Committee (3rd Day) (Continued)

Part of Financial Services Bill – in the House of Lords at 4:45 pm on 10 July 2012.

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Photo of Lord Sassoon Lord Sassoon The Commercial Secretary to the Treasury 4:45, 10 July 2012

My Lords, these amendments reprise an argument that was raised by the shadow Chancellor during the Bill's Second Reading in another place.

As the noble Lord, Lord Eatwell, said, Amendment 56 would require the Treasury to inform not only the governor but the deputy governor for financial stability when it considers that there is insufficient time for the FPC to be consulted on the introduction of a new macroprudential tool.

Amendment 79 would place in the Bill a requirement for the deputy governor for financial stability to attend the biannual meetings between the Chancellor and the governor following the publication of the FPC's annual stability report.

Clearly the Bank plays a crucial role not only in relation to the management of the UK's economy but specifically, under the Bill, in relation to macroprudential and microprudential regulation. In fulfilling these very important responsibilities, we expect the Bank to act as the serious and respected organisation that it is. This means that the senior executives of the Bank will work as a team to determine the best course of action to achieve the Bank's objectives and comply with the legal obligations placed upon it. The governor is the leader of that team and, working closely with his senior executives, will ultimately take the key decisions within the Bank.

It is clear that the success of the new regulatory structure, which, rightly, we are spending so much time debating, relies heavily on the relationship between the Treasury and the Bank of England, and I believe that the Bill provides the necessary clarity of responsibilities. However, it also depends on the personal relationships at play here, particularly between the most senior leaders of the two bodies-the Chancellor of the Exchequer and the Governor of the Bank of England. One of the major problems leading up to the financial crisis was that the tripartite committee did not meet at principals level during the previous decade.

Therefore, there are clearly things that need to be legislated for, and this is not what the noble Lord is in any way seeking to argue against, but it is important background to this discussion. The Chancellor and the governor must meet regularly to discuss financial stability. That is why the Bill and the regulatory structure that it establishes place at the heart of the matter the institutional relationship between the Treasury and the Bank, and the personal relationship between the Chancellor and the governor.

I do not see any reason to attempt to insert into that relationship a further statutory channel of communication. First, I just do not believe that it is needed. The Treasury ministerial team regularly meets the current deputy governor for financial stability and the chief executive of the FSA. There is also a constant dialogue between the deputy governor and senior Treasury officials via meetings, phone calls and e-mails. The same was true under the previous Government, as I know, since I was part of it for three years, and it was very effective at working level. That has not changed and it will not change under the new structure. In practice, the deputy governor may well attend the biannual meetings between the two principals. If the Treasury notified the governor that a new macroprudential instrument needed to be introduced on an urgent basis, the deputy governor would be well aware of that.

I will just point out one slight correction that is relevant to this, which is that the FPC is responsible for the financial stability report to the deputy governor. That is relevant to the discussion of this amendment because it shows that we should not excessively personalise the relationships or draw attention to particular individuals if that risks, as it may do in this instance, causing confusion about who is responsible for what. I agree that the relationship with the two leaders of the bodies, the Treasury and the Bank of England, should be hard-wired in, as we have done. In practice, the deputy governor is, and will be, very much involved in all the relevant discussions. Amendments 79 and 56 are not necessary and go too far.

There is a strong argument here that such a provision could be positively unhelpful by opening the door to the possibility that the Bank may be divided and encouraged to speak with more than one voice. There is a risk of recreating elements of dysfunctionality that were in the system as it used to exist. I do not want to overplay this, since the main argument is the earlier one. However, I do see a slight but secondary danger that this provision could be built on in the wrong circumstances. On the basis of the earlier explanations, I hope the noble Lord, Lord Eatwell, will withdraw this amendment.