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Part of Bank of England and Financial Services Bill [HL] – in the House of Lords at 4:30 pm on 15th December 2015.

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Photo of Lord Bridges of Headley Lord Bridges of Headley The Parliamentary Secretary, Cabinet Office, The Parliamentary Secretary, Cabinet Office 4:30 pm, 15th December 2015

My Lords, I turn to amendments on NAO reviews, which concern Clause 11. One of the objectives of the Bill is to enhance the accountability of the Bank of England, and these clauses, which allow the NAO to conduct value-for-money examinations of the Bank for the first time, are key in that respect.

We have debated these clauses at great length. That is only right, as we set out to define the respective roles of two vital public bodies. I thank those of your Lordships who contributed in Committee and earlier. Although it is invidious to name names, I thank in particular the noble Lords, Lord Bichard, Lord McFall, Lord Davies, Lord Higgins and Lord Young, and the noble Baronesses, Lady Noakes and Lady Kramer.

Since Committee, officials from the National Audit Office, the Bank of England and the Treasury have been working closely together to reach an agreement on how to address the concerns raised in debate so far.

I am pleased to tell noble Lords that the amendments before us today reflect the outcome of those discussions and have been agreed by Sir Amyas Morse and Mark Carney. I thank both the Bank and the NAO for working constructively together. Both organisations have had to make compromises to reach an outcome that represents an important step forward in public accountability while protecting the Bank’s independent status.

There are three key features of the amendment that I should like to explain in detail. First, as your Lordships will recall, to protect the Bank’s independent status the Bill provides for a policy carve-out from the scope of NAO value-for-money reviews. The NAO’s main concern with the Bill as originally presented to Parliament was that in the event of a disagreement over what constitutes policy, the Bill gave the Bank’s court the final say. To address these concerns, the existing new Section 7E will be removed from the Bill and the court will no longer have a veto over the scope of the NAO value-for-money reviews.

Secondly, we have made changes to the carve-out for the Bank’s policy functions. The NAO is typically precluded by the National Audit Act 1983 from carrying out reviews that are concerned with the merits of a public body’s policy objectives. As introduced, the wording in new Section 7D(3) of the Bill differed from the National Audit Act provision. We are introducing an amendment to ensure that the wording in this revision reflects Section 6 of the National Audit Act 1983 more closely, addressing a concern rightly raised by the noble Lord, Lord McFall.

Alongside that, the amendment provides more detail on how the policy carve-out will operate. It sets out a number of areas where the NAO will not be able to question the merits of the Bank’s policy decisions but, crucially, it has been agreed that even in these areas the NAO will, for example, be able to examine the economy, efficiency or effectiveness of the implementation of policy decisions and of the resources underpinning those decisions. This will mean that the NAO will, under these new arrangements, still be able to carry out reviews of the PRA, like the one it did of the new financial services regulators, the PRA and the FCA, last year, which was entitled Regulating Financial Services.

The areas covered by the carve-out are as follows. First, it covers the merits of policy decisions taken by the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Committee. Secondly, it covers the merits of policy decisions taken by the body within the Bank responsible for the supervision of financial market infrastructures. Thirdly, it covers the merits of policy decisions taken by the body within the Bank responsible for the exercise of its resolution functions. However, where the Bank has used its statutory resolution powers in relation to a financial institution in difficulty, the NAO would be able to consider any resolution policy decisions relating to the institution concerned. This is particularly important given that the Bank is now the resolution authority for the United Kingdom and has primary operational responsibility for financial crisis management. In future, therefore, the NAO will be able to examine the role of the Bank in interventions such as Northern Rock.

This is a bespoke arrangement that recognises the unique and crucial role that the Bank plays in UK economic policy. We do not consider that this sets a precedent for any other public body.

Arrangements between other international central banks and their public auditors allow for similar exemptions of certain activities. For example, the Government Accountability Office in the United States is precluded from looking at a number of aspects of monetary policy, such as Federal Reserve open market or discount window operations. Moreover, the Bank and its policy committees already have strong lines of accountability to Parliament. These include the governor and deputy governors, and external members of the MPC, FPC and PRC regularly giving evidence in the other place at Treasury Select Committee hearings, as well as statutory transparency requirements.

Lastly, the Bill will require that a memorandum of understanding is agreed and maintained between the Bank of England and the NAO. This MoU will contain the finer points of detail on how the two organisations will work together. That will allow for the precise nature of the relationship between these two institutions to develop over time without requiring frequent legislative change. Discussions on the MoU have already begun and it will be published in due course.

The legislation will require the MoU to cover three specific things. First, it will set out any other functions of the Bank that the Comptroller and Auditor-General would not normally consider it appropriate to examine. Secondly, it will set out a process for resolving disputes in the event that there is a disagreement between the NAO and the Bank. There was extensive discussion of the topic in Committee. As I have mentioned, we have responded to this by removing the court’s veto. We will also require the Bank and the NAO to agree a process for resolving disputes as part of the MoU. Thirdly, the MoU must set out which bodies are responsible for taking policy decisions in relation to resolution and the supervision on financial market infrastructure.

To conclude, in Committee we were rightly asked to find a compromise that is acceptable to the NAO and the Bank. This amendment does that. It strikes the right balance to protect the independence of two vital public bodies. It has been agreed by the NAO and the Bank, and I hope noble Lords will support it. I beg to move.