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CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 874-i
HOUSE OF COMMONS
TAKEN BEFORE THE
Accountability of the Bank of England
Tuesday 15 March 2011
Sir David Lees, Sir Roger Carr, Lady Rice CBE and Brendan Barber
Evidence heard in Public Questions 1 - 142
USE OF THE TRANSCRIPT
1. This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
2. The transcript is an approved formal record of these proceedings. It will be printed in due course.
Taken before the Treasury Committee
on Tuesday 15 March 2011
Mr Andrew Tyrie (Chair)
Mr Andrew Love
Mr David Ruffley
Mr Chuka Umunna
Examination of Witnesses
Witnesses: Sir David Lees, Chairman, and Sir Roger Carr, Lady Rice CBE and Brendan Barber, Members, Court of the Bank of England, gave evidence.
Q1 Chair: Thank you very much for coming before us this morning. This issue, of course, is much bigger than it was prior to the decision of the Government to move a number of very important regulatory and supervisory functions from the FSA to the Bank and to augment the Bank’s role. May I begin by asking you, Sir David, to whom you think you are accountable?
Sir David Lees: I think I am accountable to Parliament, and through you to Parliament.
Q2 Chair: When did you last appear before Parliament?
Sir David Lees: I have not had that pleasure yet, so this is my first appearance.
Q3 Chair: How long have you been on the board? For how many years in total?
Sir David Lees: I have been on the Court now for 20 months. I came in on 1 June 2009. I also served on the Court for eight years in the ’90s, and that was a very different Court.
Q4 Chair: Okay, so you have quite a bit of experience of the Court over the years, but rather less of the modern Court?
Sir David Lees: I have a lot of experience of the present Court.
Q5 Chair: Okay. As I mentioned in my opening remarks, financial stability is now very high on the agenda of the Bank. Do you happen to know roughly how much the bank is spending, by function, as a proportion of its total resources on that?
Sir David Lees: I could easily reference it from the documents that I have in front of me. If you wish to, I will.
Q6 Chair: Do you know roughly? Do you carry that sort of thing in your head?
Sir David Lees: I do not carry it in my head but I would say that it was probably something like 100 to 200 people.
Q7 Chair: And in resources terms? It is set out in the accounts in resources terms, in cash. Or as a percentage of total functions? Might that be a way of looking at it?
Sir David Lees: I will just ask my colleagues whether they have a view. I would think probably as a percentage of total functions it is something like 20%.
Q8 Chair: It is a pretty short list that is provided here. It says "Policy functions" and then it lists two: monetary policy and financial stability. This is on page 29. The figure is 43%. Do you happen to know how that number has varied over the years? Is it an issue that you have taken a look at?
Sir David Lees: No. I mean I have certainly taken a view of the total expenditures in the Bank, but not going back over time into the individual functions.1
Q9 Chair: Given that the Bank has just been given this huge new responsibility and that we have just been through the biggest financial crash since the 1930s, don’t you think the amount that the Bank is now devoting to financial stability is something that-as Chairman of the non-executive board, effectively-you will want to keep a very close eye on?
Sir David Lees: Absolutely right: that is something that we want to keep a very close eye on.
Q10 Chair: But I have just asked you whether you know roughly what has been happening to that percentage number-that key control number-for previous years, and you don’t know, Sir David, and as far as I am aware, none of your colleagues is leaping in to help. Is that correct-none of you knows whether this number is higher or lower than it was in 2008, 2007 or 2006?
Sir David Lees: I think without a shadow of doubt it would be higher, because the 2009 Act, which created the Financial Stability Committee, will of itself have created a need for more resource, and it is an issue that we on the Court are concerned about-that we have on the Bank’s payroll sufficient able and senior people to support the financial stability responsibilities.
Q11 Chair: Yes, but what I am trying to get at here this morning is whether you are really on top of monitoring that. I am well aware that that is what you should be monitoring; what I am trying to establish is whether you are monitoring it.
Sir David Lees: We certainly are.
Q12 Chair: Do you know what amounts were being spent on this prior to the crash, roughly?
Sir David Lees: I do not know.
Q13 Chair: Okay. Do you know what happened in the years prior to the crash, therefore, and know how this percentage varied during the course of the period when we were most at risk of a financial crash?
Sir David Lees: I cannot provide you with the detail, partly because I was not there, but I could easily-
Q14 Chair: But three of you were. Your colleagues, if they are up to speed on this, please speak up. The correct figures are that in 2005-06, 44% was spent. That figure then dropped to 39% at the very time it was most needed. In other words, cuts to this took place in the Bank, supervised by the Court, and by 2007-08 the figure was only 39%. It has now clawed its way back almost to the level that it was at prior to the crash. I have to say that I am very concerned that you do not seem on top of any of those numbers at all, or indeed even to have a feel for the sense of direction of the numbers.
Sir David Lees: I do have a feel for the sense of direction, and I think it is, as you have just said, up, albeit marginally.
Q15 Chair: I just asked you whether you knew if it was higher or lower prior to the crash and you said you did not know.
Sir David Lees: Well, I correct that answer, if I may, by saying I surmise that it would be higher, and I think it will go higher still as we go forward.
Q16 Chair: Has at any time the Court commissioned a review of what went wrong in the Bank during the Northern Rock crisis?
Sir David Lees: An external review?
Chair: An internal review.
Sir David Lees: To my knowledge, no, but again I will ask my colleagues.
Q17 Chair: This was the most colossal failure of Bank policy, was it not? This was a period when we were very close to a bankrupt, when the lender of last resort functions, which is the core function of central banks, came into play, and there were very serious problems as a consequence.
Sir Roger Carr: I wonder if I may just offer some commentary.
Sir Roger Carr: The whole of the Northern Rock situation was clearly regarded as a crisis. From the Court’s perspective, it is something that was discussed in considerable detail in order to try and determine where we felt the weaknesses of the system were, such that the Court through the Governor could provide commentary as to where improvements could be made in the system. I believe some of those comments were taken into account when the new structure was being evolved. I would be very clear that it was a topic of considerable importance, but it was reviewed by the Court, rather than a specific study commissioned by the Court.
Q18 Chair: Okay. Just to be clear, three of you were on the Court at that time and none of you called for a review of the Bank’s performance during the financial crisis?
Sir Roger Carr: To be clear, it was not necessary to call for a review. A review was done as part of normal Court business, and it was clearly a very important topic.
Q19 Chair: You discussed that in detail with the Governor, and the Governor responded in writing to your points made?
Sir Roger Carr: Discussion was discussion. It was not done on a question and answer basis; it was a question of reviewing the strengths and weaknesses of the system we had, the points of main failure and where we felt corrective action should be taken.
Q20 Chair: Are those points thoroughly recorded?
Sir Roger Carr: I believe they are minuted, certainly in the broad.
Q21 Chair: Certainly?
Sir Roger Carr: In the broad.
Q22 Chair: Do you really think that this is a crisis which we can limit conclusions to the broad-discussed in the broad? Really?
Sir Roger Carr: I think the minuting, other than line-by-line, is always in summary. The dialogue that took place in the courtroom was much more interactive because we were all in a learning situation. There were no right answers in this period. We were finding the weaknesses of the system that we looked at in hindsight with a view to finding corrective action going forward.
Q23 Chair: Okay. The FSA did do an internal review and they published it.
Sir Roger Carr: Yes.
Chair: Do you think it might be helpful if you publish all the minutes and exchanges of the Court at this time?
Sir Roger Carr: I think that is something for the Court to consider and the Governor to comment on.
Q24 Chair: I have most, or a good chunk, of the Court here in front of me, so I am asking you to consider it now.
Sir Roger Carr: We will give it consideration.
Chair: Okay, we are going to park it. Michael Fallon?
Q25 Michael Fallon: You are painting a picture, Sir Roger, of the Court really as a kind of commentator on the crisis. The Bank’s objective was "To protect and enhance the stability of the financial system of the United Kingdom." Where do you think the Bank went wrong? You were there at the time.
Sir Roger Carr: I was. I think the Bank, within the limits of its authority at the time, did a reasonable job. There were certainly challenges in the information flow in the tripartite structure and uncertainty as to whose finger was on the trigger for some of the action that needed to be taken. These were the issues that came out of the review that was undertaken and why the new structure has been evolved. I think the Bank did well, in terms of providing for leadership in finding a way through what was a perilous situation at the time. It did it diligently, it did it with real commitment, and the Court and the executive were very involved and engaged in working through what was a difficult time. There was no question of lack of commitment, lack of concern or lack of action, but there were questions on the system in which we were operating. I think they have now been addressed. I think looking back if you were to comment on where the Bank could have done more running up to the crisis, it may have been able to shout louder. Whether people would have listened is questionable.
Sir David Lees: I might just add, although this was before my time, that I think the Governor has said in evidence to you that if he had any regrets, it was that he did not shout louder. I think that would be a pretty accurate quotation.
Q26 Michael Fallon: Yes, but I want to know what you were doing on the Court. You were there from June onwards; you were there right through that crisis. What were you doing?
Sir Roger Carr: We were participating in the management of the problem as non-executive directors. I mean, this was clearly a level of challenge that those with the executive responsibility were committed to resolving, and they were working literally around the clock to do that. There were no ground rules, there were no absolutes, and there were no certainties. The team had to work through that, and we as the Court were working with them. We were supportive when appropriate, and we were challenging when necessary, within the limits of our own abilities.
Q27 Michael Fallon: What did you challenge the Governor on?
Sir Roger Carr: At the time? We were challenging I think all the time on whose trigger finger should it be, and where the point of authority was. Those were the sort of challenges we made as observers and outsiders, rather than executives who had the responsibility for delivering.
Q28 Michael Fallon: But the net result was a very uncertain period for the Bank. At one point the Governor was telling everybody he should not intervene, and then he did intervene. Do you not think the Court itself did enough to challenge the Bank’s position?
Sir Roger Carr: My own view is that given the circumstances that all were facing at that time, all people gave their full commitment to it and made whatever they believed to be an appropriate challenge, recognising that we were in completely uncharted waters for much of that period.
Q29 Michael Fallon: You are now being given quite significant new responsibilities, including the Financial Policy Committee. Do you think the same kind of accountability framework is adequate?
Sir Roger Carr: I think what we will have in the future is a new kind of framework, and I think the benefit of the experience that we have all been engaged in is that the learnings of that have been employed in the development of the new structure. With that new structure, with clear accountability and external people being involved in the financial stability area, I think we will have an infrastructure of reporting that will be helpful to decision making.
Q30 Michael Fallon: What additional transparency will we have, given we still do not know your internal view in the Court of how the Bank performed? What additional transparency will we have under the new framework?
Sir David Lees: If I may just add one thing to what Roger has just said, under the previous arrangements, the Bank had a responsibility only to "contribute" to financial stability. Under the proposed new arrangements that word "contribute" falls away, so that the Bank will be responsible for the financial stability objective. I think that is a significant difference, in the sense that the buck stops with the Bank now, whereas previously it was only a contributory.
Q31 Michael Fallon: But how will you be more transparent? How will we know whether you are doing a good enough job?
Sir David Lees: I suppose the answer to that is it depends on the outlook and results of financial stability management. I do not know yet what the target or aspirations will be for a successful financial stability regime, but I would have thought that if the economy were to show good growth without the disruptions that we have so recently experienced, that would be a good measure of the success of the regime.
Q32 Michael Fallon: But we had plenty of good growth leading up to 2007, did we not, Mr Barber? It was all going very well then. Nobody saw the problems-or did you?
Bre ndan Barber: I think people did see the problems and I think in the financial stability reports published by the Bank in 2006, warning signals were being given about the concerns. The difficulty was that the Bank did not have, as Roger has said, clear authority or a clear toolkit to use to intervene. The change that we are now seeing is, as David has now said, a very clear allocation of responsibility to the Bank, with the responsibilities to develop that toolkit. That is a very changed remit that the Bank has now been given, in recognition of the failures of that period.
Q33 Michael Fallon: You have been on the Court since 2003. At what point did you realise the tripartite arrangement was simply inadequate?
Brendan Barber: I think with the benefit of hindsight, in the wake of the crisis, we are all perhaps a lot clearer than we were before the crisis. Certainly, I was part of the discussions in the Court in 2006, where some of these concerns and apprehensions were being voiced. I think it would be true to say that none of us realised quite how cataclysmic the crisis that we ultimately faced might turn out to be.
Q34 Michael Fallon: You deal in your other work with this issue of accountability all the time. How do you think the Court’s new framework could be more accountable and more transparent?
Brendan Barber: I think there is a high degree of transparency, in the sense that of course the Bank produces its annual report. It reports in detail on all the aspects of its work, and in addition it is subject to exposure through this Committee, as this Committee thinks fit to invite the Court to give evidence. You obviously have a regular dialogue with the Governor and the senior executives of the Bank. It seems to me that the implication of the question is perhaps that discussion with the Court might be of value on a more regular basis going forward, and I think that would be seen as a positive thing.
Q35 Chair: You kindly said that you were going to consider what you could publish of that crucial period in the wake of the crisis. I would be grateful if you could take a look at that, bearing in mind that huge amounts of public money and enormous public concern-public money at risk and public concern generated-during that period make your response particularly pertinent. I think in order to assess the Court’s role we really need to see all the records of the Court’s engagement on the issue of the financial crisis, from immediately prior to the crisis to the most recent dates when you think it is possible for us to see it on the grounds of commercial and other confidentiality.
Sir David Lees: I have said we will take this back to Court, and we will give it very full consideration.
Q36 Chair: As you may imagine, a key question for us would be whether the Court, some other institution, or some beefed-up Court is what is required in order to deal with the FPC scrutiny issue. David Ruffley?
Q37 Mr Ruffley: I would like to talk about the history before we get on to the future. This is really for Mr Barber, Sir Roger and Lady Rice. Sir Roger, can you confirm that part of the 1998 Act puts a duty on the Court "to review the bank’s strategy in relation to the financial stability objective"? That is very much the Court’s role; in fact, Mr Barber talked about a report in 2006. Who were the executives in the Bank who were doing work on financial stability?
Sir Roger Carr: Well, there are a group of executives in the Bank.
Mr Ruffley: Who were they?
Sir Roger Carr: The Deputy Governor.
Q38 Mr Ruffley: Just for the record, could you give the names of the people that you were scrutinising?
Sir Roger Carr: At the time we had Paul Fisher, Paul Tucker, who was the Deputy Governor responsible-
Q39 Mr Ruffley: The other two can chip in to help you with the names. I just want to understand who at the Bank was responsible for doing the work on the financial responsibility objective.
Sir Roger Carr: Yes. Andy Haldane was also involved, so these were the people that we had interaction with, from the Court’s perspective.
Q40 Mr Ruffley: Would you say their work was adequate in doing work on financial stability and making sure bear traps were clearly flagged up before 2007?
Sir Roger Carr: I understand bear traps, and the reality is that these people, from our judgment, are very competent and able people who have put a lot of energy and most of their life career into exactly this area of central banking. So they were people of-
Q41 Mr Ruffley: The financial stability objective that the executives were doing work on-you think they discharged that work adequately?
Sir Roger Carr: I think they did discharge it adequately. As we discovered later, the system and all the difficulties of the financial stability area were not things that were fully understood by all parties, but that is not to say that at the time they were not discharging their obligations correctly, and working hard to do it.
Q42 Mr Ruffley: Yes. You see, I have a problem with that answer, compared with the answer you gave some moments ago to Mr Fallon and Mr Tyrie. You said-I wrote it down-that the Bank "could have shouted louder. Whether people would have listened is questionable." That is what you said.
Sir Roger Carr: Yes, that is what I said.
Q43 Mr Ruffley: On what basis? What evidence do you have for it being questionable that people would have listened, had the Bank done its job of shouting louder? You are implying there was a fault. You said, "We could have shouted louder."
Sir Roger Carr: I think in hindsight one could have always shouted louder. On one very notable occasion, I was at the Mansion House where the Governor made a speech that was clearly really forewarning of the difficulties that may result from the way the financial markets were operating. He made a speech which referred to the risk of the champagne cork and, when the bottle was opened, of it being rather flat. He said that people should be careful; there was no new financial paradigm here, and it needed to be monitored. He made that point very clearly-everybody heard it-but it was at a time when the world generally was enjoying this artificial benefit of lots of cheap credit and were developing their businesses accordingly. People did not want to hear the bad news. The bad news was being given, and I think being given with authority. Now, it is a judgment whether if he had shouted more often people would have started to listen, but naturally I think, looking back, people only really listened when it was too late.
Q44 Mr Ruffley: You are painting a picture here of the poor old Bank crying in the wilderness. They were powerless in the face of these events in 2007 and onwards. Is that what you are suggesting?
Sir Roger Carr: I am not trying to paint a picture; I am just giving you the facts as I remember them.
Q45 Mr Ruffley: You are painting a picture. You are saying, "They could have shouted louder; whether people would have listened is questionable." I put it to you that there is more that the Bank could have done. That is its job-highly ranking, highly respected professionals in the financial world of this country. You think they did a "reasonable job"-another phrase you used. I have a problem here, because it was a massive screw-up that has affected the lives of our fellow citizens in sometimes quite horrific ways.
Sir Roger Carr: Yes. I do not think that emanated from the Bank of England.
Q46 Mr Ruffley: You do not think you could have done a better job?
Sir Roger Carr: I think everybody can always do a better job in hindsight, but I think the commitment, the vigour and the determination with which the job was being done at the time was very high indeed.
Q47 Mr Ruffley: You talk about being in a "learning situation"-I quote from one of your earlier answers. Do you not think it would be a good idea to get more people on the Court who knew about central banking? That is for Sir David and for you. You can go first, but I would like Sir David’s view. Knowing about central banking-don’t you think there should be more people on the Court who are good at that?
Sir Roger Carr: I think we need a balance of skills and knowledge on the board. You certainly need a good degree of knowledge about central banking; that is what the executive are primarily for. You then need to add to that through non-executive skills of a mix, some of which are central banking and some of which are not. It is dangerous to have only one skill set in any boardroom.
Q48 Mr Ruffley: I think most people listening to this would not particularly want someone talking about being in a learning situation. Let us move on to the future.
Sir David Lees: You invited me to-
Mr Ruffley: Yes, on that point about banking, and then I will go on to the future, to the.
Sir David Lees: Really what you are talking about is the mix of the Court, I think. Whether it is central banking experience or financial services experience or both, and bearing in mind also that we are looking today at the future, we are probably talking about the insurance industry, so I think you really need a blend of skills, but not exclusively financial services or central banking related. I do think that you need on the Court of the Bank of England two or three people-it would always be a minority-who have experience of governance, of running large and complex organisations.
Q49 Mr Ruffley: Okay, I’ve got the picture. Sir David, could you just list for me the key changes under the new arrangements to the way the Court will operate now that it will have responsibility for oversight of the Financial Policy Committee and other committees?
Sir David Lees: Yes. I think I can. If I start with the Financial Policy Committee, that is a committee of Court. It has a responsibility in the smaller print of contributing to the Bank’s financial stability objective, so there will be a close link between the Financial Policy Committee and the Court. I envisage, and this is looking into the future, the relationships between the FPC and Court to be not dissimilar in certain respects to the MPC. That requires me to say a little bit I think about the MPC, because the responsibilities of Court in relation to the MPC are essentially to make sure that they have the tools of the trade available to them to carry out their responsibilities. How do we do that? We do that in two or three different ways. We attend meetings, called pre-MPC meetings, where they are reviewing the economic developments of the last month. We have external members of the MPC at Court when we are discussing the latest economic situation. I personally interview every single member of the MPC in the first quarter of the year to ensure that they are getting the support that they require and to make sure that there are no governance issues about which they have concerns.
Now I see a similar sort of operation developing also for the FPC, where the Court would invite members of the FPC to attend Court to discuss financial stability matters. We would of course, because it would be our responsibility, initiate the financial stability strategy, of course taking into account the contribution that was being made by the FPC. I would certainly envisage face-to-face interviews with members of the FPC. I hope this gives you a slight picture of how I think it might work as we go forward.
Q50 Mr Ruffley: All that would be minuted, would it?
Sir David Lees: Certainly. Everything that is said in Court, subject to the generality point that Roger made, is minuted. I think the arrangements for the FPC, as I recall them, are that the Governor and the Chancellor meet twice a year to review financial stability, and I think there is a published record of their conversations. I also understand that the FPC will be fully minuted.
Q51 Chair: I am a bit concerned by the reply you have just given, Sir David, to David Ruffley. Have you read the Government’s recent consultation document that it put out in February on this very issue?
Sir David Lees: Yes, I have.
Q52 Chair: It says something quite different. You, as I understand it, have just said to me that the relationship between the Court and the FPC should be similar to the relationship between the Court and the MPC.
Sir David Lees: I think I corrected myself by saying there are similarities. It would not be totally similar.
Q53 Chair: Not totally similar, but not dissimilar-that, in fact, was the phrase you used.
Sir David Lees: Not dissimilar in certain respects.
Q54 Chair: Okay. I do not know whether you trained as a lawyer but most people here would consider all those phrases to be pretty much in the same ballpark.
Sir David Lees: No, I trained as an accountant.
Q55 Chair: The MPC’s central objective is to set short-term interest rates, to control inflation. You have no oversight of that, do you?
Sir David Lees: No, just processes.
Q56 Chair: But the central objective of the FPC-
Sir David Lees: Is to contribute.
Chair: Is to ensure financial stability, and in that document it makes clear that the Bank will be accountable to the Court for the contribution it makes to that central objective, so whereas with the FPC you are on point as the key body to which the Bank is accountable for securing its central objective, with the MPC you are specifically told to keep out of it. That does not sound "not dissimilar" to me. It sounds completely different.
Sir David Lees: I was really concentrating on some of the process points. You are absolutely right in defining the financial stability responsibilities to say that the FPC is a contributor, and the Court is ultimately responsible, and that, I think, is what I said.
Q57 Chair: Can I go back to another remark that was also made in reply to a question by David Ruffley? "People would only have listened when it was too late." Was the Court shouting internally?
Sir Roger Carr: I think we were all participating-
Mr Ruffley: In a learning situation?
Sir Roger Carr: With respect, I think the whole of the world was in a learning situation.
Q58 Chair: Yes, but was the Court shouting internally? Were you warning internally?
Sir Roger Carr: The Court’s role is to participate, to support and to challenge, and where it believes things are not being done correctly at the time, to make it clear that it believes more should be done. From memory, I do not believe at the time we felt that more should be being done.
Q59 Chair: So when we get these papers we will not find any internal shouting?
Sir Roger Carr: I think you will find a record of debate, but there was no question, certainly in my mind-I can only speak from my perspective-that the people engaged in resolving the problem in the midst of the crisis were not fully engaged in so doing.
Q60 Mark Garnier: I want to talk about the relationship you have with the Treasury, and my question is directed specifically to all except Mr Barber, because I think all the others of you have been non-executive directors of PLCs. The Bank of England is to all intents and purposes a wholly owned subsidiary of the Treasury. How does your relationship as, if you like, non-executive directors of the Bank of England, change, or how is it different to your experience of being a non-executive director to a PLC when it comes to dealing with your shareholders?
Sir David Lees: Of course, the fundamental difference is that the Bank is not a profit centre, and therefore, I think, in relationships with shareholders in the PLC situation, the profit motive and profit performance and so on is never very far away. That having been said, I think the relationships with our shareholder, the Treasury, are reasonably close. I cannot speak exactly for the Governor, but I know he has a whole series of interfaces, particularly with the Chancellor.
Speaking for myself, I have an interface with the Permanent Secretary, particularly in relation to appointments, and again, particularly in relation to the non-executive directors on the Court. I furnish him with my ideas as to the qualifications that are needed for members of Court. I have given him a performance review of the non-executive directors on Court. I sent the Financial Secretary to the Treasury the large document that I sent the Chairman, which is the forward-looking document dealing with the responsibilities of Court. I sent that to him, so I think our relationships are reasonably close.
Q61 Mark Garnier: What has the Permanent Secretary’s reaction been to your report about the performance of other non-executive directors?
Sir David Lees: Very appreciative.
Q62 Mark Garnier: Of the fact that you wrote a report, or of the content of it?
Sir David Lees: No, appreciative of receiving it, appreciative of the amount of trouble that I had taken, and appreciative of the quality of the non-executive directors I had been a party to appointing.
Q63 Mark Garnier: I do not want to sound patronising, but it is not marking homework. We are talking about the Court of the Bank of England. Clearly there is a big issue about whether you are collectively competent, and what I am really trying to get at is how the Treasury is having an influence on the competency of the Court, and how they are using their influence as, effectively, the single shareholder, in terms of trying to influence that.
Sir David Lees: The Treasury has certain ways in which it could measure that, I think. For example, a Treasury representative attends on the Financial Stability Committee, the FSC, on which there are four members of Court, so he would get a reasonable view of at least those four.
Q64 Mark Garnier: That is quite a limited view. There are more than four of you on the Court.
Sir David Lees: I think it is a limited view, but it is the best that the present circumstances provide.
Q65 Mark Garnier: Would you suggest that there should be better scrutiny on the part of the Treasury in terms of the competency of the Court? It is interaction. It is not just what CVs look like, of course; it is how the Court works together and how effective it is. Would you like to see increased scrutiny from the Treasury on your competency?
Sir David Lees: I would not particularly mind at all.
Q66 Mark Garnier: Can I take that as yes, you would like it?
Sir David Lees: I repeat, I would not really mind. I am very confident in the competency of Court and its present membership; I believe that it is qualified to take forward the significantly enhanced responsibilities that will be falling to it. As a matter of fact, I asked the Permanent Secretary to give me a comment, if he would, on how he did see the effectiveness of Court.
Q67 Mark Garnier: I am delighted to hear that you are happy with the competency, but I think it needs to be more than just one person. Would you not agree with that?
Sir David Lees: As I say, the way in which communications with the Treasury have taken place I think should give them some comfort as to our competencies.
Q68 Mark Garnier: Okay. Sir Roger or Lady Rice, do you have anything to add?
Lady Rice: I would just make two small points, perhaps going back to your original question. We should not forget that the Treasury is involved in the process of appointing non-executive directors to the Court in the first instance. That is a position of tremendous influence from the start and we should not forget that.
The other question you asked was: how does our experience on the Court differ from private sector board experience? I hope this does not seem trivial-it may sound trivial to you-but I have experience of a wholly owned subsidiary of a clearing bank, as both an executive director and then subsequently for a while as chairman, but wholly owned by one shareholder, and the relationship there in a very small way is not all that different. There was one shareholder who would look at what we were doing; one shareholder to whom I would have to make my case on behalf of my board for what we would want to happen; and one shareholder concerned with the appointment of directors to my board. In fact, we ran as a registered bank with a full non-executive board, accountability to a regulator, public accounts and so forth. So to me there is a similarity there.
Q69 Mark Garnier: Funnily enough, I think that analogy is extremely important, because you have real direct experience of how a single shareholder can influence an organisation. Do you see that the Treasury is influencing you too much, too little, or just about right?
Lady Rice: Gosh. I see the relationship as being perhaps issue-by-issue, so the Treasury might raise an issue, ask us to consider something. I think, from anything I have seen, that there is a healthy dialogue and open doors of communication between the executives, the Bank and senior officials in the Treasury. I think that is really important. Who influences who at the end of the day is a matter of coming up with what is best in the circumstances, and that should almost always be a matter of dialogue and conversation.
Q70 Mark Garnier: If you had a serious worry about the Court, who would you go to, to talk to about it?
Lady Rice: If I personally had a serious worry about the Court or how it was operating, I might turn to you Chairman, in a sense, because the Court has a responsibility here. I do not know if the door would be open-
Chair: It would, even on a confidential basis, if you want it to be.
Lady Rice: Or depending on the issue, I might possibly speak to someone in the Treasury, but I would have to think about this.
Q71 Mark Garnier: But there is no formal arrangement for whistleblowing?
Sir David Lees: Can I just make a very important point here? Just as in the private sector, all decently run boards do board effectiveness reviews, where the chairman or, occasionally, an outside party takes the views of all the individual directors, both executive and non-executive, as to the effectiveness of the board, so we do exactly the same thing in the Bank of England. It would be very difficult, I think, for any non-executive director to rush off to the Chairman of the Treasury Committee and say he or she was very unhappy about Court without at least having gone through the gamut of the annual effectiveness review. It just could not happen.
Q72 Mark Garnier: Okay. You talked a bit earlier about the fact that you did not have the profit motivation, in terms of running it, but you have an arrangement in the amendment of the 1946 Bank of England Act that you pay 50% of your profits to the Treasury by way of a profit split, as opposed to a dividend. Have you had any discussions about that?
Sir David Lees: In terms of it being too much, too little or-
Mark Garnier: Just in general.
Sir David Lees: No, I do not think so. We have accepted it as part of the statute.
Q73 Mark Garnier: So you do not feel the dividend cover of two times is too little?
Sir David Lees: No, I do not think I see the dividend cover in the Bank quite in the same way as I would in some of the public companies.
Q74 Mark Garnier: The Treasury has not said, "Can you help by being a bit more profitable?" No?
Sir David Lees: I mean, they could make us much more profitable at the stroke of a pen by changing the customer deposit ratio, but-
Q75 Mark Garnier: You have seamlessly come to my next point. One of the main aspects of the Treasury revolves around this money, because you have to look at profitability to make sure you are functioning properly, but you are also taking on a whole lot of new policy functions. Are these new policy functions going to be funded from the CRD scheme, or are you going to get help from the Treasury in order to pick up some of these extra costs? Or are they going to change the dividend cover, if you like?
Sir David Lees: I think the CRD ratio arrangements come up for review in two years’ time. That will certainly be an issue. The ratio up to 2008 was, I think, 0.115, and it has now come down to 0.11. I think there must be an expectation in the light of these increased policy responsibilities that it may need to creep back up again.
Q76 Andrea Leadsom: I am still very concerned about this issue of accountability and the level of engagement with the Bank itself of the Court of Directors. In particular, Sir David, both you and Mr Barber made the point that during the financial crisis the Bank had done the best it could within its very limited authority and powers, and you cited the tripartite regime as a reason why it was unable to do more. Yet it is true, is it not, that the MPC had the ability at any time to raise interest rates to try and take the sting out of the credit bubble as it was rising? Did you at any point during that period try and challenge the Bank on what it was doing on the ground, so to speak, rather than just shouting loudly or not loudly enough, to make a difference practically to the credit bubble?
Sir David Lees: I cannot answer the question because I was not there, but I am sure Mr Barber can.
Brendan Barber: You have to recall that the Court’s relationship with the MPC is limited to oversight of the MPC’s processes. Although we have a regular dialogue with the MPC on their decisions, we have no authority to challenge the policy decisions they reach month by month.
Q77 Andrea Leadsom: That is a very interesting point, because it brings me on to the fundamental issue, which is going forward. You said yourself, Sir David, that the buck now stops with the Bank and that will make things much easier, but is that going to be the case? Of course, now, you will have the very much more hands-on responsibility for ensuring that the Bank meets its objective within the FPC of stability of the financial sector, but on the other hand if you see that it is not meeting its objective, how can you stand back and say, "We have no view on interest rates"? If there were another bubble, for example, and quite clearly raising interest rates would take the heat out of it, and you are required to ensure that the Bank is meeting its stability objective, are you going to stand back and say, "You are failing to meet it, but we are not going to suggest or challenge you on any of the possible remedies"?
Sir David Lees: I think that could provoke a very interesting debate in Court. As Brendan has said, we have no direct responsibilities in the monetary policy field. We will have significant responsibility in the financial stability field. To the extent that there is a clash between the priorities of those two different wings of the Bank, if I can describe them as such, I think we would probably have an extremely interesting discussion in Court.
Q78 Andrea Leadsom: How are you resolving? Are you looking at some scenarios? Clearly, your role is changing greatly, and the Governor’s role is changing greatly. What sort of scenario-testing are you doing? You said, Sir David, that the buck will stop with the Bank, but that is not strictly true, is it? The buck will stop with the Bank, with you clearly accountable for ensuring that it meets its financial stability objective. You also have European regulators that in future will have teeth, whereas previously they were more of a talking shop. What happens when there is a massive risk to financial stability, let us say from a derivative shock or something-something we have not seen before-and your view as the Court is that the Bank is failing to meet its financial stability objective because of something the European regulators are doing, or because of too tight or too easy monetary policy at home. What sort of work are you doing to ensure that you are able to meet those challenges?
Sir David Lees: We are not doing any work at this time because the new responsibilities do not even devolve until January 2013, but I think that is exactly the sort of scenario-planning that the Bank will have to engage in as we get nearer the finalisation of the legislation.
Q79 Andrea Leadsom: Obviously, right now we are in a massive consultation period. As you know, we have just had a huge inquiry into regulation. Are you contributing to that with your concerns about your ability to hold the Bank accountable?
Sir David Lees: We have not contributed yet on that specific point.
Q80 Andrea Leadsom: But do you intend to?
Sir David Lees: I think we should give it consideration, yes.
Q81 Andrea Leadsom: Okay. Turning to another point, it is still a slight mystery to me where the accountability for quantitative easing lay. Clearly, at a time of great flux, when, as you have said yourselves, everybody was learning on the hoof and so on, to what extent is the Court of Directors looking at, or considering, holding the Bank accountable for its policy on quantitative easing-£200 billion of taxpayers’ money, for good or ill? You have already said you have no profit motive at all, but to what extent are you accountable for ensuring that taxpayers’ money is carefully watched over, that we do not enter into more quantitative easing, or indeed reverse that at a massive loss to the taxpayer? Do you have any responsibility to the taxpayer to look after their interests during this period where quite clearly the Bank of England has operated well outside of its normal remit?
Sir David Lees: I would say that the quantitative easing has essentially been part of the monetary policy tools and as such is a responsibility of the MPC, and not the Court.
Q82 Andrea Leadsom: So in other words the MPC is not accountable to anyone for the quantitative easing policy? That is how it has always appeared to me, and I think you are now confirming that.
Sir David Lees: I think the MPC is responsible for monetary stability in the round.
Q83 Andrea Leadsom: But who is it accountable to?
Sir David Lees: To Parliament. To you.
Q84 Andrea Leadsom: Accountable directly to Parliament?
Sir David Lees: To you. We have not experienced them, but you have frequent hearings with the MPC, don’t you?
Q85 Andrea Leadsom: It is certainly not clear to me that there is an explicit accountability to, for example, this Committee, which would be the conduit. I am looking to the Chairman here for confirmation, but it is not clear to me that this Committee has ever taken responsibility for the MPC’s quantitative easing programme. In fact, it was at our specific request that we were invited into the Bank to hear about it just before Christmas, when all £200 billion of it was already outstanding. It is certainly not clear to me that we had any involvement in that discussion.
Sir David Lees: May I respectfully suggest that next time you have an MPC hearing, you put that exact question to them: where does their responsibility for taxpayers’ money lie? I see it, frankly, and I think everybody in the Bank sees it, as a monetary policy tool, used particularly when interest rates essentially cannot go much lower, and therefore as a way of fulfilling their monetary policy stability responsibilities.
Q86 Andrea Leadsom: One last question, on a slightly different topic. Recently, we have heard the Governor of the Bank of England making a speech saying that we are only a small crisis of confidence away from another financial crisis, that nothing has really changed, and that breaking up the banks is the solution. As the Court of Directors, do you hold him accountable for his personal views? Are you happy that he expressed his personal views at a time when there is a quite significant consultation going on as to what should happen to the banks to try to avert a future financial crisis? What are your views on that?
Sir David Lees: I have not heard him specifically say what you have just quoted him as having said. The Vickers Commission is to report, I think, next month on recommendations on the future of banking. I do not doubt that it will have taken evidence from the Governor, but I do not even know that they have.
Q87 Andrea Leadsom: But my point, Sir David, is really whether you believe, and consider it to be your role, to hold the Governor of the Bank of England accountable for the opinions he expresses in a public domain in areas that are not strictly speaking within his remit? Is it appropriate, and what are your views on it as a body?
Sir David Lees: I think this is a matter of degree, quite honestly. If the Governor, hypothetically, was making statements on taxation policy or public sector borrowing, I think that would worry us quite a lot. I think that hints on how he might like to see the Vickers Commission report would be a lesser matter of degree, but I would certainly say this: if he was to venture far into fiscal policy in ways that I have just suggested, then I think it would be necessary to have a discussion with the non-executive directors in the first instance to determine what action, if any, we should take.
Q88 Andrea Leadsom: Can I just press you slightly on that? Clearly, for the Governor of the Bank of England to say that the banks needed to be broken up is an enormous political statement, as well as having fundamental implications for what is one of our most lucrative industries in this country. It is clearly also not within his brief to express a view, bearing in mind the high-profile nature of his role. I put it to you again: is it not something that the Court of Directors should have a view on-where it is appropriate for the Governor of the Bank of England to be commenting?
Sir David Lees: I am not clear about the quotation that you have used to illustrate your point. Is it an absolute quotation, or illustrative?
Q89 Andrea Leadsom: It is both. It was a speech that he did three weeks ago. It was very widely reported. I am sorry; I should have brought it. I assumed everybody would have heard the speech and been very familiar with it, so I am slightly surprised that you are not.
Sir David Lees: I am afraid we have so many speeches in the Bank that it is almost impossible to keep up with them all, even the Governor’s.
Q90 Andrea Leadsom: This one is quite exceptional because of the extent to which it was not about monetary policy, financial stability or the future for regulation.
Sir Roger Carr: Can I assist the Chairman? I have two points, really. If the Governor strayed into political territory, as a Court, we would find that very difficult to accept and would raise it. If the Governor puts forward options for thought-provoking discussion, we would find that acceptable, because it is his role so to do. If he speaks loudly on issues that he has concerns about that are fact-based and non-political, then I think that is something that we would be very comfortable with, in the sense of the concern of the previous period, where we look back and say, "Could the Bank have shouted louder?" I think if we learned anything from that, it is that when we have a view that is non-political, fact-based and appropriate, it should be said loud and clear.
Q91 Chair: Sir David, I think you just said a moment ago that you find it hard to keep up with all the speeches of the Governor.
Sir David Lees: Not the Governor.
Q92 Chair: You do not mean that, though, do you?
Sir David Lees: No, I do not.
Q93 Chair: You are telling us that you do not read all the Governor’s speeches?
Sir David Lees: No, I certainly read all the Governor’s speeches.
Chair: Good, I am very pleased to hear that. Chuka Umunna?
Q94 Mr Umunna: I must say I do find extraordinary some of the responses you have just given to Andrea. Chair, I notice that in the responsibilities of the Court, you are there partly to ensure the effective discharge of the Bank’s functions, and obviously independence is absolutely key to that. I think, Sir David, you just said that if the Governor ventured far into fiscal policy, then you, as non-executive directors, would be looking to have a discussion with him. Have you had a discussion with him, as a result of him having spoken in some detail on fiscal policy?
Brendan Barber: There was a discussion in Court after the Governor was reported as having commented on fiscal policy and reported, indeed, to have very explicitly supported the current judgment that has been made by the Coalition Government.
Q95 Mr Umunna: Mr Barber, when was that discussion?
Brendan Barber: I forget which month it was exactly. It was at the point where-
Q96 Mr Umunna: Was it this year or last year?
Brendan Barber: This year. It was since the election and it was at the point where-
Chair: The election was in the middle of last year.
Sir David Lees: I think it was September, if I may.
Brendan Barber: Forgive me. It was at the point where the Chancellor was reported as apparently almost in a formal way seeking the view of the Governor and the Bank on the fiscal policy stance that the Government were taking.
Q97 Mr Umunna: What was asked of the Governor and what was his response?
Brendan Barber: The report suggested that the Governor was giving strong backing to the judgment that the Government had reached. Certainly, I was concerned that the way in which this issue was being reported carried an implication that the Governor, and the Bank indeed, was being asked to take a view on something that was being presented in, if you like, a highly party-political way. I expressed concern at the Bank being put in that position and risking having its political independence being seen to be in some way compromised.
Q98 Mr Umunna: What was the Governor’s response to this?
Brendan Barber: The Governor’s response was to explain that he, at an earlier stage, indeed had been widely publicly reported as saying he felt it was important that any Government had a credible strategy for reducing the deficit, and that in his latest remarks, which were being reported at the time, he had simply reaffirmed that stance. He confirmed as well that contrary to the impressions being given by the press reports, he had not taken any view on, for example, the balance of measures to reduce the deficit, decisions on tax as against decisions on spending and so on; that those were matters for entirely legitimate political debate and he had explicitly not been drawn into commenting on those matters. So the press reporting of his remarks was rather misleading.
Q99 Mr Umunna: Were you satisfied with his explanation as a Court, Sir David?
Sir David Lees: I think Court was generally satisfied with that explanation.
Q100 Mr Umunna: Have you had a discussion with the Governor since this point on the same issue?
Sir David Lees: No.
Q101 Mr Umunna: The problem with what you are saying is that, as a matter of fact, he has ventured into fiscal policy several times since. He gave a speech in Newcastle on 25 January in which he not only referred to the UK economy and a credible medium-term path of fiscal consolidation being followed but said-this is the last sentence in that speech-that "the right course has been set and it is important that we maintain it." Earlier on in his speech he talks about one of the conditions necessary for a successful rebalancing of the economy, and refers to the significant fiscal consolidation over the next five years. That is not only commenting on the Government’s fiscal policy and approving it, but going into more detail and providing comment on the speed and the time frame within which fiscal consolidation is followed. Are you comfortable with that?
Sir David Lees: Let me just report on the discussion in Court. As Brendan has pointed out, the discussion in Court at the time-I think it was September, but it might have been the month after that-was on his comment, his justification if that is the right word, of the need for a credible fiscal deficit.
Q102 Mr Umunna: Yes, Sir David, you have already mentioned that, but I have just demonstrated to you and illustrated that in the speech that the Governor gave in Newcastle, he has gone somewhat further than that test. I am asking you whether you are comfortable with that, and what you are going to do about it.
Sir David Lees: I am not terribly comfortable with that, because that is moving a bit away from the general into the particular, but I think that the scale of that fiscal intervention, if I may call it that, would not have been so great as to have created a problem with the other members of Court.
Q103 Mr Umunna: You see the problem I have with what you are saying, Sir David, is that you have not had a discussion since you had a conversation on this issue in Court in September with the Governor. You have just told me that you are not comfortable with the comments that the Governor made on 25 January in Newcastle, and I also see in the written evidence that you provided to us that you often interview the members of the MPC to ensure that they are receiving the support that they need and that there are no governance issues that are causing concern. I would be quite surprised if you had not seen the reports or even read the evidence that we took from the Governor when he appeared in front of us at the end of last year with Adam Posen and Andrew Sentence, but Adam Posen in evidence to this Committee said that some members of the MPC were concerned about the potentially political nature of a paragraph that it was proposed be included in the Inflation Report. I just find it quite strange that in light of all these happenings, you have not had a discussion with the Governor again about him commenting on fiscal policy. Given it is your responsibility to meet with MPC members regularly, did you speak with Adam Posen following his appearance in front of this Committee at the end of last year?
Sir David Lees: I have seen all the members of the MPC including Adam, including Andrew Sentence-the whole lot.
Q104 Mr Umunna: Have you seen Mr Posen since he appeared in front of this Committee?
Sir David Lees: Yes.
Q105 Mr Umunna: Did you discuss the issues that he spoke about to us with him?
Sir David Lees: No, and nor did he discuss them with me.
Q106 Mr Umunna: But why not? Is that not your job-to ensure that the independence of the Bank of England is maintained? You have a member of the MPC appearing in front of this Committee clearly raising concerns about the Governor intervening and interfering in political issues and you did not think it was necessary for you as Chairman of the Court to talk to that MPC member about those concerns he raised in front of us?
Sir David Lees: No, I did not, because he did not raise it with me. If he was sufficiently concerned, then I would have expected him, as part of the process, to have raised it with me.
Q107 Mr Umunna: You presumably read or watched the evidence that he gave to us. Did you not have concerns? Why do you have to wait for him to initiate that conversation? Is that not one of your duties to raise the issue with him?
Sir David Lees: I think that it is my responsibility with individual members of the MPC to listen to what they have to say, to hear their concerns about processes, about the support they are receiving and any other matters, including governance matters.
Q108 Mr Umunna: It is interesting that you talk about governance, because I think one of the concerns that many have had is the way in which Ministers have sought to draw the Governor into matters political. You had the former Chief Secretary to the Treasury, David Laws, in his book, "22 Days in May", very explicitly referring to the Coalition negotiations, the £6 billion-worth of in-year cuts that the Government were going to pursue, and the fact that "Mervyn and Nick", referencing Nick of the Treasury, "are very supportive of what we want to do." You have the Deputy Prime Minister explaining his change in position on fiscal consolidation in The Observer on 6 June last year, based on a conversation he had with the Governor, and you have the Chancellor explicitly stating, when he appeared in front of us at the end of last year, that his plan B would be looking to the MPC to further loosen monetary policy. Are you comfortable with Government Ministers involving the Governor in matters political in this way? I address that to each and every member. If we might start with you, Mr Barber.
Brendan Barber: I am not comfortable. I was very uncomfortable that the Chancellor chose to pose the issue in that very public way, which then resulted in the Governor’s kind of comment being reported in a certain way. I was reassured by the Governor’s response when I raised this matter in Court, and I was reassured when, in his speech to the TUC in September last year, he made it very clear that matters of judgment on the timing of deficit reduction measures and the balance of measures were issues on which there should be entirely legitimate political debate, and he was offering kind of "no comment" on those issues.
Q109 Mr Umunna: But he commented on that in January in Newcastle, when he talked about fiscal consolidation over the next five years being a necessary condition for a rebalancing of the economy. What do you think of that?
Brendan Barber: I did not see that as a significant variation from his earlier comment, many months earlier, on the need for a credible strategy for fiscal consolidation. I would draw a very clear distinction between that and the political presentation that was made that his remarks amounted to a clear endorsement of the Coalition Government’s decision to make an early package of cuts, £6 billion or so, and to establish the timetable that we now see being followed through by the Government. They sought to present his remarks as an endorsement of their strategy in all that detail, and I think that was very unfortunate and did risk getting the Bank drawn in, in a rather unhelpful way, to what is clearly a very political debate.
Lady Rice: Without repeating and revisiting those specific points, the one thing I would say, because I think this underlies your question to some extent, is that the independence of the Bank is paramount and it is in everything that we do, and the independence of, as has already been stated, monetary policy approach; those are very important matters. In terms of what was stated and how it was interpreted, there are different ways to look at this, but I believe that the Governor made clear where he was coming from. I do not believe he intended to speak with a strongly political voice but one has to be very wary if that is how comments are being interpreted.
Q110 Mr Umunna: Lady Rice, this has been a big issue. It has been very widely reported, and it is a huge matter of public interest. Sir David said that you had a discussion with the Governor about these issues back in September. There have been significant developments since then, and it does not seem to me that you as a Court have seen fit to follow up on this and to certainly visibly demonstrate that you are safeguarding the independence of your Bank.
Lady Rice: I can probably only repeat what Mr Barber said, which is that the statements more recently were in line with-or at least, I believe, to our ears, very similar to-what was stated earlier, which had been discussed with the Governor.
Q111 Mr Umunna: So you are comfortable with the Governor expressing a view on the time scale that is pursued for fiscal consolidation by the Government?
Lady Rice: Not necessarily comfortable. I think that it may behove us to have a further conversation.
Q112 Mr Umunna: Why are you uncomfortable?
Lady Rice: I did not say I was uncomfortable; I said I am not necessarily comfortable, and you are raising legitimate questions and it may behove us to have a further conversation. What I am saying is I do not believe there was intent to interfere with a proper political process, and I do believe the Governor understands those distinctions. The way words are stated, the way they are interpreted, is something else, and it matters; interpretation and perception matter, and I think that is something that perhaps needs further discussion.
Sir Roger Carr: The integrity and credibility of the Bank is absolutely dependent on it being seen as not having a political axe to grind. That to me is of paramount importance. We have made that very clear to the Governor. The Governor has made it clear to us that he is not expressing a political opinion. Naturally, as the Bank has a greater embrace of all matters of financial stability as well as monetary policy, he will give comment from an objective economic point of view on all aspects. What he must do is stay away from political support, and what the politicians must do is not to seek to draw him in to make it appear as though he is giving political support.
Q113 Mr Umunna: Do you think they have done that, Sir Roger?
Sir Roger Carr: I think it was unfortunate the way he was commented upon and quoted by the politicians of the time, and I think the newspapers found it very good to publish considerable comment. You should be clear, because we are appearing before you to try and give you confidence in our view, that we are adamant that this Court should make sure that it stays away from any political commitment at all, and that we remain objective and clinical. That is something that we will reinforce in all discussion. I believe the Governor understands that absolutely.
Q114 Chair: A moment ago, Lady Rice, you said, "We may have a further conversation about this." Let us suppose that in that further conversation you conclude that you are not happy. What are the courses of action open to you?
Lady Rice: What course is open to us, in terms of taking action? I suppose if the Court concluded that, there would be a conversation specifically between the Chairman and the Governor; the Court delegates responsibilities for management of the Bank to the Governor, who is accountable back to the Court. That is the way our governance works.
Q115 Chair: Okay, so you have a further conversation with the Governor; and then what?
Lady Rice: It depends on the outcome of the conversation. I am not sure where your question is going, so forgive me.
Q116 Chair: I am trying to work out what action the Court may reasonably take in such circumstances. Sir David, you are clearly pregnant with a thought so-
Sir David Lees: I am pregnant with a thought, yes. I think that in the circumstances to which you have referred, and partly reflecting the general contributions across this bench, what would have to happen in practice is that the non-executive directors-there is a thing called NedCo which you have probably seen reference to in some of the papers-who, incidentally, would meet in any event to appraise the Governor’s objectives and his performance against his objectives, would need to come to a conclusion as to whether or not the venture into the political world was of such an acute nature or they felt sufficiently strongly about it to require me, as their Chairman, to have a serious conversation with the Governor. I think that would be the process.
Q117 Chair: Okay, then you have a serious conversation, and this problem continues. Then what? I am trying to get at what exactly the Court’s line of action and accountability is.
Sir David Lees: I think there would have to be another very serious conversation.
Q118 Chair: Okay, then we have a very, very, very serious conversation. There is still no progress; then what?
Sir David Lees: Then I would need to think very, very hard after the first very serious conversation as to what I was going to do.
Q119 Chair: Then what are you going to do? After you have thought very hard, what are you going to do, Sir David?
Sir David Lees: By then we are in 2013 and there is a new Governor in place.
Q120 Chair: All right. In other words you will spin it out, play for time?
Sir David Lees: No, I do not think that is true.
Q121 Chair: Okay. What should I conclude from your answer? This is a very serious issue.
Sir David Lees: I know it is a serious issue, and I appreciate that it is a serious question. I would have to hope that the situation that you hypothesised upon did not happen, because-
Q122 Chair: Okay, well we are past that. We are now at the point where I am discussing with you a circumstance where it has happened and we can move out of the particular into the general. It need not be about fiscal policy; it could be about some other action, any action. It is clear that the fiscal policy issue did not warrant very serious action; it went to discussion and it was settled. That is clear from all your conclusions.
Sir David Lees: In the circumstances where the non-executive directors had required me to, or I had opined that I should, speak seriously to the Governor about this breach and it had not resulted in a successful outcome, in other words there were repeat-
Q123 Chair: Then what do you do?
Sir David Lees: I come to you.
Chair: Right, okay. Do you think that the-
Sir David Lees: Because I don’t know who else I can go to.
Q124 Chair: Do you think we ought to take a look at the grounds for removal of members from the Court, including conceivably very senior executives including the Governor, as part of our inquiry into the accountability of the Bank of England? At the moment they can only be removed if, I quote, they are "unable or unfit to discharge his"-by the way, it has just got "his" in there-"functions as a member." Do you think that that is an adequate trigger going forward?
Sir David Lees: Three months absence as well, I think, is another condition, isn’t it, without consent?
Q125 Chair: Yes, it is. Do you think that we should open up that question? While you are reflecting on it, do you think, for example, that the arrangements that have been put in place for the accountability of the OBR and the appointments to the Office for Budget Responsibility might have something to teach us here?
Sir David Lees: Yes, I think this is something that I would like to give a lot more thought to than I have.
Chair: Okay, you don’t have an answer; that is fair enough.
Sir David Lees: I don’t have an immediate answer to you.
Chair: Okay, would you reflect on it and perhaps-
Sir David Lees: Drop you a note.
Chair: Whatever you prefer. I am sure other people are thinking about this question. Stewart Hosie?
Q126 Stewart Hosie: Can I go back to the FPC? That committee will be a committee of your Court, rather than a committee of the Bank, like the MPC. Does that offer them more freedom to comment on non-monetary policy and non-macro-prudential policy than, for example, the MPC has, and would you be comfortable with that?
Sir David Lees: Would I be comfortable with-
Stewart Hosie: If the FPC were commenting on-
Sir David Lees: Monetary policy.
Stewart Hosie: Not monetary policy and macro-prudential, but perhaps on fiscal policy and on other areas that weren’t necessarily macro-prudential.
Sir David Lees: I think we have probably extensively covered comment on fiscal policy. I am not dodging your question, by the way but one of the-
Stewart Hosie: It’s all right, I wouldn’t let you dodge it.
Sir David Lees: No, I know you wouldn’t. One of the by-products of this year’s interviews with the MPC members was a more or less universal view that we could do with a code of conduct in the Bank on speech-making-just the rules of the game-because external members in particular have a pretty fair degree of freedom but we do need, I think, to be very clear about the rules of the game.
I think the same would probably apply to the FPC. It is, I think, particularly difficult with external members to restrict in any way their right to express an opinion, but one of the things that can happen, particularly with the journalists’ fraternity, is that the interpretation of personal views becomes, in some way or other, a Bank view or an FPC view, and that’s not right.
Q127 Stewart Hosie: Let me come to the external members later, because I do understand what you are saying there about the difference between a personal view and an official view. The responsibility for the FPC will be for considering the macro-economic and financial issues that may threaten financial stability, so one would imagine they would have to range wider than simply money supply, capital ratios, leveraging rules and obvious macro-prudential; they would almost be obliged to look at fiscal matters because of the impact that it could have, is that not the case?
Sir David Lees: In a committee, you are absolutely right. I think the extension of our earlier conversation as to members of a committee of the Bank externally expressing views on fiscal policy more or less takes us back to where we were about 15 minutes ago.
Q128 Stewart Hosie: Indeed, and I don’t really want to get right back there because there is a difference between the MPC as a committee of the Bank and the FPC as a committee of the Court, with different responsibilities and even the powers that are suggested; they can certainly influence macro-prudential policy in Europe and internationally, and they certainly have some powers of the PRA and the FCA-again in relation to macro-prudential tools-but they are also able to make public pronouncements and warnings and make recommendations to bodies other than the PRA and the FCA. If they thought that, for example, debt levels were too high and there was a very real risk of a sovereign debt crisis, that would clearly be significant in terms of their obligations, and they would then therefore have to range more widely than the monetary and the macro-prudential. I’m just trying to understand where the limits on this might be.
Sir David Lees: I think this is a question really that the Chairman of the FPC should be addressing. What I would say is that there is the twice-per-annum Financial Stability Review, and that should be a medium for communication about general concerns about some of the things you have just mentioned in the FPC area. I know that one of the areas on which some concentration is now going to be given is the precise format of that Financial Stability Review, because it is a key document of communication.
Q129 Stewart Hosie: I want to press this just a little further; there was a lot of talk at the beginning when the FPC was mooted that it would have some kind of role and a system of counter-cyclical economic policy-very sensible. That appears to have gone entirely. I happen to think that it was a good idea that it had some of those responsibilities. Do you think it would be safe to say there is not yet clarity or enough clarity about the role, responsibility and remit of the FPC? Would it be fair to say that?
Sir David Lees: I don’t think that is an unfair comment, and I suspect that that makes the case very strongly for the interim FPC, because I think it’s the interim FPC that is going to give considerable attention to many of the things that you’ve raised.
Q130 Stewart Hosie: That’s interesting, because I know that one of the roles of interim FPC was to define the tools and levers that it might have.
Sir David Lees: Indeed.
Stewart Hosie: You did say earlier that the FPC would need the tools for the trade. Would you, or the Court, be prepared to put a little more consideration into what tools and levers the FPC might have, and how widely it might be expected to range to fulfil its obligations and not to enter the world of politics, and to come back to us with some information later as to a more considered view from the Court?
Sir David Lees: I think, if I may just say this, that step one in this process is for the FPC to develop what they consider are the appropriate macro-prudential tools to enable them to carry out their work. I suspect, as part of the FPC strategy going forward, that that will be a key issue that will be coming to the Court.
Q131 Stewart Hosie: That’s helpful. The final question goes back to something you said earlier. Irrespective of how far or how narrowly the FPC can range, what will the relationship be between the external members of the FPC and the Court? How will that work?
Sir David Lees: I think I probably answered that question earlier, perhaps not as articulately as I might have done. The MPC external members’ relationship with the Court basically comprises first attendance at Court meetings, and secondly an annual interview with myself. Thirdly, a more recent innovation is for the external members of the MPC to have dinner with the non-executive members of the Court, to free up and to get a communication going, so that if they have any concerns they can feel free to communicate it. I see a parallel with the FPC; I think we would invite them to Court, we would wish to do the annual interviews in the same way, and we would want to try and get nearer and closer to them, because it’s quite a lonely job being an external member of the MPC, as a matter of fact-not that I’ve done it, but I imagine it is.
Stewart Hosie: Thank you.
Q132 Mr Love: I want to come to the design of the new regulatory structure within the Bank, but before I do that, can I go back to comments that Mr Umunna made in relation to being too political? I’m looking at that in terms of the reputation of the Bank. Wouldn’t it be right, Sir David, for me to say that at the meeting where you discussed these matters, it was only Mr Barber that raised concerns, or was there widespread concern among the Court about the so-called politics that the Governor was being involved with?
Sir David Lees: Mr Barber very properly raised the concern that he has described to you all-
Q133 Mr Love: I’m aware of that; what I want to know is whether other people raised similar concerns, or whether he was an isolated member of the Court in relation to that.
Sir David Lees: I don’t recall-and Susan or Roger may put me right on this-anybody voicing an opinion one way or the other. I do recall the Governor responding in the way that Brendan has just replied.
Mr Love: No, I understand that. In relation to-
Sir Roger Carr: Can I just intervene and say that I think you shouldn’t sort of interpret that as nobody else being concerned. Mr Barber raised the point, which was a very valid point to raise because it is a concern to all, and the response we got to that point was satisfactory at the time.
Mr Love: No, I understand that and you’ve made that clear.
Sir Roger Carr: Fine.
Q134 Mr Love: What I’m interested in is that the impression you’re giving here-not just on this issue but on other issues-is that you have a somewhat standoffish view of your role in relation to some of these matters, but perhaps you will correct that.
Sir Roger Carr: No, quite the reverse.
Q135 Mr Love: Okay, let me pursue the point I’m trying to make, just for a few seconds. When Mr Posen came before the Committee, he made it clear that while there was a majority on the Monetary Policy Committee for including the paragraph that he objected to, he would have to accept that that was a majority decision, but there was more than him; I think he suggested that there were several members who had similar concerns to him, yet that doesn’t seem to have raised any alarm bells with the Court. Was this ever discussed at the Court? You have already indicated you didn’t discuss it with Mr Posen; was it not of concern to you, from the reputation of the Bank, that there should even be a discussion of the political nature of a paragraph in their report?
Sir David Lees: Yes, I don’t honestly think we can say very much more than we’ve already said. Brendan appropriately raised the point; Roger has said that we shouldn’t assume that because nobody said anything else that there wasn’t concern. I think we’ve made it very clear what we would do in circumstances of a repeat or even more serious nature, and I honestly don’t think we can say any more. I’m sorry to disappoint you, but-
Q136 Mr Love: I don’t think it’s a matter of disappointment; it’s a matter of how you interpret your role that we are concerned about here. I do want to move on, but let me just make one final observation on the role of perception in politics, because it is the perception that is the reality in politics, and the perception among a wide cross-section of the media, and indeed in political circles, is that the Governor’s interpretation of what is the line between fiscal and monetary policy may differ from that of many others. I would have thought, in terms of the reputation of issues that the Court would be concerned about, that they would want to raise that issue with him to ensure that he took a conservative view of those perception issues and made sure that on no occasions did he stray into what could, by perception, be considered to be a political sphere.
Sir David Lees: We absolutely note your concerns, and I think we are concerned about perceptions because, as I think Susan or Roger just said, the independence of the Bank is one of the principal flags that we fly, and anything that does damage to that has got to be bad news.
Q137 Mr Love: Okay, I think we’ve exhausted that today. Let me move on to the new regulatory structures. Did the Court have any input whatever in the design of the new arrangements that you will have to oversee at the Bank?
Sir David Lees: The process that we have followed is-
Q138 Mr Love: I’m not really interested in the process; I’m asking you whether anyone from the Treasury, or indeed any other aspect of Government, consulted at any stage with the Court on what the design arrangements should be?
Sir David Lees: Not with the Court as such, but-
Q139 Mr Love: Don’t you find that surprising since you will have a much more important role in terms of regulation than perhaps you have had in terms of monetary policy?
Sir David Lees: If I can just make the point that when the first ConDoc came out, the Court looked at the implications of the consultative document on the assumption that it would come into law, and we published internally a document very like the one that I sent your Chairman, which he may or may not have circulated to you. The purpose of that was to demonstrate to the Minister in question what the new responsibilities of that regulation would mean for the Bank and for the role of the Court. He and I entered into some correspondence on the basis of that document. We have done exactly the same thing for the second ConDoc, so to that extent we have been proactive. There has not been, apart from an interchange of correspondence, a direct consultation with the Court.
Brendan Barber: Would it be fair to add, Sir David, that there has been very, very heavy contact between the officials of the Bank-
Sir David Lees: Oh, absolutely.
Brendan Barber-and the Treasury officials working on the consultative documents, which has been very fully reported to the Court, enabling us to comment on the issues that were being considered as the drafting work was being done. Certainly, there was very heavy engagement in that form.
Q140 Mr Love: The impression you give, Mr Barber, is that they came in and reported to you, and you had a discussion, but at no stage did you either give a lead to the officials of the Bank in their negotiations; nor did the Treasury deem it appropriate to consult with you at an early stage, so that the outlines of the new structure were in place before you got involved.
Sir David Lees: Except that by identifying from the proposed new structure what the responsibilities of the Court would be and having that approved in Court did actually mean that the Court had taken a very active interest and was reflecting a lot of work that was going on at official level between members of the Bank staff and Treasury officials. Had there been any major issues, as the Bill was being developed, with which there was discomfort from Bank staff, that would have been reported to the Court straight away.
Q141 Mr Love: Let me take an example: your role vis-à-vis the FPC and your role vis-à-vis the Prudential Regulation Authority seem to be somewhat different. Are you at ease, relaxed, and satisfied that your role in relation to both of them will be one that secures for the Bank overall control of regulations as we go forward?
Sir David Lees: Our responsibilities, as the Court, as you know, with regard to the PRA, is essentially to look at their costs, to look at their remuneration policies, and to review their strategy, and I think that gives the Court a reasonable handle on the PRA, particularly the last bit-the bit about reviewing the strategy-because that will be very important and it would of course be a precursor to anything that happens on the budgets and so on of that organisation. I am comfortable, but there is one thing I would like to say, if I may, which concerns both the setting up of the new FPC and the PRA.
There is an overlap, as you will understand, of the executive in those bodies; the Governor and the two Deputy Governors are common to both the FPC and the PRA. What I’ve urged on the Treasury is that we should have representation from the Court as non-executive directors. There should be one or two members of Court sitting on the FPC and another one or perhaps the same person, if he has got time, sitting on the PRA, because that more closely locks in the governance arrangements for the PRA, the FPC and the Court. The reception I have had to that proposal has been encouraging, but anything you can do, if you believe it, to support that would also I think be helpful.
Chair: Perhaps you could set out for us the proposal in just a tiny bit more detail with your justifications for it, and we would like to take a look.
Mr Love: That would be interesting.
Sir David Lees: I would like to do that.
Q142 Mr Love: I will ask two questions, because I’m being pressed by the Chairman to come to-
Chair: Two quick last questions and two quick last answers.
Mr Love: I wanted to ask about the role that the National Audit Office and, through it, the Public Accounts Committee will have within the regulatory structure, but the question I want you to focus on is this overall question that really is at the source of much of what we are looking at in relation to the Court. The Bank is now being placed at the centre of regulatory activity, yet if one looks back to previous days, when the Bank was at the centre of regulatory activity, its, shall we say, experience and expertise was called into question on many occasions. What we’re looking to do is reassure ourselves that the new arrangements will address both the shortcomings that have endured in the credit crunch and any shortcomings from the previous regime when it was located in the Bank. Are you satisfied that the arrangements that are being put in place will allow the Court to be contented that they will be adequate to the task being set for them?
Chair: Please don’t use that as an assessment of what constitutes a short answer.
Sir David Lees: Very briefly, I think the Court of today and the Court that was deployed back at the time when supervision was removed from the Bank are just so different as to make them not comparable. I am confident that the Court of today will be easily able and capable of giving you the assurances that you are looking for; I sincerely believe that.
Chair: Thank you very much for coming to give evidence today. It has been something of a bumpy session at times; that is to be expected at a time when there is so much widespread public disquiet about this whole area of public policy. Your role is going to become much more prominent, and the question is: how should that accountability be structured in the future? We have only touched on a number of the big questions in the field, and if you have further ideas, we are very happy to see them, and are receptive to thinking about them. Thanks for coming today.
 Note by witness: In Q7 the Chairman asked what spending on financial stability was as a percentage of total functions. As a percentage of total functions the percentage was 20%. The 43% cited by the Chairman is the percentage of policy functions (actually 44.5%). (The relevant table has been supplied to the Committee as supplementary written evidence and is reproduced later in this volume of evidence)