to do that as well. I presume and hope that the Minister will say, “Yes, it is possible for Her Majesty’s Treasury to also contribute to the protection and stability of the financial system.” I hope that he will not say, “It isn’t anything to do with us. This is entirely the responsibility of the Bank of England.” That would be of great regret, to say the least. I would be interested to hear the Minister address that point when he speaks.
Mark Durkan: As well as the point about the change in the language to protect and enhance, does my hon. Friend have any anxieties that such a change, which is pretty absolute, would open up possible challenges in relation to justiciability? The Minister said that that was a risk with the amendment that we previously discussed. Surely, it is a serious risk with absolute terms such as “protect” and “enhance”.
Chris Leslie: To be fair to the Minister, I did not think that it would be a particular risk to say “protect and enhance” the financial system, or that having that phrase in the financial stability objective would be a danger. However, in his earlier remarks, the Minister sought to rebut any other elaboration of that financial stability objective by saying that there is a risk of justiciability and judicial review of that clause. Therefore, I suppose that it opens the door to the prospect that an individual or firm who experienced difficulties—lost money—in a future crisis and felt that the Bank of England did not protect or enhance the stability of the financial system could take legal action against the Bank. That is the implication of the Minister’s comments.
This is the important second point for the Minister. Given what I thought would not be the case but he said is the case—that there is a prospect of judicial review—and given that the phraseology and the terms that we are using will indicate that it is the Bank’s duty not simply to contribute to something but to protect and enhance the stability of the financial system, that is pretty absolutist, as my hon. Friend says, and is a big responsibility. As I say, I did not think that it was in any way a bad thing to put in the Bill. The Minister, however, has painted a big old question mark above the clause, so he needs to explain how that change will not lead to a flood of litigation or other changes, given his earlier comments.
My third point is, to what extent can we have absolute confidence in the Bank to live up to that ultimate responsibility and the role placed on it by the clause? I hope that the Bank can fulfil that function, but the Committee will recall my earlier bemoaning of a lack of a thorough review and assessment of the role of the Bank of England during the 2008 to 2009 financial crisis. To this day, we have still not had the Bank review of its role or the contribution that it did or did not make to the circumstances back in 2008. It is all very well for Ministers to heap the blame on the Financial Services Authority and the previous Government, as they do, but the Bank of England surely had a role. Does the Minister think that we ought at least to open the lid on what the Bank of England’s responsibilities, frailties, successes and failures might have been, or is that something that we should sweep under the carpet, as we give more
An inordinate amount of taxpayer support has been given to the banking system. The National Audit Office report of July stated that explicit support for the banks was around £450 billion, down from a peak of more than £1 trillion some years ago. The total outstanding support is the equivalent of 31% of gross domestic product, as at March last year. The cash outlay is much less than the implied support—that safety net—which is still large and significant. We are still talking about serious sums of money directly and indirectly supporting the banking system. I do not want to reopen the debate on amendment 4, which we have just had, but there remains a gaping hole in the clause as drafted. Preferably, clause 2 ought to have regard to the need to protect the use of public funds in any future rescue, and I continue to hope that the Minister will find a way to do so. For the time being, I have made my three key points, and I should like to hear the Minister’s response.
The purpose of the clause is to revise the Bank of England’s financial stability objective, to make it clear that the Bank has primary responsibility for protecting and enhancing the stability of the UK’s financial system. That replaces the confusing and ineffective tripartite approach, in which responsibility for financial stability was shared between three authorities. The Bill makes the Bank of England a single point of accountability for financial stability in the UK.
I have been in this role for some time, so I have lived with the various manoeuvrings on financial stability and the role of the regulators. The previous Government’s 1998 reforms led to the Bank of England to have only one statutory objective: monetary policy. The other responsibilities were left with the court to decide on a non-statutory basis, so the Bank’s financial stability functions were demoted, diminished and devalued over the following decade. It was only after the failures of Northern Rock, Lehman’s, RBS and HBOS that the previous Government gave the Bank a statutory role in protecting financial stability. That was done under the Banking Act 2009, which stated:
The 2009 Act sparked a debate about the role of the FSA and whether it should have a role in contributing to financial stability. The previous Government argued that the FSA had a market confidence objective, which could be seen as broadly the same as financial stability but not quite. When we got to the Financial Services Act 2010, the FSA was given a financial stability objective rather along the same lines as “contributing to”.
The current structure has caused some confusion. A number of bodies can play a role in financial stability, but none of them takes overall responsibility for protecting
The hon. Gentleman asked about the role of the Treasury. The Bank has primary operational responsibility for the UK’s financial stability but, as the Bill makes clear, the Treasury retains certain specific responsibilities. Among those are responsibilities relating to the legislative framework for financial stability, including setting macro-prudential tools—which we will discuss in later amendments—and setting the regulatory perimeter. In advising on the tools and setting the perimeter we will get advice from the FPC, but the Treasury has a key role to play in putting those macro-prudential tools in statute and moving the regulatory perimeter. The Treasury has overall responsibility for the UK’s international engagement on financial stability, so it has a role to play, but the focus is on the Bank of England for overall responsibility for financial stability. Through the change to the Bank of England Act 1998 that is set out in clause 2, we seek to be absolutely clear about where that primary responsibility rests. I think that that addresses the hon. Gentleman’s questions. He is waving his finger at me, so I may have forgotten one.
Mr Hoban: Indeed. That raises an interesting question: what was the Bank of England’s role meant to be during the crisis? As I have made clear, at the time of the financial crisis the Bank had no statutory responsibility for financial stability. I recall the Governor of the Bank of England saying at a Mansion House speech that he had the power to make sermons, but that was about it. The Bank of England highlighted the fact that risk was mispriced, for example, but it did not have the tools to tackle that problem. The way in which the tripartite structure was set up meant that no one had responsibility for financial stability. The Bank was not responsible for it. The FSA had responsibility for market confidence, which was not the same as financial stability. So there was a gap there.
Mr Hoban: Let me just continue. Under the previous Government we saw baby steps being taken to try to fill this. So there was the “contribute to” objective that we are amending today. That was introduced to the 1998 Act by the Banking Act 2009. The Financial Services Act 2010 gave the FSA some responsibility for financial stability but there was a lack of focus. So it would be wrong to say that the Bank failed in its duties on financial stability during the financial crisis because it had no duties around financial stability then. The Bill ensures that that focus is there.
Chris Leslie: I am grateful to the Minister for giving way. He forgot that a financial stability committee was also created. The improvement process should not stop at that point. I accept that the whole purpose of this Bill should be to make those improvements but I question the idea that the Bank had no role during the crisis. We can talk about its legislative formal theoretical role, but clearly it played a part at the time and therefore does the Minister not think that it is worth having a review of the role that the Bank played during that period?
Mr Hoban: The hon. Gentleman is asking for a review of an organisation that had no responsibility in law for financial stability. This is part of the problem that we are trying to address through this Bill. He rightly pointed out that the Banking Act 2009 gave the Bank a partial mandate to contribute to financial stability and it set a vague financial stability commitment but I do not think he is focusing on what happened post 2009. He is focusing on what happened in 2007 and 2008. The reality is that there have been extensive reviews, many conducted by the Treasury Committee, and the question that we are trying to answer in the Bill is the question that the Treasury Committee itself posed to the Governor: who is in charge?
The problem was that no one was in charge of financial stability because no one had that statutory objective. This is what we are trying to remedy in the Bill by being very clear what the duties and responsibilities of the Bank, the FPC, the PRA and the FCA are. We are trying to create some clarity where before there was none. We are trying to fill in some gaps. That is what the Bill seeks to achieve. It is a matter for the court to decide what sort of review it wants to undertake. But some quite extensive reviews have been undertaken by the Treasury Committee over recent years. The Bill is about tackling the hole that is at the heart of the financial regulation in this country.
Chris Leslie: I do not see how the Minister can say that he has learnt the lessons of the global financial crisis as it applied in the UK without having had a look at the role that the Bank of England played at the time. It is all very well saying, “There were no statutory responsibilities on the shoulders of the Bank and therefore I don’t need to open that box. I don’t need to look into it” because quite obviously the Bank did play a role at the time. That was the practical experience within the crisis as it unfolded within the UK. It is invidious of the Government to argue that there was no statutory objective: I am not sure that that is the case because there were responsibilities on the shoulders of the Bank of England and it got involved and it had a part to play.
The key thing is this: the Bill seeks to lavish powers on the Bank of England to have responsibility, as we see here, to protect and enhance the stability of the financial system. So suddenly, we are going to give it pretty much everything. Yet we are not even going to test or ask whether the Bank of England was fit for purpose in terms of its practical role during that particular time. I pay tribute to the Treasury Committee and the others
I am grateful, however, to the Minister for setting out some of the legal responsibilities that rest on the Treasury and the Chancellor in terms of specific financial stability responsibilities. He mentioned international engagement and macro-prudential tools, which we will come to shortly, and the regulatory perimeter, and those are helpful. It does not blur the lines and it is perfectly possible to have the Treasury involved in those particular financial stability tasks. The Minister is breaching his doctrine slightly by having the Treasury involved in those tasks, but I am grateful that he has done so.
I am surprised by the point about the justiciability of the financial stability objective. The Minister embraces it as a sign of an extra facet to the accountability to which we can say that the Bank will be held. All the applicants and writs that pour through the door at Threadneedle street are therefore a jolly good thing, because that is about holding the Bank to account, perhaps for its failure—I hope not to protect the stability of the financial system in the future. But I do not know whether the Bank has ever acknowledged that it is potentially liable. I do not know whether the Treasury—perhaps the Minister can say—has ever made any assessment of the impact of possible litigation, of the damages that might accrue in such circumstances, and of the tests that might arise. It is interesting that the Minister has confirmed that litigation will be possible. I do not know whether it is something that individuals can pursue through the small claims court or whether a writ will have to be made through the High Court. Perhaps the Minister can elaborate on that at another opportunity, and it may be something that we return to.
Mark Durkan: As well as possible legal challenges in the event of somebody saying that they are in circumstances because of a failure to protect, are there risks in terms of Parliament’s relationship with the Bank of England if, say, in years to come the Treasury Committee says that a situation that arose demonstrated that the Bank had not adequately discharged its duty to protect? What would the implications then be for the Governor? If proposals for change from the Treasury Committee were resisted by the Bank, would that be a failure of the duty to enhance?
Chris Leslie: Indeed. It is important, in looking at the responsibilities that will fall on the Bank of England from tits new duty specifically to protect and enhance financial stability, that we consider the downstream consequences and the possible costs to the Bank.
As my hon. Friend the Member for Foyle said, should Parliament at any point judge that the Bank has failed to protect and enhance financial stability, that would be a big piece of evidence that could be prayed in aid in a court of law by any individual or company seeking to take action against the Bank. The box has been opened, and I do not understand where that might lead. As I said at the beginning of this stand part debate, I did not have any problem with the wording of the clause until the Minister spoke. It is only since he elaborated on it in response to some perfectly reasonable questions from my hon. Friends that I started to think that there may be difficulties with the phraseology.
For the time being, given that we are in Committee and that we could return to the clause at a later stage, I am prepared to agree to it without making further objections. I am grateful to the Minister for at least putting some definition on the question marks that clearly hang over the clause.
‘including the proposed range of macro-prudential measures available to the Bank.’.
Chris Leslie: We have come on quite quickly to clause 3, and I am grateful to the Committee for ensuring that we have made such good progress. The amendments are slightly different, in that amendment 38 relates to public consultation, while amendment 37 relates to the court of the Bank, its role in determining the financial stability strategy of the Bank and the proposed range of macro-prudential measures available to it. That is a pretty important issue, and I hope to probe the Government on whether the court can have a role in determining that strategy.
The Institute of Chartered Accountants in England and Wales has suggested that the Bill requires several changes. One of them is the need for an approach that not only seeks to ensure that the court of directors of the Bank has responsibility for determining the strategy but, in accepting that responsibility, provides the opportunity for wider public consultation on the decisions and recommendations of the Bank. That is why it makes sense for the amendments to be grouped.
If the court determines the Bank’s financial stability strategy, it should also be able to confirm the suite of systemic oversight and intervention powers that have been recommended to the Treasury. Proposed new section 9A of the 1998 Act states what the court of directors must determine and whom it should consult in doing so, which is important because, currently, the consultation process is simply with the FPC of the Bank—with itself, essentially—and Her Majesty’s Treasury. Amendment 38 would ensure that that consultation process was widened out to the public at large. Of course, in reality that will mean consultation with expert organisations, and potentially with Parliament and other representative bodies.
Mark Garnier: For most of the day, the hon. Gentleman has been extolling the virtues of the Treasury Committee, and yet strangely in this one particular amendment he leaves out mention of the Committee. I would be very grateful if he could explain why the love-in has now finished with amendment 38.
Chris Leslie: I would be grateful if the hon. Gentleman would give us the view of the Treasury Committee on amendment 38, if it has one. I am more than happy to see if I can dig up a quote from the hon. Gentleman himself to pray in aid in support of the amendment, if he so wishes. I am sure that he has said at some point in the past that the public should perhaps have some say in some of these pretty big measures, and if that is indeed the case then I say “Hear, hear.” I am all in support of his wisdom on these particular issues.
Lorely Burt (Solihull) (LD): I was just wondering what assessment the hon. Gentleman has made about the level of delay that might be incurred when we are trying to make changes and there is a public consultation, which I am sure he is aware can be a lengthy process. Has he weighed up the swings and roundabouts on this issue to establish just how much of a deleterious effect subjecting everything to a public consultation will have, as opposed to not making this change at all?
Chris Leslie: I thought that the Liberal Democrats were in favour of consulting with the public, but obviously I was wrong. It is not necessarily burdensome to ask the public for their views on pretty serious and large quasi-legislative changes, which is essentially the direction we are heading in by vesting so many powers in the Bank; of course, ultimately the Treasury and Parliament will rubber-stamp those powers, but we are heading in that direction.
There are provisions in the Bill for emergency circumstances, and everyone would entirely accept that in crisis scenarios, lengthy consultation processes need to be truncated or undertaken ex post. I have no problem
Ensuring that the macro-prudential measures are part of the issues determined by the court will in turn ensure that they can be consulted on more thoroughly as a matter of course, rather than just being considered by the Financial Policy Committee or the Treasury. There are a number of points that I want the Minister to address in respect of amendments 37 and 38. In particular, the Committee may be aware that in December the Bank of England published a discussion paper jointly with the Financial Services Authority on instruments of macro-prudential policy. I do not know whether anyone got that paper for their families for Christmas, or if it was in their own stockings, but it is a very interesting document, because it talks about the initial suite of macro-prudential tools that the Bank is likely to recommend under the powers that we are considering.
It is a bit of a pity that having the Bill before us today does not give us the opportunity to scrutinise the actual macro-prudential powers that the Bank and the FPC want. We have general headings—suggestions as to the first tranche of powers that they may want—but, again, we are legislating to give all the powers to the Bank; at a later date, the Bank will make its decisions, and say to the Treasury, “This is the set of macro-prudential powers we want.” We will then hear what those powers will be.
I want to ask the Minister for his view on that first tranche of macro-prudential tools, because this is the first opportunity we have had to discuss those tools properly. The Bank thinks that balance sheet tools are necessary, including
They are not exactly described in plain English, but they are pretty comprehensive powers none the less. I want a sense of how the Minister thinks that set of tools would impact practically on businesses and consumers.
A firm that has depended on a particular supply of credit in any given circumstance might find that its ability to access that credit is diminished significantly as a result of that macro-prudential tool.
The Bank has asked for tools that influence the terms and conditions of loans. Has the Minister held any further discussions with the Bank about precisely what loan terms and conditions it might want to vary? It might say to a company, “Your term loan is for 10 years, but a macro-prudential tool could be used to truncate the term, so that the loan must be paid in eight years.” Conversely, repayments might no longer need to be made in the original time frame if the term were extended
The Bank wants to be able to restrict the quantity of lending at high loan-to-value ratios. We have heard about mortgage customers and others who found that LTV ratios changed following the financial crisis and varied subsequently. Many of our constituents who are struggling to gain mortgage or even re-mortgage finance may not realise that the first set of macro-prudential tools will come into force because of a decision made by the Bank of England, which was rubber-stamped by the Treasury and, ultimately, by Parliament. Despite the lexicon and jargon that surrounds this suite of macro-prudential tools, we need to appreciate that the changes in the Bill are very real and important.
Similarly, the Bank wants powers to restrict loan-to-income ratios, so an individual’s income might restrict their ability to take out loans secured on property or unsecured lending. Such powers might be a perfectly good thing, but we should assess exactly what the Bank is asking for. At the very least, will the Minister tell us when the order for the first set of macro-prudential measures will be introduced?
Although those are complicated matters that are of more concern to experts and practitioners in the market, we must shine a light on what those powers will be. The Bank requests a set of market structure tools, which include
which is a broad phrase. The Bank is requesting a pretty broad-ranging power. I do not know whether it has something particular in mind in the short term, or whether it will simply take a wide-ranging regulatory power that the Treasury will approve and the Bank will be able to apply firm by firm, or sector by sector. I would like a sense of where we are going with those powers.
“be confined to areas where the United Kingdom has sufficient national discretion; the key hurdle here being that UK regulatory powers in some areas may be constrained by current and forthcoming EU legislation”.
That is a separate issue that I would like the Minister to explain for the Committee. How can he square the new macro-prudential rule-making intentions of the Financial Policy Committee and the Treasury with current and forthcoming EU legislation? To what extent will capital requirements directive 4 curtail the Bank of England’s ability to act, particularly in its first suite of macro-prudential rule-making requests?
The Bank has set itself four tests for what it regards as an effective macro-prudential tool. First, it believes that a macro-prudential tool needs to be effective, which means it should have speed and durability. Secondly, it needs to be efficient while avoiding adverse effects; that also seems sensible. Thirdly, it needs to be transparent about the nature and use of the particular tool. Lastly,
Can the Minister confirm that he agrees with the four principles set out by the Bank? I would like a sense that the Treasury is generally on board with the Bank’s direction of travel when it comes to the principles applying to the macro-prudential tools that the Bank seeks. I have specific questions about the first tranche of macro-prudential tools, but I would be grateful if he addressed some of these points as well.
On amendment 38, it should not be impossible to broaden consultation with the public. The Institute of Chartered Accountants in England and Wales says that the current structure gives no opportunity for consultation on the public interest, or with financial and business stakeholders. Although it should be possible to consult the public on setting the financial strategy, which should include the range of macro-prudential measures that the Bank expects to have available, it might not be practical or in the interests of financial stability to consult the public in advance of emergency situations, as I said to the hon. Member for Solihull. Where emergency powers are needed, the Institute of Chartered Accountants says that they should be subject to scrutiny after the fact by the Treasury Committee.
I think that the public should be consulted on the draft financial stability strategy. Broader perspectives always help, or should help, to improve and enhance the authorship and conclusion of a particular strategy. The public interest is clear when it comes to ensuring that the public are taken into account in the set of policies agreed. Excluding the public would not be fair or necessary.
These days, public consultation exercises are cheap, easy and affordable, and need not be particularly onerous. The internet is a newfangled invention of which I am sure the Minister is aware. If he wishes to undertake a public consultation through the miracles of the interweb, I am happy. It is also important to consult the public because that much transparency is necessary given the significant ramifications of the macro-prudential tools for the public, the economy and businesses downstream. That is the rationale behind our amendments, and I hope that the Minister will accept them.
Mr Hoban: I understand and to some extent share the motivation behind the amendments tabled by the hon. Member for Nottingham East. The scope of the macro-prudential toolkit available to the Financial Policy Committee has the potential to impact on every business and everybody in the United Kingdom—it is an important set of tools. It is vital that the Government seek a wide range of views on the content of the toolkit and that its content is subject to approval by this House and the other place, but we do not need the amendments to deliver that. I want to set out the process that will apply in determining the content of the FPC’s toolkit.
The Government recognise that macro-prudential tools are, relatively speaking, less well understood than monetary policy instruments, for which the academic thinking and practical evidence are well established. That is why we have asked the interim FPC to undertake analysis of potential macro-prudential measures. The Bank published a discussion paper in December seeking comments on its analysis, and the hon. Gentleman has highlighted
The Government will take a transparent approach on deciding the FPC’s initial toolkit. We have committed to a public consultation during the passage of the Bill on the statutory instrument that will establish the FPC’s toolkit of macro-prudential measures. We believe that industry, Parliament and consumer groups have an important role to play in shaping the Government’s proposals. Once the Bill has received Royal Assent, the Government will lay the statutory instrument before Parliament, where it will be subject to affirmative procedure. The order must be approved by a resolution of each House before it can be made. When the FPC is established in statute, the Bill requires it to produce and maintain statements of policy. For each tool, that will be set out in general terms, explaining how the FPC plans to employ the tool and the circumstances in which it might be used.
The hon. Gentleman made some specific points. I will not go into the merits of each tool—there is a time and place for that. He referred to the principles that the Bank set out in its paper. The four principles are broadly sensible. When we consider the FPC’s recommendations we will take those criteria into account, but we will also include our own criteria. I also emphasise, in addition to the four principles raised by the hon. Gentleman, the socio-economic impact of these tools. They can have a significant impact on society as well as the economy, and it is right to consider that impact.
On EU legislation, the hon. Gentleman referred correctly to CRD IV. He should recognise that the debate about macro-prudential tools is not taking place in a vacuum; there is an international debate. Clearly, the European systemic risk board is interested in this too. We are working to ensure, through CRD IV, that there is sufficient discretion to enable the FPC to use the tools that are set out.
I hope that the hon. Gentleman is reassured that we take public consultations seriously. There will be a proper consultation, not just as a consequence of the publication of the documents by the Bank—the December document and the one in March—but as we go through the formal process of consultation, as part of the introduction of statutory instruments that will give the FPC those tools.
On amendment 38, the hon. Gentleman suggests that the court should consult the public before determining the Bank’s financial stability strategy. I am not by nature prescriptive about such things. There is some value in the Bank consulting on the financial stability strategy, but I do not think it would be proper to prescribe in the Bill that the court must do that. It would be more proportionate to leave it up to the court to decide whether and when public consultation is required, and whether it would be valuable. The court might want to produce the Bank’s strategy first, then allow people to comment on it.
Public engagement is important. One of the important tools that the FPC has is disclosure and transparency in its views and operations. It will need to think what the appropriate point is for public consultation. As I said initially in response to the hon. Gentleman, I share the sentiment behind them. It is important that the public have their say, particularly on the macro-prudential tools. I just do not feel it necessary to put that in the Bill. I urge the hon. Gentleman to withdraw the amendment, in recognition of the fact that the Government share his view that consultation is appropriate.
Chris Leslie: It has been helpful to hear the Minister’s view. I am grateful that he says there is some value in public consultation on the Bank strategy. Ultimately it will be for the Bank to decide. I do not think there would be any harm in asking the Bank to open that process on what is one of the most important functions it will have in the financial stability strategy. It would be perfectly reasonable to do that. As we have other provisions in the Bill on consultation arrangements that can affect the public, I do not see why it would not be possible to include that particular provision. Perhaps the Minister will take a look at that another time.
In respect of the role of the court in determining the strategy in respect of the proposed range of macro-prudential measures, it is important to ensure that the court is involved in the process, especially as those are significant questions. For example, two things that jumped out at me in the paper from the Bank on the proposed potential instruments of macro-prudential policy were those two areas of rule-making powers that it will want to have: varying the terms and conditions of a loan—a pretty big and wide-ranging ask—and limiting specific or excessive exposures, presumably of financial services firms to other firms internationally, and to other sectors in different ways.
It is important to get a sense of how significant an intervention that could be. It may be necessary to have those measures, but I do not feel there has been a proper appreciation of the enormous size of the requests from the Bank when it comes to those pretty basic issues of a transaction: a business requiring a loan, entering a contract and potentially having ex-post changes imposed on those contractual terms by a third party. It may be necessary to do that for financial stability reasons, but it is a pretty big change. I do not think my constituents and those of other hon. Members have appreciated that.
As for public consultation, I wonder whether the Minister might say to the Bank that, if it is to engage in public consultation—albeit not of a statutory nature—a plainer English version of what it is asking would not go amiss. I am not surprised to hear that it received only 30 responses to its discussion document, given how impenetrable the text is. As I was going through those aspects of the Bank’s recommendations, I sensed that perhaps for a split second I might have lost the Committee, which might not have been with me 100% in attending to the significance of the measures I was talking about, perhaps because of how they are described in the consultation paper. I counsel the Minister to suggest to the Bank that a test from the Plain English Campaign might not go awry, given that when ordinary businesses throughout the country see what is around the corner they may have something to say about the new suite of quasi-legislative powers that are being taken.
It is useful that the Minister said that he saw virtue in public consultation, and I am sure that the Bank will listen to that. I think he said that the court will also need to have insight into, and a role in, the macro-prudential policy-making arrangements. I beg to ask leave to withdraw the amendment.
Chris Leslie: We are making rapid progress, Mr Howarth. Amendment 6 refers to the Financial Policy Committee, which is a pretty big section of new part 1A of the 1998 Act. The first line of new section 9B to the 1998 Act states:
Hon. Members may think that I am raising a semantic point, but I assure them that I am not. The point is important, and was highlighted by the Treasury Committee and the pre-legislative scrutiny Committee. The Treasury Committee stated in its 21st report:
It is perfectly reasonable to ask the Government why they seem to believe that there should be unequal status between the Financial Policy Committee and the Monetary Policy Committee. There are strong arguments for saying that equal status should be given to the new FPC. Indeed, the “Oxford English Dictionary” defines a sub-committee as a “secondary committee”. That definition is pretty short, succinct and unambiguous. I am not sure that the Financial Policy Committee should be a secondary committee. Given the importance of the issues that we have been discussing, I think the FPC should be a committee in its own right, and should be given the same status as the Monetary Policy Committee, so that it is not regarded as being lower in the hierarchy or subordinate in some other way to the MPC. It is important that the Committee recognise that under the Bill as it stands the FPC will be a committee of the court of directors of the Bank, whereas the MPC will be a committee of the Bank itself.
In written evidence to the Joint Committee, Barclays bank said:
“The FPC should, like the MPC, be a committee of the Bank rather than a committee of the Court of Directors of the Bank of England (the “Court”). At the very least, there should be shared membership of the independent non-executive members between the Court and the FPC. Otherwise, the FPC is only accountable to the Court through the shared executive directors of the Bank.”
There are good reasons to think that the Government have been dismissive of the concerns raised by the pre-legislative scrutiny Committee and the Treasury Committee. The Government stated, in response to the Joint Committee, that they noted not only the observations of the two Committees, but the response of the court itself on the matter. Therefore, having had the Treasury Committee make that particular recommendation, the Treasury lined the proposals up against the court’s own view. Whereas the court wanted to retain the FPC as a sub-committee, some thought that, as this is an important new facet of financial regulation—the FPC is a major body with significant new powers—committee status would be necessary, and I think that is a perfectly reasonable thing to ask.
The Joint Committee did not make a proposal in the absence of facts or balance. It considered the Bank’s arguments when it made the recommendation, and its pre-legislative scrutiny report explicitly states:
“We do not find these arguments convincing. Whether it is a committee of the Bank or the Court the draft Bill requires the FPC to take account of the strategy laid down by the Court. The governance arrangements in the draft Bill—where the FPC is a committee of the Court and the MPC is a committee of the Bank—risk giving the impression that one body is more important than the other. The FPC should be made a committee of the Bank.”
The Bank’s senior management have made their arguments, and parliamentarians, on the other hand, through the pre-legislative scrutiny Committee and the Treasury Committee, have made their views clear. We are fortunate that some Committee members serve on the Treasury Committee and were on the pre-legislative scrutiny Committee, and I would be interested to hear their views. [ Interruption. ] Indeed, there are other members of the Treasury Committee, but it would be particularly useful to hear the views of Members who were on the Committees at the time the reports were agreed. I am sure they have opinions, and it would help the Committee no end to hear them.
The Minister needs to take into account representations from the Treasury Committee and the pre-legislative scrutiny Committee, and to take them far more seriously. I find them compelling, and I would be grateful if the Minister explained in detail the Government’s position.
Mr Hoban: As the hon. Gentleman indicated, questions have been raised about the FPC being a sub-committee of the court, in contrast with the MPC’s role as a committee of the Bank. However, I do not share his concerns, or those raised by the Treasury and pre-legislative scrutiny Committees. We have sought to follow the model of the MPC, where it is possible and appropriate to do so. A later amendment tabled by the hon. Gentleman proposes to change the model and make relevant aspects of the FPC and MPC slightly different. We are not
We need to bear in mind the fact that the court overall wants to hold the Bank as an entity to account on financial stability. As we have indicated elsewhere, there are other aspects of the Bank’s work that do not fall within the FPC’s work but are related to financial stability. I talked earlier about the special resolution regime and the Bank’s role in supervising systemically important payments infrastructure. Because it is outside the remit of the FPC, if we want the court to hold the Bank to account on such matters, it is important that the court has overview of this, which requires the FPC to be a sub-committee of the court, not a committee of the Bank. Unless the FPC is a sub-committee of the court, the court would not have oversight of its activities and would have a slightly dislocated overview of financial stability activities. The FPC as a committee of the court, rather than a committee of the Bank, facilitates the court’s strategic oversight across the whole range of the Bank’s financial stability activities. That goes to the trend we are keen to see of enhancing the court’s role in holding the Bank to account. That was in the Treasury Committee’s report, which we have already discussed.
I understand the reason for the hon. Gentleman’s amendment, but I think it would remove an important aspect of the Bank’s financial stability work from the oversight of the court. It is therefore an ill-advised change. The hon. Gentleman did not spend as much time as I thought he might on amendment 7 to subsection (5) of proposed new section 9B, but the committee constituted by section 3 of the 1998 Act is not the FPC, but NedCo. For that reason, although I am always loth to use the argument that an amendment is technically defective, I am afraid that in this case the amendment is technically defective.
Chris Leslie: This is a useful opportunity to raise an important point from the ashes. Could the Minister explain the difference between NedCo and the oversight committee? We have raised the point in previous discussions, and, therefore, if amendment 7 addresses NedCo, he knows my anxiety, which I voiced earlier, that NedCo—those nine non-executive directors of the court—will have some responsibility for overseeing the performance of the Bank in a similar way, as he said, to the oversight committee. So could he explain how those two will not be duplicates?
Mr Hoban: The point to recognise is that in any sort of corporate governance structure there are a range of committees with different tasks. In a plc, there will be a nominations committee, a remuneration committee, a risk committee and an audit committee, which does not necessarily imply some sort of direct hierarchy of committees. So there can be committees constituted for different roles. I suggest to the hon. Gentleman that it is not quite as neat and tidy as he would like. The oversight committee is a subset of NedCo, perhaps entirely comprised of non-executive directors, but that does not mean to say that it is a sub-committee of NedCo. The two committees will perform different functions, as audit committees perform different functions from remuneration committees. I am not going to be doctrinaire, but there
Jesse Norman (Hereford and South Herefordshire) (Con): I am grateful to the Minister for his comments on the structure of the Bank and the committees and sub-committees. On the Treasury Committee, our concern was that the sub-committee structure would not give the proper authority to the Financial Policy Committee, but from what he is saying now I understand that the point is to strengthen the responsibilities and authority of the court. Am I right in thinking that?
Mr Hoban: I am keen to strengthen the oversight of the court’s role in this. There is a danger that we get theological about sub-committees of the court and committees of the Bank. We need to focus principally on what we think will work in terms of scrutiny, and not get overly fussed about the nomenclature. We might even come back to visit some of that.
On NedCo oversight, the court has proposed that the nominations committee of the Bank should decide on the composition of the oversight committee. It could be the case that the oversight committee consists of all nine NEDs, in which case it would be the same membership as NedCo. We need to reflect for a moment. One of the strands that we talk about from time to time is cross-membership. There is one member of the FPC, Michael Cohrs, who is also on the court. Would we want the oversight committee to include Michael Cohrs scrutinising himself? That is why I think we should not get too bound up on membership. It is important that it is composed of non-executive directors. We like the idea of some degree of overlap, but we should not be too prescriptive about the composition, because there may be situations in which the composition is not necessarily appropriate.
On the two amendments, let us focus on what we think will work in terms of accountability. Let us think about how the court holds the Bank to account on the full range of its financial stability objectives, including the FPC and other matters, and how it is checking carefully the membership of NedCo and the oversight committee. The structures will take time to work through to get their effectiveness right. There is a clear commitment by the Government, the Bank and the court to ensure that the structures work properly. That is what we all want to see achieved.
Chris Leslie: I am grateful to the Minister for pointing out the defective nature of amendment 7. He has shone an unintended spotlight yet again on the rather bizarre set of internal committees and sub-committees existing within the Bank of England. The Minister asks us not to be doctrinaire or theological, and not to get too bound up or prescriptive about the compositions. That is an important point. I will try to remember that and quote it back to him at a future date.
If the Bank responds to the pressure that the court should become a proper supervisory board, and its response is to create a new oversight committee, whose role is to oversee the performance and activities of the Bank as a whole, including the Financial Policy Committee, it is reasonable to ask why we also then have a NedCo—a non-executive director committee. According to the Bank’s website, its functions include
“keeping under review the Bank’s performance in relation to its objectives and strategy for the time being determined by Court…monitoring the extent to which the objectives set in relation to the Bank’s financial management have been met…keeping under review the procedures following by the Monetary Policy Committee”,
and so on. Existing NedCo arrangements are pretty broad as they stand. It prompts the question, what will an oversight committee bring to the party that the NedCo does not currently undertake? The issue of looking inside the Bank at its sub-committees is probably something that only members of the Bank itself would be concerned about, but it is important, given the principle that the Minister is expressing. Clarity matters, knowing who is responsible matters, and scrutiny and accountability with checks and balances matter as well. At some point, possibly later down the line, we need to look at the rather messy and blurred arrangement between the oversight committee and the NedCo. I do not know why that has not yet been spotted or resolved. I do not know whether the NedCo meets frequently, or whether the oversight committee is just about to be set up rather than has been set up. Perhaps we could talk about those issues on another occasion. Given that it was an unintended consequence of amendment 7, I will not push the amendment to further on at this point.
Regarding amendment 6, the question of a sub-committee and a committee matters. I understand the Minister’s logic: he wants the FPC to be a sub-committee of the court, so that the court can scrutinise it. However, I am now starting to think, “Hang on a minute. I thought that that function is being delegated to the oversight committee rather than to the court.” The mist is beginning to descend on where the lines of accountability between all the various committees go.
Fabian Hamilton: This is an interesting, if rather obscure, debate. Does my hon. Friend agree that for the public who are looking into the way the Bank of England regulates the financial services sector, it is essential to have transparency, not opacity? Would the amendment that he has tabled not try to make the whole system of regulation a little more transparent and less obscure?
Chris Leslie: Yes. I cannot claim credit for the amendment. I was inspired by those members of the Treasury Committee who made the argument in the first place, and quite rightly too. They have spent a great deal of time looking at the issues and are clearly eager. Many of them wanted to sit on this Committee to make the contributions that they have been making. It is important to note that they made the recommendations. I am here merely to propose them to see if they have merit. The Minister does not think that they do, and that is a great pity. So far, I have not seen as many concessions as I would have liked to see to the Treasury Committee’s point of view on the matter, but for the time being, I am happy to withdraw amendment 6, on the proviso that we need to return to the issue properly to understand the committee, the sub-committee, the oversight committee, the NedCo, the nominations committee and so forth. A bit of spaghetti is beginning to form within the Bank of England, and it matters. I beg to ask leave to withdraw the amendment.
‘and must have regard to the desirability of ensuring a broad representation of practitioners and consumers in the UK financial services sector.’.
‘(c) allow sufficient time for the Treasury Select Committee to hold appointment hearings with candidates to be appointed under (1)(e) before their appointment to the Committee.’.
Chris Leslie: We now move on to what I regard as quite important questions regarding the composition of the Financial Policy Committee. Amendment 9 seeks to change the number of persons appointed by the Chancellor of the Exchequer to the FPC from four to six. Amendment 8 touches, in many respects, on the diversity of expertise that we ought to see on the FPC. Amendment 10 seeks to give the Treasury Committee time to hold proper appointment hearings with candidates to be appointed under subsection (1)(e), on the recommendation of the Chancellor of the Exchequer to the FPC. The set of amendments is quite significant.
First, regarding the number of members that we think ought to be appointed externally by the Chancellor, due to the importance of the FPC, its nature and composition should be more balanced. As the Bill stands, a large majority of the FPC will be Bank of England executives. If Members turn to page 3 of the Bill, they will see in proposed new section 9B that the Financial Policy Committee will consist of:
Although I do not think that that representative has rights to vote—or necessarily to speak—when attending that Financial Policy Committee. So it is a committee with seven people appointed from within the Bank compared with four appointed by and one extra representative from the Chancellor.
That is a little bit top-heavy in terms of Bank employees, who are subservient, of course, to their boss—the Governor of the Bank. Therefore, when people say that the Financial Policy Committee basically does what the Governor wants, they can make a reasonable argument. I am sure that that will not in reality be the case and that other members of the committee will be independent of mind
Matthew Hancock: Earlier, the hon. Gentleman was comparing the Financial Policy Committee with the Monetary Policy Committee, where there is also a majority of so-called internal members. However, experience shows that they frequently vote against the Governor and, indeed, that decisions have been made where the Governor has been in the minority. Does that not rather undermine his case, which anyway calls for a retained majority of internal members? I cannot see the force of the argument.
Chris Leslie: We are talking about a different committee from the Monetary Policy Committee, and a different set of roles and functions. A different set of judgments will be required than in the slightly narrower—although, nevertheless, important—parameters within which the Monetary Policy Committee has to make decisions in terms of assessing the nature and prospects of the economy and the monetary policy responses to it. Those are very much operational decisions that are being made in that context. The Financial Policy Committee is quite different and it is much more about policy-making processes. Therefore, stronger arguments can be brought to bear on ensuring that the composition of the FPC gives the opportunity to reflect the real economy and, indeed, real society—perhaps more than might normally be the case.
I am not defending the current balance within the MPC. There are perfectly reasonable grounds to say that we should look at the situation in terms of the numbers on the MPC. However, that is not being changed in the Bill. The proposals before us today are on the composition of the FPC, and this is the moment to consider that. The majority of people on the FPC are bank executives. That is in contrast to the PRA and FCA boards, which will both have a majority of non-executive directors.
Jesse Norman: I am less moved by this issue than the hon. Gentleman by some distance. Let us consider the matter. The chief executive of the FCA operates under a board which will give him or her quite a high level of autonomy from any bank interference. Does he not share my view that the two members who will be co-appointed will not in practice be appointed by the Governor without an independent public decision being taken by the Chancellor? In fact, there is some doubt about whether he is correct in characterising there being a preponderance of bank insiders in any genuine sense.
Chris Leslie: Except that if we look at subsection (1)(d), we can see that the appointment of those two members by the Governor is only after consultation, not concurrence, with the Chancellor. If the Governor scribbles a little memo and posts it to the current Chancellor of the Exchequer, that would tick the box in terms of the requirement in the Bill to consult with the Chancellor. The point about the FCA chief executive is a reasonable
Sheila Gilmore (Edinburgh East) (Lab): Is it not also the case that beyond the consultation, it is specifically stated that both of the people must have executive responsibility within the bank. They are very clearly bank employees working to an executive responsibility. They are not, in any sense, coming from a wider perspective.
Chris Leslie: Indeed, absolutely, and my hon. Friend always reads further down the clause than many of us do. She is quite right to spot that subsection (2) specifies the characteristics of those two members and their close relationship within the Bank. Therefore, the point still stands. The board is very much a creature of the Governor and the Bank. That contrasts with the boards of the PRA and FCA, both of which have a majority of non-executive directors.
Importantly, the Treasury Committee and the pre-legislative scrutiny Committee both recommend that the FPC has a majority of non-executive members. The Government responded to those arrangements by saying that the MPC and the FPC have a similar balance of bank executives and external members, but that is just not the case. As the Bill stands, the ratio would be 7:4 executives to external appointees. The constitution of the MPC is 5:4 executives to external appointees. Therefore, by tabling our amendment today, we are seeking to have an additional two members. They will be appointed by the Chancellor of the Exchequer. I am quite happy for him to have those powers and to choose who should be on the Financial Policy Committee. We are hoping to even out the distribution of members. Appointing six external members would create a better balance of externals to executives. We accept that the Governor should have the deciding vote in the event of a six-six split—in the same way that he does for the Monetary Policy Committee if there is a four-all split. This amendment would achieve the Government’s wish for a similar balance between executives and external members on the MPC and the FPC.
Will the Minister clarify his thinking on that particular issue because representations have been made by a number of organisations, which are concerned that their voice will not be heard in the decisions of the Financial Policy Committee when it makes those recommendations about those pretty important macro-prudential tools? We should try to avoid an imperial structure within the Bank that is built around the emperor model of a Governor of the Bank. There needs to be a collegiate approach, and it needs to be perceived as such. A fairer balance between those two would be better. There are good grounds to hope that representatives from the banking sector, the insurance sector, the professional services sector, the industrial sector, manufacturing, consumers and others could have a chance of being one of those external members. Changing over from four to six would make that more likely. It is not surprising that consumer organisations, insurance firms and other representatives from different sectors are saying, “Hang on a minute, the numbers that are currently being proposed are insufficient.”
I had covered most of the arguments regarding amendment 9 and changing the number of external appointees to the FPC from four to six. Amendment 8 is designed to increase the breadth of experience and knowledge of its members. Members will recall that I have been discussing the four non-executive board members. When making appointments, the Chancellor must
That is quite vague and ambiguous. It does not say “knowledge and experience”; it says “knowledge or experience”. As the Bill stands, it is perfectly possible that there could be four non-executives with knowledge and not a single person on the FPC with experience, or vice versa. We need a broader representation of voices on the committee, and our amendment would mean that the Chancellor must also
Some have said that there are potential conflicts of interest, which might be a difficulty if certain people with certain industrial or economic experience are also on the committee, but that is not an insurmountable barrier. We can design in industry experience on to the FPC, and that is why amendment 8 has been framed in such a way. I would like to hear the Minister’s thoughts on that at a later date.
Amendment 10 talks about giving the Treasury Select Committee sufficient time to hold pre-appointment hearings with candidates to be appointed to the FPC under subsection (1)(e). There are concerns about a democratic deficit in the FPC appointment process. The Government have made some changes in the draft Bill in terms of trying to fill that gap, but important deficiencies still remain, such as the appointment hearings, which are necessary to ensure parliamentary accountability. Appointments to the FPC committee are subject to pre-commencement hearings by the Treasury Select Committee, but that does not give members of that Committee the power to have pre-appointment hearings, so that they can vet candidates before the decision is taken to appoint them. Our amendment would therefore ensure that a sufficient period of time was allowed to
The Government have said in response that that cannot take place because of the market-sensitive nature of MPC and FPC appointments, which make them unsuitable for pre-appointment hearings. I do not think that that argument washes. The Minister should give