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Clause 1 - Deputy Governors

Part of Financial Services Bill – in a Public Bill Committee at 10:45 am on 21st February 2012.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 10:45 am, 21st February 2012

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”,

which should

“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.

At first sight, amendment 2 might not appear fundamental. Clause 1 has two subsections. Subsection (1) provides that

“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.