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The Earl of Home: I thank the Minister for that and I am grateful to him for confirming that the consultation process will be as speedy as it reasonably can be. Again, we are talking about an interim phase. The noble Lord has confirmed that the Government are promoting the concept of proportionality. Obviously, one can make proportionality subject to a great many things, I accept that. We have to be very careful that a smaller institution, which might be regulated by only one or two people, does not carry the same burden as the enormous institution. We shall be watching how those costs turn out over the period between now and the next Bill.

I thank the noble Lord for his assurances and beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 59 to 61 not moved.]

Clause 26 agreed to.

Schedule 6 [Banking supervision fees]:

[Amendment No. 62 not moved.]

Lord McIntosh of Haringey moved Amendment No. 63:

Page 40, leave out lines 2 to 4.

The noble Lord said: Schedule 6 (Banking supervision fees) defines "overseas institution" and "representative office". However, these terms have no

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operative effect and consequently there is no need to define them. The amendment removes their definitions from the Bill. I beg to move.

On Question, amendment agreed to.

Schedule 6, as amended, agreed to.

Clause 27 agreed to.

Clause 28 [Board of Banking Supervision]:

Lord Eatwell moved Amendment No. 64:

Page 12, line 9, leave out (", who shall chair the Board,").

The noble Lord said: I beg to move Amendment No. 64, and I will speak to Amendment No. 65.

The amendments ensure that one of the bitter lessons learned during the Barings affair is not forgotten: namely, that supervisory authorities should themselves be subject to assessment and examination by an authority which is not only independent but is seen to be independent.

Noble Lords will remember that the investigation into the conduct of the supervisory authorities at the Bank of England with respect to the Barings affair was conducted by the Board of Banking Supervision (the board referred to in Clause 28). They will remember also that the Board of Banking Supervision has the statutory duty under the Banking Act 1987 to advise the Governor of the Bank on the exercise of his supervisory functions.

Under the Banking Act, the board consists of three ex officio members, the Governor, the deputy governor and the executive director responsible for regulation, plus six independent members appointed jointly by the Governor of the Bank and the Chancellor of the Exchequer. Crucially, the board is chaired by the Governor.

Noble Lords will recognise that essentially the same structure is contained in Clause 28, including the provision that the executive head of the institution responsible for supervision should chair the committee responsible for investigating whether that supervision is conducted in a satisfactory manner. It is this provision for chairing the board that amendments seek to change.

Noble Lords will certainly remember that at the time of the public of the report of the Board of Banking Supervision into the Barings affair the value of that report was called into question both in your Lordships' House and in another place and in the financial press, when it was revealed that the conclusions had been drafted at meetings of the board chaired by the Governor and Mr. Quinn, who was at the time the executive director responsible for supervision.

The noble Lord, Lord Ezra, noted on 18th July 1995 that the conclusions of the report did not seem to follow from the analysis which had been prepared by the independent members alone. He wondered whether the difference was attributable to the person who chaired the meetings at which the conclusions were drafted. My noble friends Lord Hollick and Lord Desai, speaking on 21st July 1995, when we managed to keep the noble Lord, Lord Mackay, from his holiday for some hours, both argued that it was unfortunate that the Governor

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should be the chairman of the committee examining activities for which he was himself responsible. They called for a new independent inquiry. For the sake of completeness, I should point out that the principal Treasury spokesman for the Opposition also expressed these fears, although perhaps that citation is somewhat diminished by the fact that that person was myself.

Similarly at the proceedings of the Treasury and Civil Service Committee of another place, held on Wednesday 19th July 1995, members of the committee expressed disquiet over the Governor's role as chairman of the Board of Banking Supervision, and suggested that it was hardly surprising that the Bank had accepted with alacrity the conclusions in the drafting of the final version of which the Governor and Mr. Quinn had themselves participated.

Let me be absolutely clear. No one has suggested--and I am certainly not suggesting--any impropriety in the operation of the Board of Banking Supervision or on the part of the Governor and Mr. Quinn. What was suggested, and I believe was correctly suggested at the time, was that the report should not only be independent, but it should be seen to be independent by virtue of having an independent chairman to prepare it.

I am sure that the Government are totally in agreement with this sentiment. Indeed, my noble friend speaking on Second Reading of this Bill argued that,

    "The objective of the reform is again to enhance transparency and improve accountability".--[Official Report, 13/2/98; col.1385.]

My amendments seek to achieve this with respect to the Board of Banking Supervision. In the new era of regulatory openness and institutional transparency, it is totally unacceptable for an individual with the authority of a chief executive to chair the body designed to monitor the institution for which he is responsible. Amendment No. 64 removes that embarrassment.

Amendment No. 65 requires that the chairman of the Board of Banking Supervision be elected from among independent members of the board, so that the chairman would be an independent member and not the chief executive of the FSA--or, as in the past, the chief executive of the Bank of England.

I am quite sure that the drafting of Clause 28 was a slip on the Government's part. These simple amendments prevent the new FSA inheriting unfortunate and embarrassing practices from the Bank of England. They seek to ensure that just and effective monitoring of some of the supervisory activities of the FSA will not just be done effectively, but will be seen to be done effectively. I beg to move.

Lord McIntosh of Haringey: I am grateful to my noble friend for the way in which he has introduced these two amendments. I appreciate that they are intended to further reinforce the independence of the Board of Banking Supervision by appointing as a chair one of the non-executive members.

In general it has not been our aim in this Bill to change the banking supervision regime in the course of transferring it to the FSA. This, again, is a matter which we will have to discuss with my noble friend between now and Report. However, in transferring the Board of

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Banking Supervision across to the FSA, we have already sought to increase its independence by reducing the number of executive members from three to two. I should point out that the Board of Banking Supervision is primarily an advisory body for the FSA and not an investigative body. When it investigated the Bank's performance, the investigative members--including the chairman--withdrew.

In the longer term we do not propose to retain the board in its current form. This would not be in keeping with the wider regulatory responsibilities of the FSA. The current provisions are only temporary until the second Bill can introduce a thorough-going reform of the system. The FSA has been consulting on the form of practitioner input for the longer term.

So we are not opposed to the spirit of these amendments, which would appoint a non-executive chair until a longer-term solution is legislated for. However, we need to consider the issue further in the context of the longer-term plans for practitioner input and to take account of the views of the Board of Banking Supervision members. On that basis, I hope my noble friend will see fit to withdraw his amendments.

Lord Eatwell: I must say that I find that reply rather disappointing. First, the Minister referred to the reduction in the number of executive members from three to two. He may have noticed that, in the investigation of the Barings affair, there were only two executive members involved because Mr. Rupert Pennant-Rea, who was deputy governor, resigned prior to the beginning of the inquiry and no new member was appointed. So the numbers of executive members in the Barings investigation, and those contained in the Bill before us, are exactly the same.

My noble friend also seems to have overlooked the point I made about the drawing up of the conclusions of the Board of Banking Supervision in the Barings investigation. He is quite right that the investigation was conducted by the non-executive members, but the peculiarity, as was pointed out by the noble Lord, Lord Ezra, at the time, was that the conclusions were drawn up at a committee chaired either by the Governor or by Mr. Quinn: that is, the executive members were actually involved in drawing up the conclusions.

As the noble Lord was speaking, I also found myself worrying about the insistence that these procedures were purely temporary. This brings to mind the number of temporary portacabins outside schools which are still there 20 years after they were erected, or indeed some of the prefabricated housing erected at the end of the Second World War, which I happened to pass in Swindon when I was there the other day. I find this word "temporary" very disturbing.

In light of what my noble friend said, I hope he will look very seriously at what is a very simple change which would significantly enhance the reputation of the Board of Banking Supervision, albeit in the period between N1 and N2. Moreover, it would be a powerful signal of the commitment of the Government to a new regulatory era of openness and transparency.

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