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Clause 216

Banking Bill – in a Public Bill Committee at 9:30 am on 30th October 2008.

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Bank of England

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 9:45 am, 30th October 2008

I beg to move amendment No. 58, in clause 216, page 103, leave out lines 9 to 11.

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

With this it will be convenient to discuss the following amendments:

No. 48, in clause 216, page 103, line 9, leave out ‘, consulting the Treasury, determine and’.

No. 49, in clause 216, page 103, line 11, at end insert

‘and monitor the delivery of that strategy’.

No. 59, in clause 216, page 103, leave out lines 13 to 19 and insert—

‘(1) There shall be a committee of the Bank, known as the Financial Stability Committee of the Bank of England, consisting of—

(a) the Governor and Deputy Governor of the Bank,

(b) two members appointed by the Governor of the Bank after consultation with the Chancellor of the Exchequer, and

(c) four members appointed by the Chancellor of the Exchequer.

(2) Of the two members appointed under subsection (1)(b)—

(a) one shall be a person who has executive responsibility within the Bank for financial stability analysis, and

(b) the other shall be a person who has executive resopnsibility within the Bank for financial stability operations.

(3) The Chancellor of the Bank of England shall only appoint a person under subsection (1)(c) if he is satisfied that the person has knowledge or experience which is likely to be relevant to the Committee’s functions and after consultation with the Governor of the Bank.

(4) The Treasury Committee of the House of Commons may hold an inquiry into any appointment made under subsection (1)(c).’.

No. 50, in clause 216, page 103, line 13, leave out from ‘a’ to ‘consisting’ in line 14 and insert ‘Financial Stability Committee’.

No. 68, in clause 216, page 103, line 14, leave out from ‘of’ to end of line 19 and insert

‘8 non-executive directors of the Bank appointed by the chair of the court of directors (designated under paragraph 13 of Schedule 1).’.

No. 51, in clause 216, page 103, line 17, at end insert

‘two other executives of the Bank appointed by the Treasury, and’.

No. 52, in clause 216, page 103, line 18, leave out from ‘4’ to end of line 19 and insert

‘other members appointed by the Treasury following a transparent appointment process overseen by the Commissioner for Public Appointments.

(1A) A person appointed under subsection (1)(c)—

(a) must not be an executive of the Bank or a member of the court of directors of the Bank;

(b) must not be an active participant in financial markets;

(c) should have recent experience of financial markets, knowledge of legal or accountancy matters relevant to the special resolution regime under the Banking Act 2008, and international experience.’.

No. 53, in clause 216, page 103, leave out lines 21 to 23.

No. 62, in clause 216, page 103, line 21, leave out from first ‘to’ to ‘implementation’ in line 22 and insert ‘decide upon the’.

No. 70, in clause 216, page 103, line 21, leave out from first ‘to’ to first ‘the’ in line 22 and insert ‘monitor’.

No. 69, in clause 216, page 103, leave out lines 24 to 29.

No. 60, in clause 216, page 103, line 24, leave out ‘give advice about’ and insert ‘decide’.

No. 61, in clause 216, page 103, line 27, leave out ‘give advice about’ and insert ‘decide’.

No. 54, in clause 216, page 103, leave out lines 30 to 32.

No. 71, in clause 216, page 103, leave out lines 33 to 35.

No. 55, in clause 216, page 103, line 33, leave out ‘court of directors’ and insert ‘Treasury’.

No. 56, in clause 216, page 103, leave out lines 42 to 43.

No. 57, in clause 216, page 104, line 16, leave out ‘to (e)’ and insert ‘or (c)’.

No. 63, in clause 216, page 104, line 23, at end add—

‘(3) At the end of section 2(1) of the Bank of England Act 1998 insert “and the Financial Stability Objective”’.

Clause stand part.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

This will be a long debate, as it includes a significant number of amendments and the clause stand part debate. I shall use the stand part debate on clause 216 to deal with the financial stability objectives set out in proposed new section 2A to the Bank of England Act 1998. This is an important area of the Bill because it deals with some of the changes to the institutional architecture in the tripartite arrangements, and in particular it deals with the scope of the Bank of England and how it carries out its duties.

The Bank has two functions under clause 216. First, it has a statutory objective of committing to protecting and enhancing financial stability, which is set out in proposed new section 2A. Secondly, proposed new section 2B establishes the financial stability committee, which will be a sub-committee of the court of the Bank of England, chaired by the Governor. I have tabled two groups of amendments to the clause. One group—amendments Nos. 56, 58, 59, 60, 61 and 62—would make the financial stability committee a wholly executive body within the Bank of England. The second group—amendments Nos. 68, 69, 70 and 71—would make it a wholly non-executive body. I have done that to stimulate debate within the Committee about the role of the financial stability committee, where it sits within the Bank, and what its powers and authorities are.

The Treasury Committee report on banking reform said:

“The House of Commons should not be invited to consider and approve arrangements for the Financial Stability Committee as they stand—with proposals of uncertain origin and with the purpose and composition of the Committee yet to be determined. This is because the committee is in danger of failing in both its executive and scrutinising functions as it is as drafted, a hybrid body”.

That is the concern that we have. I want to use this debate to tease out the hybrid nature of the committee.

With regard to those amendments that would make the financial stability committee an executive body, the model that I have used is the Monetary Policy Committee. For the financial stability committee to be as effective as the MPC, there would need to be two fundamental changes to the proposals set out in the Bill; one relates to the composition of the committee and the other to its function.

The strength of the MPC is that it brings together a group of experts, some from within the Bank and some from external appointments, with a wide range of views. One only has to listen to the views of David Blanchflower today to understand the breadth of opinion in the MPC. That provides the creative tension that any committee needs to get to the right answer, using a breadth of views. Bringing in outsiders gives a broader perspective, and the MPC is credible because of the calibre of the appointments and the mix of internal and external appointments.

Given the importance of financial stability decisions, if we are to have a committee with the responsibility to promote financial stability, it is important that there is a  clear decision-making process, and that such decisions are made by a wider range of individuals than is currently the case. That is why there should be external members who can give a wider perspective. The amendment tabled by the hon. Member for South Derbyshire suggests the type of person who might become a member of the committee.

It is not only the Treasury Select Committee that suggested there should be expertise; the Chancellor of the Exchequer, speaking in the House of Commons on 5 June, said:

“We should learn from the example of the Monetary Policy Committee, and take a similar approach to financial stability, bringing in outside expertise to advise the Governor and the appropriate deputy governor”.—[Official Report, 5 June 2008; Vol. 476, c. 916.]

Photo of Mark Todd Mark Todd Labour, South Derbyshire

The hon. Gentleman says “outside,” and one of the critical definitions of that implies outside of both executive and non-executive functions within the fabric. No MPC members currently serve on the court of the Bank, and neither should they. One of the important issues in defining what an outside individual is—something that perhaps the Chancellor muddied slightly in that comment—is that a person should be entirely outside any structure within the Bank. Does the hon. Gentleman agree?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

That is what the debate is trying to tease out. If the financial stability committee is to have decision-making powers, it would be right for outside appointees to be genuinely external rather than non-executive. I will elaborate on that, but as I see it, the role of a non-executive director—in any organisation—is one of scrutiny. They are not there to make executive decisions but to hold the executives to account. That is why audit committees of plcs are staffed almost entirely—if not entirely—by non-executive directors. It is the same with remuneration committees. If we ask a non-executive director to perform a role, generally that is in a scrutiny rather than an executive position.

The hon. Gentleman is right to make a distinction about the external appointees. If it is meant to be an executive committee, those people should not be non-executive directors of the court of the Bank of England, in the same way that they cannot be for the MPC. If it is a scrutiny role, they should be non-executive directors, and if it is not a scrutiny role, they should not be, because it muddies the water as to what non-executives should do.

I want to return to the parallel with the MPC. The Treasury Committee’s report tried to identify the strength of the MPC. It said that it has

“a distinct status and authority as the body responsible for the formulation of monetary policy within the Bank of England”

It noted that there was a clear separation from the court and said that the MPC had “clarity of function.” That goes back to the hon. Gentleman’s point that there is no blur between oversight and executive powers.

Since the Chancellor’s statement in June, there has been a lack of clarity. The model now emerging is not akin to that of the MPC or to the scrutiny role that non-executive directors would introduce into the procedure.

Sir John Parker is a senior non-executive director of the court of the Bank of England. To his mind, the financial stability committee would make executive decisions  relating to individual actions. That contrasts with the existing financial stability board within the Bank, which is open to non-executives and does not make executive decisions. In his comments, the Governor said that there should be an executive element to the financial stability committee, and that the holder of his post should chair it; otherwise, the committee will not get to grips with the policy issues faced by the Bank.

Photo of Sally Keeble Sally Keeble Labour, Northampton North

In setting out his views, can the hon. Gentleman tell us what he believes that the scope of the executive decisions should be? That is the critical difference between the MPC and the financial stability committee.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

If the hon. Lady will bear with me, I will come to that. I have tabled amendments that redraw the scope of proposed new section 2B(2), to try to distinguish between the executive and non-executive functions that the two formulations could set out.

As I was saying, the Government are clearly of the view that the financial stability committee should have executive decision-making powers, and that the chairman should chair it in the same way as he chairs the MPC. That would not be an unreasonable view to take if the committee were to be an executive body. There has been some comment on this matter by the industry. In its response to the January consultation, the Association of British Insurers said that its preferred option would be a separate expert committee, along the lines of the MPC, with responsibility for financial stability. That would allow the court to deal with its more administrative role. However, if the committee is to be an executive body and carry that authority, I am not sure that it can be a sub-committee of the court. That is why we would reconstitute the committee, under amendments Nos. 56 and 58 to 62, to consist of the Governor, the deputy governor, two members appointed by the Governor and four members appointed by the Chancellor. It would then broadly mirror the composition of the MPC.

The Treasury Committee has suggested that the committee’s functions should include liquidity operations outside the ordinary course of business, such as schemes comparable to the special liquidity scheme; the functionality of payment systems; formulating policy positions with respect to prudential regulation; directing the Bank’s analytical work on financial stability, including horizon-scanning for potential risks; and decision making in relation to the special resolution regime. That is a reasonable set of functions for an executive body to have.

Amendment No. 62 would tweak proposed new section 2B(2) to make it clear that the financial stability committee would decide upon the Bank’s financial stability report, and that it is there to make not recommendations but decisions. Amendment No. 60 would require the committee to decide whether the Bank should exercise its stability powers rather than simply give advice. Amendment No. 63 would carve out from the court’s remit responsibility for the financial stability objective in the same way that the MPC’s objective is carved out of the remit of the court in the 1998 Act.

My amendments set out how the committee could be given a purely executive function, and would ensure that the composition of the committee reflected its executive role, putting it on a par with the MPC in  terms of functionality and membership. That is a clear model of how the committee could work, with collective decision making. The amendments would ensure that a range of voices were heard when the committee made decisions about financial stability, and would broaden engagement in decision making beyond the confines of the Bank to include people with relevant external expertise, such as those with recent banking, legal or accountancy experience. However, the external appointees would have to have the credibility to make those decisions in the way that external appointees on the MPC have sufficient credibility to ensure that its decisions are seen as credible in the outside world.

Moving to the second batch of amendments, the Governor might decide, in relation to the tripartite authorities, that we do not want an executive body to make decisions, and that we want them to be made as they have been made in the past few years. What we actually want from the financial stability committee is not a hybrid of executive and non-executive roles, but someone who will hold the executive within the Bank to account. I have sought under amendments Nos. 68 to 71 to bring that about.

Significant arguments can be made for a non-executive body, and I am agnostic about which route we take. There are merits on both sides. I am not intending to press the amendments to a Division, but this is an opportunity to gain clarity from the Government about their thinking.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee 10:00 am, 30th October 2008

Will the hon. Gentleman explain why he thinks that the interest rate decision made by the Monetary Policy Committee is akin or similar to decisions that would have to be made in respect of contributing to financial stability? One is a lever to be pulled, and is connected to something; it is about the price of money. The other is much more diffuse and cannot be dealt with in the same way as the Monetary Policy Committee deals with interest rate decisions. Will he share with the Committee his thoughts on why the institutional arrangements for making the Monetary Policy Committee decision are akin to those that he thinks the financial stability committee should be making if it is doing its job?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

We need a clear structure for the decision-making process. There are two models that we could follow: one is to vest the power to make the decisions with the executives of the Bank of England, as happens at the moment, and the other is to give it to a separate committee, the financial stability committee, which could make the executive decisions on behalf of the Bank.

The Minister is right to point out that the MPC meets only two days a month to make the decisions—I accept that I am grossly over-simplifying its role. The committee members undertake a lot of analytical work between meetings. I am not sure to what extent they see their role on the MPC as being full-time; I suspect that many external appointees do see it as pretty much a full-time role.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

An important function of the MPC that could be paralleled in such a way is communication and debate about the credible subject with which it is engaged. Typically, the MPC members visit a substantial number  of bodies throughout the country, write articles and contribute speeches to bring home some of the critical monetary policy issues. One of the things that we have learnt about financial stability is that perhaps the debate has not been vigorous enough and that some of the messages have not been heard loudly enough.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Indeed. The hon. Gentleman makes a powerful argument for the financial stability committee to be constituted in the same way as the MPC. I shall come back to that point in a minute.

The strength of the MPC in decision making is that the breadth of its appointments provokes and simulates a debate, the point made by the hon. Member for South Derbyshire and, as David Blanchflower demonstrated by his remarks today, there is every breadth of view about some of the decisions. There is positive strength from engaging the wider financial community in a debate about how to gain financial stability. To go back to the Minister’s point, the executive committee can meet on a more regular basis than two days a month to make such decisions. If my recollection is right—I think that it is—the court of the Bank of England was convened in the evening after support was given to Northern Rock to advise on the committee. It is not impossible to get a committee together to make decisions so that a continual debate is in progress rather than one that would be seen as discrete and held only on a monthly basis.

Photo of Sally Keeble Sally Keeble Labour, Northampton North

What the hon. Gentleman has not mentioned, which I asked him about, is the fact that the MPC has a clear target on the inflation figures and, in interest rates, it has a clear lever, which is very focused. It debates wider matters, but its purpose and function is crystal clear and tightly defined in a policy framework set by Government, and it has mechanisms to deal with that. That is different from what he is saying about the FSC, which is an executive committee. He needs to talk about the purpose, functions and mechanisms at its disposal.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Lady makes an important point. In the second half of my remarks, I will expand on the financial stability objective. Clearly, the FSC is there to contribute to achieving that objective. She is right that it is difficult to measure whether that objective is achieved. One knows when one does not have financial stability, but it is not easy to say when there is financial stability. In his remarks to the Treasury Committee, the Governor said that during the period of tranquillity the seeds of the current crisis were being sown. That suggests that it is difficult to determine when there is financial stability. Whether the committee is executive or non-executive, there is a problem of how to measure and monitor its performance.

We could talk about more qualitative measure—in evidence to the Treasury Committee, Sir John Parker spoke about a qualitative financial stability objective. That suggests that when there is such a degree of subjectivity, having more voices involved in the debate may be better than having fewer, because that makes it harder to be as precise about whether an objective has been achieved. On more subjective areas of debate, more voices are needed to give different perspectives, rather than there being a house view on how financial stability should be achieved.

I will return to the amendments, because we will discuss the other points in a few minutes. One criticism of having an executive committee centres on whether it can make decisions quickly and whether the decision-making process is sufficiently streamlined. That relates to the point underlying the Minister’s intervention. I think that that criticism is legitimate. As I said earlier, I am agnostic on which model should be used, but I do think that there must be clarity, whichever is chosen. As its remit is constituted, the FSC might not be able to make the quick decisions that the Government and others will expect it to make in the context of securing financial stability.

On that basis, perhaps the right model is one of scrutiny, whereby the committee will examine decisions once they have been made rather than have an undefined role in making the decisions. That would send the financial stability function of that committee down a sub-committee of the court route rather than a hybrid route. It would clearly be there to deal with issues of financial stability; it is a sub-committee of the court. The financial stability board already exists within a court structure. The deputy governor for financial stability is the chairman of that board. Non-executive directors attend and attendance is open to all members of the court. The Governor also sits on that committee. It is not clear how the FSC as constituted in the Bill differs from the financial stability board. That is the board that will hold the Government to account.

If the FSC is to be a purely non-executive body, it must have a non-executive majority. It should not be party to executive decision making; its role should be confined to a forum for taking soundings prior to decisions being taken elsewhere by executives. It should be chaired by a non-executive in the same way that audit committees or remuneration committees are chaired in listed companies.

It is always important that we listen to the views of the non-executive directors of the court, who, in their memo to the Treasury Committee in June, outlined their strategic lead role, saying that they could, through the regular reviews that they conduct,

“endorse the Bank’s strategic objectives and work programme in relation to financial stability; to review the linkages between the Bank, FSA and HMT, as well as the Bank’s own capabilities, to ensure that the Bank is equipped to discharge its financial stability responsibilities; and to review the effectiveness of the Bank’s work on financial stability issues, including the internal organisation of that work”.

That is a good remit for a non-executive committee. It is not clear whether those processes that they already undertake would be incorporated within the FSC. If those are to be incorporated, that does not sit well with having an executive chairman.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

Does the hon. Gentleman agree that there is another area of inconsistency in the Bill? Care is taken to define voting rights and others matters of that sort that might be related more clearly to an executive function, but is there an area of discrepancy in respect of the non-executive roles that he has highlighted? I am not sure that the hon. Gentleman’s amendments change all those; as with my amendments, I do not think that he went through with a fine-toothed comb to produce entirely consistent positions. Is there a discrepancy in  focusing on exactly how people vote and when they are entitled to do so and having perhaps slightly less material about setting out in law a non-executive function?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman makes a good point about voting rights. If the body is expected to be a decision-making body, there must be absolute clarity about who votes and where that power rests. With a non-executive body, the process does not need to be as precise. I freely admit that if I were a parliamentary draftsman, I would produce a better, more coherent set of amendments to create the distinction between the two, but these are a peg for debate. The questions about the hybridity of the committee have not been properly addressed. This is our opportunity to do so and the Minister, too, will have the chance to do so in her reply.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

The hon. Gentleman is right: it is a recognisable option to table two incompatible groups of amendments for debate. However, which amendments does he favour? He has not told us yet.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Minister must have been preparing her speech for later on and not listening to my remarks. I have said on two occasions that I am agnostic about this matter because I can see merits in both outcomes. I am not comfortable with the hybrid nature of the measure in the Bill. These are probing amendments, not ones that I would press to a vote, but I am keen to use them to get the Government to express why they believe that a hybrid model is preferable to either a purely executive or a purely non-executive model. That is the purpose of this debate. I freely admit to having a strong belief in some areas and being agnostic in others. There are not many things in life that I am agnostic on, but this happens to be one of them. I will return to the areas where I am less agnostic in later debates.

The amendments offer two choices. One is to make the financial stability committee a proper executive body, reflecting the strengths of the MPC in terms of its composition and remit and using that as the model of how an executive committee can function. The type of decisions that a financial committee will make must be thought about carefully. There are two choices: are those decisions best made by an executive body constituted in line with the MPC, or are they are better made within the Bank’s existing decision-making processes, but with stronger scrutiny by the court of directors?

The hybrid model confuses membership, accountability and responsibility. Given the importance of the financial stability objective, it is not helpful for that to be the case. There are other issues connected with the financial stability objective which also make it harder to hold the Bank, whichever model is used, to account.

The hon. Member for Northampton, North looks as though she wants to intervene—

Photo of Sally Keeble Sally Keeble Labour, Northampton North 10:15 am, 30th October 2008

I am not going to intervene. I want to make a speech.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

In the expectation that I have finished, perhaps. I am afraid that that is not the case. It is quite a challenge—to my vocal cords as well as my powers of recollection—to have a stand part debate after such a complex set of amendments. I will plough on.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The bound copy of Hansard will sell well in Fareham. [Interruption.]

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

Order. The Committee should let the hon. Gentleman plough on.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I will continue to plough my furrow, under your guidance Mr. Hood, no matter how lonely it is.

The financial stability objective forms the basis of one of the more difficult parts of the Bill. It clearly generated quite a lot discussion in the Treasury Committee and in our evidence session a week last Tuesday. We believe it is important that the Bank be given the objective of financial stability as part of its remit. Part of the challenge of the past 12 months or so has been to decide who has this responsibility and how the Bank should play its role.

We are part way through a period of instability and there must therefore be some lessons that we can learn that will enable us to prepare for the future. As I indicated earlier, it is easier to know when we are in a period of instability than when we are in a period of stability. In trying to understand what the objective of financial stability actually is, one needs to consider three questions. First, what does it mean in practice? Secondly, how does one measure it? The hon. Member for Northampton, North made that point well. Finally, what tools does the Bank have to deliver financial stability?

Let me start with the definitional problem first. I accept that it is a problem. The hon. Member for South Derbyshire and I had a debate last week about financial stability and how one defines it. The present Economic Secretary, in his evidence to the Committee, described  the concept of financial stability as a high-level one. There has been a debate about the objective. The former Economic Secretary, the hon. Member for Burnley (Kitty Ussher), when giving evidence to the Treasury Committee in July, held out the prospect of a bit more definition than we have in the Bill when she said:

“I think we will be setting that out legally in the legislation, so the technical answer to that question will come in October...We will define it clearly, I presume, in the legislation.”

Clearly things have changed since she gave the evidence. Not only is she no longer the Economic Secretary, but we have gone from that tantalising promise that was held out to us of a definition to what we have in the Bill, which is:

“An objective of the Bank shall be to contribute to protecting and enhancing the stability of the financial systems of the United Kingdom”.

I am not sure that that is as full a definition as the hon. Lady hoped it would be, but that is the definition that we have.

The Treasury Committee concluded—having read the report and the evidence quite carefully I understand why it did so—that there is no consensus about what financial stability means. The report is clear. It sets out the range of definitions of financial stability that could be used. The Governor defined a period of financial stability as

“a period during which the payment system worked normally and the ability of households to mediate their savings into real investment in the economy at home or abroad operated normally.”

Nigel Jenkinson, who is the executive director—I see that the Whip wishes to intervene. I shall not finish this speech this morning. I will have to continue after the lunch break. I am happy if the usual channels want us to adjourn at this point.

Further consideration adjourned.—[Mr. Blizzard.]

Adjourned accordingly at twenty minutes past Ten o’clock till this day at One o’clock.