These amendments address clause 1, which makes a set of changes to the provisions in the Bank of England Act 1998—as I have said, we do not have that in the Committee Room—particularly in relation to the composition of the court of the Bank of England and the deputy governors appointed to that court.
Amendment 1 would change the name of the governing body of the Bank of England from “court of directors” to “Supervisory Board”. It is an important amendment, given the debates that took place in the Treasury Select Committee in particular, as well as in the pre-legislative scrutiny Committee. The court of directors of the Bank is a structure that has a great deal of history. It is an old institution, established in a different era from the one we are living in. It started its life in 1694, when the Bank of England was the Government’s banker and debt manager. At that time, it had 17 clerks and two gatekeepers, but it has since grown in size and employs many more staff, who have included the hon. Member for West Suffolk. He has extensive experience of working at all levels in the Bank, and I am sure he will bring that to the fore in our scrutiny of the Bill.
The court of the Bank of England was also established in 1694, when its functions were essentially to declare the dividend and to conduct elections, but its role has obviously changed since that time. Following the second world war, the Bank of England Act 1946 set out the duties of the court as the governing board of the Bank. Under the previous Government, the 1998 Act changed the governance of the Bank and the role of the court, and those arrangements again evolved under the 2009 Act.
Just as the events and circumstances of the past 300 years or so have done, so the Bill will shape and influence the role, composition and responsibilities of the Bank and the court. Amendment 1 would replace the relevant words in line 5 with the phrase:
“There shall continue to be a court of directors of the Bank but it shall be renamed the Supervisory Board of the Bank of England.”
The Treasury Committee made a series of recommendations, and it is a pity that the Government did not pick them up and reflect them in drafting the Bill.
It is important that hon. Members recognise the context of the amendment. The Bill provides for significant rule-making powers to be handed to the Financial Policy Committee and, indirectly, the Governor of the Bank of England. The FPC will be able to make rules and give instructions to the new Prudential Regulation Authority and Financial Conduct Authority. Very considerable powers will be transferred to the Bank, and it is therefore important that there are stronger supervisory functions and arrangements within the Bank to ensure that it has proper checks and balances on the execution of those powers and that, if necessary, appropriate challenge is given. That is the normal situation in large public—let alone private—institutions and, as recommended by the Treasury Committee, such improvements should be made to the arrangements for internal challenge and scrutiny so that there can be a proper assessment of the Bank’s performance and rules.
On that issue, we need the assistance of the Government and officials to draft improved governance arrangements. It would be invidious for me to attempt fully to rewrite the interstices of the Bank of England’s constitution. The amendment is a useful proxy for the Committee to consider and possibly vote on—the Minister may accept it, if he so wishes—to signal that, having considered the provision, such a change needs further development and could be reconsidered on Report or in the other place. I thought that we should discuss, as a matter of principle, the question of whether we continue with the current arrangements for the court of the Bank or create a more effective supervisory board.
Most institutions of such a magnitude and importance have governance arrangements for internally challenging and scrutinising their own performance. Banks have modern corporate governance boards. It is a moot point to question their efficacy, but they are there. The UK code of corporate governance also makes a set of recommendations about governance arrangements, which could be brought to bear properly in the definitions of how we might want a decent supervisory function. Local authorities have scrutiny committees, as many of my hon. Friends may know. Police authorities have proper scrutiny and governing arrangements. I could go on and, no doubt, my hon. Friends might wish to do so as well.
It is an anomaly therefore not to have a court at the top of the Bank of England with the flexibility to provide that level of supervision. I am delighted to see that the hon. Member for Hereford and South Herefordshire is in Committee with us today. He, I think, is the only hon. Member here—he is talking to the Government Whip at the moment—who served on the pre-legislative scrutiny Committee. I wonder whether I can attract his attention for a moment.
He is multi-tasking, as ever. He served on the Committee, which also recommended changing the name of the court to a supervisory board as an important step that needed to be taken. The Treasury Committee’s report “Accountability of the Bank of England” said:
“Given that the Court has changed recently, its name is outdated and does not give a clear picture of what the Court actually does.”
The report went further:
“To reflect the shift of emphasis in its role, we recommend that the governing body of the Bank (Court) change its name to the ‘Supervisory Board of the Bank of England’.”
That was echoed by the pre-legislative scrutiny Committee report on the draft Financial Services Bill, which said:
“We support the idea that the Court should be replaced by a Supervisory Board”.
I hope that in tabling this amendment I am learning from the advice and experience of the hon. Gentleman and others who served on those Committees. I have listened closely to their recommendations, and I want to work with him in Committee. I tried my best to interpret the recommendations that his Committee made—no doubt he supported them—and I have tried to deliver an amendment that would have an effect by putting that in the Bill. I am interested to hear his thoughts on it.
As Shakespeare wrote:
“What’s in a name? That which we call a rose By any other name would smell as sweet”.
There is an awful lot, of course, in a name. Whether we call it a court or a supervisory board may be to some people a simple matter of description and not of any great importance, but it is an important principle, for the reasons that I gave to the hon. Gentleman previously. It is a single change that we need to send to the Treasury to show that this Committee believes that we need that higher level of scrutiny. I am not necessarily fixed on the term “supervisory board”. We could look at other names: governing court, superior committee or trustees’ cabinet. There are all sorts of other possible variants on that. It is important that we dispense with the term “court”. Prime Ministers may have a court around them. Monarchs used to have a court supporting them, but these days, to be appropriate and fitting to the circumstances of the hour, a supervisory board seems to be the better term. It is more straightforward and more appropriate for the change that needs to be made.
I was impressed with the article in The Times written by the hon. Gentleman. He writes some interesting pieces, from time to time. It was fairly recent and was titled “Let’s take King to Court”. My Latin is not particularly good and I have a feeling, Mr Leigh, that “Erskine May” prevents us using any languages other than English and Norman French.
Quis custodiet ipsos custodes is the phrase, I think—I do not know whether my Cambridge or Oxford pronunciations are correct. “Who will guard the guard themselves?” That was the point that the hon. Gentleman made. I am trying to leaven the mood of the Committee somewhat, but this is a serious issue. Ultimately, the question is as old as the ancients. Who will supervise? Who will have an internal eye in the Bank of England on the immense power that the Governor will have at his fingertips? That is an incredibly important question. In his article, the hon. Gentleman referred to the Treasury Committee’s simple proposal
“that the Court should become a supervisory board in the true sense”,
“deliberately recruit members with experience of prudential regulation and bank stability.”
I could not agree more. I hope that the Minister will respond sensitively to the suggestions that have been made, with more thought than I have been able to enunciate in Committee.
The court is the board under company law, but the history of this particular court of the Bank of England is unusual. There is some doubt about the court’s sovereignty at present, given that the Crown appoints the Governor and that other aspects are delegated in law to other committees, such as the Monetary Policy Committee. However, we think that a suite of improvements is needed to the core supervisory elements to enhance the new court arrangement.
The Treasury Committee was correct in its recommendations about parallels that can be drawn between the court as it is and a corporate unitary board, including that
“the Court is a single body with both externals and internal Bank executives as members, who have equal standing on the board in terms of responsibility and liability. The Court is responsible for ensuring that the committees of the Bank are properly resourced and that its proceedings are properly conducted... Like a corporate board, the Court of the Bank represents the interests of the shareholders. The Treasury is the only shareholder of the Bank and accordingly one of the Court’s functions is to ensure that the Bank uses resources efficiently and sparingly and that it manages financial risk prudently, so as to protect the interests of the Treasury in the Bank. However, it should do this while at all times protecting the Bank’s reputation for political neutrality and objectivity.”
The Treasury Committee went on to say that the court has
“neither direct executive responsibility nor immediate influence on many of the…important decisions made by the Bank, namely those on monetary policy.”
When Professor Garratt gave evidence to the Treasury Committee, he described the court’s structure as “very odd” and “quite alarming”. Furthermore, the Committee stated that, as the Governor of the Bank is appointed by the Crown, the court cannot, under current law, take any action of censure or otherwise,
“except in case of dereliction of duty, personal financial distress, or incapacity.”
That is unusual for a corporate board. We shall discuss those arrangements later in our proceedings.
A number of changes were made after the Bank of England was nationalised, when the court was asked to look at the “affairs of the Bank.” At the time, that phrase was interpreted to mean the day-to-day running of the organisation. Over the years, court members have complained that they have felt that they did not have a serious role and were simply observers or rubber stampers of decisions. The situation has changed a little in recent decades, but we must change it further: I want the Bill to modernise arrangements for the court of the Bank of England.
“The court shall consist of the following members appointed by Her Majesty—
(a) a Governor,
(b) a Deputy Governor for financial stability,
(c) a Deputy Governor for monetary policy,
(d) a Deputy Governor for prudential regulation, and
(e) not more than 9 directors.”
Subsection (2) refers to the Governor of the Bank, the deputy governor for financial stability, and the deputy governor for monetary policy. Call me old-fashioned, Mr Leigh, but it seems anomalous to have one set of descriptors referring to the appointment of “a Governor” and another set referring to “the Governor of the Bank”. The amendment therefore seeks to replace the first phrase with the second one to make the drafting more precise and make it clear what kind of Governor the Bill refers to.
It seems inconsistent that the Bill has specific references in relation to the Monetary Policy Committee, but greater and potentially legal ambiguity in subsection (1). To the Minister, “a Governor” may clearly mean “the Governor of the Bank”, but the Bill might be taken to mean any governor—for example, the governor of a school. Some Committee members may belong to governing bodies of schools in their constituencies. Perhaps you are a governor, Mr Leigh. Prisons have governors, as do the states of the United States of America—that is a familiar term—and football managers are often referred to as such.
But that would be very tempting.
I have discovered that my hon. Friend the Member for Leeds North East is a governor of the Northern School of Contemporary Dance, which may surprise the Committee. He is a governor and I am not therefore sure, in legal terms, whether the Bill might allow him to be appointed to the court of directors. That is a small and even a silly drafting point, but I cannot understand why the Bill is so drafted. The use of the indefinite article seems sloppy and imprecise. Will the Minister explain its use?
An indefinite article indicates that its noun is not a particular one identifiable to the reader. It may refer to something that is mentioned for the first time or it may mean that the precise identity is irrelevant or hypothetical, which is obviously not the case because the precise identity in the clause is important. In my view, a general reference to “a Governor” is insufficient. If the Minister wishes to withdraw the clause and to bring back a properly drafted one on Report, I will not object.
I will return to the use of the indefinite article, to illustrate why it might be appropriate for the hon. Member for Leeds North East to be a governor of the Northern School of Contemporary Dance but not necessarily to be the Governor of the Bank of England. We all agree that the court of the Bank needs to evolve as the functions of the Bank do so, and I shall set out how that will be achieved after I have dealt with the amendments.
In their response to the Treasury Committee’s report on the “Accountability of the Bank of England”, the Government made it clear that we do not agree that the name of the court needs to be changed. The court has expressed reservations about the implications of using the term “supervisory board”. It has argued that it is not a supervisory board, as currently recognised, and that to rename it would cause confusion.
The more substantive and important questions are what role the court should have and how it is equipped and qualified to carry out its functions. The Treasury Committee’s report is clear about that and it makes several recommendations about how to enhance the court’s role as the governing body of the Bank of England and improve its accountability. There is consensus that the governance of the Bank needs to be strengthened to equip it better for the new roles it will be given by the Bill. The court has clearly acknowledged that need, stating that:
“The new responsibilities for the Bank of England in the area of financial stability will need to be accompanied by new accountability mechanisms.”
The court has been responsible for managing the affairs of the Bank since it was first nationalised in 1946. Subsequent legislation such as the Bank of England Act 1998 and the Banking Act 2009 have effected changes to the constitution and duties of the court. While the court is long established, it has evolved in both its function and its composition.
The changes being brought about in the Financial Services Bill herald a new era for the Bank: creating both the FPC and the Prudential Regulation Authority within the Bank of England group, enhancing the Bank’s responsibilities and giving it the tools and powers it needs to regulate effectively the stability of the financial services sector. As it has done with previous changes, the court will need to adapt and evolve to continue operating as an effective governing body that can oversee the transition to the new arrangements, as well as ensuring that the Bank is properly resourced to meet its new responsibilities, offering challenge to the executive and, importantly, accountability to Parliament.
To that end, in January, the court published its own response to the Treasury Committee’s recommendations. The court’s paper set out positive and constructive proposals to strengthen its oversight of the Bank’s financial stability activities and to enhance accountability. Chief among them is the creation of a new oversight committee for financial stability, which will be a sub-committee of the court with the remit of covering the entirety of the Bank’s financial stability activities. That wholly non-executive committee will have access to the meetings and papers of the Bank’s policy-making committees, including the FPC, and will be able both to review internal processes and commission periodic reviews of policy-making performance from expert external authorities. Those reports will be published, as will the minutes of the court’s meetings.
The court’s response signals important improvements to the transparency and accountability of the court, as well as a commitment to effective governance practices.
The Minister might not have it to hand, but can he elaborate a little on the proposed membership of that oversight committee? He said that it was wholly non-executive and I want just to get a sense of the relationship between the court and that oversight committee.
The oversight committee will be entirely non-executive. That is absolutely vital to ensure that the non-execs are able to scrutinise the policy-making processes and outcomes. It will be well resourced and will be able to commission both internal and external reviews. It will be an important way of challenging the policy-making functions within the Bank. Clearly, the position of the oversight committee will be a matter for the court to decide. It requires the court to ensure that its membership is properly equipped to undertake these tasks.
The Government are keen to see effective governance of the Bank and to ensure that the court is properly equipped to carry out this role. The Government therefore welcome the court’s proposals. The Chair of the Treasury Committee himself acknowledged that there was much to welcome in the court’s response to the Treasury Committee’s recommendations. However, in its report published on 23 January, the Treasury Committee outlined a number of areas where it felt that the court’s proposals did not go far enough. The Committee reiterated its call for the replacement of the court with a new supervisory board.
The Government do not agree with the Treasury Committee that replacing the court with a new supervisory board is the only way to enhance the Bank’s accountability. Although the solution proposed by the court takes a different approach from that put forward by the Treasury Committee, there is no reason why it should not be just as effective in achieving the aims set out in the Treasury Committee’s report.
One area that the Treasury Committee raised in its 23 January report was the ability of the oversight committee to commission internal policy reviews. As a consequence of that, the Chancellor has agreed with the Governor and the chair of the court that the new oversight body will also be expected to commission retrospective internal reviews from the Bank’s policy makers of their policy making and implementation performance.
May I say how much I welcome, as a member of the Treasury Committee, the Chancellor’s decision? I also welcome the emphasis that the Minister has placed on the substance of the supervision of the Bank, rather than on the language of the supervisory board. One of the weaknesses—if one can admit to it—of the Treasury Committee’s proposal was that the term “supervisory board” had a connotation of a German-style supervisory board. I do not think that anyone wants to bring that to the court of the Bank of England. The substance of his remarks is very much to be welcomed.
I am grateful for that. My hon. Friend makes the important point that “supervisory board” has different connotations. One of the things that the court was keen to see was the maintenance of a unitary board that comprised both non-executives and executives. The hon. Member for Nottingham East, in his relatively brief description of the different types of supervisory arrangement, highlighted as options both the corporate boards that we see in public companies and the scrutiny panels that we see in our local councils. There is no single model. The challenge is to ensure that the model is effective in providing the necessary scrutiny and challenge. My hon. Friend is right to focus on the substance of the proposals.
I have not yet covered a point that the hon. Member for Nottingham East made in his remarks. He referred to how the Bill gives rule-making powers to the FPC. Let me be clear: it does not give rule-making powers to the Bank or the FPC. When the FPC’s decisions must be implemented via rules, it will be done by either the Prudential Regulation Authority or the Financial Conduct Authority under existing powers and safeguards. We will discuss such matters in subsequent amendments.
I set out why the court’s proposals, including the creation of an oversight committee, represent real and constructive measures to strengthen Bank of England governance and accountability. I hope that the hon. Members for Nottingham East and for Kilmarnock and Loudoun will accept my assurances and that the hon. Gentleman will withdraw the amendment.
I understand why the hon. Members who tabled amendment 2 paused over the reference to “a Governor” when other provisions in the Bill refer to “the Governor”, but I shall explain why their amendment is unnecessary. The provision replaces section 1 (2) and (2A) of the 1998 Act, which establishes the membership of the court of the Bank of England and creates a number of posts in statute. The posts of governor and deputy governors of the Bank are not created by any other legislation, which is why the wording in the provision takes the indefinite article. The hon. Member for Nottingham East alluded to that in his remarks.
Under the measure, “a Governor” will sit on the court of the Bank; we cannot refer to “the Governor” because without the provision, that post does not exist. When it has been established, however, all other references, such as those in new sections 9B and 9U, will be to “the Governor of the Bank.” The post must be created before other provisions can refer to “the Governor”, which is what new subsection (2) of section 1 of the 1998 Act does. I know that the hon. Gentleman has prepared well for this discussion, but he might wish to revisit the existing provision in the 1998 Act, which also uses the indefinite article in reference to the court’s composition. I hope that I have reassured him. I shall give way to the hon. Member for Foyle, who might suggest another reason why the indefinite article is inappropriate.
I agree that the indefinite article is appropriate where it appears, for the reasons stated by the Minister. The provision might have been improved, however, if the reference were to not only “a Governor” but “a Governor of the Bank.” The concerns expressed by the hon. Member for Nottingham East might not then have occurred to anyone. The appointment should definitively be a Governor of the Bank.
The hon. Gentleman makes a helpful point, but the current formulation has withstood the test of time. We do not agree with everything that the previous Government did, but inserting the words “a Governor” is something that we can all support. I hope that my clarification on the use of the indefinite article will be the last grammatical discussion that we have in our 16 sittings and that the hon. Member for Nottingham East will see fit to withdraw amendment 2.
The discussion has been very helpful. The hon. Member for Foyle—my hon. Friend—made a constructive suggestion to the Committee. If the Minister were to withdraw the clause and replace the wording with “a Governor of the Bank”, at least the ambiguity in the provision would be removed and the meaning would be put beyond doubt. I think it was the former United States President, Bill Clinton, who, in evidence given at his impeachment trials in Congress, spent a lot of time discussing the meaning of the word “is” and whether it applied to his predicament. We are not in quite the same situation in Committee—at least not that I know of at this stage. The word “a” or “the” can make a significant difference. Nevertheless, the Minister has a team—a phalanx—of very educated and worthy officials, who are able to advise on these elements of vocabulary and definition, so with great reluctance I would be prepared not to press amendment 2, although I reserve the right to bring it back at a later stage.
On amendment 1, I hear what the Minister says—that the court itself does not want to be renamed. That is not a massive surprise for a conservative institution; they tend to want to retain their traditions, even when quite palpably a name has expired as a modern and useful term in current parlance. I do not believe that the name “the court” should be retained simply because those who sit upon it do not particularly want to change it. It is a public body; it has ramifications for all our lives and the economy more widely, and it is important to have a simpler, more straightforward description. Setting aside for a minute the bigger issues about what the court—that supervisory board—ought to do, the Treasury Committee itself, in paragraph 41 of its 21st report, said:
“Whatever name is ultimately chosen, we strongly recommend that the term ‘Court’ is abolished.”
I agree with the Committee and its members, some of whom are with us in the Committee today, that that is an incredibly important point. Even if we take amendment 1 at face value, as it stands, simply to move away from the term “court”, I think it is an important amendment and I think we should make it.
I was hoping to hear the hon. Member for Hereford and South Herefordshire talk about his views, given that he has written so extensively on the subject, but maybe we shall still have an opportunity to hear from him on it beyond the intervention that he made.
I am not entirely convinced about the establishment of the oversight committee, given that we do not seem to know who will be on that sub-committee arrangement. The Minister said it would be a matter for the Bank to determine. That is not really good enough, given that this is supposed to be a check-and-balance process. At the very least, we should know now who will be on that oversight committee, to give us a sense of whether it will have teeth: whether it will be able properly to oversee some of those internal—what the Minister called policy-making—processes.
There is another discussion to be had, which we may have at a later stage of our scrutiny of the Bill, about what exactly the court—the supervisory board, as we would like to call it—ought to have the ability to look into. There is a debate about whether it should simply be looking at processology—minutes, matters arising, whether the agendas are in the right font and so on—or whether it can get its teeth into the effectiveness of policy, the activities of the Bank of England, the policy-making functions and the decisions that emerge from them. If there is to be a proper set of constitutional checks and balances, the court or supervisory board needs to be able to look at the latter and not restrict itself to the merely technical, functional elements of those arrangements.
I hope that I have managed to reassure the Committee that the oversight committee will look at the substance of policy making—not necessarily the fonts or whether the minutes are in the right order—because it wants to be effective. That is why the argument is not about its name but about what it does and how it does it. I think the oversight committee will provide an effective challenge, and because it will have the power to commission both internal and external reviews, it will be able to scrutinise and hold to account the Bank’s executives and its committees in a way that represents a major step forward in accountability.
I am grateful to the Minister for clarifying that the oversight committee will have powers to scrutinise policy making, not just the procedural elements. That is quite an important point; it is a concession that should be welcomed. I am not, though, sure that it goes as far as it could by, say, creating a sub-committee of three non-executive members, or however many it might be, of the court of the Bank of England. Possibly even two would be sufficient to constitute a committee; I do not know. We already have a court of fairly limited size, and if this is going to an oversight sub-committee, we need a little more detail on that.
If the Minister can bring back a little bit more information on the Bank’s intentions on that when we come to discuss similar issues later in the Bill, that would be useful not just to myself but to other members of the Committee who are discussing some of these questions today.
I am happy not to press amendment 2 to a vote, but the principles are twofold when it comes to amendment 1. Of course the Minister is correct about what that supervisory board does, but we tabled this amendment because of the in-principle question about the tone with which the court conducts itself and the role it will have. Moreover, the phrase “court of the Bank of England” is an anachronism and something that should be replaced. If the hon. Gentleman claims to be a modernising Treasury Minister who believes in updating the terms in the Bill, he should surely move away from this outdated description. The Treasury Committee strongly recommends that. For those reasons, I seek to put amendment 1 to the vote.
‘(2A) The Chancellor of the Exchequer shall only appoint a person under subsection (2)(e) if he is satisfied that the person has knowledge or experience which is likely to be relevant to the Court’s functions and would enhance the diversity of the composition of the Court.’.
Proposed new subsection (2)(e) covers those nine directors who are not a governor or a deputy governor. Under the amendment, we seek to enhance the diversity of the composition of the court, to get a sense from the Minister about whether the court’s current composition is likely to change or evolve over time and to find out what he seeks to do in the exercise of his powers in making those appointments to the court. What sorts of experience and knowledge does he think should be available for the Bank on the court and what is the Government’s attitude to improving the breadth of the composition so that it reflects those parts of the economy—industry or the financial services sector itself—so that they can at least have a shot at being able to be represented on that court. Clearly, the composition of the court is not a mandated set of representatives who strictly come from one particular quadrant of the financial services sector, whether it is insurance or professional services. None the less, we feel that there is an important point to raise about the current composition of the court. Some eminent and skilled people sit on the court of the Bank of England, and I have no qualms with any of them on an individual basis. However, only one woman sits on the court in its current composition, together with a serious number of Bank officials and appointees. There are no representatives from consumer organisations, although some members come from the insurance sectors, and it is important to consider whether the diversity of the court can be improved. I have used the term diversity deliberately in this amendment, although not elsewhere in the Bill, because I want to get a sense of the attitude held by Ministers towards the diversity of public appointments in this instance.
Diversity has different meanings for different people. In this context, however, we want the term to be considered in as open and unconstrained way as possible. It does not simply concern the physical or personal characteristics that we know about, such as gender, ethnicity, sexual orientation, age or disability, but also diversity of skill, experience and background, which is particularly important to the composition of the court. The industrial and economic sectors of the economy are important, as are the regions and nations within the United Kingdom as they are represented. That issue will become increasingly important should developments of a constitutional nature that are currently in the air take their course, or head in the wrong direction, in the future.
I am grateful to the hon. Gentleman for clarifying what he means by diversity. We are talking about only nine people for the outside appointments. It is worth bearing in mind, however, that the court’s current construction includes Lady Susan Rice, who is managing director of Lloyds banking group in Scotland, and Brendan Barber of the Trades Union Congress. There is already a certain amount of diversity within the court. We are talking about a financial organisation that looks at the financial system, and while I welcome some diversity, with only nine outside members available, surely we could end up by having too much.
There are several points leading from that intervention. First, can we have too much diversity? It would be incorrect to say that particular segments of society should be represented in particular proportions, and I am not a believer in such things when it comes to public appointments of this sort. We should, however, expect the Chancellor to be satisfied that the appointments he makes have an eye to enhancing the diversity of the court, and ensure that a voice is given to parts of the economy that might not otherwise be heard.
We are seriously restructuring the Bank of England with extra new powers in an important way, and although diversity may not have been at the forefront of considerations in the past, perhaps now it should be. We are past the point of my early years in Parliament, when it was suggested during debates that only Labour Members believed in diversity while Conservative Members did not. I hope that we have now reached a broad consensus across modern political parties and recognise that, as far as possible, we need equal opportunities in such matters, at least in terms of gender representation.
As I have said, although I have no qualms with many of the skills of the current court, its membership contains a serious gender imbalance. Is that particularly difficult or dangerous? I am not sure, but in my experience, boards with a healthier level of diversity, particularly those with more women, bring different experiences and views to life. Enhancing the diversity of the board would also enhance the likelihood that it will capture issues that may not be seen due to the blind spots of members who come from single or narrow strata of society or the economy. That is my crucial point. If we end up with a court that predominantly comes from the south-east of England and a particular income decile, educational or experiential background and gender, we will not capture some of the issues that feature in a wider society. Ultimately, the Bank of England needs to be active and alert to all of the issues happening across all of the economy and all of society. That is a pretty simple, basic point.
That is a good point. Sometimes those of us who move an amendment have to be able to answer questions on enforceability. There are a number of provisions in the Bill that will put a duty on a Minister either to undertake a certain course or to have regard to a number of functions, many of which are not necessarily enforceable, but it is important that the principle is there.
When I was a Minister, I would receive recommendations from my officials on appointments to courts, magistrates or committees, or whatever it might be, and I had a set of criteria that those officials had to consider when making representations on the composition of a shortlist of potential appointees. It is important that officials have guidance in legislation on the necessary considerations when making recommendations to a Minister. The purpose of the amendment is to ensure that those people who advise Ministers on appointments are sent a signal of the sort of questions that need to be taken into consideration, which does matter. Such things can make a difference.
We know the history of groupthink at the banks, of course, much of it from the credit crunch and the global financial crisis. The banks thought that they were aware of a wide variety of issues, but partly because of their background and their blind spots on other issues, they did not raise concerns or alarms on certain activities as they were happening. The issue of groupthink has been raised by the Treasury Committee, the CBI and other esteemed economists, such as Willem Buiter.
The CBI has made its own recommendation that there must be a broad cross-sector level of expertise within the set-up of every regulatory body to ensure awareness and levels of understanding. In this case, the CBI particularly emphasises those segments of the economy that need to have a voice and perhaps some experience brought to bear.
Overall, experience should be reflected in the composition to ensure that we do our best by the UK economy. It is important that practical experience is also brought to bear. For instance, although the insurance sector is represented on the court, there are other committees on which the insurance sector is not properly represented, and we will come to those discussions at a later date. Enhancing the governance capabilities and allowing a diversity of voices to be heard is important.
Paragraph 102 of the Treasury Committee’s “Accountability of the Bank of England” report states:
“Groupthink will inevitably remain a potential risk in the Bank’s committees. Exclusive reliance on Parliament and the Chancellor to challenge the proceedings in the committees and ensure the external members of committees are able to challenge the executives of the Bank is inappropriate. The FPC and MPC have one non-voting Treasury representative in the committee meetings. We do not consider this to be a sufficient check or tool to allow the effective challenge of groupthink. The avoidance of groupthink is the responsibility of the Bank of England, and therefore should be monitored by the new Supervisory Board of the Bank.”
That is what inspired the amendment. We listened and tried to pick up on some of the signals sent to us by the Treasury Committee. Those are some of the important issues that need to be addressed today.
With those thoughts, it is clear that we need to make improvements, and I hope that the Government will consider the points I am making with this amendment.
It is a pleasure to serve under your chairmanship, Mr Leigh. In an earlier intervention, Mark Garnier touched on the question of regional diversity and made the point that there is a representative from Scotland, Lady Susan Rice, on the court, but my understanding is that she was not necessarily chosen specifically because she was a Scottish person; that was accidental. We need to look to the future of the Bank of England, as it is named, which is our UK bank.
I do not know how much awareness there is about this, but there has been a lot of discussion in Scotland about the potential role of the Bank of England in the event of Scottish independence. I do not want to suggest in any way that I favour Scottish independence, but there will be a referendum in due course, in which the Scottish people will speak one way or the other. There has been an interesting debate about the future currency of an independent Scotland and the country’s relationship to the Bank of England. The fashion some years ago was to suggest that in the event of independence, certain people would be willing or even enthusiastic to join the euro, which would solve the problem. The latest suggestion, however, seems to be to keep the pound, and therefore to be strongly linked to the Bank of England, which it might be better to rename appropriately. Other interesting suggestions have been made, some of which were bizarre. I am sure it must have been a joke, but I read a suggestion that Scotland might link itself with the Chinese currency. If that was not a joke—and it might not have been—perhaps the suggestion was made on the basis that the Chinese currency is particularly strong, and it might be advantageous to a small—dare I say struggling?—independent country to link itself to a strong currency.
We must think about the fact that the economies of different parts of the United Kingdom—I strongly hope that they will remain part of the United Kingdom—move at different speeds. Different levels of economic growth and unemployment in Scotland, Wales and Northern Ireland cause difficulties, and we need to think about how the different parts of the UK work together to ensure the kind of financial stability that the Bill is all about.
It is important to make special provision for the representation of the different parts of the United Kingdom, particularly those that are accepted as nations within the United Kingdom—as I have said, I hope that they will remain so—but have distinct problems and ways of operating. It would be useful, not only in planning for the future but in analysing the present, to make provision in the court of the Bank of England for specific recognition of such regional and national diversity. Perhaps I should have tabled an amendment to suggest that we rename the institution the Bank of the UK, because that might be more appropriate. We recognise that we have strength in unity and we have diversity, and that the two can work very well together.
I support the amendment, and it is important to stress that it makes it clear that appointments should be made by the Chancellor on the basis that the person appointed has knowledge and experience relevant to the court’s functions. Diversity is therefore not put first, above all else, but the amendment states that such an appointment
“would enhance the diversity of the composition of the Court” as an additional consideration. It is for the Chancellor to be satisfied on that point, and it is not to be tested by anybody else.
Diversity comes in many shapes and forms; gender, for example, is not particularly well-reflected in the court’s current composition, and there is the question of people’s sectoral insights and experience. Given the Bank of England’s key role on the economy, economic performance and its assessment, questions arise over whether a more rounded representation should be sought, rather than only from those with a fairly narrow experience that perhaps gives them highly-rated CVs as far as posts in the City are concerned, but not necessarily with regard to the country’s wider interests, or the broader economic interests for which the Bank, the court and the Governor are responsible.
Diversity should not be seen only in terms of gender or geography and, although geographical considerations are important, they should not determine everything. The amendment does not talk about a representative court, stating that there would have to be a governor for Northern Ireland, Scotland or Wales. It does not stipulate that in any way. God forbid that we create a West Lothian question for the court of the Bank of England; we would not want to do any such thing, but it is important that future Chancellors, when making appointments, consider whether people’s broad experiences and insights cover the full range of the UK economy and its increasingly international perspectives and interfaces.
I can think of many people—not necessarily from Northern Ireland or the island of Ireland—who, by virtue of their business experience in the financial sector or other parts of industry, would have a strong affinity with the economic realities in Northern Ireland, or a strong knowledge of the banking business as it operates on the island of Ireland. Northern Ireland is in a bit of a twilight zone as far as the banking sector is concerned; there are some UK banks and some Irish banks, and we operate with that odd interface. I am not saying that the Chancellor should always appoint someone with direct experience of that situation. However, it is important to know, from time to time, that the Chancellor can say that some of those he has appointed have an affinity with or awareness of affairs in different parts of the UK—that not only applies to distinct regions such as Northern Ireland; it could relate to parts of England—and that should be shown in the composition of the court.
Such appointments would not be too hard a test for the Chancellor. Many boards and panels are appointed at a national level with people who can cover a range of interests and insights, because of their experience. Not everybody who is appointed will have had only one experience or one job. We are talking about people who will have been practitioners, not just in the financial sector, but at the coalface of industry as well. Some of them will have spent time in academia. Some, from any or all of those perspectives, will have come into contact with particular regional economies and operated in particular sectors of the market, whether it be industry or the property or housing market or any of those other areas of economic life that will be affected by the thinking and work of the Bank of England.
With that broad acknowledgment of the sweep of diversity that we are talking about, it is not too much to ask for some consideration to be given to that, alongside the important point that the person has knowledge or experience that is likely to be relevant to the court’s functions. It is not an override and it is not about making the court representative by parcelling up appointments to different regions; it is about ensuring that the Chancellor, in exercising his appointment function, has regard to the full needs and realities of the entire economy of what is called the United Kingdom.
We have had a helpful debate and I will set out some of the constraints that affect the appointment process to the court of the Bank.
“The new responsibilities of the Bank will require its governing body to have an enhanced mix of skills.”
The Government agree with that conclusion, and committed in our response to take that point into consideration when making future appointments. In our publication, “Corporate governance in central government departments: Code of good practice 2011”—a title that all members of the Committee will have on their Amazon wish list—the Government clearly state that a board should have a balance of skills and experience appropriate to fulfilling its responsibilities. Moreover, it stipulates that the membership of the board should be balanced, diverse and manageable in size.
In principle then, I am broadly in agreement with the position taken by the hon. Member for Nottingham East in his interventions, but it is not necessary to make a new legislative provision for this. The appointment of non-executive directors to the court is fully regulated by the Office for the Commissioner of Public Appointments, which ensures a fair, transparent and competitive process. It is worth bearing it in mind that the code for the Office for the Commissioner of Public Appointments states:
“Appointment on merit is the overriding principle within the public appointments process.”
“Departments must seek to encourage a wide range of suitably qualified individuals from different backgrounds”.
Merit is the key consideration for the appointment of members to the court, but the Government should ensure that they seek a broader range of interest. For example, when an appointment was made last year to the court, the vacancy was advertised openly and the role profile sought people with substantial experience as: a board member or head of function in a major financial services organisation, and/or someone who had built up a successful enterprise of a significant size, and/or someone who had played a prominent role in a relevant area of public policy, the voluntary sector or a trade union.
The hon. Member for Nottingham East commented that he was happy with the suitability of the existing members of the court and then commented on their lack of diversity. All bar one of the non-executive directors were appointed under the previous Government and only one has been appointed since this Government came to power.
No doubt when we go through the process of appointments—of identifying people who could be appointed to the court—we will look at the various characteristics that they bring. I go back to the code of the Office for the Commissioner of Public Appointments: it is about merit. We established the point in the previous debate that we want the court to be able to hold people to account. The court is there to hold the policy makers of the Bank of England to account. We need people who are capable of doing that; that should be an important characteristic.
May I press the Minister briefly on the points related to Scotland raised by my hon. Friend the Member for Edinburgh East? As the Minister is aware, the passage of the Scotland Bill will give significant additional powers to the Scottish Parliament, the Scottish Government, particularly in terms of tax-raising and borrowing. That is important because it influences the overall economy. The people of Scotland would believe that is a positive case for being part of the UK. There would continue to be recognition of the need and importance of having Scottish representation on key boards in relation to the economy. I recognise what has been said about Susan Rice already occupying one of those positions, but I think people would want some reassurance that that representation would be taken into account in future.
The hon. Lady makes a helpful point. The previous Government legislated to reduce to nine the number of non-executive directors on the court. If we had a designated Scottish place, the hon. Member for Foyle would ask for a member to represent Northern Ireland. We do not have a Member here from a Welsh constituency—ah, the hon. Member for Islwyn, of course. He might argue for a Welsh member of the court. We are looking for a court that has the skills to do the job we are asking for. That is what we should aim for when it comes to appointments. We are looking for a court that is effective, that has depth and breadth of skill and experience. We can achieve that without the prescriptive legislative obligation in front of us.
I remind hon. Members that appointments to the court are not made by the Chancellor of the Exchequer. They are made by Her Majesty on the recommendation of the Prime Minister, who in turn relies on the recommendation of the Chancellor. I do not think it would be appropriate to impose a duty on Her Majesty to form a view of the candidate’s knowledge or experience, or the diversity of the court, before making the appointment. The hon. Member for Nottingham East might wish to make to that point to her when she comes to Parliament on 20 March.
It is important to get the right balance. The hon. Member for Edinburgh East talked about what would happen in an independent Scotland. I do not know what will happen in future. If Alex Salmond wants to run a campaign about keeping the pound, I suspect my hon. Friends may have some material used in previous elections where that was a centrepiece of our campaign. There are important issues to bear in mind but I believe what we have before us is a recognition from the Government of their importance.
My hon. Friend’s defence against the amendment is very cogent, but I wonder whether I might tempt him to express the wish that diversity—particularly with regard to the lack of gender diversity in the industry—might be improved through the future composition of organisations of this kind?
Indeed. I think my hon. Friend would strike common cause with our hon. Friend the Member for West Suffolk, who has written about that recently. It is important to have diversity, but the key point is to ensure that appointments are made on merit. We must do all we can to bring forward people with a diverse range of backgrounds, who wish to apply for these posts.
As I said, the last time a vacancy was advertised, we reached out to try to attract people from a wide range of backgrounds. It is commendable that the general secretary of the TUC is a member of the court. In fact, he is the longest-serving member of the court, having joined in 2003. That is testament to the breadth of the experience in the court. There are people with international backgrounds, insurers, people from the banking sector and people with broader business experience, such as Sir Roger Carr and Sir David Lees. There is a wide range of people in the court. That diversity is important, but I think that sufficient checks are in place to ensure that that is the case, while at the same time we ensure that people are appointed on merit. Therefore, the amendment is not necessary and I hope that the hon. Gentleman will seek the leave of the Committee to withdraw it.
This has been a useful debate. The intervention from the hon. Member for Solihull as well as the interventions from other hon. Members eventually pressed the Minister into expressing some hope or desire that more consideration could be given to the diversity of the court, although he is getting very good at swerving to avoid particular questions that I think are fairly straightforward. I asked him whether he was satisfied with the current composition of the court in terms of its diversity, and he went off on a tangent. On this occasion, I will forgive him for doing so, but we must reach a position where he can answer a question in a straightforward way. He made some important concessions, but they are of course informal concessions. This Minister is here today, but he may be gone tomorrow. We do not know what his duration of office will be. Perhaps he will be here for a very long time. Who knows where the hon. Member for West Suffolk is at the moment? Perhaps he is with the Prime Minister, discussing his career prospects. Undoubtedly that is something that he does frequently. I just hope that the Minister can hang on for the duration of the Committee at least, because it would be cruel and unusual punishment to give the hon. Member for West Suffolk this portfolio midway through Committee.
My point is simply this: informal concessions from particular Ministers at a particular time are not sufficient. The OCPA code, from which the Minister quoted, is an important one and is correct. As my hon. Friend the Member for Foyle said, diversity should not be the overriding issue. Merit must be the driving force in the appointments process. However, the amendment is drafted in such a way as to deliver that. It is a fairly balanced and reasonable approach that I would have thought was fairly unobjectionable. We need to ensure that there is stronger sectoral insight—the phrase used by my hon. Friend—but we also want to ensure that we have a court that is fit for purpose. Yes, the members must have the skills and breadth of experience necessary, but to a certain degree they should reflect more effectively the composition of society and the economy and those industries working within it.
The Committee will know that this issue comes up in relation to other sub-committees of the Bank later, particularly with reference to the FPC, but given the importance of the question that my hon. Friends have raised about Scotland, Wales, Northern Ireland and the important voice that they need to have in these institutions, it is important to press the amendment to a vote to test the Committee’s view on the issue.
We have touched on some very specific aspects of the drafting of clause 1. I hope that the Committee was not offended by my simple questions about the difference between the indefinite and definite article, but there were some pretty important questions to do with the court of the Bank of England, including whether it will have a proper supervisory function and whether the membership will have sufficient diversity as well as merit.
There are some more substantial questions in clause 1 generally that merit pause for thought, chief of which is the creation of the post of the deputy governor for the Prudential Regulation Authority, which is a new principal actor in policy making. Hector Sants, who will be the chief executive of the new body, will be deputy governor, and is already in post ahead of this legislation, which is a slight issue. He is doing his job well but, stepping away from the individuals, it is a shame that Parliament increasingly finds itself legislating for changes which are coming into place. As the Government have learned to their cost in the Health and Social Care Bill, making a whole set of structural and expensive constitutional changes before legislation receives Royal Assent can be fraught with difficulties. If this Bill receives Royal Assent, we will have the PRA and the Financial Conduct Agency, with a deputy governor for the PRA being put in place. We are where we are with the legislation, although much of change has already taken place.
Would the hon. Gentleman prefer Parliament to wait until this legislation had been cleared before putting in place these changes, given the howling economic and financial crisis that we are in at the moment?
I do not know whether Parliament should wait. Parliament needs to get on with the changes. This may be unavoidable, but if legislation and the process of scrutiny take place ex-post—after the changes have already taken place—that is not exactly desirable. Parliament should consider changes before they take place in reality. Ultimately, it would put undue pressure on Parliament if we consistently backed into a corner and said, “You can’t unwind this now because the changes have already been made in practice.” To be fair to the Minister, we have not yet heard the argument, “Please don’t reject this particular arrangement because we have already spent millions and millions creating a shadow PRA or a shadow FCA.” That has happened in other pieces of legislation under the previous Government. All I am saying is that it is slightly unfortunate that we find ourselves in an unavoidable situation of legislating for arrangements when in reality they have already taken place.
It is good to hear the hon. Gentleman say that the situation is unavoidable. The contrast, as he was hinting at, is the situation in 1997 when we did not have a financial crisis, yet a series of ill-thought-through changes were rushed through Parliament on, in many cases, an ex-post basis without adequate thought, and we see the result around us now.
I am not sure that the independence of the Bank of England can be described as ill-thought through or rushed. There are certain circumstances in which Executive decisions have to take place for market sensitivity reasons, and I am not decrying that. I am simply saying that we are debating something after the fact, and after it has taken place. Parliament is not necessarily on the crest of the wave when it comes to discussion of these issues; we are almost just mopping up in the wake of decisions that have already been taken. However, that is just a passing observation.
On Second Reading, I said that the Labour party agreed with the need to enhance systemic oversight of our financial services. A system of prudential regulation has strong cross-party consensus, at least on the principles, although we have not really seen what it will mean in reality when it bites and comes into force. That is true of the operation of prudential regulation and the suite of policy changes that will deliver an eagle-eye view across the economy. We wait to see quite how the new arrangement pans out over time, but nobody would dispute that the principle is correct. The system needed improvement, and we welcome this aspect of the reforms to the Bank of England.
The clause creates three deputy governors, as opposed to two. Paul Tucker is the deputy governor for financial stability, Charles Bean is the deputy governor for monetary policy and Hector Sants will be the deputy governor for prudential regulation. It is important for the Minister to explain how he sees those three deputy governors working together in practice. For example, I would like him to explain in a bit more detail the differences between the roles of the deputy governors for financial stability and for prudential regulation, and where the join is between their two sets of tasks and job descriptions. Is there the potential for duplication? Are there risks of overlap? In a sense, overlap is less of a problem than underlap, but I want to know how we delineate the tasks of those two deputy governors. That is perhaps set out in their job description or job specification. The job spec I have seen for the deputy governor for financial stability says he has responsibility for risk-assessment and risk-reduction work, but my layman’s definition of prudential regulation would lead me, perhaps incorrectly, to expect that risk-assessment and risk-reduction work also to be part, perhaps indirectly, of the role of the deputy governor for prudential regulation. I want to get a sense of how the roles of those two deputy governors in particular line up.
Will the Minister say a word about the ranking of the deputy governors? Under current legislation, we have the Governor and two deputy governors. Presumably, in the normal parlance, a deputy has the ability to step up and be a principal in the absence of the Governor. What is the situation when we have three deputy governors? Who will act in the absence of the Governor? I would be grateful if the Minister elaborated on that.
We have a peculiar situation, in that the court is appointed partly externally but also has powers of its own. There are also executive members as well as non-executive members on the court, although that is not particularly unusual in other walks of life. However, given that we are talking about the court potentially having some scrutiny role in relation to the Bank, how can we avoid conflicts of interest involving the three deputy governors and the Governor—there is quite a large number of executives on the court as it is—when it comes to the broader scrutiny function of the court as a whole?
The Minister mentioned that the oversight committee will be composed solely of non-executive members. I do not know whether he has had any inspiration since we debated the issue an hour or so ago, but I would still quite like to know what the distinction will be between those executive and non-executive functions, when it comes to scrutiny activities.
I think that there is an exclusion in relation to the deputy governor being part of the Monetary Policy Committee. Under subsection (2) the deputy governor for prudential regulation is not, I think I am right in saying, a member of the MPC. I should be grateful if the Minister would explain the decision-making logic of that; why financial stability is represented by a deputy governor, while the prudential regulation governor has no role there. To what extent would the prudential regulation deputy governor be able to make his views known, if he had thoughts or recommendations to make about monetary policy? Is that entirely outside his remit? Will those questions come before him solely at the court, or will he have any impact on questions despite not being a member of the MPC?
There is also an interesting change, which was made in the Bank of England Act 1998, by which certain functions of the court were delegated to a sub-committee, which I think is known as the NedCo—the non-executive committee. That may well be the body that the Minister is renaming “the oversight committee”. I am not sure whether that is the case. It seems on my reading of the 1998 Act that certain functions of the court are delegated to that—to the nine non-executive directors of the Bank.
Those delegated functions are to keep under review the Bank’s performance in relation to objectives and strategy, monitor the extent to which the objectives set in relation to the Bank’s financial management have been met, keep the internal financial controls under review, determine remuneration and pensions issues, and keep under review the procedures followed by the MPC—and, presumably, the FPC, if that is established.
I do not know to what extent the 1998 NedCo arrangements are being changed or amended. Perhaps I have misread the clause; they do not seem to have been affected in the arrangement. I just want to get a sense of how the Minister is continuing the court as it is, in its existing composition. The Bank proposes to create an oversight committee, but will that take on some of the functions of the NedCo or not, and how will those two bodies work if they are to continue together?
On the next amendment I will make some broader points about the clarity of the structure that we have tried to establish, and some of my remarks in this stand part debate will touch on that; but I shall deal first with the issue of the status of the current regulatory arrangements, and the extent to which they are front-running the Bill.
To make things clear, Hector Sants is still the chief executive of the FSA. He has not been appointed the chief executive of the Prudential Regulation Authority or a deputy governor, because those posts do not exist. At the moment he is overseeing the transition of the FSA to the new regime, assuming that the House and the other place pass the Bill.
None of the changes being made in preparation is irreversible; they could be undone, if Parliament disagrees. I am the first to say that Parliament should express its view, and not be bound by institutional changes being made at the moment. For further comfort, it has been made clear by both the Bank and the FSA that they have not sought to spend money on implementing the changes before Second Reading. They recognised that it was important to hear the will of the House.
Of course, as the Committee will know, the Bill received its Second Reading without a Division. That seems to provide a degree of support, although I think it was caveated to an extent by the speech of the shadow Chancellor. We are not pre-empting Parliament. We are putting it in place so that if Parliament approves the Bill and the Bill receives Royal Assent, it will be possible to implement the changes quickly and effectively. Given the state of the regulatory regime that we inherited and the lessons that need to be learned from the financial crisis, I think we would agree that it would be important, once the legislation is on the statute book, to implement the changes quickly and effectively. We would not want an undue lag in the process.
The hon. Member for Nottingham East asked about the deputy governors. We have sought to be clear about them throughout the process. One of the questions at the back of my mind and the Chancellor’s mind when looking at the system is the one posed by the Treasury Committee in one of its many reports on the financial crisis: who is in charge? We are therefore trying to create a system where there is clarity about roles and responsibilities, not just about the individual components of the regulatory structure, but about some of the players.
The three deputy governors have clear roles. The deputy governor for monetary policy is responsible, as his job title says on the tin, for the Bank’s monetary policy activities. The deputy governor for financial stability is responsible for its financial stability activities, including the work of the Financial Policy Committee and the regulation of important elements of the financial infrastructure. For example, the Banking Act 2009 gave the Bank responsibility for the regulation of payment systems, and that is a responsibility for the deputy governor for financial stability. The 2009 Act also set up the special resolution regime, and again, the deputy governor is responsible for that activity. The deputy governor for prudential regulation, which will be a new post to be created by this part of the Bill, will be responsible for, and will be the chief executive officer of, the PRA, and for the micro-prudential supervision of banks, insurers and systematically important investment firms.
I think that there is clarity of the responsibilities of each deputy governor. The deputy governor for financial stability is more responsible for systemic issues, whereas the deputy governor for prudential regulation will look at micro-prudential matters. There is a clear distinction between them.
Of course, there will be times when those responsibilities have to be discussed collectively, which is why there will be debates in court, in which everyone will be able to participate.
The Minister is helpfully setting out the different roles. I think it would be useful for the Committee to pause on the difference between micro-prudential and macro-prudential regulation. Many people may feel their eyelids begin to droop slightly when faced with such terms, but they know that it is important to get the distinction right. I want to test the Minister a little further on those two definitions.
As I see it, there are three layers in his particular structural proposition rather than two: conduct issues, in addition to micro-prudential and macro-prudential issues. Will the Minister explain the boundary between them a little more precisely? I think the matter will crop up time and time again.
The hon. Gentleman makes an important point. He reminds me to correct something that the shadow Chancellor seemed to say on Second Reading. The shadow Chancellor seemed to be working under the assumption—I do not know if the hon. Gentleman is working under the same misunderstanding—that conduct issues are within the Bank of England’s responsibility. The Financial Conduct Authority will be separate from the Bank of England; it will be independent and outside the Bank of England group. It will have its own board, its own chairman and its own chief executive. Conduct issues are clearly outside the Bank of England group. [ Interruption. ] The quizzical look on the hon. Gentleman’s face suggests that that is new information.
My facial expression relates to the wiring that clearly exists between the Bank of England and the rules, recommendations and policies that the Financial Conduct Authority will have to follow, which are very much directly or indirectly set by the Bank of England’s policy arrangements. Perhaps we can have that debate when we come to clause 3. Will the Minister return to the question of the boundary between micro and macro-prudential regulations? I know it is a tutorial point rather than a legislative one, but it is important that we get a proper understanding because it roots right back into the different roles of the two deputy governors. Can the Minister elaborate?
Let me go back to the FCA. We clearly need to discuss this more when we come to clause 3, but the FCA is independent of the Bank of England. There will be issues where the FPC as a macro-prudential body may need to highlight risks that affect systemic financial stability—it may be an issue that creates that risk—but we should be clear that the FCA is outside of the Bank family. It will have its own chairman and its own chief executive. The chief executive designate is Martin Wheatley, who is currently leading the conduct of business unit within the FSA. The FCA will have a separate existence.
Let us return to the macro and micro-prudential issue. It is not the talking point of the Jolly Farmer in Warsash, but it clearly needs to be a talking point here in Committee. The micro-prudential supervisory regulation is about the safety and soundness of individual firms. It is about the strength of the balance sheet of a bank or insurance company. The PRA will make decisions about the safety and soundness of individual institutions. The FPC’s task is to remedy a deficiency in the existing architecture, where no one has responsibility and power to look at systemic threats to financial stability. The FPC will be responsible for such things as looking at the boundary of regulation. For example, it will have responsibility for the exercise of macro-prudential tools. It will apply a policy measure that will affect a whole range of financial institutions, whereas the PRA will apply a policy measure that will affect individual institutions. The FPC looks at system-wide risks and responses to those risks, whereas the micro-prudential supervisor will look at firm-specific issues. I hope that that helps. I see that the hon. Member for Foyle is keen to chip in on those points.
Given what the Minister has just said about the FPC, does he believe that the FPC will be in a suitable position to make effective, targeted and timely judgments and interventions? As things stand, the regulatory authorities will not be equipped to form an accurate assessment of current and future risks to the financial system, or indeed individual financial institutions, because of the poor standard of reporting information that banks submit to regulators. In the Bill, no one is given clear responsibility to oversee the improvement of information standards for the Bank of England or for the financial services sector generally. The Joint Select Committee—
The responsibility of the FPC and the staff that support it is to look at the emerging threats to financial stability. They will get information from a wide range of sources, in part from existing regulators, but also from the experience and engagement that they have with the financial sector. They will play an important role in identifying risks. There is quite a lot of resource already deployed in identification of risk. There is always an issue about the quality of information that is available. We will talk in a later amendment about the leverage ratio as a macro-prudential tool and the disclosure of the Bank’s leverage ratio. We are always looking for ways to improve the quality of reporting and transparency, to gain a better understanding of risk, and if we think about what has happened during the past year in the context of the eurozone crisis, the increased information that is available to supervise that crisis, which is also available to the wider public and markets, about individual banks’ exposure to eurozone sovereign debt has helped to improve supervision and regulation, not only by the regulator but by the market. Reporting is an important issue, which I am sure we will come back to.
The hon. Member for Nottingham East raised the issue of who would be responsible in the absence of the Governor. The reality is that the Governor performs a range of roles: some are about monetary policy; some are about financial stability; and because the Governor is the chairman of the Prudential Regulation Authority, some will be about micro-prudential supervision and regulation. If the Governor is indisposed, it is very clear which deputy governor is responsible for which aspects of the Governor’s portfolio. That is vital.
The hon. Gentleman also asked why the deputy governor for prudential regulation is not on the Monetary Policy Committee. Again, it is about the clarity of responsibility. The deputy governor for prudential regulation is looking at the safety and soundness of individual institutions; that is his remit. There is cross-membership between the Financial Policy Committee and the MPC, which is important. And there is a facility in the Bill, which we will talk about later, for joint meetings between the two committees or for someone from one committee to be invited to observe the other committee. What is important is that there are clearly defined roles and responsibilities, and that applies not only to the overall structure but to the responsibilities of individuals.
The hon. Gentleman also talked about the composition of the court again. If we look at the nature of corporate boards in the UK, there are a mixture of executive directors and non-executive directors. That is a model that has been followed in the Bank of England. The court has executive directors, in other words the Governor and his deputies, and non-executive directors; I do not think there is anything particularly novel in that. The fact that there are four executive directors and nine non-executive directors is not unreasonable. Different boards in corporate structures will have a different ratio, but it is important that there is a majority of non-executive directors.
The hon. Gentleman talked about the issue of the non-executive directors committee of the Bank of England. There are minor modifications to the role of NedCo in the Bill and we will come to one of the hon. Gentleman’s amendments—an amendment to subsection (5) of clause 9B of the proposed new part 1A of the Bank of England Act 1998—in a later grouping of amendments. The oversight committee, which was referred to earlier, is different from NedCo. NedCo has particular statutory purposes, and the oversight committee is set up on a non-statutory basis and will determine its own composition. That deals with the issues raised by the hon. Gentleman.
However, let me reiterate the central point of many of the reforms that are set out in the Bill. It is about the clarity of purpose, the clarity of roles and the clarity of responsibilities, and by ensuring that there is a deputy governor for prudential regulation there will be very clear responsibility for the role that he undertakes, just as the deputy governor for monetary policy has clear responsibility for the role that he undertakes and the deputy governor for financial stability has a clearly distinct role. Those responsibilities are enshrined in clause 1 and when we discuss the FPC, the PRA and the Financial Conduct Authority, we will discuss how the different responsibilities of the different deputy governors are enshrined.
The Minister has just made the point that there are very clear, distinct roles for the three deputy governors. I want to return to the adequacy of the information available, the enhancement of information standards in the financial system, the information available to the regulators in particular, and the information and intelligence available to the Bank of England. The US Dodd-Frank Act anticipated those issues and created the Office of Financial Research. There is no equivalent provision in the Bill, and perhaps the Minister will assure us that one of the deputy governors will be responsible in practice for such oversight.
In its report, the Joint Committee on the draft Bill stated:
“The Bill should be amended to place a duty on the Bank of England (or its subsidiary the PRA) to develop information standards for the UK financial services industry and to report regularly on progress in improving these information standards in order to support financial stability.”
Even in that recommendation, which has not been reflected in the Government’s amendments to the Bill, there is a reference to the Prudential Regulation Authority, so perhaps it will be the deputy governor for prudential regulation who will pay particular regard to that need; but there is also a reference to supporting financial stability, so perhaps it will be the deputy governor for financial stability. It would help if the rules were clear, and if we knew which it would be. That is not indicated anywhere, and given the absence of provisions elsewhere in the Bill, it is relevant, as we are scrutinising clause 1, to ask the Minister to enlighten us in that regard. As things stand, the Financial Policy Committee, which we have not yet discussed, will not be in a position to make the necessary judgments or activate the necessary interventions.
May I draw the hon. Gentleman’s attention to page 13 of the Bill and new section 9V to the Bank of England Act 1998—“Directions requiring information or documents”? Subsection (2) gives the Bank the power to issue directions to the Financial Conduct Authority or the PRA requiring the regulators
“to provide the Bank with specified information or information of a specified description”.
That is the power for the FPC or the Bank to request information in pursuit of financial stability. I hope that the hon. Gentleman will be satisfied with that assurance.
Does that answer the question: which of the deputy governors will have particular responsibility in that regard? Or will they all have consubstantial, as opposed to distinct, responsibilities?
It is very clear. I suggest that the hon. Gentleman reads new section 9V, because the answer is there. To the extent that the FPC may require information from the PRA, the PRA is the responsibility of the deputy governor for prudential regulation. To the extent that the FPC asks for that, the FPC would be the responsibility of the deputy governor for financial stability.
I am reminded of an experience in a Catholic school in my town. A priest was visiting the school one day and explaining an aspect of Catholic doctrine, but had an unfortunate throat problem and did not speak distinctly. A young student asked him to repeat something, because he had not understood it, and he received the answer, “You’re not supposed to understand: it’s a mystery.” I am in a similar position. Will the Minister say whether one or all of the deputy governors have clear responsibility in a way that is equivalent to the clear mechanism that was created in US legislation under the Dodd-Frank Act? Do we have clear equivalence or not?
Mr Leigh, I suspect that you, the hon. Member for Foyle and I may be well equipped to discuss elements of Catholic theology, but I hope that the Bill is clearer than some aspects of Catholic theology. It is very clear that when the information is required from the PRA, the deputy governor for prudential regulation is required to provide it; he is responsible for that. The FPC, in asking for information, is the responsibility of the deputy governor for financial stability.
The hon. Gentleman alluded to the arrangements in the United States. We should remember that the landscape of financial regulation there is very different from that in the UK, in that it is much more fragmented. There are 50 insurance regulators, for example. There is the Office of the Comptroller of the Currency, which includes the Office of Thrift Supervision; and there is the Federal Reserve and the Securities and Exchange Commission—a whole plethora of bodies. There is greater need for an Office of Financial Research in the US than there is here. The Bill clearly sets out what the responsibilities are, where the information should come from, and who is responsible for providing that information.
Under the Bill, quite a soap cast is being built up, so I would welcome more clarity. The Minister has helpfully clarified which deputy governor is expected to give the information. Will the same deputy governor have responsibility, through the PRA, for enhancing information standards and for keeping track of developments in information technology that might feasibly require there to be new information standards?
In the financial crisis, people said that they did not know that they were caught behind the pillar, because information systems were not available or because information technology had not been kept up to speed and reporting standards had not been made to conform to the new possibilities of that information technology. Who will be responsible for ensuring that information and reporting systems are state of the art and up to speed, so that no one can say that the problem was due to the fact that they were working on an old dashboard, when much better information would have been available had it been planned into the system?
I am grateful to my hon. Friend for bringing his history and background to bear. His anecdotes are immensely relevant to the Committee’s consideration.
I do not wish in any way to denigrate the Minister’s attempt to describe the structures; they are so simple and clear, how could we not see what is in the Bill? He has talked about the independence of the FCA and the varying roles of the deputy governors, but the more the Minister speaks—and we are only on clause 1—the more I start to think that the Bill is an over-egged, messy, overladen structural spaghetti tangle of new regulatory responsibilities and arrangements.
To go back to the point made by my hon. Friend the Member for Foyle about Catholic doctrine, it is important that the Minister should not fall back on saying that we must all have faith that the arrangements will become clear and that everyone’s responsibilities will all naturally fall into place. How could my hon. Friend not have seen, on page 13 of the Bill, how clear these matters are? The Minister made the point that the FCA is entirely independent. Page 13 relates to information requirements between the FCA, the PRA and the Bank, and page 29 relates to the duties of the FCA and the PRA to co-ordinate their functions. The PRA will be part of the Bank, so there will be more wiring there. On page 6, proposed new section 9G of the 1998 Act provides for the FPC to direct the FCA to implement measures.
The FCA does not sound like an organisation that is massively independent. It may be so under the Minister’s definition of “independent”; perhaps it is independent in the same way that he as a Minister is independent of the Chancellor of the Exchequer. I mean this in the most affectionate way, but the Minister is, of course, a cipher for the views of the Chancellor who, after the election, decided to implement in government the messy arrangement of structures that he had dreamed up in opposition. The hon. Member for West Suffolk, who was chief of staff to the Chancellor, and who perhaps had more of a hand in drawing up the architecture of the structures than the Minister did, may be able to elaborate.
The idea was clearly to pour opprobrium on not only the previous Government but the Financial Services Authority, as the body responsible for all the ills of the global financial crisis. That is, of course, a bit of nonsense, as the FSA can hardly be held responsible for what happened in the United States, never mind most of the other corners of the developed world. There was a set of political decisions to restructure the FSA, and a justification for that restructuring was then bodged together in a post hoc way in the Bill.
We have a political Chancellor who has been criticised for spending too much time on political strategy and not enough on financial and economic policy, and that possibly lies at the root of the mess that we are in. The devil, however, is in the detail, and it seems to be shouting loudly when it comes to the structural anomalies that are beginning to emerge, even in clause 1.
I am sure that the hon. Gentleman has read the FSA’s report on the Royal Bank of Scotland and its supervision. One point that it makes concerns the confusion between conduct and prudential responsibilities. It refers to the fact that the FSA had a dual mandate, which was, in part, the cause of the problems it faced in properly supervising the financial sector. We are seeking to deal with that confusion in our reforms, and to answer the question about who is in charge. The clarity of the structure has much to commend it. If there is a failure, we now know who is responsible. Under the regime set up by the previous Government, everyone was allowed to duck responsibility.
Two wrongs do not make a right. I do not say that everything in the FSA was perfect, and there are important critiques to be made about prudential regulation. I am not sure, however, that the solution in front of us today will provide the route through. The Minister spoke earlier about the shadow Chancellor’s view on Second Reading. We were, and are, prepared to look in Committee at whether the Bill will become clear and can be improved, and will make a judgment on Report or Third Reading about whether to support it.
Even at this early stage, we are talking about the delineation of functions between deputy governors—macro-prudential, micro-prudential, and otherwise. The wiring is becoming unclear and there is danger in having opacity or ambiguity in regulatory reform. We should not, as the Minister would say, jump out of the frying pan into the fire.
My worry is that things are not as clear-cut as the Minister thinks. For example, we have already discovered that we will continue to have a NedCo to the court of the Bank of England, and an oversight committee as well. Presumably the NedCo will keep its role of reviewing the Bank’s performance in relation to its objectives and strategy, and the oversight committee will perform a similar role. That is a small part of the interstices of the structural constitution of the Bank of England, never mind any wider questions.
I am grateful to my hon. Friend the Member for Foyle for casting a light on the issue through his anecdote. Rather than us being made to feel that we are uninformed members of the Committee who ought to know better, and that things ought to be clear to us, the onus is on the Minister and the Government properly to explain the superstructure and the costs associated with it.
I may be prepared to let clause 1 stand for now, because we want to get to the meat of the Financial Policy Committee and other issues. However, this is an incredibly important moment in the Committee’s deliberations.