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We are looking at a situation of that kind. The code of practice is hopelessly woolly, and the Government’s thinking about what they are going to ask the Bank of England to achieve is also not sufficiently worked out. I am convinced that the author of the code of practice had a pretty desperate time deciding how to qualify some of the paragraphs that I have read out, and I sympathise with them in that matter. I urge that between now and Report some careful thought is given to this. I could, and possibly would, table some interesting amendments. I did not think that was the right thing to do in Committee because we simply did not know what we were talking about, and it is difficult to amend something when you do not know what it really means.
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There were interesting points in the Minister’s reply. He told us about reports. That is right, the code says that the arrangements are not expected to last for more than a year, and you only have to make a report if they last for more than a year. That is one of the contradictions here.
I would like to believe that by Report we shall know a great deal more about bridge banks and onward bridge banks. An onward bridge bank is clearly intended at the moment for bad assets, not good ones. The possibility is then envisaged that the Bank of England will be able to persuade the Treasury to take this lot of bad assets off its hands into full public ownership—it says that in the code of practice.
There are many things about the position of the Bank of England and its duties and obligations under the Bill that should be clarified before Report. Meanwhile, I withdraw the suggestion that Clause 12 should not stand part.
Clause 13: Temporary public ownership
Lord Newby: I hope that with this amendment we are moving into somewhat less opaque territory. It would amend Clause 13(3), which deals with the provision in the code relating to the management of banks taken into temporary public ownership. We spent a considerable time yesterday talking about how banks in public ownership might operate, and I do not want to repeat those arguments today. I will merely paraphrase the noble Lord, Lord Sawyer, whom I am pleased to see in his place, when he spoke on this issue in the debate on the Queen’s Speech. Talking about mutuals, he said:
“When customers are owners, they are given a very different model of customer engagement”.—[Official Report, 8/12/08; col. 218.]
My view is that when citizens are owners, there needs to be a different model of engagement. That is why we spent some time yesterday trying to tease out from the Government what management of a publicly owned bank under these provisions might mean.
The amendment is relatively specific; it says that the code should include within its provisions the question of board membership. The reason for wanting that provision there is that in our view the board members who are appointed by the Government will play a significant part in the way in which the bank operates, particularly in circumstances where the Government are by far the single largest shareholder. It is important who those members are and that they should not all be the same kind of person. They certainly should not all be from a banking background. They need to represent the other stakeholders in the bank, of whom customers, not least business customers, are one and the taxpayer is another. Therefore, we want to ensure that the composition of the board, in respect of those members placed on it by the Government, is diverse and reflects the diversity of interests that the Government’s stake itself reflects.
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If my noble friend Lord Smith of Clifton were here, I am sure that he would make again the argument, as eloquently as he has done in the past, for having a proportion of women among the Government’s nominees. I remind the Minister and the Committee of his example of the Norwegian requirement that 40 per cent of board members should be women. It would be extremely welcome if the Minister could say that 40 per cent of government appointees to the board of the bank would be women. If he cannot do that, I hope that he will at least give some assurances that the Government, in making those appointments, will try to ensure that they reflect the diversity of stakeholders with a genuine interest in the bank and that the bank, as reflected by its directors, might be slightly different from a bank not principally in public ownership.
Lord Sawyer: I very much support this amendment. The issue of diversity is central to what we are trying to do in this set of circumstances. There is general public disappointment about the performance of directors of banks. Certainly, Northern Rock is a good example: it had a star-studded board of directors yet, at the same time, its business model failed. We must ensure that we have people on the boards of our banks—or banks with some public ownership—who can take a wide and diverse opinion and bring different skills sets, ideas and backgrounds to the bank’s governance.
Part of the problem is with FSA regulation. Obviously, anybody who is appointed as a director of a bank must be approved by the FSA. Of course, it is commonsense and very important to have people on the boards of banks who understand banking—but there are far too many bankers among directors of banks. Other people in the community, with skills from the economic and marketing sectors and from all walks of life, would make a valid and relevant contribution to the governance of the bank.
Customer representation—or, in this case, taxpayer representation—is very important. On the boards of banks, it is the shareholders who need primarily to be satisfied, but there is also the customer input. When the Government take up an issue such as this, it is important that the position of the customer of the bank is reflected in the diversity of the board. I hope that the Government will be able to give some reassurances that they are prepared in these circumstances to do some new thinking and, perhaps, to do some things that have never been done before. Perhaps they could challenge some of the old ways of thinking about the appropriateness of different types of directors and widen the pool of people who are able to take up these appointments.
Lord Blackwell: Can the Minister clarify the nature of board membership in this situation? It is important that we understand whether the directors appointed through the public sector to represent the public sector interest will be classed as independent directors, or whether they will be connected persons who are representing directly a particular shareholder interest—that is, the Government. In a normal corporate situation, when directors are appointed by a significant shareholder, whether a minority or a majority shareholder, the presumption is that those people have an interest that is specific to that shareholder and that, when matters
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I am not clear, and it would be very helpful if the Minister could clarify, whether the intention is that shareholders appointed by the Treasury or by the holding company from the Government are there to represent the Government. If that is the case, will the Government accept all the implications of that: not only exclusion from certain decisions but the confidentiality of information passed to those directors and the implications for those whom they pass it to in terms of their use of it in decision-making? Again, there are quite strict rules on that.
Alternatively, is the intention that the directors are truly independent? If that is the case, there should be an important set of provisions making clear that they are not there to represent the Government’s interests but those of shareholders at large, even where they diverge from the Government’s interests. Again, there are very strict rules about not passing information back to the shareholder executive.
I have not been clear what category these directors must fall into. Before they are appointed, the terms on which they are appointed and the way in which they use their position and information must be very clear.
Lord Stewartby: I have absolutely no problem with requiring the code of practice to include sensible provision about the situation of directors. In particular, on the point just raised by my noble friend Lord Blackwell, some clarification would be very helpful. In fact, it would be necessary before anybody took up the role as a director of one of these companies.
I should like to raise a point parallel to that raised by the noble Lord, Lord Newby, about what the code of practice should contain in this regard. There is a discrepancy between the wording of Clause 13(3) and that of Clause 12(3). Clause 12(3) states:
“The code ... must include provision about the management and control of bridge banks”,
whereas Clause 13(3) refers just to the “management of banks”. I was brought up when looking at draft legislation always to ask questions if there were discrepancies in the wording between apparently similar situations. It is not clear to me why it is necessary for the code to cover control of bridge banks but for it to be omitted from Clause 13(3). There are many common features between temporary public ownership and control by a bridge bank. I should be grateful for clarification on that.
Lord Borrie: The noble Lord, Lord Stewartby, has made a most important point following on from points made by others in this short debate. It would be helpful if the Government could explain the justification for the difference between Clauses 12 and 13 that the noble Lord has drawn attention to. I imagine that, if the current amendment to Clause 13 were carried, “management, including board membership”, would indeed cover both management and control, and would helpfully align Clause 12 with Clause 13.
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5.45 pm
The noble Lord, Lord Blackwell, asked an important question with regard to the directors of a bank in temporary public ownership; namely, will they be independent or will they be government representatives? The answer to that should be that they will be independent. Today and yesterday the Government have frequently emphasised the need for an arm’s-length relationship for good or ill. Therefore, it is surely evident that the directors should be independent and act in the public interest and in the best interests of customers and the company as a whole. They should certainly not be appointed at the behest of the Government to fulfil government requirements.
Noble Lords raised the important point of diversity. My noble friend Lord Sawyer emphasised the need for a wider range of background experience among bank board members than has been customary. It is almost inevitable, and justifiable after the disasters—that is not too strong a word—that have occurred in British banking in the past year, that noble Lords and others should favour a much broader brush approach as regards selecting suitable independent directors. I would not dream of suggesting that there should be positive discrimination in favour of women, as some have proposed. I agree with the suggestion of the noble Lord, Lord Newby, that there should be more diversity than there has been. However, it would be most unwise to go down the route that has been suggested by his noble friend Lord Smith of Clifton of having a certain percentage of women on the board, as is the case in Norway. Above all, merit and value must be the key factors to be taken into account when appointing directors.
Baroness Noakes: In some ways I support the amendment to Clause 13 tabled by the noble Lord, Lord Newby. Indeed, it could usefully be included in Clause 12 to clarify the code of practice with regard to what the Bank of England or the Treasury intend to do about the board membership of the organisations that they take into public ownership. I hope that the Minister will respond to the very important point that my noble friend Lord Stewartby raised about the different wording of those two clauses. However, I should not like my support for clarification about board membership to be included in the code, which would be helpful, to be taken as indicating my party’s support for social experimentation such as gender balancing with regard to that membership. Like the noble Lord, Lord Borrie, I believe that diversity has a role to play but that appointing the best man for the job—if I can use a politically incorrect phrase—is the right approach to board membership for the reasons that he outlined. I had understood from the noble Lord, Lord Myners—I think he said this yesterday but I am losing track of time—that that was the Government’s approach to board membership. It would be helpful to put that in the code of practice to make it clear beyond peradventure that the Government will not appoint placemen to the board, or use it for social experimentation. However, as I say, the amendment of the noble Lord, Lord Newby, makes a useful point.
Lord Davies of Oldham: I am grateful to all noble Lords who contributed to a rather lengthier debate than I had anticipated. I am also grateful to the noble
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I emphasise that we understand the concerns that both my noble friends emphasised; that one should be concerned about the nature of management and who is effective in management. I assure the noble Lord, Lord Blackwell, that the Government’s view is that the directors of a company will be independent. They have a company law duty to the company; they are not appointed to represent particular interests but to develop and effect the strategic plans of the company to its good. The Government stand by our constant reiteration that that is how we define the role of directors. That is part and parcel of the point that my noble friend Lord Myners emphasised earlier this week, when we talked about the arm’s-length relationship in these terms. I offer reassurance on that point.
On the more general point of whether those who are appointed to the board should be more diverse in their backgrounds, interests and factors of that kind which were brought up in the debate, of course those are matters that ought to be considered. They are appropriate for the code of practice and, as I indicated, we are still in the process of developing that code after the initial consultation exercise and the initial draft. I say to the noble Lord, Lord Newby, that we do not think that the Bill needs to be changed. His concept under his amendment is somehow to indicate that there is some difference between directors and management. Our point is clear; the board of directors is part of the concept of the management of the bank or the company.
I hope that he will therefore recognise that the Government are not at all excluding any of the considerations that we are enjoined to take into account through the representations this afternoon by staying with the clause’s wording and not accepting his amendment. That is not because we are against his intent or his concerns about greater diversity of representation on the boards, but it is simply because the Bill enables that to take place if, after consultation, the code of practice in any way reflects these necessities. It is not necessary to have it in legislation in circumstances where the Bill already includes the concept of directors when it refers in this clause to management.
Therefore, I hope that the noble Lord will recognise that he has had a most fruitful debate as a result of moving his amendment, but that his amendment would not in any way strengthen Clause 13. Therefore, I seek to protect the clause as it stands, and I hope that the noble Lord will withdraw his amendment.
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Lord Newby: I am grateful to noble Lords who have spoken in the debate. The Minister has yet again produced a definition that cut across my view of what the word meant. Yesterday, we were arguing about the definition of other words. I thought that the Government were at great pains yesterday to make a distinction between management and the board of directors. If management in this context does not mean management in the normal sense, but in a broader sense regarding every way in which the bank is managed, that is one thing; but the Government have been at great pains to point out, as the Minister has today, that the directors appointed by the Government will be distinct from management and independent. Therefore, the wording that I propose in the amendment clarifies matters and should remain.
Regarding appointing people on merit, while I agree with the noble Lord, Lord Borrie, that everyone appointed to the board needs to be able to do the job well, and I am not a great fan of quotas, in every circumstance that I have seen when there has been pressure for greater diversity, the status quo has been defended on the basis that appointments had to be made on merit. However, many people who do not fit the status quo, but who would do a very good job on the board of a bank or in many other positions of authority, would not be appointed if you simply looked at their conventional history. This issue is causing problems across the public sector, because head hunters who produce appointments for directors and other senior people look for their definition of merit and appoint people who are exactly the same as the people who are already doing the job. I am very keen to avoid that in this case.
This has been an interesting debate. I shall take away the Minister’s remarks and consider whether I wish to return to the issue on Report. In the mean time, I beg leave to withdraw the amendment.
35: Clause 13, page 7, line 25, at end insert—
“( ) The Treasury shall report to Parliament on an annual basis on the activities of each bank which is taken into temporary public ownership for as long as the bank remains in public ownership.”
Baroness Noakes: The amendment adds a new subsection to Clause 13. This is a probing amendment for the Committee. The parliamentary accountability of banks that are in some kind of limbo within the special resolution regime troubles me, and, on reflection, the amendment itself is not sufficient to allay my concerns. I shall, therefore, take the opportunity to raise issues that have not been dealt with in the Bill that are relevant to dealing with the accountability of failed banks more generally.
Under Clause 80, the Bank of England has to report to the Chancellor each year on the activities of a bridge bank, and that report must be laid before Parliament. However, in the Bill there is no equivalent provision for reporting to Parliament in respect of
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I can quite see that organisations that become a permanent part of the public sector—which is not, I believe, what is intended—might report annually, because that is what most public sector bodies do, but not these temporary creatures. My noble friend Lord Eccles, when he opposed the Question that Clause 12 stand part of the Bill, said that if a bridge bank was not held for a whole year, there would be no report at all to Parliament. That could equally be a criticism of my amendment, which is another reason why it is a probing amendment for today.
I looked at the code of practice for further help, but received very little. Paragraph 98 refers to the reporting arrangements for bridge banks, and paragraph 99 states:
“As and when appropriate, the Chancellor of the Exchequer shall report to Parliament about the activities of the bank”.
I am not entirely clear whether paragraph 99 is intended to refer to a bridge bank or a temporary public ownership bank. Either way, leaving it to the Chancellor’s discretion is at the very least a discourtesy to Parliament, and I believe that we need to see much clearer rules, preferably set out in this statute.
6 pm
When the Minister replies, I invite him also to cover the position of the banks that have been acquired under the Banking (Special Provisions) Act 2008. I believe that that Act contains no reporting requirements and, to that extent, it is deficient. That Act is about to expire and it seems to me that this Bill should therefore cover the parliamentary accountability of the banks in public ownership when this legislation takes over from the previous Act.
More recently, we have also had a case of a controlling interest in the Royal Bank of Scotland, and I should be interested to know how information about that bank will flow to Parliament. In addition, the Government have set up UK Financial Investments as a holding vehicle for their growing banking conglomerate business. Although that seems sensible, it raises questions about that body’s accountability to Parliament. I am sure that the Government did not need a statute to set up UK Financial Investments but that does not excuse them from regularising the accountability of such a body at the first natural opportunity, and it seems to me that the first natural opportunity that presents itself is this Bill.
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