Clause 3 - Financial stability strategy and Financial Policy Committee

Financial Services Bill – in a Public Bill Committee at 5:30 pm on 21st February 2012.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 5:30 pm, 21st February 2012

I beg to move amendment 37, in clause 3, page 2, line 21, after ‘strategy’, insert

‘including the proposed range of macro-prudential measures available to the Bank.’.

Photo of George Howarth George Howarth Labour, Knowsley

With this it will be convenient to discuss amendment 38, in clause 3, page 2, line 26, after ‘Treasury’, insert ‘(c) the public’.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

We have come on quite quickly to clause 3, and I am grateful to the Committee for ensuring that we have made such good progress. The amendments are slightly different, in that amendment 38 relates to public consultation, while amendment 37 relates to the court of the Bank, its role in determining the financial stability strategy of the Bank and the proposed range of macro-prudential measures available to it. That is a pretty important issue, and I hope to probe the Government on whether the court can have a role in determining that strategy.

The Institute of Chartered Accountants in England and Wales has suggested that the Bill requires several changes. One of them is the need for an approach that not only seeks to ensure that the court of directors of the Bank has responsibility for determining the strategy but, in accepting that responsibility, provides the opportunity for wider public consultation on the decisions and recommendations of the Bank. That is why it makes sense for the amendments to be grouped.

If the court determines the Bank’s financial stability strategy, it should also be able to confirm the suite of systemic oversight and intervention powers that have been recommended to the Treasury. Proposed new section 9A of the 1998 Act states what the court of directors must determine and whom it should consult in doing so, which is important because, currently, the consultation process is simply with the FPC of the Bank—with itself, essentially—and Her Majesty’s Treasury. Amendment 38 would ensure that that consultation process was widened out to the public at large. Of course, in reality that will mean consultation with expert organisations, and potentially with Parliament and other representative bodies.

Photo of Mark Garnier Mark Garnier Conservative, Wyre Forest

For most of the day, the hon. Gentleman has been extolling the virtues of the Treasury Committee, and yet strangely in this one particular amendment he leaves out mention of the Committee. I would be very grateful if he could explain why the love-in has now finished with amendment 38.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I would be grateful if the hon. Gentleman would give us the view of the Treasury Committee on amendment 38, if it has one. I am more than happy to see if I can dig up a quote from the hon. Gentleman himself to pray in aid in support of the amendment, if he so wishes. I am sure that he has said at some point in the past that the public should perhaps have some say in some of these pretty big measures, and if that is indeed the case then I say “Hear, hear.” I am all in support of his wisdom on these particular issues.

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

I was just wondering what assessment the hon. Gentleman has made about the level of delay that might be incurred when we are trying to make changes and there is a public consultation, which I am sure he is aware can be a lengthy process. Has he weighed up the swings and roundabouts on this issue to establish just how much of a deleterious effect subjecting everything to a public consultation will have, as opposed to not making this change at all?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I thought that the Liberal Democrats were in favour of consulting with the public, but obviously I was wrong. It is not necessarily burdensome to ask the public for their views on pretty serious and large quasi-legislative changes, which is essentially the direction we are heading in by vesting so many powers in the Bank; of course, ultimately the Treasury and Parliament will rubber-stamp those powers, but we are heading in that direction.

There are provisions in the Bill for emergency circumstances, and everyone would entirely accept that in crisis scenarios, lengthy consultation processes need to be truncated or undertaken ex post. I have no problem  with that in those scenarios, if that was the point that the hon. Member for Solihull was getting at. However, it is not impossible to ensure that there is a bit more transparency in the new, significant, rule-recommending set of powers that we are vesting in the Bank of England. That is why it is important to make this particular change.

Ensuring that the macro-prudential measures are part of the issues determined by the court will in turn ensure that they can be consulted on more thoroughly as a matter of course, rather than just being considered by the Financial Policy Committee or the Treasury. There are a number of points that I want the Minister to address in respect of amendments 37 and 38. In particular, the Committee may be aware that in December the Bank of England published a discussion paper jointly with the Financial Services Authority on instruments of macro-prudential policy. I do not know whether anyone got that paper for their families for Christmas, or if it was in their own stockings, but it is a very interesting document, because it talks about the initial suite of macro-prudential tools that the Bank is likely to recommend under the powers that we are considering.

It is a bit of a pity that having the Bill before us today does not give us the opportunity to scrutinise the actual macro-prudential powers that the Bank and the FPC want. We have general headings—suggestions as to the first tranche of powers that they may want—but, again, we are legislating to give all the powers to the Bank; at a later date, the Bank will make its decisions, and say to the Treasury, “This is the set of macro-prudential powers we want.” We will then hear what those powers will be.

I want to ask the Minister for his view on that first tranche of macro-prudential tools, because this is the first opportunity we have had to discuss those tools properly. The Bank thinks that balance sheet tools are necessary, including

“maximum leverage ratios, countercyclical capital and liquidity buffers, time-varying provisioning practices, and distribution restrictions.”

They are not exactly described in plain English, but they are pretty comprehensive powers none the less. I want a sense of how the Minister thinks that set of tools would impact practically on businesses and consumers.

The Bank also wants sectoral capital requirements, or variable risk weights. At certain points in the cycle, it wants to be able to

“apply different risk weights to new and old loans to influence the flow of new lending relative to its stock.”

A firm that has depended on a particular supply of credit in any given circumstance might find that its ability to access that credit is diminished significantly as a result of that macro-prudential tool.

The Bank has asked for tools that influence the terms and conditions of loans. Has the Minister held any further discussions with the Bank about precisely what loan terms and conditions it might want to vary? It might say to a company, “Your term loan is for 10 years, but a macro-prudential tool could be used to truncate the term, so that the loan must be paid in eight years.” Conversely, repayments might no longer need to be made in the original time frame if the term were extended  to 12 or 15 years. The Bank is requesting a significant set of powers. Has the Treasury had any further dialogue on those?

The Bank wants to be able to restrict the quantity of lending at high loan-to-value ratios. We have heard about mortgage customers and others who found that LTV ratios changed following the financial crisis and varied subsequently. Many of our constituents who are struggling to gain mortgage or even re-mortgage finance may not realise that the first set of macro-prudential tools will come into force because of a decision made by the Bank of England, which was rubber-stamped by the Treasury and, ultimately, by Parliament. Despite the lexicon and jargon that surrounds this suite of macro-prudential tools, we need to appreciate that the changes in the Bill are very real and important.

Similarly, the Bank wants powers to restrict loan-to-income ratios, so an individual’s income might restrict their ability to take out loans secured on property or unsecured lending. Such powers might be a perfectly good thing, but we should assess exactly what the Bank is asking for. At the very least, will the Minister tell us when the order for the first set of macro-prudential measures will be introduced?

The Bank wants powers

“to impose and vary minimum margining requirements or haircuts on secured financing and derivative transactions.”

Although those are complicated matters that are of more concern to experts and practitioners in the market, we must shine a light on what those powers will be. The Bank requests a set of market structure tools, which include

“obligations to conduct financial trading on organised trading platforms and…to clear trades through central counterparties.”

It wants to be able to limit

“uncertainty about specific exposures or interconnections”,

which is a broad phrase. The Bank is requesting a pretty broad-ranging power. I do not know whether it has something particular in mind in the short term, or whether it will simply take a wide-ranging regulatory power that the Treasury will approve and the Bank will be able to apply firm by firm, or sector by sector. I would like a sense of where we are going with those powers.

The Bank also says that direction must

“be confined to areas where the United Kingdom has sufficient national discretion; the key hurdle here being that UK regulatory powers in some areas may be constrained by current and forthcoming EU legislation”.

That is a separate issue that I would like the Minister to explain for the Committee. How can he square the new macro-prudential rule-making intentions of the Financial Policy Committee and the Treasury with current and forthcoming EU legislation? To what extent will capital requirements directive 4 curtail the Bank of England’s ability to act, particularly in its first suite of macro-prudential rule-making requests?

The Bank has set itself four tests for what it regards as an effective macro-prudential tool. First, it believes that a macro-prudential tool needs to be effective, which means it should have speed and durability. Secondly, it needs to be efficient while avoiding adverse effects; that also seems sensible. Thirdly, it needs to be transparent about the nature and use of the particular tool. Lastly,  it needs adequate coverage but also independence, which basically means that the coverage must be broad enough to tackle the main risks at hand.

Can the Minister confirm that he agrees with the four principles set out by the Bank? I would like a sense that the Treasury is generally on board with the Bank’s direction of travel when it comes to the principles applying to the macro-prudential tools that the Bank seeks. I have specific questions about the first tranche of macro-prudential tools, but I would be grateful if he addressed some of these points as well.

On amendment 38, it should not be impossible to broaden consultation with the public. The Institute of Chartered Accountants in England and Wales says that the current structure gives no opportunity for consultation on the public interest, or with financial and business stakeholders. Although it should be possible to consult the public on setting the financial strategy, which should include the range of macro-prudential measures that the Bank expects to have available, it might not be practical or in the interests of financial stability to consult the public in advance of emergency situations, as I said to the hon. Member for Solihull. Where emergency powers are needed, the Institute of Chartered Accountants says that they should be subject to scrutiny after the fact by the Treasury Committee.

I think that the public should be consulted on the draft financial stability strategy. Broader perspectives always help, or should help, to improve and enhance the authorship and conclusion of a particular strategy. The public interest is clear when it comes to ensuring that the public are taken into account in the set of policies agreed. Excluding the public would not be fair or necessary.

These days, public consultation exercises are cheap, easy and affordable, and need not be particularly onerous. The internet is a newfangled invention of which I am sure the Minister is aware. If he wishes to undertake a public consultation through the miracles of the interweb, I am happy. It is also important to consult the public because that much transparency is necessary given the significant ramifications of the macro-prudential tools for the public, the economy and businesses downstream. That is the rationale behind our amendments, and I hope that the Minister will accept them.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury 5:45 pm, 21st February 2012

I understand and to some extent share the motivation behind the amendments tabled by the hon. Member for Nottingham East. The scope of the macro-prudential toolkit available to the Financial Policy Committee has the potential to impact on every business and everybody in the United Kingdom—it is an important set of tools. It is vital that the Government seek a wide range of views on the content of the toolkit and that its content is subject to approval by this House and the other place, but we do not need the amendments to deliver that. I want to set out the process that will apply in determining the content of the FPC’s toolkit.

The Government recognise that macro-prudential tools are, relatively speaking, less well understood than monetary policy instruments, for which the academic thinking and practical evidence are well established. That is why we have asked the interim FPC to undertake analysis of potential macro-prudential measures. The Bank published a discussion paper in December seeking comments on its analysis, and the hon. Gentleman has highlighted  some of its thoughts. It was a discussion paper—no decisions have been taken about what tools the Bank should have. Those decisions will be taken by this House and in the other place. The Bank received more than 30 responses to that paper and we expect to receive the committee’s recommendations after its next meeting on 16 March.

The Government will take a transparent approach on deciding the FPC’s initial toolkit. We have committed to a public consultation during the passage of the Bill on the statutory instrument that will establish the FPC’s toolkit of macro-prudential measures. We believe that industry, Parliament and consumer groups have an important role to play in shaping the Government’s proposals. Once the Bill has received Royal Assent, the Government will lay the statutory instrument before Parliament, where it will be subject to affirmative procedure. The order must be approved by a resolution of each House before it can be made. When the FPC is established in statute, the Bill requires it to produce and maintain statements of policy. For each tool, that will be set out in general terms, explaining how the FPC plans to employ the tool and the circumstances in which it might be used.

The hon. Gentleman made some specific points. I will not go into the merits of each tool—there is a time and place for that. He referred to the principles that the Bank set out in its paper. The four principles are broadly sensible. When we consider the FPC’s recommendations we will take those criteria into account, but we will also include our own criteria. I also emphasise, in addition to the four principles raised by the hon. Gentleman, the socio-economic impact of these tools. They can have a significant impact on society as well as the economy, and it is right to consider that impact.

On EU legislation, the hon. Gentleman referred correctly to CRD IV. He should recognise that the debate about macro-prudential tools is not taking place in a vacuum; there is an international debate. Clearly, the European systemic risk board is interested in this too. We are working to ensure, through CRD IV, that there is sufficient discretion to enable the FPC to use the tools that are set out.

I hope that the hon. Gentleman is reassured that we take public consultations seriously. There will be a proper consultation, not just as a consequence of the publication of the documents by the Bank—the December document and the one in March—but as we go through the formal process of consultation, as part of the introduction of statutory instruments that will give the FPC those tools.

On amendment 38, the hon. Gentleman suggests that the court should consult the public before determining the Bank’s financial stability strategy. I am not by nature prescriptive about such things. There is some value in the Bank consulting on the financial stability strategy, but I do not think it would be proper to prescribe in the Bill that the court must do that. It would be more proportionate to leave it up to the court to decide whether and when public consultation is required, and whether it would be valuable. The court might want to produce the Bank’s strategy first, then allow people to comment on it.

Public engagement is important. One of the important tools that the FPC has is disclosure and transparency in its views and operations. It will need to think what the appropriate point is for public consultation. As I said initially in response to the hon. Gentleman, I share the sentiment behind them. It is important that the public have their say, particularly on the macro-prudential tools. I just do not feel it necessary to put that in the Bill. I urge the hon. Gentleman to withdraw the amendment, in recognition of the fact that the Government share his view that consultation is appropriate.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 6:00 pm, 21st February 2012

It has been helpful to hear the Minister’s view. I am grateful that he says there is some value in public consultation on the Bank strategy. Ultimately it will be for the Bank to decide. I do not think there would be any harm in asking the Bank to open that process on what is one of the most important functions it will have in the financial stability strategy. It would be perfectly reasonable to do that. As we have other provisions in the Bill on consultation arrangements that can affect the public, I do not see why it would not be possible to include that particular provision. Perhaps the Minister will take a look at that another time.

In respect of the role of the court in determining the strategy in respect of the proposed range of macro-prudential measures, it is important to ensure that the court is involved in the process, especially as those are significant questions. For example, two things that jumped out at me in the paper from the Bank on the proposed potential instruments of macro-prudential policy were those two areas of rule-making powers that it will want to have: varying the terms and conditions of a loan—a pretty big and wide-ranging ask—and limiting specific or excessive exposures, presumably of financial services firms to other firms internationally, and to other sectors in different ways.

It is important to get a sense of how significant an intervention that could be. It may be necessary to have those measures, but I do not feel there has been a proper appreciation of the enormous size of the requests from the Bank when it comes to those pretty basic issues of a transaction: a business requiring a loan, entering a contract and potentially having ex-post changes imposed on those contractual terms by a third party. It may be necessary to do that for financial stability reasons, but it is a pretty big change. I do not think my constituents and those of other hon. Members have appreciated that.

As for public consultation, I wonder whether the Minister might say to the Bank that, if it is to engage in public consultation—albeit not of a statutory nature—a plainer English version of what it is asking would not go amiss. I am not surprised to hear that it received only 30 responses to its discussion document, given how impenetrable the text is. As I was going through those aspects of the Bank’s recommendations, I sensed that perhaps for a split second I might have lost the Committee, which might not have been with me 100% in attending to the significance of the measures I was talking about, perhaps because of how they are described in the consultation paper. I counsel the Minister to suggest to the Bank that a test from the Plain English Campaign might not go awry, given that when ordinary businesses throughout the country see what is around the corner they may have something to say about the new suite of quasi-legislative powers that are being taken.

It is useful that the Minister said that he saw virtue in public consultation, and I am sure that the Bank will listen to that. I think he said that the court will also need to have insight into, and a role in, the macro-prudential policy-making arrangements. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I beg to move amendment 6, in clause 3, page 3, line 7, leave out ‘sub-committee of the court of directors’ and insert ‘committee’.

Photo of George Howarth George Howarth Labour, Knowsley

With this it will be convenient to discuss amendment 7, in clause 3, page 3, line 31, leave out ‘sub-committee’ and insert ‘committee’.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

We are making rapid progress, Mr Howarth. Amendment 6 refers to the Financial Policy Committee, which is a pretty big section of new part 1A of the 1998 Act. The first line of new section 9B to the 1998 Act states:

“There is to be a sub-committee of the court of directors of the Bank (the “Financial Policy Committee”) consisting of…the Governor” and deputy governors, and so on. The amendment would simply replace “sub-committee” with “committee”. Amendment 7 does the same in line 31. New section 9B(5) states that the committee’s

“function under subsection (4) is to stand delegated to the sub-committee constituted by section 3.”

Hon. Members may think that I am raising a semantic point, but I assure them that I am not. The point is important, and was highlighted by the Treasury Committee and the pre-legislative scrutiny Committee. The Treasury Committee stated in its 21st report:

“There is some concern that the position of the FPC within the Bank may appear anomalous with regard to the MPC”— the Monetary Policy Committee. The pre-legislative scrutiny Committee concluded:

“The new Financial Policy Committee should become a committee of the Bank”,

and it recommended a

“new Supervisory Board, with equal status”

To the Monetary Policy Committee. That was on page 1 of its executive summary, so it was a signal change that it wanted to make to the clause.

It is perfectly reasonable to ask the Government why they seem to believe that there should be unequal status between the Financial Policy Committee and the Monetary Policy Committee. There are strong arguments for saying that equal status should be given to the new FPC. Indeed, the “Oxford English Dictionary” defines a sub-committee as a “secondary committee”. That definition is pretty short, succinct and unambiguous. I am not sure that the Financial Policy Committee should be a secondary committee. Given the importance of the issues that we have been discussing, I think the FPC should be a committee in its own right, and should be given the same status as the Monetary Policy Committee, so that it is not regarded as being lower in the hierarchy or subordinate in some other way to the MPC. It is important that the Committee recognise that under the Bill as it stands the FPC will be a committee of the court of directors of the Bank, whereas the MPC will be a committee of the Bank itself.

In written evidence to the Joint Committee, Barclays bank said:

“The FPC should, like the MPC, be a committee of the Bank rather than a committee of the Court of Directors of the Bank of England (the “Court”). At the very least, there should be shared membership of the independent non-executive members between the Court and the FPC. Otherwise, the FPC is only accountable to the Court through the shared executive directors of the Bank.”

There are good reasons to think that the Government have been dismissive of the concerns raised by the pre-legislative scrutiny Committee and the Treasury Committee. The Government stated, in response to the Joint Committee, that they noted not only the observations of the two Committees, but the response of the court itself on the matter. Therefore, having had the Treasury Committee make that particular recommendation, the Treasury lined the proposals up against the court’s own view. Whereas the court wanted to retain the FPC as a sub-committee, some thought that, as this is an important new facet of financial regulation—the FPC is a major body with significant new powers—committee status would be necessary, and I think that is a perfectly reasonable thing to ask.

The Joint Committee did not make a proposal in the absence of facts or balance. It considered the Bank’s arguments when it made the recommendation, and its pre-legislative scrutiny report explicitly states:

“We do not find these arguments convincing. Whether it is a committee of the Bank or the Court the draft Bill requires the FPC to take account of the strategy laid down by the Court. The governance arrangements in the draft Bill—where the FPC is a committee of the Court and the MPC is a committee of the Bank—risk giving the impression that one body is more important than the other. The FPC should be made a committee of the Bank.”

The Bank’s senior management have made their arguments, and parliamentarians, on the other hand, through the pre-legislative scrutiny Committee and the Treasury Committee, have made their views clear. We are fortunate that some Committee members serve on the Treasury Committee and were on the pre-legislative scrutiny Committee, and I would be interested to hear their views. [Interruption.] Indeed, there are other members of the Treasury Committee, but it would be particularly useful to hear the views of Members who were on the Committees at the time the reports were agreed. I am sure they have opinions, and it would help the Committee no end to hear them.

The Minister needs to take into account representations from the Treasury Committee and the pre-legislative scrutiny Committee, and to take them far more seriously. I find them compelling, and I would be grateful if the Minister explained in detail the Government’s position.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

As the hon. Gentleman indicated, questions have been raised about the FPC being a sub-committee of the court, in contrast with the MPC’s role as a committee of the Bank. However, I do not share his concerns, or those raised by the Treasury and pre-legislative scrutiny Committees. We have sought to follow the model of the MPC, where it is possible and appropriate to do so. A later amendment tabled by the hon. Gentleman proposes to change the model and make relevant aspects of the FPC and MPC slightly different. We are not  being precious about exact replication of the MPC in the FPC’s establishment, and we will look at what works, and at changing it where appropriate.

We need to bear in mind the fact that the court overall wants to hold the Bank as an entity to account on financial stability. As we have indicated elsewhere, there are other aspects of the Bank’s work that do not fall within the FPC’s work but are related to financial stability. I talked earlier about the special resolution regime and the Bank’s role in supervising systemically important payments infrastructure. Because it is outside the remit of the FPC, if we want the court to hold the Bank to account on such matters, it is important that the court has overview of this, which requires the FPC to be a sub-committee of the court, not a committee of the Bank. Unless the FPC is a sub-committee of the court, the court would not have oversight of its activities and would have a slightly dislocated overview of financial stability activities. The FPC as a committee of the court, rather than a committee of the Bank, facilitates the court’s strategic oversight across the whole range of the Bank’s financial stability activities. That goes to the trend we are keen to see of enhancing the court’s role in holding the Bank to account. That was in the Treasury Committee’s report, which we have already discussed.

I understand the reason for the hon. Gentleman’s amendment, but I think it would remove an important aspect of the Bank’s financial stability work from the oversight of the court. It is therefore an ill-advised change. The hon. Gentleman did not spend as much time as I thought he might on amendment 7 to subsection (5) of proposed new section 9B, but the committee constituted by section 3 of the 1998 Act is not the FPC, but NedCo. For that reason, although I am always loth to use the argument that an amendment is technically defective, I am afraid that in this case the amendment is technically defective.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 6:15 pm, 21st February 2012

This is a useful opportunity to raise an important point from the ashes. Could the Minister explain the difference between NedCo and the oversight committee? We have raised the point in previous discussions, and, therefore, if amendment 7 addresses NedCo, he knows my anxiety, which I voiced earlier, that NedCo—those nine non-executive directors of the court—will have some responsibility for overseeing the performance of the Bank in a similar way, as he said, to the oversight committee. So could he explain how those two will not be duplicates?

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

The point to recognise is that in any sort of corporate governance structure there are a range of committees with different tasks. In a plc, there will be a nominations committee, a remuneration committee, a risk committee and an audit committee, which does not necessarily imply some sort of direct hierarchy of committees. So there can be committees constituted for different roles. I suggest to the hon. Gentleman that it is not quite as neat and tidy as he would like. The oversight committee is a subset of NedCo, perhaps entirely comprised of non-executive directors, but that does not mean to say that it is a sub-committee of NedCo. The two committees will perform different functions, as audit committees perform different functions from remuneration committees. I am not going to be doctrinaire, but there  will be different structures for different purposes, which is not unreasonable. I hope I have resolved the situation, although I suspect I have not.

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

I am grateful to the Minister for his comments on the structure of the Bank and the committees and sub-committees. On the Treasury Committee, our concern was that the sub-committee structure would not give the proper authority to the Financial Policy Committee, but from what he is saying now I understand that the point is to strengthen the responsibilities and authority of the court. Am I right in thinking that?

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury

I am keen to strengthen the oversight of the court’s role in this. There is a danger that we get theological about sub-committees of the court and committees of the Bank. We need to focus principally on what we think will work in terms of scrutiny, and not get overly fussed about the nomenclature. We might even come back to visit some of that.

On NedCo oversight, the court has proposed that the nominations committee of the Bank should decide on the composition of the oversight committee. It could be the case that the oversight committee consists of all nine NEDs, in which case it would be the same membership as NedCo. We need to reflect for a moment. One of the strands that we talk about from time to time is cross-membership. There is one member of the FPC, Michael Cohrs, who is also on the court. Would we want the oversight committee to include Michael Cohrs scrutinising himself? That is why I think we should not get too bound up on membership. It is important that it is composed of non-executive directors. We like the idea of some degree of overlap, but we should not be too prescriptive about the composition, because there may be situations in which the composition is not necessarily appropriate.

On the two amendments, let us focus on what we think will work in terms of accountability. Let us think about how the court holds the Bank to account on the full range of its financial stability objectives, including the FPC and other matters, and how it is checking carefully the membership of NedCo and the oversight committee. The structures will take time to work through to get their effectiveness right. There is a clear commitment by the Government, the Bank and the court to ensure that the structures work properly. That is what we all want to see achieved.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am grateful to the Minister for pointing out the defective nature of amendment 7. He has shone an unintended spotlight yet again on the rather bizarre set of internal committees and sub-committees existing within the Bank of England. The Minister asks us not to be doctrinaire or theological, and not to get too bound up or prescriptive about the compositions. That is an important point. I will try to remember that and quote it back to him at a future date.

If the Bank responds to the pressure that the court should become a proper supervisory board, and its response is to create a new oversight committee, whose role is to oversee the performance and activities of the Bank as a whole, including the Financial Policy Committee, it is reasonable to ask why we also then have a NedCo—a non-executive director committee. According to the Bank’s website, its functions include

“keeping under review the Bank’s performance in relation to its objectives and strategy for the time being determined by Court…monitoring the extent to which the objectives set in relation to the Bank’s financial management have been met…keeping under review the procedures following by the Monetary Policy Committee”,

as well as others, and

“determining…the Monetary Policy Committee”,

and so on. Existing NedCo arrangements are pretty broad as they stand. It prompts the question, what will an oversight committee bring to the party that the NedCo does not currently undertake? The issue of looking inside the Bank at its sub-committees is probably something that only members of the Bank itself would be concerned about, but it is important, given the principle that the Minister is expressing. Clarity matters, knowing who is responsible matters, and scrutiny and accountability with checks and balances matter as well. At some point, possibly later down the line, we need to look at the rather messy and blurred arrangement between the oversight committee and the NedCo. I do not know why that has not yet been spotted or resolved. I do not know whether the NedCo meets frequently, or whether the oversight committee is just about to be set up rather than has been set up. Perhaps we could talk about those issues on another occasion. Given that it was an unintended consequence of amendment 7, I will not push the amendment to further on at this point.

Regarding amendment 6, the question of a sub-committee and a committee matters. I understand the Minister’s logic: he wants the FPC to be a sub-committee of the court, so that the court can scrutinise it. However, I am now starting to think, “Hang on a minute. I thought that that function is being delegated to the oversight committee rather than to the court.” The mist is beginning to descend on where the lines of accountability between all the various committees go.

Photo of Fabian Hamilton Fabian Hamilton Labour, Leeds North East

This is an interesting, if rather obscure, debate. Does my hon. Friend agree that for the public who are looking into the way the Bank of England regulates the financial services sector, it is essential to have transparency, not opacity? Would the amendment that he has tabled not try to make the whole system of regulation a little more transparent and less obscure?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Yes. I cannot claim credit for the amendment. I was inspired by those members of the Treasury Committee who made the argument in the first place, and quite rightly too. They have spent a great deal of time looking at the issues and are clearly eager. Many of them wanted to sit on this Committee to make the contributions that they have been making. It is important to note that they made the recommendations. I am here merely to propose them to see if they have merit. The Minister does not think that they do, and that is a great pity. So far, I have not seen as many concessions as I would have liked to see to the Treasury Committee’s point of view on the matter, but for the time being, I am happy to withdraw amendment 6, on the proviso that we need to return to the issue properly to understand the committee, the sub-committee, the oversight committee, the NedCo, the nominations committee and so forth. A bit of spaghetti is beginning to form within the Bank of England, and it matters. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I beg to move amendment 9, in clause 3, page 3, line 14, leave out ‘4’ and insert ‘6’.

Photo of George Howarth George Howarth Labour, Knowsley

With this it will be convenient to discuss the following: amendment 8, in clause 3, page 3, line 24, after ‘functions’, insert—

‘and must have regard to the desirability of ensuring a broad representation of practitioners and consumers in the UK financial services sector.’.

Amendment 10, in clause 3, page 3, line 27, at end insert—

‘(c) allow sufficient time for the Treasury Select Committee to hold appointment hearings with candidates to be appointed under (1)(e) before their appointment to the Committee.’.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

We now move on to what I regard as quite important questions regarding the composition of the Financial Policy Committee. Amendment 9 seeks to change the number of persons appointed by the Chancellor of the Exchequer to the FPC from four to six. Amendment 8 touches, in many respects, on the diversity of expertise that we ought to see on the FPC. Amendment 10 seeks to give the Treasury Committee time to hold proper appointment hearings with candidates to be appointed under subsection (1)(e), on the recommendation of the Chancellor of the Exchequer to the FPC. The set of amendments is quite significant.

First, regarding the number of members that we think ought to be appointed externally by the Chancellor, due to the importance of the FPC, its nature and composition should be more balanced. As the Bill stands, a large majority of the FPC will be Bank of England executives. If Members turn to page 3 of the Bill, they will see in proposed new section 9B that the Financial Policy Committee will consist of:

“(a) the Governor of the Bank,

(b) the Deputy Governors of the Bank”— of course, that is all three of them—

“ (c) the Chief Executive of the FCA,

(d) 2 members appointed by”— guess who?—

“the Governor of the Bank after consultation with the Chancellor of the Exchequer,”.

So that is seven people so far appointed from within the Bank. The Bill then states:

“(e) 4 members appointed by the Chancellor of the Exchequer, and

(f) a representative of the Treasury.”

Although I do not think that that representative has rights to vote—or necessarily to speak—when attending that Financial Policy Committee. So it is a committee with seven people appointed from within the Bank compared with four appointed by and one extra representative from the Chancellor.

That is a little bit top-heavy in terms of Bank employees, who are subservient, of course, to their boss—the Governor of the Bank. Therefore, when people say that the Financial Policy Committee basically does what the Governor wants, they can make a reasonable argument. I am sure that that will not in reality be the case and that other members of the committee will be independent of mind  and spirit and, even if they are a deputy governor or chief executive of the FCA, they will bring their own views to bear. However, those positions very much fall under the auspices of the Governor. Regarding the chief executive of the FCA, there is an argument to be made about whether there is independence, but very much the majority is under the auspices of the Governor.

Photo of Matthew Hancock Matthew Hancock Conservative, West Suffolk 6:30 pm, 21st February 2012

Earlier, the hon. Gentleman was comparing the Financial Policy Committee with the Monetary Policy Committee, where there is also a majority of so-called internal members. However, experience shows that they frequently vote against the Governor and, indeed, that decisions have been made where the Governor has been in the minority. Does that not rather undermine his case, which anyway calls for a retained majority of internal members? I cannot see the force of the argument.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

We are talking about a different committee from the Monetary Policy Committee, and a different set of roles and functions. A different set of judgments will be required than in the slightly narrower—although, nevertheless, important—parameters within which the Monetary Policy Committee has to make decisions in terms of assessing the nature and prospects of the economy and the monetary policy responses to it. Those are very much operational decisions that are being made in that context. The Financial Policy Committee is quite different and it is much more about policy-making processes. Therefore, stronger arguments can be brought to bear on ensuring that the composition of the FPC gives the opportunity to reflect the real economy and, indeed, real society—perhaps more than might normally be the case.

I am not defending the current balance within the MPC. There are perfectly reasonable grounds to say that we should look at the situation in terms of the numbers on the MPC. However, that is not being changed in the Bill. The proposals before us today are on the composition of the FPC, and this is the moment to consider that. The majority of people on the FPC are bank executives. That is in contrast to the PRA and FCA boards, which will both have a majority of non-executive directors.

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

I am less moved by this issue than the hon. Gentleman by some distance. Let us consider the matter. The chief executive of the FCA operates under a board which will give him or her quite a high level of autonomy from any bank interference. Does he not share my view that the two members who will be co-appointed will not in practice be appointed by the Governor without an independent public decision being taken by the Chancellor? In fact, there is some doubt about whether he is correct in characterising there being a preponderance of bank insiders in any genuine sense.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Except that if we look at subsection (1)(d), we can see that the appointment of those two members by the Governor is only after consultation, not concurrence, with the Chancellor. If the Governor scribbles a little memo and posts it to the current Chancellor of the Exchequer, that would tick the box in terms of the requirement in the Bill to consult with the Chancellor. The point about the FCA chief executive is a reasonable  one, but even if we take that into account, there would still be a minority of non-executive directors, and that is not the case with the PRA or the FCA.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

Is it not also the case that beyond the consultation, it is specifically stated that both of the people must have executive responsibility within the bank. They are very clearly bank employees working to an executive responsibility. They are not, in any sense, coming from a wider perspective.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Indeed, absolutely, and my hon. Friend always reads further down the clause than many of us do. She is quite right to spot that subsection (2) specifies the characteristics of those two members and their close relationship within the Bank. Therefore, the point still stands. The board is very much a creature of the Governor and the Bank. That contrasts with the boards of the PRA and FCA, both of which have a majority of non-executive directors.

Importantly, the Treasury Committee and the pre-legislative scrutiny Committee both recommend that the FPC has a majority of non-executive members. The Government responded to those arrangements by saying that the MPC and the FPC have a similar balance of bank executives and external members, but that is just not the case. As the Bill stands, the ratio would be 7:4 executives to external appointees. The constitution of the MPC is 5:4 executives to external appointees. Therefore, by tabling our amendment today, we are seeking to have an additional two members. They will be appointed by the Chancellor of the Exchequer. I am quite happy for him to have those powers and to choose who should be on the Financial Policy Committee. We are hoping to even out the distribution of members. Appointing six external members would create a better balance of externals to executives. We accept that the Governor should have the deciding vote in the event of a six-six split—in the same way that he does for the Monetary Policy Committee if there is a four-all split. This amendment would achieve the Government’s wish for a similar balance between executives and external members on the MPC and the FPC.

Will the Minister clarify his thinking on that particular issue because representations have been made by a number of organisations, which are concerned that their voice will not be heard in the decisions of the Financial Policy Committee when it makes those recommendations about those pretty important macro-prudential tools? We should try to avoid an imperial structure within the Bank that is built around the emperor model of a Governor of the Bank. There needs to be a collegiate approach, and it needs to be perceived as such. A fairer balance between those two would be better. There are good grounds to hope that representatives from the banking sector, the insurance sector, the professional services sector, the industrial sector, manufacturing, consumers and others could have a chance of being one of those external members. Changing over from four to six would make that more likely. It is not surprising that consumer organisations, insurance firms and other representatives from different sectors are saying, “Hang on a minute, the numbers that are currently being proposed are insufficient.”

Sitting suspended for Divisions in the House.

On resuming—

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am conscious of the time, so I will try to be as brief as possible. [ Interruption. ] A welcome first intervention from the hon. Member for West Suffolk.

I had covered most of the arguments regarding amendment 9 and changing the number of external appointees to the FPC from four to six. Amendment 8 is designed to increase the breadth of experience and knowledge of its members. Members will recall that I have been discussing the four non-executive board members. When making appointments, the Chancellor must

“be satisfied that the person has knowledge or experience which is likely to be relevant to the Committee’s functions”.

That is quite vague and ambiguous. It does not say “knowledge and experience”; it says “knowledge or experience”. As the Bill stands, it is perfectly possible that there could be four non-executives with knowledge and not a single person on the FPC with experience, or vice versa. We need a broader representation of voices on the committee, and our amendment would mean that the Chancellor must also

“have regard to the desirability of ensuring a broad representation of practitioners and consumers in the UK financial” sector when making appointments to the FPC, which was also highlighted by the CBI in its submission. Legal & General also made the point that the legislation

“should explicitly require external members of the FPC…to have sufficient breadth of knowledge and experience across all financial industry sectors”,

and the Association of British Insurers made a similar point. The Financial Services Consumer Panel also argued that the FPC ought to have

“adequate information from a consumer perspective” and it obviously hopes that a consumer voice would have a chance of being heard on the committee. The pre-legislative scrutiny Committee also recommended that the FPC membership should

“include experts from across the financial services industry, including insurance and the wider economy.”

Some have said that there are potential conflicts of interest, which might be a difficulty if certain people with certain industrial or economic experience are also on the committee, but that is not an insurmountable barrier. We can design in industry experience on to the FPC, and that is why amendment 8 has been framed in such a way. I would like to hear the Minister’s thoughts on that at a later date.

Amendment 10 talks about giving the Treasury Select Committee sufficient time to hold pre-appointment hearings with candidates to be appointed to the FPC under subsection (1)(e). There are concerns about a democratic deficit in the FPC appointment process. The Government have made some changes in the draft Bill in terms of trying to fill that gap, but important deficiencies still remain, such as the appointment hearings, which are necessary to ensure parliamentary accountability. Appointments to the FPC committee are subject to pre-commencement hearings by the Treasury Select Committee, but that does not give members of that Committee the power to have pre-appointment hearings, so that they can vet candidates before the decision is taken to appoint them. Our amendment would therefore ensure that a sufficient period of time was allowed to  facilitate those TSC appointment hearings. The TSC itself has asked for the power to undertake appointment hearings and that is why we have tabled amendment 10. I am sure that members of the Treasury Select Committee recall paragraph 92 of that 21st report recommending that that take place.

The Government have said in response that that cannot take place because of the market-sensitive nature of MPC and FPC appointments, which make them unsuitable for pre-appointment hearings. I do not think that that argument washes. The Minister should give  some examples of how a pre-appointment hearing could have a damaging impact on the market. Conversely, will he explain how the lack of a pre-appointment hearing does not represent some sort of market shock, which, of course, it could? That is the rationale behind amendments 8, 9 and 10.

Ordered, That the debate be now adjourned.—(Greg Hands.)

Adjourned till Thursday 23 February at half-past Nine o’clock.