Banking Bill

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Mr. Todd: It is a pleasure, as always, to serve under your chairmanship, Mr. Gale. I will cover similar ground to the hon. Member for Fareham, but perhaps not at quite the length he treated us to.
First, I will focus on what is in the Bill and the purpose of my amendment, and then go back to some fundamental principles. Financial stability and any objective that we set in that regard should be set by a democratic body. In this context, that must be the Treasury, and its policies should be answerable to the House of Commons, so the first goal is for the Government to set out exactly how they intend to drive forward the achievement of financial stability in this country, however defined. That is not set out in the Bill, and my purpose in proposing the amendment is to provoke the Government to say more about it. It would be helpful if they defined their approach more sharply. The Bill does not give responsibility for financial stability to the Bank; what it actually states is that the Bank
“shall contribute to protecting and enhancing the stability of the financial systems of the United Kingdom”.
That is a rather different thing, because I think that we all accept—the hon. Member for Fareham made this clear—that there are a number of potential assistants in that process. We have tended to shorthand the text by saying that the Bank has been given that objective, but actually that is not true. It has been given a specific contributing function, and my task is to try to make that function more specific and clearer.
Mr. Hoban: Is not part of the problem that the Bank is the only member of the tripartite with a statutory duty for financial stability? The Bill therefore projects almost sole statutory responsibility on to it, rather than the Bank being a contributor to the process.
Mr. Todd: The hon. Gentleman is of course right, but that is not what the Bill states.
Angela Eagle: In fact, the hon. Member for Fareham is not quite right. It might assist the Committee if I say that the FSA has important objectives in relation to financial stability and the Financial Services and Markets Act 2000, which has a direct bearing on what we are talking about. For example, the FSA has a responsibility for maintaining market confidence in the financial system. That, too, is about financial stability, so it is inaccurate to say that only the Bank of England has that duty in all the laws that impinge on the area we are discussing.
Mr. Todd: But it is the only body that will be nailed with the particular piece of jelly that we are trying to hammer to the wall—financial stability. The terminology, which the Minister has rightly quoted, does not quite use those words. One of the difficulties is defining what we mean. We have just had a little exchange about the various definitions, and I accept that they vary widely.
The sort of process that I am used to, if one accepts the principle that core goals should be set by a democratically elected Government, is that the strategy for delivering those goals is worked out between the various participants who are supposed to deliver the objective. I think that we would all accept that fundamentally those participants are the tripartite authorities, but there may be other contributors to the process. The Government must own that task, however. That is why I attempted in my amendments to define more narrowly the role of the Bank of England court. The Bill states—indeed, it is the Bank’s current reporting practice—that the court determines the Bank’s strategy in that regard. I have some doubts about whether that is right. The strategy should be set by the Government, and the detailed mechanics of delivering it should be a matter for the governance of the Bank. One of my amendments touches on that point. Clarification of who leads and how to divide the responsibilities would be valuable.
Secondly, I focus on the Bill’s narrow elements. We must define the institutional structure and how it functions. I shall not repeat the comments made by the hon. Member for Fareham, with interventions from me, but I shall try to simplify things. One difficulty is that the court of directors as we know it is not the court of directors to which we may give responsibility in future. The number of members of that court is, of course, specifically modified in the Bill, but my strong feeling is that we shall be looking for slightly different characters in terms not of their morals, but of their background, knowledge and experience. One of my difficulties lies in imagining the Bill in the hands of the people I know and encounter through my work on the Treasury Committee, whereas the challenge is perhaps to envisage a slightly different group of people. That leads me to believe that without sharper knowledge of the sort of qualifications that the individuals who will fill the seats will have, it will be hard to judge the Government’s rather uneasy compromise, which gives a substantial role to the court of directors in that area of policy.
I shall go into a little more detail. The court of directors, as it is now, is in essence a non-executive body in its functions. The way in which it is acknowledged in the annual report suggests that it performs a more profound role, but my experience is that that does not seem to be the reality. The Bill asks it both to determine and to review the Bank’s financial stability strategy. Although I would expect the court, if it were primarily a non-executive body, to review the strategy and monitor its delivery, determination of that strategy should lie with the Treasury and the Bank’s executive. Giving that critical task to the court, chaired by a non-executive, as the Bill explicitly requires, means that the proper function of scrutiny and challenge is compromised.
Having said that, this country is used to fudge and deals made around personalities and the occupants of individual posts. We have tended to do that for centuries in the role of, for example, the Lord Chancellor, so it is not foreign to say, “That may be the theoretical position, but surely we can find another way of cracking this.” If that is our approach, I would like the Government to set out with greater clarity how the monitoring and oversight functions are clearly separated from the executive tasks involved in delivering what the Bill requires of the Bank.
It is important for the financial stability committee to recognise that the Bank already has governance structures for some elements. The hon. Member for Fareham referred to the financial stability board, which already exists in the Bank. The deputy Governor is tasked with financial stability, so we are not talking about new tasks and functions with which the Bank is unfamiliar. It carries out core tasks in relation to financial stability. We can argue about whether those tasks have always been done well, but they are explicitly recognised. The Bank regularly publishes a financial stability report focusing on many of the issues that we have discussed. I sense that what is happening is an attempt to formalise the financial stability board and to make it more capable of bearing greater explicit burdens and broadening its membership from its current, relatively narrow, base. It would be useful to see, set out in a clearer form, the lineage from where we are to where we seek to be.
The committee, as set out in the measure, will be a core part of the executive team at the Bank, and there will be four non-executive directors drawn from the court, who would normally see their core role as challenging and monitoring the performance of the Bank’s executive. The tasks that the committee has been given are a curious mixture. The first, in new section 2B(2)(a)—
“to make recommendations to the court of directors”—
contains an explicit relationship to the court, so that subsidiarity is confirmed and there is a reasonably clear definition of what is expected. However, as I pointed out in our evidence session, it is not clear to whom the committee is answerable regarding other tasks. In subsections (2)(b) and (c), the committee is invited to “give advice” on critical issues to persons unspecified. It could be to the court or anyone else—the Treasury, the world at large or the financial community; I do not know. The issues on which it may give advice include
“whether...the Bank should act in respect of an institution”
“whether and how the Bank should use stabilisation powers”.
The gathering of information before a critical executive decision by the Bank is a vital part of what is in essence an executive function. To me, that sits ill with the membership of the board that has so far been defined.
Stewart Hosie (Dundee, East) (SNP): It does sit ill. The hon. Gentleman is absolutely right about the advice being given—it might be given to the world at large, and it might be general rather than specific. Is there not a contradiction between the possibility of offering that sort of advice, which might be public, and the abolition of the weekly return, thus allowing the Bank to publish only the information that it sees fit? Is there not a contradiction between publishing general, global advice while possibly restricting information that might allow people to determine whether that advice is good?
Mr. Todd: The hon. Gentleman anticipates a point that I shall touch on—the communication and public role of the body if we set it up in the form that is being discussed.
Subsections (2)(d) and (e) provide for the accepted, non-executive function of monitoring various activities within the Bank. To be rather explicit, I think that those matters should be carried out by non-executives. Much though I admire the current Governor—I do not wish to imply otherwise—if I were in his position, I would find it uncomfortable to sit on a body that was monitoring the performance of my duties if I were chairing that body when it happened. I am not sure how I would manage a meeting of that kind if the process was genuinely meant to be challenging and critical. The Governor is a man who might be able to master that process, but it is certainly not one that many people would be particularly comfortable with.
Mr. Hoban: May I draw a parallel with the private sector? Where a plc has an audit committee, the financial director would not be a member of that audit committee to avoid the great tension to which the hon. Gentleman referred. [Interruption.]
Mr. Todd: As was said in a quiet intervention from my right, we are talking about a unique set of circumstances, so it is difficult to draw comparisons. That is a fair comment. However, if we work out the principles of the matter, it can be helpful. The hon. Gentleman is right to say that, in a corporate environment, we would expect the model to be one in which the executive responsible for carrying out a function would at least not be leading the meeting that discussed whether the person or persons had done the job appropriately.
1.45 pm
I shall not press the amendments to a Division, but I want to disentangle the process to some extent or at least encourage the Government to make more explicit their rationale for choosing such an apparently compromised framework to deliver the tasks. My alternative would make clear the oversight duty of the court. It would establish the financial stability committee not as a sub-committee of the court, but as an entity in its own right. It would place it within the executive framework of the Bank, correctly led in my view by the Governor. It would add four members who are separate from the executive and not members of the court either, and in that sense would have parallels with the Monetary Policy Committee, as no member of the MPC is a member of the court of the Bank of England.
My proposal sets out some qualifications. I do not claim that my choice is particularly wise, but it attempts to find some qualifications and disqualifications in respect of the membership. Although the precise means of the committee’s operation need not be defined under the Bill, I can see it fulfilling some functions beyond those that my amendment structure has left from the Bill, as drafted. In response to an earlier intervention, the Bank already publishes a financial stability report. It is fair to say that in the evidence sessions enjoyed by the Treasury Committee the Governor and other Bank officials made it clear that close reading of the financial stability report would have revealed many of the problems that have crystallised into the crises that beset us now.
In our consideration of this and other matters relating to the crisis, it has come across quite frequently that there is a strong argument that the communication function is critical. Some remarks made by the hon. Member for Fareham have some resonance. It would be valuable if there was open communication and an obligation for people to respond to it, so that they acknowledge that warnings have been expressed and must prepare a response that at least says, “We’ve heard that, and this is our reaction, and this is how we will manage the information that has been provided.” Adding external weight to the body that produces that communication would be helpful. Both the line of questioning that I followed in the Treasury Committee and the evidence that the Committee heard was that that experience needs to be drawn from well outside these shores, too. We have much to learn from other countries about managing financial stability. Furthermore, that would not be a new experience for the Bank. I believe that one of the members of the financial stability board in an ex officio role is a key Scandinavian banker who was presumably selected by the Bank’s executive to provide exactly the sort of experience of the Scandinavian banking crisis that would be helpful when considering some of the complexities of both anticipating loss of financial stability and attempting to rectify the problems caused by it. Deepening the intellectual base of the committee and the communication channels available to it are part of what I am proposing.
As we know from the activities of the MPC—I touched on this during an intervention—it spends a good part of its time travelling the country, listening to other people. The Bank has an excellent collection of regional agents who often host functions with MPC members so that they can listen carefully to the experience of those on the ground in the economy. Members of the financial stability committee, when it is established, would play a valuable role if they did something similar. Gathering information, not merely from data in the economy but from the anecdotes and experiences of those who are working to deliver wealth in our country, is an important function of people carrying out such a role. Communicating that to the outside world, not just in a report, which I have mentioned, but in speeches is, as we know, an important part of the MPC’s work. The hon. Member for Fareham mentioned the role of David, or Danny, Blanchflower—depending on how well people know him—in these matters. To be honest, all those involved perform that function.
It will be important to have people who do not share exactly the same intellectual leanings on the committee. Diversity of membership is a strength and an incredibly powerful educational resource for those of us who dip into many of these subjects. A range of experts should approach the issues from various directions and would present challenges, both to other parts of the intellectual community and to those in the real economy, who are the critical determinants of whether we will succeed or fail.
The operational duties of the Bank in that respect, which are covered in aspects of the Bill, could benefit from greater external experience and challenge. Again, the Bill has the potential to do that. If it is confined only to drawing from a membership who are members of the court, it will narrow the ability to respond to that need.
A further point that came up in the discussions in the Treasury Committee is the importance of stress-testing and war-gaming in these critical areas—examining data that indicate where weaknesses might be and positing some of the scenarios that will have to be confronted by the various authorities involved in dealing with threats to financial stability. Although the exact circumstances to be faced can never be predicted, there is evidence, certainly in respect of the Northern Rock crisis—where it was obvious—of inexperience in tackling some of the functional tasks of addressing the “what if” scenarios that lie before us. When discussing this subject, I am afraid that such scenarios tend to be rather dramatic and outside our normal experience, as we have seen. Defining some of those scenarios and testing how we might respond to them institutionally is thus an important function of the body we are talking about. All the things I have mentioned are executive resources, making the Bank do its job as an executive better.
To answer the Minister’s question about which model I would prefer, I favour the more executive model. I have a pretty strong suspicion from the evidence that we heard from the Governor that that is his preference too. That may explain the slightly hybrid body that confronts us; it has some executive features and some non-executive features, and it has some curtailment of members in various respects too.
I sense that what we have in these provisions is a typical compromise that is designed to meet the rather unique circumstances. That is why I have not gone down the route of thinking, “Well, this is how we do it in plcs, and so on”. These are unique circumstances. There is no right answer, but there may be some issues of principle that we can get wrong.
I want this debate to be an opportunity for the Government to set out more sharply what they are trying to do and the means that they have chosen to achieve it, as well as the linkages to where we are now, so that we can see more clearly the path that is being put down for us.
As I said, some of the frameworks already exist within the Bank; some of the tasks are already there. Some questions remain. How do we move from A to B? What are the underlying principles, and why have we chosen a model that, on the face of it, does not fit the expected division of non-executive and executive functions? The Treasury Committee was certainly robust on that last point.
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