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The Bank of England

5.44 p.m.

The Minister of State, Department of Trade and Industry (Lord Clinton-Davis): My Lords, with the leave of the House, I shall now repeat a Statement which has been made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:

    "On 6th May, I announced the means by which we would achieve this promise, by giving the Bank operational responsibility for setting interest rates, and on the first economic day in the new House, I have sought the opportunity to explain my proposals for legislation that will be introduced to and fully debated in the House. The House will understand that the length of the Statement reflects the significance of the changes I propose.

    "In undertaking these reforms, I have taken account of the recommendations of the Treasury and Civil Service Committee's report on the role of the Bank of England, which stressed the need for clear lines of accountability and answerability for monetary policy to Parliament. As the committee stated in 1993:

    'The present system for determining monetary policy does not, in practice, allow for clear parliamentary accountability'.

    "The reforms represent a British solution to meet British needs. Their main elements are as follows. The Bank's monetary policy objective will be to deliver price stability and, without prejudice to this objective, to support the Government's economic policy, including its objectives for growth and employment. The Government will set the inflation target for the Bank. This target will be reviewed annually, and announced in the Budget. The Bank will have operational responsibility to achieve the inflation target.

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    "Decisions on what actions need to be taken to achieve the target will be taken by a Monetary Policy Committee, on the basis of a majority vote. The committee will include the Governor and two deputy governors nominated by the Government, and two senior Bank officials with management responsibility for monetary policy and market operations. But it will also include four other expert members appointed from outside the Bank by the Government. The committee will take responsibility for taking full account of regional and sectoral information in its monetary policy decisions.

    "The Monetary Policy Committee will meet on a monthly basis. All decisions on interest rates will be announced immediately after the meeting. The proceedings of the meetings, including votes, will be minuted, and published within six weeks. The Monetary Policy Committee's performance will be reviewed by the Court of the Bank. The Court will be substantially reformed, so that it is able to take account of the full range of industrial and business views in this country and for the first time is fully representative of the whole of the United Kingdom.

    "The Bank will be expected to report to the Treasury Select Committee and to the House. I will write to the chairman of the committee suggesting that the Bank's annual report be debated in the House, and that the Bank appear four times a year before the committee to give evidence and answer questions on its inflation report, so that the Bank's performance will be able to be judged by Parliament. There will be a review of the Bank's financial arrangements, to ensure that the Bank meets the highest standards of accountability and transparency, in the light of its new responsibilities. The Bank's role in debt management will be transferred to the Treasury.

    "The Government will retain the right to override the operational independence of the Bank in extreme economic circumstances, for a limited period only, and subject to ratification by the House. I would expect this right to be exercised rarely if at all. These requirements mean that, while the Government retain clear responsibility to Parliament for the goals of monetary policy, the Bank will be clearly accountable for the operation of monetary policy, and will be required to report to Parliament on a regular basis. In addition, through the regular publication of the minutes of the Monetary Policy Committee's meetings, and the Bank's inflation report, the public will have sufficient information to judge the performance of the Bank against the target it is set.

    "I intend to introduce legislation enacting these changes as soon as possible, for the House to consider. In the meantime, the Governor--for whose co-operation in this I am grateful--has agreed on a transitional basis to implement the new procedures for decision-making, and I will be nominating the four new members of the Monetary Policy Committee.

    "I now turn to the question of prudential supervision. Of course this concerns not just the Bank of England, but also the reform of the Financial Services Act.

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    "Financial services lie at the heart of a modern, dynamic economy. The effectiveness and competitiveness of all our industries depend on the availability and efficiency of the increasingly wide array of financial products and services, from pensions and insurance to securities and derivatives. Our standard of living depends on them, particularly in retirement. Financial services are often complex and long term. Products, markets and advice must therefore be fair, honest, transparent and command confidence.

    "It has long been apparent that the regulatory structure introduced by the Financial Services Act 1986 (FSA) is not delivering the standard of supervision and investor protection that the industry and the public have a right to expect. The current two-tier system splits responsibility between the Securities and Investments Board (SIB) and the self-regulatory organisations (SROs), together with the recognised professional bodies. This division is inefficient, confusing for investors and lacks accountability and a clear allocation of responsibilities. Reform is long overdue to simplify the delivery of financial service regulation, and this was a key commitment in our Business Manifesto. At the same time, it is important to preserve the beneficial aspects of the current Act, including practitioner involvement and differential levels of regulation for wholesale and retail business.

    "I can announce today that work is to start immediately on the legislation needed to simplify and reform the regulatory system at an early opportunity. I am announcing our intentions in advance to give the SIB and the self-regulating bodies the opportunity to work with us on the detailed implementation of our proposals, to ensure the smoothest possible transition to the new regime. I am confident that the simpler system we are proposing will reduce compliance costs, and increase public confidence in the regulatory regime.

    "But simply reforming the Financial Services Act is not enough in itself. In today's world of integrated global financial markets, the financial services industry transcends geographical and political boundaries and the regulatory response must meet this challenge. The UK financial services industry needs a regulator which can deliver the most effective supervision in the world.

    "You cannot ensure the success of British financial services in the 21st century without modernising arrangements for the protection of investors. My reforms are essential to ensure the future confidence of investors large and small, and the future success of the increasingly integrated financial services industry on which so many British jobs now depend.

    "At the same time it is clear that the distinctions between different types of financial institution--banks, securities firms and insurance companies--are becoming increasingly blurred. Many of today's financial institutions are regulated by a plethora of different supervisors. This increases the cost and reduces the effectiveness of supervision.

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    "So there is a strong case in principle for bringing the regulation of banking, securities and insurance together under one roof. Firms organise and manage their businesses on a group-wide basis. Regulators need to look at them in a consistent way. This would bring the regulatory structure closer into line with today's increasingly integrated financial markets. It would deliver more effective and more efficient supervision, giving both firms and customers better value for money. This would improve the competitiveness of the sector and create a regulatory regime that would generally meet the challenges of the 21st century.

    "So I have decided to take the opportunity presented by the Bank of England Bill to reform the regulatory system. Responsibility for banking supervision will be transferred, as soon as possible after passage of the Bill, from the Bank of England to a new and strengthened Securities and Investments Board, which will also, as a result of forthcoming legislation, take direct responsibility for the regulatory regime covered by the Financial Services Act.

    "SIB will become the single regulator underpinned by statute. The current system of self-regulation will be replaced by a new and fully statutory system, which will put the public interest first and increase public confidence in the system.

    "The Governor of the Bank of England will be fully involved in drawing up the detailed proposals. The Bank will remain responsible for the overall stability of the financial system as a whole. The enhanced Securities and Investments Board will be responsible for prudential supervision.

    "As the House will already be aware, Sir Andrew Large, the current chairman of the SIB, has decided to step down. I would like to take this opportunity to pay tribute to him, and thank him for his contribution to financial regulation over the past years.

    "It is crucial to the success of these reforms that I am proposing that we should have a new chairman with the stature and calibre to implement them quickly and smoothly. Because of the importance I attach to drawing on the Bank of England's expertise in these areas I have asked Howard Davies, the Deputy Governor of the Bank, to be the first chairman of the enhanced Securities and Investment Board responsible for integrating the supervision of banking and financial services. I am pleased that he has agreed. He is of course already a member of the SIB board. He will take over as chairman when Sir Andrew Large steps down. Two new deputy governors of the Bank will be appointed in due course.

    "I have today written to Sir Andrew Large with further details of my proposals. I have placed a copy of this letter, together with my earlier letter to the Governor on monetary policy, in the Library of the House.

    "I am confident that the new arrangements, taken together, will enhance significantly the credibility of UK monetary policy and improve the workings of the

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    financial markets. That means lower long-term interest rates and higher growth and investment. Indeed, we have already seen long-term interest rates fall since my announcement a fortnight ago, reflecting the positive reaction to the new monetary framework.

    "These reforms are founded on sound economic principles. This is a long-term policy for long-term prosperity. It provides the building blocks for a new economic strategy for monetary and financial stability aimed at enhancing longer term growth and prosperity. I am confident that their success will be reflected in a stronger and more robust economy for the long term".

My Lords, that concludes the Statement.

5.57 p.m.

Lord Mackay of Ardbrecknish: My Lords, before turning to the Statement, I welcome the noble Lord, Lord Clinton-Davis, to his new post on the Front Bench as a Minister at the Department of Trade and Industry, which I am sure he will greatly enjoy. I especially welcome him to the role of Treasury spokesman, one that I fulfilled previously and took great enjoyment in. It is a little like having responsibility without power. You merely have to answer for what your Treasury colleagues do without having any role in deciding what it is. I found it great fun and very interesting, as I am sure the noble Lord will.

I am grateful to the noble Lord for giving me slightly longer to mull over the Statement than was given to my right honourable friend Kenneth Clarke in the other place. I believe that he had only about a quarter of an hour to look over a Statement of some considerable length and about two very important issues.

Many people were surprised two weeks ago by the announcement--not to Parliament--that the Bank was to be given operational responsibility for setting interest rates. I suppose we should therefore be grateful this afternoon that, two weeks later, Parliament has been properly informed. There was not much indication of that in the manifesto (although a paragraph was quoted in the Statement) nor in any of the speeches by Mr. Gordon Brown. Indeed, as recently as February Mr. Gordon Brown said:

    "The Bank must demonstrate a successful track record in its advice and build greater public credibility".
I should like to be assured, as I can only assume, that this was demonstrated over the very first weekend in May, and that in those few days the greater public credibility came about that justified the creation of the monetary policy committee.

When are we likely to see these appointments? As well as the additional deputy governor and the four others who are to be appointed there will have to be a replacement for Mr. Howard Davies. That makes a total of six appointments, all very clearly by the Chancellor of the Exchequer. It sounds very much like the first new quango. How independent will the Bank be if all the appointments are made by the Chancellor of the Exchequer?

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Perhaps the Minister will tell me when we can expect to hear who is to be appointed and what consultation will take place. I see from the Statement that the Court is to be reformed to be fully representative of the whole UK. That may be fine, so far as it goes, but the real decision-maker will be the Monetary Policy Committee. Will it represent the whole UK? Specifically, will it represent Scotland, with its considerable financial sector? Will the new Scottish parliament and government, if they are set up, be consulted even on one member of the Monetary Policy Committee?

I also note that there is to be accountability to the other place via the Treasury Select Committee and that the annual report of the Bank is to be debated in the House of Commons. Will the Minister give me an assurance that at least the annual report of the Bank will be debated here, in your Lordships' House, to give us a chance to discuss these important matters?

I wonder whether the noble Lord, Lord Clinton-Davis, and his colleagues at the Treasury are confident that this new system will deliver as good a record on inflation as my right honourable friend Kenneth Clarke did, in conjunction with Mr. Eddie George. Is the Minister concerned that when the last Chancellor and the Governor disagreed, about two years ago, events proved the Chancellor right and the Governor wrong? In an independent system, interest rates would have been raised then, as banks have always proved to be more likely to follow deflationary policies than policies that would encourage growth and increasing employment.

We only have to look at the years before the war, when the Bank was independent. Are the Government absolutely satisfied that the Bank will not pursue deflationary policies? Is there not a danger that the Monetary Policy Committee will always err on the side of caution in order to meet the inflationary targets laid down? Therefore interest rates will be at a higher level than they need be and consequently there will be an upward effect on the value of sterling. I know that the noble Lord, Lord Paul, was concerned about that eight weeks ago and he must be much more concerned about it now than he was on the day he questioned me. It will also have an adverse downward effect on growth in our economy and on the employment rate.

Another point on the interesting proposal is this. I wonder whether this is the first step towards European monetary union. One of the first steps on the road to European monetary union is the independence of the bank. Is that the hidden agenda? Has the Foreign Secretary agreed, or has he been out of the country when these important decisions were made?

My last point about that part of the Statement is that I hope that by the new policy the Government do not think that they are off-loading responsibility for interest rates onto the Bank of England and that they can do a Pontius Pilate act on the subject of interest rates so that when the interest rates rise, they can wash their hands of any consequences and say, as they do in the television police programmes: "Honest, guv, nothing to do with me", or in this case, "Nothing to do with me, ask the Guv".

I turn to the second half of the Statement. The two halves merit being two separate Statements and not being run together because they are very important

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indeed. The changes in the financial services provisions are considerable and wide ranging. When will the new Bill be presented to Parliament? Indeed, why was it not in last week's gracious Speech? Surely a Bill of this importance must have been agreed before yesterday evening. It seems to me that the SIB will have an enormous and important task not just taking direct responsibility for the regulatory regimes covered by the Financial Services Act, but also taking over responsibility for banking supervision from the Bank of England. There will be costs. I noticed that the Statement said that the compliance costs would be lower. I should like an assurance that there will be publication of a compliance cost assessment. When looking at the role of this new regulatory authority, I wonder whether it will include Lloyd's.

The details of these changes are not contained in the Statement but in a letter to Sir Andrew Large which has been placed in the Library. Clearly, we shall have to study the contents of that letter to learn a little more of the proposals. Will the Government consult in a meaningful way all those involved in the banking, insurance and financial sector? Will the Government always remember the vital role that those industries play in the wealth-creating sector of this country? Will they ensure that nothing they do in the creation of the new system will endanger the pre-eminent position of the City in the worldwide financial markets nor will it endanger the important role that other financial centres play around this country--for example, in Edinburgh?

I hope that the Minister will be able to answer those questions. We look forward to the two Bills: one that we knew about, on the Bank of England, the other being the new one which comes to us. Perhaps the Minister will give us an indication of when he expects the supervision Bill to come to Parliament.

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