Conclusions and recommendations |
The Bank's proposed Oversight Committee
1. The authority of any Oversight Committee will depend on its statutory remit far more than its structure or membership. We welcome the Governor's flexibility as to the remit of the proposed Oversight Committee, which he has said could also include monetary policy. Such a Committee should also examine the work of the Prudential Regulation Authority.
2. Parliament's practical ability to hold the Bank to account will rest, to a substantial degree, on the extent to which the Court develops into a proper board, with adequate scrutiny and review powers. Court lacks much of what is required under present arrangements. The Oversight Committee, as proposed in the Court's memorandum, does not plug that gap. The Oversight Committee's role, as proposed by the Court, would be so heavily circumscribed that it could not be relied upon to provide adequate scrutiny. It is unrealistic to suppose that an oversight body could plausibly be expected to commission an external review of a policy decision without assessing the substance. Nor could such a body be expected to avoid engaging with the implications of the policy conclusions of that external study.
3. We are unconvinced by the Court's argument that internal review of policy, as distinct from process, is undesirable in principle. On the contrary, internal review is essential. Most public and private institutions have the capability and self-confidence to debate and review policy internally without damage to the institution concerned. We do not exclude a role for external review; it should occur when the Bank does not itself have the skills to conduct such a review, or for other reasons thinks that an external review would be better than an internal one. We reiterate our view that the body commissioning internal and external reviews should be adequately resourced and staffed within the Bank.
Provision of information
4. We welcome the Governor's assurance that the Bank will respond to requests from this Committee for information. The Court/Supervisory Board should be responsible for monitoring the way this duty is carried out. Parliament needs prompt and full responses to such requests in order to hold the Bank to account.
5. It is important to avoid cases where significant operations are undertaken by the Bank without any accountability at all. On one recent occasion the Bank failed adequately to inform the Chairman of this Committee about a secret operation. The Chairman of Court should have the duty to inform the Chairman of the Treasury Committee and of the Committee of Public Accounts where the Bank acts as a lender of last resort, or where the Chancellor is notified by the Bank of a risk to public funds but the crisis is resolved without recourse to public funds.
6. The Chancellor, accountable to Parliament, must have the discretionary power to direct a crisis where a material risk to public funds is developing. He or she should not, as was the case in the Johnson Matthey rescue in 1984, be faced either by a fait accompli, required to accede to an emergency request for support at the time a crisis is breaking out, or, as was the case in 2007, by a refusal on the Bank's part to provide additional funding to the banking system in order to alleviate a developing liquidity crisis.
7. A memorandum of understanding may be needed to govern some of the arrangements between the Bank and the Treasury in a crisis, but it should not be relied upon for determining how a crisis will be addressed. As much detail as possible about the Chancellor's power of direction should be set out in statute. This will greatly improve the clarity of the responsibility of the Chancellor for conduct of a crisis and thus his or her accountability.
8. We welcome the Court proposal that any Oversight Committee should monitor whether the Bank has notified the Treasury of a risk to public funds "at the appropriate time": this should help ensure that the Bank does so as early as reasonably possible.
9. The legislation must define the trigger for the Chancellor's assumption of the power to direct the Bank. The Court's proposal for a double trigger is unacceptable. A material risk to public funds alone should be enough to pass responsibility for affairs to the Chancellor.
10. Legislation should also define the scope of the power of direction. Court's suggestions are too circumscribed. The extent of the Chancellor's authority should not, in a crisis, be restricted to certain instruments of crisis management. He or she must have a general power to direct the Bank when public funds are at risk.
11. We are not convinced by the arguments of Court for the retention of a majority of internal members on the MPC and FPC. A bare majority of externals would not in our view dilute the Committees in the way, or with the consequences, that the Governor claims. A majority of externals is a necessary and sensible precaution against groupthink.
12. We do not agree with the Governor that the FPC would necessarily need to expand in order to have a majority of external members. Four, rather than five, very senior Bank executives should suffice.
13. It is greatly in the public interest that the new legislation provide a satisfactory long term framework for the accountability of the Bank of England. It will increase, not diminish, the authority of the Bank. The Court of the Bank of England has gone some way towards accepting the framework of our proposals for its future governance and accountability. However, we have set out in this Report a number of outstanding points, contained in our original Report, that must be reflected in the Financial Services Bill. If they are not, we may need to ensure that the Bank is accountable in other ways, such as the use of select committee specialist advisers to undertake reviews in the Bank on our behalf and to assist us in obtaining appropriate documentation. These alternatives are likely to be less satisfactory for the Bank, Parliament and the public. They are also less likely than our proposals to bolster the authority of the Bank's decisions. We want to see a strong, authoritative Bank.