Clause 54 - Duty of Bank to notify Treasury of possible need for public funds

Financial Services Bill – in a Public Bill Committee at 5:40 pm on 20th March 2012.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 5:40 pm, 20th March 2012

I beg to move amendment 173, in clause 54, page 134, line 2, at end insert—

‘(3) The first case requires the Bank of England, FPC, FCA or PRA to provide the Treasury or the Secretary of State with an early warning of the possibility that a notification of a material risk to public funds may be given, and full information about the circumstances.’.

Photo of James Gray James Gray Conservative, North Wiltshire

With this it will be convenient to discuss the following:

Amendment 176, in clause 54, page 134, line 3, leave out ‘first’ and insert ‘second’.

Amendment 177, in clause 54, page 134, line 6, leave out ‘second’ and insert ‘third’.

Amendment 178, in clause 54, page 134, line 15, leave out ‘third’ and insert ‘fourth’.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Part 4 deals with the collaboration between the Treasury, the Bank of England, the Financial Conduct Authority and the Prudential Regulation Authority and was featured in significant detail on Second Reading. I have significant worries, all the way to clause 63, about both the drafting and content of this procedure. The context is that, by creating an additional organisational change, the Minister has framed the Bill in such a way as to cloud and obfuscate lines of accountability and decision making within the arrangements. Memorandums of understanding are needed, as are other duties, to co-ordinate the various bodies and organisations, and that necessitates changes to the clauses in part 4, some of which have changed since the original draft of the Bill last summer, in response to a number of concerns and worries voiced by both the pre-legislative scrutiny Committee and the Treasury Committee. Amendment 173 has been grouped with amendments 176 to 178. Broadly speaking, they relate to the notification of a material risk to public funds that the Bank of England is obliged to give the Treasury, and the need, in our view, for changes to ensure clarity about who will receive what warning and the downstream consequences of that.

Clause 54(1) states:

“Where it appears to the Bank of England that there is a material risk of circumstances within…the following cases…the Bank must immediately notify the Treasury.”

Our substantive amendment 173 would insert a change in relation to the first case, with the other amendments relating consequentially to the second and third case, and so on.

We believe it would be preferable for an early warning system of that formal notification of risk to be instituted in the Bill. It would serve a number of purposes. First, it is necessary for the Bank, FPC, FCA and PRA to have a more proactive stance when scanning the horizon for potential future risks, and not simply wait until financial assistance is expected and required. It would be better to have incentives and structures within the system to allow that informality, that early warning process, to come into place. We are not the only ones to have thought about that; other organisations have also done so.

Photo of David Rutley David Rutley Conservative, Macclesfield 6:00 pm, 20th March 2012

Will the hon. Gentleman give the Committee further detail of what the early warning system would look like? I understand the point he is making but, presumably, like most financial services organisations, the Bank would have risk logs and other related materials that it uses on an ongoing basis, and is probably in dialogue with the Treasury anyway.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

That is what we are trying to tease out from the Minister. There are a number of reports that might be useful. The PRA will have a document called the proactive intervention framework—the PIF—which it has already said it will rely on. There is concern that some of those secondary and subsidiary activities might not manifest themselves to the Treasury, because they will all be guarded and cloistered within the Bank of England. Specifically, there is a bigger debate in another clause about the extent to which this clause invests powers in the Bank of England generically or in the individual person of the Governor of the Bank of England. That is why we need something more than a simple notification when on the brink of a potential crisis. We need a series of early warning potentials that can be exercised.

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

I have a concern, which may or may not be appropriate, and I am interested in the hon. Gentleman’s view. If there is a formal requirement for notification, will the markets have any knowledge of that? If these warnings are going to and fro all the time, would that not have an unsettling effect on the markets?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

The Bill anticipates that. The hon. Lady makes an important point, because such warnings or discussions could spook people and the markets. There are occasions when the Treasury and the Bank of England can decide not to publicise those warning processes and that notification arrangement precisely for the reasons she gives. The Bill already deals with some of those circumstances quite adequately, so there is no particular disagreement between us and the Minister on that point.

However, the Treasury needs to be given a heads-up on the potential risk to public funds, rather than such circumstances suddenly emerging in a formal way. I accept that it is difficult to draft and frame legislation to capture that concept, but ensuring that we have that system in place in a way that specifically empowers all  regulators—not just the Governor—is an important principle. According to my reading of the Bill, the Governor has a responsibility to make such a notification.

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

May I point out clause 54(1) to the hon. Gentleman? The obligation is not on the Governor; it is on the Bank.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

As the Minister knows, this issue has come up during our debates, but it is not clear in the legislation whether the deputy governor, a chief executive of the PRA or other officials at the Bank can make that notification. [ Interruption. ] The Minister scoffs, but I had presumed that we should read subsection (1) to mean that the Governor will decide when the Bank makes a notification. Am I wrong? I will give way to the Minister if I am and if it is not the responsibility of the Governor alone to make that notification.

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

The responsibility rests with the Bank of England—it is clear and in the Bill. The Bank of England has the responsibility to make the notification. If we had meant the Governor, we would have said “the Governor”. If it was meant to be a Doorkeeper, it would have said “a Doorkeeper”. If it was meant to be a Clerk, it would have said “a Clerk”. It is the Bank of England.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

The Minister does not understand my point, which is that if, for argument’s sake, a responsibility fell on the Treasury to notify the Bank of England, one would naturally assume that the legislation would be interpreted to mean that the Chancellor of the Exchequer—otherwise known in the legislation, I think, as the Secretary of State—has that responsibility and therefore would be able to decide when a notification was given. The Minister may feel this to be a small point, but it came up significantly on Second Reading. As I read the clause, it would not be possible for the deputy governor or the head of one of the other regulators to make a notification should the Governor disagree with it. In this legislation, the “Bank of England” is taken to mean matters which the Governor sanctions. The Minister can stand up and say that the legislation is clear and it says “the Bank”, but he must accept that there is an important point here. We are creating new regulatory structures and setting up this architecture with all these other regulatory responsibilities, but we are then at risk of gagging them, preventing their voicing concerns about policy matters that may have a downstream consequence on the taxpayer, unless they get the agreement of the Governor of the Bank of England when making a particular notification. That is our key point.

We are going slightly wider than the amendment that we are discussing, Mr Gray, but we will come to those points in future amendments. With amendment 173, I want to establish the principle that the early warning of a material risk to public funds ought to be made in a strong way. I am delighted to see three members of the Treasury Committee here, and I am simply taking a leaf from that Committee’s 21st report, in which the hon. Members for Hereford and South Herefordshire and for Wyre Forest considered the circumstance and made their recommendations. In some respects, the amendment is a bit of plagiarism on my part; I merely copied some of their suggestions and tabled an amendment that would, hopefully, facilitate their view on the issue.

Photo of Mark Garnier Mark Garnier Conservative, Wyre Forest

I would be grateful if the hon. Gentleman referred to the specific clause in the report.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Paragraph 166 of the Treasury Committee’s 21st report says that the Committee is concerned about material risks becoming apparent too late to the Treasury. The Committee recommended that the Bill

“require the Bank to give the Chancellor an early warning of the possibility that a notification of a material risk to public funds may need to be given, and full information about the circumstances.”

The report also stated in paragraph 165 that

“definition is crucial; it determines what notice the Treasury will receive and therefore how much time it will have to prepare for a crisis and consider alternative courses of action.”

I share the concerns of the hon. Members for Wyre Forest and for Hereford and South Herefordshire, and of my hon. Friend the Member for Erith and Thamesmead, who served on the Committee when the report was published. That is why I tabled my amendments in that vein. I hope the Government will agree to their provisions.

The issue has been of concern to others as well. The British Bankers Association stated on page 3 of its briefing on the crisis management aspects of the Bill that it is concerned that the notification process as framed might have perverse consequences:

“Given that the MOU stipulates that the Bank should notify the Treasury of a material risk to public funds and specifically that ‘if in doubt’ it should ‘tend towards notification’ it is possible that one outcome of the MOU as currently drafted would be to bring forward the point at which the PRA (as the new authority responsible for triggering the SRR), under the Bank’s governance structure, would determine that a firm has met the conditions for resolution. Since recovery is invariably a better option than resolution, it would be an unfortunate consequence of the duty to notify if it resulted in the PRA having less tolerance in its judgment concerning whether the threshold criteria were irrevocably breached. At the very least, this introduces a further area of uncertainty to an already subjective test which remains the subject of considerable nervousness in the market.”

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

Does that not argue for later notification, not earlier? Does it not argue against the hon. Gentleman’s amendment rather than in favour of it?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

No. My interpretation of the BBA’s concern is that some degree of earlier warning arrangement would help to ensure that a series of flags, traffic lights, or whatever the Minister wishes to characterise a warning process as, might gently begin to raise concerns or awareness of a situation developing within the Treasury. Rather than that information being hoarded within the Bank of England, it would be far better to have some process of dialogue. That is why it is important that the amendment be made, in order to put an early warning in the pipeline. That is the purpose of amendment 173.

Photo of Sheila Gilmore Sheila Gilmore Labour, Edinburgh East

Is the concern that if the procedure involves only formal notification, either it would be made too soon, which could cause actions to be taken or concerns to be promulgated needlessly within the financial system, or it would held back too late? Would not an earlier step give a gradation in that process?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 6:15 pm, 20th March 2012

My hon. Friend is entirely correct; she has got the gist of the amendment we have tabled. These are complicated arrangements, but they are  necessitated not by the current state of affairs but by the particular structural reforms the Chancellor and his Ministers are deciding to make by vesting such significant powers in the Bank of England in this way. Therefore, we have a duty to spend a little more time figuring out what those early warning processes—those traffic light warning processes—are going to be in the run-up to that formal presentation of a notification of “material risk” to public funds.

It is good that clause 54 requires that notification, and there are a number of circumstances when it would be expected to be used. However, it is important to have a preliminary step—the early warning arrangement—so that we can learn the lessons from the Treasury Committee’s careful and thoughtful scrutiny of the Bill, and particularly of the point about notification. It was in the hope that we could facilitate the Minister’s acceptance of the Treasury Committee’s recommendations that we tabled the amendment.

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

What we have sought to do through these crisis management arrangements is to create some clarity, whereas under the previous regime there was confusion as to who is responsible in these circumstances. In fact, the hon. Gentleman’s amendment would re-create that confusion where the Bill tries to create clarity.

Let me explain why the hon. Gentleman’s amendment is unnecessary. First, as we have made clear in our response to the Treasury Committee, the duty on the Bank to notify the Treasury of a risk to public funds already achieves the amendment’s aim. The notification process is designed to be triggered early enough that an additional early warning system is not necessary. If we are not careful, there could be an early warning of an early warning of the early warning; however, we have designed this notification process to ensure that an additional layer of complexity is not required.

Clause 54 sets a low bar for notification. For example, in analysing a firm or a group of firms, if the Bank thinks that a situation could arise in which, as clause 54(4)(b) says,

“the Treasury might reasonably be expected to regard it as appropriate” to use public money, a notification must be made at that point. We should note the conditionality implied in that language:

“might reasonably be expected to regard it as appropriate”.

We are talking about a relatively early stage of the process. The provision is designed so that the Bank cannot wait until the need to use public funds actually materialises. As clause 54(1) makes clear, the Bank must make a notification as soon as it believes

“that there is a material risk of circumstances…arising” in the future in which public funds might need to be used. So it is not the quantum of public funds that matters; it is the risk of that need arising. Therefore, in the scenario the hon. Gentleman describes—where the Bank is aware that at some future point a risk to public funds could arise—the Bank should be making a notification under the existing duty, and not requiring some sort of early warning mechanism.

In addition, to underscore this process the draft memorandum of understanding makes it clear that there must be no surprises for either institution. It also spells out that, where the Treasury independently identifies  a possible risk, it can ask the Bank to consider whether the notification threshold of “material risk” has been reached.

As I have said, the hon. Gentleman’s amendment would create confusion by adding additional regulatory bodies to clause 54. The clause is based on the premise that the Bank and the Bank alone is responsible for notifying the Chancellor of risks to public funds. If, therefore, the Bank fails for some reason to notify the Chancellor in time, it is absolutely clear and transparent where accountability for that failure would lie.

There was some discussion about whether it would be better to have earlier or later notification, and whether earlier or later notification would increase or decrease the risk of intervention. Let me be clear to hon. Members about this. The Bank of England’s duty to notify the Treasury of a risk to the public funds is entirely separate from the Prudential Regulation Authority’s decision about whether a firm should be put into the special resolution regime.

Where a firm is in difficulties and one or more of the potential options to resolve the firm—if it fails—would involve the use of public funds, the Bank should notify the Treasury. In most circumstances, that will be well in advance of any decision to trigger putting the firm into the special resolution regime. A notification of risk to public funds does not mean that the firm will definitely fail, or that public funds will definitely be used in the case of failure. Therefore, a notification of a risk to public funds would have no impact on the PRA’s assessment of a firm’s ability to meet its threshold conditions.

It is important to separate the two processes. We are trying, via the clause and the MOUs, to ensure that any risk that public funds might be used is brought to the Treasury’s attention as soon as possible. It is unnecessary to add an early warning system to that which is already in place. That would not be appropriate, given that we are talking about the use to which public money will be put under the PRA, the Financial Policy Committee and the Financial Conduct Authority.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am grateful to the Minister for his response. I understand to a degree why he does not want to introduce a caveat into the provision, but I still believe that the notification procedure’s current design will result in a series of risks. Indeed, the Treasury Committee has been particularly keen to highlight that.

These provisions could lead to situations in which there is no adequate dialogue between the Bank and the Treasury. The Treasury is the steward of public funds, and if taxpayers’ funds are likely to be affected the clause would be triggered, but that could lead to indirect circumstances that may hit the public purse. That is what we want to capture in the amendment.

I accept that it is difficult to address this issue in the Bill, which is why we drafted amendment 173 as we did. An early warning and a notification of material risk would add some broader, contextual information to help the arrangements. This is an important issue, particularly given that the Treasury Committee suggested that the Bill address it, so I will not withdraw the amendment. I want to test the Committee’s will, especially given the presence of some members of the Treasury Committee.

Question put, That the amendment be made.

The Committee divided: Ayes 8, Noes 10.

Division number 37 Decision Time — Clause 54 - Duty of Bank to notify Treasury of possible need for public funds

Aye: 8 MPs

No: 10 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I beg to move amendment 179, in clause 54, page 134, line 5, at end insert

‘or where there is a risk to relevant markets functioning well, fairly, efficiently and transparently.’.

Photo of James Gray James Gray Conservative, North Wiltshire

With this it will be convenient to discuss amendment 180, in clause 61, page 137, line 29, at end insert

‘which must include risks which significantly impact upon the safety and soundness of PRA-authorised persons, or which put at risk relevant markets functioning well.’.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Amendment 179 relates to how best we define material risk, and to cases where the notification of material risk needs to be presented. Amendment 180 relates to clause 61 and the memorandum of understanding in circumstances of crisis management. It states that the memorandum needs to make provision for what the Treasury and the Bank regard as material risk. I know that you are following the Bill closely, Mr Gray, and that you will recognise the two phrases in the amendments, which relate to the responsibility of the Prudential Regulation Authority and the strategic objective of the Financial Conduct Authority. Amendment 179 also refers to the strategic objective of the FCA. It goes a little further toward the strategic objective that we had hoped would be in the Bill, but for the Minister’s resistance to the amendment that we tabled at the time. We wanted to ensure that such situations encapsulated risks relating to relevant markets functioning well, fairly, efficiently and transparently.

The Bill and the draft form of the memorandum of understanding are too vague about the role of the FCA and the PRA in circumstances of material risk to public funds. Therefore, the amendments seek to ensure that the definitions also encompass these FCA and PRA matters, and, implicitly, we hope that they will be involved by the Governor in assessing whether a material risk exists. We had a prelude a moment ago to the debate we are likely to have on amendments relating to clause 58(1) and the duty that falls on the Bank of England, in generic terms, to make this notification of material risk. My concern is that that is not precise enough. It will probably be taken that the Governor will have the power to make the recommendation. It would be preferable for the FCA and PRA, as newly formed, free-standing—or supposedly free-standing—regulators to also be able to  make their views known about material risks to public funds. That is the rationale behind the amendments—to ensure that markets function where that is already a strategic objective of the FCA.

Surely, if there is a material risk because markets are functioning badly, inefficiently or in a non-transparent way, the Chancellor should be notified and therefore made aware of whether action needs to be taken. Poorly functioning markets can have a significant impact on monetary policy and on public funds. For example, there are a number of circumstances where policy measures have needed to be taken because of deteriorations in market activity. We have not just dreamt this up. The pre-legislative scrutiny Committee, in its report on the Bill in paragraph 140, said:

“The definition of the term ‘material risk’ should be subject to parliamentary approval and not left to a Memorandum of Understanding.”

We agree. The definition is too vague. It needs to include these concepts, particularly as they affect the PRA and FCA.

Will the MOU be revised from time to time? Could that be done in a way that redefines material risk, without necessarily going through any parliamentary scrutiny process? In other words, could this MOU arrangement be amended to include prudential regulatory concerns or conduct concerns? Would the Minister expect that?

We would not expect necessarily a formulaic definition but it would be helpful if the Minister can explain why he thinks the term has not been fully fleshed out in the Bill. We suggest that it needs to include some of those conduct and prudential concerns as there are worries that the Bill is not explicit enough on that definition. There are also concerns that without a clear view as to what a material risk might entail, the Bank might not consider a material risk to be relevant or there might be circumstances where a material risk has arisen but the Treasury is not notified. We are just trying to table amendments to ensure that we capture as many circumstances of material risk to public funds, both direct and indirect, as possible. I hope the amendment is helpful, and I should be grateful if the Minister gave a sense of what he regards as being within that definition.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury 6:30 pm, 20th March 2012

I made clear in the debate on the previous group of amendments that material risk refers to the likelihood of the use of public funds. It is an early warning system. That is clear. The MOU will be able to be revised. It is not a document that is set in stone. That could include changes to what is meant by material risk. Let us be very clear about what we are trying to achieve here through this MOU. It is not an all-purpose MOU. It is designed to deal with the issue of the use of public funds in a crisis. The purpose of the process set out here is to ensure that the Treasury is aware of and can take action to mitigate the risks to public funds.

Decisions to use public funds to resolve a financial crisis are for the Government to take, usually the Chancellor personally. The use of taxpayer money is rightly reserved to the Government. The clause ensures that the Treasury  is always informed when there is a material risk to public funds in the future, in order to allow the Chancellor to make a timely and informed decision based on detailed analysis from the Bank and the Treasury itself.

The same does not apply to the objectives of the PRA and the FCA. Ensuring that the relevant markets function well is the FCA’s responsibility; the safety and soundness of PRA-regulated firms is the PRA’s responsibility. The Treasury is ultimately and solely responsible for the use of public funds. It is not ultimately or solely responsible for ensuring that markets function well or for promoting the safety and soundness of firms. The rationale for creating a formal notification process does not apply in the same way to well-functioning markets and the safety and soundness of funds in the same way as it does to the protection of public funds.

These issues move into the area of the Treasury’s direct responsibility if they have the potential to put public funds at risk. That is where the existing duty on the Bank will kick in. The additions proposed by the hon. Gentleman are both unnecessary and potentially confusing. We recognise that the FCA and the PRA will inform the Treasury when they are managing significant issues that are of wider public interest but do not impact upon public funds. The FCA and the PRA will keep the Treasury informed of these matters, not least because it is Treasury Ministers who will need to explain these issues to Parliament where necessary.

This type of communication already goes on routinely between the Treasury and the FCA. The hon. Gentleman suggests that the chief executive of the FCA or the chief executive of the PRA would be in some way scared of coming to Ministers to talk about these issues. I can assure him from the conversations that I have with Martin Wheatley, who is running the conduct business unit in the FCA, that he has no problems at all about coming to see me to talk about issues. In the same way, I have regular meetings with the chief executive of the FSA and the deputy governor for financial stability. They are all at liberty to come to talk to us about these issues, so there is that dialogue, but that does not relate to the memorandum of understanding and the duty of the Bank to notify the Treasury about the possible need for public funds. The amendments are not necessary, because they would again create confusion about what the duty is meant to achieve. We now have clarity, where we had confusion under the old regime.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I think that I understand the Minister’s logic in that he does not want to open the floodgates in the definition of material risk now; he wants to keep it relatively prosaic in so far as it is set out in the MOU. I asked about the MOU and the extent to which it will be subject to parliamentary scrutiny because those are big questions.

Ultimately, we have to step back and recognise that our constituents have grave concerns about why so much taxpayer’s money was put on the line by circumstances that were not properly captured ahead of the crisis. We cannot expect the regulators at that time to have known in hindsight about needing to capture such a set of issues, but in designing a new set of arrangements, we should ensure that material risks encapsulate the set of questions for which the two new regulators will properly have responsibility.

I am sure that it is true that the current chief executives of the FCA and PRA are very good at being vocal, meeting Ministers and communicating such questions. We read that we are losing the chief executive of the PRA, and a new deputy governor of the Bank of England is due to be appointed by the Governor of the Bank.

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

The hon. Gentleman has now made that point twice. The deputy governor is appointed by the Crown, not by the Governor of the Bank of England.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

That is quite interesting. Will the Minister confirm that the Governor will not finally sign off the appointment, and that the deputy governor will be appointed by the Crown on the advice of Ministers?

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

The appointment is made by the Crown.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

On the advice of Ministers—it is sometimes difficult to get a simple answer from the Minister. I do not think that the Crown makes decisions without the advice of Ministers. If it is a ministerial appointment, that is important because it might imply that, to a degree, there are lines of accountability back to Ministers, which would not be the case if the Governor made that appointment directly.

I do not know whether, under any statute, the deputy governor is necessarily—I may be wrong—always the chief executive of the PRA. Might it not be possible for the chief executive of the PRA to be different from the deputy governor for prudential regulation? I do not think that the two are inextricably linked, although we have assumed that the two will always be one and the same. I do not think that that is specified in statute, but I may be wrong.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

It was silly of me to have such a memory lapse about something very important. With such clarity about the issues, I concede that it is important to recognise that there may be scope for prudential regulation concerns to come to the attention of Her Majesty’s Treasury that go beyond what is contained in clause 54 on the notification of material risk. I was trying to establish that point, and the Minister has been exceptionally helpful in clarifying it. I do not want to labour the matter, so I will heed the Minister’s comments. I do not think that he has sufficiently set out his definition, but I hope that when we discuss the MOU we can consider that again.

Sitting suspended for a Division in the House.

On resuming—

Photo of James Gray James Gray Conservative, North Wiltshire

Order. Before we recommence, the usual channels have told me that it would be convenient if the Committee suspended for dinner at 7.15 pm for 45 minutes. I understand that there may be Divisions in the Chamber at 8 pm, so the Committee will recommence at the conclusion of one or more votes. If agreeable, we will continue our deliberations until about 7.15 pm and then suspend the Committee for 45 minutes for supper.

I think that the hon. Gentleman was in the process of seeking leave to withdraw amendment 179.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Looking around the Committee, I think that it may be necessary to withdraw the amendment. I have made my point, so 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 174, in clause 54, page 134, line 7, after ‘England,’, insert ‘FPC, FCA,’.

Photo of James Gray James Gray Conservative, North Wiltshire

With this it will be convenient to discuss the following:

Government amendment 98

Amendment 175, in clause 54, page 134, line 13, after ‘Bank,’, insert ‘the FPC, the FCA,’.

Government amendments 99 and 100.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

In many ways, the amendments go to the heart of the Second Reading debate on 6 February between the shadow Chancellor, my right hon. Friend the Member for Morley and Outwood (Ed Balls), and the Chancellor. Despite the Chancellor’s protestations at my right hon. Friend’s concerns about certain voices being excluded from the new regulatory structures, I am pleased that the Government have tabled amendments to the Bill following those exchanges. We wanted to effect a particular change to the Bill, and the Government have—at last—conceded something and recognised the need to ensure that some of the gaping holes are plugged in clause 54 by improved references to the communication of warnings about material risk to public funds.

We welcome the Government’s amendments; they are an improvement to the current Bill. It is right for the Financial Conduct Authority to be included in the list of bodies affected if a notification were triggered, or if the Treasury

“might reasonably be expected…to incur expenditure” of public funds.

Amendments 174 and 175 are similar in tone to the Government amendments, but we have added the Financial Policy Committee. It would seem strange for the new body that is tasked with responsibility for macro-prudential and broad financial stability not to be able to pull that trigger and notify the Treasury of a change. The Minister will say, of course, that the Bill does not exclude the potential of the Financial Policy Committee to act in such a way, but it does not explicitly allow it. Because of the overly-ambiguous drafting of clause 54(1), simply allowing the Bank of England to act does not give the FPC that responsibility. We have therefore tabled the amendment in the hope of clarifying whether the FPC would formally be able to have that level of dialogue with Her Majesty’s Treasury in such circumstances.

We have given the new Financial Policy Committee significant powers, but clause 54 seems to place a lot of the power to trigger an early warning notification about a risk to public funds in the hands of the Governor of the Bank of England. It is entirely possible to envisage circumstances in which the Governor takes issue with the FCA, the PRA, deputy governors or even the majority  on the Financial Policy Committee, and uses that power to override their misgivings and refuses to make such notifications.

We are trying to help the Government put some sense into the convoluted structure they have constructed by allowing the various channels to be tasked with the responsibility of safeguarding the system and, by extension, protecting the taxpayer. Under the Bill, there is a risk that the Governor might judge not to inform the Chancellor that perhaps the deputy governor believes there to be a material threat to stability. If the Governor makes a personal judgment, and for whatever reason dismisses the views of others, there could be a danger that important voices would not be heard by the Chancellor.

There are strong differences in judgment within the Bank of England about appropriate safeguards against moral hazard, for example, so we want to broaden lines of communication in relation to warnings of material risks to public funds. Although we welcome the Government’s amendments, the Minister should explain why the FPC is not included in the list.

Photo of Mark Hoban Mark Hoban The Financial Secretary to the Treasury 7:00 pm, 20th March 2012

The hon. Gentleman should have thought about to which part of the clause our amendments were tabled before he repeated them and inserted the words “and the FPC”. The second case sets out the position whereby people are exercising their respective powers under parts 1 to 3 of the Banking Act 2009. The FPC does not have responsibilities when it comes to the exercise of powers under parts 1 to 3 of that Act. That is the special resolution regime.

If the FPC were to revisit the regulatory perimeter, it might decide that the FCA should exercise some micro-prudential responsibilities in relation to deposit takers. If the FCA does exercise a micro-prudential responsibility in respect of small deposit takers, it would need to have powers under parts 1 to 3 of the Banking Act 2009, which is why we chose to insert the reference to the FCA into lines 7, 13 and 14 of the clause and why we did not choose to insert a reference to the FPC. It is not about duty to notify the mature risk per se, but the exercise of powers under the Banking Act, and those powers do not extend to the FPC.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

The Minister is envisaging a hypothetical situation when the regulatory perimeter is extended for micro-prudential responsibilities to the FCA, but he does not envisage that there will ever be circumstances in which that might also apply to the Financial Policy Committee. That is a rather strange approach. There could indeed be circumstances in which some of those references relate specifically to the provisions of the Banking Act 2009 or other special resolution regimes, and I can understand the justification in drafting terms for not including the FPC in one reference or elsewhere. However, the hon. Gentleman did not deal with my core point, which was why not allow the FPC to make those representations directly to the Treasury. It would be helpful and clear if, for the avoidance of doubt, it was possible for the FPC to make such representations.

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

The hon. Gentleman made that case when he spoke to amendment 173.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am making the case again in respect of amendments 174 and 175. It is an important point that needs to be made. I do not know what the Minister’s intervention was intended to achieve, but we shall want to return to such matters at a later date. It is important for the FPC to be given a voice to ensure that if it has collective concerns, even if they clash with the views of the Governor, it is allowed to have a dialogue directly with the Chancellor. It is a system of early warnings and notifications of risk. What would be the reason for deliberately preventing that voice from being heard? For the avoidance of doubt, it would be better to allow for that possibility. It is therefore important to test the Committee’s view on that point. I will not press both amendments 174 and 175, but I will test the Committee’s views on amendment 174.

Question put, That the amendment be made.

The Committee divided: Ayes 8, Noes 9.

Division number 38 Decision Time — Clause 54 - Duty of Bank to notify Treasury of possible need for public funds

Aye: 8 MPs

No: 9 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Amendments made: 98, in clause 54, page 134, line 7, after ‘PRA’ insert ‘, the FCA’.

Amendment 99, in clause 54, page 134, line 13, after ‘PRA’ insert ‘, the FCA’.—(Mr Hoban.)

Chris Leslie rose—

Photo of James Gray James Gray Conservative, North Wiltshire

Order. I am not all that inclined to allow a stand part debate on clause 54, given that we have had a fairly extensive debate on it already. I suspect it might be better to put the Question.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

On a point of order, Mr Gray. I accept that we have discussed a number of amendments to clause 54, but they were in only three groups, which is a relatively modest number in amendment terms.

The provisions of clause 54 extend beyond those that we have amended and relate to, for example, the public funds test and the role of the European Commission in the deposit guarantee scheme. Given that we have not touched on them in the amendments, not to mention discussed the concerns that the Treasury Committee has raised, it would be helpful if we had an opportunity to test the Minister on a couple of questions.

Photo of James Gray James Gray Conservative, North Wiltshire

I understand the point of order. It is matter for my discretion as the Chair, none the less, because of the breadth of the clause in question, I am prepared to allow a brief stand part debate on clause 54.

Question proposed, That the clause stand part of the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

You are generous, Mr Gray, and I am grateful for your flexibility and wisdom in showing such judgment in the Chair. May I say again what a pleasure it is to serve under your chairmanship?

The concerns that the Treasury Committee voiced about clause 54 are important, because it stated that “material risk” was not adequately defined. I can tell by the facial nuances of the hon. Member for Wyre Forest, and to a lesser extent those of the hon. Member for Hereford and South Herefordshire, that they know what I am talking about in terms of the 21st report of the Treasury Committee.

The Minister, articulate as he always is on such points, has not shed sufficient light on what he regards material risk to be, and it is important that he take the opportunity to set out what he thinks it will be. Is the definition simply that in the memorandum of understanding, namely, that it is broadly those questions in the proactive intervention framework in the PRA’s report or is it broader than that? Given that it is not in the Bill, will he at least commit to finding an opportunity for parliamentary scrutiny of the MOU? As I understand it, there is no affirmative resolution procedure for that important and crucial document. My hon. Friends will be aware of the importance attached to those questions, given that they clearly relate to crisis scenarios for which we need to ensure clarity, that lessons are learned, that we have clear definitions and that we are prepared for the next situation, if and when it occurs, without fumbling around for definitions. That is the purpose of the arrangements.

In my point of order, I mentioned the public funds test. The arrangements to finance the resolution of failed institutions are evolving because of a series of legislative initiatives. In particular, the European Commission has announced its intention to develop a regime under which member states should ensure that they have arrangements in place, such as a ex ante financial resolution fund, to

“cover the costs incurred in connection with the use of resolutions tools”,

reflecting the Financial Stability Board’s belief that resolution should be

“feasible without resort to public funding”.

The existing tri-partite arrangement has joined the banking industry in supporting the principles that banks not taxpayers must pay for failures. In agreeing that the depositor guarantee scheme can be used to contribute to resolution costs and be leveraged to meet the requirements for a national resolution fund required by the forthcoming EU directive, the British Bankers Association has observed:

The European Commission appears to be open to the notion that DGS could be used to meet resolution costs, particularly as the European Directive on Deposit Guarantee Schemes is likely  to introduce a requirement for national DGS funds to be partly ex ante financed…Together these developments reduce the likelihood that public funds would need to be utilised to resolve a failed institution. As such, it is important to consider whether the material risk to public funds test proposed in the Bill is crafted in a way which ensures its future relevance and the engagement of the Chancellor when there are risks to financial stability which do not involve the use of public funds.”

The BBA has been quite exercised about that question, and it makes a reasonable point. It suggests that the proposed public funds test might be too restrictive to ensure that the Chancellor is engaged at an appropriate point when conditions are deteriorating rapidly. It believes it would be advisable to align the MOU and the Bill with the provisions in the Banking Act 2009 by requiring the Bank to notify the Treasury whenever there is an actual or likely need to invoke the special resolution regime.

Can the Minister offer reassurances that he is mindful of the EU directives on deposit guarantee schemes? Were they taken into account in the drafting of the Bill? Does he anticipate that it might be necessary to change legislation further at a later date, in the event that the directive on deposit guarantee schemes is used to meet resolution costs? That is a specific query about the Bill.

I want to raise a couple of other issues with the Minister. On page 134 of the Bill, as drafted, lines 22 and 23 state:

“A public funds notification must give a general indication of the matters giving rise to the notification.”

That has a ring of insufficiency about it. Will the Minister clarify what is meant by the reference in the Bill to “general indication”?

Although this may be a slightly lesser point, line 24 states:

“A public funds notification must be given or confirmed in writing.”

If a person notifies the Treasury of a material risk to public funds through a telephone call or a face-to-face meeting, would there perhaps be an e-mail, or a hard copy follow-up? Will more robust procedures be set out in the Bill? Sometimes circumstances will be fast-moving, and I worry—

Photo of James Gray James Gray Conservative, North Wiltshire 7:15 pm, 20th March 2012

Order. Before he continues, I warned the hon. Gentleman that I would interrupt him at 7.15 pm, even if he were on his feet at the time. It is the magic hour, and I suspend the Committee until 8 o’clock, or as soon thereafter as the Divisions in the main Chamber have been completed.

Sitting suspended.

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