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'(4) Where a matter has been omitted from either the annual report or the minutes published under section 2(4), where the action involves financial assistance as defined in section 257 of the Banking Act 2009, a report should be laid before Parliament when the conditions under (3) above no longer apply.'.
The Minister and I went round this loop a few times and at some length in Committee. I will not repeat the length, but I may repeat some of the arguments. The Bill puts on a statutory footing the standing committee of the tripartite authorities that sought to bring together the Bank of England, the FSA and the Treasury in a single body. Its remit was to be
"the principal forum for agreeing policy and, where appropriate, coordinating or agreeing action between the three authorities. It is also an important channel for exchanging information on threats to UK financial stability."
The body put in place as a consequence of the reforms the Government announced in 1997 has been subject to a lot of scrutiny over the past few years. Its operations were the subject of much work by the Treasury Committee, which said in its report:
"We cannot accept... that the Tripartite system worked 'well' in this crisis."
There are two approaches one could adopt. The first is to say that the system needs to be swept away and there needs to be wholesale reform of financial regulation, and that the structural failures-between the Bank and the FSA, for example-are such that the Bank needs to
take on additional responsibility as a macro-micro potential regulator. We need to reform what is left of the Financial Services Authority. That is the view we take on the Conservative Benches, but the Government take another view. Their belief is that the structure still works and all we need to do is to put the committee on a statutory basis. That is the thrust of the first four clauses.
"we could have done better."--[ Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 10, Q16.]
That is a mild understatement, typical of the Minister. In Committee, he made a much more vigorous defence of the merits of the standing committee and why it should be put on a statutory basis, instead of introducing the wholesale reform we proposed. His argument was that the committee worked well during the crisis. He cited four instances and said that no retail depositor had lost money. When it became apparent that the authorities did not have all the appropriate tools to resolve bank failure, the Government had passed new legislation-the Banking (Special Provisions) Act 2008, which the Minister and I dealt with in Committee.
If the tripartite authorities had worked well before the crisis, those arrangements would have been in place, because it is clear from the war games between the Bank and the FSA, when they looked at what would happen in a crisis, that one of the missing tools was the appropriate resolution tool. The fact that the authorities felt the need to put in those tools after the crisis arose was not necessarily a sign of the success of the tripartite arrangements but rather recognition of their failure.
The Minister said that the Government had used the powers to rescue failing banks and that the world's financial system stabilised as a consequence. However, although we can see what the outcomes of the tripartite committee have been, not much light has been cast on its inner workings since the crisis started.
Some of the committee's failings are quite deep-seated. In Committee, my hon. Friend the Member for Chichester (Mr. Tyrie) asked the Minister how many times the committee had met before the crisis. The Minister tried to duck the issue; indeed, he succeeded, but we know the answer. The committee met only once and that was via a telephone call at the request of Hank Paulson, the then US Treasury Secretary.
It is beyond belief that the body meant to co-ordinate risk and response did not actually get together. I do not understand why it did not, but the Bill rectifies that situation. It requires that the committee meet quarterly, but just in case the principals do not want to get together they can of course send their deputies instead. There is no guarantee that the committee will function properly if it is put on a statutory basis. It is a very Labour approach-"Something needs to be done so let's pass a law." There is a real challenge here.
Given that the committee was the forum for discussing financial issues, and given the warnings published during the run-up to the financial crisis, we would have thought it had plenty to talk about. The Bank of England's financial stability report for 2004 said:
"The questions are whether risk is being priced properly, and to what extent the search for yield is leading to excessive leverage"-
a prescient warning of some of the problems emerging in the financial market, which would eventually lead to the crash, yet the committee did not meet to talk about
those questions. I do not know what discussions there have been between the three parties, but clearly none of them got together in a room to talk about things. In the run-up to the crisis, the committee failed to look properly at the risks.
The financial crisis demonstrated the problem of who was in charge. Who in the tripartite committee ensured that things were dealt with and that the authorities co-ordinated their work properly? We know that the authorities failed to co-ordinate over the emergency funding needed to provide a private sector purchaser for Northern Rock. Even when the committee was being established and the arrangements were being put in place, questions were being asked about what would happen in a crisis. In 1999, when the Financial Services and Markets Bill was wending its way through the House, my hon. Friend the Member for Chichester asked:
"If a single bank crisis develops into a systemic crisis, who is responsible then?"-[ Official Report, Standing Committee A, 13 July 1999; c. 174.]
"What do you mean by 'in charge'?"
We have a standing committee tainted by its failure to prevent or anticipate the crisis, and tainted by its failure to co-ordinate before or during the first stage of the crisis. In Committee, the Minister said:
"I do not pretend that there was not room for improvement-indeed, lessons have been learned." --[ Official Report, Financial Services Public Bill Committee, 5 January 2010; c. 226.]
That sounds encouraging, but if there are lessons to be learned we would expect far-reaching reforms to financial regulation. We would expect the committee to be restructured, to be more dynamic and forward-looking in its work and to be much more decisive and clear about who is in charge.
"It is the principal forum for agreeing policy and, where appropriate, coordinating or agreeing action between the three authorities. It is also an important channel for exchanging information on threats to UK financial stability."
"The Council must...keep under review matters affecting the stability of the UK financial system, and...co-ordinate any action taken...for the purpose of protecting or enhancing the stability of that system."
All we seem to have done is to reshuffle the words, but the remit is exactly the same. That does not fool anybody. The Treasury Committee described the changes as "largely cosmetic". In a way, the Minister nodded to that argument when he said:
"What we are doing through the Council for Financial Stability is formalising arrangements that have already been in existence." -[ Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 5, Q4.]
I am not entirely sure whether that was the warm endorsement of a new structure that we were looking for to give us confidence. We know that earlier this month the council has already met without legislative support. It has broadly the same remit, with a re-jigging
of the wording. However perhaps it will be more decisive. Perhaps it will demonstrate the leadership we are looking for. The Treasury Committee report "Run on the Rock" said:
"The Tripartite authorities did not seem to have a clear leadership structure. We recommend that the creation of such an authoritative structure, must be part of the reforms for handling future financial crisis."
John Howell: Given that the establishment of the council means that the tripartite relationship will be put on a statutory basis, is my hon. Friend any clearer-he might recall that I have raised this question before-about how many people are in the relationship? Is it now three or four?
My hon. Friend the Member for Chichester will remember the Public Bill Committee evidence session in which he asked probing questions of Andrew Whittaker, the general counsel for the Financial Services Authority, and John Footman, who gave evidence on behalf of the Bank of England. It was clear that there was a disagreement about responsibility. The Minister had suggested that this was some sort of endeavour in which everyone shared full responsibility for the body, but Mr. Whittaker suggested that the FSA had a secondary role to play in delivering financial stability, which was not quite the same thing that the Minister said. John Footman of the Bank of England suggested that the prime responsibility rested with the Chancellor because he was accountable to Parliament.
We have a confused situation, in that the Government suggest that this is a shared enterprise in which everyone has responsibility, but once we get below the surface and probe the three parties of the new body, we find that the only person who seems to believe in the principle of equality of responsibility is the Minister, and the Bank of England and the FSA believe that they have a different role. That is disappointing, because we would have hoped that one outcome of this process, given the previous lack of leadership, would be clear lines of responsibility. We have tried to get more clarity from the Government at various times throughout the passage of the Bill about who will be responsible for what. We now have a further opportunity to add clarity to the Bill, but if the Minister feels unable to agree with our proposals, he could accept amendment 3, which would strike out clause 1 and send the clear signal that we do not think that this structure will be fit for purpose.
Mr. Tyrie: Perhaps it is worth illustrating the confusion about the new structure, never mind the old one. When John Footman was asked whether anyone in particular had a lead role, he replied that the Bill
"is an attempt to answer that question".
"They treat each other as equals",
"it is an attempt to bring together bodies whose powers are different, but which interact with one another."
"Do you think it is possible for somebody in a secondary role and somebody in the same committee in a lead role to have equal roles?",
"I am confused about roles."--[ Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 38, Q95 and Q97-99.]
Mr. Hoban: My hon. Friend does the House a service by reminding us of those exchanges during our evidence session because we saw the creation of a sense of confusion. The problem was exacerbated by the fact that the Minister had been robust about shared responsibility during our morning sitting, but it had all rather fallen apart by the afternoon.
"We, for our part, recognise that our role in relation to financial stability is, in some senses, a secondary one to the other authorities. If there were to be a disagreement as to what would be needed for financial stability, it is inconceivable that we would wish to second-guess the views of the other authorities in that respect."
"Do you think that there is someone who is first among equals in the three-way committee?",
"The obvious answer is that only one person in that committee is directly accountable to Parliament, and that is the Chancellor." --[ Official Report, Financial Services Public Bill Committee, 8 December 2009; c. 28-29, Q58 and Q62.]
All those quotes are absolutely relevant, but surely the most damning quote of all is that from Adrian Coles of the Building Societies Association, who said that the proposal was a "modest measure" and that
"Of itself it is not going to prevent the next bubble, it is not going to prevent the next banking crisis" --[ Official Report, Financial Services Public Bill Committee, 10 December 2009; c. 71, Q183.]
Mr. Hoban: The quotes that my hon. Friends and I have cited-there is a feast of quotes-demonstrate the fundamental failure of the architecture that the Government are putting in place through the Bill. Two of the three authorities that form the tripartite body demonstrate a lack of confidence in the arrangements, and the evidence from Mr. Coles shows that even those who are regulated by a part of the structure-the FSA in his case-lack confidence that the outcome will be any better than that under the standing committee. We need to address that problem, and new clauses 11 and 12 are an attempt to do that by drawing together the parties to the arrangement more closely.
In new clause 11 we reflect on the fact that the Banking Act 2009 gave the Bank of England responsibility for financial stability, although the Governor argues that it was given responsibility without powers, which is addressed by new clause 12. It is clear that when the Bank of England undertakes its role of maintaining and enhancing financial stability, it should have some
regard to the council for financial stability when devising its strategy, and that is what new clause 11 would achieve.
Mr. Footman responded in the Public Bill Committee's evidence session to the Governor of the Bank of England's evidence to the Treasury Committee in which concern was expressed about the lack of powers to implement financial stability objectives. When I asked Mr. Footman what additional powers he thought the Bank needed, he identified the need for the Bank to have the power to collect information, saying:
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