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13 Jan 2009 : Column 1128
4: Clause 1, page 2, line 2, at end insert—
“( ) If there is any conflict between the roles of the Bank of England, the Treasury and the FSA, or if there is any disagreement between all or any of them as to their roles or responsibilities, the view of the Treasury shall prevail.”
Baroness Noakes: I shall speak also to Amendment 5. The amendments would add two new subsections to Clause 1. They focus on the tripartite authorities and how they should work in practice.
The Committee will be aware that the tripartite arrangements were invented by the Prime Minister when he was Chancellor of the Exchequer to provide some counterweight to the fragmentation which he caused when he set up the FSA and transferred to it some of the functions of the Bank of England. Many now criticise those arrangements; indeed, the critics are probably more numerous and vociferous than they were at the time.
The plain fact is that the fragmentation was not remedied by the tripartite arrangements, and the three key actors, the Bank, the Treasury and the FSA, failed in their first real test in relation to Northern Rock. As the Northern Rock events unfurled it was very clear that there was no overall leadership in the tripartite authorities and that, within them, they had different views and interests.
The FSA has published its own internal review of its handling of Northern Rock, which was pretty dreadful. We can therefore only speculate on what a truly independent review might have found. There have been no other publicly available reviews of the actions of the other players in the tripartite arrangements and no definitive reviews of whether the tripartite arrangements work, other than those undertaken by the Treasury Select Committee in another place. That committee has made many recommendations for improvement, some of which have inspired the thinking behind these amendments.
The tripartite arrangements do not exist as a matter of law. They were not written into the Bank of England Act 1998 or the Financial Services and Markets Act 2000. They exist only because the Treasury, the Bank and the FSA say that they do in the form of a memorandum of understanding on how they expect to work.
This Bill does, however, take us for the first time into the territory of defining in law who does what within the tripartite authorities in relation to banking and financial stability. They are called “the relevant authorities” in the Bill. It is perhaps a pity that an extra bit of terminology has been added to that of “tripartite authorities”, but we welcome the attempt to clarify individual responsibilities.
In another place, my honourable friend Mr Mark Hoban sought to tease out in Committee the interaction between the FSA’s responsibilities and those of the Bank and the Treasury. The Bill appears to set out a linear process whereby the FSA triggers the use of a stabilisation power by determining whether certain
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Once Clause 7 is activated, the Bank or the Treasury can exercise its stabilisation powers under Clauses 8 and 9. Unlike Clause 7, these will be subject to the special resolution objectives in Clause 4 and, before they are used, the Bank or the Treasury has to consult the other two. Again, nothing is said about what happens if there is a disagreement.
My honourable friend in another place posed the question of what would happen if the Bank or the Treasury disagreed with the FSA over whether the trigger should be pulled under Clause 7. He asked whether there could be a decision tree, showing how the various players operated. The answer seemed to be that, notwithstanding that the Bill appears to set out a linear approach, in practice all parties would consult each other all the time, and the process would be very much non-linear and did not need any process for disagreement.
The Minister in another place said that the FSA would have regard to its own objectives and rule book under the Financial Services and Markets Act, rather than the special resolution objectives, but that would not be a problem because of all the interaction between the parties. He referred to the approach in the Bill as “clear and sophisticated”. It is certainly sophisticated in the sense that it is complicated, but whether it is clear is a matter of opinion. The Bill is, frankly, not clear on the interactive nature of the process. It implies, as I have said, a logical step-by-step approach, which has clearly not happened in the past and will not happen in future. By assigning responsibilities in Clauses 7 to 9, the Bill creates the illusion of simplicity and clarity, which no one will expect to work in practice.
My two amendments in this group address two aspects of these issues. First, Amendment 5 emphasises that, although there is a lot of notification and consultation throughout this Bill, there is a general obligation on the three parties to keep each other informed. As I understand it, that is the Government’s intention, with the Bill merely highlighting some of the formal points of reference. On that basis, I hope that the Minister will accept my amendment.
Amendment 4 is, perhaps, more controversial. It addresses unanswered questions that arose from the handling of Northern Rock. Who was actually in charge? Committees have never been good at running things, which is why in corporate structures and even political ones there is always somewhere the buck stops. This Bill is predicated on there being a unanimity of view among the tripartite authorities, but that does not even accord with historical precedent, let alone the potential in future, when different parties have, under this Bill, to have regard to different criteria.
Amendment 4 says that the view of the Treasury should prevail if there are any disagreements. That should be the intuitive answer because, if something
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Lord Newby: As the noble Baroness says, this is a sophisticated not to say complicated Bill which assigns within it distinct roles to the bank, the FSA and the Treasury. As the noble Baroness pointed out, the powers that each is given are qualified by the requirement in the Bill that consultation take place at every point. Followers of the sorry saga of Northern Rock would agree that nobody came out of it desperately well, but I do not think that anybody would argue that the Treasury at every point absolutely had its finger on the pulse and that it, better than the Bank or the FSA, was able to exercise judgment in a way that subsequently seems satisfactory.
What slightly concerns me about the first of the noble Baroness’s amendments is that although at one level what she proposes is blindingly obvious, at the end of the day the Treasury always does call the tune. For example, during the Northern Rock saga, at one stage the Treasury informed the interim management of Northern Rock that it had to give preferred bidder status to Richard Branson at a time when that was not the view of the management, far less of the Bank or anybody else. The Treasury was calling the shots. But in that case, and in many others, the Treasury was proved to have exercised poor judgment. My shorthand way of opposing the amendment is almost to say, “Don’t encourage this”. If the Bill says that whenever the Treasury disagrees with the other actors in a saga it will automatically win, that will encourage Treasury officials to believe that they are in charge of every aspect of the workings of the Bill. I do not believe that that is a good idea. We will therefore not be supporting the amendment.
4 pm
Lord Northbrook: I rise to say a few words on the amendment of my noble friend Lady Noakes. It is quite clear that the tripartite arrangements have not worked. The FSA’s report into the handling of Northern Rock showed its weakness. Should not the Bank of England have the final view rather than the Treasury, as it is likely to be less biased?
Lord Stewartby: On the comment made by the noble Lord, Lord Newby, about whether it is a good thing to spell out bluntly that the Treasury is in the ultimate key position, this issue arises more generally. After all, we are only dealing here with a Bill that deals with the special resolution regime. We have a whole new tranche of provisions to come in another Bill, in
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A difficulty with this Bill is that we need to be as specific as possible to avoid any sort of gum-up of the system, as occurred because of Northern Rock and related issues. Legislation has probably to say something about the view of the Treasury prevailing. Otherwise, we go back into a ring-a-ring o’ roses situation and nobody knows exactly who is going to be in the key position.
My noble friend has done us a service in bringing forward Amendments 4 and 5 because, although they apply here only to the special resolution regime, they must be consistent with what is going to be done on a broader canvas when subsequent legislation comes forward.
The Archbishop of York: Before other banks came into being, only the Bank of England was entitled to introduce legal tender. Then we created another currency called credit. Those banks in some ways are doing the same. I think that the Bank of England should ultimately take the decision. The introduction by the present Government of interest rates being governed not by the Treasury but by the Bank of England has created far better stability and better transparency and therefore they are not liable to political manoeuvrings. Even the best civil servants are still liable to political manoeuvrings. I will not welcome the amendment, but perhaps the ultimate decision ought to lie not with the Treasury, although it is answerable to Parliament, but with the Bank of England, which can turn up at the Select Committee, and its chairman can be quizzed on the decision. It is dealing with banking day by day, with an interest in the entire economy as opposed to banks that are just interested in their shareholders. Perhaps, when there are difficulties, the decision ought to lie with the Bank of England, not the Treasury. However, the clarity of the noble Baroness’s argument is irrefutable.
Lord Mackay of Clashfern: I would have thought it a necessary condition of an effective organisation that the buck should stop somewhere. It is therefore important that somebody—some group or institution—should have responsibility for the ultimate decision. In the Bill, the ultimate decision is with the FSA. Clause 7(1) says:
“A stabilisation power may be exercised in respect of a bank only if the FSA is satisfied that the following conditions are met”.
It does not say, “A stabilisation power may be exercised by the FSA only”. So if the FSA is not satisfied, it does not matter what the Bank of England or the Treasury think. Clause 7(1) seems to mean that its power to make stabilisation orders will not be affected.
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Lord Myners: As this is my first experience of taking a Bill through Committee, I shall endeavour in my response to these amendments not to fall into the trap of chiding the noble Baroness, Lady Noakes, or teaching the Committee lessons, and certainly never that of quoting any Member of the Committee out of context.
To address the noble Baroness’s points on Amendment 4, the Government believe that there should be a clear role for the FSA, the Bank of England and the Treasury in the special resolution regime. These roles should be in line with their expertise, and are accordingly mandated with, as the Minister said in the other place, a clear and sophisticated model. The FSA should be responsible for assessing whether a firm should enter the SRR, and the ongoing supervision of any firm while it continues to operate in the SRR. In that respect I agree with the noble and learned Lord, Lord Mackay.
The Bank of England should be responsible for the operation of the SRR and the tools within, other than temporary public ownership. The Treasury should be responsible for public finances and the overall public interest. The Treasury will also lead on the decision to take a bank, or bank-holding company, into temporary public ownership. This position has been consulted upon and is widely supported by stakeholders.
Of course, the authorities will continue to work closely together both prior to and during the period for which a bank is subject to the measures of the special resolution regime. This has been demonstrated during the recent resolution of actions on financial stability. As Members of the Committee will know, I have only been a Member of the House of Lords for a relatively short period of time. Before that, I was actively involved in the banking and financial sector. I was an observer from the outside of most aspects of the tripartite process. Over the past three months, I have had an opportunity from the inside to see how the tripartite process works. My judgment is that it works a lot better than many would suggest. It may appear that these separations of responsibility in themselves give rise to scope for conflict, tension or, conceivably, for nobody owning a particular issue; “Who’s in charge?” was the question that Mr McFall put to the Government at the Treasury Select Committee. But the reality is that the tripartite authorities all have a shared responsibility that draws upon their specialist area of expertise and which gives them particular focus on different aspects of how the tripartite arrangement works. Therefore, I respectfully do not agree with the amendment proposed by the noble Baroness, Lady Noakes. The Banking Bill provides for the roles that I have just set out for the authorities, providing in each case a lead authority. For example, Clause 9 provides the Treasury only with the power to take a bank into temporary public ownership. Clause 7 makes it clear that the FSA is the lead authority in deciding that the general conditions for entry into the SRR are met, as the noble and learned Lord, Lord Mackay, drew to the Committee’s attention.
Lord Lamont of Lerwick: I wish to ask the noble Lord a question on that point. I am sure that he will know the answer immediately and I attempt only to
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Lord Myners: The noble Lord, Lord Lamont, answered his own question in his final comment. As I was saying, the FSA is the lead authority in respect of entry conditions for the SRR. For the exercise of each power the Bill is clear about which authority is the lead one.
Baroness Noakes: For the sake of the whole Committee, perhaps the Minister might expand on the way in which he responded to the point of my noble friend Lord Lamont. He did not quite answer it. It would be helpful if he explained the answer to the Committee.
Lord Myners: I beg the Committee’s indulgence in allowing me to come back to that point in a moment.
I also do not agree with the proposed amendment that would make the Treasury the authority with the final say. In particular, the independent regulator should make any regulatory decision, such as the decision that a bank is failing its threshold conditions—that is part of Clause 7. It is, of course, absolutely right that Ministers lead in matters that affect public funds or the wider public interest. Again, the Bill provides for this. That may well be at the heart of the observation of the noble Lord, Lord Newby, about the relative strength of the Treasury and the particular circumstances in which that strength is of considerable relevance to the operation of the tripartite arrangement. I therefore beg the noble Baroness to agree to withdraw the amendment.
I understand that the purpose of Amendment 5 is to require that each of the authorities keeps each of the others informed of their actions, considerations and decisions. I shall set out why I do not believe that this amendment is necessary. I agree that consultation between the authorities on these matters is essential, as I said. The authorities will, of course, work closely together prior to and during any situation where a bank is failing. This has been demonstrated during recent action taken under the special provisions Act and with regard to other actions to protect financial stability. It is clear to me that the authorities have demonstrated a capacity to work collegiately and effectively in handling challenging situations. I believe, however, that the amendment is unnecessary as where the Bill confers powers on a lead authority it also requires consultation with the other two authorities. For example, I draw the Committee’s attention to Clause 7(5), Clause 8(3) and Clause 9(4). I hope that my explanation has satisfied the noble Baroness that appropriate provision is made for consultation in the Bill. I therefore beg her to withdraw the amendment.
If I may, I shall come back to say a little more in response to the comments made by the noble Lord, Lord Lamont of Lerwick. The FSA is taking regulatory
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4.15 pm
Baroness Noakes: Before I move on to more general points, I want to come back to the Minister on that point. The conditions in Clause 7 on which the FSA must satisfy itself are in the context of the special resolution regime; they do not exist for their own sake. They are there only in the context of the special resolution regime. Therefore, the question has to be asked: why is the FSA making a decision under Clause 7 without reference to the special resolution regime? The FSA could make a decision under Clause 7 that had no implications for the issues raised in Clause 4, yet those issues must be taken into account by the Bank and the FSA in the exercise of the stabilisation powers. We do not believe that that conflict has been adequately explained, and, with respect, we do not think that it was adequately explained by the Minister just now. Perhaps he would like another go.
Lord Myners: I am disappointed that I did not pass the test. Where the Bank or the FSA applies to have a bank placed in the bank insolvency procedures, both the general conditions must be satisfied. Additional conditions must be satisfied that relate to the conventional test for entering insolvency procedures—for example, principally if the bank is unable or is likely to become unable to pay its debts. The general conditions do not apply where the Secretary of State applies to have a bank wound up on the basis that this is fair. This reflects the Secretary of State’s historic and rarely exercised jurisdiction to apply to have any firm placed in insolvency procedures on the grounds of the general public interest, which is separate from the SRR.
Baroness Noakes: As we say in Committee, I shall have to read that in Hansard. Perhaps I could respond more generally to the debate that we have had on Amendments 4 and 5.
I thank all noble Lords who have taken part in the debate. The one thing that has emerged is that there is no unanimity on who should be in charge. The Minister rightly said that Mr John McFall in another place asked that question during the Northern Rock crisis and got no answer. Today, we have had two votes for the Bank of England, a couple of votes for the Treasury and a couple of votes for no one. Perhaps there is no unanimity of view in Committee on the way forward. A serious issue remains—that the Bill, by implying that somehow everything will come out harmoniously, misses the point. In a practical sense, when things start to go wrong, leadership has to be exercised, and you cannot expect a committee or a set of three or more organisations to exercise collective leadership, because that simply does not work. If the Minister has any examples from his wide experience in the commercial world, I would be pleased to hear from him, but I have not come across any. I continue to think it important that someone should be in charge.
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My other point related to needing to ensure that all parties are kept informed. The Minister referred to the primary clauses powers in Clauses 8 and 9, where there clearly are some cross-reference points, and there are some other clauses with cross-reference points. There are also some other powers that are taken in the Bill that do not have explicit cross-reference points, yet one would imagine that the tripartite authorities would be keeping themselves informed on a much more detailed basis. My point remains that the Bill does not describe the workings of the tripartite authorities in relation to cases of bank failure, and that is a pity.
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