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I want to follow up from a slightly different angle the point made by the noble Lord. Clause 4(3) states:

“For the purpose of this section the relevant authorities are—

(a) the Treasury, (b) the FSA, and (c) the Bank of England”.

The Explanatory Notes on the background to the Bill state that a tripartite structure for overseeing the UK financial system has been created with distinct roles for the Treasury, the Bank of England and the Financial Services Authority. I do not want to digress

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into a Second Reading debate but it would be helpful before agreeing the clause if we could have an answer to the question of who is in charge.

It is clear from recent events that no one has been in charge, and while the later clauses make provision for particular activities to be carried out by particular parties, and for consultation, it is not clear what will happen if consultation results in disagreement. Will the Minister give us some comfort? It is not the same point but it echoes the one made by the Minister’s noble friend Lord Barnett. It is all very well saying that the relevant authorities consist of three groups but it would be nice to know who is in charge and who is driving the process.

Lord Myners: I plead not guilty to any part of the decision of the Economic Affairs Committee to meet at the same time as this Committee. I welcome the appearance of the noble Lord, Lord Forsyth of Drumlean, and respect his great knowledge of banking matters. We discussed these matters at some length earlier. It may not have been to everybody’s satisfaction, but other noble Lords and I referred to the simple question of who is in charge. The answer is that people are in charge in their spheres of competence and expertise, and the tripartite committee brings together the Treasury’s responsibility for public assets and the taxpayer, the FSA’s responsibility for effective regulation and effective markets and the Bank of England’s responsibility for overall financial stability. With all respect, I am not much inclined to go back into that debate at this stage. We covered it at some length. I suggest that the answer is that a person is in charge for the appropriate situation as contemplated in the Bill and as matched by his competence and expertise.

Lord Forsyth of Drumlean: I—

Lord Myners: I shall give way in a moment, but I shall continue while I still have fresh in my mind the question asked by my noble friend Lord Barnett. I was a little worried that he was going to ask technical questions about the code, not least because he has my copy of it, which would have given him a distinct advantage, had he wanted to. He did not go in that direction, and for that, I am grateful.

We have got “arm's length”, “hands on”, “fingers in pies” and other metaphors. Let me try to help my noble friend. “Arm's length” applies to situations in which there is a significant public shareholding—government finance or government-owned shareholding— but we do not own the whole bank. We must have regard to the fact that these are publicly quoted institutions with external shareholders who expect them to be run in the way that a conventional successful business would be. I characterise arm's length in that situation as being an informed and engaged shareholder, an exemplar, reaching for and achieving the standards that the noble Lord, Lord Newby, referred to earlier. By contrast, “hands on” would apply immediately after a bank goes into a resolution regime and in a situation where it is wholly owned by the Government on behalf of the nation, either through a bridge bank arrangement or through temporary public ownership. I do not think those terms are inconsistent; they apply

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as circumstances determine. For the avoidance of doubt, it is not contemplated in the arm's-length situation that the Government would in any way direct banks to lend.

My noble friend Lord Barnett asked about guarantees. The existing guarantees are largely in respect of liabilities to aid banks in their funding. It is for banks whether they seek guarantees to facilitate a deepening and broadening of their funding, and if they do so, they pay what we judge to be an appropriate rate of return to us for the risk that the Treasury is assuming in guaranteeing bank obligations. There are also certain arrangements in respect of guarantees of loans made by banks, particularly relating to small companies and to ECGD, which was covered in an earlier question. It is for the individual borrower and the bank to make what would be described as an arm's-length commercial decision. The bank will decide whether it regards an application from a small company to borrow under the small business loan guarantee arrangement to be good for its client and itself. If it does, it will enter into it, but it will not be compelled to do so.

Lord Eatwell: Can the Minister help me further on the arm's-length issue? He defined “arm's length” as involving a company being conventionally run in a successful manner. Such a company is usually run by its owners as represented on the board, and one would expect that if an owner held a majority of shares in the company, minority shareholders, who could enter or exit as they wished, would follow the general policy pursued by the majority shareholder. In the case of Royal Bank of Scotland, the Government are the majority shareholder by a substantial proportion. In this situation, why are they pretending that they are a sleeping partner and leaving commercial decisions to the whim of minority shareholders or the management who are not acting in the interests of the taxpayer?

Lord Myners:In the case of Royal Bank of Scotland, the Government are acting not as a sleeping shareholder but as a responsible shareholder. We are engaged with the board of that bank in strengthening its membership in the interests of all shareholders. It would be inappropriate for the Government to involve themselves in commercial, day-to-day banking decisions. The Government do not have the appropriate skills to do that. We find the right skills in the private sector, and we act in the interests of all shareholders. As a responsible lead shareholder, the Government ensure that the board is appropriately resourced, that the company’s approach to risk is professional and consistent with protecting and enhancing the value for shareholders and that the company’s control regimes and its approach to remuneration comply with the best standards. It would be abusive of public shareholders for us to act as if we own 100 per cent of the company when we own only 56 per cent and we did not intend or wish to own that much if things had worked out differently. Ideally, we would not have wanted to have been put in this position at all.

Lord Eatwell:The Minister is right to suggest that a majority shareholder may not involve itself in the day-to-day running of a company—that is left to the

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board and the management—but would he agree that it is entirely appropriate for a majority shareholder to set the strategy for the company?

Lord Myners: We could debate this subject for hours. Indeed, lengthy books have been written on it. My limited experience in business is that it is not generally appropriate for shareholders to set the strategy, but it is appropriate for them to be engaged in challenging and approving it. That is what happens with public companies in the perfect world in which all shareholders appropriately engage, challenge and ask questions about business strategy. In that respect, Lloyds Banking Group and Royal Bank of Scotland should be no different from any other quoted company.

Lord Forsyth of Drumlean: I agree with the Minister about the importance of the arm's-length arrangement, but I shall press him, and I apologise if he has already covered this this afternoon. I am not trying to make difficulties for him, but I am genuinely concerned by this clause. It sets out five objectives and then states:

“The order in which the objectives are listed in this section is not significant; they are to be balanced as appropriate in each case”.

However, there are three relevant authorities—the Treasury, the FSA and the Bank of England—that will have different perspectives in a complex situation. Somebody has to be able to take a decision and be in charge. Am I missing something here? Is the answer that it is the Government or the Treasury? If it is the Treasury—

6.30 pm

Baroness Noakes: I hesitate to intervene on my noble friend, but we discussed a couple of groups of amendments earlier in Committee. It is a great pity that my noble friend was unable to be with us, but I wonder whether, in the interests of moving on in Committee, we might leave this to later in the Bill, when my noble friend has had a chance to read the extensive discussions that we had on those groups of amendments. If my noble friend wishes to continue, he is perfectly at liberty to, but I am conscious that most Members of the Committee have heard the arguments once this afternoon.

Lord Forsyth of Drumlean: They may have heard the arguments, but they may not have had a satisfactory explanation. It is a very simple question that I hope that the Minister could answer in one sentence.

Lord Myners: I thought that I had answered the question. The notion of who is in charge applies an altogether too simplistic approach to a complex and sophisticated interaction between three authorities, each of whom has different delegated responsibilities and expertise, but which come together and, as the Bill contemplates, have certain responsibilities which act in sequence in particular circumstances.

Lord Barnett: I am sorry to revert back to it, but on the question of the difference between an arm's-length and a hands-on role, I did not cite the rest of the draft code, which goes on to state that there must be a

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business plan setting out how the directors intend to operate the bank and that that plan will include a commercial strategy. Given the arm's-length procedures, who will devise that commercial strategy: the Government, the Treasury, or who? Who is managing the bank?

Lord Myners: I am grateful to the noble Baroness, Lady Noakes, for her intervention; we could go on at some length here. The answer, as we previously covered, and as in the ideal model to which the noble Lord, Lord Newby, referred—albeit one which we have both suggested has shortcomings at present—is that the development of the strategy is a matter for the board of directors, who will put it to the shareholders. In the case where we are but one shareholder—albeit the largest shareholder—it will be put to all shareholders. Royal Bank of Scotland’s strategy will not be solely approved by the Government with complete disregard for other shareholders, with no engagement between the bank and other shareholders, as would customarily be the case where the UK Government were not a large shareholder.

In a case such as Northern Rock and Bradford & Bingley, where the bank is currently, temporarily, 100 per cent in public ownership, the process is rather more direct, but there is a very clear difference between those who are charged with developing and executing strategy—the board and the management—and those who are charged with approving strategy, the shareholders.

Lord Newby: The Minister kindly prays me in aid in the approach that the Government are adopting to RBS, but he is not totally fair to do so. There is a gap between being a detailed manager and, as a representative of everybody in this country and as the major shareholder, when people generally have a view about how they want their banks to behave, there being a strong moral pressure on the Government to exercise very close control of the bank’s strategy through the directors appointed to its board. The country expects the Government to exercise that degree of control. As several noble Lords have said—although I do not presume to speak for the noble Lord, Lord Eatwell—we are trying to tease out the extent to which the Government accept that the country expects them, as a major shareholder, to exercise their power in that position to ensure that the bank is run to look after its customers and does not behave as it has in the past. If the bank is seen not to behave in that way, whatever the technicalities, the Government will be blamed for it.

Lord Myners: We will have to move on fairly soon, but this is a subject of considerable interest to me, so I am probably allowing myself to be drawn into it more willingly than my colleagues might suggest that I should be.

There is a pressing need to strengthen the board of directors of a number of UK financial institutions. In cases where the Government have invested, UKFI, under the chairmanship of Sir Philip Hampton, the chairman of Sainsbury, and the leadership of its chief executive, John Kingman, is actively engaged to work with boards of directors to strengthen them through new appointments. I would not want those new

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appointments to be described or understood as being government appointments. I believe that the Liberal Democrat party and the Official Opposition support the concept of a unitary board in which the board is responsible to all shareholders. The concept of having directors who sit around the board table to speak for one shareholder to the disregard of others and who potentially take instruction from outside the boardroom or impart information from the boardroom back to one shareholder is alien to our core beliefs about corporate governance and correct practice.

However, stronger boards we need. In the case of the Royal Bank of Scotland in particular, several directors, including the chairman, have indicated their intention to leave the board. Therefore, those boards, their major shareholders and UKFI need to work together to make first-class appointments. Finally, I add that those appointments should not necessarily be wholly and exclusively people with banking experience because, as the noble Lord, Lord Newby, said, and as was covered in an earlier debate in this House on the subject, we need to ensure that other issues such as technology and customer focus are appropriately represented around the board table.

I now suggest that we move on.

Clause 4 agreed.

Clause 5: Code of practice

Amendments 15 and 16 not moved.

Amendment 17

Moved by Baroness Noakes

17: Clause 5, page 3, line 33, at end insert—

“( ) the meaning of the stability of the financial systems of the United Kingdom,”

Baroness Noakes: We managed to stretch the Clause 4 stand part debate to a considerable degree, but with the next amendment I think that we will stay fairly narrow. Amendment 17 would amend Clause 5, which requires the Treasury to issue a code of practice. My amendment adds the new requirement that the code should contain,

which is the wording that we find in the special resolution objectives.

When the meaning of financial stability was debated in another place, largely in connection with Part 7, to which we shall come at some point this year, it was recognised that the term can have several meanings—some narrow and some broad. That emerged from the evidence given to the Public Bill Committee in another place before it commenced its detailed consideration of the Bill. The Government argued in relation to both Part 7 and Clause 5 that a definition of financial stability should not appear in the Bill. In the case of Clause 5, they say that it should be in the code. We do not have a problem with that in principle, because the draft code indeed contains a definition of financial stability; we

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welcome that. We are concerned that that crucial aspect of the detail underpinning the special resolution objectives as set out in Clause 4 should be a positive requirement of the code.

Clause 5(2) sets out quite a lot of process for what should be in the code but not enough meat. My amendment adds a little flesh to the bones of Clause 5. I suspect that we are not far from the Government on this point, because they have included a definition of financial stability in the draft code. The problem is that the current draft may not last for all time. Indeed, it might not even make it to the final version. There is also the possibility that the code will be revised many times over time, and we want to ensure that whenever that occurs, given the importance of the phrase in the context of the special resolution objectives, the code always contains that definition. We agree with the Government that a definition is more flexible in a code than it is in legislation; but, that being the case, we believe that the code should be in legislation. I beg to move.

Lord Davies of Oldham: I am grateful for the constructive way in which the noble Baroness has presented her amendment. There is not a great deal of difference between the Government’s approach to these issues and the one that she has identified, but we have reservations about the amendment, which would permit the code to include a section on the meaning of the stability of the financial systems of the UK.

Our problem is quite straightforward. The draft code of practice expands on the term,

by referring to,

This is a useful elucidation of the term, and I accept that there could be other competing and useful definitions. However, we do not believe that we have in the draft code an exhaustive definition of financial stability. We do not think that we could have such a definition.

The problem is how to define financial stability in such a way that it would obtain among all commentators and all those interested in the concept, and how to identify what acts might pose a threat to financial stability. After all, instability is the product of challenges to the system, and it is not easy for us to foresee these and to produce an exhaustive definition that pays full regard to that. Whether the financial system of the UK is stable or whether any particular act would threaten financial stability depends a great deal on the circumstances and is likely to vary as the operation of global financial markets change and as the British economy and its relationship to such global financial markets evolve. We have therefore included in the code of practice an elaboration of what financial stability means, and it will be used to guide the authorities in determining whether the specific conditions for the special resolution regime have been met, as set out in Clauses 8 and 9. However, this definition is not intended to be exhaustive and definitive. That is why we shy away from the noble Baroness’s objective, although I

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recognise the value of what she proposes. We do not think that we should make such a definition mandatory in primary legislation.

We hope that it will be recognised that the code of practice is likely to change over time. That is in the nature of codes of practice and why they have elements of flexibility. We are therefore resistant to an amendment that would require us to be quite definitive about a concept which we could not claim to be definitive about. I hope the noble Baroness will recognise that I am not hostile to her intent but am struggling with the fact that the Government do not think that they can fulfil the objective which she has indicated in her amendment. That is why I hope she will consider withdrawing it.

6.45 pm

Lord Eatwell: I support the position which my noble friend on the Front Bench has taken. I argued at Second Reading that one of a series of important characteristics of the financial system is its continuous innovation and change. Indeed, the problems of instability that now affect the financial system have not come purely from the banks but also from failures of other institutions and counterparties in elaborate chains of market relationships that go outwith the banking sector but that impose themselves on it. A precise definition of financial instability would fail to take account of the process of innovation that is characteristic of the system as a whole, so leaving the definition rather more open, as my noble friend has suggested, is the best course in these circumstances.

Viscount Eccles: I agree with the argument, but am I right that if it is a condition of doing something that you can show a serious threat—as set out in Clauses 8 and 9, as the Minister said—you are in fact leaving any discontented party to see whether they can resolve the matter in the courts?

Lord Davies of Oldham: There is always the question of the courts and the proper action of the authorities when it comes to action that may be taken under the Bill when it becomes an Act. At this stage, however, we cannot see how we can produce a definition in the code of practice that aids clarity in these terms. That is why we are not prepared to accept the amendment, although I accept what the noble Viscount, Lord Eccles, says; the basis on which the authorities interpret the law and act on it is always open to challenge. That must inevitably be so. The job of wise legislation is to make the issue as clear as possible so that such mishaps are minimised, if not ruled out, as far as humanly possible—a limitation, inevitably.

Baroness Noakes: The Minister does not really surprise me, because I know that Ministers like to resist all amendments that are proposed in Committee, but he has rather missed the point of the amendment. With respect, the noble Lord, Lord Eatwell, has also missed it. It was not to require a definition in statute that was therefore immutable except by further primary legislation, but to accept that the code of practice was the right place for such a definition in order to guide those who need to understand how the Bill will be interpreted at any point.

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