Financial Regulation: a preliminary consideration of the Government's proposals - Treasury Contents


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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