Financial Services Bill
The Committee consisted of the following Members:
James Rhys, Marek Kubala, Committee Clerks
† attended the Committee
I have made most of the detailed points that I want to raise so, in essence, I need the Minister to give us a little more of a sense of how he considers that the concept of material risk should be better defined in accordance with the points made by the Treasury Committee. Will he say something about the public funds test and, in particular, about whether the European directive on deposit guarantee schemes will be used to meet resolution costs, and whether that will have a downstream effect on the provisions of the Bill? Does he think that there is a little ambiguity in some of the later provisions in the clause, such as the phrase “general indication”?
Before the dinner break, the hon. Member for Nottingham East questioned subsection (7); it does mean that there should be notification in writing. “General indication” is a broad term, but the Bank will need to provide the Treasury with sufficient information to understand the nature of the risk, the type of analysis that might be required and what action might be needed. I do not want to get into the position of micro-managing what should be in the general notification, but it should make sufficient sense to enable the Treasury to respond to it. It should include a broad range of things, such as an explanation of the risk to public funds, an identification of the options that the Bank is considering to mitigate the risk, an assessment of the potential impact of each option and the identification of specific risks to public funds arising from any action.
The hon. Gentleman asked what is meant by “material”, but that term is difficult to define. Clearly, it is not a risk that is remote or negligible but, equally, it is not necessary for risks to be more likely than not for them to be material. The term requires judgment. I have already said clearly that the emphasis is on early notification. There is a low bar for notification, and we would expect the Bank to notify when it thinks that a risk could occur and that, if there were more notification, actions would be taken to get the balance right.
The hon. Gentleman asked about the procedure for scrutiny of the MOU. He has tabled amendment 190 on that subject, so I shall save my firepower until our discussion on that, rather than stealing the excitement of this evening’s proceedings by dealing with it now—[ Interruption. ] I am sorry to disappoint my hon. Friends.
I come now to the alignment of the public funds notification with the special resolution regime, which has been raised by the BBA. The public funds notification is designed to create a formal mechanism for the Treasury to be notified early of circumstances that could lead to the use of public funds. It reflects the principle that it is the elected and accountable Government alone who can take decisions to deploy taxpayer money to resolve a threat to stability.
The use of the special resolution regime powers is not an appropriate proxy for public funds. In certain cases, the Bank can manage risks to financial stability using tools at its disposal with no risk to public funds. In other words, there may be cases where the SRR is used, but there is no risk to public funds. Of course, public funds can be put at risk without the SRR being used. For example, RBS and Lloyds were recapitalised with public funds without using the SRR. The use of the SRR is therefore the wrong test. To use the Goldilocks analogy, and to keep the hon. Member for Foyle amused, the test is both too wide and too narrow.
On the FSCS, the Banking Act 2009 already allows it to contribute to the cost of resolution. It is flagged up in clause 54(5), so the Bill reflects the fact that it can be used to contribute to the cost of resolution. It is not clear at this point whether changes will be required as a result of the deposit guarantee scheme or, indeed, the crisis management framework, which the Commission is yet to publish. However, there are routes we can take to amend legislation to take such things into account. I think that that deals with the issues raised by the hon. Member for Nottingham East.
Chris Leslie: The Minister was exceptionally thorough and I am grateful to him for addressing those points so helpfully. I can understand his point about material risk, and it is always difficult to know quite how to define such things. He set the balance out in broad terms, but the devil is always in the detail. That is why we should have more scrutiny of the memorandum of understanding, but we will come to that shortly.
The Minister dealt with the FSCS point. On the possibility that European rule changes might have consequences for these provisions, he indicated that he would be open-minded about amending the Bill to reflect whatever circumstances might arise. In the light of those helpful comments, I can see why clause 54 is framed in the way it is. I have certain questions about it, but I am happy for it to stand part of the Bill.
On clause 54, we talked about the Bank of England notifying the Treasury of a material risk. Under clause 55, the Bank must, in certain circumstances, notify the Treasury of any changes to that notification. The clause is therefore consequential on clause 54, and it also applies where the notification has ceased.
even if the notification continues to be valid. May I gently ask the Minister whether there is not a danger that, while the Bank does not think a change is material or substantial, the Treasury will be of a different opinion? Would it not be better if the Treasury were notified of any changes in circumstances so that it could judge whether they were substantial? Perhaps the Minister has in mind a concept of what is substantial, and he might be happy to leave us with a vague concept, but I worry that the judgment about whether there has been a change should be in the hands of the Treasury.
and so on. Again, I have to ask the Minister: what does that mean? Is it in reality the Government’s opinion? I am sorry to be constantly pointing out this lacuna in the legislation, but it would be better if the Bill were precise and if it specified, even if in a definitional, consequential clause later on, what is meant by the Bank’s opinion. As a corporate body, the Bank will have lots of opinions, but we have to take it that the opinion is essentially determined by the head of the organisation—the Governor—and if that is the case, the Minister needs to say so. If he will not put it in the Bill, saying it in Committee would be one step towards that.
I want to know what happens if there are disagreements within the Bank about whether risks have changed or ceased, and whether different opinions can be communicated to the Treasury, or whether the only opinion that matters will ultimately be the Governor’s. The Minister has mentioned that the Deputy Governor is a Crown appointment, and perhaps that gives some level of independence, but he will also know that the line management chains mean that the Governor can overrule the Deputy Governor and other deputies, so it is important to test this point. It was heavily discussed on Second Reading, and it is important to get a sense of how such disagreements are to be aired—or not.
Clause 58 allows the Bank and the PRA, following the Government’s amendments, to look at the public funds notification. The Minister is not amending clause 55 to ensure that the FCA is involved, but my view is that the FCA ought also to voice its opinion.
Chris Leslie: This is the difficulty. We are not the architects of this legislation—the Government are, and they have to iron out this difficulty. Sadly, there is some confusion and lack of clarity about how these procedures will work, and it is incumbent on us to ask what is meant by consultation in this context.
Mr Hoban: I am curious about this obsession with what the Bank means. Perhaps the hon. Gentleman or the shadow Chancellor has had a bad experience at some point. This was such a centrepiece of the shadow Chancellor’s speech on Second Reading that I could not work out if he had any other objections to the Bill. He dilated on the topic—as the Speaker would say—for some time, and we never really got to the bottom of why he had this concern.
Let us for the sake of argument replace the Bank of England with the Governor. In that case, if the Governor was ill or away, nothing could happen, because the Governor could not do this. We need to recognise that there is a legal institution called the Bank of England, and it makes these notifications to the Government.
Mr Hoban: No, I will not give way on that point. For at least the second time today, we are debating whether the Bank of England means the Governor. We have had that debate, and when the hon. Gentleman tested the will of the Committee, it decided not to accept his amendment.
On the point about substantial change, we need to recognise that the ongoing risk to public funds might change from day to day. It would be disproportionate and bureaucratic to require the Bank to provide formal notification any time the risk changes, so it is important to qualify the risk with the word “substantial”. Otherwise, every minor change will end up being notified, which would get in the way of a proper dialogue between the Treasury and the Bank of England. We, of course, expect the Bank to keep the Treasury up to date on changes in risk.
The form of consultation might, as the hon. Gentleman has suggested, be a phone call or a meeting. The purpose of the provision is to enable the Treasury to make representations to the Bank if it disagrees with the reason for a notification so that the available power of direction still remains. The Treasury has a power to tell the Bank that it disagrees with such a change because it does not accept the Bank’s description of the circumstances.
However, the Bank is not required to consult the Treasury in relation to the notification of a substantial change in the matters giving rise to the risk. The Bank just notifies the Treasury and there is no prior consultation, which surely is odd.
Mr Hoban: If there is a change, there will be an opportunity for a discussion, as there is when there is a notification of a risk. The provision relates to when the Bank decides that a risk no longer exists. It gives the Treasury the power to say that the notification should remain in place.
Mark Durkan: Subsection (2) concerns public funds notifications. Clause 54(2) states that such notifications are covered by clause 54(1) or by clause 55(2). For public funds notifications, there will be no prior consultation with, or indication to, the Treasury. The only room for consultation with the Treasury that is provided for relates to denotifications, not public funds notifications involving a material change.
Mr Hoban: If the hon. Gentleman will allow me, we want the Bank to tell us, first, when there is a material risk and, secondly, when there is a change in that material risk, and there will be consultation if the Bank decides to withdraw a notification. The arrangement permits a dialogue in that, once a general indication about the risk has been given, the Treasury and the Bank of England have the opportunity to discuss the nature of that risk. Ultimately, the Chancellor decides how to use public money, so such information has to be provided.
We have to be clear on the point made by the hon. Member for Nottingham East about disagreement within the Bank of England. The MOU sets out that if the Bank is in doubt, it should tend towards making a notification rather than not doing so. The whole emphasis of clause 54 and the MOU is to set the bar low, so the expectation is that a notification will be made rather than not made. That will ensure that there is a flow of information from the Bank to the Treasury. It is important for the Bank to notify the Treasury of a change, but it should be a substantial change rather than any change, because otherwise the Treasury will be deluged with notifications every time there is a slight tweak in the Government’s potential exposure to something. The approach must be proportionate to prevent the measure from being used in a bureaucratic fashion.
Chris Leslie: My hon. Friends the Members for Foyle and for Kilmarnock and Loudoun made important points about the clause’s lax drafting. I am sorry that the Minister is exasperated by our asking what is meant by the opinion of the Bank. There are many players in the Bank. He did, however, ask an interesting question: what if the Governor falls ill? I am still not clear that we know who is second in command at the Bank, given that there are three equal deputy governors. Presumably, the second-in-command functions are divided equally between each of the three players according to their relative portfolios. I presume that the court of the Bank would appoint an acting director in the interim. In a crisis scenario, we cannot dissociate the question of individuals and their opinions, because they really do matter. It is important to test such issues, because in a crisis, there will not be time to figure them out. We might waste half a day trying to work out who will be in charge. It is far better to have clarity in the Bill about how things would flow.
The clause is generally reasonable in relation to notification of changes, but the Treasury must be very trusting of the Bank of England in the measure. Such trust between great institutions of state is good, but the provision puts an awful lot of power in the Bank’s hands and leaves the Treasury blind, and reliant on the Bank to define a substantial change in circumstances. However, we have had sufficient debate.
Chris Leslie: We have discussed matters relating to the meaning of the word “Bank”, so we do not need to run through that discussion—[Hon. Members: “Hear, hear.”] Perhaps we do need to run through it again. If I have not convinced hon. Members, the power of my oratory is obviously as not as strong as it might be at this hour.
I find it strange that the Financial Policy Committee is missing from the list of organisations with particular responsibilities in subsection (5)(b). The clause is a prelude to the main Treasury power of direction, which the Treasury Committee was keen to see in the Bill. It provides a set of preconditions under which Her Majesty’s Treasury may exercise power and direction over the Bank of England. That is fair enough—I suppose it makes sense to try to define such circumstances and, essentially, fetter the Treasury, so that it cannot direct the Bank more frequently.
The Minister has set out in the clause three specific scenarios or circumstances in which the power of direction might be used. I want him to assure us that he genuinely believes that the provision has been drafted with sufficient breadth to capture hypothetical future scenarios. He
I accept that the balance is difficult to find, because one has to ensure that there is some sort of check on the Executive’s ability to interfere with the workings of the Bank of England, but on occasion it may be necessary to interfere. That is my main question to the Minister, and I would be grateful if he could elaborate on that.
Mr Hoban: We have, as the hon. Member for Nottingham East would expect, looked at the interventions that have taken place in the recent financial crisis to ensure that subsection (5) is as broad as is appropriate. Provisions such as
The reason why the FPC has been excluded from subsection (5)(b) is that we do not expect it to be a micro-prudential regulator; it is a macro-prudential regulator. However, the FCA will be included as a consequence of the amendment that we have already discussed.
Chris Leslie: Clause 57 is more substantial than clause 56, which is essentially a paving set of circumstances, and the Minister feels that this is qualified sufficiently in clause 56. Clause 57 is in essence a countervailing power that was pressed for by the Treasury Committee in response to its concerns. Indeed, much of this part of the Bill has grown up around the power of direction that the Treasury will have over the Bank of England in circumstances where financial assistance might be necessary, where stabilisation powers in the 2009 Act might be relevant, or where an administration regime may be imminent.
The clause will not make powers of direction possible in circumstances of ordinary market assistance, and that is the crux of the clause. The Minister needs to give us a sense of what is meant by “ordinary market assistance”. There is a grey area between crisis scenarios and a scenario that may or may not amplify into a systemic question. It is difficult to know at the time whether a
I get the sense that there has been some detailed and convoluted negotiation between the Bank and the Treasury on the clause. I also get the sense that following the Treasury Committee’s intervention, there was a desire in those negotiations by the Treasury to ensure that accountability can be maintained and that a thread is present. It is an important thread, because ultimately the buck has to stop with the Chancellor of the Exchequer; that is correct. However, the Bank may have insisted on some of the other restrictions on the power of direction. Will the Minister define and elaborate on that?
Provisions in clauses 58 and 59 relate to the power of direction. It would be useful to get a sense of the definitions. Essentially, the power of direction is to be used only if it is necessary to tackle
or if it is in the public interest to do so. A public interest test is applied as well. Those are two broad concepts. Is the provision justiciable? Could it be tested and defined by the courts? It is difficult to imagine a scenario in which the courts got involved to test the definitions. If there were a dispute about why a power of direction was not possible, presumably the Treasury would win out simply because it would be able to make a direction. It would therefore be open to the Bank to challenge it, and it would just be tough on the Bank if it did not want to challenge it in that way. I need to get a sense of the definitions that we are talking about, because they are quite slippery. Will the Minister assist?
Mr Hoban: This is quite an important clause. It creates the Treasury’s new power of direction at the Bank. It responds to a recommendation made by the Treasury Committee. Under the provision, the Treasury will have the power, once certain criteria are met, to direct the Bank to use its crisis management levers in relation to one or more firms. The power of direction covers the Bank’s two primary crisis management powers. I will deal with the power that allows the Treasury to direct the Bank to use its stabilisation powers under the SRR. That would allow, for example, the Treasury to direct the Bank to put a particular failed firm into a bridge bank.
On Second Reading, my right hon. Friend the Chancellor of the Exchequer suggested that the power would allow the Treasury to direct the Bank to put a particular firm into resolution. I will clarify what that means in practice. The Treasury can direct the Bank to use a particular resolution option in relation to a firm where the PRA has determined that the Bank meets the test for entry to the special resolution regime. The power of direction does not cover the decision to trigger a firm into the special resolution regime. That, of course, rests with the PRA and not with the Bank, as we discussed earlier.
The second power is one that the hon. Member for Nottingham East focused on, which is the Bank’s provision of liquidity. That covers two things: general support for
“My frustration was that I could not in practice order the Bank to do what I wanted. Only the Bank of England can put the necessary funds into the banking system; indeed that is one of the core purposes of a central bank.”
What we are doing here is seeing a crisis situation in which the Chancellor could instruct the Bank to provide liquidity assistance to the market or to a particular institution. We recognise that liquidity is one of the crisis tools. It can be used in a way that puts the Government’s balance sheet at risk, so it is important that the Chancellor, or the Treasury, has the power to offer that liquidity assistance. That is what subsection (2)(a) is intended to achieve.
Chris Leslie: That is partially helpful. Clearly the Treasury Committee had in mind the points made by my right hon. Friend, the former Chancellor, in thinking through the difficulties that would arise in practice, but in circumstances where, it may be imagined, there might have been disagreements about particular strategies.
I suppose that that is the backdrop to the point that we are making—the idea that we cannot simply rely on everyone agreeing naturally. Circumstances may arise in which the Bank of England and the Treasury genuinely disagree. Those disagreements might not be institutional, but might arise from the strongly-held views of individuals. In that case, it is important to make the lines of accountability clear.
It was helpful that the Minister clarified the Treasury’s power to direct a particular course of resolution, but not to trigger the necessity for that resolution in the first place. That is a sensible step. We would not disagree with that provision, because, from our perspective, it is important that that accountability should lie in the hands of the Chancellor, and through the Chancellor to Parliament.
We have discussed issues to do with clause 57, and different aspects of that important provision. We may discuss it further later, but I am happy with the points that the Minister has made about it so far.
“On being given a direction, the Bank may, if it considers it appropriate to do so, give the Treasury a report on how it is complying or intends to comply with the direction, and on such other matters relating to the direction as it considers appropriate.”
This is one of those provisions that I always feel is provocative to the Opposition: “Please come and amend this if you happen to spot it.” The Minister will not be surprised that we have tabled an amendment to leave out the ambiguity in the words
We feel that it is not unreasonable to provide that, in a situation where the Treasury has gone so far as to direct the Bank of England, the Bank must give the Treasury a report on how it is complying or intends to comply with the direction. I cannot see arguments for not requiring it.
I suspect that the provision is one that the Bank asked for to give it a little wiggle room in the to-ing and fro-ing in the relevant negotiations between it and the Treasury. However, as to the phrase
It is perfectly possible for the Bank to be required to give a report on its compliance. Surely the Minister agrees about that. It would be a very strange dynamic, would it not, if the Treasury, having gone so far as to make that formal direction, had then to tease out information about whether, when and how the Bank would comply with it. It is a strange provision and it is inappropriate for it to be so vaguely drafted.
Chris Leslie: That is why we need to wait for the Minister’s rationale. He must tell us why that is the case. I am getting to that moment imminently, but there are another couple of points that he needs to bear in mind on the amendment. There is a problem with parliamentary accountability, in that clause 59 requires any reports from the Bank under clause 58(3) to be laid before Parliament, but if the Bank decides not to publish a report, Parliament will not be able to scrutinise it, so there are downstream consequences for us. It is not only the Treasury that will not see the reports. There should be no grey area.
I hope that the Minister will accept the spirit in which the amendment was tabled. Perhaps he put the provision in the Bill deliberately to see if we spotted it—it would be good if that were the case—and we have spotted it. Can he really say that the clause is framed in the right way?
Mr Hoban: It may be immediately obvious that the Bank has done it. If the Treasury’s suggests that Bank X goes into a bridge bank, and the news headlines say, “Bank X has Gone into a Bridge Bank”, we will know that it has done it. There may be some things for which compliance with the direction is so obvious that it is hardly worth the Bank telling us, because we all know that it has happened. One has to be careful not to have an unnecessarily bureaucratic mechanism.
The hon. Gentleman does have a point on what happens if a bank does not comply. We should think about whether the provision can be tightened to ensure a more automatic reporting process, which may be a comply or explain route or using “must”, but let us think about what the appropriate mechanism is to enhance transparency.
The Minister is right to say that the provision could be improved. I do not think that he needed to make the argument about things being so obvious, because I would be slightly worried if the Treasury only got its information from what it read in the tabloid newspapers or wherever. [ Interruption. ] That is true. My hon. Friend the Member for Islwyn said that we know what—
Chris Leslie: Mr Leigh, I could hazard a guess that we might see changes to the top rate of tax and any number of changes to pensions tax relief, but such things are shifting around the deckchairs. It is important that we focus on the amendment before us.
We should not rely on news headlines to be the main conduit of information to the Treasury. Even a short handwritten note from the Governor, saying that we have taken an institution into administration or whatever it happens to be, would suffice. It would be proper to have a formal route.
I accept the Minister’s comments in the spirit in which they are intended. I was going to press amendment 192 to a Division, but I sense that he wants to look again at
Chris Leslie: I have a small point to make to voice our concern over the asymmetric dynamic between the Treasury and the Bank. We talked a little about that on amendment 192, but I want to press the Minister on another issue. Subsection (8) says:
The provisions in clause 58 seem stronger. I do not understand why the initial communication in subsection (8) would not be possible orally, with subsequent confirmation in writing. Why are there different standards in different clauses?
Chris Leslie: My point was really about the fact that there are high standards in clause 58, but lax standards in previous clauses. I was just trying to get a sense of who on earth is holding the ring for consistency in the drafting of the Bill, but I will not labour the point, because we have said enough about the clause.
Chris Leslie: The clause requires the Treasury to lay before Parliament a copy of a direction given under clause 57, which deals with the power of direction, as well as any reports provided by the Bank under clause 58 and any notices of revocation of directions.
We talked a little about some of those issues on amendment 192, but I am concerned that there is only a partial duty to lay documents before Parliament. The amendment was intended to tighten up the conditions on when the Bank should publish documents, but we also need to ensure through the clause that Parliament has access to details of any changes. Subsection (3) says:
It would also be helpful if the Minister could set out who will judge the appropriate frequency for reviews of such arrangements in the Treasury. Does he not think that these internal reviews, which will take place from time to time, should be published alongside the other documents, so that Parliament can see them? That would ensure proper transparency and accountability.
Chris Leslie: It is true that they will be the responsibility of Ministers, but I was trying to get a sense of the time scales the Minister was thinking about and what the frequency of the reviews would be, but it does not appear that much thought has gone into that so far. In general, it would be helpful if we tried to keep to the principle of having parliamentary accountability for as many of these things as possible. The Minister knows my feelings about the super-affirmative procedure for affirmative orders more broadly, but we should always err on the side of putting documents before the House of Commons and the House of Lords if possible. However, I have made my point.
Chris Leslie: Clause 60 is crucial to the Bill. It places a duty on the Treasury on the one hand and the Bank and the PRA on the other, to co-ordinate the discharge of their functions. Again, it is a shame that the Bank of England and the PRA have been lumped together. It does suggest that there is always the overruling power of the Bank of England over the functions and activities of the PRA, so the co-ordination responsibilities have been framed in that way.
Will the Minister explain why there is not also a requirement to co-ordinate with the FCA? That seems the glaring anomaly in the clause. If the FCA is, as is believed, a slightly more independent entity, surely it is more necessary for that body to have a duty to co-ordinate, rather than leaving co-ordination to the Bank and the PRA. The Government amendments agreed earlier suggest that the Government were willing to look at involving the FCA a bit more thoroughly in the process of co-ordination when it came to the memorandum of understanding. However, they have not done so in clause 60. Will the Minister say why it was appropriate in earlier clauses but not this one? It is an important principle and I do not quite see the logic. As a result I am concerned about the clause.
Mr Hoban: One assumes that these bodies will automatically co-operate. However, the Joint Committee recommended having a clause in the Bill that required the Bank of England group, which includes the PRA, and the Treasury to co-ordinate during a crisis. If there is a crisis, significant responsibility will rest particularly with the Bank and the Treasury. That is why the clause is drafted as it is.
We talked earlier about the FCA, as a micro-prudential regulator of small deposit takers—not as a matter of course—potentially having powers. That would be only for small institutions, whereas here we are talking about a major crisis. It is unlikely that the FCA would have a role in a major crisis, even if it were to take on some additional micro-prudential responsibilities. This situation is very much related to crisis. The section on crisis management responds specifically to a pre-legislative scrutiny Committee recommendation, which is why we have drafted it in that way.
Of course, there is the overriding paragraph about the stability of the financial system, but the Minister has already accepted the principle that the FCA would be relevant in some circumstances. I do not see the harm in including the FCA in those duties to co-ordinate. What would be the harm in including the FCA?
Mr Hoban: The problem is that the hon. Gentleman, as he demonstrated with his earlier amendments, does not get to grips with this issue. He thinks that in a crisis the FCA should be involved regardless, in the same way as he thought the FPC should be involved regardless. There is a clear limitation here. Subsection (2) talks about “public funds notification”. This is a very narrowly defined duty to co-ordinate.
I do not think that it is necessary to include the FCA, where there is an issue about the stability of the UK financial system arising from a widespread financial crisis. We have future-proofed the Bill elsewhere to take account of relatively minor situations where the FCA may have some micro-prudential responsibility for small institutions. It is unlikely that its powers will be relevant when a large bank or insurance company is under threat.
It is fair to respond to the comments of the pre-legislative scrutiny Committee. I have done so in the clause, and I think the right balance has been achieved. The hon. Gentleman would accuse me of being churlish if I did not accept that Committee’s recommendations from time to time. He needs to reflect on the fact that the FCA is not currently tasked with the safety and soundness of deposit takers and insurers. The big difference between us on the matter is that our future proofing takes into account a situation in which the FCA might be a micro-prudential regulator for banks or insurers—it is not—whereas the hon. Gentleman thinks that the FCA should be involved regardless.
Chris Leslie: It is a question of ensuring that the right people are party to the conversations so that they can contribute whatever benefits they might bring to the discussions. What harm would come from allowing the
The Government’s approach seems stubborn. The Minister has included the duty to co-ordinate in response to a recommendation from the pre-legislative scrutiny Committee, and it is an important concession. The clause could have been improved further, however, and perhaps we should have tabled an amendment to it. I assumed there would be some logical reason for the provisions, but there does not appear to be.
Chris Leslie: That is another angle to the reason why we need to pause and look at the clause. Although the duty to co-ordinate is important, it would be wrong to let the clause pass with its current deficiencies. It is a question of the glass being half full or half empty, and unfortunately the glass is a little bit empty because the FCA is left out in the cold.
I do not see that any harm would result from the arrangement that I have suggested. The Minister justifies the rejection of that arrangement by saying that clause 60(2) specifically mentions the importance of co-ordination as a function of “public funds notifications”, but only the Treasury, the Bank and the PRA must have regard to it in such circumstances. The clause does not exclude circumstances where there might be a question of market function. I feel that the clause needs improvement, and I am not happy to see it stand part in its present form.
‘(7) The memorandum is a measure prescribed by the Treasury by order which shall not be made unless a draft of the order has been laid before and approved by resolution of each House of Parliament.’.
Chris Leslie: I am sorry that the hon. Member for West Suffolk was unable to join us in that Division. He obviously has important business relating to tomorrow’s activities ahead of him. He has been allowed to go off and get on with those important activities, so Government Members have been left holding the fort on his behalf. As we know, he is an important fellow.
In a sense, this group of amendments develops some of the arguments we have made in previous discussions. Amendments 181 to 186 would amend clause 61, which addresses the memorandum of understanding on what would happen in certain circumstances in relation to a particular crisis. The amendments would, for example, insert “and the FCA” at line 23 so that the Financial Conduct Authority would join the Treasury in drafting and preparing a crisis management memorandum for such circumstances. We began to debate that a moment ago during our consideration of clause 60.
The collaboration between the Treasury, the Bank and the regulators is exceptionally important. The Government’s earlier amendments gave me the impression that the Government were beginning to see sense, but as the clause stands, although the Treasury, the Bank and the PRA may include in the memorandum provisions on co-operation between any of them and the FCA, the FCA has been given the power only to agree or not, so the FCA will not be party to the drafting process; that is a strange scenario. Again, I do not know why that situation exists. We believe that the FCA should be an equal party to the PRA in authoring, preparing and maintaining the memorandum of understanding, rather than merely having a veto on it; otherwise, there is a chance that risks to financial stability caused by disruption in financial markets overseen by the FCA could be given insufficient weight.
In the arrangements later in the clause, it is strange that certain bodies are able to say only whether they agree with the draft that the Treasury, the Bank of England and the PRA put before them. The Minister might take the view that a committee should not draft such things and that the memorandum of understanding should be drafted by the fine narrative that only one or two, or in this case three, bodies can provide, but that does not apply in this circumstance. It would be better and wiser to involve the FCA in crisis management preparations because we just do not know what type of crisis might be round the corner.
Again, I sense that the Minister has drafted the Bill always looking backwards to the scenarios that history has taught us. Yes, learning from history is important, but it would be foolish to preclude scenarios in which market failures might prompt certain crisis arrangements. Not to have the FCA in the room helping to author how the cogs in the wheel will operate in such a crisis scenario seems an incredibly strange decision on the Government’s part.
There is again the sense that the Governor or the Bank of England took exception to the Chancellor’s concession that a memorandum of understanding is necessary in order to try to provide for circumstances in which a crisis might occur. In stamping its authority at this point in the Bill, the Bank appears to have drawn a line, saying, “Don’t you dare tell us how the PRA should interact with the Bank of England. It is a matter for us entirely.” That again suggests that the PRA is a creature of the Bank of England—if any subsection ever said such a thing, this is it.
We suggest leaving out that arrangement. It would be interesting to hear the Minister explain why the Treasury should not be able to detail some of the dialogue and contributions that the PRA might have to make in crisis management scenarios, and why the Treasury should not have powers to at least negotiate some detail on how that relationship would work. It plays to our suspicion that there is somehow an attempt to gag or suppress the PRA’s voice in a crisis, so that it must always be channelled through that of the Governor, as the only voice heard by the Chancellor at such times. It is a dangerous set of circumstances, and it would be better if the PRA’s voice could be heard in those scenarios. As we have only been able to interpret subsection (4) in that way, will the Minister explain his logic for arguing that the Treasury should not be able to make provisions about that relationship? Does it not prove the subservient nature of the PRA, and why we should be careful about muzzling the PRA’s voice in that manner?
Incidentally, it would be useful if the Minister took this opportunity to set out his understanding of the replacement procedures for the PRA’s departing chief executive. I am sure that he will not want to go into too much detail on individuals, but we have read in the papers that Mr Hector Sants is departing the organisation,
Having conceded the affirmative resolution procedure for a number of other points—and I welcome the Minister’s change of heart in that regard, particularly on FPC order-making powers and so on—why not give us the opportunity for proper parliamentary scrutiny of that MOU? The Bill already provides insufficient accountability to Parliament in a number of different ways, and our amendment would be far more consistent with the parliamentary control of orders as previously set out in the Bill. The Minister will understand why we feel that such a change should be made, so will he at least consider our point?
Sheila Gilmore: It will be during a crisis that it is proved whether this financial regulatory architecture is a success. Obviously, we cannot predict everything that might happen, but that does make these particular arrangements important. The Bill sets up a complex variety of organisations, as we have discussed at length, and splits functions that were previously within the FSA by creating different bodies, albeit all largely under the umbrella of the Bank of England. Several different organisations will have a role to play in the event of something going wrong, and getting that right is particularly important. How that is laid out, who takes the decisions and who talks to whom will be extremely important.
On Second Reading, there was debate as to whether we have a quadruple situation with several organisations of relatively equal weight advising the Treasury or whether we have what has been described as a twin peaks arrangement with the Treasury and the Bank of England, which encompasses the other organisations, and how that would work. If we simply have the two organisations—the Bank and the Treasury—there is a risk that the Bank will become much more important in the way that it relates to the Treasury. Would the Treasury have full information from all the different elements of the regulatory framework in order to understand what is happening and, most importantly, make the right decision in the event of a crisis? Much as we hope that there will be no crisis, it is essential that we get the arrangements right. Currently, the Bank of England could have internal disagreements on such matters, with the regulatory arms within it having different views on how to proceed. That will be dealt with internally by the Bank, and it will make a view known to the Treasury, but the Treasury will not necessarily—although it may do informally—have the full view of that internal debate between the different regulatory arms within the Bank.
At times during our debates, we have heard that such discussions are occurring anyway, so it does not matter whether we put them on the face of the Bill, because there will obviously be constant contact and people will know what is happening. At other times, however, such arrangements are specifically laid out. We cannot have it both ways. If it has been deemed necessary to lay down specific indications, such as in the clauses we
Cathy Jamieson: I will be brief. I just want to raise a couple of points, and I hope that the Minister will respond. To put them in context, I want to return to an earlier debate on what would constitute material risk. I recall the Minister saying that that would be difficult to define. However, the explanatory note to clause 61 states that
so, notwithstanding that it is actually quite difficult to define, the explanatory notes make it clear that that was the intention. There is another point I want clarification on in relation to the memorandum of understanding as outlined in the explanatory notes. It states:
“For example, the memorandum could include provisions about the regulation of a financial institution which might seriously affect diplomatic relations between the United Kingdom and a foreign country.”
Why is that specifically referred to in the explanatory notes and why does it say “could”? Will the Minister give us some examples of where he thinks that might be relevant? It is in the explanatory notes, so someone must have thought about it.
Mr Hoban: Let us be clear: we want to move away from a situation where we have unclear and overlapping roles in crisis management. That was inherent in the tripartite system. The Bill sets out a new approach, which involves the Treasury being responsible for public funds and the Bank as a single point of accountability for financial stability. They are to co-ordinate together, rather than in a large committee, which was the method tried by the previous Government and which clearly failed. Our approach ensures clarity and a focus of communication.
It is clear that the FCA has no significant role in crisis management. To the extent that it needs to be involved in assessing a risk or evaluating options to resolve the risk, it can do so under the existing provisions and in the MOU. It is not a requirement for the FCA to be a full participant in the MOU. There is a risk that that would lead to it being involved in discussions and decisions where it lacked a clear role. There is a duty on the FCA and the PRA set out in new section 3P of FSMA, as inserted by clause 5, which emphasises the importance of regulators co-operating with the Bank on the Bank’s duty to notify the Treasury of risks to public funds. That ensures that, in the unlikely event of a potential risk to public funds arising solely from the FCA’s areas of responsibility, the FCA will inform the Bank, which enables the Bank to make a notification if appropriate.
The hon. Member for Nottingham East also talked about the need to have some provisions in the MOU for the co-ordination of the Bank and the PRA. I do not know where he has got this obsession from, talking about people gagging others, dominant force and brooking no dissent. I cannot imagine who he has had experience
On parliamentary scrutiny, we have ensured that there is provision for the Treasury to lay before Parliament a copy of the MOU and any revisions to the MOU. That is a helpful way to ensure that there is accountability and scrutiny of the MOU. It will be a prerogative of the Treasury Committee, for example, to discuss the MOU and to understand how it works in practice.
The definition of material, which was raised by the hon. Member for Kilmarnock and Loudoun, is, as I have indicated, difficult. There is a requirement in the MOU to define it and that definition should be kept under revision. With that, I hope that the hon. Member for Nottingham East withdraws his amendment.
Chris Leslie: I will certainly do that, because there are quite a few amendments in this group. It would be churlish to divide the Committee on all six amendments, from 181 to 186, which would insert the proper role of the FCA from the memorandum of understanding on crisis management provisions into the Bill. We will test the Committee’s view on amendment 181, which will suffice as a way of pressing the point.
I disagree with the Minister’s view of the FCA’s role and the harm that would supposedly come if we allowed it to take part in the drafting of a memorandum of understanding. It would be entirely reasonably to allow it to be party to the drafting, rather than just having the memorandum presented to it. Okay, it has the power to veto or change things after the fact, but it is an awkward way to draft and design an MOU. Would it not be far more sensible, easier and more consensual to be party to that process in the first place? This rather convoluted provision of having organisations that get presented with the fait accompli and then have to say yes or no, but with almost no negotiation involved, is a strange way to draft a clause.
is an odd one to have put in the clause. Provision can be made, but need not be made. I cannot quite see what subsection (4) brings to the party. It is an entreaty to say, “Don’t intrude too much on to our terrain.” It is a very “get your tanks off our lawn” subsection, given that that lawn is now expanding. We have heard about Threadneedle street and the vast expense of the new offices at Moorgate. One gets the sense that an empire is beginning to be built, and the manifestation of that is in subsection (4).
I disagree with the Minister’s position on use of the affirmative procedure for the MOU. He should have conceded that particular change, which would have
This is another quite important amendment in relation to the memorandum of understanding. The issue came up on Second Reading and relates, in particular, to paragraph 20 of the draft memorandum of understanding on crisis management from the Treasury—a copy of which I am sure members of the Committee will have—which states:
“During a potentially fast-moving crisis, it will become especially important to ensure close and effective co-ordination so as to maintain coherence in the overall crisis management process. At the heart of institutional coordination during a live crisis will be frequent contact between the Chancellor and the Governor. However, the Chancellor and the Governor may agree to establish ad hoc or standing committees at other levels to support this process.”
The memorandum of understanding recognises that some level of formality of a committee or sub-committee structure to work properly through a series of decisions in a crisis management scenario might be necessary. However, there is no detail of those ad hoc or standing committees throughout the rest of the document. Such matters are left opaque and dangling in the air. They are not properly resolved, and presumably will be left on a dusty shelf until such time as we have a crisis and the document has to be brought off the shelf, dusted down and on we go.
The amendment would ensure that the MOU has more particulars of the constitution of the arrangements to resolve a particular crisis. Obviously, we believe that there is a strong case for setting out the draft orders on how the ad hoc meetings would take place and what sort of arrangements would exist. Whether it were called a stability committee, as we have suggested, or however it were termed, it would be important to capture
If Ministers started tearing their hair out, saying, “My God, there is a crisis happening. This is dreadful. Let’s set up a series of ad hoc committees quickly,” I am sure that capable and diligent civil servants within the civil service machine would be able to supply answers readily and do so with great success. However, I worry that that might take some time, so it would be preferable if such arrangements were settled as far as possible ahead of time. It is a dusty area of the policy. While emergency planning and preparedness is not something that often hits, after the fact people will always say, “Why didn’t you think about this before the situation arose?” We should take stock now and take the opportunity to deal with such matters, or at least require the participants in the drafting of the MOU to set up more specific stability committee or ad hoc committee arrangements so that the standing orders are clearer. That is the logic of the amendment.
Mr Hoban: I do like the idea of a stability committee. It reminds me of the council for financial stability under the Financial Services Bill, prior to the general election. It could be the tripartite committee, the quadripartite committee or the bipartite committee. I wonder whether working out what the standing orders are for a committee is the best use of time. The MOU is there to facilitate how the organisations would work during a crisis. Trying to recreate failed models of the tripartite committee or the council for financial stability will not do it. We have seen how they failed under previous regimes, and we do not want to repeat those mistakes. Yes, there may be times when ad hoc groups need to get together, but let us not try to recreate the failed models of the past.
Chris Leslie: That is a wholly unsubstantial response from the Minister. He has a totally complacent attitude to what ought to be his duty as a Minister: to take preparedness properly into account, though not here in the Committee. We are just saying that in the MOU, he should ensure that the organisations think about how things would work. He infects his argument with a sort of partisan nonsense, saying that we are attempting to resurrect the old tripartite committee arrangements; not at all.
I am quite happy to accept that we have a new architecture and a new set of structures, with the PRA, the FCA and others playing their particular part. All I am saying is, rather than waste time when the proverbial difficulties hit the fan, why not at least commission the players, with all their vast capabilities ahead of time, to think about how such things are done? One could argue that that is part of the scenario planning of how such arrangements might come to pass, and I just think that it is worth doing.
I am sorry that the Minister takes such a dismissive attitude to emergency planning and preparedness; after all, I thought that that was the point of the MOU and the whole section of clauses before us. He gets us right to the brink in paragraph 20 of the MOU, and then falls
Chris Leslie: I beg to move amendment 188, in clause 61, page 137, line 40, at end insert ‘and ensure that the Governor and all Bank of England Deputy Governors and the Chief Executive of the FCA may consult with the Treasury directly.’.
Clause 61 will make a number of changes where we believe that the voices of the Governor, the deputy governors and the chief executive of the FCA should be more explicitly and clearly heard by the Chancellor of the Exchequer. We are seeking to amend clause 61(2) to add a further point to the provisions of the memorandum. In particular, it should ensure that the Governor, all the Bank of England deputy governors and the chief executive of the FCA may consult the Treasury.
We have already voiced our concerns about the concentration of power in the hands of the Governor, so it will not surprise the Committee when I say that relying on one person’s opinion is not the best way to proceed when so much rests on it. The amendment would ensure that the deputy governors or the chief executive of the FCA can have their voice heard by the Chancellor if they have concerns. That might be especially relevant if the Governor does not share their view, and it is easy to envisage such a situation.
Such an amendment would benefit the Government of the day and the Chancellor, not Her Majesty’s Opposition. We simply seek to ensure that as many voices as possible can be heard and that there is no doubt that they will be heard clearly, particularly if there is a difference of opinion. As the Bill stands, there is a risk that the Governor might not judge it appropriate to inform the Chancellor that a deputy governor or the chief executive of the FCA, or indeed both, believes there is a material threat to stability or the use of public funds. If the Governor, for whatever reason, makes a personal judgment to dismiss their views in the belief that there is no such danger, the Chancellor will not hear those important voices. It is not beyond the wit of man to imagine such a scenario, and the amendment would address it.
In the current situation, the Chancellor hears from the head of the FSA, Adair Turner. Under the new system and the memorandum of understanding, he will hear from no one other than the Governor. I therefore have to ask again whether the Minister is not in the least concerned that the current drafting of the MOU might not only prevent the Chancellor from hearing such important voices in a crisis, but undermine important relationships and create tension between key post holders in the new regulatory architecture. Would there not be a greater likelihood of leaks if certain people felt they could not voice their concerns to the Government and that leaks were the only way to get information out? We have already seen in the Budget process that leaks often occur on financial policy, and it would be a shame if we ended up instituting a set of circumstances that made that worse.
To help ensure that the right voices are heard at the right time in a crisis, we should enshrine in the Bill a provision to ensure that the deputy governors and the chief executive of the FCA have a right to voice their concerns to the Chancellor of the Exchequer.
Mr Hoban: We come back to the hon. Gentleman’s obsession with dominant figures preventing any dissent from emerging from an organisation. Not every institution works like that. It is clear from existing dialogues between the FSA and the Treasury, and between the Bank and the Treasury, that there is quite a lot of interaction at all levels. Whether we are talking about Ministers and the Governor and deputy governors, or Bank of England officials and Treasury officials, that engagement and openness are there, so the amendment is not necessary.
The hon. Gentleman seemed to suggest that the Bank of England means the Governor, but it does not; in the Bill, the Bank of England means the Bank of England. The question whether the use of public funds is appropriate is not a matter for the Governor’s personal opinion; that is completely irrelevant, because it is for the Bank to notify the Treasury of a risk. As clause 54 clearly sets out, it is the Government’s opinion that matters. As soon as the Bank is aware of a risk of circumstances arising in which the Government might reasonably be expected to consider it appropriate to use public funds, the Bank must notify the Treasury immediately. So it is not a matter of the personal opinion of a Governor or deputy governor. It is about whether they believe the Government might be reasonably expected to consider it appropriate to use public funds.
I noticed that the hon. Member for Nottingham East did not talk about this issue much in his winding-up speech on Second Reading, but he has suddenly been gripped by new enthusiasm. Perhaps he feels the need to please his boss at the moment, who I can imagine is a dominating figure who brooks no dissent.
Sheila Gilmore: I have several times heard the Minister say that the Bank of England is a legal personality in its own right, which is of course the case. However, the Bank cannot be a single voice in that sense, or, if it is to be one, surely that will be in the actual person of the Governor; otherwise it is not clear how that voice will be expressed.
Chris Leslie: I am sorry that the Minister feels he can fudge the issue in that way, by saying that the Bank means the Bank, and therefore the Bank will do what it is going to do. Signatures are necessary on orders and decisions. Individuals and their posts in the Bank are clearly important. The Minister is the one who is creating a new deputy governor for prudential regulation. Therefore it would seem perfectly reasonable to ask whether that deputy governor will have the right to have their voice heard, even if that is in contradistinction to that of the Governor of the day. It is not clear whether that will be so. One can only hope that we will have a very relaxed Governor, who will delegate decisions and be happy to allow dissent, or differences of opinion. That is not necessarily something that we can always bank on.
Fabian Hamilton: On that point about the Governor and the obsession that the Minister claims the Opposition have with the Governor’s power, does my hon. Friend accept that the Treasury Committee, in its 21st report of the 2010-12 session, “Accountability of the Bank of England”, agrees with Opposition Members? It said that it wanted a stronger supervisory board, because it was concerned about the concentration of power in the hands of the Governor without it. Indeed, one of the Members who called for it is a member of this Committee—the hon. Member for Hereford and South Herefordshire.
Chris Leslie: My hon. Friend is right. We tested this discussion in clauses 2, 3 and 4, and elsewhere in the Bill, and we did not manage to get a supervisory board to create that better balance of accountability and power in the Bank of England. Perhaps we shall come back to that later, but I do not think it is unreasonable to clarify the point and allow those voices to be heard. It is important that we do not just assume that the pragmatic realities of dialogue will just follow their natural course, everyone will get on swimmingly, and of course the Governor will allow dissenting voices or differences of opinion to be heard. We know that organisational structures tend sometimes not to work in that way.
I hope that that is how things will work, and the Minister may be very relaxed about the circumstances, but we will probably have a new Governor of the Bank of England by the time the measure is enforced in large part. We do not know who it will be, their character, how they are likely to govern or what sort of management systems they will put in place. We will have to keep our fingers crossed and hope that they are relaxed and collegiate, or we could ensure that that is the case by making provision for it in the Bill. That is the intention of the amendment, which it will be important to press to a Division.
I fully understand the arguments made by my hon. Friend the Member for Nottingham East about the deficiencies of clause 61, but I am not persuaded that the amendment will resolve them; in fact, it might create more difficulties. If the memorandum of understanding is to deal with crisis management, I am not sure that making a general provision for the Governor, all the deputy governors and the chief executive of the FCA to be able to consult the Treasury directly would necessarily make that crisis management easier. If the MOU makes such a provision, does that mean that the Treasury has to check with all the deputy governors and the head of the FCA each time that it hears from the Governor, or that the deputy governors or the chief executive of the FCA can at any time make speculative inquiries of the Treasury about what the Governor tells it? We have talked about the need for certainty during crisis management, and I am not sure that the amendment would fine-tune the process of crisis management; I think it would add to the uncertainty.
If I support the amendment, I would contradict my position on previous amendments. I backed an amendment which stated that, if there was disagreement between the Monetary Policy Committee and the Financial Policy Committee, the Governor would be charged with reporting such disagreement to the Chancellor; it also related to how that disagreement was resolved. Having supported an amendment to vest such a clear power in the Governor to communicate to the Chancellor on behalf of the Bank, it would be contradictory for me to argue that, in the dire exigencies of crisis management, there could be a free-for-all on communications with the Treasury. I am not sure that the amendment would lead to certainty. It would not help the roles of the people named in it and it would not positively improve the Treasury’s position.
‘(7) The memorandum is a measure prescribed by the Treasury by order which shall not be made unless a draft of the order has been laid before and approved by resolution of each House of Parliament.’.—(Chris Leslie.)
Chris Leslie: Hopefully we can find a way to cool the room down—or perhaps we can keep the door open—because the heat of our debate has given a sauna-esque feel to our proceedings. Fortunately, I like to run warm, and it is heartening to have such a sense of support from so many Committee members.
The clause relates to the crisis management MOU, which is a key concern in the Bill that was discussed at length on Second Reading. During that debate, my right hon. Friend the shadow Chancellor pressed the Chancellor several times on the danger of leaving the matter of communicating a material threat to stability and the use of public funds exclusively to the Governor’s personal judgment. The Government have given some ground through their amendments 98 to 100 by including the FCA in the list of organisations that relate to notification and when the Treasury might reasonably expect to incur expenditure. We remain concerned, however, that the Bill falls short of allowing the deputy governors to be heard, which was why we tabled amendments. These are important matters. The Government are creating new and additional regulators. They must accept that the internal wiring between regulators will be made more complex by additional numbers of such bodies. They must properly address how those bodies will interact in a crisis situation.
Opposition Members are not convinced that the memorandum of understanding, which we have seen in draft form, will be sufficient. Improvements could be made to the MOU, not least through proper scrutiny of the provisions in Parliament. The Bill would have been improved if the Minister had allowed the affirmative procedure to apply to the adoption of the memorandum. He has already dismissed the notion that there might be disagreement between the deputy governors and the Governor. He regards that as a minor point with which we should not concern ourselves, but the memorandum of understanding must deal with that properly.
“Treasury Ministers are responsible for keeping Parliament informed of action taken to manage a financial crisis—including action taken by the Bank without any public funds implications. The Bank will keep the Treasury informed to the degree needed for Ministers to fulfil this function.”
Is not the Minister nervous that the Bank might keep him informed only to the degree that it sees fit? Would it not be more appropriate for him to have full knowledge and facts, rather than only those that the Bank chooses to give him?
I should be grateful if the Minister would explain why the explanatory notes are out of kilter with the clause’s current drafting. There are either typos or mistakes in them; they seem to refer to clause 59 duties when I think that they should refer to clause 60 duties, for example, and they refer to section 55 notifications when I think that they should refer to section 54 notifications. [ Interruption. ] My hon. Friend the Member for Kilmarnock and Loudoun agrees—she has spotted similar problems. Perhaps I have misread the explanatory notes, but is the Minister willing to accept that a corrected version needs to be issued?
Mr Hoban: With respect to clause 61, we need to bear in mind that the Treasury’s engagement is when public funds are at risk. We seek to create clarity. Yes, it is important that the Bank notifies the Treasury as appropriate when it has resolved a situation without recourse to public funds but, clearly, the information required will vary between circumstances. The alternative would be to go into immense detail in the MOU about the amount of information that should be provided, and it is not clear that that is necessary.
The hon. Gentleman says that paragraph 37 of the MOU suggests that the provision of information would be based on the opinion of the Bank, but that is not right. As the Treasury reports to Parliament, the Bank needs to give the Treasury sufficient information for the Government to be accountable to Parliament. It is not about the Bank’s opinion; we need sufficient information from the Bank to enable Parliament to hold us to account so, in terms of disclosure, the obligation is on the Treasury, not the Bank.
Chris Leslie: I am grateful to the Minister for that. The explanatory notes could have been more helpful generally throughout our consideration in Committee. Running into such typographical errors makes them difficult to navigate, but that is a minor point, and we have more general concerns.
The Minister knows that we have worries about the inadequacies of the MOU provision. Although we agree that, of course, an MOU on crisis management is necessary, it is framed in such a lax manner—without proper definition, without clarity on how the ad hoc committee arrangements in paragraph 20 will work, and without an opportunity for Parliament to approve it though a statutory instrument—that it is necessary, given that this is an early stage of the Bill’s passage, to send a message that this is a failure. We therefore cannot support clause 61.
Chris Leslie: We now get to some difficult and complex aspects of the Bill, and there is one issue that hon. Members will know has significantly exercised me and some organisations. Clause 62 relates to how international organisations should co-ordinate and collaborate with domestic UK regulatory players, and a significant number of City firms and financial services practitioners, along with other observers, have raised major concerns about the new structures proposed in the Bill.
The Committee will recall my general thesis that before the general election, when the Chancellor of the Exchequer was looking at how to apportion blame for the global financial crisis in a way that would pin it on a particular previous Administration, he decided that the way to do so would be to pour opprobrium on the Financial Services Authority. Splitting the FSA into conduct and prudential regulators was his approach. The fact that he designed such arrangements in opposition meant that he neglected, perhaps accidentally, to try to integrate the new structures with the European supervisory arrangements, which are motoring ahead in the way they regulate this country’s financial services institutions. Whether it is Commissioner Barnier and his pipeline of directives and regulations affecting the conduct and regulation of our financial services players, or whether it is the European Banking Authority, the European Insurance and Occupational Pensions Authority or the European Securities and Markets Authority, they all have a locus over our domestic regulatory arrangements. In a number of ways, they can overrule many of the decisions of the domestic structures that we are spending so much time constructing. Several organisations have therefore said that that Bill needs to be amended to reflect that situation and to address the mismatch.
The draft Bill was rightly amended by Ministers to require that the international co-ordination MOU should be established with a committee under Treasury chairmanship and reporting to the Chancellor, and with FCA, PRA, and Bank membership, with the aim of agreeing consistent objectives and effective international
those letters sound like something from Old MacDonald, but I gather that usual pronunciation of the acronym is such as to avoid the titters that might be caused by spelling it out. The report continues:
“We recommend that the Government consult on the appropriate level of co-ordination and set this out in secondary legislation in order to ensure both adequate scrutiny of the basis on which the two regulatory authorities will co-ordinate, and legal clarity about how they should do this. We further recommend that the Treasury take steps to ensure that the impending change to the FSA does not lead to a fragmentation of UK representation in the EU, and that the UK’s market position in the provision of European financial services be given an appropriate level of consideration within each of the ESAs”
or supervisory authorities. That is a tremendously important recommendation from the Treasury Committee, which I commend for its prescience. I hope that the members of that Committee agree that secondary legislation needs to set out an appropriate level of co-ordination, and that steps need to be taken to ensure the impending changes at the FSA do not lead to a fragmentation of UK representation in the EU.
Specific queries have been raised about the drafting of clause 62. There are concerns about disparities between subsection (1), subsection (6) and section 3E(3) of the consolidated FSMA, in terms of how the memorandum intends to co-ordinate a number of organisations. Some references are to co-ordination with the European supervisory authorities, EU and other international institutions, while others simply mention the European supervisory authorities. Elsewhere, there is specific reference to the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority. For the sake of clarity, will the Minister say which organisations will fall within the ambit of the memorandum of understanding for international organisations, as the Bill is specific in some parts but not others?
“The Committee shall be comprised of officials from the UK authorities and shall be chaired by the representative of Her Majesty’s Treasury. The Committee may invite representatives of other bodies to attend its meetings.”
Will the Minister shed some light on how many authorities are likely to be on that committee and how many officials are likely to be involved? He has already expressed concern about committees becoming unwieldy,
The MOU highlights the principles of openness, co-operation and coherence and lists seven high-level methods, describing what should be done around sharing information, keeping other authorities informed, consulting other authorities and so on. However, there are no concrete terms explaining how that would be done. At least two organisations, TheCityUK and the CBI, in their September briefings on the Bill, suggested that the international co-ordination committee would benefit from a joint secretariat, staffed by members from different regulatory bodies. In evidence submitted to the Treasury Committee, Aviva said:
“We believe that there may be merit in setting up a forum or secretariat in relation to EU and international engagement. A forum or secretariat could help co-ordinate strategy and support activity by the regulatory actors (but should not be a barrier to action).”
Generally, the Minister will know—we have discussed this on many occasions in European Scrutiny Committee B —the importance of exerting a strong British voice when it comes to European regulations and taking the opportunity to steer and shape where the regulatory agenda goes at a European level. I am honestly growing tired of reacting post hoc to a whole series of regulations as they flow from Europe, with Ministers saying, “We are going to try and fix this particular issue; we will go and negotiate for a concession here or there,” rather than getting in the driving seat and making sure that we are promoting the British model of regulation, which we ought to believe is superior. If the Minister feels that we have the superior system, he needs to show leadership and make sure that the European arrangements follow suit.
I have anxieties, as we have discussed previously, about various circumstances. I have heard that the PRA and FCA players will have to swap seats in certain meetings, in certain circumstances, to voice various views. That can cause great difficulty, so it would be
“We believe that it should also cover consultation with stakeholders. Given the importance of international (particularly EU) rules it is vital that stakeholders are involved as early as possible in discussions”.
People are concerned about that. It is not just about co-ordination between the regulators themselves, but ensuring that there is some insight for the organisations that will be affected by the regulation—the practitioners, consumer organisations and so on. We have very complicated lobbying arrangements for European decisions. Currently we have great costs that are borne by practitioners in the sector and by industry bodies in making representations to the European Parliament or to the European Commission. It would be far better to have a sort of clearing house for those views. We could have our regulators making sure that they are doing the right thing. We would get a little more unity and a bit more co-ordination here in the UK, and we would punch our weight properly in those important forums. Will the Minister comment on that co-ordination?
Chris Leslie: Yes. Indeed, that is the point that we need to make. It would be useful to involve stakeholders and ensure that those players felt that they knew what was going on. That common UK line is quite an important point to stress. If it were possible to get that more clearly it would be of great value.
Again, that is something that is not necessarily mentioned in other parts of the clause. The ESRB is obviously quite an important layer in this set of very complicated European supervisory structures. The BBA says that is needed
The City of London voices concerns, as do the CBI, Barclays and others. I will not read out all those quotes. Given the changes within the memorandum of understanding and given the concessions that the Government have already made on this, it seems that they are beginning to recognise the deficiencies in the Bill and this particular architectural arrangement. Surely we should have a review and consider the effectiveness of this approach at some point. What does the Minister envisage will be the opportunities to take stock of the effectiveness of this international co-ordination arrangement? Will we be able to have a stocktake of these arrangements? Those are my general thoughts on clause 62 and I look forward to hearing what the Minister has to say.
Mr Hoban: This is one of those moments where one rather feels that most of the arguments have been made in earlier debates. Let me therefore restrict myself to some of the things that the hon. Gentleman said that are new.
Mr Hoban: No, and that is not my objective. The hon. Gentleman asked about musical chairs and rotating votes. It is clear from the MOU which of the UK regulators is represented on the European regulatory bodies. We have drawn the hon. Gentleman’s attention to that before. He asked about membership of the Committee, including representatives of the Bank, the PRA, FCA and the Treasury. We cannot set out in advance exactly who will attend various committees and from which organisations. That will depend on the agenda. So we will have the right person in the room at the right time. Which bodies is covered by the MOU. Paragraph 6 sets out the scope and annexe A provides the current list.
The hon. Gentleman asked why ESAs are spelled out in subsection (2) but not in subsection (6). It is quite straightforward. Subsection (2) defines the term “European supervisory authorities” for the purpose of clause 61 as meaning EBA, EIOPA and ESMA. Subsection (6) uses the term “European supervisory authorities”, which is defined in subsection (2). That is all fairly clear. The bodies other than the ESAs are dealt with in subsection (5)(a), which refers to other international organisations of which it is a member or with which it has relations and which are concerned with matters related to its relevant function.
The hon. Gentleman talked about engagement. He was absolutely right: there is a need for engagement with industry. So, for example, I met the executives of insurance companies together and singly to talk about solvency II. We convene industry groups on a dossier-by-dossier basis. So we engage with the industry and we talk through their concerns.
I think that stipulating in an MOU who should be consulted and when is not necessarily appropriate given the diversity of matters raised through European dossiers. The reality is that the European Union has decided to set up three bodies on a sectoral basis. The UK has decided to do it on a conduct-of-business and prudential basis. Other member states have different arrangements. There is no single model across Europe. The key thing is to ensure that we engage, as we do, effectively not just with the ESAs but with the Commission and the European Parliament.
Chris Leslie: I am sorry that the Minister did not address some of my concerns about the nature of the officials taking part and adjunct details about the membership of the relevant organisations. He did not really flesh out where we were with the secretariat recommendation and how that would be taken forward, or state whether he would concede that a review of how that will work is necessary. I had assumed that he would say, “We will keep all those questions under review as best we can,” but he did not. I am concerned about how effective the clause will be.
Chris Leslie: That is very helpful to have on the record. I apologise, because I must have missed that section—[ Interruption. ] The Government Whip had spotted it; he is obviously on top of the Bill’s detail in a far more effective way than am I—[ Interruption. ] I can tell that that idea has a measure of support from his colleagues, but I doubt that that is actually the case.
I have my misgivings about the clause, and I suspect we will want to return to it at another time. I am not convinced that it fully addresses our concerns, but I will not press the point at this late hour, because we have had a good opportunity to voice some of our concerns.
Chris Leslie: This is a fairly straightforward clause, which simply talks about the interpretation of some of the measures in part 4. As the Committee knows, the Opposition have significant concerns about part 4, because we do not believe that the provisions for collaboration between the Treasury, the Bank, the FCA and the PRA have been framed in the right way. The clause simply defines terms such as “public funds notification” and “financial assistance”, however, so it is difficult to object to it.
Chris Leslie: Part 5 deals with inquiries and investigations, which will be of concern to hon. Members who have been party to debates about failings regarding regulatory matters that have not been dealt adequately with by regulators. I can think of a number of cases—such as Arch Cru, which has been debated in the House recently—and other arrangements where consumers have felt that there was significant failure among the firms involved, and that inquiries should be held into what went wrong in certain corporate arrangements. That is particularly relevant to those of us who have concerns about the impact of the failure of financial firms on consumers, including our own constituents.
Clause 64 details a number of cases in which the Treasury may arrange independent inquiries. We welcome the strengthening of regulatory bodies’ ability to commission inquiries when the interests of consumers and the wider economy have been endangered, so we support the intentions behind clause 64. We would like to place on record some concerns about the clause, however. For a start, it states that the Treasury “may” commission an inquiry if it considers
The wording is interesting. Does the Minister envisage the Treasury applying some form of public interest test? If so, what form does he think that test might take? The question is about what triggers an inquiry or investigation. Will the Treasury set out some sort of decision logic to establish when a public interest test would be applied? The clause appears to suggest there will be a set of circumstances—or will the need for an inquiry simply be left to ministerial discretion on a case-by-case basis?
It would be helpful to have a little more clarity on when public interest might kick in in such circumstances. Does the Minister agree that the use of the word “may” in line 30 of page 140 might lead to an unhappy situation in which the Treasury believes an inquiry to be in the public interest yet fails to commission one? We need to ensure there is clarity on that point.
I would also be grateful if the Minister were to place on record how he imagines the Treasury’s decision-making process for setting up an inquiry will work. What role will the Chancellor play? I am sure the Minister will agree that an inquiry should be a shield against future instability rather than a political weapon, but we need to know what constraints will be on the Chancellor of the Exchequer’s shoulders or, indeed, the Minister’s shoulders, because this is one of the few issues that the Chancellor might delegate to him. Therefore, how will that be framed?
Section 167 of the Financial Services and Markets Act 2000 empowers both the relevant authority and the Secretary of State to commission inquiries. Will the Minister explain why that principle was not followed when drafting clause 64? The clause adopts a slightly different model in which the relevant authority and the Secretary of State do not commission inquiries.
Clauses 64 to 67 are based on the existing powers set out in section 16 of FSMA. In reality, those powers have never been used by either this Government or the previous Government. In these few clauses, we seek to tidy up some of those powers. I am concerned that the fact those powers have never been exercised suggests a problem and that we need to introduce a more automatic process for investigating areas where there might have been a failure to secure appropriate protection—in the context of either the FSA and its objectives or the PRA and similar issues in clause 70, for example. That is why there is a division between clause 64, which allows the Government to do that, and clauses 69 and onwards, which allow the regulator to do it.
In a sense, the powers set out in clauses 64 to 67 are back-stop powers. If the regulator has not investigated, the Government may act where we believe that, rather than having an internal review, which is envisaged in clauses 69 and 70, we need an independent external review—that is the power we are taking in clause 65.
The clauses that address inquiries largely replicate the existing powers. The clauses on investigations introduce new powers to ensure that, as a matter of course, we have more investigations when the regulatory objectives of the PRA and FCA are not met. I hope that that gives some clarity on the purpose of these two sets of clauses in part 5. I hope that that will help accelerate progress.
Chris Leslie: It is telling that the provisions in the Financial Services and Markets Act 2000 have not been triggered in that way. I know that that came up in respect of Arch Cru and we debated that in Westminster Hall. Others have been concerned about why that particular group of powers has not been set up. Presumably there has been reluctance in the Treasury to intervene unless exceptional circumstances occurred. These changes make it more likely that we will be within the realms of inquiries and investigations. By and large, that is why we welcome the changes.
I was trying to test the Minister’s view on what that public interest test would be, because, if he is saying that the thresholds were too high and that we never had the inquiries into those arrangements, presumably the public interest tests will be a little more pragmatic and be more likely to occur. I was trying to get a sense from him of where that trigger or threshold would be set. I do not want to raise the hopes of consumer bodies and others who might want to see, in some future market failure scenario, that they can get a Treasury inquiry in this or that circumstance. I can understand why he would not want to set that out so explicitly. It would have been helpful if he had elaborated on whether he would have wanted some level of inquiry to take place in past situations, such as that with Arch Cru. I accept, however, that the Minister has made his points on clause 64. We generally support it and we will not object to clause 64 standing part of the Bill.
Chris Leslie: This clause relates to the power to appoint persons to hold an inquiry. It invests a huge amount of power over inquiries solely into the Treasury’s hands. The Treasury may appoint, direct, suspend and dismiss an inquiry with no obvious oversight provided. That is a slight concern that we have about the powers invested in the Treasury by this clause. Will the Minister explain why there is no reference to some level of outside accountability, particularly parliamentary accountability?
There is serious concern over subsections (3)(c) and (3)(d) of the clause, which allow the Treasury to suspend, postpone or dismiss an inquiry, without establishing any criteria on which to make that judgment. Worse still, the clause makes no requirement on the Treasury to offer an explanation for such a decision to either Parliament or the public. That would create a serious accountability deficit, which could lead to back-room arrangements or sweetheart deals, which run contrary to the public interest. I am sure that the Minister will understand why we have those concerns.
There may be logical reasons why the Minister has gone so far in allowing the creation of these inquiries and investigations and is then pulling back great powers for the Treasury in clause 65, which is a concern. Furthermore, the clause does not set out any meaningful criteria for selecting the person who will lead that inquiry. Indeed, the only criterion is that the Treasury considers them appropriately. That does not seem to be the best means of selecting a person who will be granted significant powers under subsequent clauses.
It is difficult to look at these clauses out of the context of the clauses that surround them. We know that inquiries will be funded by the Treasury out of moneys provided by Parliament. It is therefore strange that Parliament is mentioned in this group of clauses only as a facilitator of the inquiries, and that it is not entitled to any degree of oversight of their operation.
Will the Minister say why he is taking such draconian powers for the Treasury on such arrangements? Would it not be possible to trust slightly more those who are commissioned to conduct inquiries? We have consistently argued that the new bodies established by the Bill must not become creatures of the Treasury, and the same principle also applies to new processes. The clause grants powers to the Treasury that are untempered by oversight or accountability, which is why we have serious misgivings.
Mr Hoban: It is important for Ministers to be able to satisfy themselves that the regulatory system as a whole functions correctly and to account for that to Parliament, and the investigations provision will ensure that Ministers can fulfil that role. If Ministers are to receive the comfort that they need about the functioning of the regulatory system, it is right that they should be able to
The Bill has a range of other mechanisms by which Parliament can hold the PRA and the FCA to account for regulatory failure or other aspects of their activities—for example, for the first time the regulators will be in the remit of the National Audit Office. Powers in clauses 69 and 70 will require the FCA and the PRA to report on regulatory failure, for which the trigger will be set out in legislation, and those reports will also be laid before Parliament. In the first instance, the reports will give Ministers the insight that they need about the functioning of the regulatory system and, as appropriate, they will then be laid before Parliament.
The hon. Gentleman questioned the powers in subsection (3) to suspend or postpone an inquiry. It is perfectly possible to envisage situations in which that would be appropriate. For example, in relation to postponement, the carrying out of an inquiry may be prejudicial to ongoing enforcement action taken by the regulator. We would therefore have to decide whether it is better to have the inquiry or the enforcement, and I suspect that most hon. Members would say that the enforcement should happen first and not be jeopardised by the inquiry. It is also in the interests of consumers to ensure that enforcement action takes place.
In relation to suspension, the Treasury might order an inquiry into the failure of a bank, but if there were subsequent failures, we might wish to suspend the investigation until there is a return to stability, so that the work of the investigator and market concerns about that investigator’s recommendations do not add to the instability. When a failure is followed by a series of others, we might decide to wrap all the investigations into a large inquiry, rather than have several smaller ones.
On the issue of appointments, if it became clear that the Treasury had appointed someone who was not up to the job, we can imagine the opprobrium that would be heaped on it. It is in our interest to ensure that suitably qualified people, with the right and necessary skills and experience, hold the inquiries, and we would be foolish to appoint anyone who does not fit such criteria.
Chris Leslie: I am sure that the Minister can cite hypothetical situations in which such draconian powers are necessary, but I have misgivings about the balance of power. Ultimately, the public must have the confidence that such inquiries, if and when they happen, are genuinely independent. As hon. Members will know, what seem to be small points might in other scenarios become very important questions about the balance of power. I will not labour the point. I am afraid that the balance of power under clause 65 is too far towards clawing back powers for the Treasury, and I do not wish to support clause 65 for those reasons.
Chris Leslie: The clause is important. It is about giving teeth to the people appointed to make the inquiry. It is a strong clause and we are happy to support it. The clause will give the person appointed to make an inquiry a wide range of powers, but they will be subject to clause 65(3)(d), which empowers the Treasury to order the person to
If there was a question of interpretation, it could become a source of conflict. Will the Minister reassure the Committee that that would not be the case and that the Treasury would not overrule the chair of the inquiry with that arrangement? That is the only question that I have on clause 66.
Cathy Jamieson: In the interests of trying to make progress, I want to ask the Minister a couple of questions about the references in clauses 66 and 68 to the Court of Session in Scotland. Will those references be covered by the legislative consent motion, which has to go through the Scottish Parliament? Also, should any costs fall on courts in Scotland, are they covered by the expenses “reasonably incurred” referred to in clause 67? Would that be transferred from the UK Government to the Scottish Government?
Mr Hoban: I will investigate the latter point. I made the point at the start that the provisions were by and large covered by section 14 of FSMA. I do not think there is any point in reopening issues that have been settled some years ago.
Regarding the powers under clause 66, we are making it clear that we are giving significant powers to the appointed person and the procedure. The powers under clause 65(3) are predominantly about the scope of the inquiry, rather than necessarily the sort of people who should be summoned before the inquiry to give witness or evidence or to provide documentation. Clause 66 is therefore not in any way constrained by clause 65(3).
‘(4A) Any direction under subsection (4) must be laid before Parliament and published.’.
‘(5A) Any direction under subsection (5) must be laid before Parliament and published.’.
‘(6A) Any direction under subsection (5) or (6) must be laid before Parliament and published.’.
‘(2) The Treasury may publish the whole, or any part, of the report and may do so in such manner as it considers appropriate.
(3) The Treasury must prevent publication of any part of the report which it considers may contain material—
(a) which relates to the affairs of a particular person whose interests would, in the opinion of the Treasury, be seriously prejudiced by publication of the material; or
(b) the disclosure of which would be incompatible with an international obligation of the United Kingdom.
(4) The Treasury must lay before each House of Parliament a copy of any report or part of a report published under subsection (2) subject to the provisions of subsection (3).’.
Chris Leslie: These simple amendments relate to directions that can be given to investigations by Her Majesty’s Treasury and the fact that it can tell the FCA and the PRA that certain investigations are required. I do not see sufficient provisions to ensure that those
Mr Hoban: There is no reason why we will not, or cannot, publish the directions. We should bear it in mind that in some circumstances, publication would not be appropriate. We might envisage a situation in which the trigger for an investigation had been met, but launching an investigation could have unintended consequences. For example, it could undermine the orderly resolution of a firm or lead to consumer detriment if firms were rapidly to withdraw a product from the market. Alternatively, there may be operational reasons for the Treasury’s direction; for example, if an enforcement action, or other supervisory or regulatory action is under way, that should not be undermined by the commencement of an inquiry. Therefore, our broad intention is to publish those directions, but there may be good reason why doing so would be unhelpful, if uncertainty is created elsewhere.
The hon. Gentleman did not refer to amendment 139, which he tabled along with the hon. Member for Rutherglen and Hamilton West. That amendment would weaken the requirement to publish, set out in clause 77, because it downgrades what is now a “must” to a “may”. I do not think that would be helpful.
Chris Leslie: I am grateful to the Minister for speaking to amendment 139 before I have mentioned it. On reflection, that amendment could be improved, but we tabled it to take account of the particular circumstances that he spoke of, in relation to public interest reasons for not disclosing those particular directions. It was a consequential amendment to the key points that we made in the earlier amendments.
The Minister’s general commitment to the publication of those directions is sufficient. Obviously, in certain circumstances, publication might not be desirable, but the assurance he has given is enough, and I beg to ask leave to withdraw the amendment.
Chris Leslie: This is a mildly important clause, relating to the FCA’s ability to investigate and report on possible regulatory failure. I have a simple set of questions, because this is almost about drafting legislation to include the concept of near misses. For example, we could imagine circumstances in which aeroplanes pass one another and the Civil Aviation Authority conducts an inquiry into what might have occurred had they been closer. In a sense, I read the power to mean that there could be investigations into potential or possible regulatory failure, even though no harm necessarily came of it. Have I interpreted the clause correctly?
Presumably, such inquiries would also be conducted by an independent authority, rather than the FCA itself. I would be slightly worried if we ended up with the FCA solely undertaking inquiries into its own good activities or failings. It will sometimes be necessary to have an independent body to scrutinise whether the FCA has fulfilled is obligations. I therefore have two questions. Is my understanding correct about near misses, and would it be possible to have a greater degree of independence in the scrutiny of the FCA’s regulatory objectives in respect of clause 69?
That is why we have kept in the old section 14 powers under FSMA—I suppose they will now be section 64 powers—to have an independent inquiry. If we do not feel that it is appropriate for the FCA to hold its own, internal inquiry into what has happened, the Treasury is in a position to appoint an independent person to undertake the inquiry. That provides an important backstop to ensure that, where appropriate, there is independent scrutiny of a regulatory failure.
Chris Leslie: This is a sensible mirroring provision, replicating for the PRA the provision for potential regulatory inquiries for the set of issues that come under its remit. We are happy to support this provision.
Mr Hoban: Clause 70 relates to the duty of the PRA, so if section 72, as it will be, is to amend section 70, it can do so only in respect of the PRA. It recognises the fact that members of Lloyd’s are not actually authorised by the PRA. If we are to have an inquiry that looks at the way in which members of Lloyd’s are being dealt with, we need to amend the provision in section 70.
Chris Leslie: I have just a few questions for the Minister about the threshold triggers whereby the Treasury can require the FCA or the PRA to undertake an investigation. Will he explain what they are and what level of failure in relation to “relevant events” would need to have occurred for the Treasury to require such an investigation? Does not that imply that an investigation should be conducted by an independent body, rather than the regulators? Why is that not mentioned in this provision? Will the Minister also explain how concerns will be addressed in relation to the disclosure of confidential information that might be included in reports to the Treasury? I would be grateful if he could help me on that.
Mr Hoban: The power in clause 73 supplements the operation of clauses 69 and 70—they require the PRA and FCA to launch an investigation into potential regulatory failure—with a backstop power for the Treasury to require the regulator to carry out an investigation in the public interest. Of course, whether that is in the public interest or not cannot be defined in legislation, so the clause is silent on that matter. It would be a matter of judgment for the Government of the day. We are seeking to ensure that where there are borderline cases, in which the regulators are not clear that the trigger for conducting an investigation has been met, action can nevertheless be taken if the Treasury uses the powers under clause 73. There may be areas where it is not quite clear whether there has to be an inquiry, and we are giving the Treasury the power, in those grey areas, to say there should be an inquiry.
In some circumstances, it may be appropriate for confidential information to be disclosed, if that is necessary to give a proper account of what has happened. The new transparency power will enhance the public accountability of the PRA and FCA by imposing on them a duty to investigate and to report to the Treasury on certain matters, including possible regulatory failure.
Chris Leslie: This is a slightly more substantive clause, about the conduct of investigations. We have raised the question of independent bodies conducting investigations, but there is no mention of giving the regulator or the Treasury the power to appoint an independent body to conduct investigations under the clause. Will the Minister explain why not?
We accept that the regulator will often face a dilemma between conducting an investigation for public reporting and for enforcement purposes, and we recognise that that can be an issue where enforcement should take precedence over public recording. However, subsection (2) states:
Who decides whether it is desirable to have an investigation, and what criteria should they use? Why does subsection (3) refer to a “material adverse effect”, when subsections (2) and (7) refer only to an “adverse effect”?
Mr Hoban: These are quite detailed clauses. It is important that the regulator has the freedom to decide how the investigations should be carried out. Clearly, the regulator will need to think about whether the inquiry will get in the way of its carrying out its work. For example, if there is an ongoing crisis, it would be helpful for the regulator to focus on dealing with it, rather than carrying out the inquiry. Some balance may therefore be required.
It would also be helpful to ensure that the Treasury is aware of the postponement of the start of an inquiry. The power in subsection (3) is slightly different from that in subsection (2). If the FCA or the PRA decides to postpone the start of an investigation they are required to carry out by virtue of clauses 69 and 70, they should notify the Treasury to that effect.
The materiality test applies where the regulator postpones or suspends an investigation, and it is right that the test that applies to that is higher than simply how the regulator juggles investigations and its ongoing regulatory activities, as I discussed in relation to subsection (2).
Mark Durkan: In speaking to this and previous clauses, the Minister has used the words “inquiry” and “investigation” interchangeably several times. He has referred several times to inquiries being conducted under
Under clauses 74 and 73, the Treasury has the power to ask the regulator to conduct investigations. Under clause 74, it has fairly wide powers of editorial control over such investigations, including over the scope, the timing and the conduct—when to press stop and when to press go. The Minister told us that the earlier powers of inquiry of the Treasury have not been used before. Is it the intention or expectation of the Minister that the Treasury would be more likely to deal with matters when asked to call for an inquiry by way of requesting the regulator to conduct an investigation, if it is not already doing so, rather than ordering an inquiry itself?
The Minister seemed to imply that the likelihood of inquiries might not be that frequent an occurrence. Is the provision an attempt to allow the Treasury to respond to demands that might come from the media, Members of Parliament as well as practitioners in the field or consumers? Does he expect it to be the Treasury’s preference to rely on the powers of investigation via the regulator at the behest of the Treasury rather than on the powers that the Treasury itself has to institute its own inquiry?
Mr Hoban: I thought quite long and hard about the matter because, when I took up this position, it struck me that there had been no section 14 inquiries. To initiate one now would be a nuclear option. Part of the problem is that it has been left too late to use it.
However, it is important that the PRA and the FCA are accountable to Parliament for their activities. Conducting investigations is a good way of demonstrating that accountability and I expect that we would see more investigations than we have seen so far under section 14. That goes without saying in a way, given that we have had none under that section. I expect the powers to be used appropriately, and I do not expect them to lie dormant on the statute book. Their use will provide
Chris Leslie: I have a simple question. The clause covers detailed issues that have to be included in the conclusions of an investigation. It has included results of the investigations, lessons and recommendations, but not the background and causes of the regulatory failure. I am slightly worried that the root causes of that failure are not captured specifically in the Bill. If the Minister can confirm that the provisions, perhaps the results of the investigation or the lessons, will broadly include the causes, that would be helpful. It just seemed an obvious omission in the clause as framed.
Mr Hoban: I would certainly expect that to be the case. Under subsection (a), I assume that the results would uncover the process issues, the failure of the process and the failure of rules. The list is not exhaustive, and I expect the clause to cover the causes either under subsection (a) or, indeed, subsection (b).