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2.31 p.m.

The Earl of Home: My Lords, at the outset I should declare what may be a conflict of interest in that I have worked for a bank in the City of London for the past 31 years which has been supervised by the Bank through good times and bad. My experience differs somewhat from that of the noble Lord, Lord Spens, and other noble Lords. In declaring a conflict of interest I admit an unashamed bias towards the admirable way that the Bank has operated during the past three decades that I have been in the City. Every institution has its own problems. Some of the Bank's alleged mistakes have been talked about today. I cannot, however, agree with the noble Lord, Lord Peston, that any institution must be better than the one that is there now. I can think of many other regulatory bodies around the world set up for a similar purpose which do not appear to be doing as well as the Bank of England in its current position.

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My noble friend Lord Mackay of Ardbrecknish commented on the unseemly haste with which the Chancellor announced the move envisaged in the Bill. In the interests of time and after a long parliamentary week, I shall not repeat those comments. I should, however, raise one point on the speed with which the Government acted in May. I do not believe that they took any notice of the international reputation of the Bank of England. That view is, I believe, shared by the noble Lord, Lord Cobbold. Perhaps the Government did not worry about how widely respected the Bank of England is. Central banks and other banks around the world set enormous store on the words of the Bank of England not only for its advice but for the way it looks after their subsidiaries in the City of London. The announcement that the supervisory function of the Bank was to be peremptorily taken away caused considerable international consternation. I know that because I was travelling overseas at the time of the announcement.

Can the Minister inform the House what briefing was given to our ambassadors and high commissioners around the world prior to or coincidentally with the announcement? I fear the answer may be that none was sent until some time after the event, but I should be delighted to be proved wrong. I make the guess that our long-suffering foreign service had to respond to some very alarmed central bankers and their inevitable questions without any knowledge of the Government's true intentions. The reaction I experienced among those central bankers was that, at best, the Government had treated the Bank of England in a most cavalier way. More often their reaction was worry that the new Government somehow knew that something was wrong with the Bank, and they wanted to know what had happened.

Most noble Lords have commented upon the composition and remit of the MPC. We have heard erudite remarks on monetary policy. I shall merely emphasise one or two points on that aspect of the Bill. One is that I am delighted to agree this time with the noble Lord, Lord Peston. He is concerned, like me, by Clause 19 under which the Chancellor reserves the ability to overrule the committee in extreme economic circumstances. That presumably gives him flexibility to do more or less as he likes if the going gets tough. But what are extreme economic circumstances? Does sharply rising unemployment give justification for the Treasury to intervene? Does a high level of bankruptcies also give just reason? Does a high level of repossession of houses by mortgagors constitute an excuse? Any of those circumstances can be caused by high interest rate movement set by the MPC. I only hope that a strong adverse movement in the opinion polls is not also deemed to be an extreme economic circumstance.

That part of the Bill gives the Chancellor the excuse to say in public that interest rates are not his fault if they go up. He will, I am sure, claim credit if they go down because of other measures that he has taken. But the Chancellor has already succeeded in hoodwinking many people. Indeed, he has hoodwinked the Member for Great Grimsby, Mr. Austin Mitchell, who said that the

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decision to give the governor the power to raise interest rates had already led to instability in that rates had been raised four or five times.

Until the Bill becomes law, neither the governor nor the MPC has the power to raise interest rates without reference to the Chancellor. Any movement we have seen since the election has therefore been the Chancellor's responsibility. Nonetheless he has succeeded in persuading one of his colleagues in another place that interest rate rises are no longer his problem. Interest rate rises are his problem. He cannot shirk that responsibility.

I turn to the Bank's supervisory functions and to the new FSA. Many noble Lords have today raised questions, and there are still some other unanswered ones. At present several different bodies oversee the operations of, say, an investment bank. Some of those, from my own experience, have been slow to act. They spend a long time coming to any conclusion. There is the real danger that by putting them all together extra layers of command will be created. The whole process of regulation could become even more bogged down than it is at present as checks are made interdepartmentally that what is being said does not affect anyone else.

It is far from clear from what has been so far said, and from what is in the Bill, that just because everything is under one roof the system will become more streamlined. Government spokesmen have said that there is competition between the various bodies at present. The new structure tells me nothing to allay my fears that external competition will not become internal competition. We can only hope that the Government are not here setting up a bureaucratic nightmare.

It is also far from clear--this was a point raised by the noble Lord, Lord Desai--what will happen to the concept of the lender of last resort, and when the Bank will be empowered to intervene. In response to a pertinent question in another place, the Economic Secretary to the Treasury said:


    "The Government expect that interventions ... will be extremely rare, and practised only if there were to be a serious systemic threat".--[Official Report, Commons, 11/11/97; col. 804.]

The Minister went on to say that the memorandum of understanding between the Bank and the Financial Services Authority emphasises a need for co-operation and an exchange of information. I hope that that will not simply turn out to be a pious hope. Crises blow up very quickly, as we saw in 1967 and 1974. Unless that exchange of information is updated daily, almost hourly, much time will be wasted at the worst possible moment in trying to establish the facts and who agrees with them before anyone can start to concentrate on the remedy.

We need to know what evidence the Bank must require, first, from the FSA, which will then probably have to be put into a different form and submitted to the Treasury before it is allowed to intervene. Can it, on its own bat, set up a lifeboat, as it did so effectively in 1974? At what stage does the Chancellor give it permission to act?

In support of the remarks made by my noble friend Lord Stewartby, lifeboats have in the past not been launched just to rescue banks. In a much quieter way

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the Bank has also been the catalyst in persuading banks to assist other industries which are not in danger of sinking but have perhaps sprung a leak and need some temporary flotation bags. I do not see how, under the proposed structure of responsibilities, the Bank can continue that very useful function.

Indeed, during the course of regular supervisory meetings, the Bank picks up some very useful information about other sectors of industry. In future, if this intelligence is imparted at all it will go to an authority which has no interest in sectors other than those it supervises. I fear that a useful and informal two-way street of information will be lost to us.

There is a further aspect to the disclosure of information which is of great concern to banks and which was touched upon by my noble friend Lord Boardman. Increasingly, supervisors and regulators are asking for information which is, in effect, privileged. But supervisors understandably require and request it so that they can gain the full picture of the position of the individual institution. It would be helpful if the Minister could assure the House that when banks disclose privileged information to supervisors there will be adequate safeguards protecting them from legal action from third parties because they have been required to disclose that privileged information.

Obviously, banks want to be entirely open with the FSA. That is to everyone's advantage. But we live in an increasingly litigious society and we do not want a lawyer sitting beside us every time we have a meeting with the FSA. Assurances from the Minister at some stage during the passage of the Bill would be most welcome to the House and to the City.

Noble Lords also raised the question of the costs relating to the FSA. Many figures have been bandied about and it is hard to know which to believe. However, it seems to be agreed that at present some £75 million of the Bank of England's expenditure relates to public goods and that the cost is financed by cash ratio deposits. This rate is currently 0.35 per cent. of eligible sterling liabilities.

Given that the Bank will no longer have the supervisory function costs, banks and building societies--I believe that those two categories should be expanded in due course--which currently fund those costs should not have to carry the burden at the same rate as today's purely to fund the activities of a Bank which will be responsible largely for financial and monetary stability. The British Bankers' Association calculates that the rate could be reduced to only 0.1 per cent. of eligible liabilities in the comparatively near future which it believes would be a fair long-term rate. I am grateful to the Minister for his remarks on that topic during his opening speech and I hope that we shall be able to discuss the issue further during the passage of the Bill.

Fees for supervision are to be charged by the FSA so the Bank of England would be making an undue amount of money if the rate of CRDs is left where it is. It would be to everyone's advantage if, in future, the Bank were funded somewhat differently. I hope that the

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Government will review the system of funding sooner rather than later or, at any event, before the next piece of legislation envisaged by the Minister.

Perhaps the Government will look further at the way in which the FSA charges fees because that needs to be kept under review. In the debate in another place, the Economic Secretary to the Treasury said that,


    "bringing under a single regulator nine different structures thus avoiding all the duplication that has caused such chaos in the financial community, will provide the opportunity for effective regulation at lower cost".

The Minister himself said earlier that it is hoped that costs will be lower. The financial community has some doubts on that score. In particular, small institutions, which at present pay for the costs of one or two of the nine regulators, are understandably worried that they will now have to pay a proportion of the huge costs of the infrastructure of an institution which embraces nine different disciplines. Not surprisingly, those smaller institutions fear that their costs will far outweigh the benefits derived from reducing a small amount of the overlap.

Through the removal of the supervisory function of the Bank, I am extremely worried that the Government will make it a less attractive place in which to work and soon it will no longer be able to attract the admirable quality of staff which it has done in the past. I fear too that existing staff will start to look elsewhere as they see disappearing opportunities for widening the scope of their work. The Chancellor has taken away a large part of the rationale of the Bank and has given to it, probably only for a fairly short time, as we have heard today, a veneer of independence through the MPC.

I hope that the Government will take many of the points made during the course of the debate. Most have been made by noble Lords with practical experience of how the City of London works and who have a real desire to see that the pre-eminence of London as a financial centre is maintained.

The Government could further assist the morale of the Bank by confirming the report in the Daily Telegraph this morning of the re-appointment of the Governor of the Bank of England to which I, for one, although not all noble Lords in the Chamber, certainly look forward.

Other financial centres are snapping at the heels of London as the centre of the European financial world. We cannot afford to damage the morale and standing of one of our most respected institutions and I fear that that is what this Bill will do.


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