Lord McIntosh of Haringey: My Lords, I beg to move that this Bill be now read a second time. This Bill is a further step in our determination to modernise the British economy and to equip the country for the new global economy of the future.
First, it gives the Bank of England operational independence to set interest rates to meet the Government's inflation target. It will do so through one of the most open, accountable set of procedures of any central bank in the world. Secondly, the Bill implements the first stage in the modernisation and reform of supervision and regulation of the UK's financial services industry. The new Financial Services Authority launched last year will enjoy the confidence of consumers and industry alike, giving London and the UK industry as a whole a huge competitive advantage.
The Bill underpins our economic approach: to secure long-term stability and the promotion of high and stable levels of growth and employment. It enshrines our commitment to increased openness and accountability, which in turn leads to the enhanced credibility in monetary policy that the world now demands. The Bill will provide the stable platform business that the country needs, and it will increase confidence in this country's commitment to low inflation in the future.
Price stability--low inflation--is an essential precondition of achieving the Government's objectives of high and sustainable levels of economic growth and employment. Inflation hits business, savers and pensioners alike. It causes uncertainty. It discourages investment and in the end hits jobs. This country has paid a heavy price for a successive cycle of boom and bust. Because of that legacy, our long-term interest rates have been higher than they should have been, and higher than those in other countries.
The new framework will not only deliver low inflation but generate greater confidence in long-term decision making in Britain, which in turn will lead to lower long-term interest rates. We have seen some benefits already. Britain's long-term interest rates fell immediately following the Chancellor's announcement last May and they have remained lower since that time, falling by nearly a full percentage point--7.4 per cent. on 5th May and around 6 per cent. today.
In the modern economy, markets demand increasing openness and transparency in decision making. That is one of the purposes of this Bill. They want to know that the Government are fully committed to low inflation and have the determination to see that commitment through; where the institutions are in place to deliver that
It sets in place a clear division of responsibility between the Chancellor and the Bank. The Chancellor will set the target for price stability, and he will do so every year. The target announced by the Chancellor last year provides a rigorous, open and precise definition--a target of 2½ per cent. The Bank has the responsibility for achieving that target and, subject to that, supporting the economic policy of the Government including their objectives for growth and employment. So the Bank and the world at large is quite clear as to the objectives: price stability in support of the objectives of growth and employment.
The composition of the monetary policy committee itself will ensure a broader base of decision making. No one individual can dominate. It is a blend of experience from the Bank and outsiders appointed by the Chancellor because of their knowledge and experience. And of course the decisions are free from party political manipulation. The interests of the country will come before the interests of the party of Government. Decisions will be made with the long-term interests of the economy in mind. The Bank will also be fully accountable, not just to the Chancellor but to Parliament.
First, the MPC has to meet rigorous reporting requirements. It will be required to announce all its interest rate decisions immediately. Minutes of each meeting will be published and if there is a vote then the voting record of each member recorded. The Bank's quarterly inflation report will be put on a statutory basis. It is another instrument of accountability--one of the principal ways in which the explanations of the MPC can be assessed and subject to scrutiny outside the Bank.
Parliament will have ample opportunity to scrutinise the Bank: through an annual debate following the publication of the Bank's annual report; also through the Treasury Select Committee, which has said that it intends to call MPC members to appear before it. The fact that all the information is published and that discussions and decisions are open will in itself create accountability. All that is new and is a direct result of our determination to modernise the decision-making process.
Secondly, there is a clear procedure when the Bank misses its target, which the Chancellor set out in his letter of 12th June 1997. If inflation is more than 1 percentage point higher or lower than the target, the Bank will be required to publish an open letter to the Chancellor. Again, there is complete clarity and transparency. In the letter the bank must set out the following: why the target was missed; what action it has
And thirdly, there will be an increased accountability through reform of the Bank's constitution. So Part I of the Bill makes much needed changes to the Bank's management structure to enable it to fulfil its new role. The court will be expanded, and it is our intention that it will reflect the diverse interests of the City, business and industry. It will also reflect the nations and regions of the United Kingdom. And it will hold the Bank to account.
The Bill also gives an enhanced role to the non-executive directors of the Bank who will ensure that the Bank performs its functions effectively and manages its resources efficiently. They will review the Bank's performance as a whole, including the procedures of the monetary policy committee, and publish their own report every year. There is a new post--that of the senior member--who will lead the non-executive directors. Those three measures all add up to far greater accountability than ever before.
Part I of the Bill makes provision for the Bank's finances to ensure a secure foundation for the future. The Bank has long been funded by a voluntary arrangement for the banking sector. Now we are putting the main features of the existing scheme on a statutory basis. Because we are doing that it is appropriate that all those who benefit from price stability and the Bank's role in the financial system should pay, which includes building societies as well as banks.
With the transfer of banking supervision to the Financial Services Authority, it is important to look at the overall impact on the financial sector of cash ratio deposits and the new charges to be levied by the FSA. I want to make very clear that the intention is that the overall cost to the financial sector should be no greater than before and probably less. Both the Bank and the FSA will bear down on costs to the industry and therefore the public. We will ensure not only that banking regulation is effective, but that the costs are fully justified. For that reason we have been consulting on the cash ratio deposits scheme during the passage of the Bill.
Perhaps I may now turn to Part III of the Bill, which transfers banking supervision from the Bank of England to the new single regulator, the Financial Services Authority. This is just the first step of a much wider reform which we promised and which was the result of consultation while we were in opposition. As the House will be aware, the Government are currently drafting a new Financial Services Reform Bill that will formally put in place a regulator with clout and respect at home and throughout the world. Last October we launched the FSA, which has taken over from the Securities and Investments Board. It will in due course take over from the supervisory functions of the self-regulating organisations, the insurance directorate of the Treasury,
For years now there has been a consensus developing that reforms were necessary. The industry and the public knew that the present system had to go: it was cumbersome, expensive and fundamentally flawed in concept; it failed the public--look at the pensions scandal, my Lords. And it was an ineffective burden on business. It pleased no one. Regulation should be complementary to the business process and not a hindrance. It should give consumers and public alike confidence in the integrity of the system.
In the global economy, where markets are changing every day, where innovation and diversity are essential, the need for a new regulator that has power and flexibility has never been greater. The objective of the reform is again to enhance transparency and improve accountability through a simpler framework for the industry as a whole. The framework recognises that the industry is changing fast; that the traditional boundaries between banks, insurance companies and building societies are increasingly blurred. Many firms now offer a wide range of financial services.
That is why it is important in this Bill to start the reform process by transferring banking supervision to the FSA. The Bank of England of course retains responsibility for the stability of the financial system as a whole. But this Bill transfers supervision to the FSA.
There is another step in the modernisation of the old system. Clear divisions of responsibility between the Treasury, the Bank and the FSA are set out in a new memorandum of understanding, which was published last year and which is available in the Library of the House. The memorandum is based on principles of clarity, transparency, elimination of duplication and regular exchange of information between the three institutions. That is another first; never before have different responsibilities been so clearly set out. The memorandum also establishes a standing committee which will meet on a regular basis, and ensure an appropriate and co-ordinated response to any failure or collapse in the future. The Financial Services Authority, as the single regulator, will be able to provide effective and consistent regulation across financial services sectors. Traditional boundaries between those sectors are being eroded, and that process will doubtless continue. It is vital that we have a regulatory structure that reflects the way in which the modern financial services industry is structured. The new single regulator is also about clarity for the consumer. The ordinary person should not be faced by a vast array of different regulatory bodies, whose responsibilities are separated by boundaries that are obscure to the person in the street.
The same logic applies with equal force for complaints and compensation. So the single regulator will be matched by a single compensation scheme and a single independent financial services ombudsman. The FSA has published consultation documents on proposed arrangements for compensation and complaints. All this will be the subject of a further Bill that will be put
As the Chancellor announced when launching the new authority last October, the FSA will have a range of statutory objectives. These are: sustaining confidence in the UK financial sector and markets (working on an agreed basis with the Bank of England--the memorandum of understanding between the Treasury, the Bank and the FSA sets the framework for co-operation in this area); protecting consumers by ensuring that firms are competent and financially sound and give their customers confidence in their integrity, while recognising consumers' own responsibility for their financial decisions; promoting improvement in public understanding of the benefits and risks associated with financial products; monitoring, detecting and preventing financial crime; and pursuing these objectives in a way which is efficient and economic and ensures that costs and restrictions on firms are proportionate to the benefits of regulation; facilitating innovation in financial services; and taking account of the international nature of financial regulation and financial services business.
The FSA will be required to report annually to the Treasury on the performance of its functions and how it has sought to achieve its objectives. It will also be required to publish its budget for consultation and to publish estimates of the costs and benefits of proposed new or modified rules. The key to the FSA's regulatory role will be the authorisation of those carrying on business in the relevant areas. It is consistent with having a single regulator that there should be a single authorisation requirement and a single process for considering applications. The particular activities which any particular authorised person may carry on within the scope of his authorisation will be determined by the FSA.
It is right to arm the regulator with an effective array of sanctions. This will ensure that we enjoy effective regulation. But the powers must be adequately balanced. The FSA must itself be subject to the discipline of a satisfactory appeals mechanism. We propose to create a new single tribunal to consider all disputes arising from the FSA's exercise of its powers against authorised persons. The tribunal will be entirely independent of the FSA and will be managed as part of the court service. This is an important advance on the present range of financial services appeal mechanisms which are set up and run on various lines.
As we have said, the FSA will be responsible for authorisation and regulation of all those insurance, deposit taking and investment businesses currently regulated by several separate bodies, including the professional bodies. The FSA will also have extensive supervisory powers over Lords.
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