Clause 2 - The Bank’s financial stability objective

Financial Services Bill – in a Public Bill Committee at 12:30 pm on 21st February 2012.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 12:30 pm, 21st February 2012

I beg to move amendment 4, in clause 2, page 2, line 7, at end insert

‘(2A) The Bank shall also be under a duty to minimise, as far as possible, the use of public funds to support or rescue parts of the UK financial services industry.’.

The amendment would ensure that the Bank’s financial stability objective explicitly aims to reduce the likelihood of recourse to public funds in the event of a crisis. The Committee will not need to be reminded of the history and circumstances of the financial crisis—well, perhaps it will, because there has been a bit of revisionism by the Conservative party—and the impact that it had, requiring the UK taxpayer and the Treasury to step in and make sure that the cash machines still worked. There was the sad, unfortunate necessity of rescuing the banks, which led to the public finance situation that we are now saddled with, and that we see the Government making little progress in getting out of.

Photo of Jesse Norman Jesse Norman Conservative, Hereford and South Herefordshire 12:45 pm, 21st February 2012

Of course, it is within the hon. Gentleman’s formal rights to accuse the Government and Government Members of revisionism but, lest we forget the reason why the banks had to be taken over, there was no resolution regime under the previous Administration. Why was there no resolution regime? Because of the incompetence of the previous Government. That is the problem, if we are sticking to the facts of the matter, which the current situation is designed to resolve.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I did not want to go down the avenue of a partisan defence, but it clearly has to be done, notwithstanding that we are talking about amendment 4 and the need to minimise the use of public funds. The idea that the financial crisis can be wholly laid at the front door of the previous Government is specious nonsense and, if Government Members—I cannot remember if the hon. Gentleman was in the previous Parliament, because I was not—are legislating from that perspective, they are bound to make errors of judgment on the prescriptions to follow.

Photo of Edward Leigh Edward Leigh Chair, Public Accounts Commission, Chair, Public Accounts Commission

Order. We will have a long debate if we talk about the origins of the financial crisis, so keep it narrow.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Exactly. In a different context yesterday, I was trying to coin the concept of mutually assured summation in our debates. We must keep an eye on the time and make as much progress as we can.

As I said, it is important that we listen to the recommendations of the Treasury Committee and of the pre-legislative scrutiny Committee. On page 37 of the 21st report of the Treasury Committee, it recommended that:

Clause 2…should be amended so that the reference to the stability…takes account of the Chancellor’s proviso about not requiring the support of taxpayers’ money.”

The report of the pre-legislative scrutiny Committee stated, on page 20:

“The FPC’s objective should be amended to require it to ‘reduce the likelihood of recourse to public funds’.”

That was in respect of the FPC and we are discussing the Bank, but the point is broadly similar and an important principle on behalf of the taxpayers, who are suffering as a result of the banks’ failures. The banks are ultimately responsible for the mistakes—we can blame the policeman for sometimes failing to capture crime, but surely the criminal involved is culpable of the criminality. The parallel in a regulatory arrangement is  that we can blame regulators or Governments for not having the resources or for not spotting a particular problem at a particular time, but the culpability has to rest with the actors principally caught in the act. That is a truism that even the hon. Lady would accept.

Photo of Lorely Burt Lorely Burt Chair of the Liberal Democrat Parliamentary Party

I shall restrain myself from commenting on the fact that the whole problem arose because of the tripartite system, which the Bill is seeking to correct, in particular in this part. Does the hon. Gentleman not agree that built into the whole function is the minimisation of any further cost to the taxpayer after what happened under the jurisdiction of his previous Government?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I have no objection to improving regulatory structures—we are all present, spending our time, to try to do that. However, if the hon. Lady seriously thinks that the root cause of the problems of the global financial crisis was the design of the tripartite regulatory structures, I seriously disagree. If she and Ministers are coming from that point of view, that that is the causal problem at stake, they are completely deluded. I do not wish to diminish in any way anybody’s attempts to improve regulatory structures. As I have said, we need absolutely to learn lessons and enhance prudential regulatory capabilities. I am all for that. However, I disagree with the hon. Lady’s comments that it was a structural causation. I am afraid that I cannot go as far as that. That issue is really important because we will spend our consideration of the rest of these clauses ripping apart and refashioning all those structural arrangements. If she therefore thinks that everything will be fine and rosy and that is the solution, I am afraid she is sadly wrong.

Photo of Lorely Burt Lorely Burt Chair of the Liberal Democrat Parliamentary Party

I agree with the hon. Gentleman that the structures will not necessarily ensure that we never get into the same situation again. However, does he not agree that it is extremely unfortunate that, along with structures, if there are not strong regulating and monitoring organisations, which is what the Bill is intended to deal with, whatever structures are put in place will not necessarily be satisfactory?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I do not disagree. We are obviously not a million miles apart. The hon. Lady makes the point that the policy approach and those changes are more important than necessarily who the actors are. I am not defending the current structure of the FSA and so on, but I do not think that it would have been impossible to place duties on the FSA that would have allowed it to improve and enhance its ability to undertake prudential regulatory activities. It would not have been absolutely impossible to achieve that.

We must, in a sense, judge whether the structural changes in the proposals before us today are absolutely functional in delivering that improved prudential regulatory step forward, whether they are possibly a second order question or whether they will inhibit or possibly complicate the clear lines of prudential regulatory approaches that we might want to have in future. In terms of what we are trying to achieve, we might be on a similar wavelength but, in terms of some of the structural arrangements, I am beginning to think that we might be stepping backwards rather than forwards. However, I am prepared to hear the Minister defend and advocate his case.

I digress slightly because the amendment is ultimately supposed to be fairly uncontroversial, and we should be able to achieve a degree of cross-party support. We surely would all agree that the Bank should be under a duty to minimise as far as possible the use of public funds to support or rescue parts of the UK financial services industry. That is something the Chancellor has said. Indeed, there are various triggers later in the Bill that relate to the Bank informing the Chancellor if those circumstances begin to arise. However, having a duty on the Bank is important and reasonable.

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

Could the hon. Gentleman explain how he proposes minimal cost to the taxpayer will be defined? Is it in the narrow cost of any cash transfers? Does it include the wider impact on the economy? Over what period? Is it over the immediate period of the rescue, over the period of recovery or over a period when there are wider economic consequences? Unless he can answer those sorts of questions, having a legal duty to consider those things seems to write into law something that will only confuse when it would be better for such matters to be tackled through the judgment of those who are charged with financial stability.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Sometimes it is important to say in a Bill—on the tin—what we want an individual, an Act or an institution to do. If we say that we want the Bank of England to be under a duty to have in its mind the need to minimise the recourse to public funds, it is pretty straightforward stuff. When I was a Minister, from time to time, I would be given advice to rebut an amendment. “Resist” is usually the advice given in big, bold capital letters to the Minister—resist, resist, resist. Of course, advice is given on arguments that could be made. Sometimes an argument about drafting—the technical wording—and enforceability is deployed. I advise the hon. Gentleman that that is not the best tack when trying to rebut this amendment. Most people would understand the importance of minimising recourse to public funds; the hon. Gentleman should not be dancing on the head of a pin about a definition.

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk

The hon. Gentleman said that the proposal was simple. In that case, can he answer the question?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I just have. If the hon. Gentleman really wants an answer to the question about enforceability, the duty would not be justiciable—people would not be suing the Bank of England over it. However, the Bank would need to be mindful of its duty to minimise recourse to public funds when making decisions. That is not a particularly difficult concept to grasp, even for someone of the capabilities of the hon. Gentleman. [ Interruption. ] I did not think it was a cutting remark. He is clearly going places in the Government, almost as we speak.

It is important to ensure that we have a view to scenarios and policies that the Bank of England might be pursuing as a powerful new institution with a financial stability objective. At all times, it must keep in the back of its mind that it must be careful about taxpayers’ money. That is the intent behind our amendment. As far as I recall, we have still not had a full review of the  role that the Bank played in the most recent global financial crisis. I want to discuss that at a later date. One of the interesting things that must come out is the extent to which the Bank has regard to taxpayers’ money. Ultimately, all our constituents are suffering as a result of Bank mismanagement and the risks that it took, so it is not—[Interruption.] The Government Whip, the hon. Member for Chelsea and Fulham, says that that is not so, but surely he is not trying to say that the banks are not responsible for this.

Photo of Jesse Norman Jesse Norman Conservative, Hereford and South Herefordshire

Two issues arise from the amendment: one is whether the proposed duty on the Bank to minimise cost to taxpayers would be justiciable if it were written into legislation. Someone might reasonably say, “Actually, that is a matter for court.” The second point—

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Thank you, Mr Leigh. The jusiciability of duties on Ministers, Secretaries of State and banks is important, however. The Committee may have realised that I am not a lawyer, which is a rare thing in Parliament these days, when most people have one law degree or other. I do not have such an educational background, so I wait to hear the Minister’s rebuttal of my amendment and whether he thinks that there is a problem.

Given that elsewhere in the Bill duties fall on Ministers and the Bank in other contexts, we probably do not have to flick far through it to find similar provisions.  That is not the core issue, especially as the Treasury Committee asked for this change, and the pre-legislative scrutiny Committee asked for it to be included in the Bill. I understand that the Government responded to the Treasury Committee and the pre-legislative scrutiny Committee in January, saying that they agreed generally. However, they said:

“The FPC will not have a role in crisis management and will therefore not be in decisions made when there is a material risk to public funds”.

They said that the proposed

“‘public funds’ objective for the FPC would therefore not be appropriate.”

Of course, those comments relate to the FPC, which we shall discuss later, but that response seems slightly odd. It is important to take the public funds issue into account. I agree with the Treasury Committee’s view that the best place to include this change is in the Bank’s financial stability objective.

The Bank’s decisions might have an impact not only on rescue plans for financial institutions, but on the Financial Services Compensation Scheme, on the national loans fund and—heaven knows—even on the International Monetary Fund in certain circumstances. Public funds issues crop up from time to time, so it is important for us to hear the logic behind the Minister’s views on the amendment.

The Chairman adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Four o’clock.