Financial stability strategy

Bank of England and Financial Services Bill [Lords] – in a Public Bill Committee at 10:45 am on 9 February 2016.

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

Photo of Harriett Baldwin Harriett Baldwin The Economic Secretary to the Treasury

This will be more of a trot—[Interruption.] There are no Trots opposite me today, obviously.

Clause 5 will provide the court of directors with an express power to delegate the production of the financial stability strategy within the Bank. Subsection (3) makes it clear that the court retains the ultimate responsibility for any delegated duty or power, including its duties in relation to the financial stability strategy. The clause will allow the Bank to utilise its internal expertise to produce the strategy, while maintaining a clear line of accountability to the court. The drafting reflects the discussion in the other place, where it was felt that the Government’s initial proposal lacked sufficient clarity. Those concerns were addressed by the Government amendments that bring us the clause as it stands today. I hope that the Committee agrees that the clause will afford the Bank the necessary flexibility when producing the strategy while ensuring that the court will be held to account for its contents. I commend the clause to the Committee.

Photo of Richard Burgon Richard Burgon Shadow Minister (Treasury)

In the debates on the clause both on Second Reading and in Committee in the Lords, it was argued that it should not simply confer on the Bank the power to set the financial stability strategy. The original proposal was vague, but although it was subsequently clarified by the Government amendment that conferred the power on the court of directors, the Opposition are not convinced that that is sufficient.

The impact assessment says:

“At present, the Bank’s financial stability strategy is set by the Court after consultation with the FPC…and HMT.”

It goes on to say that making the Bank responsible for setting the strategy and allowing the court to delegate its production within the Bank will ensure that the court is responsible for the running of the Bank and the Bank’s policy committees are responsible for making policy. The clause does not make it clear exactly what the financial stability strategy is supposed to be. All it does is create a power and impose the responsibility to create such a strategy relating to systemic risk in the UK financial system.

I shall repeat a concern raised by my colleague Lord Tunnicliffe regarding the financial stability strategy, because the response in the other place was not sufficient. Lord Tunnicliffe highlighted how a five-page strategy document was produced in 2013; it was then revised and published in the 2014-15 report, wherein it had been reduced to one column. In the Bank’s 2015-16 report, there was no mention of a financial stability strategy in the court’s ownership. Will the Minister confirm the importance of the financial stability strategy? It should be clear who is responsible for such a strategy.

Clause 5 creates a problem. A future financial stability strategy will emerge from somewhere within the Bank of England. It would be preferable if the people who are to be directly responsible for its production were identified in the Bill, rather than responsibility being conferred on the court with powers to delegate elsewhere. It would make most sense if the people made responsible for producing the strategy were the members of the Financial Policy Committee, as we have set out in new clause 6, which we will discuss later.

Photo of John Mann John Mann Labour, Bassetlaw

The debate on the clause is very important, because the little-discussed danger is that we are creating an all-powerful Governor who determines, in his or her ultimate wisdom, a financial stability strategy for the country—as if everything will then be fine.

The current Governor obviously has a bit more time on his hands because interest rates have not risen since 2009. The MPC, with its monthly meetings having gone down to eight a year, has not had a great deal to do other than maintain the status quo. In some ways, that is precisely the problem that was there previously. Before the 2008 crisis the Governor was responsive—looking at things, making speeches about what had happened in the past month or two and trying to tweak the system—and examination of the underlying problems in the system, in the sector and on occasion in the economy as well simply did not happen. The danger is that we again become complacent about such things. That is precisely why the Treasury Committee was keen to see an enhanced and powerful court of directors taking responsibility. It would be useful to have a clear statement from the Minister, endorsed by Parliament, that the model being created is not that of the all-powerful Governor, and nor is it one that we expect to see in future.

The Treasury Committee is a wonderful body, with great membership over the years and reasonable membership even to this day, but a clear message about what is expected of it by Parliament would be valuable: the Committee, on behalf of Parliament, is expected to hold the court to account properly and effectively. That has not been the case over the past decade. The chair of court has appeared, but the non-execs have been invisible. With the court having a more important role, it is critical that the Treasury Committee be given a clear indication by Parliament that it is expected to give a reasonable amount of its time to holding the court to account publicly for the new powers, whether the Committee likes it or not, or does it joyously or reluctantly.

It will be useful to hear from the Minister about those two points, so that we get her views on the record.

Photo of George Kerevan George Kerevan Scottish National Party, East Lothian

In itself, the clause is innocuous. It is a tidying-up operation, but lurking beneath it is a danger. Standing back from the restructuring of the policy committees of the Bank, we appear to be ending up with an exercise in bureaucratic symmetry—a committee to do this and a committee to do that, micro, macro, prudential or supervision, and the Monetary Policy Committee. The different committees are not supposed to talk to each other, doing discrete policy. That looks all right—someone is doing it—but what we are in fact ending up with is what I want to underline to the Minister and, through her, to the Treasury team.

The danger is that in creating bureaucratic symmetry, we have not got very far in creating a workable regulatory regime that is robust enough to meet the next crisis. One of the problems is that we are creating a silo for fiscal stability—basically, checking when a bubble arises and stopping it—and a silo for monetary policy, but the two are not talking to each other, so we are in danger of creating conflicts between the two main policy committees.

It is perfectly possible for the Monetary Policy Committee to go in a separate direction. At the moment it is refusing to raise interest rates, but that is leading to the committee in charge of fiscal policy and financial stability starting to discuss whether it should use its financial buffers to slow down a bubble in the housing market. It is possible, but a bit crazy, for the two different committees to take two different stances when the whole point of putting financial stability and monetary policy under the same roof—the Bank—was meant to be a co-ordinated policy.

Assigning responsibility for financial stability to the Financial Policy Committee does not get us off the hook of someone somewhere laying down broad policy objectives. The MPC has broad monetary policy objectives—I think that in the present climate of deflation, they are probably the wrong ones—but the FPC has very vague guidelines as to what it should be doing, and so suddenly we discover, in default, that the only person in the land who is actually overseeing all the different policy options is the Governor himself, and he is not even getting clear enough direction from the Treasury. By all means support clause 5 as a tidying-up operation, but it still leaves big holes in terms of who is actually laying down the major policy directions for the committee.

Photo of Harriett Baldwin Harriett Baldwin The Economic Secretary to the Treasury

Opposition Members have suggested that the Bill, in and of itself, makes a change to the power and importance of the role of the Governor of the Bank of England. I would submit that the Governor of the Bank of England is an incredibly powerful and important appointment, but I would not say that the statutory powers of the Governor are increased from their already elevated level by the Bill. Obviously, he is the one who has a role across all the different committees, but he has always had a very important role.

The hon. Member for Leeds East is absolutely right to highlight the fact that in the other place there was extensive debate on the precise wording of the clause. Convincing arguments were made to change it and the Government tabled amendments to provide the court with an express power to delegate determination of the strategy. That is a change from the original intention after the consultation undertaken in the summer. To be clear, it will be for the court, as the governing body of the Bank, to decide who is best placed to set and review the strategy.

The hon. Member for Bassetlaw asked specifically about the role of the Treasury Committee in continuing to scrutinise the role played by the Bank of England, the Governor and the court. I see nothing before us today that would change the current arrangements whereby the Committee has an important role in taking evidence.

Hon. Members asked about the co-ordination between the Monetary Policy Committee and the Financial Policy Committee. They are independent committees with separate objectives. It is important that the Governor sits on both committees and is able to see what is going on in both committees, but we think it right to strike a balance to ensure that each of the committees remains focused on its individual remit while fostering interaction between monetary and macroprudential policy.

There has been a good debate in both Houses, illustrating the value of line-by-line scrutiny. I think that we have landed in the right place and I commend clause 5 to the Committee.

Question put and agreed to.

Clause 5 accordingly ordered to stand part of the Bill.

Clause 6