Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 320-339)


8 MAY 2007

  Q320  Mr Fallon: Why has not the Court then promulgated the idea of open advertisements for memberships of the MPC? Why has not the Court in 10 years expressed any kind of view on anything to do with the appointments process?

  Ms Fawcett: I think there are several ways this has happened and we can address personal views on whether it should be more public or more enhanced. First, there have been discussions between Court through the senior non-executive—Sir John Parker—with Treasury on this very issue. Second, the Governor has come to this Committee and has explained the view of the Court on this issue and that it lacks some transparency and is opaque. Third, this year in our annual report, which is a public document, we will make that very same statement that the appointments process could indeed be improved.

  Q321  Mr Fallon: That is after 10 years, Ms Fawcett?

  Ms Fawcett: I cannot speak for seven of those last 10 years.

  Q322  Mr Fallon: There was silence for 10 years. There has not been anything in the annual reports making any comment at all about the appointments process to your major Committee.

  Ms Fawcett: I do not know the reason for that lack of a comment. I will say that the issue has become more acute, particularly in the last year, and Court has dealt with it.

  Q323  Mr Fallon: Has the Court ever communicated with the Treasury about the appropriateness, costs or background of any particular appointment to the MPC in your knowledge, Dr Potter?

  Dr Potter: Not to my knowledge, no. There have been private conversations but not officially formally.

  Q324  Mr Fallon: Has there been a private complaint?

  Dr Potter: No. There are obviously private discussions that go on. There are personal discussions that go on and these matters are discussed in a broad sense, but, no, the Court has not specifically tasked a formal complaint to the Treasury. I would make the comment, Mr Fallon, that rigorously and strictly speaking, the appointment to the MPC is in the hands of the Treasury according to the Act. We can comment about the nature of those appointments, and we have publicly through the Governor and, secondly, through Sir John Parker, our Chairman, and through the Governor to the Chancellor and the Treasury. That has been expressed both publicly and to the Chancellor. This has only occurred in the last 18 months or two years. I am not aware that there was a general complaint of the process in the preceding seven or eight years.

  Q325  Mr Fallon: I do not think, with respect, that references in some of the Governor's speeches or private communications to the Treasury exonerate you from your duty over 10 years, even though the Chancellor makes the appointment, from commenting on the appointments' process when there has been widespread criticism of the lack of transparency, the delay in making timely appointments, the balance of membership, all of these things, and in 10 years we have not had a word of commentary, let alone criticism, in the annual report of the Court whose principal Committee this is.

  Dr Potter: I think we have commented in the non-executive directors' section of the annual report, but then there is also the annual report as a whole, and in that there is comment.

  Q326  Mr Love: This question arises from the discussion so far. In your opinion, what makes a "good" MPC member, Dr Potter?

  Dr Potter: Firstly, I think that the role clearly requires expert knowledge as an economist, although I would not eliminate people with huge experience, such as Richard Lambert, in economic matters as a whole. In general, it does require the great majority to be expert economists.

  Q327  Mr Love: In relation to Richard Lambert, his replacement was a professional economist? He was not a professional economist. Is there a role for somebody like Richard Lambert in the future?

  Dr Potter: I believe so. That is my personal belief as a non-expert, not in the Committee. I believe that there are people who can give value, like Richard Lambert, and there are business people, people from the financial world, who have spent most of their careers in that world and understand the workings of the economy, even though they do not have a PhD in economics, if you like. To answer your question about what the skills are: obviously people with a particular emphasis in macro-economics, but clearly drawn from different fields in the economy, such as we have seen; people who are experts in labour; experts in macro-economics or econometrics or whatever. The second thing I think that is essential and fundamental for the Committee is that "they do not do consensus" and that they each have their own independent vote. I think that changes the whole culture of the workings of that Committee. As part of that, I think it is essential to have a diversity of backgrounds, personalities and experiences. There are five members appointed from the executive of the Bank itself, and there are four externals. The four externals should be drawn broadly and I think there is merit sometimes in one of them in general having a City economics background. I would generally believe that is necessary in the complex world we have.

  Q328  Mr Love: To what extent do you believe that the non-executives should mirror the executives in a sense in order to hold them to account or to what extent do you believe that they should have a wider range of economic expertise to bolster the Monetary Policy Committee as a whole? Is there a tension or a challenge between the two of those?

  Dr Potter: No. Within the membership of the Court, the non-executive directors are not expert economists in general. There are some that might be. There are quite a number who are experts or are hugely experienced in the financial world. In general, they are characterised by wide experience in running or managing businesses or organisations, public or private. No, I do not think they can mirror it. Remember that the MPC is one of the functions; there is also the issue of how interest rates are transmitted through to the system. There are many functions in the Bank. Because of the importance of the MPC and the high profile that it has had in the 10 years, these other functions are less considered but they are critically important and that is part of the role.

  Q329  Mr Love: Perhaps I can draw Ms Fawcett into this question as well. To what extent do you think they have concentrated too much on academics for the non-executive directors rather than practitioners? Do you think that is something they need to correct?

  Ms Fawcett: Coming back to Dr Potter's earlier point, it is critical that we have a diversity and a balance of views on the Committee. That would include academia, financial sector experience and business experience and the externals in particular bring a very broad array of background to that Committee and should continue to do so. I would think it would be unwise for them all to be academics but I do not think that is how the Committee is currently structured.

  Dr Potter: May I add one rider to what you suggest, Mr Love? The five members from inside the Bank often in the past would have had different experiences. I think in general, without making any comment on the particular current membership that include the highest calibre of people in my view, nevertheless it is extremely important that the appointment of governors and deputy governors looking out in the long run—10 or 20 years out—should not be drawn from purely the Civil Service or the public sector. If one looks at some of the history of the Bank and the appointments from outside, that is an important factor too because that will define the MPC as well. That is a very important factor.

  Q330  John Thurso: Could I clarify one point on remuneration? I fully understood the point you were making about the review and the pension side of things. In terms of the base salary, is that dealt with by the Remuneration Committee or is that set by the Treasury?

  Dr Potter: That is set by the Remuneration Committee.

  Q331  John Thurso: In that instance, how do you go about benchmarking that salary? What factors do you use to decide the basic remuneration?

  Dr Potter: In the case that Mr McFall previously mentioned where he understood there was a review going on, that is correct, there has been. To answer your question, we retained an organisation that is expert to carry out a review of the pay of economists in general at that level. That is a complex matter because economists work in many different fields. There are academic economists; there are economists working for large corporations; there are economists working in the City of London who are hugely paid. So there is a wide diversity of pay and roles for the potential candidates who could be members. Nevertheless, we commissioned that report and in reviewing and discussing the balance of the report as a whole, that is how we defined it, benchmarked it, if you like. I might comment that the Committee came to the conclusion that the general level of remuneration for members of the MPC is broadly compatible with the review.

  Q332  John Thurso: Can I move on to the Non-executive Directors' Committee and ask Ms Fawcett: how does the non-executive directors' Committee monitor the performance of the members of the MPC?

  Ms Fawcett: There is a process that is both a regular process and an annual process. The annual process, first, is through an annual questionnaire, individual one-on-one meetings that the Chairman of the non-executive directors, Sir John Parker, has with each member of the Monetary Policy Committee, external and internal. The results of that questionnaire and those specific meetings and any issues are discussed privately with the non-executives. In addition, throughout the year, we have informal meetings with MPC members—we had an excellent working lunch with them not too long ago—where we are able to discuss with them their issues, both in a macro context but also in the context of the Committee. We have regular reports, a monthly report from Charlie Bean on how the process is working and any particular issues that are emerging, internally and externally. It is an iterative, continuous process anchored each year in an annual process.

  Q333  John Thurso: Are there any particular concerns that they express to you that come up regularly?

  Ms Fawcett: Nothing urgent or compelling at this stage has come out. In the past, there was a big issue about support, which has been addressed; some concern about the forecasting round, which has also been addressed; some concern about data, ONS data on services for example, which they addressed directly with the ONS. Again, all of this has been what I would consider part of the process—refining it and making it better but nothing particularly acute or damaging to the process of the MPC at this stage.

  Q334  John Thurso: The Bank of England Act also gives you the duty to deal with MPC members that you are not satisfied with and you can remove them at the end of the day. Have you ever had a case where there is an MPC member that you are not satisfied with or considered in any way?

  Ms Fawcett: Not in my time in Court, which is the last three years.

  Q335  John Thurso: I did not think so somehow but I thought I would ask the question anyway! Are you satisfied with the current terms of appointment of the external MPC members, which is three years with the possibility of a three-year reappointment, or whether you would prefer to see a longer term that was fixed or some other variant?

  Ms Fawcett: The main thing here is to attract the very best people we can, picking up Mr Love's point, from the broadest possible base with the broadest possible experience. When you are an academic, you will have different constraints on your time in terms of how much time you can be away compared with someone in the City. The key here is to be flexible and not necessarily set in our ways. I have not seen or heard in my time in Court that the three-year term "with the possibility to renew for three years" has been an issue for any member of the MPC, and I am not aware that it has prevented us from attracting the right people to the MPC.

  Dr Potter: I believe there is an argument to appoint members for, say, six years. Professor Nickell suggested six years or five years with a cut-out at three; in other words, of their choice. The reason I say that is that I think that there is great merit in being completely independent of the appointment. There is huge merit in that.

  Q336  John Thurso: The point would be that by not being up for reappointment, you would say that that gives a greater degree of independence?

  Dr Potter: Yes, to the individual, not that the values and ethics of individuals currently are not independent but, nevertheless, it is better not to have any thought like that in one's head.

  Q337  John Thurso: Following on from that, in the evidence we had from Stephen Nickell, he suggested that there had been full-time external members in the past but there were now only three day per week members and that this might create some difficult. Is there actually a formal policy at the moment to hire new external members only on a part-time basis?

  Dr Potter: The question is: what is the amount of work involved in that activity and also whether there is merit in other activities beyond the Bank? It is the view of non-executive directors that the period of three days a week every week, apart from holidays, is an appropriate time to do the job, if you like, and there should be time spent in broader matters to keep abreast of things as a whole through their other activities, and so we believe that three days a week is the appropriate level, and that is the current position formally. In the past, during my time, there were members who were there for four days and paid for four days out of five. I cannot recall prior to my time, which is since 2003, whether there were five days but perhaps there were.

  Q338  John Thurso: The point that I am looking at here is that we have talked earlier about remuneration and getting the highest possible quality of people. If you had a candidate who was working for a major financial institution and therefore on a large City salary, clearly to do a job on the MPC at three days a week, they would almost inevitably have to resign that other job. They are faced with the choice of three-fifths of the salary that you decide upon, probably giving up several times that to take the job and many people will say, "No, thank you, I will keep the well-paid job". Are you not therefore then unnecessarily restricting the pool of applicants by making it three days regardless?

  Dr Potter: I think if you made it five days times the amount that we have been talking about here it still would not impact hugely on the scale of the City salaries that are involved and therefore I think the point is moot. In addition to that, if they were employed on the MPC and coming from a City institution, they would undoubtedly have to leave their position because of conflicts of interest or possible conflicts of interests that could occur. I am afraid it is a serious problem that the remuneration that can occur in the City is of such a different order, if you like, compared to the general level of economists in the academic world for example, or in the business world more generally. My only answer to that is that people take on the role because it is eminent and it is status-enhancing at the peak of their career to be appointed to the MPC. That is why they will join.

  Q339  John Thurso: It comes back to the point that Mr Fallon was making about the appointment process. Because you are disjointed from that, you do not really know how much this impacts because that is being dealt with by the Treasury. If you had a Nomination Committee and were dealing with it as a plc would do, you would be more aware and alive to these issues.

  Dr Potter: I totally agree with that. I think there is an argument, as I think has been discussed in the Committee, that the process of appointment could partly occur through a consultation internally in the Court, which would go towards this panel. It has been suggested the Chancellor could ultimately set it but I do think there is great merit in that.

  Peter Viggers: Chairman, could I say that we regard this inquiry as important and when a significant witness is due to appear and then fails to appear, that is a disappointment.

  Chairman: There has been a communication that there are legitimate reasons why Sir John Parker is not here.

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