Reporting contingent liabilities to Parliament - Treasury Contents

Reporting contingent liabilities to Parliament

1. On 24 November 2009 the Treasury Committee was to take evidence from the Governor of the Bank of England on the Bank's November inflation report. However, immediately before that hearing the Governor wrote to the Chairman to alert the Committee to the fact that:

In exceptional circumstances, as part of its central banking functions, the Bank acts as 'lender of last resort' to financial institutions in difficulty in order to prevent a loss of confidence spreading through the financial system as a whole. Accordingly, the Bank extended Emergency Liquidity Assistance (ELA) to two institutions, RBS and HBOS, in the Autumn of 2008.

In most cases, confidence can best be sustained if the Bank's support is disclosed only when the conditions that gave rise to potentially systemic disturbance have improved to a point where the disclosure itself should not be a cause of such disturbance. Having carefully weighed the public interest case for disclosure against the potential systemic consequences, the Bank decided to use its powers to limit the extent of disclosure in its financial statements in the 2009 Annual Report. However, as stated in the Bank's Annual Report 2009, it is the policy of the Bank that such assistance should be disclosed once the Bank considers that the need for secrecy has ceased. Now that RBS has signed up for the Asset Protection Scheme and Lloyds Banking Group has embarked on its alternative strategy for capital raising, the Bank judges that there is no longer a need for the assistance to remain secret and that it is now appropriate to disclose details relating to the ELA provided to RBS and HBOS last autumn.[1]

2. The Bank's operations were underwritten by a Treasury indemnity which:

indemnified the Bank on a net basis against losses that it might suffer or incur in connection with the Bank's commitment to ensure that the banking system had sufficient access to liquidity, including this ELA. The indemnity was granted due to the size of the operations, and considered in the context of the existing demands on the Bank's balance sheet at that time. It was not related to any perception of any increased risk associated with lending to the banks.

The indemnity was provided initially for a period of two months. The Bank paid an indemnity fee of 170bps to the Treasury.[2]

3. On the same day, the Chairman of the Committee received a letter from the Chancellor of the Exchequer, dated 23 November. This letter also revealed the emergency liquidity assistance. In addition it set out the terms of the Treasury guarantee.

4. The assistance provided by the Treasury was a contingent liability. The House of Commons, of course, authorises government expenditure each year through the Supply cycle. When the Government gives an indemnity it is undertaking that it will if necessary provide funding, even though the House has not yet authorised it (and cannot, by definition, authorise it until the need for such funding is clear). Under long-standing arrangements contingent liabilities are required to be reported to the House of Commons by the department which has incurred them. This one had not been. The unusual nature of this procedure prompted us to inquire further and to make this Report to the House.

Normal Procedure

5. The current system whereby contingent liabilities are notified to Parliament was proposed by the Treasury in November 1977 following a report of the Committee of Public Accounts. The proposal was as follows:

The Treasury note the comments of the Committee. They propose, as regards the introduction of a standard procedure to notify Parliament of the details of each new case of a guarantee of any substance, that such guarantees, when no statutory procedure is already laid down, should be the subject of a Minute to be laid before Parliament. Wherever practicable the likely order of magnitude of such contingent liabilities will be given where the financial effect cannot be quantified with any certainty.[3]

Guarantees and contingent liabilities had been reported to Parliament before the standardised procedure was introduced, either by inclusion of a token sum in the estimates, or by ministerial statement or written answer. The Committee of Public Accounts had recommended:

We note that Parliament is informed of individual guarantees in a variety of ways, and that one might be merely through the inclusion of a token sum in the published Supply Estimates without specific attention being drawn to it. We therefore recommend that the Treasury should consider arranging for more specific notification to Parliament in each new case of any substance, preferably by one standard procedure; and that they should consider the possibility of informing Parliament of the likely order of magnitude of contingent liabilities on the Consolidated Fund in those major cases where the Government has given a general assurance whose financial effect cannot be quantified with any certainty.[4]

6. However, not all contingent liabilities can be openly reported or reported ahead of time. Managing Public Money, in effect the Treasury's manual for Accounting Officers, sets out what should happen in such cases:

If, exceptionally, the liability needs to remain confidential, the minister should inform the chairs of the relevant select committee and the PAC; then inform Parliament openly if the need for confidentiality lifts.[5]

Similarly, as Erskine May makes clear, the Chairmen should be informed if a contingent liability is incurred during a periodic adjournment of the House and Managing Public Money notes that "As a matter of record, when Parliament reconvenes, a Minute should be laid explaining what has happened, including any liabilities undertaken."[6] While it is important for Chairmen to be informed when the House is not sitting, we do not understand why the guidance does not simply require the Minute to be laid when they are so informed, since Command Papers can be laid during adjournments.[7]

7. The reason for reporting the liability is to provide Members with an opportunity to object. Indemnities should therefore be notified in advance. Managing Public Money states:

If an MP objects by letter, Parliamentary Question or Early Day Motion, the indemnity should not normally go live until the objection has been answered. In the case of an Early Day Motion, the Member(s) should be given an opportunity to make direct personal representations to the minister, eg proactively arranging a meeting with them. The Treasury should be kept in touch with representations made by MPs and of the outcome. When confidential reports to Chairmen are made then representations from those Chairmen should be treated in the same way.[8]

This provision has been included in Treasury guidance since 2000.[9] The Treasury clearly breached its own well established guidance to all parts of the public sector when it failed to inform the Chairman of this Committee and the Chairman of the PAC of the guarantee given to the Bank of England in respect of Emergency Liquidity Assistance.

The Permanent Secretary's explanation

8. The Committee called Sir Nick Macpherson, Permanent Secretary to the Treasury and Accounting Officer to explain why the indemnity had been concealed for so long. He first claimed, in a letter to the Chairman, that his action had been "consistent with the principles in Managing Public Money". We asked his justification for this:

I think you will find, Mr Fallon, that in relation to the role of the Accounting Officer there is a line which says that the acid test is whether the Accounting Officer could justify the proposed activity if asked to defend it, and I believe I can.[10]

I think you have to go back to the very exceptional circumstances of October of last year. Over a period of days there emerged a very considerable risk that the banking system would collapse altogether. The previous year in relation to Northern Rock emergency liquidity assistance had been offered but, you will recall, leaked prematurely, thus triggering the run on Northern Rock.[11]

Sir Nicholas claimed both that the indemnity had to be kept secret to avoid triggering bank runs and that Parliament had been informed about the scale of potential Government support for the banks:

You will recall that the Chancellor came to Parliament, or certainly made a statement to Parliament, on 8 October, I think, which was before the guarantee supporting the ELA was given, which was on 14 October, so the Chancellor had already informed Parliament that the amount of guarantees we might give to the credit guarantee scheme could reach £250 billion. The ELA in effect was subsumed within that £250 billion, so that when, over the course of November in the case of RBS and, I think, December in the case of HBOS, those companies had managed to line up support from the credit guarantee scheme, they no longer needed the emergency liquidity assistance. In terms of the aggregate liabilities, we have always been totally clear to Parliament about the magnitude.[12]

9. It was clear that the decision to conceal the liability was taken by the Chancellor:

Sir Nicholas Macpherson: No, I did not advise concealment. We advised the Chancellor on this issue.

Q7 Mr Fallon: What was your advice?

Sir Nicholas Macpherson: The advice was consistent with notifying Parliament.

Q8 Mr Fallon: Did you advise the Chancellor to notify Parliament?

Sir Nicholas Macpherson: Yes, as we would with all contingent liabilities. The Chancellor, perfectly reasonably, took the view that he did not want to disclose the support at that time.

10. However, as Sir Nicholas himself pointed out, Accounting Officers have the power to demand explicit instruction if they consider a Minister is acting improperly. He did not consider this to be the case.

As Accounting Officer I could have demanded a direction on the issue but I thought, taking all the issues into account, that was a perfectly reasonable decision for the Chancellor to take and I did not think it right to demand a direction in this case.[13]

…..I thought the Chancellor's decision was consistent with the principles of Managing Public Money because the circumstances were truly exceptional. I have mentioned already that the support was consistent with the broader guarantees which had already been notified to Parliament, so I did not feel that this was somehow an additional sum of money because it was subsumed within the money contained within the special liquidity scheme and the credit guarantee scheme.[14]

11. Later in Sir Nicholas's evidence, a picture emerged of decisions necessarily taken extremely quickly, in extreme circumstances:

you have to understand is that everything during this period happened at an extraordinary pace. This advice was put together in the course of about 45 minutes. We had that little time. The decision was taken within an hour, I think, of the advice being drafted.[15]

It was also clear that the Governor of the Bank of England considered that secrecy was paramount, and that:

The Governor was clear that for emergency liquidity assistance to be successful secrecy was of the utmost importance. What you need to remember is that they started the ELA initially without a Treasury guarantee. You should also bear in mind that at its peak we guaranteed £18 billion of the £60 billion. The Bank had £100 billion of quite good quality collateral being offered for the £60 billion, so initially at least there was a prospect that the Bank of England could provide the assistance without a Treasury guarantee, so it was only a few days after the ELA started that the guarantee was sought and given.[16]

However, Sir Nicholas was clear that the decision as to whether or not to inform the Chairmen was one for the Government, not the Bank.

12. One reason for Government reluctance to reveal the liability to the Chairmen was that the Treasury clearly envisaged that the two Chairmen would have to be advised by letter, as had been the case in the past, and that this would inevitably compromise the extreme secrecy needed:

the Chancellor of the Exchequer, and indeed the Treasury, have the highest respect both for the Chairman of this Committee and the Chairman of the PAC, but this was all about minimising risk and it is in the nature of letters that there is a risk that more than one person sees them and the decision was taken on that basis.[17]

13. Since the Committee hearing the Chancellor of the Exchequer has written to the Chairmen of this Committee and the Committee of Public Accounts and proposed that if such exceptional circumstances arise in future they should receive an oral briefing.

14. Sir Nicholas's evidence was exceptionally frank, and is to be commended. Given the events surrounding the failure of Northern Rock, the extreme urgency of the situation, and the Bank of England's view that "secrecy was of the utmost importance", we can understand why the Chancellor decided that absolute secrecy was paramount, and why Sir Nicholas considered that decision proper. Nonetheless, in our view, the decision was overly influenced by the assumption that disclosure of the liability would have to be in writing. We welcome the Chancellor's proposal that if such extreme circumstances arise in future the Chairmen should be briefed orally, and regret that this was not done when the indemnity for Emergency Liquidity Assistance was extended. In future, we expect Committee Chairmen to be briefed properly, whatever the circumstances.

1   Ev 5  Back

2   Ev 4 Back

3   Treasury Minute on the Reports from the Committee of Public Accounts Session 1976-77 and abstract of Appropriation Accounts, Cmnd 6977, p 28. Back

4   Committee of Public Accounts, Tenth Report of Session 1976-77, HC 536, para 67 Back

5   Chapter 5: Funding, Box 5.2: contingent liabilities: notifying Parliament Back

6   Managing Public Money, A5, 5.30 Back

7   Erskine May, Parliamentary Practice, 23rd edition, page 265. Back

8   Managing Public Money A.5.5.26 Back

9   Government Accounting, 2000 Back

10   Q 2 Back

11   Q 3 Back

12   Q 4 Back

13   Q 8 Back

14   Q 9 Back

15   Q 23 Back

16   Q 28 Back

17   Q 4 Back

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Prepared 22 February 2010