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Clause 216

Part of Banking Bill – in a Public Bill Committee at 1:30 pm on 30th October 2008.

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Photo of Mark Todd Mark Todd Labour, South Derbyshire 1:30 pm, 30th October 2008

But it is the only body that will be nailed with the particular piece of jelly that we are trying to hammer to the wall—financial stability. The terminology, which the Minister has rightly quoted, does not quite use those words. One of the difficulties is defining what we mean. We have just had a little exchange about the various definitions, and I accept that they vary widely.

The sort of process that I am used to, if one accepts the principle that core goals should be set by a democratically elected Government, is that the strategy for delivering those goals is worked out between the various participants who are supposed to deliver the objective. I think that we would all accept that fundamentally those participants are the tripartite authorities, but there may be other contributors to the process. The Government must own that task, however. That is why I attempted in my amendments to define more narrowly the role of the Bank of England court. The Bill states—indeed, it is the Bank’s current reporting  practice—that the court determines the Bank’s strategy in that regard. I have some doubts about whether that is right. The strategy should be set by the Government, and the detailed mechanics of delivering it should be a matter for the governance of the Bank. One of my amendments touches on that point. Clarification of who leads and how to divide the responsibilities would be valuable.

Secondly, I focus on the Bill’s narrow elements. We must define the institutional structure and how it functions. I shall not repeat the comments made by the hon. Member for Fareham, with interventions from me, but I shall try to simplify things. One difficulty is that the court of directors as we know it is not the court of directors to which we may give responsibility in future. The number of members of that court is, of course, specifically modified in the Bill, but my strong feeling is that we shall be looking for slightly different characters in terms not of their morals, but of their background, knowledge and experience. One of my difficulties lies in imagining the Bill in the hands of the people I know and encounter through my work on the Treasury Committee, whereas the challenge is perhaps to envisage a slightly different group of people. That leads me to believe that without sharper knowledge of the sort of qualifications that the individuals who will fill the seats will have, it will be hard to judge the Government’s rather uneasy compromise, which gives a substantial role to the court of directors in that area of policy.

I shall go into a little more detail. The court of directors, as it is now, is in essence a non-executive body in its functions. The way in which it is acknowledged in the annual report suggests that it performs a more profound role, but my experience is that that does not seem to be the reality. The Bill asks it both to determine and to review the Bank’s financial stability strategy. Although I would expect the court, if it were primarily a non-executive body, to review the strategy and monitor its delivery, determination of that strategy should lie with the Treasury and the Bank’s executive. Giving that critical task to the court, chaired by a non-executive, as the Bill explicitly requires, means that the proper function of scrutiny and challenge is compromised.

Having said that, this country is used to fudge and deals made around personalities and the occupants of individual posts. We have tended to do that for centuries in the role of, for example, the Lord Chancellor, so it is not foreign to say, “That may be the theoretical position, but surely we can find another way of cracking this.” If that is our approach, I would like the Government to set out with greater clarity how the monitoring and oversight functions are clearly separated from the executive tasks involved in delivering what the Bill requires of the Bank.

It is important for the financial stability committee to recognise that the Bank already has governance structures for some elements. The hon. Member for Fareham referred to the financial stability board, which already exists in the Bank. The deputy Governor is tasked with financial stability, so we are not talking about new tasks and functions with which the Bank is unfamiliar. It carries out core tasks in relation to financial stability. We can argue about whether those tasks have always been done well, but they are explicitly recognised. The Bank regularly publishes a financial stability report focusing on many of the issues that we have discussed. I sense that what is happening is an attempt to formalise  the financial stability board and to make it more capable of bearing greater explicit burdens and broadening its membership from its current, relatively narrow, base. It would be useful to see, set out in a clearer form, the lineage from where we are to where we seek to be.

The committee, as set out in the measure, will be a core part of the executive team at the Bank, and there will be four non-executive directors drawn from the court, who would normally see their core role as challenging and monitoring the performance of the Bank’s executive. The tasks that the committee has been given are a curious mixture. The first, in new section 2B(2)(a)—

“to make recommendations to the court of directors”— contains an explicit relationship to the court, so that subsidiarity is confirmed and there is a reasonably clear definition of what is expected. However, as I pointed out in our evidence session, it is not clear to whom the committee is answerable regarding other tasks. In subsections (2)(b) and (c), the committee is invited to “give advice” on critical issues to persons unspecified. It could be to the court or anyone else—the Treasury, the world at large or the financial community; I do not know. The issues on which it may give advice include

“whether...the Bank should act in respect of an institution” and

“whether and how the Bank should use stabilisation powers”.

The gathering of information before a critical executive decision by the Bank is a vital part of what is in essence an executive function. To me, that sits ill with the membership of the board that has so far been defined.