Clause 57 - Treasury power of direction

Financial Services Bill – in a Public Bill Committee at 8:30 pm on 20th March 2012.

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

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Clause 57 is more substantial than clause 56, which is essentially a paving set of circumstances, and the Minister feels that this is qualified sufficiently in clause 56. Clause 57 is in essence a countervailing power that was pressed for by the Treasury Committee in response to its concerns. Indeed, much of this part of the Bill has grown up around the power of direction that the Treasury will have over the Bank of England in circumstances where financial assistance might be necessary, where stabilisation powers in the 2009 Act might be relevant, or where an administration regime may be imminent.

The clause will not make powers of direction possible in circumstances of ordinary market assistance, and that is the crux of the clause. The Minister needs to give us a sense of what is meant by “ordinary market assistance”. There is a grey area between crisis scenarios and a scenario that may or may not amplify into a systemic question. It is difficult to know at the time whether a  crisis afflicting one particular financial institution is sufficient to cause a domino effect across a range of other organisations, or whether it will be confined to just that particular organisation. Failure might be allowed and administration would be perfectly manageable, and that would be an issue of market failure. The power of direction might therefore not come into play.

I get the sense that there has been some detailed and convoluted negotiation between the Bank and the Treasury on the clause. I also get the sense that following the Treasury Committee’s intervention, there was a desire in those negotiations by the Treasury to ensure that accountability can be maintained and that a thread is present. It is an important thread, because ultimately the buck has to stop with the Chancellor of the Exchequer; that is correct. However, the Bank may have insisted on some of the other restrictions on the power of direction. Will the Minister define and elaborate on that?

Provisions in clauses 58 and 59 relate to the power of direction. It would be useful to get a sense of the definitions. Essentially, the power of direction is to be used only if it is necessary to tackle

“a serious threat to the stability of the…system”,

or if it is in the public interest to do so. A public interest test is applied as well. Those are two broad concepts. Is the provision justiciable? Could it be tested and defined by the courts? It is difficult to imagine a scenario in which the courts got involved to test the definitions. If there were a dispute about why a power of direction was not possible, presumably the Treasury would win out simply because it would be able to make a direction. It would therefore be open to the Bank to challenge it, and it would just be tough on the Bank if it did not want to challenge it in that way. I need to get a sense of the definitions that we are talking about, because they are quite slippery. Will the Minister assist?

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

This is quite an important clause. It creates the Treasury’s new power of direction at the Bank. It responds to a recommendation made by the Treasury Committee. Under the provision, the Treasury will have the power, once certain criteria are met, to direct the Bank to use its crisis management levers in relation to one or more firms. The power of direction covers the Bank’s two primary crisis management powers. I will deal with the power that allows the Treasury to direct the Bank to use its stabilisation powers under the SRR. That would allow, for example, the Treasury to direct the Bank to put a particular failed firm into a bridge bank.

On Second Reading, my right hon. Friend the Chancellor of the Exchequer suggested that the power would allow the Treasury to direct the Bank to put a particular firm into resolution. I will clarify what that means in practice. The Treasury can direct the Bank to use a particular resolution option in relation to a firm where the PRA has determined that the Bank meets the test for entry to the special resolution regime. The power of direction does not cover the decision to trigger a firm into the special resolution regime. That, of course, rests with the PRA and not with the Bank, as we discussed earlier.

The second power is one that the hon. Member for Nottingham East focused on, which is the Bank’s provision of liquidity. That covers two things: general support for  operations of the system as a whole and emergency liquidity support to individual firms. As part of its day-to-day operations, the Bank of England provides liquidity to banks. That is the purpose of its many market operations. It puts its own balance sheet at risk and makes decisions on normal events. However, there may be situations in which the system requires more liquidity to deal with the crisis of a particular type of liquidity. At that point, it may be the case that the Government provide indemnity for that liquidity, as happened during the financial crisis. We felt it was important that the Treasury had a power to ensure that emergency liquidity assistance was provided.

The challenge was reflected in “Back from the Brink”. My hon. Friend the Member for West Suffolk is not here to plug his own book, but let me plug the former Chancellor’s book. He said,

“My frustration was that I could not in practice order the Bank to do what I wanted. Only the Bank of England can put the necessary funds into the banking system; indeed that is one of the core purposes of a central bank.”

What we are doing here is seeing a crisis situation in which the Chancellor could instruct the Bank to provide liquidity assistance to the market or to a particular institution. We recognise that liquidity is one of the crisis tools. It can be used in a way that puts the Government’s balance sheet at risk, so it is important that the Chancellor, or the Treasury, has the power to offer that liquidity assistance. That is what subsection (2)(a) is intended to achieve.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 8:45 pm, 20th March 2012

That is partially helpful. Clearly the Treasury Committee had in mind the points made by my right hon. Friend, the former Chancellor, in thinking through the difficulties that would arise in practice, but in circumstances where, it may be imagined, there might have been disagreements about particular strategies.

I suppose that that is the backdrop to the point that we are making—the idea that we cannot simply rely on everyone agreeing naturally. Circumstances may arise in which the Bank of England and the Treasury genuinely disagree. Those disagreements might not be institutional, but might arise from the strongly-held views of individuals. In that case, it is important to make the lines of accountability clear.

It was helpful that the Minister clarified the Treasury’s power to direct a particular course of resolution, but not to trigger the necessity for that resolution in the first place. That is a sensible step. We would not disagree with that provision, because, from our perspective, it is important that that accountability should lie in the hands of the Chancellor, and through the Chancellor to Parliament.

We have discussed issues to do with clause 57, and different aspects of that important provision. We may discuss it further later, but I am happy with the points that the Minister has made about it so far.

Question put and agreed to.

Clause 57 accordingly ordered to stand part of the Bill.