Banking Bill

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Mr. Hoban: It is right that the Government will ensure that the people on the committee do not have a conflict of interest, but I wonder how challenging that is to deliver in practice. Given the interconnected nature of the financial services sector, the Chancellor, or whoever selects the court members, will have to be very careful not to appoint someone who has directorships across a range of City institutions and is an active participant in the market, as they could be excluded under the clause. The alternative is somebody who has recently retired and has no interests, but whose market knowledge is not as fresh as it might be. How will the Chancellor, in appointing court members, to deal with that, particularly given the reduction in the court’s size from 16 members to nine?
Angela Eagle: The hon. Gentleman rightly identifies some of the issues that need to be balanced when deciding who to appoint. They are not new issues for the court, however, because this part of the Bill ensures that the financial stability committee itself comes under the same regime that has worked successfully for the court of directors in the past. He rightly points out that there is always a balance between having those with enough up-to-date knowledge and savvy experience of markets to be able to contribute and avoiding those who have so many conflicts of interest that they have to leave the room for every meeting. That balance will have to be borne in mind when the appointments are made. I do not pretend that it will be easy, but those matters will be in the Chancellor’s mind when he makes those decisions.
As set out in new section 2B(3), a Treasury representative and others may attend the committee but they will have no say in decisions. The Bill also provides the Bank with additional policy levers by which it can contribute to financial stability. There was talk about a lack of tools, but hon. Members recognised that the earlier part of the Bill, which we shall start to discuss next week, puts other tools at the Bank’s disposal to contribute to financial stability, in particular its key role in the implementation of the special resolution regime and oversight of inter-bank payment systems.
The functions of the financial stability committee, which are set out in new section 2B(2), reflect the committee’s role in advising on and monitoring the Bank’s use of the new tools for maintaining financial stability. The committee will make representations to the court on the nature and implementation of the Bank’s financial stability strategy. The court will then be able to delegate further functions to the financial stability committee, if necessary.
Mr. Hoban: May I draw the Minister’s attention to new section 2B(2)(b)? It states that one of the FSC’s functions will be
“to give advice about whether and how the Bank should act in respect of an institution, where the issue appears to the Committee to be relevant to the Financial Stability Objective”.
That decision may have to be taken quite quickly, but we are to have a committee that will give advice on how the Bank should act. In a way that new section demonstrates part of the problem: by the time the committee talks about a particular institution it may be too late. It may take too long to get the committee together to talk about how it might approach a particular institution.
Angela Eagle: Obviously, the financial stability committee’s work will relate to a range of work that the tripartite system itself, in all of its forms, will be doing to monitor the circumstances of the market. For example, although we do not discuss it in the clause, the FSA has the duty to monitor particularly important market participants on an ongoing basis. I do not anticipate that a problem that serious would suddenly emerge and would not have been tracked earlier as a potential risk. I do not envisage a problem with getting monitoring and advice in a space of time that was too short to draw together the members of the financial stability committee—
Mr. Hoban: It could make a decision.
Angela Eagle: Let me come to that. The hon. Gentleman referred to the “hybridity” of the proposed model when expressing his worry that perhaps we had not picked the right one. As I understand it, he was getting at the hybridity between an executive committee, such as the Monetary Policy Committee, and a scrutiny committee. The former has been used as a model by both the hon. Gentleman and my hon. Friend the Member for South Derbyshire and is clearly supported by the Treasury Committee in its report, and the latter is the model that we are all familiar with.
The membership of the financial stability committee, as suggested in clause 216, reflects its functions. It is important to ensure that the committee is set up in a way that best enables it to fulfil its functions, rather than to compare it with very different committees. I agree with my hon. Friend the Member for Northampton, North that the Monetary Policy Committee is not a model on which to base the financial stability committee, simply because the FSC’s job is very different from and more complex and more difficult than the nevertheless important one of the MPC—deciding on the price of money, as reflected in an interest rate decision. The FSC’s functions as set out in the Bill and as reflected in its membership are primarily advisory, but they are also supported by monitoring functions. However, that does not mean that the committee should be constituted of only non-executive members.
Mr. Todd: I have already hinted that it is not explicitly stated to whom the committee gives advice, whereas it is clear that the recommendation should go to the court. The Bill is silent on who will receive the committee’s advice.
Angela Eagle: That is not because we do not have a view on who should receive the advice. It is not always the case that everything about the operation of committees is necessarily set out in primary legislation.
On a day-to-day basis, the financial stability committee will advise the Bank’s executives, because it is they who will often need to make decisions on how to deal with individual institutions, in perhaps fast-moving conditions. The Governor and his executives derive their authority from the court: they have delegated responsibility from the court and are ultimately accountable to it. That will be consistent with the strategy that the court of directors has agreed for fulfilling the financial stability objective, and it will be the court that holds executives and the committee to account for supporting it in meeting that objective.
Some decisions relating to financial stability will need to be taken by the court of directors, particularly the setting of the financial stability strategy. On some occasions a sub-committee will advise the court. The approach is context-specific, and it sits better in practice than in primary legislation. I hope that that gives my hon. Friend a view of what was in our mind when we plumped for this structure.
2.30 pm
Our model provides the best of both worlds; it allows executives and non-executives to come together to discuss, debate and advise on issues, including crucial decisions regarding banks and the operation of the special resolution regime. In designing the financial stability committee, the priorities of the Government have been to provide the Bank with a single source of co-ordinated expertise and advice; to monitor its functions and actions in relation to financial stability; to ensure that the Bank’s executives can take timely and informed decisions to safeguard financial stability in fast-moving situations; and to draw clear lines of accountability from the executive and from the financial stability committee to the Bank’s governing body. The model that we are proposing will allow us to achieve those objectives.
By establishing the financial stability committee as a sub-committee of the court, we integrate it into the existing governance structure rather than tearing it up and starting again. That helps to ensure that the financial stability committee will be central to the Bank’s decision making on financial stability. The non-executive members of the committee will provide vital expertise on financial stability, while the executive members on the committee, including the Governor as chair, will mean that the committee will be close enough to the action to be able to give informed advice, often in fast-moving situations.
It is right that the Bank’s executive takes the lead in operational decisions, taking expert advice from the financial stability committee, where possible. It would not be realistic to expect a committee including the expertise of non-executives to meet with the frequency that may be required for decisions in fast-moving emergency situations.
I hope that that approach at least explains the thinking behind the model, hybrid or otherwise, that the Government have set out in clause 216 and I hope that it explains why we ask that all the amendments, from amendment No. 58 to No. 63, not be moved or that they be voted against.
Mr. Hoban rose—
The Chairman: Mr. Todd, if you wish to come back on that you must do so now; otherwise, Mr. Hoban will wind up.
Mr. Todd: I think that I formally moved the amendments in my name.
The Chairman: No, you did not.
Mr. Todd: I thought I said so.
The Chairman: Order. For the benefit of the Committee, the procedure is that only the lead amendment is moved; the others are moved formally in due course, if necessary. So the hon. Gentleman does not have to withdraw his amendments, if that is what he was about to do.
Mr. Todd: Then I will explain why I will not move them, if that is the case. The nub of this is a very English model, which will greatly depend on the people who are appointed to the functions set down in the Bill; it does not have the intellectual coherence that I would like, but it may well work, and that is what we tend to do in this country. On that basis, I will not move my amendments.
Mr. Hoban: I had hoped the Minister would address the definition of financial stability, but she has not done so and, as this is a stand part debate—
Angela Eagle: I am happy to come back to that.
Mr. Hoban: I should be grateful if the Minister made a long, or short, intervention.
Angela Eagle: Perhaps if the hon. Gentleman makes a brief intervention I can come back and make a longer intervention in answer to his question, rather than try to fit it in quickly. It is not a simple issue, Mr. Gale, as you will have noticed from our earlier discussions. I am happy to come back on that; my apologies for missing it out in my response.
Mr. Hoban: Mr. Gale, I am not sure where we are, procedurally. I would find it more convenient, in winding up this debate, if the Minister responded to my question about the financial stability objective now; then I can come back—
The Chairman: If the hon. Gentleman would like to sit down, I will call the Minister.
Angela Eagle: Thank you, Mr. Gale; we got there in the end. Again, my apologies for not covering this point directly.
The debate featured just a sprinkling of the many different definitions of financial stability that the Treasury Committee managed to uncover in its hearings that various people, not only from the UK but from all around the world, have come up with. The one that Nigel Jenkinson quoted and the one that was quoted earlier from the Governor of the Bank is perhaps as good as any. The fact that there are so many definitions and they all differ slightly bears upon why there is no direct definition of financial stability in the Bill in primary legislation. We know it when we see it. In fact, some of the definitions are of financial instability rather than stability. It is interesting to note that Nigel Jenkinson in his evidence at the beginning of this Committee’s proceedings said:
“I do not personally think that it is necessary to have a definition of financial stability in the Bill. We produce regular reports”.——[Official Report, Banking Public Bill Committee, 21 October 2008; c. 21, Q54.]
My hon. Friend the Member for Northampton, North quoted some of them, as did the hon. Member for Fareham.
Financial stability is context-specific with a very broad definition that can change quickly. We felt that it was such a moving target and so context-specific that it would not fit easily in the Bill. The Bank, of course, will have to agree its financial stability strategy with the Treasury and we have every confidence that it will do so appropriately, drawing on all the available international and academic sources. It has the capacity to call in people to advise it on that subject. Rather than have an awkward and rigid definition of financial stability in the Bill, we felt that this would be the more appropriate and future-proof way of dealing with it. I hope that helps the hon. Gentleman.
Mr. Hoban: I am grateful to the Minister for that addendum. In a way it captures the essence of the debate we have had on clause 216. It is an evolutionary process.
Mr. Todd: Suck it and see.
Mr. Hoban: That is absolutely where we are. The hon. Member for Northampton, North gently chastised us for using the Monetary Policy Committee as a model for this but I would point out that her right hon. Friend the Chancellor of the Exchequer said:
“We should learn from the example of the Monetary Policy Committee, and take a similar approach to financial stability,”—[Official Report, 5 June 2008; Vol. 476, c. 916.]
The present Under-Secretary of State for Work and Pensions, her hon. Friend the Member for Burnley (Kitty Ussher), said in July, only about six weeks after the Chancellor came up with those wise words:
“I know the comparison with the MPC has been made but I think it is an entirely different situation.”
It just shows that, even over the course of six or seven weeks, the Treasury’s own view of this had evolved. We will see how effective it is in practice. While not necessarily coming back to look at legislation, I suspect that people will pore over the practice of how the Bank of England delivers and contributes towards maintaining and enhancing financial stability. I am sure the Treasury Committee will be kept busy for some time monitoring its activities in that respect.
This has been a helpful debate. It has drawn out from the Government that we will have to see how this works and think about the context. We are in difficult waters at the moment trying to work out the right institutional arrangements, but this debate has been helpful in establishing the start of that process and we shall see how it develops. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
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