Committee (1st Day)

Bank of England and Financial Services Bill [HL] – in the House of Lords at 3:13 pm on 9th November 2015.

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Relevant document: 11th Report from the Delegated Powers Committee

Amendment 1

Moved by Lord Eatwell

1: Before Clause 1, insert the following new Clause—

“The Bank: definition

(1) For the purpose of this Act, “the Bank” has the same meaning as in section 41 of the Bank of England Act 1998 (general interpretation).

(2) In section 41 of the Bank of England Act 1998—

(a) For “In this Act” substitute “For the purposes of this Act”; and

(b) After “England;” insert “for the purpose of this Act, powers delegated to “the Bank” may be exercised by, or be limited to, any or all of—

(i) the staff of the Bank of England,

(ii) The court of directors,

(iii) The committees of the court of directors,

(iv) The Governor,

(v) the Deputy Governors,

(vi) the executive staff; and”.”

Photo of Lord Eatwell Lord Eatwell Non-affiliated 3:20 pm, 9th November 2015

My Lords, as was evident in the speeches around the House at Second Reading, there is a feeling in this House that the Bill is a serious retrograde step from the measures taken in 2012 and 2013 following the financial crisis to strengthen the accountability and oversight of the Bank of England. The purpose of my Amendment 1 is to exemplify the argument that I made at Second Reading that the Bill renders the governance structure of the Bank of England opaque and not fit for purpose. Many measures in the Bill that we will come to discuss later on this afternoon serve the cause of making the governance structure opaque. One device for achieving this obscurantist outcome is to use the term “the Bank” in an active sense; that is, where an entity labelled “the Bank” is to act, notably to make policy or policy decisions, without ever defining who might be responsible for those actions since, as my amendment seeks to make clear, “the Bank” could refer to anyone involved in the institution: the governor, deputy governors, various committees, or even the doorkeepers in their pink coats.

I read carefully through the Bank of England Act 1998—the version as amended by subsequent legislation, which the Bill seeks to amend further. In all clauses within that Act that provide the power to make policy, the active entity is clearly identified. So in Section 9A the financial stability strategy must be determined by the court. In Section 9C, the Financial Policy Committee has clearly defined functions and powers. In Section 13 the formulation of monetary policy is clearly defined as the role of the Monetary Policy Committee.

There are a few instances in the existing Act where the vague term “the Bank” is used in an active sense. However, as far as I can tell, in all such instances it is clear from the context which entity within the organisation might perform the relevant function. For example, Section 9Y of the Bank of England Act provides “the Bank” with powers to enable the pursuit of the financial policy objective. These powers are to seek information to enable the Financial Policy Committee to do its job. Clearly, the active entity would be the Financial Policy Committee asking for information. Section 18 of the Bank of England Act requires “the Bank” to produce reports on the activities and objectives of the Monetary Policy Committee. The active entity would presumably be the MPC, although I admit that in this case it is not entirely clear.

Generally, up until now the vague term “the Bank” is used within the Bank of England Act, where the context is such that the active entity can be identified and consequently, and crucially, can be held to account. If this Bill were to be enacted as currently drafted, that would no longer be the case. In new paragraph 13B(2) introduced under Clause 8(6) of the Bill, the Bank is given the power to revise and replace the code of practice to which members of the Monetary Policy Committee must comply. Can the Minister tell us exactly who “the Bank” is in this context? Who can revise and replace the code of practice with which members of the Monetary Policy Committee must comply?

The most extraordinary example of deliberate obfuscation is to be found in Clause 5, where we find amendments to the Bank of England Act that would make “the Bank” responsible for the determination of strategy with respect to the financial policy objective. Indeed, Clause 5(2) amends Section 9A of the Act with the extraordinary statement that “the Bank” must consult the Financial Policy Committee about that strategy. Will the Minister tell us precisely who is doing that consulting?

I remind the Minister that the financial policy objective and the role of the FPC arose out of the experience of the financial crisis, when it was evident that the Bank of England’s attention to questions of financial stability was woefully inadequate, yet now this vital piece of policy-making is to be handed over to—we know not whom. The Treasury has connived in this obscurantism. In its impact assessment of the Bill, it states with respect to Clause 5:

“Making the Bank responsible for setting the strategy”,

within the Bank,

“will ensure that Court is responsible for the running of the Bank and that the Bank’s policy committees are responsible for making policy”.

Really? How does it know? It is not in the Bill. Nothing in the Bill identifies the division of responsibilities with respect to the financial stability objective in the terms set out in the impact assessment. I remind the Minister of the words of the Treasury Select Committee in another place:

“The Bank is a democratically accountable institution and it is inevitable that Parliament will wish to express views and, on occasion, concerns about its decisions”.

Does the Minister agree with that view? If he does, will he tell us how it will be possible for Parliament to hold the Bank to account when the Bill sets out to obscure where within the institution responsibility for the exercise of vital powers may actually lie?

My amendment—which is, if you like, a probing amendment—is intended to expose what is being done in the Bill. The amendment makes it clear that the term “the Bank”, when used in the active sense, is an empty, amorphous expression and hence is designed to obscure. If the Minister disagrees with my definition of “the Bank”, perhaps he would be good enough to provide his own definition. I beg to move.

Photo of Lord Tunnicliffe Lord Tunnicliffe Opposition Deputy Chief Whip (Lords), Shadow Spokesperson (Treasury) 3:30 pm, 9th November 2015

My Lords, I thank my noble friend Lord Eatwell for this amendment, which takes us to the central problem with the Bill. His words are powerful: he calls the Bill opaque and obscure, and he says that it leaves unclear who makes policy. I thank him for his review of the previous legislation and his assurance that, broadly speaking, it works. I thank him for the concept of an “active entity”, which I shall adopt. However, he comes back to the point: who is doing what?

Perhaps before I go on, I should explain where the Opposition stand on the Bill. We feel that the role of the Bank of England is quite central to the economy and that it needs to be reviewed and probably reformed. We believe that, to do that, we have to have a period of reflection and study. My noble friend the Shadow Chancellor in another place has announced those reviews. Nevertheless, in respect of this Bill, we have a role to review the Bill, ensure that it makes sense and do all that we can to help the Government bring it back to a more sensible position.

Like my noble friend, having read the Bill, I ended up feeling that I understood less about how the Bank works than I did when we were in the very painful position in 2012—I say painful because it took so long to get there—when we created the legislation that created the present situation. Largely speaking, there is a question around why we are changing it from something that is clear to something that is significantly less clear. I thank the Minister for all his help in trying to help me understand the Bill—I wish that he had had more success. I am very grateful for the consolidated document that his staff have produced, and that has made studying the Bill and the Acts that it affects so much more straightforward. I also thank the Minister for the meetings he arranged, with himself and with the chairman of the court.

Those two meetings had an interesting effect: they produced two letters. One was dated 4 November and the other was dated November; noble Lords will have to take my word for it that it came after 4 November. I will quote selectively from the letters and am very happy to circulate them to anybody who is interested. Under a large paragraph labelled “Court of Directors and Financial Stability Strategy”, the Minister says:

The Court, as the governing body of the Bank, is responsible for managing the Bank’s affairs except for the formulation of monetary policy. The Court is also responsible for determining the Bank’s objectives and strategy, and, in line with the Court’s role overseeing the Bank, the Bill makes the Court responsible for the oversight functions. The Court is therefore ultimately responsible for deciding how power given to ‘the Bank’ should be exercised, and how duties given to ‘the Bank’ should be fulfilled. This includes the Bank’s recovery and resolution powers”.

When I read that, I thought that it was pretty straightforward and sounded like any other company: power rests with the board—we happen to call it “the court”—except for where it is either taken out by statute, which it clearly is in the formation of monetary policy, or where the court has decided to delegate that power.

Unfortunately, after I met the chairman of the court, I got another, shorter letter. Under a paragraph labelled “Powers and duties conferred on the Bank”, it said:

“As the governing body of the Bank, the court is responsible for deciding how powers given to the Bank should be exercised and ensuring that the Bank fulfils its duties”.

That sounds okay. It then goes on to say that:

“These include powers and duties in relation to note issuance, resolution, and supervision of financial market infrastructures”.

It does not quite say that it shall have no other duties, but I put it to noble Lords that they are a pretty thin number of duties, given the tremendous responsibility that the Bank has in our monetary affairs. In the next paragraph, under the heading, “Powers and duties conferred on statutory committees”, the letter states:

“Powers and duties conferred on a statutory committee are for that committee to exercise, according to the terms of their legislation. The Court cannot exercise the powers conferred on a statutory committee”.

Because there was no legislation passed between 4 November and the something of November, I assume that the two letters say the same thing; I just have a lot of trouble seeing how. If the first letter is right, as I read it, then I am relatively comfortable. Unlike the Bill—and we can clear that up with some amendments—it restates my understanding that the court is in charge, except where responsibility is taken out by legislation. The second letter rather implies that there are four entities in the Bank: the Financial Policy Committee, the Monetary Policy Committee and the Prudential Regulation Committee—I think I have got them roughly right—which have clear powers and lots of authority and are all, incidentally, chaired by the governor; and then there is something called “the Bank”, which is left with note issuance, resolution and supervising infrastructure. We all know that no committee is going to have much to do in a resolution situation, since it will happen over a weekend in 48 hours We have moved from a position where the court is central to the Bank to one where it seems almost irrelevant.

There are two points here. First, is that move the Government’s intention and, secondly, is it clear? We are going to worry elsewhere about the standards for senior management in banks. If a bank came along with its roles and responsibilities as obscurely set out as we now have in the proposed legislation, it would be denied a licence to operate. What are we asking from these organisations? It is absolute clarity of who does what, with what authority. This does not meet those standards and it would not get a licence. I hope the Minister will ponder on what the noble Lord, Lord Eatwell, and I have said. If he agrees that the Bill produces more obscurity than light, I hope he will pause and bring forward some amendments on Report, first to make absolutely clear what the Bill does.

Photo of Lord Flight Lord Flight Conservative

My Lords, when the Bill was published, I wrote to the Economic Secretary to the Treasury on this territory, because I could not really understand how the reorganisation of the Bank was intended to operate, or what it intended to achieve. Part of the reply I got was:

The Governor has said that: ‘Our strategy will be to conduct supervision as an integrated part of the central bank and not as a standalone supervisory agency that happens to be attached to a central bank’. De-subsidiarisation, together with the organisational changes being put in place by the Bank as part of its ‘One Bank’ strategy, is an important element of this, and will help to break down any remaining barriers that could stand in the way of a unified culture and impede flexible and coordinated working across the Bank”.

I thought about this and looked at the structure. In answer to the points raised by the noble Lord, Lord Eatwell, what struck me was that “the Bank” actually means “the Governor”.

Photo of Lord Bridges of Headley Lord Bridges of Headley The Parliamentary Secretary, Cabinet Office, The Parliamentary Secretary, Cabinet Office

I begin by thanking noble Lords who have spared the time to meet and discuss aspects of the Bill. I am grateful to the noble Lord, Lord Tunnicliffe, for his kind words, but it was clear that some of my epistles have caused more confusion than I would wish. I will try and address that, and the points made by the noble Lord, Lord Eatwell. I am conscious that the noble Lord, Lord Eatwell, like so many others in your Lordships’ House, has a lot more experience in this, so bear with me as I set out the Government’s case on this specific point.

It is a good point to start with because we are, as a Committee, seeking to answer the question, which the noble Lord posed very eloquently, of “What is the Bank of England?”—which is a good place to start with in a Bank of England Bill. As he rightly said, during Second Reading he worried that this definition might be an amorphous entity and I completely agree that a full answer to his question is overdue. Let me try to answer it.

The noble Lord referred to the 1998 Act. The Bank of England is defined in the Interpretation Act 1978, which tells us:

“Bank of England means, as the context requires, the Governor and Company of the Bank of England or the bank of the Governor and Company of the Bank of England”.

Acts amended by this Bill either refer to “the Bank” and define that expression as “the Bank of England”, or refer initially to “the Bank of England”, so that it is clear what the subsequent references to “the Bank” mean.

This is all well and good for making sure that the corpus of legislation functions neatly, but I know that it does not quite get to the nub of the noble Lord’s question, which is: what does it mean when legislation such as this Bill names “the Bank”, who does the work and, as the noble Lord rightly said, who is responsible? Legislation generally confers powers and duties on the Bank of England in two ways: either directly on the Bank or on a statutory committee of the Bank. Sometimes legislation grants roles directly to court, and we will get on to what that means when we discuss Clause 5.

However, for now I want to focus on the question of what it means when powers and duties are conferred on the Bank. Who is responsible for the Bank in relation to these powers and duties? The answer is: the court is. As the governing body of the Bank, the court is responsible for deciding how powers given to the Bank should be exercised and ensuring that the Bank fulfils it duties. Powers and duties granted to the Bank include, as the noble Lord said, those in relation to note issuance, resolution and supervision of financial infrastructures. As he rightly said, he should take the first letter he received as the position on this.

The court may delegate these powers and duties within the Bank as it deems fit, a situation the noble Lord’s amendment would try to replicate. However—this is the heart of the matter—the court remains responsible for that delegation, and where it decides to delegate powers and duties the court still retains ultimate responsibility for the exercise of those powers and duties. I hope that gives some shape to what the Bank is and who is responsible within the Bank for determining how it fulfils the responsibilities conferred on it.

Some powers and duties are not conferred on the Bank but on statutory committees. Powers and duties conferred on a statutory committee are for that committee to exercise according to the terms of its legislation. The court cannot exercise the powers conferred on a statutory committee. That said, even when powers and duties are conferred on a statutory committee, the court still has responsibilities. As the governing body of the Bank, the court is responsible for ensuring that the statutory committees exercise their statutory roles and responsibilities effectively, including that they are adequately resourced and supported to do so.

The Bill reinforces this role of court by making the oversight functions the responsibility of the whole court, a point we will come on to. For example, the oversight functions include keeping under review the Bank’s performance in relation to the duty of the FPC.

I am conscious that the noble Lord may have further questions in regard to what I have said. Let me pick up on one point. He asked about the FPC and who is doing the consulting. It is for the court to approve changes to the code of practice for, I think it is, the MPC because it is responsible for managing the affairs of the Bank. I hope that addresses his point.

Photo of Lord Eatwell Lord Eatwell Non-affiliated

Why has the court’s responsibility been taken out of the Bill and replaced with “the Bank”? The Bill originally said that the court should consult the FPC, but now it says that the Bank must do so. The noble Lord is saying that that means the court, so what is the point of this amendment?

Photo of Lord Bridges of Headley Lord Bridges of Headley The Parliamentary Secretary, Cabinet Office, The Parliamentary Secretary, Cabinet Office 3:45 pm, 9th November 2015

My Lords, we will come to address that. Responsibility for these functions still rests with the court, and I think that is perfectly clear. I am happy to meet the noble Lord to address these points in more detail, and we will come to the FPC in due course. I hope I have begun to provide further clarity on the Bank’s governance, but I can see from the noble Lord’s face that I may not have done. Even so, I hope he will withdraw his amendment.

Photo of Lord Eatwell Lord Eatwell Non-affiliated

My Lords, I am grateful to those noble Lords who have spoken, and in particular to my noble friend Lord Tunnicliffe for his exposition of yet further confusion in letters from the Bank of England, or from whoever, attempting to explain what the Bill is really about. I must say that I am sympathetic to the suspicion in the mind of the noble Lord, Lord Flight, that “the Bank” means “the governor”.

The noble Lord, Bridges, has said that the answer is that the court is responsible for deciding what “the Bank” means, and the court may delegate those purposes how it might wish. This House spent many hours working carefully with the noble Lord, Lord Deighton, who I am delighted to see in his place, to define precisely the roles of different committees within the Bank of England and their responsibilities. It is very striking that in the crucial role of financial stability, this definition is lacking. For the Monetary Policy Committee the definition is clear and, in respect of other activities within the Bank, if one reads the Bank of England Act 1998, one can see that the responsible entity is clear. In respect of the vital role that arose from the financial crisis and the failures of the Bank of England during that crisis, however, there is to be no clarity or clear definition of role.

I think it will be necessary to amend the Bill to make the position clear, because if it is not amended, parliamentary scrutiny has less insight than it requires to perform the role of ensuring that the Bank is democratically accountable. At this time, I will say that unless the noble Lord amends the Bill appropriately on Report—he may be encouraged to do so—I will produce appropriate amendments myself. In the mean time, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

Clause 1: Membership of court of directors

Amendment 2

Moved by Lord Sharkey

2: Clause 1, page 1, line 7, at end insert—

“( ) In section 1(2) (court of directors), in paragraph (e) omit “not more than”.”

Photo of Lord Sharkey Lord Sharkey Liberal Democrat

My Lords, I start by thanking the Minister and his officials for meeting us to discuss the provisions in the Bill. It was helpful and I look forward to further meetings between Committee and Report. The purpose of the amendment is to set the number of non-executive directors of the court of the Bank to nine. The helpful Treasury briefing note to the Bill is a little ambiguous in this area. It states on page 1 that, alongside these changes, the number of NEDs on the court will be reduced from nine to seven, although the legislation will leave flexibility for up to nine NEDs. But as far as I can see, there is no measure in the Bill to reduce the number of NEDs from nine to seven. I understand that this reduction is within the gift of the governor, who has simply decided that the number should be seven and not nine. As far as I know, there has been no consultation on this measure.

According to the Bank’s website as of this afternoon, the court has four executive members and nine non-executive members. The governor proposes to reduce the number of non-execs to seven, while at the same time the Bill proposes to increase the number of Bank officials on the court from four to five. Together, this would radically change the composition of the court. As I say, at the moment the court consists of four Bank officials and nine NEDs. The new structure would mean that there are five Bank officials and seven NEDs. This seems unsatisfactory and possibly even dangerous. The Bank’s tendency to groupthink is well known, and of course the Bank is famous for its intellectual humility and capacity for self-doubt. It is important that the tendency to groupthink and arrogance is resisted. The last two financial services Acts gave much more power to the governor than to the Bank but, at the same time, they provided for more robust oversight. The officials/non-executive director balance on the board is a critical part of that. It is absolutely critical if the court succeeds, later in the Bill, in abolishing the oversight committee and assigning its functions to the court itself, which I hope it will not. We will look at that later.

I pressed the Minister at Second Reading, and in a subsequent meeting, to explain why the number of non-executive directors is to be reduced, and I have had no real answer. I have heard something about administrative convenience and transition arrangements, whatever they may be, but that is certainly not a proper answer. I again ask the Minister why the number of non-executive directors on the court is being reduced.

A lot in the Bill seems to be aimed at reducing the influence of non-executive directors, and we will come to discuss the composition of the various sub-committees. A lot in the Bill seems aimed at reducing external influence on the Bank’s processes and deliberations. There is also a lot in the Bill that weakens the supervisory regime that the Bank is charged with enforcing, and we will come to all that. For now, our amendment seeks to maintain the balance of NEDs and officials on the court of the Bank. That is obviously vital if we are to avoid a repetition of groupthink and introspective and arrogant behaviour. The Bank will have five officials on the court—one more than it has now. We need to retain nine non-executive directors to be certain of strong, uncaptured, independent voices on the court. I beg to move.

Photo of Lord Flight Lord Flight Conservative

My Lords, I support the points made by the noble Lord, Lord Sharkey. If the number of independent directors on the court is reduced to seven, and is not far off being equal to the number of resident directors, I am not sure what role the court has. I also raise the point as to what should independent directors of the court be. What sort of people should be there and how should they be appointed? I was surprised when exploring this to be told that there was now a ruling that a member of the court must not be any NED of any form of bank. It seems that, by and large, NEDs on the boards of banks are, in today’s world, almost an extension of regulators. One of their prime governance tasks is to make sure that the banks are run properly, in accordance with regulatory requirements. I would have thought that the independent members of the court ought to be a cross-section of NEDs from banks and other financial institutions, and that to say, “Oh no, you mustn’t have anybody who is an NED of a bank because there is a conflict of interest”, is a complete misunderstanding of the role of the court.

Obviously, if the bank of the individual NED were being discussed, they could leave the room and behave as in the normal arrangements when any conflict of interest arises. However, I repeat: if the court is to do a useful job, it should have on it independent representatives who have first-hand experience of the banking system in this country.

Photo of Lord Davies of Oldham Lord Davies of Oldham Shadow Spokesperson (Treasury)

My Lords, I am grateful to the noble Lord, Lord Sharkey, not just for his amendment but for the arguments that he put forward, with which we have a great deal of sympathy. I still find it difficult to understand the Government’s case for reducing the number of the non-executive directors in the Bill from nine to seven. I am sure that this issue will run like a—I almost said a golden thread, but certainly a constant thread throughout our discussions because we are concerned about the issues of accountability and openness, as well as the effectiveness of the Bank. I know that the Government want to achieve all those objectives. At the moment, I am afraid we have not, despite the assiduous work of the Minister. I pay due regard to that and to the meetings we have had identifying aspects of the Government’s case. However, we are still not persuaded of the merits of this argument, although the Minister obviously thought that we would be, and we probably anticipated that we would be.

I am unclear as to why the Government want to reduce the number to seven; they must recognise that that will change the balance of the court. What is the argument for reducing this crucial number of non-executive directors? I hear what the noble Lord, Lord Flight, said about a certain qualification for non-executive directors, but he would be the first to recognise that we need on this body people with a breadth of experience and understanding, not just of banking issues but of the most fundamental aspects of the operation of the economy.

What seems to underpin the Government’s position is the view that plenty of academic evidence exists which indicates that smaller boards are preferable to the more extensive boards that obtained in a great deal of City institutions in the past. I am not against that consideration as I hold academics in some regard. I probably ought to, given the well-informed contribution of the noble Lord, Lord Eatwell, who discussed the preceding Bill to which this one obviously relates, so of course I respect academic opinion on size. However, unless the Government make their case with greater clarity than they have done so far, I am not prepared to accept that the Bank of England is exactly like any other City institution. It is not. It has responsibilities and duties that go beyond those of any other institution and because of that we have to look carefully at the balance of forces on the Bank’s board. I almost use the word “cavalier” with regard to what the Government are doing, although I am not sure that they are being cavalier. However, they are seeking to reduce the size of the court and are claiming that this is good practice on the basis of some fairly thin arguments. We want to see good practice on the part of the Bank. We are well aware that the present position is the product of the legislation that was taken through after the crisis. We are all well aware of the criticisms and failures that occurred during the 2007-08 financial and economic crisis. However, we do not believe that the Government’s proposition for the Bank is based on secure arguments or that it will result in improvements.

We would like to know how the Government reached their decision to reduce the number of executives while increasing the official side of the Bank. We are not sure what consultation was undertaken on these matters, what advice was taken or who the prime mover behind such a striking and significant change was. The Minister is working hard on the Bill. We value that and the expertise he brings to it. This is only a limited aspect of the whole issue of the accountability and effectiveness of the Bank. However, on this point, the Government have thus far not established their case. Therefore, Her Majesty’s Opposition broadly support the amendment in the name of the noble Lord, Lord Sharkey.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy) 4:00 pm, 9th November 2015

My Lords, I completely support my noble friend Lord Sharkey in this. Although I greatly respect the noble Lord, Lord Flight, I hope that the House will resist his blandishments. I think non-executive directors of banks finding themselves on the Court of the Bank of England would be constantly facing conflicts of interest, and the public perception would be appalling—that the Bank had become the captive of the industry that it is there to regulate. That does not seem to be a sensible principle.

With the changes that are now proposed—for there to be five inside members, if you like, of the court and seven outside—the inside members would need to persuade only one outside member to join them to achieve stalemate. That is an unacceptable balance in any institution which is so important to the economic life of this country. If the argument cannot persuade more than one non-executive director, it cannot have the standing that would allow it to prevail.

Like my noble friend Lord Sharkey, I am still struggling to understand why this change is being made. The only reason that has been presented to me is the issue of transition. If there are only seven members of the board, for a period of time there could be an incoming and an outgoing member on the board at the same time. Perhaps that is a good practice; it sounds reasonably attractive. But for that to be the reason that the board should be reduced on a normalised basis to seven seems extraordinary. I also suggest that an outgoing member might be very hesitant to exercise their rights, knowing that they were about to depart the board. Transitional arrangements could be put into the Bill, and we would be quite supportive of the idea that there might be a period when an outgoing member of the court could remain on the board in certain roles, or perhaps even in a full role, for a brief transitional period to achieve the goals that the Minister is attempting to achieve.

I hope very much that we can resist this set of issues. The Bank of England is sufficiently important and outsiders are absolutely necessary. This House has made sure over the past several years that that is central to legislation and I think we will continue to hold to that importance.

Photo of Baroness Noakes Baroness Noakes Conservative

My Lords, I agree with the noble Baroness, Lady Kramer, that the Bank of England is an important institution but I am not sure that that importance needs to translate itself into how the court is constituted. The important activities of the Bank are carried out in what will be the three major committees: monetary policy, financial stability and prudential regulation. The activities carried out by the court are relatively few in number. The question then is: what size of court is going to be efficient for carrying out the functions it is there for?

The model that well serves both the plc community in this country and much of the public sector that is modelled on corporate lines is to have a majority of non-executives. That is being kept in here. I have never heard it suggested that the number of non-executives is somehow important to the quality of governance in plcs. Many have more than a bare majority of non-executive directors but a lot operate strictly within the rules to have just a bare majority. I have not seen any studies anywhere that the ratios have any correlation with the quality of governance that is capable of being exercised.

The noble Lord, Lord Davies, referred to the academic evidence that smaller boards are effective boards—that is one of the things that came out of Sir David Walker’s review into the governance of banks—and that committees should be 4:5 and boards 8:10 or something like that. That is because in a smaller organisation, all members can have a proper voice and there can be a proper discussion, whereas in large boards often it is relatively simple for an inner group to dominate the larger group. That is what the behavioural studies have shown.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy)

I respect the views of the noble Baroness, Lady Noakes, very much but is she saying that the current Court of the Bank of England is ineffective because it is too large, and that the effect has been that many of the non-executive directors are not having their voice heard? That is a very serious comment to lay on the table. If that is the case, we really need that evidence because we will want to effect a cure, if this is an answer to a board that the Government have essentially decided is ineffective.

Photo of Baroness Noakes Baroness Noakes Conservative

My Lords, I have absolutely no knowledge of how the Court of the Bank of England works and have not had that knowledge since 2000, when my tenure on the court ceased. At that time I think that we were a court of 16, of whom 13 were non-executives. I will not claim that we were a very effective board at that. All I am trying to say is that what the Government are proposing is perfectly sensible and in line with general corporate practices. It seems to be entirely defensible.

Photo of Lord Eatwell Lord Eatwell Non-affiliated

My Lords, the Bill reeks of the feeling that non-executive directors are a nuisance. Everywhere, we find the role of the non-executive directors in the Bank being reduced. This simple numerical reduction is something like arguing about the number of angels who can dance on a pin. None the less, let us remember why legislation was brought to this House and argued for so forcibly by the noble Lord, Lord Deighton. It was because the Bank of England was seen to have significantly failed during the financial crisis: in particular, that the Bank of England had not had sufficient alternative voices or challenge within its decision-making process. That is what underlay the Financial Services Act of, let me remind the Committee, 2012—just three years ago. From its vesting date to today, that Act has been in force for about two and a half years. How, after that period, can it be decided that the experience of the Act and the structures put in place by it were misconceived? This seems to be simply an attempt for the Bank to return to business as usual, ex ante—before the financial crisis. If the size of the court is too large then that should be the subject of a careful review and the evidence should be presented to this House. That has not been done. Where is the evidence?

The noble Baroness, Lady Noakes, said that what the court does is of course not very much. I wonder whether she was listening to the noble Lord, Lord Bridges, just now when he said that the court is responsible for deciding delegation of powers within the Bank. That seems to me to be quite a lot. With respect, perhaps in the day of the noble Baroness the court did not do very much, but the 2012 Act was specifically designed to empower the court and to produce on it a variety of views and the potential for challenge. There is not much of an issue between seven and nine. The issue is: why is this being changed now? What was wrong in 2012 that is now to be righted and what evidence is there that the decisions which this House made into 2012 were misconceived?

Photo of Lord McFall of Alcluith Lord McFall of Alcluith Labour

My Lords, I would like to make a couple of points in support of the views of the noble Lord, Lord Sharkey. The noble Baroness, Lady Noakes, made the case that the court did not do very much; that was precisely the problem. It had the job of oversight and it is a matter of record that it did not do that job well. The feeling was therefore that the Bank was engaged in groupthink. It did not allow the doors of the Bank to be opened and for the outside world to understand what the Bank was doing.

That closed community failed. Evidence to the Treasury Committee acknowledged that it had failed; the current governor acknowledged that it had failed in a speech at Mansion House a number of months ago, when he made three detailed points about the areas in which it failed.

This body has failed. It therefore needs to ensure that that groupthink and closed mentality is disposed of, but that cannot be disposed of by shrinking. It has to ensure that there is a wider community looking over the Bank. After all, society depends on the decisions that the Bank makes, and it is extremely important that society has confidence in the Bank. This is not just a matter for the Bank, the directors and the governor or how he feels; this is a matter of democratic accountability to Parliament and societal involvement. As the noble Lord said, two years after a change with no examination is an unacceptable way to go about business. Let us get the doors of the Bank open and ensure that we have a wider engagement and a wider debate. That will do both the Bank and society good.

Photo of Lord Ashton of Hyde Lord Ashton of Hyde Lord in Waiting (HM Household) (Whip)

My Lords, I thank noble Lords who have participated in this short debate. The general theme has been that the Government have not put forward a sufficient case for reducing the number of non-executives. I hope that by the end of the debate, we will have been able to elaborate on that. The noble Lord, Lord Eatwell, said that there seemed to be a pervasive feeling through the Bill that non-execs are a nuisance. That could not be further from the truth—good ones are essential, but too many non-execs are not effective. It is crucial to have very high-quality non-execs. I will come on to that as far as the court is concerned.

I agree with the noble Lord, Lord Sharkey, that we have got the figures right in terms of what we have at the moment and what we are going to have, but I come to completely the opposite conclusions as a result of that. I will try my best to outline the Government’s feeling and will also refer, to a certain extent, to some of the points my noble friend made about the academic evidence and the experience of commercial firms, which show that sometimes reduced numbers are more effective.

As noble Lords are aware, the Bank of England Act 1998 states that the court can contain,

“not more than 9 non-executive directors”.

This Bill does not make any alteration to this provision. Before I dive into the detail, it may be helpful to remind the Committee what we are seeking to achieve: a court that is effective in scrutinising the actions of the Bank, holding executives to account, challenging their thinking and exercising its statutory functions. A number of noble Lords have cast this debate in terms of avoiding groupthink, which I agree is very important.

Given that, there are two important factors to bear in mind about the issue we are discussing here, both of which mitigate the risk of groupthink. The first is the number of non-executive directors on the court, which the noble Lord’s amendment focuses on. The second, but no less important, factor is the quality of non-execs on the court. Let me first address the issue of numbers.

Within the terms of the current legislation as written, the Government plan to reduce the number of non-execs to two. This will not weaken the court; instead, it will strengthen it.

Photo of Lord Ashton of Hyde Lord Ashton of Hyde Lord in Waiting (HM Household) (Whip)

Yes—by two, to seven. We think that will strengthen it, because the governance of the Bank will be enhanced by enabling the court to become a smaller, more focused unitary board, as several noble Lords have mentioned.

A smaller court is something the Treasury Select Committee advocated in its 2011 report, Accountability of the Bank of England. It recommended that the court’s membership be reduced to eight, emphasising that a smaller court would allow a diversity of views and expertise while still being an efficient decision-making body.

Our proposals exceed the size of court recommended by the Treasury Select Committee, but a court of 12 is significantly smaller than both the court’s original size of 24 and its size more recently, during the financial crisis, of 19.

Photo of Lord Eatwell Lord Eatwell Non-affiliated 4:15 pm, 9th November 2015

I am intrigued by the Treasury Select Committee’s recommendation of eight. Can the Minister tell us what would have been the composition among those eight recommended persons?

Photo of Lord Ashton of Hyde Lord Ashton of Hyde Lord in Waiting (HM Household) (Whip)

I fear I cannot. Can the noble Lord help us? The answer is, no, I cannot tell noble Lords that.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy)

Perhaps I could be helpful on that point. As the noble Lord will remember, this legislation is adding one more insider, so the balance with eight would have been five insiders versus three outsiders.

Photo of Lord Ashton of Hyde Lord Ashton of Hyde Lord in Waiting (HM Household) (Whip)

The balance would change if we do what the Chancellor has decided to do—to reduce it to seven—but, as I will come on to, the flexibility is maintained to have nine. The legislation says “up to nine”, and nothing in the Bill changes that. We are still operating on the original number of “up to nine”. The amendment would make it exactly nine and reduce any flexibility.

My original point was that our suggestion is smaller than the Treasury Select Committee’s original number of 12, the court’s original size of 24 and its size during the crisis of 19. The size of the court was identified as a barrier to its effective functioning during the financial crisis. We think that a smaller board will better scrutinise the executive. With fewer non-executive directors, each member has greater opportunity to pose questions to executive members and to debate with them. A larger court can encourage a round table of individual speeches, rather than enabling back and forth discussions and challenge to the executive.

As Professor Capie, former official historian of the Bank of England, noted in his evidence to the Treasury Select Committee, historically, larger boards have often consisted of “simply observers or rubber-stampers”. This was supported by independent evidence from the

Walker report, which suggested that the ideal size for a board tends towards 10 to 12 people. Our proposal for five executive and seven non-executive members sits within this range. The Walker report notes that boards larger than 12 people become less manageable and less effective.

The Bank itself has highlighted the benefits of reducing the size of the court. In its 2014 report, it said that,

“consistent with best practice in the private sector, the Bank sees the value of continuing to evolve towards a slightly smaller body, with a non-executive chair and majority”.

Undoubtedly, board sizes in the private sector are on average relatively small. For example, according to the Spencer Stuart board index, the average sizes of boards in 2014 in the US and UK were 10.8 and 10.5 respectively.

Our proposals therefore align the court with current best practice for a unitary board. However, I accept that best practice can, and often does, evolve over time. Therefore, as I said, the current wording provides flexibility, but no compulsion, to increase the number of non-executives up to nine if future evidence suggests that this would be beneficial. Similarly, and importantly, this flexibility will ensure continuity and transfer of knowledge during periods of flux between departing and joining non-executive directors, as the noble Baroness, Lady Kramer, mentioned. But that is not the only reason for the change. We will retain the flexibility, but the normal number will be seven. Specifying that the court must contain an exact number of non-executives, as the amendment does, would lose those benefits.

Let me now turn to the quality of non-execs on the court, which is critical and was mentioned by several noble Lords, including my noble friend Lord Flight. The court has been transformed over the last three years. The Chancellor sought to appoint the highest quality team with significant experience of running large organisations and expertise in matters relevant to the Bank. All non-execs are appointed by the Queen on the recommendation of the Prime Minister and the Chancellor of the Exchequer. The appointment process is run by the Treasury and regulated by the Office of the Commissioner of Public Appointments. It is in line with best practice, with open competitions held for all positions. The Government look far and wide for the best candidates, with roles advertised in the international press. The result is a board of the highest quality non-execs chaired by Anthony Habgood, one of the most experienced and respected company chairmen in the country.

I was asked by the noble Lord, Lord Davies, what consultation took place on reducing the number of non-executive directors. In its December 2014 publication, Transparency and Accountability at the Bank of the England, the Bank made the case for reducing the size of the court. The Government included the proposal to reduce the size of the court to seven in the July consultation paper, with the consultation closing in September. No respondents opposed the proposed reduction in the size of the court.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy)

Would the Minister remind us how many responses there were to that consultation?

Photo of Lord Ashton of Hyde Lord Ashton of Hyde Lord in Waiting (HM Household) (Whip)

There were not that many, but I cannot tell the noble Baroness the exact number.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy)

I think the number was 14. Most people did not know it was there.

Photo of Lord Ashton of Hyde Lord Ashton of Hyde Lord in Waiting (HM Household) (Whip)

So clearly it was not a burning issue. As my noble friend Lord Flight said, no member of the court is from a regulated firm—that is absolutely true—which ensures no conflicts of interest. We think that that is the correct way forward. Of course, they bring a wide amount of experience and there are many members of the court whose description is a “former” director of relevant parties, including banks.

Finally, who made the decision to reduce the number from nine to seven? That was made by the Chancellor, on the advice of the non-executive chairman of the Bank. The proposed composition of the court, as recommended by the Treasury Select Committee, was a total of eight: the governor, two deputy governors, an external chair and four other external members.

Photo of Lord Sharkey Lord Sharkey Liberal Democrat

Does that not make the point that it would give a clear majority to the external members?

Photo of Lord Ashton of Hyde Lord Ashton of Hyde Lord in Waiting (HM Household) (Whip)

It would also be considerably smaller than what we propose today—which is one of the problems brought up by noble Lords. We are not going with that exact number but we will have a majority of externals with the flexibility to increase those by two—something the noble Lord’s amendment would remove.

We agree that the ability for independent scrutiny and challenge should not be compromised. We think that with seven high-quality non-executive directors this will not change. There will still be a majority of external members on the court, well equipped to scrutinise the actions of the Bank and hold the executive to account. My noble friend Lord Bridges and I are happy to meet with the noble Lord, Lord Sharkey, if he would like to discuss this further, but in the mean time I hope that my explanation of the Government’s thinking will allow him to withdraw his amendment.

Photo of Lord Sharkey Lord Sharkey Liberal Democrat

I am afraid we have not heard any kind of compelling explanation as to why this reduction should take place or what its benefits might be. It is simply not enough to pray in aid, as the Minister did, the alleged size and efficiency ratio of commercial company boards. That is simply a category mistake. The Bank is not a commercial company. It has duties that no commercial company has, and it is more important in our national life than any private sector company.

The reduction proposed in the number of non-execs would completely change the culture in the court. But what is worse, as the noble Lord, Lord Eatwell, has said, there is simply no evidence to support the case for the reduction. Evidence may arise out of the consultation, but I am not quite clear about that—and that may need at some later stage a little more explanation. I am happy to take up the Minister’s offer to meet, but I am certain, too, that we will want to return to this issue on Report. In the mean time, I beg leave to withdraw the amendment.

Amendment 2 withdrawn.

Amendment 3

Moved by Lord Davies of Oldham

3: Clause 1, page 1, line 10, leave out “Treasury” and insert “Chancellor of the Exchequer

Photo of Lord Davies of Oldham Lord Davies of Oldham Shadow Spokesperson (Treasury)

My Lords, in moving Amendment 3, I shall speak also to Amendment 4. Amendment 3 would ensure that any alteration to the Court of Directors, and in particular the role of the deputy governor, would be the Chancellor’s responsibility, rather than Treasury’s, as stated in the Bill. Amendment 4 would require the Treasury to,

“publish in such a manner as it thinks fit the reasons for any changes to”,

the membership of the Court of Directors, and lay it before Parliament.

The House will recognise that these are not the most epoch-making amendments I have ever had occasion to advance, but they are a cunning device to give us the opportunity to explore further the Government’s position on guaranteeing that we have the necessary level of accountability, and to gain some real insight into the Bank’s decision-making operations and its relationship to the Treasury. The amendments are far from perfect but, as the House will appreciate, in Committee I am undertaking somewhat informally to withdraw any amendments that we table at this stage. I am sure the Minister will respond to them in his usual meticulous way in the context of the issues that arise, rather than the validity of the amendments themselves.

The Bill gives the Treasury the power, after consulting the governor, to add or alter the title of the deputy governor. This, along with the reduction of the number of non-executive directors from nine to seven, which we have just discussed, will alter the structure of the court. Also, under the Bill, alterations to the Court of Directors will be made in secondary rather than primary legislation. The amendments give the Minister an opportunity, which he will seize with enthusiasm, to place on record how this process will work in practice and what the Government consider to be the benefits of these alterations.

It is clear that accountability and transparency must be the cornerstone principles of any public institution, and that applies with great significance to the Bank, while at the same time recognising that the sensitivity of some decisions it has to take require special provision. It is crucial that we get the relationship right. These amendments were tabled in the context of the Government’s decision to make future changes in secondary rather than primary legislation. However, we consider, as evidenced by today’s discussions, that alterations to the Court of Directors are very significant indeed. The first amendment simply identifies that the Chancellor is the individual responsible for making the change. At least there would then be a clear line of accountability to Parliament, which we are not sure the Bill as drafted safeguards. Has the Minister envisaged who at the Treasury would be making such recommendations, if not the Chancellor? It must be unexceptional that we are stating that a clear line of responsibility runs through to the Chancellor.

We are not satisfied that this provision should come under secondary legislation. Following a meeting between the Minister, my noble friend Lord Tunnicliffe and me, the Minister wrote the following in a letter:

“I think I should start with the reassurance that the Government does not expect that the number or the title of Deputy Governors will be altered frequently”.

Nor do we, and we gain some reassurance from that letter. However, if it is an infrequent occurrence marked with some considerable experience, why is it proposed that it be dealt with in secondary legislation? In what circumstances does the Minister imagine such a change would be necessary, and why should it be made through secondary legislation?

Our related amendment, Amendment 4, would add another opportunity for scrutiny. Ideally, reasons would be published before any legislation was moved, giving Members of both Houses an opportunity to examine the proposal. I hope the Minister will seize this opportunity to clarify that which lacks clarity at present. I assure him that the moment he says these amendments are poorly drafted, I will be the first to concur.

Photo of Lord Bridges of Headley Lord Bridges of Headley The Parliamentary Secretary, Cabinet Office, The Parliamentary Secretary, Cabinet Office 4:30 pm, 9th November 2015

My Lords, the noble Lord does himself a great injustice by saying that these amendments are not epoch-making. I see this process as a form of legislative acupuncture—not that I have ever gone through acupuncture, but I am reliably informed that every needle makes a difference. I am delighted to answer these points.

Clause 1 makes the deputy governor for markets and banking a member of the Court of Directors. Following the expansion of the Bank’s responsibilities through the Financial Services Act 2012, a deputy governor for markets and banking was appointed, as noble Lords will know, with responsibility for reshaping the Bank’s balance sheet, including ensuring robust risk-management practices. This important position, currently filled by Dame Minouche Shafik, is not a statutory member of court. This clause amends the Bank of England Act 1998 to make this position statutory, ensuring equal status for all the Bank’s deputy governors and simplifying the Bank’s governance structure.

In addition, Clause 1 provides enhanced flexibility to add or remove a deputy governor or to alter the title of a deputy governor. Correspondingly, it provides the ability to make changes to the composition of the court, the FPC, the MPC or the new PRC where a deputy governor is added or removed. It should be noted that this power will not permit the Treasury to remove a deputy governor or change his or her title while that deputy governor is in office. This is a measure to ensure flexibility for future need. The Government will be able, by order—a point I will return to—to adapt the size and shape of the court to bring in new expertise when necessary. Thus the Bank’s senior management team can be easily adjusted to meet future requirements.

The Bill also provides for the continued balance of internal and external members on the FPC, the MPC and the PRC. When a deputy governor is added or removed from a policy committee, the Bill enables a comparable change in the number of appointed members to that committee. In a little more detail, if one or more deputy governors is added to the FPC or the PRC, there may be an equal increase in the number of members appointed by the Chancellor. Similarly, if one or more deputy governors is removed from the FPC or the PRC, an equal number of members appointed by the Chancellor may be removed. The situation is comparable for the MPC. If one or more deputy governors is added to or removed from the MPC, then there may be an equal increase or decrease in the number of members appointed by the governor of the Bank. External expertise on these committees is important to ensure a range of views are considered. This provision is necessary to facilitate a diversity of opinion and counter the risk of groupthink.

The noble Lord raises a number of issues in the amendments and I will try to address them. The first issue is where the responsibility for adding, removing or altering the title of a deputy governor lies. In the Bill, this power is conferred on the Treasury rather than specifying, as the noble Lord’s amendment wishes, the Chancellor of the Exchequer. This does not mean that the Chancellor is not consulted. Obviously the Chancellor would be kept fully informed of anything as important as adding or removing a deputy governor, but where a more minor administrative change is made, such as the title of a deputy governor, it may be more appropriate for a junior Treasury Minister to take the lead. Retaining the existing drafting provides this element of flexibility but—I think this is the key point—the Chancellor remains accountable, whatever the phrasing of the Bill, to the public and to Parliament for the decisions and actions in his department.

Secondly, the noble Lord proposes that the Treasury should publish the reasons for making changes to the composition of the FPC, the MPC or the PRC. This gives me the opportunity to clarify the process of making changes to the membership of these bodies following a change to the deputy governors. If the need to alter, add or remove the position of a deputy governor is identified, the Treasury will discuss this with the governor of the Bank. The need for the change could initially be identified by either the Treasury or the Bank. If, following these discussions, the Treasury believes that the change is required, along with any associated changes to the membership of the MPC, the FPC and the PRC, the Treasury will present secondary legislation to Parliament. It will then be for Parliament, as the noble Lord said, to determine whether the change goes ahead. I therefore hope it is clear that Parliament plays a key role in this process. It is the ultimate decision-maker and, in passing an order on the membership of these committees, the Government will need to outline their reasoning to this House and the other place in order to pass our and their acute scrutiny and debate. It is in this context that the reasoning will inevitably be published.

In short, it seems that the noble Lord’s amendments, while worthy of debate, are unnecessary, and I hope that he will feel able to withdraw them.

Photo of Lord Davies of Oldham Lord Davies of Oldham Shadow Spokesperson (Treasury)

As I indicated, my Lords, we tabled these amendments in order to clarify the thinking behind these proposals, and I am reassured on the crucial aspect that the answerability to Parliament is contained accurately within the Bill. It therefore gives me great pleasure to beg leave to withdraw the amendment.

Amendment 3 withdrawn.

Amendment 4 not moved.

Clause 1 agreed.

Clause 2 agreed.

Clause 3: Abolition of Oversight Committee

Debate on whether Clause 3 should stand part of the Bill.

Photo of Lord Sharkey Lord Sharkey Liberal Democrat

My Lords, I do not believe that Clause 3 should be part of the Bill. Clause 3 abolishes the oversight committee and transfers its functions and responsibilities to the court itself. This is a significant weakening of the oversight of the Bank. The oversight committee consists only of the non-executive directors of the Bank; there are quite deliberately no bank officials on the committee. Parliament arranged this in order to be certain that oversight was truly independent and to avoid the possibility of undue bank influence in assessing the performance of the Bank itself in its various roles.

There is an irony in the proposal to abolish the committee. As the noble Lord, Lord Eatwell, pointed out at Second Reading, the Court of the Bank was opposed to the original proposal to create a supervisory board. It was the Bank itself that proposed an oversight committee composed exclusively of non-executive directors.

The reasons given by the Government for the abolition of the oversight committee are extraordinarily weak. The Minister’s letter to me, received last Thursday, says about the oversight committee:

“The new oversight functions and transparency measures have been successful, but the extra layer of governance imposed by the oversight committee has proved unnecessary”.

It goes on to say:

“There is effectively an oversight committee overseeing the work of an oversight board”.

That is emphatically not the case. It was precisely because Parliament found oversight by the board to be unsatisfactory and defective that it introduced the non-executive director-only oversight committee.

In exercising oversight of the Bank there is a completely obvious difference between having that oversight carried out by the Bank itself sitting as five officials and seven NEDs, and having it carried out by an oversight committee composed only of non-executive directors. Anyone with experience of corporate governance in the commercial world would immediately recognise the difference and the danger to independent scrutiny in the current proposal.

The Minister also says:

“The non-executive chairman of the Court has found the division of responsibilities between the Court and the Oversight Committee difficult to operate and unnecessarily complex since, to ensure that the meetings are effective, the Oversight Committee has often required the presence and engagement of the executive members of the Court”.

As a reason for abolishing the oversight committee, this is very feeble. Does the chair of the court imagine that the oversight committee could function without calling on the executive directors? How could any oversight committee function without evidence from the executives it is charged with overseeing? Does the chairman not understand the obvious and critical difference between court executives being called to give account to a committee of nine non-executive directors, and these same court executives giving an account of their actions and decisions to a full court meeting of five bank executives and seven non-executives? When you come right down to it, the main reason advanced by the Government for abolishing the oversight committee seems to be that the chair has diary and scheduling issues.

Perhaps I should remind the Committee—although seeing those present in the Chamber this afternoon, I probably do not need to—that Parliament considered the oversight committee a vital part of the reform of the Bank’s structure of governance. It was intended to prevent a recurrence of groupthink and as a check on the tendency to arrogance. It was intended as a means of ensuring a cool, independent view of the Bank’s operation, as a means of ensuring proper scrutiny and transparency and, as the Minister says, it has been successful in doing exactly this.

The Government have made no meaningful case for abolition. Abolition would reduce oversight and transparency and reinstate the Bank’s influence over oversight itself. It would ignore all the reasons Parliament advanced for the establishment of the oversight committee in the first place and, in common with other measures in the Bill, it would increase the influence of the governor and the Bank in areas where Parliament has taken deliberate steps to decrease it. Abolition is a retrograde and dangerous measure. The Government have given no compelling reasons—in fact, hardly any reason at all—for abolishing the oversight committee. This clause should not stand part of the Bill.

Photo of Lord Tunnicliffe Lord Tunnicliffe Opposition Deputy Chief Whip (Lords), Shadow Spokesperson (Treasury)

My Lords, I support the noble Lord, Lord Sharkey, in his contention that the clause should not stand part of the Bill. This whole issue is about holding the executive to account. In these situations it is very difficult to make a speech which does not sound as though you are criticising the current executive and governor. Oversight mechanisms are in place for when things go wrong. They are largely irrelevant when things are going right but they are there in case they go wrong. I contend that the Government’s proposals significantly reduce the power of the non-executives to hold the executives to account.

Those of us who sat through those long days of Committee on the Financial Services Act 2012 will remember that the Government stated that they,

“fully recognise the importance of strong lines of accountability for the Bank, given its expanded responsibility and powers”.—[ Official Report , 26/6/12; col. 184.]

I am not sure whether the Government took that view immediately in the debate, but it was the consensus in the Chamber at the time, after an enormous amount of discussion.

Anybody doing what you have to do in the modern world to see how the Bank functions and looking it up on the Bank’s website will find a very good page—except that we are about to change it all—labelled “How we are governed”, which says:

“The Oversight Committee of Court, consisting solely of non-executive directors and supported by an Independent Evaluation Office, reviews and reports on all aspects of the Bank’s performance”.

That is very convincing for anybody with a proper interest in the banking structure and all the various banking responsibilities. There is a process whereby people who know what is happening can call the executive to account.

The result of the previous legislation was, very simply, that not only could a majority of non-executives call for a report on virtually anything—or, more accurately, carry out an investigation themselves—but they had the resources to do it. Indeed, the Bank has created—it is referred to on its web page—the Independent Evaluation Office in order to secure the right support for the non-executives. A majority of NEDs is all that is required to call for a report and they have the resources to do it. Let us compare that with the situation proposed by the Bill. If there were a concern among the non-executives, all of them, in a contested vote, would have to vote for a report and an investigation to go ahead. With a strong executive leader, that would be extremely difficult. It would be extremely difficult even to call for a vote in the first place. However, if real concerns were building and if the strong executive leader—the governor—almost always took his executives with him, a considerable confrontation would be needed before a report could be called for. If the Act is left unamended, it merely needs a majority vote by the non-executives to carry forward a report.

Furthermore, the very words “Independent Evaluation Office” suggest that the office has some power to conduct investigations into the Bank. Those of us who were privileged to attend the Treasury Select Committee scrutiny of the Bill heard the chairman, Andrew Tyrie, question Mr Carney on this matter. He confirmed that the IEO cannot independently decide to start an inquiry; instead, it gets its priorities from the court. This is central. In a difficult situation—which we have experienced within living memory—independence is central to the NEDs having the power to hold the executive to account. I hope that the Government can explain why they have decided to so significantly weaken the oversight role of the court’s NEDs.

Photo of Lord Eatwell Lord Eatwell Non-affiliated 4:45 pm, 9th November 2015

My Lords, I find this a somewhat naive and shocking part of this small Bill, in the sense that the clause under debate has two objectives. The first is to reduce the powers of the NEDs and the second is to reduce the powers of Parliament. Both of those goals I regard as reprehensible. As the noble Lord, Lord Tunnicliffe, set out, these issues were debated extensively in this Chamber with respect to the Financial Services Act 2012. We went through them in great detail and, in particular, we followed the advice of the Treasury Select Committee of another place.

It is obvious that this measure is designed to reduce the powers of the non-executives, but perhaps I may comment on the second point that I made about the powers of Parliament. That derives from the statement by the Treasury Select Committee of another place, which at that time was referring to a new supervisory board. That, in debate, was transformed into the oversight committee. The Select Committee said:

“Our recommendation that the new Supervisory Board have the authority to conduct retrospective reviews of the macro-prudential performance of the Bank should, if operating successfully, provide”,

Parliament,

“with the tools for proper scrutiny”.

Those “tools for proper scrutiny” are being removed in this clause. I think that Mr Carney’s explanation of the role of the Independent Evaluation Office, which can be summoned into action only by the oversight committee, is particularly revealing.

It has also been argued that, in some sense, the Bank now has two boards—the court and the oversight committee—and that this is causing confusion and reducing the effectiveness of the Bank. That is a very foolish argument. The notion that there should be an independent non-executive committee reviewing the activities of a main board is commonplace, particularly given that the reviews are specifically defined by legislation to be retrospective and not to question the contemporary acts of the court. That process is one that the best unitary boards have embodied in their codes of practice. I am amazed and, as I say, shocked that the Government are attempting to reduce the powers of non-executive directors in this way and, in particular, to reduce the powers of Parliament.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy)

My Lords, I will make just a few comments, if I may. I join my noble friend Lord Sharkey, and the noble Lords, Lord Tunnicliffe and Lord Eatwell, in their concern about the changes being proposed and the implications that would follow from them.

Will the Government confirm that, under the arrangements to reduce the number of non-executive directors to seven and increase the number of officials on the board to five, it would take co-operation from only one non-executive director with those officials to effectively prevent any investigation into any area of Bank activity? That is, I feel, a completely unacceptable balance that is being proposed today. The Government will have to come up with a very great justification for why the hurdle must be so low—four current officials—to prevent investigation of historical activity.

Clause 4 effectively falls if Clause 3 falls. Clause 4 makes the situation yet worse, because it contemplates not that the whole court will act as an oversight committee but that a sub-committee can be created in order to carry out that work, comprised of as few as two non-executive directors. For two non-executive directors to be considered sufficient for the important work of investigation, review and oversight of the Bank of England strikes me as completely extraordinary. It is also noticeable that the number two applies to the sub-committee responsible for the remuneration of officials at the Bank.

We are moving into a “two best friends” provision here, and I find it exceedingly disturbing. The Government will have to come up with some justification for why a sub-committee of two NEDs is sufficient to carry out a crucially important task that was absent during the many years in which the Bank of England essentially failed to meet the necessary standards to prevent a systemic crisis in finance in this country. I would like to hear their justification for the number two.

Photo of Lord Bridges of Headley Lord Bridges of Headley The Parliamentary Secretary, Cabinet Office, The Parliamentary Secretary, Cabinet Office

My Lords, I thank all the noble Lords who have made very powerful contributions and thoughtful points.

I will not detain your Lordships with lots of history; you know it much better than I do. However, to remind the Committee how this came about, I will repeat something that has already been said. The Financial Services Act 2012 gave rise to the Oversight Committee, largely in response to recommendations made in the report Accountability and the Bank of England from the Treasury Select Committee in the other place. That report recommended that the court should be reformed into a board, with powers to conduct ex-post reviews of the performance of the Bank; that board members should be authorised to see all the papers submitted to the MPC and FPC; and that the board should be responsible for reviewing the processes of the Bank’s policy committees.

The Treasury Select Committee argued that the new board should be called the Supervisory Board of the Bank of England but, despite this name, the structure that was proposed was in fact a unitary board. As has been said, the Financial Services Act 2012 took steps to implement these recommendations, by creating a set of statutory oversight functions. However, instead of conferring powers on the court itself, the powers were conferred upon a new statutory Oversight Committee, made up exclusively of the non-executive directors.

Photo of Lord Sharkey Lord Sharkey Liberal Democrat

Would the Minister agree that it was the Bank itself that suggested that?

Photo of Lord Bridges of Headley Lord Bridges of Headley The Parliamentary Secretary, Cabinet Office, The Parliamentary Secretary, Cabinet Office

That is my understanding. If I am wrong, I will correct myself.

The noble Lord, Lord Sharkey, made his points very forcefully and I fear we may still have to have further discussions—if he can bear it—but let me restate the Government’s position. The problem now faced by the Oversight Committee is simple. As the noble Lord said, for the non-executives to hold the executive to account effectively, they need to meet together, not separately. There needs to be full and frank discussion between the governors and the non-executives on how best to exercise the court’s oversight functions. I am sure the noble Lord would agree that the challenge and recommendations of the non-executives need to be informed by in-depth knowledge of the Bank’s operations. Effective oversight needs to be carried out by the executive and non-executives in partnership, not in silos.

It bears repeating that the key powers of oversight, which are necessary and working, are not lost as a result of their transfer to the whole court. Court will continue to be able to commission reviews as they see fit. Moreover, the non-executives will continue to be a majority on the court and will also continue to meet together as a group after each meeting of court, in line with best practice. As was discussed earlier today, court contains a high quality non-executive majority and is therefore well placed to oversee the work of the Bank.

It is entirely appropriate that court, as the governing body of the Bank, should be responsible for exercising these oversight functions.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy)

I hate to stop the noble Lord, Lord Bridges, in his flow, but could he confirm that, under the proposed structure, if the officials of the Bank collectively believe that an area is not appropriate for investigation, they need the support of only one non-executive director?

Photo of Lord Bridges of Headley Lord Bridges of Headley The Parliamentary Secretary, Cabinet Office, The Parliamentary Secretary, Cabinet Office

As the noble Baroness points out, that would obviously be the maths. We will probably have to have further discussion on this, but I would like to come back to the powers.

It is entirely appropriate that court, as the governing body of the Bank, should be responsible for exercising these oversight functions. The Bill is putting in place a model which is widely regarded as best practice in the United Kingdom. It also completes the model that the Treasury Select Committee recommended in 2011, and was subsequently endorsed by the PCBS in 2012. That model is a streamlined unitary board, with express powers to commission performance reviews. Parliament would still see copies of the reports of any performance review published by the court, just as would be the case for reports published by the Oversight Committee. Parliament’s powers are not being reduced and the Treasury Select Committee can summon any non-executive director to give evidence.

On the point that has consistently been raised about groupthink, I agree that we need to ensure that the Bank is not susceptible to groupthink. The changes that have been made since the financial crisis and the changes we have proposed in this Bill will help to ensure those mistakes are not repeated. Let me run through a few of them. First, the minutes of every court meeting are now published. Secondly, any one non-executive director on court is now able to attend every meeting of the MPC, FPC and PRA boards. Thirdly, the MPC will in future publish transcripts of every meeting. Fourthly, the Bank has established an Independent Evaluation Office, as has been mentioned, to support the non-executive chair in exercising the court’s oversight functions. Noble Lords may have seen that the IEO published a detailed report last week into the accuracy of the Bank’s economic forecasting. Finally, the Bank’s court has been strengthened with a number of new appointments with expertise across a wide range of industries.

Furthermore, we should not assume that groupthink can be avoided in a small group which meets without being able to challenge or be challenged by executive directors. It could equally be argued that a committee of seven people may be just as susceptible to groupthink as a committee of 12. Once again I would argue that it is not only the number of people that matters but their quality and the forum in which they are debating and scrutinising issues.

I strongly believe that there is nothing gained from having an oversight board as well as an oversight committee.

Photo of Lord Tunnicliffe Lord Tunnicliffe Opposition Deputy Chief Whip (Lords), Shadow Spokesperson (Treasury) 5:00 pm, 9th November 2015

Surely there is a world of difference between the phenomena of groupthink in either one of the policy committees or on the court than the phenomena of the seven NEDs meeting alone. If they do produce a piece of groupthink, the most harm they will do is require a part of the activities of the Bank to be examined. It is very unlikely that they would do that, but it would do no great evil and cause little inconvenience. We are talking about a radical difference in balance when it comes to the powers of the NEDs to question the executives of the Bank.

Photo of Lord Bridges of Headley Lord Bridges of Headley The Parliamentary Secretary, Cabinet Office, The Parliamentary Secretary, Cabinet Office

My Lords, it is clear that I still have some persuading to do. I would argue that those powers have not changed in the sense that they have been transferred from the committee to the court.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy)

The Minister said that the powers have not changed, but would he agree that who exercises the powers has changed significantly? Officials had no opportunity to exercise those powers; they were the powers only of non-executive directors. Now they can be easily exercised by the officials plus one NED.

Photo of Lord Bridges of Headley Lord Bridges of Headley The Parliamentary Secretary, Cabinet Office, The Parliamentary Secretary, Cabinet Office

As the noble Baroness rightly points out, obviously her maths is correct and there would be robust discussion. This comes back again to the quality of those who are on the court and their ability to persuade people that such a review is necessary.

That is all I wish to say on this matter.

Photo of Lord Eatwell Lord Eatwell Non-affiliated

The noble Lord, having not been present at our discussions, sadly, three years ago, has not appreciated the loss of confidence in this House in the general accountability of the Bank of England.

Given the structure of the Bank of England and its role in national and international life, the position of the governor is extremely powerful, and quite rightly so. He needs to carry the gravitas and status of his or her office. However, in those circumstances, it is important that an Oversight Committee, charged with retrospective evaluation of the performance of the Bank with respect to its objectives, should not include the governor or the deputy governors. That is a crucial element of our thinking which underpinned the 2012 Act. In repeating that powers have now been simply transferred but still remain, the noble Lord has failed to take that aspect into account and has failed to reflect on the experience of the financial crisis of 2008 and the Bank of England’s performance during that crisis.

Photo of Lord Bridges of Headley Lord Bridges of Headley The Parliamentary Secretary, Cabinet Office, The Parliamentary Secretary, Cabinet Office

Once again the noble Lord makes a powerful intervention. I am sorry that I was not here for what were obviously those interesting debates and I heed what he has to say. I would simply repeat that I am more than happy to meet with him if he so wishes to discuss these points in more detail. Clearly the court would continue to be able to delegate and to meet as a sub-group of non-executives to look into matters as they see fit, but I believe that this Bill will put in place a more transparent, accountable, effective and recognisable board structure for the Bank, and I hope that I have been able to convince noble Lords that this clause should not stand part of the Bill.

Noble Lords:

It should stand part.