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Lord Eatwell moved Amendment No. 5:

Page 12, line 20, leave out (", who shall chair the Board,").

The noble Lord said: My Lords, in moving Amendment No. 5, I shall speak also to Amendment No. 6. It was moved in a slightly different form in Committee and I am grateful to my noble friend for discussions which have taken place since then.

The objective of the amendment is to ensure that one of the lessons learnt during the Baring affair is not forgotten; namely, that supervisory authorities should be subject to assessment and examination by an authority which is not only independent but seen to be independent. We discussed that issue in respect of Amendment No. 1 in that, under the new Bill, the Treasury Committee in another place will be charged with the responsibility of overseeing the activities of the Financial Services Authority.

Noble Lords will remember that the investigation into the conduct of the supervisory authorities of the Bank of England with respect to the Baring affair was conducted by the Board of Banking Supervision, to which Clause 28 refers. The Board of Banking Supervision has not only the investigatory role, which was thrust upon it at that time, but, under the Banking Act 1987, it has the statutory duty to advise the Governor of the Bank in the exercise of his or her supervisory functions. Under the Banking Act the board is chaired by the Governor.

Noble Lords will recognise that that structure--a committee chaired by the chief executive of the Financial Services Authority replacing the Governor--is contained in Clause 28. Therefore, the executive head of the institution responsible for supervision is deemed the appropriate person to chair the committee responsible for investigating whether that supervision is conducted in a satisfactory manner and advising the organisation on the conduct of its activities.

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My amendment seeks to change the provision for chairing the Board of Banking Supervision. Noble Lords may remember that at the time of the publication of the report of the Board of Banking Supervision into the Baring affair the value of the report was called into question in your Lordships' House, in another place and in the financial press when it was revealed that the conclusions had been drafted at meetings of the board chaired by the Governor and by Mr. Quinn, who was at that time the executive director of the Bank of England responsible for supervision.

No one has suggested--and I am certainly not suggesting--any impropriety in the operation of the Board of Banking Supervision or on the part of the Governor and Mr. Quinn. But what was correctly suggested at the time was that the report of the Board of Banking Supervision should not only be independent but it should be seen to be independent by virtue of having been prepared under an independent chairman.

I am sure that the Government are totally in agreement with that sentiment. In the new era of regulatory openness and institutional transparency, it is totally unacceptable for an individual with the authority of a chief executive to chair the body designed to advise and monitor the institution for which he or she is responsible. Amendment No. 5 removes that embarrassment. Amendment No. 6 requires that the chairman of the Board of Banking Supervision be elected from among the independent members of the board.

As I said in Committee, I am sure that the drafting of Clause 28 was a slip on the part of the Government. My simple amendments prevent the new FSA inheriting unfortunate and embarrassing practices from the Bank of England. I understand that the Board of Banking Supervision will not survive N2, but I believe that it is appropriate to send a signal to the markets and to all those involved in the financial services industry that in the new regulatory apparatus openness and independence will be the key characteristics defining the supervisory activity and the monitoring of that activity. I beg to move.

Lord Mackay of Ardbrecknish: My Lords, in some ways, although not entirely, the amendment parallels one which I tabled to Clause 3, which referred to the sub-committee of the Court of the Bank of England. At an earlier stage, I suggested that the members of the court should appoint their own chairman to the sub-committee, but the Government were absolutely determined that the Chancellor of the Exchequer may designate one of the members as chairman. I believed that that was wrong and I still believe that is wrong, but the Government got their way.

Today's amendment is similar, although I suspect more important and I listened with care to the noble Lord, Lord Eatwell. I remember the Friday afternoon when we in your Lordships' House spent some considerable time discussing the affairs of Baring. I can certainly say that the noble Lord made the point which he has just made fairly forcibly in my direction because I had to answer for it at that stage.

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It seems to me that if the Board of Banking Supervision is to be seen as independent, it should not have a chairman of the authority as the chairman of the board. I believe that the noble Lord has made an eminent case that one of the six independent members should be the chairman and that the independent members should make the decision as to which of their number it should be.

After all, rather like the court, the six independent members will not be picked off the street at random. They will be appointed jointly by the Chancellor of the Exchequer and the chairman of the authority. Therefore, quite clearly they will have the confidence of both of those gentlemen as people of some substance and considerable knowledge in that field. On that basis, I believe that it is right and proper that the six independent members should decide for themselves which of their number should be chairman. I have some pleasure in supporting the noble Lord, Lord Eatwell.

4 p.m.

Lord McIntosh of Haringey: My Lords, I am grateful to both noble Lords who have spoken for explaining the motivation behind the amendment. I should say straightaway to the noble Lord, Lord Mackay of Ardbrecknish, that I do not follow him in his analogy with the amendment to which the House disagreed at an earlier stage.

I should explain that the board was set up originally to advise the Bank rather than to discharge any executive functions. Therefore, under those circumstances, we believed that it was proper for it to be chaired by the Governor. It has not been our approach in this Bill, as has become clear, to change the banking supervision regime in the course of transferring it to the FSA, although we have proposed to increase slightly the Board of Banking Supervision's independence by reducing the number of executive members from three to two.

However, in Committee I undertook to consult on those amendments. We have consulted Howard Davies, the chairman of the FSA, and through him the non-executive members of the board. Having done so and having confirmed that they are content with that change in their role, I am happy to accept my noble friend's amendment.

In accepting it, I wish to reinforce what my noble friend Lord Eatwell confirmed: that this does not imply any criticism of the past conduct of the board or of any of its members or, indeed, of the Governor and other executives who sat on the board. I wish to reiterate the point which my noble friend made that we do not propose to retain the board in its current form when we bring forward our further legislative proposals. That would not be in keeping with the wider responsibilities of the FSA. But the FSA has consulted on the form of practitioner input in the longer term. On that basis, the amendments have our support.

Lord Eatwell: My Lords, I am extremely grateful to my noble friend for accepting the amendments. Perhaps I might add to his remarks concerning the Governor and Mr. Quinn. Of course, the purpose of the amendments

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does not suggest any lack of confidence in the abilities of Mr. Howard Davies, chief executive of the FSA, who is doing a truly excellent job. The amendments seek merely to establish a clear independent framework for the Board of Banking Supervision between N1 and N2.

I am grateful also for the support of the noble Lord, Lord Mackay, who rejected exactly those propositions at the time at which I advanced them; namely, at the time of the Barings affair. But there is of course more rejoicing in heaven for one sinner that repenteth, and I am delighted to hear of his repentance on this matter. Having said that, I am extremely grateful to the Government for supporting the amendment.

On Question, amendment agreed to.

Lord Eatwell moved Amendment No. 6:

Page 12, line 27, at end insert--
("( ) The independent members shall elect one of their number to chair the Board.").

On Question, amendment agreed to.

Schedule 3 [Monetary Policy Committee]:

Lord Mackay of Ardbrecknish moved Amendment No. 7:

Page 23, line 8, at end insert ("or
( ) he has been the Governor or a Deputy Governor of the Bank").

The noble Lord said: My Lords, in moving this amendment I shall speak also to Amendment No. 8. I suppose that it would be too much for me to expect that the success rate of the noble Lord, Lord Eatwell, might carry over to at least one of these two amendments.

We have been over this ground before and I have tabled the amendment in this way partly because I placed the amendments wrongly the first time and the Minister was able to have some sport at my expense because of that, but also because of something he said on Report on 23rd March.

I shall go over the ground quickly because I do not suppose that there are many noble Lords who have not been present during other stages of the Bill. Essentially, the Monetary Policy Committee will have nine members. I described five of them as the home team. They are people from the Bank--the Governor, two deputy governors, as there will be two in the future and two people who are employed by the Bank in senior executive positions. Then there will be four others who are appointed by the Chancellor and they will come from outside. They will bring their outside expertise--at present it is three from universities and one from commerce--to meetings of the Monetary Policy Committee. Your Lordships will know that the meetings of that committee are extremely important as regards the economic life of this country and for everyone who lives in it, whether they be mortgage holders, in employment, seeking employment or running businesses, especially in the export business, given the high value of the pound at present.

What bothered me rather when I looked at this matter was that there did not seem to be any way in which the hands of a future Chancellor might be tied as to who he

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could appoint as the away team. I was concerned in particular by the fact that two of the four current away team members--and I mean it as no reflection on them--had been in the past senior officials. One was at the Bank. Professor Goodhart was the chief adviser to the Bank in 1980. One was at the Treasury. Sir Alan Budd has been the Chief Economic Adviser at the Treasury since 1991. Therefore, two out of the four members have had some fairly high powered, in-house experience of the home team. In the case of one that is not so long ago and somewhat longer ago in the case of the other.

That is why I questioned whether in this part of the schedule as a disqualification for appointment we should suggest that no senior employee of the Bank or the Treasury could re-emerge as one of the four non-Bank members of the Monetary Policy Committee. I have slightly refined that to mention Treasury officials at Grade 3 or above or:

    "office of equivalent rank in the Bank".
That is my general point.

However, the first amendment comes from an exchange which the noble Lord, Lord McIntosh, had with me on Report. At that time I asked whether there was any reason why the Chancellor could not appoint a former governor or deputy governor of the Bank as one of the away team. The noble Lord, Lord McIntosh, said that,

    "there is no formal exclusion for a former governor or deputy governor".--[Official Report, 23/3/98; col.1016.]
Therefore, it was not just a case of thinking that the teams were home and away. It was almost the school versus the old boys. Although I do not suppose that the present Chancellor would act in that way, one cannot guarantee the actions of future chancellors. He might decide that a previous Governor was a safe pair of hands. Noble Lords who have served in government will recognise the minute, "AB was the Governor some years ago. The Chancellor will remember he was a perfectly sound man and can be relied upon on all occasions. We suggest that now he has a nice job at a university as a part-time professor, he is eligible to become one of the four wise men who will help the Monetary Policy Committee". The Chancellor may think that that is a good idea and will sign his initial at the top and off the minute will go.

I do not suggest that a future Chancellor would try to pack the committee with previous Governors, deputy governors and senior employees. Perhaps the Minister can give an assurance on the record that that certainly would not be the Government's intention and that in writing into the Bill that four members of the Monetary Policy Committee should not be employees of the Bank of England, they have absolutely no intention of the positions being taken by former Governors and deputy governors.

In a way, I am less concerned, although I am still concerned about senior employees of the Treasury and senior employees of the Bank being on the MPC as part of an "away team". Indeed, I was extremely concerned when the Minister raised the doubt in my mind about former governors or deputy governors. I hope therefore

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that the Minister can give me some assurance, at least as regards my first amendment, at this Third Reading stage.

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