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1.29 p.m.

Lord Stewartby: My Lords, I should begin by declaring certain interests. I am deputy chairman of an international bank and chairman of its audit committee. I am also a director of a building society. In the 1980s, as a Treasury Minister, I was responsible for the Banking Act of 1987. For four years until the end of last year I was a member of the Securities and Investments Board, latterly the Financial Services Authority. It is tempting to enter into the wide-ranging debate on monetary policy, as many other speakers have done. Although I wish to say a few words about that, I want to concentrate on certain matters relating to

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supervision which have not been so heavily covered in your Lordships' remarks so far but which constitute a major part of the Bill.

As regards monetary policy, it seems to me that the vital step was taken by my right honourable friend Mr. Kenneth Clarke when he was Chancellor in opening up a much more transparent discussion of policy decisions about interest rates, and that the present further step was sooner or later an inevitable consequence of that greater transparency because it was not reasonable to have a continuous debate as to whether there was a dispute between the Chancellor and the Governor, and whether it was politically derived, or how it was to be interpreted. It seems to me that the present proposals are themselves sensible and practical but the debate has correctly drawn attention to the fact that one cannot separate monetary policy in isolation from other aspects of the economy, as my noble friend Lord Cockfield and many others, including the noble Lord, Lord Roll, said. There will be tensions in that relationship. I do not necessarily believe that the Bill has provided all the answers, but it will be an evolving scene.

The most important consequence of these changes--which go back a few years--is that there is now an attempt by the monetary authority to anticipate future inflationary pressures. In the past there was too much of an inclination to take measures--particularly in relation to interest rates--only after the signs of substantial change in the economy had become all too evident, and at that stage, in arrears, it was necessary to implement much sharper interest rate moves in order to correct those positions. I believe that the present system and the one now proposed are designed to ensure that the monetary authority looks ahead and tries to anticipate what will be needed in the way of monetary conditions to ensure reasonable economic stability in terms of inflation. I do not think it is possible at this stage for any of us to guess how well it will perform, but I am sure this is the right way to approach the matter. It will not abolish the business cycle; no government and no monetary authority can do that. However, I hope that it will succeed in making that cycle less violent so that the economy does not become too over-heated or, if some slowing down is necessary, does not require a full-blown recession.

I turn to the supervisory matters in the Bill. When we were discussing what should be included in the Banking Bill in the 1980s we were faced with the potential conflicts of the Bank of England as a supervisor and as a lender of last resort to which noble Lords have alluded. At that time--I suppose one could fairly describe it as an interim solution--we felt that it was necessary to have some separation from the mainstream of the Bank of England for the supervisory process. That is why the Board of Banking Supervision was set up. It was a sensible step at that time, but the world has moved on. Banking and securities markets are increasingly overlapping and to have separate supervision for banking and for securities markets is no longer such an evident virtue as it was some years ago.

Other countries are moving in the same direction. There is a growing case now for ensuring that supervision of these coalescing markets--which are

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becoming increasingly international and therefore more complex--should be handled in a way which is separate from the traditional functions of central banking and notably monetary policy. That throws up some other difficulties of course. If the Bank of England is to remain responsible for the stability of the system, it needs a great deal of information about individual institutions. Whereas it was able to gain this through the supervisory role, it will now either have to have it at second hand, or it will have to duplicate part of the lines of communication between institutions and their supervisors.

A number of comments have been made about the costs of regulation and supervision. I am more concerned about the costs to the institutions which are being supervised than about the actual costs of running a regulatory system. My experience of the Financial Services Authority was of a cost-conscious organisation, tightly run and operating its budget in a disciplined way. It was run by high calibre, dedicated people who realised that they were spending other people's money and were cautious about it. Of course in any organisation economies can be made but I do not believe it to be an extravagant body in its nature. Indeed there should be possibilities for saving because some duplication in the current system should disappear with the integration of various forms of supervisors into the FSA. If you have a liberal financial centre with the reputation of the City of London, in order to be a world class financial centre it needs world class regulation and supervision. The proposals which we now have are likely to assist us in retaining that status for London.

I mentioned that markets are becoming more international. This means that the international dimension has to be taken into account by supervisors. That has added to the complication and the cost of supervising major international banking, insurance and other financial institutions. In my view the danger is that one has excessively detailed and intrusive supervision. Supervisors have to strike a balance between having the necessary level of understanding of the institutions they are looking after but not trying to tell insurance companies, banks and others how to run their businesses. Despite what the noble Lord, Lord Peston, said, I think that with one or two unfortunate exceptions the Bank of England has carried out its role pretty well. I hope that its approach to supervision can be preserved in the context of the new organisation.

However, the Financial Services Authority will face difficulties in that it has to look in two different directions. On the one hand it has to protect the position of the consumer at the retail level; on the other it has to ensure the soundness of big international institutions. My own view, from experience both as a practitioner and on the SIB, is that more emphasis needs to be placed on high level controls on defined lines of accountability and responsibility; on the calibre of the individuals at that level; and on the general culture of compliance throughout an organisation. I say in parenthesis that I doubt whether the Barings affair would have developed as far as it did with such catastrophic consequences if that company had had its equity publicly quoted and had followed the requirements of

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having an independent audit committee which asked awkward questions of the company's auditors. If that had happened I do not believe that it could have ended up the way it did. However, one can say that with the benefit of hindsight. We need to learn the lessons of these affairs. There is a triangular memorandum of understanding between the Treasury, the Bank of England and the Financial Services Authority designed to deal with the situation of there no longer being a bilateral relationship between Treasury and Bank but a triangular one and the lender of last resort not being the supervisor of institutions in the financial sector. I hope that this will work in practice. It is a sensible memorandum in its concept.

However, when serious problems arise, they come suddenly. It is difficult enough on a bilateral basis between Whitehall and the Bank to achieve rapid decisions in such cases. With a triangular arrangement I fear that it will take a little longer. I am also bound to wonder whether the traditional role of the Bank of England in assisting the stability of major companies in the economy as a whole, beyond deposit takers, will be catered for under the new arrangements. I remember the 1970s when there was a collapse of the property sector. The Bank of England was able to use its offices to secure lifeboat support in a way which went beyond the banking institutions themselves. Under the new arrangements I do not see how that will be provided for.

Finally, while I accept that the movement towards a very large omnibus regulator for financial activities of different kinds is now inevitable, and in many ways desirable, we have to accept that there are inherent problems of managing any large organisation. This will be a large, diverse organisation which will have to face in different directions at times. It will not be easy to run it in a way which meets all its objectives. It will need common standards, but it will need to apply them in different ways. This will be a tremendous task for the management of the authority. I have great confidence in Howard Davies and his team. I do not think that there could be better people to try to bring this about. But it is a major task. It is not one which has been attempted on this scale in any other country. I wish it well, but I have to keep my fingers crossed.

1.41 p.m.

Lord Bruce of Donington: My Lords, every now and again Parliament has laid before it a Bill of a highly specialised nature, dealing with a specific section of our economic and financial activities and the institutions that administer them. It is right that that should be so. We have had today a quite limited but nevertheless penetrating analysis on the nature of the steps proposed and the effect of them on the immediate environment of those concerned. So far as it goes, that should be done.

However, we have to be careful that when we have considered these questions on their intrinsic merits, we have to restore them into the context into which they are taken. The context is the fortunes of the nation as a whole. Where do the steps to be taken lead us? What effect do they have on the ordinary lives of citizens?

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In our capacity as Members of Parliament, and in one House or the other, we are not only enjoined to examine the activities of experts, we have to take a general view as to what happens to the population as a whole. How do these steps affect them? How relevant are they to their happiness or unhappiness, their fortunes or misfortunes? The overriding duty of Government is not to consider matters in isolation but within the context of the nation's fortunes a whole.

I have but little qualification to address the House in what may be considered presumptuous terms. I remember well in October 1990 when all the political parties, and the Bank of England, took a decision to enter into ERM. I, together with a few of my colleagues in both Houses and of all parties, ventured to dissent from that proposition because we thought it would lead to considerable trouble. Who was right and who was wrong in those circumstances? The experts put forward and supported the proposal that we should enter the ERM--and nonsense! I remember it well. My own party started the issue off three days before the Conservative Party conference in the October. The Liberal Party had decided automatically anyway because they had been fond of it from the beginning. The Conservative Party had decided, and the Bank of England agreed. But who was right? In fact we were right.

I say this in order to defend the position of the politician as against the expert. My old chief, Aneurin Bevan, had the saying--I still regard it to be a profound truth--that the expert should be on tap, never on top. That event well illustrated that saying.

Today we are discussing a Bill which takes away specific powers from the Government and hands them to the Bank of England. I shall refer again later to the section of the 1946 Act. The section provides for directions to be given by the Treasury or the Government to the Bank of England. Section 4(1) of the 1946 Act--the noble Lord, Lord Cockfield, regards the policy as an unqualified disaster--states:

    "The Treasury may from time to time give such directions to the Bank as, after consultation with the Governor of the Bank, they think necessary in the public interest".

That is emphatic. There have been many endeavours today to demonstrate to this House that these provisions really do not mean what they say, that there is not really much difference anyway, that this has been unofficially always the position and that we need not bother much about them. But the words are specific in the Bill. The Bill states:

    "In section 4(1) of the Bank of England Act 1946 ... at the end there is inserted ',except in relation to monetary policy'."

That seems to be quite emphatic. It is so important that it has to be put in law. There is no question of any regulation or understanding. The step is so important that the House has to legislate for it. Moreover, it can only reverse it or give some amelioration for its provisions, under a later section of the Bill which requires a regulation to be laid for affirmative resolution within a period of 28 days--or whatever it is--when it is in the public interest, or when there is an economic event of some disastrous importance. What those circumstances are, one does not know, or whether they

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would have applied, for example, on 2nd September 1992, and how catastrophic that might conceivably have been.

What are the effects of this step? As we know perfectly well--and numerous examples have been given in this debate--there have been five or six "hikes" in Bank rates so far. What effect has that had? It is common ground and few would dispute it that the exchange rate of the pound has been such as to over-value the pound against both the dollar and the deutschmark. That in itself has had further consequences. The over-valuation has meant that British exporters are finding it increasingly difficult to export British products. On the other hand, importers find it very much easier to import from other countries as a consequence.

What are the results of exporters finding it more difficult and importers finding it easier to conduct their affairs? First, it must be remembered that the CBI comprises both importers and exporters, and that the importer section is probably highly gratified. That is reflected in the inconclusive nature of some of the voting. But what happens in the meantime? It means that more unemployment occurs. Firms are there to make a profit, and if they cannot export their goods and see even less prospect of orders materialising in the future, they will cut down on their labour force. The joint effect is that pressure is put upon the whole of British industry, because of the less competitive nature of our domestic manufacturers, which is unable to export so easily and, again, find it difficult economically to compete with imports entering the country. There is a "double whammy" effect.

But that is only part of the story. What is the other result of a rise in interest rates? Surely it is the effect on loans to the ordinary public--on mortgage rates, and so on. There is a diminution in spendable income for those who have taken out mortgages on their houses: they have less money to spend. If there is less money to spend, there is less effective consumer demand. Less consumer demand, together with competition from importers, once again has an adverse effect on British industry. Indeed, more than that, it affects the attitude of the ordinary person who is subject to the extra charges on income, and if they are unemployed, their employment prospects suffer.

Overall, there is a further effect, which has a further adverse influence on British policy. Concurrent with the events that I have described, there is a deterioration in the balance of payments, making the position even worse. It makes it more difficult for the Government to continue to look after the affairs of the ordinary person. And it is the ordinary person that we have not heard very much about. I have not heard from the Government, or from those who have supported the Government in this matter, any mention of full employment. To me, that is surprising. We are living in times when the figure for the unemployed in the United Kingdom is at least 2,800,000, and probably very much higher than that. Yet no observation has been made as to how the steps that are to be taken by the Bank under the new laws will improve the lot of those who, through no fault of their own in most instances, are unemployed.

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No indication has been given as to what, in view of the adverse circumstances created by an over-valued pound and an over-hyping of local interest rates, will happen to domestic investment. We all know perfectly well that although the bank rate may be 7¼ per cent., that is not the rate to small businesses. On any overdraft they arrange, the rate is more like 12 per cent. to 13 per cent., and in some cases 15 per cent. or more. That is also true of temporary loan facilities. Those are the facts. They certainly do not produce a sense of euphoria and well-being among the thousands of owners of small businesses upon which the future of this country is said fundamentally to depend. On the contrary, the tendency is that more small businesses are failing, and at an alarming rate. The evidence is that numbers of people are being deterred from setting up small businesses.

Those are the matters which, I respectfully suggest, have to exercise our minds as we consider the situation from our own perspective--which in some cases is limited to university precincts and academic institutions and is not always embarrassed by any contact with real life as it is lived by millions of our people. I pay honour to them. They are entitled to their point of few. The noble Lord, Lord Cockfield, spoke about what he regarded as the disasters of the Labour Government of 1945. Perhaps I may point out that in the quarter of a century that followed--and the credit belongs to the then Conservative governments as well as Labour governments--the inflation rate over the whole period did not average more than 3.6 per cent., which is perilously near the 3.5 tolerance mentioned earlier. Moreover, unemployment never exceeded 3 per cent. of the total as compared with the 22 per cent. it reached at one time (when the noble Lord, Lord Cockfield, was active in this House) at the hands of Sir Geoffrey Howe, as he then was.

We ought, therefore, to take a further look at this matter before we throw our hands up in ecstasy, even in Brussels, where, I observe today, the new parliamentary building has been opened, at a cost of some £670 million, to accommodate 700 MEPs for a certain number of weeks a year. We ought to take another look. Above all, when restoring the arguments to the setting from which they emerge, we should always have regard to the aim, which is not, unfortunately, explicitly stated in my party's manifesto, of full employment. Full employment--or employment where the unemployed are only marginally higher than the vacancies, which is the old definition--is of prime regard to our country.

I hope therefore that we may pause to reflect on these matters when, within a couple of years, the regulations have to come in suspending the existing amendment to Clause 4, which in certain grave economic circumstances, or certain unforeseen events, will soon be upon us unless we are very, very careful indeed.

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