Financial Services Bill

The Committee consisted of the following Members:

Chairs: Mr George Howarth  , Mr Edward Leigh 

Bradley, Karen (Staffordshire Moorlands) (Con) 

Burt, Lorely (Solihull) (LD) 

Durkan, Mark (Foyle) (SDLP) 

Evans, Chris (Islwyn) (Lab/Co-op) 

Fovargue, Yvonne (Makerfield) (Lab) 

Garnier, Mark (Wyre Forest) (Con) 

Gilbert, Stephen (St Austell and Newquay) (LD) 

Gilmore, Sheila (Edinburgh East) (Lab) 

Hamilton, Fabian (Leeds North East) (Lab) 

Hancock, Matthew (West Suffolk) (Con) 

Hands, Greg (Chelsea and Fulham) (Con) 

Hoban, Mr Mark (Financial Secretary to the Treasury)  

Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op) 

Leslie, Chris (Nottingham East) (Lab/Co-op) 

Norman, Jesse (Hereford and South Herefordshire) (Con) 

Pearce, Teresa (Erith and Thamesmead) (Lab) 

Rutley, David (Macclesfield) (Con) 

Sharma, Alok (Reading West) (Con) 

James Rhys, Marek Kubala, Committee Clerks

† attended the Committee

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Public Bill Committee 

Tuesday 28 February 2012  


[Mr George Howarth in the Chair] 

Financial Services Bill

Financial stability strategy and Financial Policy Committee 

Amendment moved (this day): 33, in clause 3, page 11, line 35, leave out ‘two’ and insert ‘four’.—(Chris Leslie.)  

4 pm 

The Chair:  With this we are discussing the following: amendment 32, in clause 3, page 11, line 37, after ‘system’, insert 

‘including both the most likely outcome and a range of reasonably possible scenarios.’. 

Amendment 19, in clause 3, page 12, line 2, at end insert— 

‘(f) an assessment of the impact of each macro-prudential measure on employment and economic growth.’.

Amendment 20, in clause 3, page 12, line 9, at end insert— 

‘(c) an assessment of the state of financial stability against early warning indicators and report against the effectiveness of the macro-prudential measures deployed.’.

Amendment 31, in clause 3, page 12, line 9, at end insert— 

‘(c) an assessment of the impact of the Committee’s measures on the functioning of financial markets and the wider economy.’.

Chris Leslie (Nottingham East) (Lab/Co-op):  The Committee will recall that I was moving amendment 33, which is grouped with amendments 32, 19, 20 and 31. Amendment 33 is about the Financial Policy Committee’s financial stability reports. It seeks to increase the reports’ frequency from twice a year to four times a year to align it with the Monetary Policy Committee’s quarterly bulletin. 

Amendment 32 states: 

“after ‘system’, insert ‘including both the most likely outcome and a range of…possible scenarios.’” 

It concerns the details of what the financial stability reports must cover, particularly the requirement for the Committee to give a 

“view of the stability of the UK financial system at the time when the report is prepared”. 

Clearly, the recommendations of the FPC can have a wide-ranging impact, so we need to ensure that the financial stability reports and the measures that the FPC advocates impact the wider economy with as few adverse or unintended consequences as possible, especially when it comes to the prospects for economic growth. Members of the Committee will recall my anxieties that the Bill as it stands already has a blind spot for economic

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growth. They will know how concerned we are that so little thought has been given to the impact on growth under this system, and we have already discussed how the FPC would be improved if it had an employment and growth objective. 

A submission from the Institute of Chartered Accountants in England and Wales made the compelling argument: 

“Given the uncertain nature of projections about the financial system, a discussion of a range of possible scenarios in an outlook should also be introduced in the reports, to ensure the committee’s considerations are transparent.” 

Our amendment therefore highlights the need for a range of reasonable possible scenarios rather than simply one narrow projection. 

Members of the committee will be familiar with the fan chart process with which the MPC’s quarterly bulletin makes predictions about likely scenarios. Although I accept where we are today in terms of our economic and econometric forecasting—it is difficult to turn what many will feel is a qualitative set of analyses into a quantitative set of analyses when it comes to stability projections and such concepts—we are not in quite the same ballpark as perhaps with monetary policy. This opens up the box in terms of what sort of metrics the Monetary Policy Committee will be using. What are the tells and what are the indicators across economic activity that might suggest credit bubbles are beginning to expand? 

It is all very well in hindsight saying, “Gosh, that was a big credit bubble in the housing market” or whatever it may be. Hindsight is a wonderful thing, but it does not help in terms of projecting the next scenario. We want the FPC to somehow develop a set of indicators that might act as markers or posters that say, “This set of circumstances might be an indicator that something difficult is potentially looming or around the corner.” I am not after a target-driven set of scenarios, but looking for an analysis that properly appreciates the various scenarios that might come in the medium to long term. That is the purpose of amendment 32. 

Amendment 19 would make an important change to clause 3 on line 2 of page 12, at the end of the proposed new paragraph requiring the financial stability report to include various aspects. We are seeking to introduce paragraph (f), so that the report must also include 

“an assessment of the impact of each macro-prudential measure on employment and economic growth.” 

My hon. Friends will know about the importance of ensuring better attention to those facets of policy about which our constituents and businesses care most of all. 

Mark Garnier (Wyre Forest) (Con):  The hon. Gentleman makes laudable points, but are they not more appropriate for the Office for Budget Responsibility than the FPC, in terms of economic forecasting? 

Chris Leslie:  No, because the Office for Budget Responsibility looks at fiscal policy, and we are talking here about stability. Stability may well fall under the ambit of the OBR at some point, and I would be interested to hear its thoughts about it, but given that we are talking about the contents of the financial stability report, it is important to understand what the report will include. 

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I am not the one being over-prescriptive here: there is a list in the Bill that sets out that a stability report must include a, b, c, d and e. I am simply talking about the components that it ought to include. The job of the interim FPC has so far been to publish financial stability reports. They have been interesting, but there are ways in which we can improve the FPC’s analysis and ensure that it covers issues that policy makers more broadly might want to touch on. Amendment 19 would build in a better sense of specific analysis of the impact of each macro-prudential measure that the FPC feels needs to be taken. 

For the sake of argument, let us say that the FPC wants to change the minimum repayments our constituents make on their credit cards from roughly 2% on a monthly basis currently to 5%, for whatever reason. That is an example of a macro-prudential tool. To what extent will the FPC properly appreciate the impact on the economy that such a change would have––not just the change itself, but the timing of the change? If many of my constituents were forced to repay their credit cards more rapidly than they would otherwise do, it might take significant sums of money out of the economy and have a significant macro-economic impact. 

I want to ensure that the FPC has a proper understanding of the downstream consequences of its measures. That is why we wanted, in an earlier section of the Bill, the FPC to have regard to the Government’s employment and growth objectives, but we were defeated, at least in Committee, on that amendment. It is more appropriate to ask the Minister to think again about the impact of such elements in the FPC’s bi-annual, but hopefully quarterly, reports. 

There should be transparency about the impact of jobs and growth of each macro-prudential tool. We need to have some means of holding the FPC accountable for its decisions, albeit with the Treasury’s support in enacting them. Given that there are other requirements on a financial stability report in proposed new section 9T, a specific requirement about the impact on jobs and growth is exceptionally important. 

We recognise that there are difficulties in fully analysing what the impact on the economy could be from a particular measure, but it is not impossible to make an estimate. Perhaps in working with the OBR and others in the forecasting business, the FPC and the Bank of England could learn a thing or two about how to make such predictions. That is why we think the report process needs enhancing in this way. 

Amendment 20 would ensure that the FPC makes 

“an assessment of the state of financial stability indicators against early warning indicators and report against the effectiveness of the macro-prudential measures deployed.” 

We want to insert that provision into proposed new section 9T(4), on page 12, which talks about other aspects the financial stability reports must include. Again, the amendment would aid transparency regarding the strategy and indicators used by the FPC. It would allow others to make a judgment about the effectiveness of the measures concerned. 

The Treasury Committee thought that that was necessary. Paragraph 14 of its 21st report recommended that Her Majesty’s Treasury 

“give guidance under Clause 3 of the draft Bill to the Bank of England to adopt indicators for gauging financial stability. The selected range of indicators must be flexible and under constant

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challenge and review, not only by Parliament, Government and the Bank of England, but also by others such as financial industry practitioners, the media, academia and the public. The indicators should be published so that the performance in maintaining financial stability may be monitored and so that it can be held accountable for that performance. The FPC should report against these criteria at regular intervals.” 

The pre-legislative scrutiny Committee picked up on that proposal, and its comments chime in perfect pitch with the amendment. Paragraph 319 of its report said: 

“The bi-annual Financial Stability Reports should assess the state of financial stability against the early warning indicators which we endorsed…and report the effectiveness of macro-prudential tools deployed.” 

Surprise, surprise, the Government, in their response to the Treasury Committee and the pre-legislative scrutiny Committee, were of a different opinion, but it is interesting to see how they framed it. They said: 

“The Government believes that openness and transparency are important to secure public understanding of macro-prudential policy. The Bank has made clear in its response to the TSC’s report into Bank accountability that the FPC will regularly publish, and report against, indicators of financial stability.” 

If the Treasury is in agreement, I do not see what harm can come from writing such a requirement into the Bill.  

Ultimately, we have a right as parliamentarians to say which aspects of a report and which indicators we would find particularly informative. It would also help to have a degree of specificity in this part of the Bill. The amendment would not prevent the FPC from publishing in other ways to supplement the financial stability reports. However, it would ensure, at a minimum, that the FPC reports against indicators of financial stability. 

David Rutley (Macclesfield) (Con):  The hon. Gentleman makes a strong case, but it fails the “Just a Minute” test, because amendment 20 repeats what is in proposed new section 9T. That provision says the financial stability report must include a summary, and proposed new subsection (4)(b) goes on to say that it should include an assessment of the extent to which the exercise by the Committee means it has carried out its functions. The amendment is very worthy, but it is surely repetition. 

Chris Leslie:  If it was repetition, I am sure you would rule it out of order, Mr Howarth, as indeed happens on “Just a Minute”. Let us not change the rules as we go along. I do not think it is repetition, because there is no provision in the Bill asking for an assessment of the state of financial stability against early-warning indicators, and it would be useful to have such a provision. Simply judging whether the FPC’s exercise of its functions has succeeded during the reporting period in meeting its objectives is not as forward-looking a requirement as I would like. If the reports are to be useful, they need to focus on horizon scanning and what is coming in future. That is a crucial component of the FPC’s work. 

4.15 pm 

Amendment 31 would introduce a requirement that the financial stability reports make 

“an assessment of the impact of the Committee’s measures on the functioning of financial markets and the wider economy.” 

The amendment is framed so that we can get a sense of the read-across from the work of the Financial Conduct Authority, which currently, as framed in the Bill, has a strategic objective to ensure that relevant markets function well. 

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It is appropriate to ensure that the FPC also keeps an eye on the smooth functioning of financial markets. There are important interconnections within the financial system and the knock-on consequences of macro-prudential measures, given the interrelated nature of the different financial services sectors, could be important. Therefore it is necessary, for completeness’ sake, to ensure that the FPC also has regard to some of those market-functioning tests. We are talking about the impact of the measures on the real economy and how they will affect the operation of day-to-day markets. The amendment would add some colour to the report. 

It is difficult to debate the relative merits of each amendment in such a considerable group of amendments, but it is important that financial stability reports are rigorous, sufficiently frequent, forward looking and judged against indicators that give some intelligence about what is coming on the horizon and, in particular— I hope that my hon. Friends agree—assess the impact of the measures on the real economy and what will happen to economic growth and job creation. For those reasons, I commend the amendments to the Committee. 

Lorely Burt (Solihull) (LD):  I want to speak briefly on amendment 32. It is important that we can forecast clouds on the horizon. Looking back to the beginning of some of our financial difficulties, all the signs were there, but we did not necessarily understand how to interpret them. I am sure that we never imagined that things would turn out as badly as they eventually did, because of the range of factors available to any Government or the FPC at any time. 

Although it is not necessary to include it in the Bill, will the Minister comment on scenario planning to ensure that we map out eventualities and consequences that may not immediately be apparent? That is important, because we do not have a crystal ball or, indeed, many crystal balls. The Minister’s reassurance that, in the normal course of things, he would expect an element of scenario planning to facilitate the work of the committees would be welcome. 

The Financial Secretary to the Treasury (Mr Mark Hoban):  It is a pleasure to welcome you to the Chair for this afternoon’s proceedings, Mr Howarth. As an experienced Chairman, you will know that Ministers occasionally seek enlightenment and clarification during the lunch break, and that has been the case today. 

During a previous debate, the hon. Member for Nottingham East asked me to write to him about the Joint Committee on Statutory Instruments. I can inform him that it was not that Committee, but the equally well respected and experienced Delegated Powers and Regulatory Reform Committee of the House of Lords that made a representation to the pre-legislative scrutiny Committee. I know that he will have read its recommendations as part of his assiduous preparation. In paragraph 9, on page 127 of the pre-legislative scrutiny Committee’s report, the Delegated Powers and Regulatory Reform Committee stated that the reason for the power to make macro-prudential tools was explained in the Treasury’s delegated powers memorandum and that 

“We do not consider it inappropriate; and the importance of the power is recognised by the application of the draft affirmative procedure or, in urgent cases, the 28-day ‘made affirmative’ procedure”. 

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That Committee has therefore adopted the same view as the Treasury, which is that the affirmative, rather than the super-affirmative procedure, is needed. I thought it would be useful to clarify that, although we identified the wrong Committee, we certainly arrived at the right answer. 

Amendment 33 would require four financial stability reports to be published every year, which draws a parallel with the inflation reports that were so notably contributed to by my hon. Friend the Member for West Suffolk in his time at the Bank of England. There are key differences between monetary policy and macro-prudential policy. Macro-prudential policy action may take time—perhaps running into months—to be implemented properly, and its full effects may not be felt for a long time. That different pace of macro-prudential policy is reflected in the fact that the FPC will meet quarterly, while the MPC holds monthly meetings. The six-monthly financial stability report also reflects the longer time frame over which macro-prudential actions must be considered. As my hon. Friend made clear this morning, that report is not the only communication tool; it will be supplemented in other ways. The six-monthly cycle will sit neatly with the quarterly pattern of meetings, bearing it in mind that the MPC meets monthly and the inflation report is quarterly. On that basis, there is no requirement to have the same frequency of reports. 

My hon. Friend the Member for Macclesfield, who is clearly a devotee of the panel game “Just a Minute”, rightly pointed out the repetition not so much in the speech made by the hon. Member for Nottingham East, but in his amendments. Amendment 32 would insert the phrase, 

“including both the most likely outcome and a range of reasonably possible scenarios.” 

However, subsection (3)(e) refers to 

“the Committee’s view of the outlook for the stability of the UK financial system.” 

A forward-looking sense is therefore already enshrined in the Bill. 

On amendments 19 and 31, as I made clear last week, one of the interim FPC’s recommendations on macro-prudential tools is the need to think through the likely macro-economic impact of those tools on the wider economy, which is a key part of putting the powers in place. As the hon. Member for Islwyn pointed out in the debate about indicators, the FPC’s December report stated that it should look at a range of them. That report—it has already been much quoted in Committee—also stated, in section four, on “Selection criteria” for tools, that 

“The second criterion is the efficiency with which a tool successfully achieves a reduction in systemic risk”. 

The points are well made by the hon. Member for Nottingham East, but they are already reflected in the Bill or by the way in which the Financial Policy Committee will act in practice. On that basis, I do not believe that the amendments are necessary. 

Chris Leslie:  I am grateful to the Minister for his explanation. I hope that we do not get into the practice of finishing discussions on groups of amendments that took place previously. The Minister mentioned the Delegated Powers and Regulatory Reform Committee in respect of the super-affirmative procedure, which we

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talked about this morning. I would have been quite happy for the Minister to write to us with his apology for getting the wrong Committee. 

The Chair:  Order. I took it that the Minister was trying to be helpful and therefore was not being too prescriptive about how I dealt with it. 

Chris Leslie:  I was just about to say that it is important to have some flexibility in the proceedings to allow Ministers to be helpful whenever that is necessary. 

The Minister’s justification for not wanting four reports from the Financial Policy Committee was a little tenuous. The pace of macro-prudential policy is sufficiently longer than it is for monetary policy or other macro-economic policy arrangements. With the greatest of respect to the Minister, that has yet to be proven. There are many ways in which the pace could be quicker or slower, but I do not think that he can say at this stage that he knows what the pace of macro-prudential policymaking is likely to be. There are many other non-macro-prudential policy measures that can take an inordinately long time to enact, so the argument is a little spurious. None the less, I accept his point about the fact that the MPC meets on a monthly basis and then has a quarterly report. That is a stronger point. Reports do not necessarily have to align with each particular meeting. If we are creating a certain degree of constitutional symmetry within the Bank and we are having a Financial Policy Committee and an MPC as well, it would make sense to mirror the four reports a year. We may want to return to this matter when we are in Government, but at this point in time, the Minister makes his arguments well, so I will not press that issue. 

The Minister thinks that amendment 32 is already sufficiently covered by subsection (3)(e). Again, that is a moot point. It would have been preferable to have been more specific about the sort of forward looking early-warning indicators or the range of scenarios that might be there. The hon. Member for Solihull made an important point on this; Ministers do not want to write any more on that in the Bill. It is a shame, but we have heard the Government’s point. 

I am afraid that I do not agree with the Minister when it comes to amendment 19. It is important that at the very least the financial stability report should have an assessment of the impact on the real economy of each one of the macro-prudential tools that are being put in place. It is a bit like the regulatory impact assessment that we sometimes have accompanying legislation or other statutory instruments. At the very least, it is the sort of impact assessment that most of us should be concerned about in the Committee. It is not in any way a light matter. I am happy to withdraw amendment 33 and not to press amendments 32, 20 and 31, but I will press amendment 19 to a Division, because it is an important point of principle. I beg to ask leave to withdraw the amendment. 

Amendment, by leave, withdrawn.  

4.30 pm 

Amendment proposed: 19, in clause 3, page 12, line 2, at end insert— 

‘(f) an assessment of the impact of each macro-prudential measure on employment and economic growth.’.—(Chris Leslie.)

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Question put, That the amendment be made. 

The Committee divided: Ayes 6, Noes 10. 

Division No. 9 ]  


Evans, Chris   

Fovargue, Yvonne   

Hamilton, Fabian   

Jamieson, Cathy   

Leslie, Chris   

Pearce, Teresa   


Bradley, Karen   

Burt, Lorely   

Garnier, Mark   

Gilbert, Stephen   

Hancock, Matthew   

Hands, Greg   

Hoban, Mr Mark   

Norman, Jesse   

Rutley, David   

Sharma, Alok   

Question accordingly negatived.  

Question proposed, That the clause stand part of the Bill. 

Chris Leslie:  We have come to a point where we have exhausted clause 3, although I say that with a degree of regret because it is probably one of the most important clauses in the Bill. There are so many difficulties with the legislation that it has taken a bit of time to debate and try to amend, although the Government have not conceded a thing. 

Greg Hands (Chelsea and Fulham) (Con):  We have not been persuaded. 

Chris Leslie:  The Government Whip says that I have not persuaded the Minister, and I bear that failing entirely on my shoulders. Perhaps I will try harder in future clauses when it will be important to make my arguments in a more forceful but not necessarily more voluminous way, although I could be tempted. 

Clause 3 has some merit in that it establishes the Financial Policy Committee and sets out the concept of macro-prudential policy making. The Opposition recognise that and support the work of the interim Financial Policy Committee. If the Bill is enacted, we want to see a Financial Policy Committee that works effectively. The problem is that clause 3 also contains many gaping holes, and the Minister has not assured me that the legislation is adequate as it stands. 

For example, the status of the FPC as a sub-committee rather than a committee was raised by the Treasury Committee and the pre-legislative scrutiny Committee. We sought clarity during earlier debates about the internal wiring between the FPC and the regulators, and the FPC and the rest of the Bank of England, but rather than shedding light on the matter, the Minister has confused and obfuscated the situation. 

On committee membership we had a small discussion about whether there will be a fair balance of external representatives from the wider economy, or whether the committee will be a creature of the Governor. Seven executives will be appointed, four externally. The Minister made a point about the chief executive of the Financial Conduct Authority, but even if that is factored into the figures, the majority of appointees will still be made by the Governor and that will create quite an imperial

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system within the Bank. I do not think that the right balance has been struck between non-executives and Bank executives, which is a pity. 

One of the biggest blind spots in the clause is the lack of attention paid to the impact that macro-prudential policy making could have on jobs and growth. I know that we divided the Committee specifically, just now, on the macro-prudential measures, but also on the strategic objectives of the Bank, and it is troubling that the Government have not accepted that somehow macro-prudential policy making could have an impact on growth. 

The Minister could have said, “Yes, I think that some of the stuff that the FPC will be doing might cause difficulties—it could lead to higher or lower unemployment; there could be downstream consequences for the real economy”; but, no, his view was that there was a wall to be built around the work of the FPC, that it had nothing to do with jobs and growth, and that, in fact, if we were to give it an obligation to have regard to those things, somehow that would breach the fundamental principle of separation of powers, which was something to be resisted at all costs. 

It was partly for those reasons that we felt, “Well, hang on a minute, we need proper parliamentary scrutiny of the macro-prudential measures, when they come, so at least we can pause and properly check whether adequate account has been taken of issues to do with the real economy”; but those concerns were rebuffed again by the Minister. 

As to problems with parliamentary scrutiny and accountability, the Minister has cited one House of Commons Committee that perhaps had not picked up on the importance of the super-affirmative process, but others who have perhaps considered the matter in greater detail made the recommendations. Sometimes I think that because I am the one advocating the conclusions of the pre-legislative scrutiny Committee or the Treasury Committee, I am colouring them from my perspective; but I am trying to bring the issues to the fore in Committee. 

The Government are right to want financial stability, but they must be careful about lack of accountability and about having insufficient regard for the effect on the wider economy. The clause has serious deficiencies, which could have significant consequences. Unless we get the fundamentals of the regulators right, we risk creating regulation that is out of touch and that pays inadequate attention to the important tasks of creating jobs and growth in the UK economy. 

That leaves us in a dilemma. The Minister has rigidly refused to accept any changes to the clause, and, as we near the end of consideration of part 1, it is exactly as it was when we began our proceedings. Report stage is still to come, and although some of the bigger points of principle that I have been arguing will not be accepted, there are some smaller ones about which Treasury Committee members have concerns, and they may try to influence Ministers behind the scenes. 

I hope that the Minister will table amendments to clause 3 on Report, and we would welcome those, particularly if they were in the spirit of some of our suggestions. As things stand it would be irresponsible

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merely to allow clause 3 to be passed without voicing our concerns. We are in favour of a financial stability strategy and a strong and functioning Financial Policy Committee, but clause 3 would not achieve those ends, so, with the greatest regret, we must vote against it. 

Stephen Gilbert (St Austell and Newquay) (LD):  It is a pleasure to reconvene under your chairmanship again, this afternoon, Mr Howarth. I do not want to detain the Committee long, but, as the hon. Member for Nottingham East said, clause 3 is perhaps the most significant provision in the Bill, and the clause stand part debate is a significant milestone. 

The clause is important because of the macro-prudential regulatory regime that it introduces, and the possible overall consequences for many different sectors of the economy. There has been talk about the ability to regulate mortgage lending and credit cards—and perhaps the leverage and debt exposure of small and medium-sized enterprises. Potentially all parts of the economy could be touched by the powers that we have debated in the past three sittings. That is why the clause represents such a significant step and such a change in the way we manage the UK economy. It is clearly the right change. The hon. Member for Nottingham East suggested that in his comments, although he cannot quite bring himself to support the clause overall. We clearly need to avoid the type of asset class bubbles seen in recent years, which have distorted parts of the economy and caused so much damage. 

I do have a concern, however, about parliamentary oversight. I was reassured on Second Reading, when I intervened on my right hon. Friend the Chancellor, who made it clear that he is relaxed about debates on the Floor of the House on proposed macro-prudential measures. I see my hon. Friend the Minister nodding, so perhaps we will look again at whether that can be made more explicit in the Bill, while still resisting the further proposals of the hon. Member for Nottingham East. 

In particular, if we look at proposed new section 9J(2) and (3), the FPC, when issuing a macro-prudential measure, 

“must give the Treasury a copy of any direction under section 9G”, 

but the Treasury then 

“may, if they think fit, lay” 

a copy of that order before Parliament. I find that provision wholly unacceptable, and I hope that the Government will take that on board and review it on Report. Clearly, given the level of the powers that Parliament is handing to the Bank of England, Parliament must maintain authority. We must be accountable for the powers being handed over, and there must be some form of redress. Therefore, that provision as it stands is not satisfactory, although I look to the Minister to enlighten me in case I am misreading it. If a copy of an order is laid before the Treasury, it is perfectly proper and easy for it also to be put in the House of Commons Library. 

I also wonder whether the new body that we are creating is the opposite of a rolling stone gathering no moss. We may well be creating a rolling stone gathering all sorts of moss, with all sorts of additional powers accreting to it as the years go on. Can the Minister, therefore, enlighten us as to whether consideration was

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given to the insertion of sunset clauses on the macro-prudential measures? It strikes me that everyone in the House wants to maintain responsibility for the powers that we are handing over, and one of the easiest ways to do that might be to ensure that they are in some way self-limiting. 

Overall, we clearly have the right direction of travel. The lesson of the previous years is that we have not properly managed full oversight of the UK’s economy so, with those two caveats, I am happy to support the clause. 

Fabian Hamilton (Leeds North East) (Lab):  I was intrigued to hear the remarks of the hon. Member for St Austell and Newquay on oversight. For a minute, I thought he was going to agree with us, and he seemed to be havering between what the Government are saying about the lack of necessity for a Select Committee to scrutinise financial services and his own concerns that there should be proper parliamentary oversight and sufficient debate on the Floor of the House. I await with great interest the response of the Minister or, perhaps, an amended clause 3 on Report. 

We have had an interesting debate on the clause which, in many ways, is the nub of the Bill. It is a good attempt to ensure that the stable door is closed after the horse has bolted. I give it six or perhaps seven out of 10, but it is not perfect. We can never be perfect, of course, but what my hon. Friend the Member for Nottingham East has tried to do is to improve it and to be helpful to the Government in this joint venture, because the wish throughout the House is to produce a Bill that not only will prevent some of the catastrophes that we have seen from happening again, but will work to ensure provision for jobs and growth in the economy. Regrettably, the Minister was unable to give an assurance that he would consider my hon. Friend’s proposals, even if the amendment was unacceptable to the Government. I had hoped that he might say more about jobs and growth, and whether the FPC could balance its remit for ensuring stability and—dare I use the word?—prudence in that side of the economy, which is so important in ensuring that the deficit is repaid. 

4.45 pm 

I support my hon. Friend in urging the Opposition to vote against clause 3, simply because of the number of amendments that he has helpfully proposed to the Government that have been completely rejected. In light of that, I hope the Minister will reconsider some of the points that were made even though the amendments were rejected. During this Parliament, the Minister and I debated the then Equitable Life (Payments) Bill. Do he and the Government believe that clause 3, as it stands, would prevent another Equitable scandal? That is what my constituents and those of every Member in Committee want to know. Will it prevent, or would it have prevented had it been in place, the scandal of Equitable occurring in the first place? 

My final point is one to which I alluded last week. Small and medium-sized enterprises, to which the hon. Member for St Austell and Newquay and many other hon. Members have referred, are the cornerstone of creating jobs, growth and wealth in this country. Many of my hon. Friend’s share my view that we must ensure that whatever legislation we enact through the Committee

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process will help such enterprises, in any way possible, to carry out their businesses and expand, grow and become larger. In doing so, we will create the jobs, growth and wealth that this country so badly needs. 

Sheila Gilmore (Edinburgh East) (Lab):  A Bill of this kind, as written, may seem extremely abstract and far removed from the everyday considerations of many of our constituents. However, the clause goes to the heart of what people want from the measure. We can trade allegations about who was asleep on the job and who did and did not want regulation in the past, and we have done so on the Floor of the House at various times. Clearly, the public expect us to introduce a system that will work and be in place for a considerable time to come. They want a system that not only prevents situations such as that of Equitable and others, which many of us are still dealing with, but that relates to the bigger picture, too, in which organisations such as the Royal Bank of Scotland overreached itself. 

That is why some of the provisions in the clause, on which we have tabled amendments, are especially important. We must get right the balance on financial stability and strategy, which we debated at length. It is not good enough simply to say that financial stability in itself is the be-all and end-all of what we are trying to achieve in financial policy. That can be overdone, and it is perhaps the habit of politics to run from one extreme to the other end of the spectrum. We are already seeing the effects of the banks becoming ultra-cautious, certainly compared with how they were previously. That has implications for the economy, and our constituents in their day-to-day life. The economy is affected because businesses need to borrow to expand and grow, but there is also a huge effect on the housing market. Decisions are being taking about deposits for house purchase, and the ratio of income to loans. That affects not just individual households, but house builders, and in turn employment and jobs in our local economies. 

The lack of jobs has a knock-on effect on other aspects of our local economies. It also has a marked effect on housing tenure, not because of planned decisions about what sort of housing tenure we want, but by default. The private rented sector, which virtually disappeared some 20 years ago, is growing, and that is having an effect on household budgets because of the rise in rents as people are pushed more and more into the private rented sector, creating huge demand there, which in turn again, affects the Government’s budgets. 

We have had huge debates in recent months about, for example, housing benefit, and the size of the housing benefit bill. Unless there is some control over rents, or the huge overwhelming demand for such accommodation ceases, much of what the Government are trying to do will come to grief. I have seen that in my constituency where the amount of money that people can claim if they require housing benefit assistance to rent in the private sector has been reduced. The amount that they can claim for a one-bedroom house was £115 a week last year. 

The Chair:  Order. May I gently remind the hon. Lady that we are discussing clause 3? 

Sheila Gilmore:  I accept that, Mr Howarth, and I will not pursue the matter further. 

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The Chair:  I am glad that the hon. Lady accepts it. 

Sheila Gilmore:  I was simply trying to illustrate the importance of these debates to our constituents. 

As well as the wider issue of the financial stability part of the clause, it is important to our constituents that we consider aspects such as public consultation and, as we discussed earlier today, proper parliamentary scrutiny of the procedures that will be put in place, because they are crucial, and if we get this wrong and the provision does not work as it should, the country as a whole and many of our constituents will suffer. On that basis, I support my hon. Friend the Member for Nottingham East in not wanting clause 3 to stand part of the Bill in its current form. 

Chris Evans (Islwyn) (Lab/Co-op):  It is a pleasure, Mr Howarth, to serve under your chairmanship again. I will try to be brief. I want to press the Minister on a point I raised earlier. I am still not clear about what financial stability looks like. How does one do the touch, taste, feel test? He has still not come up with a simple definition of financial stability. History is littered with all sorts of examples of economies believing that they were financially secure and stable. I do not want to give a history lesson, but we all know about the tulip boom in the Netherlands in the 17th century, the Wall street crash in 1929 and Black Wednesday in 1989. At every stage, every Government thought that everything was tickety-boo. 

Now we find ourselves in the situation of the FPC working towards financial stability, but the Government cannot provide an indicator. I am talking about a simple indicator so that when I walk down the street in Blackwood in my constituency, and someone asks me whether we have financial stability, I can say yes or no, because of x, y or z. That brings me back to the thought that probably the best way—it is not perfect—of measuring financial stability in layman’s terms for someone on the bus in Blackwood on a Saturday morning is by saying whether the economy is growing and creating jobs. That is the simplest way of talking about financial stability. 

Mr Hoban:  Will the hon. Gentleman reflect for a moment on the fact that, just before the financial crisis hit, the economy was growing and was creating jobs, yet that growth was fuelled by the instability that led to a massive contraction in both? 

Chris Evans:  I think the Minister saw my argument about the tulip boom and things like that. Perhaps he can enlighten me, but I cannot think of something simple to say in terms of what financial stability looks like because of how the markets work. 

I shall make a general point before I finish. It seems that sometimes we have applied economic theory to people’s behaviours. We do not know what the behaviours are of people in the market. So when we talk about financial stability, we do not know how people have behaved to create financial stability. Also, people tend to take risks, which at such a time will destabilise their business and society. All I am looking for from the Minister is for him to answer this simple question in a few sentences: what does financial stability look like? I hope that he can enlighten me on that. 

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Matthew Hancock (West Suffolk) (Con):  I will speak briefly to argue that the financial policy committee that clause 3 sets up is the meat of the Bill. It is one of the most important innovations in the measure and probably across the whole banking reform programme that the Government are introducing. It removes the tripartite committee that failed so catastrophically. Therefore, if someone votes against the clause, they are, in effect, voting against the Bill as a whole and against reforming the banks. It would be a vote in favour of the status quo. 

In response to the question about what financial stability means, I am sure that we will get an eloquent description from the Minister. However we certainly know what financial instability looks like: everything that happened in the past few years thanks to a system that did not work and that the clause is at the heart of replacing. 

Jesse Norman (Hereford and South Herefordshire) (Con):  May I briefly add to and second what my hon. Friend has said? We have heard a lot of deviation and a fair amount of repetition from the Opposition Benches. May I encourage some hesitation before they consider voting against this very important clause? 

Mr Hoban:  I will not give the hon. Member for Islwyn a glib statement about what financial stability is because, as he demonstrated when I intervened on him, it is rather difficult to characterise. That is part of the challenge. There is no simple definition. If there were, we would know what it is and how to get there. 

The threats to financial stability are manifold and will come from different areas. Different people will have their own views about what those threats are. The challenge is not, as the hon. Member for Leeds North East said, to close a stable door after the horse has bolted, but to try to stop the next horse bolting. We are looking for a forward-looking committee that will survey the horizon. Again, that is one of the things that the committee will have to report on in its six-monthly review: it will have to consider the outlook for financial stability. 

As we discussed last Thursday, credit and the ratio of credit to GDP will be an indicator of that, but there are other things as well. Sometimes structural matters will undermine the stability of the country’s financial system or it may be the growth of a new product. Anyone who has read Gillian Tett’s book, “Fool’s Gold,” will understand about the growth of credit-derivative obligations. The growth of that product was a threat to financial stability. It is very hard to measure the complexity of product. We need a committee that has the experience and the expertise to be able to look ahead to those future threats. It will need the expertise of the officials of the Bank of England, but it will also need a broad representation. We discussed those points earlier in Committee. It is important to have that balance of internal and external members to ensure that there is not a risk of group-think. 

Chris Evans:  The Minister might think I am being a bit mischievous, but is he saying that the committee will be more focused on financial instability rather than stability because that is an easier mark to measure? 

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5 pm 

Mr Hoban:  It is easier to identify instability than stability. I said that the seeds of the financial instability during the banking crisis were sown during a period of what people might have described as stability. It is difficult, but we need the committee to understand whether instability relates to new products, changing market structures or growth of credit and to consider areas that could trigger instability, such as a new financial instrument in the market, and think through the impact on financial stability of the growth of shadow banking—the role of money market funds. 

The FPC has a key role to play in looking ahead and taking action to tackle problems that it sees. Going back to what the committee should do and how we ensure that it is targeting the right things and appropriately taking into account the impact of its actions, I think that all Committee members recognise that financial instability has its cost, as we have seen in recent years, but too much financial stability is the stability of the graveyard and it, too, has its costs. We need to take into account the impact of the committee’s actions. We need to assess whether the FPC is doing a good job, taking the right decisions and making the right judgments on how to use the powers available to it. 

The answer to these questions relies on three key elements: getting the objective right; making decision making as transparent as possible and providing for adequate retrospective scrutiny; and the challenge of decisions. It is right to focus on getting the objective right and ensuring that the committee can be held to account for its performance. 

The hon. Member for Nottingham East and others asked whether the balance is there in the objective. One overriding Government objective throughout the reform is to create specialised bodies with specific, focused objectives. That approach, which has been widely supported, allows each body to concentrate on one, or a small number of, areas in which it has the greatest expertise, instead of asking them to do a lot of different things, perhaps leading to their achieving none. We have seen what happens when we give bodies too much responsibility, or responsibilities that are too wide-ranging without setting any sense of prioritisation, such as in respect of the FSA. I am wary of diluting the FPC’s focus and role by asking it to promote, in some other way, other public policy goals at the same time as pursuing financial stability. That is why the Government believe that the FPC should be asked to focus on a single primary objective of financial stability. 

We agree that the FPC’s pursuit of stability should not be completely unfettered. As the Chancellor said, we do not seek the stability of the graveyard. In other words, the FPC should not be able to pursue stability to the point where the financial sector can no longer support the wider economy. It is a question of balance. On one side, costs imposed by intrusive regulation may restrict the ability of the financial sector as a whole to support economic growth and, on the other, an under-regulated, unstable financial sector can have, as we have seen, devastating effects on the economy by fuelling unsustainable bubbles and causing disorderly firm failure. 

Clearly, over the long term, financial stability and sustainable economic growth are complementary, not contradictory. Financial stability is an essential precondition of sustainable economic growth. 

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My position, like that of the Government, is clear: the FPC should not be able to use its powers to take action where the costs that that action would impose are disproportionate to the benefits. 

Chris Evans:  I understand that the driver for the FPC is financial stability, but how does the Minister ensure that that does not stifle innovation in financial services? I hope that he can clear that matter up. 

Mr Hoban:  The hon. Gentleman makes an important point. That is why there is no blanket ban on the creation of new products or services, for example, and why financial services firms will be encouraged to identify new opportunities in the markets. New products that are available would benefit businesses. For example, at the moment we are considering, through the business finance partnership, using the resources of financial management companies or insurers to lend to businesses. That innovative approach could support economic growth and should be encouraged. However, the challenge is whether it could move to a point where it creates instability. The Committee needs the judgment and the understanding to recognise what is genuine innovation, what can help support the wider economy and what developments pose a risk to the economy. This is about creating a stable platform where people are encouraged to be innovative and to adapt to compete and provide new ways of meeting the needs of our constituents rather than simply closing down any of the opportunities to do so. 

As well as ensuring that the cost is not disproportionate to the benefits, it is important that the FPC should not be able to take action that would seriously damage the ability of the financial sector to contribute to growth in the medium to long term. The Bill, as drafted in new section 9E, subsection (4), and in new section 9C, prevents the FPC from acting where it will have a significant adverse impact on the capacity of the financial sector to contribute to the growth of the economy in the longer term. It is not a “have regard to” but a clear requirement that it should not do anything that will have a significant adverse effect on the Government’s wider macro-economic policy. It is a much tougher bind than the “have regard to” that was proposed at an earlier stage. 

The hon. Member for Leeds North East talked about Equitable Life. The challenge of what to do with Equitable Life is not a role for the Financial Policy Committee looking at system–wide financial stability. However, when we discuss the PRA, which has a particular responsibility around the solvency of insurance companies and towards with-profits policyholders, we will see an increased focus on meeting the needs of policyholders and their reasonable expectations—a phrase that was used quite a lot in the court case. I am sure that we will come on to that at a later point. 

My hon. Friend the Member for St Austell and Newquay talked about sunset clauses. He will be relieved to know that new section 9K allows orders to be published with a sunset clause, and that may be a tool that the FPC may wish to consider. He also raised the issue of “may”, which is in new section 9J. This raises an important point in relation to the exercise of the FPC’s powers. The question is whether it will be appropriate in all cases for the FPC to publish the orders that it is given to

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deliver financial stability. The assumption would be that the FPC will publish that information, but there may be times where it may not be in the public interest to publish those orders. While it is right to issue that order and to give direction about what should happen, there may be times when the matter is of such sensitivity to the wider economy that to make it known would be detrimental to financial stability. Although a degree of caution needs to be exercised, I believe that we should err on the side of openness and not on the side of keeping things quiet. 

Lorely Burt:  I entirely agree with the Minister’s analysis. There will be times when providing a running commentary on the state of the economy and the potential difficulties that we may be facing could be counter-productive. However, I totally agree that, wherever we can, we must err on the side of transparency. 

Mr Hoban:  I am grateful to my hon. Friend for her comments. One of the things that I am keen to pursue in financial regulation is a greater use of transparency as a tool for delivering better outcomes. My hon. Friend the Member for St Austell and Newquay returned to the point about debates on macro-prudential tools taking place on the Floor of the House. I have no aversion to that. The more opportunities there are for people with an interest to take part, the better. However, as in all such cases, it is a matter for the usual channels. The strong support for such debates, particularly from my right hon. Friend the Chancellor, sends a clear signal about how we want these tools to be debated. It is important. As we have said time and again in our last few sittings, consultation, engagement and transparency are absolutely vital. They are vital not only in terms of accountability. It is important to recognise that the FPC’s role in financial stability is not simply through the application of tools, but via the messages that it sends. That is important. 

In conclusion, the clause is an important part of the Bill. The FPC will play a huge role in trying to tackle the causes of financial instability and trying to bring about the stability that is absolutely vital if we are to have a stable economy. 

I will counsel the hon. Member for Nottingham East on how he votes. He has had sufficient experience in this House to make his own judgment, but by voting against the clause he sends a signal that the Labour party has not learnt any lessons from the tripartite system. It has not recognised the threats to financial stability and the way in which financial stability needs to be tackled in the new regulatory architecture. He would be setting his and his party’s face against significant reforms to the stability of the financial system. He has made his point eloquently in the debates on various amendments. We know exactly where he stands. He wants to see both more spaghetti and less spaghetti around the wiring. He wants more clarity and less clarity around the roles of these bodies. The clause is a fundamental piece of reform. To oppose it would send a signal that the Labour party has set its face against reform, which I do not think is where he or his right hon. Friend the shadow Chancellor are really at. 

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Chris Leslie:  I do not wish to be misrepresented in any way. As I said in my speech on clause 3 stand part, I think there is a virtue in the financial stability objective and the Financial Policy Committee, but we in opposition need to put pressure on Ministers in Committee to listen to the detailed points of improvement that we want to see. Other than that, we can urge Ministers on Report, which is the last opportunity to vote on individual clauses. I have great expectations for this Minister on Report. I know that he is a considerate and thoughtful fellow. I hope that he will, on reflection, recognise the importance of some, if not all, of the amendments that we have tabled. I hope that he will introduce changes on Report and then we can hopefully all skip off into the sunset supporting one another on clause 3. However, as it stands, it would be invidious for us to abstain on the matter. 

Mr Hoban:  I am not asking the hon. Gentleman to abstain. 

Chris Leslie:  Come on. 

Mr Hoban:  I want him to join us wholeheartedly and support the clause. That is not unusual. I remember times in opposition when I supported the previous Government on clauses in Bills when I thought it was the right thing to do. The reforms are important. We know exactly what the hon. Gentleman’s points of concern are, but I hope that they do not detract from the fact that this is a significant piece of reform that recognises and learns lessons from the financial crisis. To oppose it would send the wrong signal about the Labour party’s ability and willingness to embrace change. 

Question put, That the clause stand part of the Bill. 

The Committee divided: Ayes 9, Noes 7. 

Division No. 10 ]  


Burt, Lorely   

Garnier, Mark   

Gilbert, Stephen   

Hancock, Matthew   

Hands, Greg   

Hoban, Mr Mark   

Norman, Jesse   

Rutley, David   

Sharma, Alok   


Evans, Chris   

Fovargue, Yvonne   

Gilmore, Sheila   

Hamilton, Fabian   

Jamieson, Cathy   

Leslie, Chris   

Pearce, Teresa   

Question accordingly agreed to.  

Clause 3 ordered to stand part of the Bill.  

Schedule 1 

Bank of England Financial Policy Committee 

5.15 pm 

Chris Leslie:  I beg to move amendment 24, in schedule 1, page 168, line 11, at end insert 

‘but shall not exceed the terms and conditions and remuneration arrangements available to external members of the Monetary Policy Committee.’. 

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The Chair:  With this it will be convenient to discuss the following: 

Amendment 28, in schedule 2, page 173, line 17, at end add— 

‘Review of remuneration

5 Within a year of Royal Assent for this Act the Bank of England shall publish a review of the remuneration and pension fund arrangements for senior executives and those appointed to serve on the committees and sub-committees of the Bank.’.

Amendment 71, in schedule 3, page 183, line 45, at end insert 

‘with the approval of the Treasury’. 

Chris Leslie:  So bon voyage to clause 3, and we hope that it will be improved by the time we reach Report. We now welcome schedule 1 and page 167 of the Bill, although we will be returning to single-figure page numbers. 

The three amendments have been very sensibly grouped together by the Chair, as they relate to the terms and conditions of membership of the Financial Policy Committee. Essentially, the schedule is a sort of standing orders, for want of a better term, of the FPC. It makes provision for the terms of office of appointed members, qualifications, removals, appointment and so on. 

Amendment 24 would insert an additional phrase to the provision on terms and conditions. Currently, the terms and conditions under which a person holds office as a member of the FPC will be 

“such as the Bank may determine.” 

The argument could be made that the Bank is independent in that respect and that it should be able to make such determinations. To my mind, it is important that those terms do not exceed the terms and conditions and remuneration arrangements available to external members of the Monetary Policy Committee. The terms and conditions for holding office in the FPC should be no more generous than those for holding office in the MPC, because of a risk that could arise in the discrepancy of payments, which might give the impression that one committee is more important than the other. Clearly, that should not be the case. Unfortunately, the Government will not concede that both the FPC and the MPC should be committees of the Bank: the MPC is, but the FPC will be a sub-committee. Their importance, given that monetary and financial services are in many ways inextricably linked––as is the economy––should be reflected in some of the terms and conditions arrangements. 

According to the Bank of England annual report, on page 40, it is for court to determine 

“the remuneration of the Bank’s most senior executives, including the Governors, Executive Directors, Advisers to the Governors and the external MPC members.” 

The court is advised by the remuneration committee or RemCo—we know about NedCo and the oversight committee, but here is another—the composition of which is set out in the annual report. I assume that the Minister will clarify that RemCo will also advise on the terms and conditions, pay, rations and pension arrangements of the FPC membership. If the Minister confirms that, at least it will be one step towards clarification. 

Looking into this can be interesting. We can only assume that the Bank plans to remunerate FPC members to a similar or equivalent parallel level as MPC members.

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According to the terms and conditions for the four external members of the MPC, who are appointed by the Chancellor, they have terms of three years, on a part-time basis that averages three days a week. External MPC members must not retain or accept other appointments or interests that would create a conflict with their MPC responsibilities during their term of office as determined by the Chancellor, on the Governor’s advice. 

It is interesting that the external members of the MPC were each paid £101,362 in 2010-11. I cannot remember what ministerial salaries tot up to, but I think that that is broadly the same as those of Government Whips. Perhaps the salaries of Ministers of State are different from those of the Whips, but MPs’ salaries are about £65,500 and MPC members receive £101,000. Are hon. Members aware that MPC members are also paid a 30% supplement, on top of that £101,000, in lieu of membership of the Bank’s pension fund? They are also entitled to cover under the Bank’s group medical insurance scheme. A public body is providing private medical insurance to those members, a point which I wanted to draw to the Committee’s attention. 

Deputy governors are paid considerably more. On 1 March 2010, the salary of deputy governors increased by 2.5% to £258,000, but those salaries have since been frozen. The Governor’s salary increase was due on 1 July, but he chose not to accept it, and I think it is the case that there have been no bonuses within the senior executive ranks of the Bank of England. I would be grateful if the Minister clarified his understanding of the Bank’s intentions about the remuneration and pension arrangements for FPC members. 

That ties in neatly with amendment 28, which would require that 

“Within a year of Royal Assent for this Act the Bank of England shall publish a review of the remuneration and pension fund arrangements for senior executives and those appointed to serve on the committees and sub-committees of the Bank.” 

A 30% cash supplement in lieu of pension contributions is extremely generous—it certainly exceeds the 20% cap that was placed by the Exchequer on parliamentary pension fund contributions—and I am not sure that much light has been shone on that corner of the public sector. 

I know that the Chief Secretary has to sign off salary arrangements above a certain level, particularly if they exceed those of the Prime Minister, but will the Minister say whether he is content or not content with the 30% supplement in lieu of pension schemes? That is a very precise question, which is meant to obtain his sense of whether that arrangement will continue with the FPC or whether he thinks that the Bank should rethink that plan. Those members will receive at least another £33,000 as cash in lieu of belonging to a pension scheme, and we should not forget that, as things stand, they are part-time. Will the Minister tell us whether he thinks that those members will have three day a week postings, and what time commitment we should expect from them? 

Another interesting facet of the Bank of England’s pension scheme is that pension benefits for the current deputy governors are provided for through the court’s section of the pension fund. They are not externals, so they are members of that pension scheme, which allows them to obtain a maximum pension of two thirds of salary at a normal age of 60, not 65, after 20 years’

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service. That is quite a generous scheme all round and I think I am right in saying—some people have said this—that the most generous scheme is the parliamentary one. The Bank of England’s scheme is right up there with such schemes, and I am not sure how far that has been reviewed. Is the Minister content with the arrangement of having, in the public sector, a maximum pension of two thirds’ salary at a normal age of 60 after 20 years of service? 

Amendment 71 deals with a slightly different issue, on page 183 of the Bill, in schedule 3—[ Interruption. ]  

The Chair:  Order. 

Chris Leslie:  Thank you, Mr Howarth. I know that hon. Members are discussing whether to support the amendment. It is a difficult decision for them, as they serve on the Treasury Committee. It cannot be easy, given the conflict that they must be racked with when considering amendments that were in many ways created under their own authorship. 

Amendment 71 deals with the terms of service of the members of the governing body of the Prudential Regulation Authority, which are set out on page 183 of the Bill. I do not think we have been told by Ministers how independent the regulators will be from the Bank. The Bill states: 

“The PRA must pay to the members of its governing body such remuneration as may be determined by the Bank.” 

The paymaster, set out quite clearly in the Bill, will be the Bank of England. 

Our amendment suggests that the remuneration should gain the approval of Her Majesty’s Treasury. I do not think that the amendment is particularly difficult for the Minister to accept. There is an important point about accountability. Although I understand that public money might not be involved, as the money will come from a surcharge on the financial services sector, in order to ensure that there is accountability for the sums paid to the members of the PRA, the sums should be approved by Her Majesty’s Treasury. We could have tabled similar amendments to all the various committees, the FPC and to other elements, such as the FCA, but we have little time, and we thought that here would be a sufficient place to table a probing amendment about that point of principle. We are not singling out the PRA for any other reason, and we hope that the Government will table similar amendments. Treasury approval is necessary when it comes to remuneration arrangements for the PRA and other governing bodies. 

Mr Hoban:  This is an interesting set of amendments. 

I shall first deal with amendments 24 and 28. The Bank is responsible for setting its own remuneration policies. The court determines the remuneration of the Bank’s most senior executives, including the governors, executive directors, advisers to the governors and the external MPC members. The court will also set the remuneration of the external FPC members, and it will be advised in that respect by the remuneration committee. The court has mandated the committee to keep senior executives’ pay under review, and its approach is set out each year in the annual report. The court made the decision, which the Government support, that senior

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executives and the rest of the Bank’s employees’ pay would be frozen for two years from 1 March 2011, in line with Government policy for the public sector. 

Amendment 24 seeks to place constraints on the remuneration of those serving on the FPC as external members. The court, advised by the remuneration committee, sets remuneration so as to enable the Bank to discharge its functions effectively. It is vital that we safeguard the court’s flexibility in setting the remuneration policy for those important roles. The work of the MPC and the FPC requires skilled individuals to act as external members. Such members must have the requisite skills and expertise to challenge the thinking of Bank executives. It is important, given the roles and expertise that we are looking for, that they are rewarded sufficiently. 

Although the Government place equal importance on the roles of the MPC and FPC, we must recognise that external members of the committees have different roles, and it is inappropriate to constrain one group in relation to the other. In all aspects of the Bank’s remuneration policy, it is a matter for the court to ensure that its policies are adequate to be able to recruit the right people to do the jobs that we ask them to do. 

5.30 pm 

On amendment 28, as required by the Bank of England Act 1998, the Bank already publishes an annual report that includes a report by NedCo, the committee mentioned earlier that comprises the non-executive members of the court who have responsibility—among other things—to decide on the pay and pensions of the executive members of the court. The remuneration committee’s approach has been to carry out a review of senior Bank remuneration against external benchmarks every five years, in order to set appropriate pay, benefits and conditions of service. The most recent review was in 2006, but it was not implemented in full because of the public sector pay freeze. The 2011 review was also postponed because of that pay freeze. The remuneration committee will continue to review regularly the remuneration of senior Bank staff and publish reports in the annual report. It is important that the court has the discretion to set the remuneration of external FPC members, and that those decisions are subject to appropriate scrutiny. 

Chris Leslie:  What is the Minister’s opinion on the 30% supplement in lieu of membership of the pension scheme? Is he content with that? 

Mr Hoban:  The test is whether the overall package for members of the committee is appropriate to attract the right quality and calibre of people to serve on it. Different professions and organisations have different benefit packages, and the challenge is to ensure that the overall package is sufficiently competitive to attract the right people. We are asking people to give up other significant opportunities in order to be members of the MPC, so we must ensure that the overall package is adequate and will attract people. We do not want substandard members of the MPC. That may be the hon. Gentleman’s objective, but it is not my objective and neither is it in the interests of the country. It is important that the pay is sufficient to attract good quality applicants, although it should not be excessive. That is a challenge for the court and Bank to live up to, and they should be accountable for the process. 

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Mark Durkan (Foyle) (SDLP):  Will the Minister say whether the Bill as currently worded would allow different pay to be awarded to different non-executive members? 

Mr Hoban:  As I have made clear, the hon. Member for Nottingham East seeks to bind the court so that the same terms of service apply to FPC members as to MPC members—the hon. Member for Foyle may like to think about that if the matter is put to a vote. My point is that those terms should be flexible in order to attract the right people. I am looking for greater freedom and not the prescription sought by the hon. Member for Nottingham East. 

Mark Durkan:  Does that flexibility extend to the four different people appointed possibly being paid different rates? Are we talking football-club style flexibility in terms of payment of external members? 

Mr Hoban:  If the hon. Gentleman wishes to table an amendment to specify which members should be paid what, that is fine. The issue is one of flexibility, and we should allow the court to exercise that. Opposition Members should be careful not to get into a micro-management style of government. We set up bodies and we give them responsibility. If we want people to join those bodies and exercise responsibility, we should allow them to do so rather than seek to constrain them or second-guess their judgment, because that does nothing to attract people into public service. It is a matter for the court. I will not be prescriptive about who should be paid what; the court needs to make that decision. It may decide that FPC member A needs to be paid more than member B, but that is not my decision. The court should be deciding on the right pay packet to attract the right people for the job, and that is an interest we all share. 

It was not that many minutes ago that Opposition Committee members were expressing concern about thinking through the macro-economic impacts of macro-prudential tools, economic growth and what the FPC will do. Surely, it is in all our interests to ensure that the right people do the job, which requires some flexibility regarding the right pay rather than being constrained, as the hon. Member for Nottingham East would require, to pay in accord with MPC members’ pay. That is not the right approach. 

Amendment 71 raises similar concerns. The remuneration of PRA board members is determined by the Bank. The amendment states that the Treasury must approve the board members and their pay. I do not support the amendment. 

Yet again, the hon. Member for Nottingham East objects to spaghetti—to interconnections at one level—but wants to introduce more interconnections, through the amendment, by blurring the lines of responsibility. It is clear that, as a subsidiary of the Bank, the PRA will be accountable to the Bank’s governing body—the court—on administrative matters. The court will approve the PRA’s budget and ensure that it is providing good value for money. Consistent with that, the court will also set the remuneration of directors. Giving the Treasury an additional role would muddy the lines of responsibility and accountability and undermine the court. It is vital that there is responsibility. 

In conclusion, one issue that has— 

Column number: 204 

The Chair:  Order. We are just checking whether a Division is cancelled. 

Mr Hoban:  I am sure that no hon. Member on the Floor of the House would want to interrupt the remarks of my hon. Friend the Member for Staffordshire Moorlands with a Division. 

It is vital that there is proper accountability in respect of how money is spent. One thing that we are introducing in the Bill, which was not in the previous legislative regime, is a statutory role for the National Audit Office with regard to the use of its funds. That significant improvement will provide reassurance not just to Members of Parliament, but to those people who pay their fees to the regulators. That money is spent carefully and wisely. 

People in the financial services sector want to know that their fees are being spent wisely, but they also want to know that good quality people who know what they are doing have been recruited. We need to give the court the power to do so. 

Chris Leslie:  The Minister is multi-talented: he can be in Committee while simultaneously estimates tabled in his name are being debated downstairs on the Floor of the House. What a fantastic, multi-talented Minister. He was slightly spooked by the idea that there might be a Division on his business, but juggling and keeping the balls in the air, as he does, is an impressive skill. 

I am saddened by the Minister’s rather prosaic defence of the Bank’s remuneration and pension arrangements. He said that pay needs to be sufficient but not excessive. That is a classic politician’s comment, if ever I heard one. I asked whether he thought that the pension scheme—the 30% supplement—was right or wrong, but he did not exercise his opinion in that regard. 

The Minister castigated us for suggesting that the Treasury should have a level of approval on some pay and remuneration arrangements in public bodies, when of course the Chief Secretary to the Treasury has been hauling in every chief executive of a public body, wanting to sign off—micro-manage, as the Minister might put it—pay and conditions above a certain threshold. We were trying to take his lead, but he rebuffed us with his argument. 

I welcome NAO oversight, which is an important, worthwhile step forward in respect of the stewardship of money by the regulators. We will be talking about issues to do with that later. 

I do not think that having some sign-off from Her Majesty’s Treasury on such matters would blur the lines of responsibility. These are public bodies and ultimately they should be accountable to Parliament. I am not trying to constrain the Bank in varying FPC members’ terms and conditions, but if we end up with an FPC that remunerates at a far higher and more generous level than the MPC, people might infer that one committee is more important than the other. We might even end up with a trade-off, with one committee asking for more money and vice versa. I wanted to get a sense of the Minister’s perspective, but he does not want to get too embroiled in the situation, so we will have to leave it at that for the time being. I beg to ask leave to withdraw the amendment. 

Amendment, by leave, withdrawn.  

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Chris Leslie:  I beg to move amendment 25, in schedule 1, page 169, leave out lines 35 to 37. 

Schedule 1 provides for what happens at FPC meetings. Members will recall that one of the FPC members must be a Treasury representative, but under paragraph 11(7)(a), 

“At a meeting of the Committee…the Treasury’s representative may not vote”. 

I suppose that is fair enough and we will go along with the provision as there is a pretence of independence for the FPC. However, under sub-paragraph (7)(b), 

“anything done by the Treasury’s representative is to be disregarded in determining under sub-paragraph (4)”, 

according to which, the person chairing the FPC meeting 

“must seek to secure that decisions of the Committee are reached by consensus wherever possible.” 

The chair must try to conduct the FPC meeting so that members reach consensus, but the Treasury representative might put a hand in the air and say, “Please may I speak?”. That representative is not allowed to vote, but might want to make an opinion known, saying, “The Chancellor thinks this, that or the other.” According to the Bill, if there is a disagreement and the Treasury representative voices a concern, it is to be disregarded and is not to be classed as part of the consensus arrangements. 

We are back to the old issue: the Minister thinks in the box, and he thinks that the box must have high walls and compartments. The FPC must be rigidly separate from Her Majesty’s Treasury and there should be no read-across between the two. Even if the Treasury voices a doubt about a particular decision, there should be no attempt to reach a consensus opinion. The Treasury representative does not need to be included in characterising whether a consensus has been reached. 

I find the provision strange. I understand why the Minister would not want to allow the Treasury representative a vote, but it seems perverse to write into primary legislation that there cannot be an attempt to reach a consensus with that representative. I know that Ministers have referred to the difficulties caused by blurring lines of accountability, but we need some common sense read-across between the key actors and institutions in our economy. I do not understand why the provision is necessary. It should be possible to strive for a consensus, and if one cannot be reached, the FPC has the vote. The Treasury representative may disagree, but it is strange to disregard the Treasury view. 

Mr Hoban:  Does the hon. Gentleman think that the Treasury member should have a vote in the FPC? 

Chris Leslie:  No, I have said that we should keep subsection (7)(a). It is the point about disregarding the Treasury view in reaching a consensus that I find strange. I do not see the point of the Treasury being represented there at all if its view is essentially to be disregarded. It is not even allowed to exercise influence through debate or discussion. Sometimes I get the same impression about being on this Committee—but I am being facetious. Obviously, there is a purpose in Opposition Members being here. 

I want to get the Minister’s view. What is the point of having a Treasury representative there if their view is to be disregarded for consensus purposes? That is the point of the amendment. 

Column number: 206 

5.45 pm 

Mr Hoban:  The hon. Gentleman’s answer to my intervention demonstrates one of the problems with his position. It is not the case that we do not want the Treasury representative to influence or shape the committee’s decisions. We do. That is the point of having a Treasury representative there. They are not there as a passive observer but to contribute to the debate and discussion and share with the Committee their own experience and view of what is happening. 

However, sharing that view and helping shape the debate is different from the FPC’s decision-making process, which is where voting comes into play. The FPC can take a decision in one of two ways: by consensus if possible, and by a vote if not. In practice, a decision taken by consensus must have the support of, or at least not be opposed by, all the voting members. 

If we allowed the Treasury representative’s opinion to be taken into account when determining whether consensus has been reached, what would change? If the Treasury representative agreed with the rest of the committee, the decision would be the same, but if the Treasury representative’s view was contrary to that of all other members, the decision could not be passed by consensus. In effect, the Treasury would be vetoing any attempt by the rest of the FPC to reach a decision by consensus. It would then pass to a vote, and if all the voting members agreed, the decision would be taken. 

It is about the procedural process of decision making, not the FPC’s debate. If the hon. Gentleman believes, as I do, that the Treasury representative should not have a vote, the representative’s opposition to a particular course of action should not prevent all voting members from seeking a consensus. That is what we are seeking to enable. To be clear, in the process of the committee, the Treasury representative may participate in the discussion freely and on an equal basis with other members. The provision will not prevent that from happening. 

Chris Leslie:  I know that Her Majesty’s Treasury and the Government have a problem with the concept of a veto, but the Minister must accept that if the Treasury representative is not allowed a vote but merely allowed to express an opinion, the representative will not be able to veto the committee’s proceedings. Therefore, I do not see his objection to allowing the Treasury’s voice to be heard in the consideration of a consensus. 

Mr Hoban:  I do not have a problem with it. In fact, I want the Treasury’s voice to be heard in the discussion. What I am saying is that a consensus should be a consensus of all voting members, not of all voting members and one non-voting member. We want the FPC to come to a consensus as a committee. That can only be a consensus of voting members, which is why the Treasury representative will be ignored when it is asked whether all members of the FPC agree with a measure. That is not to say that he cannot participate in the debate—I suspect that he will participate fully—or help shape the committee’s views, but he will not have a vote. He will not be part of the consensus of voting members, because he does not have a vote. 

The hon. Gentleman and I agree that the Treasury representative should not have a vote. When determining whether there is a consensus of voting members, what

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the representative says should not be taken into account as forming part of that consensus. I am trying to think of the right way to say this without sounding very critical. It is a slightly pedantic point of procedure to dwell on, but it does mean that the FPC can reach a decision by consensus of all voting members. 

Mark Durkan:  Will the Minister give way? 

Mr Hoban:  I will not give way because we should move on to slightly more substantive and interesting issues. It is just a way of trying to deal with the process within the FPC. It does not in any way prevent the Treasury representative from having a very strong and vigorous view in this matter. 

Mark Durkan:  Our problem is not in relation to the Treasury representative not voting; nobody believes that they should vote. The problem is the strange wording of sub-paragraph (7)(b). It is not even anything said or any view expressed by the Treasury representative, it is 

“anything done by the Treasury’s representative”— 


“ is to be disregarded in determining under sub-paragraph (4) or (5) whether there is a consensus.” 

Does that apply even if the Treasury representative is making facial expressions, such as frowns, raised eyebrows and other gestures of disapproval or dissent, so that it is not even just what is recorded? It is strange this reference to “anything done”. Will the Minister clarify this reference to 

“under sub-paragraph (4) or(5).” 

Is that an attempt to ensure that the Treasury representative not only does not have a vote, but does not even influence whether or not there is a vote? Whoever is chairing the meeting will hopefully decide that there is consensus, but if they decide that there may not be consensus, they can put it to a vote. Is the reference to sub-paragraph (4) or (5) an attempt to ensure that the Treasury’s representative does not even influence whether there is a vote? Is that to protect the clear and total discretion of the Chair in that regard? Is that what that strange wording is about? The reference is made specifically to the Treasury representative not being part of the decision as to whether or not there is consensus. That seems strange and peculiar, and the amendment is there to flush it out. It is very awkward wording. There could be better ways of achieving that. Sub-paragraph (b) could simply say that the views of the Treasury representative will be disregarded by the Chair in determining whether or not there is consensus before putting it to a vote. There could be a better and simpler way to deal with that. It is very awkward wording. It is bound to give rise to the question of why the board of legislators did not ask questions about such odd wording. 

Chris Leslie:  My hon. Friend the Member for Foyle makes an important point. Ministers may think that joined-up Government is an old-fashioned concept, but we need to recognise that the Treasury has a key role to play in the stewardship of our economy, as does the Bank of England. We have to ensure that there are the correct synaptic connections between those institutions. One such connection is the role of the Treasury representative on the Financial Policy Committee. It is

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not the case that a consensus is only visible if a vote is taken. A consensus may be visible before a vote is taken. Let us imagine a situation in which the Treasury may feel strongly about a particular issue, but is not able to override the FPC in that particular way. It may want to ensure that the members of the FPC have pause for thought on a particular measure in which case it may be necessary for the Treasury to prompt a vote among members of that Committee by encouraging them to take a different view or to consider a different set of opinions. The Minister has conceded that this is not a one-way street process. He says that the Treasury representative is not a passive observer, but is there to contribute to a debate. That is a positive commitment by the Minister. 

Mr Hoban:  May I try to draw these proceedings to a conclusion by suggesting that what I might do is get the parliamentary counsel to see whether there is a better way of wording this particular aspect so that we can deal with some more substantive issues? 

Chris Leslie:  I would be delighted if the Minister did that. That is a phenomenal achievement. I particularly thank my hon. Friend the Member for Foyle. With that helpful suggestion I should be delighted to beg leave to withdraw the amendment. 

Amendment, by leave, withdrawn.  

Chris Leslie:  I beg to move amendment 26, in schedule 1, page 170, line 42, at end insert— 

‘Scottish Parliament (Disqualification) Order 2010

6 In Part 1 of the Schedule to the Scottish Parliament (Disqualification) Order 2010, at the appropriate place insert “Member of the Financial Policy Committee of the Bank of England appointed under 9B(1)(d) or (e) of the Bank of England Act 1998.”

National Assembly for Wales (Disqualification) Order 2010

7 In Part 1 of the Schedule to the National Assembly for Wales (Disqualification) Order 2010, at the appropriate place insert “Member of the Financial Policy Committee of the Bank of England appointed under 9B(1)(d) or (e) of the Bank of England Act 1998.”.’.

Although this amendment is also to schedule 1, I hope hon. Members will find it interesting. They will have noticed that it relates to the Scottish Parliament and the National Assembly for Wales. Schedule 1 sets out two disqualifications from membership of the FPC. Members of the House of Commons are disqualified from being on the committee in paragraph 4 of part 2 of the schedule and Members of the Northern Ireland Assembly are disqualified in paragraph 5. The amendment is a probing amendment to see why the Minister has not also sought to extend similar disqualifications to Members of the Scottish Parliament or the Welsh Assembly. 

Sheila Gilmore:  Perhaps the Government are anticipating the outcome of a referendum in Scotland or a similar referendum in Wales, in which case they are pre-empting the will of the Scottish people. 

The Chair:  We do not need to debate that question too far. 

Chris Leslie:  It would stray beyond the remit of the amendment. It had not occurred to me that that might be the Government’s motive. We are talking about the

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Bank of England, which is a bit anomalous in some respects. Why on earth would the Minister not also extend that disqualification to MSPs or Members of the National Assembly for Wales or, conversely, allow Members of the Northern Ireland Assembly to become members of the FPC? That would in a sense treat the devolved Administrations equally. The amendment was designed to probe why this particular combination has been chosen. When I asked the Library to clarify this arrangement, it was similarly baffled. It could see none of the disqualifications for Scottish Parliament or the Welsh Assembly and it could not shed much light on this. I should be grateful if the Minister could explain. 

Mr Hoban:  It is quite straightforward. The answer is in the title of both the amendments and paragraphs 4 and 5 of part 2. The disqualification for this House and the Northern Ireland Assembly is done by an Act of Parliament. Disqualification for Members of the Scottish Parliament and the National Assembly of Wales is done by order. So orders will be passed to ensure that members of the Scottish Parliament or the National Assembly for Wales are disqualified. It does not need to be done through primary legislation. 

Chris Leslie:  I am very surprised. Just because something does not have to be done by primary legislation, does not prevent it from being done that way. The Minister rolls his eyes as though this is such an obvious issue. He may well have a phalanx of 300 officials in his Department poring over and writing every jot and tittle of the notes that he reads out, so eloquently may I say, but for those of us who are not staffed to the same degree, it is not quite so easy to discern these things. I personally think it would have been fairer and more transparent for all of those disqualifications to have been in the Bill thereby not insulting members of the Northern Ireland Assembly for thinking they were singled out among the devolved Administrations for disqualification. I am sure that their feelings, having been hurt in that way, can be soothed. It is helpful to have that commitment from the Minister that orders will be brought so I shall expedite proceedings. I beg to ask leave to withdraw the amendment. 

Amendment, by leave, withdrawn.  

Question proposed, That this schedule be the first schedule to the Bill. 

6 pm 

Chris Leslie:  For the sake of making some progress in the Committee, we do not need to spend much time on schedule 1. We know that these are the standing orders of the Financial Policy Committee, terms of appointment, disqualifications and so forth. These are relatively uncontroversial, fairly administrative arrangements, so I am happy to support schedule 1 as part of the Bill. 

Schedule 1 agreed to.  

Clause 4 

Further amendments relating to Bank of England 

Chris Leslie:  I beg to move amendment 23, in clause 4, page 14, line 36, at end add— 

Column number: 210 

‘Within a year of commencement of this Act the Bank of England shall publish a review of the effectiveness of coordination by the regulators of the exercise of their functions relating to membership of, and their relations with, the European Supervisory Authorities (namely, the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority), and their relations with other regulatory bodies outside the United Kingdom.’. 

Clause 4, which is small and perfectly formed in many ways, seeks to enact schedule 2 of the Bill, which is slightly longer. The amendment we seek to add to the one line of clause 4 is simple and straightforward. The draft Bill, as it first appeared, was rightly changed by the Minister to require in clause 62 that an international co-ordination memorandum of understanding should establish a committee under the Treasury’s chairmanship to report to the Chancellor, with members to include the FCA, the PRA and the Bank, all with the aim of agreeing consistent objectives and effective international engagement. That was called for by the pre-legislative scrutiny Committee and is one area where the Government decided to move in response. I welcome to an extent the changes made. 

There are still concerns about the Government’s understanding of the importance of integration with the regulatory structures of the EU and beyond. Again, I think this is an important part of the Bill. I suspect that the Chancellor of the Exchequer when in Opposition had a cunning plan for redrawing the regulatory systems of the UK, pouring a considerable amount of opprobrium, not just on the previous Administration but on the Financial Services Authority. He chose to divvy up the task between the PRA and the FCA in this particular way. I suspect he forgot at the time the overriding—in many cases—and senior powers of the EU in financial services regulation. 

We are labouring under the pretence that the regulators that we are creating domestically are sovereign, when in fact they are subject not only to directives from the EU but can be overridden by EU regulations emanating from Commissioner Barnier or other directors general in the Commission. That is a crucial point; I know hon. Members of all parties have concerns about it. We have expressed our concerns about the Bill not properly appreciating the impact that macro-prudential measures have on growth and jobs. We have expressed our concerns about parliamentary accountability and so forth. 

Another big, glaring problem with this piece of legislation is the mismatch between how these structures are being formed and the regulatory superstructure with which they will have to engage at the European level. As we can see, the European supervisory authorities have decided to split their regulatory approach in a distinct and different manner. They have gone for a thematic approach—banking, insurance, securities and markets—whereas that is not the case in the UK. We can argue about whether that is right or wrong, but the British Government are not doing a massive amount to change the European arrangements as they are set out. 

We know from the pipeline of directives and regulations coming from Commissioner Barnier and others that much, if not the majority, of the regulatory agenda is being set by the European Commission. There are also significant concerns that the domestic regulators—the Bank, the PRA and FCA—can simply have their concerns washed away by the flick of a series of pens in the European Commission and have their views overridden. 

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It is crucial therefore that we have mechanisms in the Bill to not just adequately interface with the European arrangements, but to steer and shape those decisions. So far, I have not been convinced by anything that the Minister has said that the regulatory arrangements that we are putting in place domestically are going to be influencing or steering the decisions at European level. In fact, I am worried that they will constantly be playing catch-up and that there will be confusion and muddle about which of the domestic regulators will be attending the various councils and meetings of the European supervisory bodies. I know for a fact that Government Members will secretly share some of my concerns. 

Mr Hoban:  May I just be clear about what the hon. Gentleman is arguing? Rather than the set of reforms that we have in front of us, is he arguing that we should introduce three regulators: one to match EIOPA, one for ESMA and one for the EBA? 

Chris Leslie:  No, I am arguing in favour of amendment 23, which states that there should be 

“Within a year…a review of the effectiveness of coordination” 

of the regulatory arrangements with the European Union. That is the argument that I am making. I thought I was making it in a pretty modest way so that I could try to entice the Minister to support our amendment. Ultimately, that is my objective. Given his willingness to consult parliamentary counsel on an earlier amendment, perhaps we are on a roll here. Perhaps the Minister will concede this particular point. I would be grateful if he did. 

I am not simply voicing my concerns; others have voiced them as well. For example, in its briefing on Second Reading, the British Bankers Association stated: 

“We believe that it is in the interests of the UK to act in partnership with other Member States through the European Banking Authority and the European Systemic Risk Board to make the case for flexibility in specific areas of the rule book”. 

It is envisaged that the capital requirements regulations 

“in relation to the risk-weightings attached to residential mortgage lending” 

will need attention. In its briefing, the City of London stated: 

“the PRA/FCA judgement-based approach may conflict with the move to a single rule book and supervisory convergence at the level of the European Supervisory Authorities, which the industry broadly supports.” 

So the industry itself is trying to ensure that there is some harmony and consistency in the rule-making approach. The Corporation of London says that it has concerns about conflict. 

The CBI stated: 

“There must be a joined up approach between the new regulatory bodies (FPC, PRA and FCA) and between the UK regulators and their EU counterparts... it is also vital that the regulators are able to influence the European regulatory regime. To do this, they must actively engage with the European debate.” 

Barclays bank stated: 

“The PRA and FCA must be mindful of European law and must ensure the UK maintains sufficient influence with global and EU developments. Whilst we are supportive of the principle of ‘judgement based’ regulation, care must be taken to ensure that decisions do not clash or overlap international rules and that firms face consistent and predictable decisions.” 

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I accept that the Minister has moved to a degree by trying to clarify the spaghetti—is there now a quartet of various players?—of regulators and players that he is creating. 

The multiple layers of European regulation add even more complication. Which member of which UK regulator attends which European supervisory arrangement? There was some discussion, which I think related to ESMA, of the FCA having a representative in the chair. As soon as prudential issues arise, the FCA representative has to leave the room, or at least vacate the chair, and allow a different UK representative to sit in their seat to make the case on prudential matters. What sort of signal does that send to other European partners, who are trying to forge relationships with 27 other countries, if the UK representative is not a consistent player in those circumstances? 

I am pointing out only one anomaly that might exist, and the Minister should acknowledge that there are deficiencies that must be addressed. He has done so implicitly with the concession in clause 62, but it would be complacent of him to feel that there were no lessons to be learned from this new spaghetti of public bodies that he is creating. A year down the line, it might be advisable to consider whether we can improve the co-ordination of the arrangements. 

This issue is particularly pertinent now because there are rumours, which the Minister may wish to confirm or deny, that the Government are going soft on the implementation of the Vickers independent banking commission recommendations, particularly with respect to the 10% core tier 1 recommendation, which the Government had, I thought, accepted. I may be wrong, but the rumours are that the harmonisation efforts led by the French, and by Commissioner Barnier in particular, to ensure that there is not regulatory arbitrage between different countries may mean that 10% is too high a capital buffer and that the arrangements need to be rounded down. It would be helpful if the Minister confirmed whether the Government still believe in the 10% threshold, and whether they still believe that that is achievable through negotiations. As it stands, the consensus of opinion across the 27 other countries and the European regulators may be against him. We need that important clarification, so I would be grateful if the Minister addressed that point, said why he does not think we should reveal the effectiveness of these arrangements within a year, and clarified which members of the PRA or the FCA will sit on each one of the European bodies. This is an important amendment and crucial to whether the Bill will succeed. 

Mr Hoban:  I appreciate the vigour with which the hon. Gentleman wanted to attack this matter, but it is a pity that he has not read to the end of the policy paper we published in January. On page 119, it states who is in the voting chair when it comes to the EBA, ESMA and EIOPA. It is there for everyone to see. It does not require much work to get there. For example, on EBA it is PRA, on ESMA it is the FCA, and on EIOPA it is the PRA. The reality is that there is not a perfect match between European regulators, even as it is now. For example, on EIOPA, yes, the FCA is represented, but it has to talk to the pensions regulator. On ESMA, the FCA has to talk to the FRC and the takeover panel—just as it was under the previous Government. There is

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nothing novel about this. The reality is that different member states have different configurations. We are adopting what is casually referred to as a twin peaks approach to regulation. The same happens to be the case in the Netherlands as well, for example. People will configure their own domestic arrangements to reflect what they think are their priorities and will work on their interrelationship with other European bodies as is appropriate. 

The other point I would make is this. We have listened to the pre-legislative scrutiny Committee. The international co-operation MOU is in the back of the policy paper published in January. It is important that those who have a voice in the European regulatory process are able to exercise it. That is why we will have a committee set up under the chairmanship of the Treasury and reporting to the Chancellor. It is that committee that will undertake any reviews, as it will do on an ongoing basis, rather than the Bank of England undertaking its own review. I am not quite sure what the role of the Bank of England is in what the hon. Gentleman proposes. It is best that the committee we are establishing works on the effective co-ordination. 

6.15 pm 

I have no idea where the hon. Gentleman’s point about the FCA having to vacate the chair at ESMA comes from. It is not the case. I also have no idea where these rumours have come from about watering down the 10% additional capital required by John Vickers. The hon. Gentleman should perhaps be careful to whom he listens in future. I am happy to offer clarification on that matter for him today. 

Co-operation is as vital now as it will be in the future. We are collectively playing a strong role in shaping European regulation. The MOU and the committee will help that. The amendment is not particularly necessary or helpful. However, I assure the Committee that one area that the new committee will keep under review is how well people work together in this area. 

Chris Leslie:  I am delighted that the Minister has said so categorically that the Government stick solidly behind their commitment to the implementation of the Vickers commission—the independent commission on banking. That is a very clear commitment from the Minister. I am sorry for even doubting that that might be the case, but rumours abound with such things. It is good that they have been scotched by the Minister today. 

I am also grateful to the Minister for pointing out that I was wrong in my impression that there needed to be a bit of musical chairs between the PRA and the FCA when attending various European regulatory meetings. I had been under the impression that there were circumstances in which FCA representatives would need to stand up and move out of the chair they were sitting in and PRA representatives would need to come along and take their particular point of view. We now know that the FCA is able to take a lead on any prudential matters that come up at the European Securities and Markets Authority. That was a very helpful clarification from the Minister. I am sure that the chief executive of the FCA will be delighted to hear that statement. 

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The Minister says that it is not currently a perfect match. I can see that that is the case, but we are creating a multiplicity of regulatory bodies. We are even creating another new committee to co-ordinate those regulatory bodies. Let us consider the situation. We start at the top with the supervisory authority. There is then a banking authority, a separate securities and markets authority, and a separate insurance and pensions authority. There is then a Prudential Regulation Authority, a Financial Conduct Authority and a co-ordinating committee between all those—the FPC. And let us not forget the Treasury, the MPC and so on. The list is not exactly an inspiring, clear set of decision-making arrangements. I can see this being a recipe for chaos. 

All I am saying is that we want a review. I do not necessarily think that a further committee will always help with these things. However, the Minister has made that concession in relation to clause 62. It was not asking the earth for the Government at least to have a review of whether we can improve these arrangements after a year. These are serious issues that are happening. What did we see yesterday? The insurance company Prudential voicing its worries about the solvency II arrangements. To what extent will the Minister do what is necessary to stand up for British interests in those European forums where he needs to be negotiating the conclusions of the solvency II arrangements? These are crucial issues, including the capital requirements directives and so on. These are areas of policy where European writ in many ways overrules the domestic arrangements, so it is important that we get that interface right. 

Jesse Norman:  Since the hon. Gentleman has been relying on rumours and media tattle about Prudential for his evidence, he might consider that solvency II will apply wherever Prudential locates itself. Can we please stick to the point? 

Chris Leslie:  I am sorry if the hon. Gentleman finds this debate a little tiresome. If he wants to just leave his seat, nothing is stopping him from doing so. He is perfectly able to leave the Room and go wash his hair or powder his face—whatever he wishes to do. If he is here and he wants to take part in the debate, I would welcome a more substantive contribution than, “Please can you shut up.” 

The warnings from Prudential are serious and need to be listened to. I hope that it does not leave the UK and relocate to Hong Kong. In many ways, however, the test will be whether the British Government and, by extension, the British regulators, succeed in getting the right balance of decisions at those European forums. If they cannot do that, we have to transpose and even implement those regulations straight away. These are not my concerns; I am simply voicing those of others: the British Bankers Association, the Corporation of London, the CBI and Barclays bank. There are concerns across the financial services sector. It would have been perfectly possibly for the Minister—even voluntarily, without writing it into the Bill—to say, “We will concede and review within a year.” The Minister, however, cannot even bring himself to do that. We will press the amendment to a vote, to put this point to the test. 

Question put, That the amendment be made. 

The Committee divided: Ayes 8, Noes 10. 

Column number: 215 

Division No. 11 ]  


Durkan, Mark   

Evans, Chris   

Fovargue, Yvonne   

Gilmore, Sheila   

Hamilton, Fabian   

Jamieson, Cathy   

Leslie, Chris   

Pearce, Teresa   


Bradley, Karen   

Burt, Lorely   

Garnier, Mark   

Gilbert, Stephen   

Hancock, Matthew   

Hands, Greg   

Hoban, Mr Mark   

Norman, Jesse   

Rutley, David   

Sharma, Alok   

Question accordingly negatived.  

Clause 4 ordered to stand part of the Bill.  

Schedule 2 

Further amendments relating to Bank of England 

Chris Leslie:  I beg to move amendment 27, in schedule 2, page 171, leave out lines 26 to 28. 

The amendment, which is probing, proposes the omission of what is intended to replace paragraph 6(1) of schedule 1 to the Bank of England Act 1998: 

“The fact that a person has held office as Governor of the Bank does not disqualify that person from appointment as Deputy Governor or director of the Bank.” 

In many ways, this is the Putin clause. A Governor, having served—in this case—an eight-year term, might be slightly frustrated and might want to continue to exert power over the Bank of England, and so thinks, “Aha, here’s a cunning wheeze, I’ll serve as a deputy governor of the Bank, and perhaps swap positions with another deputy governor, and who knows what might happen in the future.” The Russian Prime Minister and President have sought to do much the same in recent years—perhaps a parallel can be seen. 

When a powerful, imperial figure seeks to take a deputising role, the dynamics within an institution used to that dominant and firm stamp of authority might be difficult. Can the Minister justify opening that particular box and being so specific in allowing a person who has held office as Governor to hold office as a deputy governor? Given that we are moving towards a single term for the Governor, rather than terms of reappointment, is it not more sensible to say, “Once you have been Governor of the Bank of England and your term expires, that’s it. Thank you very much for your service, here is your carriage clock, we appreciate your many hours, days, months and years of contribution, but that is it”? But under the Bill, it is entirely possible that he or she could serve as a deputy governor. 

Can the Minister explain why the provision is in the Bill? Is he aware that some cynics might worry about the continuing power dynamics? Indeed, the British Bankers Association has picked up on the measure. [ Interruption. ] The Minister raises an eyebrow at that suggestion, but the BBA said: 

“We were see the provision at paragraph 1(6) of Schedule 2 proposing that paragraph 6” 

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be substituted with that provision. It continued: 

“It is not immediately obvious to us the reasons why a Governor should become a Deputy Governor after serving an eight year term as Governor or the circumstances in which this would be appropriate.” 

Can the Minister address such concerns and explain why the Putin clause has been put in schedule 2? 

Mr Hoban:  I am a little surprised by the hon. Gentleman’s concern. In a slightly modified form, we are replicating what is in paragraph 6 of schedule 1 to the Bank of England Act 1998, a piece of legislation introduced by the previous Government, although the original 1998 Act places no restrictions whatever on the number of terms that an individual may serve. Under that legislation, a person could theoretically switch between the posts of Governor and deputy governor indefinitely—a real Putin clause. Under the proposals in the Bill, that will not be the case, so the concerns of the hon. Gentleman are misplaced. 

The existing paragraph 6 of schedule 1 to the 1998 Act clarifies that: 

“The fact that a person has held office as Governor, Deputy Governor or director of the Bank does not disqualify him for re-appointment to that office or for appointment to any other of those offices (subject to paragraph 1(3) and (4)).” 

The original wording, therefore, creates a slightly Putinesque rotation policy. Paragraph 1 of schedule 2 to the Bill, however, restricts future Governors to a single term of eight years, so the wording in the original paragraph about reappointment is clearly not appropriate, while the cross-reference to paragraph 1(3) and (4) no longer works. Paragraph 1(6) of schedule 2 will amend schedule 1 to the 1998 Act to remove cross- references to the Governor being reappointed and update the cross-references. However, that does not change the practical effect of existing legislation, which is to clarify that a person who has held office as a member of the court in one guise is not prevented from being subsequently appointed to another. 

6.30 pm 

The most obvious example of that is a deputy governor being subsequently appointed as Governor, a career path that a good number of Governors, including the current one, have taken. Other permutations are possible. A former deputy governor or Governor could be reappointed to the court many years later as a non-executive director of the court, or, in the other way around, a non-executive director of the court could, later on in their career, seek appointment as a deputy governor or Governor. It is also theoretically possible for a Governor to seek appointment as deputy governor after they have served their term as Governor, but that is highly unlikely in practice, as it would effectively be a demotion. 

In any case, the term limits for deputy governors and Governors are absolute. Paragraph 1(3) states that a person cannot serve more than two terms as deputy governor and one term as Governor in their lifetime, regardless of the order in which those terms take place. A Governor who has served two terms as deputy governor before being appointed a Governor cannot seek appointment for a further term as a deputy governor. Term limits cannot be reset. 

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Chris Leslie:  Cutting and pasting provisions from the 1998 Act into the Bill will invariably mean that certain provisions read across. I was surprised that the Minister was updating the provision to allow a Governor to serve as a deputy governor. That is a specific point. 

If we are now moving, as an important point of principle, to a fixed single eight-year term for the Governor, does the Minister seriously envisage circumstances in which the Governor would continue in a role such as that of deputy governor? Is now not an opportunity to remove that anomaly from the Bill? 

Mr Hoban:  I agree with the hon. Gentleman that it is not likely at all; I would be surprised, as I said, as it would be a demotion. However, we are not ruling out that possibility, just as we are permitting a member of the court to seek appointment as a Governor. A member of the court may also decide to become one of the deputy governors. It is merely a permissive piece of legislation; we are not ruling it out, but we do not think that anyone is likely to do it. 

I do not know who christened the proposal “a Putin clause”. It will be impossible under the Bill for someone to recycle endlessly between two terms of deputy governor and Governor—return to two terms of deputy governor, and then become Governor again. 

Matthew Hancock:  It is probably important to note that Putin has not yet recycled into the presidency. It is only in the febrile imagination of someone trying to dream up amendments that the proposal is a Putin amendment. After all, is it not the Crown who appoints the Governor and deputy governors? Therefore, it is not in the gift of the Governor to become deputy governor, unless so appointed. 

Mr Hoban:  My hon. Friend makes a helpful point. The deputy governors and the Governor are appointed by the Crown, so even if it were possible for a Governor to do a Putin, the Crown could block that appointment, so it will not become self-perpetuating at the whim or discretion of a Governor. It is clear that there will not be endless recycling, and I hope that that allays the concerns of the hon. Member for Nottingham East. 

Mark Durkan:  The Minister knows that Treasury Ministers have been making the point about the importance of term limits. We heard that stressed in the Chamber, and we now have, for the first time, a clear term limit. There was a clear, conscious decision to qualify the term limit. What was the reason? Why did Ministers agree to do that if they did not think it would ever arise? 

Mr Hoban:  It is a funny thing, but one of the important measures in the schedule has not been touched on, which is why we have moved from two five-year terms to one eight-year term. We have made that change, and perhaps a schedule stand part debate is welling up in the mind of the hon. Member for Nottingham East. We are not banning someone from being demoted from Governor to deputy governor. I think that is unlikely to happen, but the facility is there. 

The important thing is to ensure that someone may have one term as Governor, and not more than two terms as deputy governor. That is reasonable. I do not

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think we should preclude someone who ends up as Governor from deciding that they fancy a term in charge of financial stability. 

Chris Leslie:  In my experience, the way these things tend to happen is that Ministers are presented with submissions from their officials about the formation of legislation, and then have to make some decisions. I wonder whether the Minister positively decided on the provision, or whether it is one of those read-across arrangements that slipped through the net. We will discuss in a moment under schedule 2 stand part whether there should be a fixed single term of eight years. 

I am in two minds in many ways about term limits as a concept. If they were applied to hon. Members, and office holders of the Crown, we would be in all sorts of difficulties. Term limits have virtues in ensuring that in certain circumstances independence can be built into the system. The Minister is seeking to strengthen the Governor’s independence by having a single appointment and no reappointment process. 

If the Governor could be appointed to further offices within the organisation, that would be a small carrot that the Minister could dangle over the Governor’s head for the longer term, and they could have that consideration in the back of their mind, although I doubt whether that would happen. I suspect that the Minister did not spot the anomaly, and he may wish to revisit it on Report. I do not believe it strengthens his case for an eight-year term limit, because the Governor could end up going beyond that, and it is not impossible to envisage such circumstances. After all, some of the deputy governors are exceptionally well rewarded. Their posts are important and powerful, and I can imagine a Governor who is young and still has a career ahead of them wanting an ongoing role. 

With the hope that the Minister will think again about this—he did not say so, but I must hope that he will—I beg to ask leave to withdraw the amendment. 

Amendment, by leave, withdrawn.  

Question proposed, That the schedule be the Second schedule to the Bill. 

Chris Leslie:  I want to emphasise the fact that the most important element in the schedule is clearly the move to a single-term appointment for the Governor of the Bank. That is obviously an important change, and there are pros and cons. On balance, I am happy to hear the Minister justify why he thinks a single eight-year term is necessary. I wonder why he chose eight years; perhaps he will explain the logic of that arrangement. 

The current arrangement is two five-year terms, which is 10 years in total, so the Governor will serve for slightly less than previously. Is there added virtue in not having the reappointment process? I would be grateful if he explained the logic behind that, because we may want to debate it later. The rest of the schedule is broadly administrative, and I do not have many other objections to it, but I would like the Minister to explain the eight-year term. 

Mr Hoban:  This is an important point that we considered carefully when in opposition. There was a sense, perhaps, of politics being played over the reappointment of Governors for a second term, because that could undermine

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the independence of the Governor. If the Governor felt that they were dependent on the whim of the Chancellor or the Prime Minister of the day, or that the prize of reappointment was being dangled in front of them, it could cause them to feel that their independence was compromised while waiting for that reappointment decision. 

It was right to reconsider whether two five-year terms were appropriate, or whether we should move to a single eight-year term. Our conclusion was that to strengthen the independence of the Governor, it was important to have a single term so that they did not feel fettered by the sense of an imminent reappointment. I do not think that any Governor has felt fettered in such a way, but a single-term appointment would put beyond any doubt the independence of the Governor of the Bank of England. 

The question is about whether that term should last for eight years, five years or 10 years, and I do not suspect that a huge amount of science is involved in the decision. Clearly, however, the Governor should have time to get into the job and understand their complex range of responsibilities. We have touched on that during the debate so far, and we have mentioned the Governor’s responsibilities as chairman of the Financial Policy Committee and the MPC, their overall responsibility for the Bank, and the fact that they are the chairman of the PRA. 

Those are important tasks, and it is important to give the Governor time to develop that expertise and have a prolonged period in which to exercise the powers that come with the role. These are big jobs and we want to appoint someone for a reasonable period of time so that they are prepared to develop the expertise they need. Continuity is vital, whether across an economic cycle or during changes to the financial landscape. 

Column number: 220 

The other point is that a term that is too long would create the sense of a Governor who lacks accountability. There is a balance to be struck. It is vital that Governors are accountable, which is why, as with other appointments, a Governor has a pre-commencement hearing in which they come before a Treasury Committee and are subjected to parliamentary scrutiny about their role. It is about getting the balance right. 

The other merit, which I know the hon. Gentleman is always keen to latch on to in support of his arguments, is that the Treasury Committee has also suggested a single eight-year term for the Governor, and that provides another wise reason for moving to such a term. In looking at the duration of the appointment, a range of factors should be considered. Getting the balance right between continuity and accountability is vital, as is ensuring that there is no doubt about the independence of the Governor, by having a single term rather than providing an opportunity for reappointment. Again, that strengthens the sense of the independence of the Governor of the Bank of England. 

We would all agree that one of the strengths of the reforms introduced by the previous Government was to strengthen the independence of the Bank, and this measure goes a step further. There are a range of reasons why it is appropriate to move to a single eight-year term. It is the right balance to strike and I am grateful for the Committee’s support for the second schedule to the Bill. 

Question put and agreed to.  

Schedule 2 accordingly agreed to.  

Ordered, That further consideration be now adjourned. —(Greg Hands.)  

6.45 pm 

Adjourned till Thursday 1 March at Nine o’clock.  

Prepared 29th February 2012