Previous Section Back to Table of Contents Lords Hansard Home Page

Lord Eatwell: My Lords, I wish to lend my support to the proposal of the noble Lord, Lord Barnett, that there should be a committee of this House to examine the performance of the Monetary Policy Committee of the Bank of England. As noble Lords will know, the Treasury Committee in another place is charged with that responsibility. It will also be charged with the responsibility of examining the performance of the Financial Services Authority. Taken together, those are

30 Mar 1998 : Column 14

very heavy responsibilities indeed. It would be entirely appropriate for the work of the Treasury Committee in another place to be supplemented by an appropriate committee of your Lordships' House or perhaps by the formation of a joint committee of both Houses. Given the new position of the Bank of England as defined in the Bill, and given the new independent regulator who will have extraordinary powers over the whole financial industry in this country, Parliament will have a heavy responsibility of review and assessment of the activities of the Bank and the FSA. A committee of this House or, as I would prefer, a joint committee would be appropriate to consider such heavy new responsibilities.

Lord Mackay of Ardbrecknish: My Lords, it gives me some pleasure not only to follow the noble Lord, Lord Eatwell, but also to agree with everything that he said about the need for a committee of this House, or perhaps a joint committee, to examine the policies of the Monetary Policy Committee and how it reaches its decisions. As we know from previous Sittings on this Bill and from the way in which the MPC has behaved to date, decisions of that committee are extremely important and many people will be affected by them. I referred at Question Time to the exchange rate. Anybody who is involved in selling abroad will be most interested to learn the basis on which the MPC makes its decisions in any given month. Therefore, it is important that the MPC should publish the forecasts that it has used when reaching its conclusions, so that the outside world can have confidence in its decisions.

That is why I think that the amendment in the name of the noble Lord, Lord Barnett, is sensible, and that is why I support it, as I support the point made not only by him but also by his noble friend Lord Eatwell about the need for this House to have a committee to examine the MPC.

Lord McIntosh of Haringey: My Lords, I am grateful to my noble friend Lord Barnett for raising this matter again. Clearly, it is of interest to the House and I am happy to be able to respond to it. I am also grateful to my noble friend for speaking to the amendment in a way in which I could understand. My noble friend Lord Peston occasionally places me out of my depth, so I am grateful that my noble friend Lord Barnett did not do that on this occasion.

The MPC is committed to providing the best and fullest possible explanation of its members' thinking. It has already progressed from publishing just an inflation fanchart to publishing a chart also for growth; and it has most recently added a further set of charts illustrating the implications if interest rates were to follow the course implied by market expectations.

The Bank does not have a single economic model which generates a single forecast, but forecasts play an important part in the MPC's decisions, and when members hold differing views the Bank may provide forecasts based on different assumptions to reflect the range of views. I am reminded at this point of Casey Stengel, the manager of the New York Yankees, who uttered a word of warning about forecasts saying

30 Mar 1998 : Column 15

that they were peculiarly difficult, particularly when relating to the future. That might be true in this instance also.

The MPC would expect to continue to vary or expand the range of its published forecasts where there was a clear value in doing so. However, it does not favour publishing point forecasts, but rather charts or tables which show clearly the inherent uncertainty of any economic forecast. That brings us back to Casey Stengel. Also, given the number of possible forecasts, the MPC would be trying the patience of its audience if it was to attempt to publish in the inflation report all the possible outcomes of each set of assumptions.

Nevertheless, it has no wish to withhold the details of its forecast where these would be helpful to promoting understanding of the way it is approaching its task, and it is committed to the following. First, it is planning to publish its suite of economic models, and it hopes to do this later this year: outside forecasters and others will then be able to assess these and to use them. Secondly, it expects to indicate further in the text of the report the main implications for employment, the balance of payments and other variables of the different forecasts that it illustrates in the report. Finally, of course, the MPC will be prepared to consider reasonable requests from the relevant parliamentary committee to make available, in fanchart form, details of the MPC's forecasts that are not published in the inflation report.

I can confirm that the Bank is keen to have the widest possible scrutiny of the proceedings of the MPC, including all forms of parliamentary scrutiny. As the House will know, it is not for me to decide whether there should be a special committee of your Lordships' House or a joint committee, but I am sure that the Select Committee on Liaison and the powers that be will have noted that noble Lords on both sides of the House have requested such a committee and noted also what I have said about the Bank and the Treasury welcoming the widest possible scrutiny. In the light of those assurances, I hope that my noble friend will be prepared to withdraw his amendment.

Lord Barnett: My Lords, I am obliged to my noble friend for his reply. I am sorry that my noble friend Lord Bruce has been kept off Select Committees. I do not have the faintest idea why, except that it is just possible that his views are reasonably well known. It is not my job, however, to put my noble friend on or off a committee, so I cannot really reply to that point. I would always be happy to see my noble friend-- I cannot say that I would always be happy to "hear" him because sometimes I hear him just a little too often and just a little too loudly. However, at least I know his views, whether or not he serves on a Select Committee.

I am obliged for the support of my noble friend Lord Eatwell and the noble Lord, Lord Mackay of Ardbrecknish, with regard to my point about the need for a Select Committee of this House or a joint committee. I noted, and was pleased to hear, my noble friend on the Front Bench expressing his "sort-of" support which I am sure that the Select Committee on

30 Mar 1998 : Column 16

Liaison and the Lord Privy Seal will note with great interest. I look forward in due course to such a committee being established.

I am grateful to my noble friend Lord McIntosh for what he said. I appreciate--I have always appreciated--the fact that the Bank of England will always supply the maximum amount of information possible. I have never had any doubts about that. Indeed, what my noble friend has said today goes a long way towards replying to my noble friend Lord Bruce of Donington. I have no doubt that with the information and the variables which he set out, it will be possible for a Select Committee of this House, or a joint committee, or another place, to consider the matter fully. I note that my noble friend does not always quite understand economists--or at least one economist. I do not believe that for a minute. I am sure that my noble friend fully understands economists and all that they have to say, whether that be my noble friend Lord Peston or anyone else. My noble friend Lord McIntosh is too bright not to understand these matters.

I was interested in the view of forecasting given by the New York Yankees. I wish that my noble friend could forecast what will happen to Manchester United this season as that might be even more interesting. I very much appreciate the point about forecasting and the future. It is not always easy to know the forecast for tonight's weather, let alone that for weeks, months or years ahead, yet we sometimes seem to rely on forecasts given on the economy by all kinds of strange people.

Having said that, I am happy with the reply given by my noble friend and with what he said about the kind of reports that the Bank of England would be willing to commit itself to supplying. I know that my noble friend Lord Sefton, who spoke in Committee, would be happy to see regional reports also on how the Bank's policies will affect different parts of the country. Given what my noble friend Lord McIntosh has said and the commitments given by the Bank, I am very happy to withdraw the amendment.

Amendment, by leave, withdrawn.

3.30 p.m.

Lord Eatwell moved Amendment No. 2:

After Clause 22, insert the following new clause--

Listed money market institutions: inclusion on the list

(" . In section 43 of the Financial Services Act 1986, after subsection (1) there is inserted--
"(1A) The Authority shall have rules and practices to secure that a person included on the list referred to in this section is fit and proper to be included on that list.".").

The noble Lord said: My Lords, in moving Amendment No. 2, I should like to speak also to Amendments Nos. 3 and 4. Noble Lords may be aware that I am an independent member of the board of the Securities and Futures Authority. Although much of what I have to say this afternoon is motivated by my experiences in that position, my remarks are made, and my amendments have been tabled, in a purely personal capacity.

I first moved similar amendments in Committee and I am grateful to my noble friend Lord McIntosh for discussing them with me since then. I am also grateful

30 Mar 1998 : Column 17

to Mr. Howard Davies and his staff at the Financial Services Authority for giving up some of their valuable time to discuss the amendments with me. I remain convinced of the importance of the issues raised in these amendments. While not repeating the whole case made at Committee stage, I shall make a brief and, I hope, convincing case for the Government's urgent consideration of these issues.

The case rests upon the need to minimise risks to the integrity of financial supervision between N1, the date at which the supervisory functions of the Bank of England are transferred by this Bill to the new Financial Services Authority, and N2, the date at which the statutory responsibilities of the other regulatory authorities, notably the present self-regulatory organisations (SROs), are also transferred to the FSA. It is currently estimated that about two years will elapse between N1 and N2.

However, at N1 not only the supervisory staff of the Bank of England but virtually all of the staff of the SROs will be transferred to the FSA. Their services will then be contracted back to the SROs in order to enable them to maintain their statutory regulatory duties under the Financial Services Act until such time as the new financial services reform Bill becomes operative in a couple of years' time.

Therefore, the staff of the Financial Services Authority will be responsible for virtually all financial regulation as of 1st June this year. Prior to the implementation of the new Finance Bill they will be performing their duties under different statutory frameworks and according to a number of different rule books. As I pointed out in Committee, in some important instances this will result in the same people regulating exactly the same kinds of businesses but in quite different ways. This lack of coherence is particularly acute in the case of those firms listed as exempt under Section 43 of the Financial Services Act and whose investment business has therefore typically been regulated up to now by the Bank of England and not the Securities and Futures Authority which, under the Act, has the main responsibility for regulating such business.

As a result of the Bill before us and the working agreement between the new Financial Services Authority and the FSA, these Section 43 firms will be regulated by the same people as unlisted firms which are currently the responsibility of the SFA but according to quite different rule books. Therefore, the same people will regulate the same kind of investment business but according to different rule books; the difference being due entirely to the history of which firms in the past had been regulated by the Bank of England and which by the SFA. I believe that that situation is not only incoherent but confusing and even dangerous. It is exactly the kind of regulatory incoherence that can be exploited by wrong-doers. Moreover and perhaps more importantly, as we have seen in the Far East in recent months, financial storms can appear out of a clear blue sky. If between N1 and N2 a major business crisis were to be associated with incoherence in the regulation of investment business the reputation of the new system which the Government rightly seek to introduce could be placed in jeopardy.

30 Mar 1998 : Column 18

My amendments are an attempt to enhance regulatory coherence among listed and unlisted firms with respect to all investment business during the period between N1 and N2. The amendments achieve that goal by the simple device of ensuring that the listing of all institutions under Section 43 follows criteria that are more in line with the registration procedures used to regulate firms conducting identical investment business which are currently regulated by the SFA. Accordingly, the investment business conducted by listed firms will be regulated in a manner more akin to the regulation of investment business by unlisted firms. The criteria that I propose essentially replace the informal procedures used up to now by the Bank of England. Those informal procedures may have been appropriate for a regulatory authority which was also responsible for the conduct of monetary policy and the maintenance of liquidity, but they are totally inappropriate to the new Financial Services Authority.

I accept that in no way can these three amendments result in the complete harmonisation of regulatory rules and procedures for all investment business. That would require a new and highly complex financial services Bill. But I believe that the two areas covered in my amendments--the criteria by which firms and individuals are deemed fit and proper and the enforcement of conduct of business rules--go to the heart of the matter. The incorporation of these amendments will remove a large amount of ambiguity and incoherence which is the inevitable product of the gap between N1 and N2.

I turn now to Amendments Nos. 2 and 4. These amendments require that clear rules be formulated for establishing that institutions, and most importantly the individuals comprising those institutions, are fit and proper to conduct investment business. They achieve coherence in the characterisation of what is fit and proper by requiring that rules which stem from what used to be called the SIB principles should be applied by all investment business regulated by FSA employees. Under Section 43 of the Financial Services Act there are at present no specific criteria that govern how companies are listed. The Bank of England procedure is fundamentally informal. Amendment No. 50 replaces that informality by requiring that in order to be listed all institutions conducting investment business shall be deemed fit and proper to conduct such business according to the specific rules and practices of the new Financial Services Authority.

Amendment No. 4 is the most important of all. The amendment requires that to be included in the list each institution must satisfy itself that its employees are fit and proper persons to carry out their designated functions and that for such positions as the authority designates persons appointed are approved by the authority. We seek to ensure that individuals are fit and proper--fit in terms of having acquired the appropriate qualifications. Again, the procedures of the Bank of England are essentially informal. Certainly, the Bank requires that all senior management of listed firms should be fit and proper, but exactly how fitness and propriety are defined is not embodied in a set of formal rules. In particular, the Bank of England requires that only senior management, not traders, should be licensed

30 Mar 1998 : Column 19

as fit and proper, whereas the Security and Futures Authority requires that such persons conducting investment business should be listed and regulated as fit persons. The value of this is that in the enforcement activities of the regulator subtle differences can be drawn between the activities of firms and the activities of individuals employed by those firms. That is an important part of the regulatory process which the Bank of England at present does not pursue.

Amendment No. 3 requires the authority to ensure that listed firms obey conduct of business rules appropriate to the kind of investor with whom they are dealing and the costs involved. I believe it is vital that Bank of England informality be replaced with modern rules. As far as concerns the conduct of the Bank of England, it seeks to regulate business by means of its code of conduct set out in the so-called Grey Book. But the terms of the code are not rules. The code defines best practice but the rules demand a minimum satisfactory performance. Conduct of business regulation is the fundamental protection which the supervisory system offers to individuals. In a modern regulatory system surely it is imperative that what is appropriate should be embodied in clear rules and that those rules are attuned to the characteristics of the counterparty. It would be a nonsense if the investment business conducted by listed firms was subject to a best practice code while identical investment business conducted by unlisted firms was subject to clearly defined conduct of business rules. This amendment ensures that conduct of business regulation is formal, clear and coherent rather than informal, unclear and incoherent.

These three amendments replace the informality of Bank of England procedures with the more formal rules required of a modern regulator. They will ensure that coherent rules and practices define which firms and which individuals are fit and proper. They will also ensure that all business, not just some, is conducted according to a clearly defined set of rules so that the same SFA staff regulate the same kind of business in the same way. I quite understand that the development of a coherent structure is an important part of the very hard work that the SFA will be carrying out between N1 and N2. If the Government believe that these amendments are premature I understand that position, although I disagree with it.

In those circumstances, I should be grateful if my noble friend would at least provide some comfort by answering three questions. First, do the Government intend that in future individual registrations should be the rule in what were previously listed firms? As I said earlier, I regard that as the most important element in establishing an effective modern financial regulatory system. Secondly, do the Government intend that in future the conduct of business rules should apply to all firms, whether previously listed or unlisted; and, thirdly, what steps do the Government expect the FSA to take to achieve maximum coherence in the regulation of investment business between N1 and N2? I beg to move.

30 Mar 1998 : Column 20

Next Section Back to Table of Contents Lords Hansard Home Page