9 Transparency and accountability
of the new bodies
Transparency and the Bank of
England
185. While the Crown appoints the Governor and Deputy
Governors, they can only be removed by the Court of the Bank,
with the consent of the Chancellor, and the grounds for removal
appear limited to non attendance at meetings, bankruptcy or being
"unable or unfit" to continue as a member.[162]
Such a powerful guarantee of independence increases the need for
clear, transparent criteria against which the Bank's performance
can be judged.
186. The monetary policy process in the United Kingdom
has several elements within its design to ensure its transparency.
For example, the MPC produces a quarterly Inflation Report, providing
analysis of the current macro-economic conjuncture, as well as
several forecasts, including the so-called 'fan charts' of forecast
inflation and GDP . The minutes of the MPC meetings are published,
and provide full disclosure of the votes of its members, as well
as an insight into the discussion that took place in the meeting.
MPC members also undertake public speeches, outlining their views
on the issues currently facing the UK economy, and their thinking
on the outlook for inflation.
187. Previous Treasury Committees have engaged with
the Monetary Policy Committee, their recommendations for further
improvements to transparency have been readily accepted. The Bank
implemented the recommendation that the minutes of MPC meetings
should be published earlier than was previously the case, and
they are now published a fortnight after the meeting. Another
previous Treasury Committee's Report encouraged the Bank's plans
to ensure "a structured set of discussions between professional
economists and staff members of the Bank."[163]
This Committee has decided to continue the previous Committee's
practice of holding hearings on the Inflation Report and appointment
hearings.
188. The Treasury Committee provides an appropriate
process for disagreements between members of the Monetary Policy
Committee to be aired.[164]
189. Both the previous Treasury Committee and this
one have called upon the Governor, and other Bank staff, to appear
to give evidence as part of our work on financial regulation and
the banking crisis. The Monetary
Policy Committee and the Bank of England have repeatedly demonstrated
their commitment to transparency. They have seen their engagement
with the Treasury Committee as a means of securing accountability.
That has been a key reason for the system's success and we warmly
welcome it.
Accountability under the new
arrangements
190. The combination of functions within with the
Bank of England raises the issue of how that institution is to
be called to account. This is particularly acute in the case of
the macro-prudential and monetary policy decisions made by the
FPC and the MPC. The FSA's regulatory proposals are potentially
open to judicial review, and have, on occasion, been so reviewed.
The policy decisions of the FPC and the MPC are of a different
nature, and we would be dismayed if they became subject to judicial
review. Moreover FSA proposals are consulted on openly before
they are implemented. The FPC will have access to some information
which must be held in confidence. Many of the decisions it is
to take would be undermined if prior warning were given.
191. One of the historical responses to the question,
"who shall guard the guards themselves?" has been to
argue for the separation of powers, but the whole thrust of the
reform proposals is away from such a separation. As the Governor
has stressed in his evidence to the Committee, each member of
the FPC and of the MPC should make up his or her own mind about
proposed decisions, so there is no sense in which the external
members should be thought of as overseeing the decision-making
of Bank staff. In the economic sphere, competition is usually
argued to be the appropriate discipline to punish poor decision-making,
but that is inapplicable for regulation within a single national
jurisdiction. In the long run, competition among jurisdictions
might help to drive out poor regulatory arrangements, but there
is also the danger that shorter-run location decisions by regulated
entities would undermine the effectiveness of national prudential
policy tools.
192. Hence attention needs to be paid to how the
Bank of England's considerable economic policy powers are to be
monitored and appropriate incentives set to encourage good decision-making.
The Governor has pointed out that the Bank of England is a public
body, subject to the scrutiny of Parliament, and has welcomed
regular hearings into the Bank's work by the Treasury Committee.
Scrutiny of the conduct of monetary policy has already been helped
by such hearings (prior to the granting of operational independence
to the Bank of England in 1997, there had been hardly any parliamentary
debate or effective parliamentary scrutiny of this important part
of economic policy-making). The Government consultation encourages
such engagement with the Treasury Committee. It also considers
there is a need for direct accountability to the Treasury, and
proposes:
As well as internal accountability (through Court)
and external accountability to Parliament, given its important
role in economic policy, the Government believes that the FPC
must also have a direct line of accountability to the Treasury.
Therefore, the Governor, in his capacity of chair
of the FPC, will brief the Chancellor on a six-monthly basis,
after the publication of each FSR. These briefings will serve
to update the Chancellor on the prevailing and emerging risks
to financial stability and the action proposed by the FPC to address
them. The Governor will also use these meetings to inform the
Chancellor of any other financial stability issues in the Bank's
wider remit—including the PRA. The meetings will provide
an opportunity for the Chancellor to comment on the risks to financial
stability, and action being taken to address them. A high-level
record of these conversations will be published.[165]
193. Even with these proposals, the new proposals
for financial regulation have raised concerns about a possible
democratic deficit. For example, the evidence of the British Bankers'
Association suggested that there were insufficient safeguards
to ensure democratic accountability:
When you consider the breadth of the Bank's new remit
it is easy to see why many consider the proposed accountability
to Ministers and Parliament to be undemanding […]. Few would
argue with the need for a strong, independent central bank. In
view of the broad responsibilities now being assigned to the Bank,
however, we would see a greater need for a more interactive engagement
between the Bank and the Government and Parliament.[166]
THE MPC VERSUS THE FPC
194. As we have already noted, there is a significant
level of transparency around the workings of monetary policy in
the United Kingdom. But transparency and accountability are two
different, but linked, concepts. Monetary policy is conducted
in a highly structured accountability framework. As the Bank of
England Act 1998 sets out:
In relation to monetary policy, the objectives of
the Bank of England shall be -
(a) to maintain price stability, and
(b) subject to that, to support the economic policy
of Her Majesty's Government, including its objectives for growth
and employment.[167]
195. The responsibility of the Treasury is then set
out by the Act:
The Treasury may by notice in writing to the Bank
specify for the purposes of section 11 -
(a) what price stability is to be taken to consist
of, or
(b) what the economic policy of Her Majesty's Government
is to be taken to be.[168]
Such 'remit letters' are produced every 12 months.[169]
The remit is currently defined as a target for inflation of 2
per cent as measured by the 12-month increase in the Consumer
Prices Index (CPI) at all times. Deviations of CPI from this target
by 1 percentage point in either direction lead to the Governor
writing an open letter to the Chancellor explaining:
- why inflation moved away from
target;
- the period within which the MPC expects inflation
to return to target;
- the policy action being taken to deal with it;
and
- how this approach meets the Government's monetary
policy objectives.
The Chancellor then responds to such letters he receives
from the Governor.
196. The
performance of the inflation targeting regime in the UK is measurable,
with explicit and well-defined roles for the Treasury and the
Monetary Policy Committee of the Bank of England as to overall
policy remit, decision taking and implementation. Deviations from
the target are obvious, to both the participants, and the wider
public. By a one person, one vote system on the MPC, alongside
vote publication in the minutes, decision making is transparent.
The Treasury Committee takes an active part in this process, pursuing
both transparency and accountability, using our hearings to draw
out MPC members' thinking on key topics, and appointment hearings
to assess their competence and independence. We can also question
the Chancellor as to the remit set by the Treasury for the MPC.
Independence is maintained by the strict separation between remit
setting at the Treasury, and decision making over interest rates
at the MPC.
197. While the FPC appears to be in some ways modelled
on the MPC, several sections of the accountability and transparency
system present in the MPC model have not been confirmed by the
Government. A number of them may not work as well for the FPC,
even if they were. As we have discussed previously in this Report,
financial stability is not an easily defined, or measurable target.
In the absence of a better description, it will be difficult for
outside observers, such as this Committee, or the wider public,
to assess the level to which the FPC is achieving its targets.
The Treasury and the FPC
must provide far more detailed criteria against which the achievements
of the new regime can be assessed. Without this accountability
will be considerably weakened.
198. The remit letter provided to the MPC provides
an opportunity, such as over the change from RPI to CPI, for the
Treasury to alter the target for monetary policy, without affecting
the independence of the MPC in its decision making on interest
rates. In monetary policy, regular remit changes are unwanted,
as part of the monetary policy targeting regime is to anchor inflation
expectations of consumers to a set inflation level. Repeated changes
would undermine that process.
199. However, in the case of the FPC, we question
whether the same logic stands. Financial firms would not like
the uncertainty of regular remit changes. However, changes to
the remit may be required in response to the development of macro-prudential
tools and the suitability of the way in which the target has been
defined. The MPC is given
its target in a regular, published remit letter from the Treasury.
We recommend that this be the case for the FPC. We would not be
surprised if the remit changed as more information and further
research becomes available about the operation of the macro-prudential
tools, and about how financial stability can usefully be defined.
Such remit letters provide the political authority for the operation
of such independent bodies. Their publication allows for scrutiny
by this Committee, as well as other interested parties. We will
take a close interest in the Financial Policy Committee, and its
relations with government, and we will hold regular hearings.
200. While the measures above are parallel to the
MPC process, there remain a number of differences. In particular,
some of the actions of the FPC, and the information it receives,
will be damaging if placed in the public domain at the time of
the FPC's consideration of it. The transparency of the MPC bolsters
its accountability, allowing this Committee and others to engage
with it, assess how it intends to meet its target in the future,
and provide accountability to Parliament. The need for the FPC
to occasionally act secretly, and regularly receive information
of a confidential nature, makes replication of such a system impossible.
201. The Committee
will give further consideration to the accountability of the new
regulatory structure in the light of the Government's second consultation
document, due to be published shortly. Meaningful proposals on
accountability cannot be made without more detail.
162 Bank of England Act 1998, Schedule 1 Back
163
Treasury Committee, The Monetary Policy Committee of the Bank
of England: Ten years on, HC 299-I, Session 2006-07, para
113; The Bank has initiated alongside the Centre for Economic
Policy Research a programme of Monetary Policy Roundtables, the
last one being held on 14 December 2010. Back
164
For example, see oral evidence given to the Treasury Committee
by members of the MPC on the November 2010 Inflation Report Oral
Evidence on Thursday 25 November 2010, Session 2010-11, HC 634 Back
165
Cm 7874, paras 2.61-2.62 Back
166
Ev 194, see also Q 163 Back
167
Bank of England Act 1998, section 11 Back
168
Bank of England Act 1998, section 11 Back
169
Bank of England Act 1998, section 12 Back
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