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House of Commons Hansard
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Public Bill Committees
09 February 2016

Bank of England and Financial Services Bill [ Lords ] (First sitting)

The Committee consisted of the following Members:

Chairs: Mr Graham Brady, † Phil Wilson

† Baldwin, Harriett (Economic Secretary to the Treasury)

† Burgon, Richard (Leeds East) (Lab)

† Caulfield, Maria (Lewes) (Con)

† Cooper, Julie (Burnley) (Lab)

† Donelan, Michelle (Chippenham) (Con)

† Fysh, Marcus (Yeovil) (Con)

† Hall, Luke (Thornbury and Yate) (Con)

† Kerevan, George (East Lothian) (SNP)

† McMahon, Jim (Oldham West and Royton) (Lab)

† McGinn, Conor (St Helens North) (Lab)

† Mak, Mr Alan (Havant) (Con)

† Mann, John (Bassetlaw) (Lab)

† Marris, Rob (Wolverhampton South West) (Lab)

† Mullin, Roger (Kirkcaldy and Cowdenbeath) (SNP)

† Newton, Sarah (Truro and Falmouth) (Con)

† Skidmore, Chris (Kingswood) (Con)

† Tolhurst, Kelly (Rochester and Strood) (Con)

† Wood, Mike (Dudley South) (Con)

Matthew Hamlyn, Fergus Reid, Committee Clerks

† attended the Committee

Public Bill Committee

Tuesday 9 February 2016

(Morning)

[Phil Wilson in the Chair]

Bank of England and Financial Services Bill [Lords]

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Before we begin, I have a few preliminary points. Please switch electronic devices to silent. Tea and coffee are not allowed during sittings. Members may, if they wish, remove their jackets during Committee meetings. Today, we will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication. In view of the time available, I hope we can take those matters formally, without debate.

Ordered,

That—

(1) the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 9 February) meet—

(a) at 2.00 pm on Tuesday 9 February;

(b) at 11.30 am and 2.00 pm on Thursday 11 February;

(c) at 9.25 am and 2.00 pm on Tuesday 23 February;

(2) the proceedings shall be taken in the following order: Clauses 1 to 13; Schedule 1; Clauses 14 to 16; Schedule 2; Clause 17; Schedule 3; Clauses 18 to 20; Schedule 4; Clauses 21 to 38; new Clauses; new Schedules; remaining proceedings on the Bill;

(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Tuesday 23 February.—(Harriett Baldwin.)

Resolved,

That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Harriett Baldwin.)

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Copies of any written evidence that the Committee receives will be sent to Members and made available in the Committee room and online.

We will now begin line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room. It shows how the selected amendments have been grouped together for debate. Amendments grouped together are generally on the same or similar issues. A Member who has put their name to the leading amendment in a group is called first. Other Members are then free to catch my eye to speak on all or any of the amendments within that group. A Member may speak more than once in a single debate.

Please note that decisions on amendments take place not in the order in which they are debated, but the order in which they appear on the amendment paper. In other words, debate occurs according to the selection and grouping list, and decisions are taken when we come to the clause that the amendment affects. I hope that that explanation is helpful. I will use my discretion to decide whether to allow a separate stand part debate on individual clauses and schedules following the debates on the relevant amendments.

Clause 1

Membership of court of directors

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I beg to move amendment 9, in clause 1, page 1, line 7, at end insert—

“(2A) In section 1(2)(e), at end insert “who shall include four designated representatives including—

(i) Practitioner Representative,

(ii) Smaller Business Practitioner Representative,

(iii) Markets Practitioner Representative and

(iv) Consumer Representative.”

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With this it will be convenient to discuss the following:

New clause 2—Composition of the Court of Directors of the Bank of England

“In making nominations to the Court of Directors of the Bank of England, the Chancellor of the Exchequer must have regard to the importance of ensuring a balanced representation from the nations and regions of the United Kingdom.””

New clause 5—Publication of transcripts of meetings of the Court

“In paragraph 12A of Schedule 1 to the Bank of England Act 1998, replace the word “record” with the word “transcript” in each place where it occurs.””

Clause stand part.

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It is a pleasure to serve under your chairmanship, Mr Wilson, and to serve opposite the Minister.

On part 1 of the Bill, which is on the Bank of England, it is our intention to make the case for increased transparency and increased accountability at the Bank. At a time when the financial services sector, as the political system does, faces a lack of public support and public trust—or rather, not as much as we would like—it is in the interests of the sector as a whole and the Bank of England itself for it to present itself and its decisions in the most open way possible.

Clause 1 relates to membership of the court of directors. Amendment 9 regards representation on that court. We accept the proposals in the clause regarding membership of the court, but I note that concern was expressed in Committee in the House of Lords about a potential reduction in the number of non-executive directors in the court. Will the Minister clarify the number of non-executive directors that the Government foresee sitting in the court? In the light of amendment 9, which is in my name, and new clause 2, tabled by Scottish National party Members, the Government should make use of the option of nine non-executive directors in the legislation to ensure the widest possible representation and fullest possible input into and scrutiny of the Bank’s work through the court.

Through amendment 9, we seek to amend the Bank of England Act 1998 to insert a requirement that, of the nine non-executive directors, four be designated as representatives of specific practitioner sectors, including a consumer representative. We recognise that the court, as it stands, includes representatives of a variety of backgrounds, including, historically, the trade union movement. We welcome that and believe that that tradition and representation should continue.

To improve that representation, we propose drawing on the practice at the Financial Conduct Authority and the categorisation of its statutory panels to ensure that a practitioner representative for larger firms, a smaller business practitioner representative for smaller firms, a markets practitioner representative and a consumer representative are included. That is all I have to say directly in relation to amendment 9.

We believe that providing transcripts of the court’s proceedings, such as Hansard provides of our own discussions in Parliament, allows for rich scrutiny of lines of argument and is a clear way to increase transparency and public awareness. In the United States of America, it is the practice to broadcast meetings of the chairs of the various Federal Reserve banks. In the new clause, Members have not asked the Bank to go that far, but we believe that that is a positive example. The aim is to enable the public to understand what is going on and to allow greater scrutiny of the Bank of England’s valuable work.

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I want to speak to new clause 2, which is a probing amendment. My response will be determined by the Minister’s response. We are asking that, when making nominations to the Bank’s court of directors, the Chancellor should have due regard to the importance of ensuring balanced representation from the UK’s regions.

Overall, the Bill is useful in tightening regulation and in refocusing the organisation and direction of the Bank of England. In particular, there is much merit in tidying up the operation of the Bank’s three main committees overseeing micro and macroprudential activity and the operation of the Monetary Policy Committee and, if that is accepted, in ensuring that the Bank’s court becomes essentially the organiser of the organisation, with responsibility, as the main oversight, for how the Bank’s operation works and for ensuring that there is managerial competence and value for money and that resources are well deployed between the Bank’s various functions.

It has been generally recognised over the years that the court has sometimes had an ambiguous position halfway between being a proper corporate board and a policy-making institution. The Bill, correctly, separates the policy functions that go to the committees, leaving the board with the essential corporate governance. That is a step forward. My point is that, if we do that —if we redefine and concentrate the board’s activity—we must look at the composition of the board and ensure that it is fit for purpose—a new board for a new competence.

The composition of the current board is a little too narrow. I accept that it has moved beyond the days when the court consisted simply of City grandees. In recent years, appointment to the board has widened; the international influence has widened. It includes a South African and an American. There is some industrial representation, but by and large there is still a feeling in the wider financial community outside London and in the wider industrial and commercial communities outside London that it is too City focused. For a board that is about not simply managing the City, but managing the central bank, it would be in the interests of the central bank and of commanding the respect of the central bank if there were a wider remit in relation to appointments to the board.

In the new clause, I am trying not to be too specific. A board should not be federalised; it should not consist of delegates. A board has overall responsibility. I presume that most people around this table have been on the boards of companies, large and small. I have been on at least two dozen boards in my rather geekish lifetime. When boards have discussions about who should be on them, they say, “Well, what experience do we have? Who is not represented? What area of competence do we need that will help the board to function?” That is perfectly proper.

I am just saying that, given the key role that the Bank of England plays in the UK, there should be more representation of the regions and nations of the UK. That is particularly the case because the banking community is no longer concentrated simply in the City of London. There are operations in Manchester, Bristol, Glasgow, Edinburgh, Cardiff and beyond, and the industries and sectors there want to feel some confidence that the Bank of England listens to them.

I know of course that the Bank of England has long had a system of agents. I suppose that many of us around the table will have met the agents in our region over the years. However, the agents have a different function. We are talking about a new board for a single bank.

Let me say—I hope that the Government will respect this—that the principle has already been conceded in one respect, which has been referred to. It has been traditional since the post-war period for the Bank to have a representative of the labour movement, the trade union movement, on the grounds that labour and capital were the two great elements of the economy. Given that that principle has already been conceded, all we are talking about is extending it.

My final point is that the distinguished Governor of the Bank of England, Mr Carney, of course comes from Canada, where the principle is already accepted. There is a rule that, in composing the board of the Bank of Canada, due consideration should be given to the provinces being represented. There is not a rule that every province has to be represented on the board of the Bank of Canada; it is not as specific as that and nor should it be. However, if we look at the board of the Bank of Canada, we see that, strangely enough, all the provinces are represented. Mr Carney is perfectly comfortable with that, so we are not trying to impose a burden that he has not had to face in the past.

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I will comment on new clause 2, in the name of the hon. Member for East Lothian. As I said, we see merit in the proposal for wider geographical representation on the board and we believe that it complements our proposals to ensure that different stakeholders are represented. We would be interested to hear a little more detail if possible. He spoke about different centres of employment—Birmingham is one example—but I would be interested to hear specific comments on whether this proposal relates to personal residency or employment and, crucially, does the SNP believe that devolved bodies should make recommendations to the Chancellor?

To clarify, our new clause 5, on the publication of transcripts of meetings of the court, is a small tidying amendment, but we hope that it would have a significant impact by opening up the discussions of the court to wider scrutiny and that it would ensure increased transparency and accountability. That is why I will seek a Division on new clause 5 and why I invite all hon. Members to consider voting for it.

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It is an honour and a privilege to serve under your chairmanship, Mr Wilson. The issue of the court and its lack of transparency— the amendments attempt to bring in some transparency—is one that has bypassed the majority of commentators and the general public. Hidden in the rather grand depths of the Bank of England, the court holds significant potential power, yet it has become embodied by not a concept of nepotism within the financial sector, but something akin to that. Perhaps “revolving door” is a better term. Someone goes in one door, they fail and go out of another door, and then they turn up in the same industry and at the same heights, time and again.

The criteria for who is on the board have always been shrouded in some secrecy. The hon. Member for East Lothian raised the question of the representation of the labour movement. That is a good and interesting point to examine in this context, because it remains the case today that Mr Prentis of Unison is on the court, as was Mr Brendan Barber of the TUC before him. I believe that Mr Bill Morris was on the court before that, and Mr Gavin Laird was too, in the distant past. Indeed, I used to see the papers that Mr Laird received at the time and the contributions he made. If they had been listened to at the time it would have had a significant impact on British competitiveness. Mr Laird used to argue repeatedly, very eloquently and in beautifully scripted speeches, that we were in danger of overemphasising the importance of finance at the expense of manufacturing. That is an issue not only for the Government, but for the Bank of England itself. Industry, as opposed to finance, needs to be in at the Bank. That is a fundamental weakness, because at present it is financiers as opposed to industrialists who are evident at the Bank, not so much in the expertise but in the mindset and the thinking which lead to decision making. The Bank thinks as financiers do, and it does not think more widely.

In the same way, my hon. Friends on the Front Bench propose to broaden the court with consumer champions and others who are missing at the moment. The Chancellor is decisively, deliberately and calculatedly removing consumerism and the consumer interest from regulation. Why? Because that is seen as a barrier to the ever onward growth and recovery of the big banks, not least RBS and Lloyds. Some commentators are speculating that there might be a fuel tax increase. That is quite wrong, in my view. What the Chancellor wishes to do is maximise his returns on the sale of shares in RBS and Lloyds. In itself, that is very sensible, and it is something that the Bank of England would support, does support and will support. However, speed and timing are critical in all of this. We have the Bank of England being unduly influenced by the Chancellor and the Treasury, while at the same time it is losing external influences from the world of industry. That includes both the employer and, potentially, the trade union influence.

There is the intriguing possibility of a more regional Bank. What would the world come to if there were people in the Bank of England who did not live in London or, more likely, in the commuter belt outside London? How would the world survive? It is a shame that my hon. Friends did not go even further and suggest that the court ought to meet not in the hallowed chambers on the third or fourth floor of the Bank, but in Manchester, Birmingham, Cardiff, Edinburgh, Aberdeen or Sheffield, in order that the public can see and hear it and get a feel for it. That would be an easy, significant win, and I am sure that the Bank’s representatives listening in will take note of that. I commend the amendments to the Committee; they are excellent and should be agreed.

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May I say what a pleasure it is to serve under your chairmanship, Mr Wilson? I will speak to clause 1 and why it should stand part of the Bill before dealing with the amendments.

The clause makes the deputy governor for markets and banking a member of the court of directors—an important position that is not currently a statutory member of court. It also provides enhanced flexibility to add or remove a deputy governor or alter the title of a deputy governor, as well as the corresponding ability to make changes to the composition of the court, the Financial Policy Committee, the Monetary Policy Committee or the new Prudential Regulation Committee where a deputy governor is added or removed. Those important provisions will simplify the governance of the Bank.

Following the expansion of the Bank’s responsibilities through the Financial Services Act 2012, a deputy governor for markets and banking was appointed with responsibility for reshaping the Bank’s balance sheet, including ensuring robust risk management practices. That important position is currently filled by Dame Minouche Shafik, who is not a statutory member of court. We have talked about regional diversity this morning, but she ticks many boxes in terms of other forms of diversity, having been born in Egypt, worked a lot in America and being a British citizen. The clause amends the Bank of England Act 1998 to make that deputy governor a member of the court, ensuring equal status for all the Bank’s deputy governors and simplifying the Bank’s governance structure.

It should be noted that the power to add or remove a deputy governor will not permit the Treasury to remove a deputy governor or change his or her title while that deputy governor is in office. The measure will ensure flexibility for future need. At present, changes such as the creation of the new position of deputy governor for markets and banking can only be affected through changes to primary legislation. Instead, as a result of the clause, the Government will in future be able, by order and after consulting with the Governor, to adjust the size and shape of the Bank’s senior management team to meet future requirements—for example, to bring in new expertise if that proved to be necessary.

The hon. Member for Bassetlaw asks why we are changing the number of non-executive directors on the court. To be clear, that change is not being made by the Bill. The Bank of England Act 1998 requires up to nine non-executive directors, and following retirements there are currently seven non-executive directors on the court. A smaller board will be better for the Bank. The strong view of the Bank’s non-executive chair, Anthony Habgood, is that a smaller board makes for more effective challenge and accountability of the executive. When there are fewer non-executive directors, each member has greater opportunity to pose questions to executive members and to debate with them. A larger court might encourage a round table of individual speeches, rather than enabling effective back-and-forth discussions with and challenge to the executive.

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Other than remarks from an individual, what is the evidence base from analysis of input over years for the Government seeing the reduction as being quantified in better input?

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The hon. Gentleman serves as a member of the Treasury Committee, and I believe he was also a member of that Committee in the previous Parliament, so he will remember that it produced a report in 2011 called “Accountability of the Bank of England” which recommended that the court’s membership be reduced to eight—smaller than we propose. It emphasised that a smaller court would allow for

“diversity of views and expertise”

while still being

“an efficient decision-making body”.

He may want to go back and look at the evidence base that the Committee looked at. It is important to emphasise that the Bill does not make a change in terms of the membership, which remains at possibly up to nine.

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Does the Minister therefore believe that the Cabinet should be reduced in size?

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The Cabinet, as the hon. Gentleman knows, has fluctuated in size over the years. On the evidence base, we are obviously talking about the experience of the Bank of England having in the past, particularly in the run-up to the financial crash, had a significantly larger court. I think there were 19 members in the run-up to 2009, and it was thought that that was a very large and unwieldy body. I think it still falls short of the number of people who currently attend Cabinet. There is a range of different views of effectiveness, but the important point to emphasise is that the Bill does not intrinsically make any changes to what is already there, although in practice we currently have seven non-executive directors on the court.

Importantly, the Bill also provides for the continued balance of internal and external members on the MPC, the FPC and the newly formed PRC. Following the addition or removal of a deputy governor, the Government may make a corresponding change to the number of members appointed by the Chancellor in the case of the FPC or PRC or the Governor in the case of the MPC.

New clause 5 would require the court to publish transcripts of its discussions within six months. I agree completely with the hon. Member for Leeds East that transparency is critical. The Bank of England makes decisions that affect all of us and it must be accountable to the public, and enhancing transparency is central to that. That is why I am so pleased to bring this Bill to the Committee: it makes governance of the Bank much more transparent in several ways. First, it makes the entire court responsible for the oversight functions. No longer will an oversight committee oversee the work of an oversight board. Every member of the board, executive or non-executive, will be clearly responsible for oversight of the Bank.

Secondly, the Bill removes a greater barrier to transparency and unnecessary complexity. In 2013, the Parliamentary Commission on Banking Standards noted the complexity of the present regime. It said:

“The accountability arrangements of the new structures”—

that is, the structures that exist now—

“are more complex than those of the previous regulatory regime. The PRA is a subsidiary of the Bank, and the FPC is a sub-committee of the Court of the Bank.”

The Bill will change the FPC’s status from a sub-committee of the court to a committee of the Bank and will end the PRA’s subsidiary status, establishing the Bank’s three policy committees on a common statutory footing.

The final and perhaps most significant means of enhancing transparency is bringing the whole Bank into the purview of the National Audit Office for the first time in its history. Allowing the NAO to conduct value-for-money reviews across the Bank will increase its accountability to Parliament and to the public. In turn, this will build greater public trust in the Bank’s operations and governance, supporting its vital independence role in the UK economy.

I agree with the hon. Member for Leeds East that transparency is important: it improves accountability and ultimately makes the Bank’s governance better. However, I disagree with him that mandating transcripts of court sessions will make governance better. As hon. Members are aware, the court is now required to publish the minutes of every meeting within six weeks. That was not always the case, but I am glad to see that the court has published historical records of its minutes, including those during the financial crisis. Through this, Parliament and the public now have greater insight into the governance of the Bank and the key decisions made. Transcripts are a different matter entirely.

We are fortunate in this debate because the impact of transcripts on Bank discussions has already been examined by Governor Warsh in his review, “Transparency and the Bank of England’s Monetary Policy Committee”. He said:

“Creating a safe space for true deliberations is among the most critical indicia of organisations that make good decisions, according to the leading academic and empirical literature and my own observation”.

I am sure we all want a court that makes good decisions. The alternative would be extremely costly for all of us. Governor Warsh looked at the MPC’s two discussion days and found that the different nature of the day one and day two discussions required different approaches to transcript publication. It makes sense to see which of those days is most like a court session and what Governor Warsh recommended. Day one is when the MPC members deliberate, challenge the evidence before them and question one another—exactly the kind of role that the court performs very effectively. Day two is very different. In Governor Warsh’s words:

“With few exceptions, the deliberations are nearly complete, policymakers are heard, and their judgments tallied.”

I think it is clear that day one is closer to the deliberations and discussions of a board.

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I thank the Minister for explaining Governor Warsh’s views, but I would like to challenge his view that the academic literature is all one way. In fact, some of the academic literature points out that in more private settomgs, people are more prone to groupthink.

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As a distinguished academic himself, the hon. Gentleman will know that academics often differ in their points of view. It is clear that in this case the distinguished Governor Warsh has come down in one way, and here in our deliberations we have come down in favour of producing a transcript, and Hansard performs that incredibly valuable role for us. I will make some further points, which I hope will convince him of the wisdom of the position that the Government are taking on transcripts.

When Governor Warsh looked at releasing transcripts of the day one deliberations, which he described as “safe space” deliberations, he found that

“Should the transcripts of the Day 1 deliberations be made public, the quality of the deliberative process would risk being materially impaired, to the detriment of sound policymaking.”

He went on to make a clear recommendation that

“the Day 1 policy discussions should no longer be recorded nor should they be transcribed.”

Publication of transcripts of meetings of the court would have a “chilling effect” on discussion and the quality of debate and harm decision making. I therefore hope that the hon. Member for Leeds East will not press his new clause.

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Having gone through in some detail an analysis of whether transcripts of meetings of the Monetary Policy Committee should be made available, on which there has been a thorough debate, including with members of the MPC, the Minister translates that to an amendment relating to the court. In relation to the court, what is the evidence base that suggests that the hearings or decision making of the court, as opposed to the MPC, would in some way be restricted by a transcript?

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The hon. Gentleman makes an important point. The court oversees the MPC, the FPC, and the PRC under the proposals in the Bill. We have not discussed yet—I will be happy to do so—the fact that on the prudential side of discussions, the people on that committee will looking at material that constitutes, by any judgment, non-public information on the soundness of important financial institutions in this country. I am sure that, as a member of the Treasury Committee, the hon. Gentleman will agree that such material ought to be treated as extremely market-sensitive in any circumstances.

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The Minister is now jumping to a third body. The amendment relates to the court. The court does not make decisions on interest rates. The court does not delve into the financial situation of individual banks or other financial institutions. The court oversees; the court is strategic. Will she explain the relevance of her case in relation to the court, as opposed to the committee dealing with prudential regulation or with monetary policy?

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I would have thought that it spoke for itself. The fact that the court is overseeing all these different committees, some of which will be considering material that is non-public information—

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rose—

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If the hon. Gentleman will allow me, I will give way to him when I have replied to his previous point. We are proposing the publication of a record of the court’s meeting, and I agree with him that it is important for that record to be in the public domain. There is a clear difference between that record and a transcript.

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I thank the Minister for giving way again. I have the advantage over her of having been in the deliberations of the Treasury Committee on these matters. There is a world of difference between decision making on interest rates or the examination of whether a particular financial institution is in danger of collapse and going into that in a committee and the role of the court. The Minister seems to misunderstand the role of the court. Has she looked at and understood the transcripts the discussions of the Treasury Committee and the banking review on the question of the court? She is talking about different bodies. This amendment is about the court. The Minister said, in response to my earlier intervention, that this is self-evident. No, it is not self-evident—

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Order. This is an intervention.

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It is a precise intervention. Would the Minister like to comment?

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In responding to the hon. Gentleman’s intervention I will be a little bit cheeky, if I may, and highlight the fact that even that august body, the Treasury Committee of this House, sometimes meets in private. There is a need for a safe space for discussions at certain points. We agree with the hon. Gentleman that it is important to have a degree of transparency in terms of the court. We think that the record provided is adequate. I hope that the hon. Gentleman will not press the amendment.

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Will the Minister give way?

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I would like to move on, but I will take another short intervention.

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I thank the Minister for giving way. Debate is important. The Minister now cites in evidence the Treasury Committee, which is a good example. The reason that minutes and transcripts of Select Committees are available is because of the strategic overview and public accountability that they provide. That is the whole point about the court. It is not making decisions on the minutiae or on the specifics. It is providing an overview and oversight, on precisely the same democratic logic as a Select Committee. That is the point of this excellent amendment. The Minister does not seem to understand the point of the court and what it is there for.

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With great respect to the hon. Gentleman, I do understand that. Perhaps he would like some further examples. The court plays an important role in relation to emergency liquidity assistance at the time of a financial crisis. We have to agree as a Committee that there will be times when the court is discussing something that we do not want to have transcribed and put into the public domain. Personally, I thought that Governor Warsh was very convincing in comparing what happens on day one of the Monetary Policy Committee and what can happen at other times—not necessarily all the time—and how a record will be published. The hon. Gentleman will vote one way and I will vote another. I do not agree with the amendment.

Amendment 9 would require representation on the court of particular sectors, and require the Chancellor to have regard for balanced regional and national representation on the court. Obviously, the Bank of England plays a central role in the UK economy, and its policy decisions are vital to everyone in the United Kingdom. I therefore entirely agree with hon. Members about the importance of the Bank of England giving careful consideration to how its policy decisions affect people throughout the country. This is at the heart of the Bank’s mission of promoting the good of the people of the United Kingdom by maintaining monetary and financial stability—indeed, that is precisely what the Bank does.

I will give a few examples. The Bank has representatives around the country; those agents work from 12 agencies, in Scotland, Wales, Northern Ireland and the regions of England, to gather information from businesses operating across many different sectors, including financial and non-financial firms. The regional agents, often joined by the Bank’s governors and members of the policy committees, regularly meet and hold panel discussions with companies of a range of sizes across the UK to gauge economic conditions and inform the Bank’s monetary policy and financial stability work. I trust that all members of the Committee have had an opportunity to observe that activity in their constituencies. If they have not, I strongly recommend that they do so, because those Bank activities are extensive. To give hon. Members an idea of how extensive they are: in 2014-15 the agents visited some 5,200 companies drawn from firms in all sectors and in all corners of the country; also, panel discussions were held with 3,700 businesses. Undoubtedly, the Bank goes to great lengths to ensure that it develops a detailed understanding of the conditions for businesses in all sectors across the whole United Kingdom.

In addition, the Prudential Regulation Authority’s practitioner panel ensures that the interests of those who must put the PRA’s rules into practice are communicated to the regulator. The panel includes representatives of banks, insurers, building societies and credit unions. The Financial Conduct Authority’s consumer panel has a statutory right to make representations to the PRA, and the FCA chief executive sits on the Financial Policy Committee and the PRA board, and will sit on the new Prudential Regulation Committee.

Through this Bill we are going further in ensuring that the regulators take into account the diversity of business models operating in the financial sector. Specifically, we are making it clear that both the PRA and the FCA must take account of the differences between different types of firm, including mutuals, whenever they are discharging their general objectives. We argue that these amendments are unnecessary and, indeed, unhelpful. They would cloud the appointments process.

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Does the Minister not accept that there is a difference between being consulted and having a right to be consulted and having a right to feel that one is represented on a deliberative body?

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There is, but the purpose of the deliberative body, as we have heard, is effectively to act as the board of the Bank of England, supervising the different committees. Prior to the financial crisis, members of the court were often selected specifically to represent a range of sectoral interests, including many of those proposed in the amendments. The first problem with the amendments is that requiring representatives of different sectors and regard to regional representation will entail a much larger and therefore oversized and dysfunctional court. Before the financial crisis, when the court had non-executives specifically to represent different interests—why stop at the four listed in the amendment?—the court had an incredible 16 non-executives, rendering it far too large to operate effectively and unable to hold the executive properly to account.

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I think the Minister may have been in error when she implied that the new clauses would introduce a requirement. Our new clause 2 simply says

“the Chancellor of the Exchequer must have regard to the importance”

of balanced representation.

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The hon. Gentleman is right to highlight that difference. Of course, what the Chancellor of the Exchequer would have regard to is the quality and ability of those individuals to perform the function they are asked to perform. The Banking Act 2009 sensibly limited the court to nine non-executives, and in practice we have now reduced the number of non-executives to seven while keeping that non-executive majority, which means that the court is now sufficiently small to form an effective body that can challenge the executive. The amendments before the Committee would inevitably mean a return to a large, inefficient and ineffective court.

A second problem with amendment 9, which would require sectoral representation on the court, is that it would give rise to conflicts of interest. The amendment calls for several practitioner representatives on the court. We have tried that in the past, too. During the crisis, the conflicts of interest meant that some of those on the court who could have been of most assistance to the Bank had to leave the room for the most important decisions, such as on liquidity provision to the markets and on individual firms. That hampered the court’s ability to respond effectively.

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Does the Minister agree that her statement about the ineffectiveness of the board, because of its narrow composition during the crisis, makes our point that we need wider representation across the country, across areas and across industrial sectors?

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I do not think anyone disagrees with the idea that we would want to have a range of different abilities and skills on the court of directors. What we are fighting against in opposing the amendments is the propensity of such amendments to lead to a larger and larger group of individuals on the court. Importantly, in relation to highlighting the potential for conflicts of interest, the conflicts policy now makes it clear that, among other restrictions, members of the court should not accept or retain any interest that is in conflict with membership and should not normally be associated with a PRA or Bank-regulated firm, whether as a director, employee or adviser. That ensures that the wide-ranging expertise—we all agree that that is necessary—appointed to the court can be deployed without obstacles, and leaves the court better equipped to respond to a crisis. The amendment would unravel those arrangements, and I argue that we should oppose it; we should not allow it to take us backwards.

The third and most important concern about the amendments is that they would impose unnecessary and undesirable constraints on appointments to the court. In the past three years, the court has been transformed. The Chancellor has appointed the highest-quality team, with significant experience of running large organisations and deep expertise in matters relevant to the Bank. The Government look far and wide for the best candidates, with roles advertised in the international press. Let me be clear: obviously, there are highly competent and highly qualified individuals who work in the sectors proposed and from all the regions across the UK. The amendments would constrain the appointments process utterly unnecessarily, potentially preventing us from forming the highest-quality, most experienced board for one of the most important institutions in the country.

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The Minister lauds this dramatic improvement in the court during the past three years. Can she give a specific example of a key decision made by the court during the past three years that has benefited by that enhanced performance?

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Not off the top of my head. I cannot specifically think of anything, other than to highlight the fact, in relation to the previous life of the court, when we were dealing with a much larger organisation, that all the reviews since the financial crash have highlighted the unwieldiness of that organisation and the lack of clarity in terms of conflicts of interest as being among the underlying imperfections in the financial regulation that we inherited in 2010.

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The decision in Sweden, for example, to move to negative interest rates, the collapse in oil prices, the mistake that the Chancellor made with the timing of the RBS shares sale and the successful prosecution in relation to LIBOR are all issues that have originated within the past three years. Did the court in its wisdom say anything about any of them in giving advice to the Bank?

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As the hon. Gentleman will be aware, a number of different independent reviews have been commissioned by the oversight committee during the past few years. I completely dispute his point about the sale of RBS shares. Given how much lower they are today, I would have thought he would welcome the fact that the Government were able to sell the first £2 billion-worth in the market last August. He and I will clearly vote along different lines on this matter. The Government feel that the amendment would constrain the appointment process, to the detriment of effective decision making in the court and in effect, therefore, to the detriment of the Bank’s overall effectiveness. Undoubtedly the court should have a breadth of experience and knowledge, and we certainly want different perspectives to be brought to bear.

It is also important that the court is able, when necessary, to commission the kind of review about which the hon. Gentleman speaks. There has been the Plenderleith review to increase emergency liquidity assistance capabilities and the Stockton review, which made recommendations on how the Bank communicates its forecasts. We have even spoken this morning about the Warsh review, which has made the very recommendations that we are considering, regarding MPC procedures and the governance of the Bank of England.

The current court contains a remarkable collection of experience and talent. Among the directors are the chief executive of a major telecoms provider.

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The Minister is being very sporting in giving way this morning. Can I take it from the tenor of everything she has said that the place for the trade union representative on the court, which we have had since world war two, is now in jeopardy?

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I do not know where the hon. Gentleman would get that impression from. It is important that we have a chief executive of a major telecoms provider, a chief executive of a major power utility, a private equity specialist, a leader of a global information services group and a leader of a major public sector trade union. The chair, Mr Anthony Habgood, is one of the most experienced and respected company chairmen in the country.

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There has always been, since world war two, a place reserved on the court for a leading trade union figure. That is not written down anywhere, but it has always been accepted. Will it continue?

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Nothing in my remarks this morning has suggested any change whatsoever in that policy, but it is important that the best people are selected for the roles and we do not accept the Opposition amendments, which would further constrain the selection process. I hope we can all agree that every member of the court, wherever they are from, should consider in their decision making the Bank’s impact on everyone in the UK, across the UK, not just in one region or one individual sector.

The amendments call for a different kind of court, made up of representatives from UK regions and representatives of narrow interests, and that would result in a court riven by conflicts of interest. We have tried that kind of court before and we know how the story ends. I hope that members of the Committee agree that we should not allow the amendment to take us back there.

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We will not seek to divide the Committee on the amendment, but we might, of course, revisit the matter on Report.

On new clause 5, we have heard powerful interventions from the hon. Member for East Lothian, and insightful ones from my hon. Friend the Member for Bassetlaw, who speaks, on this and other matters, not only with great experience because of his role on the Treasury Committee but with great common sense about transparency and representation. I am disappointed, therefore, by the Minister’s lack of support for the new clause. She says that she supports transparency but, with respect, I do not believe that she has offered greater transparency in this regard, not even with the compromise of an above-the-line and below-the-line model for transcripts, which is used by local authorities and school governor boards. On that basis. I will wish to press the new clause to a Division and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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I remind colleagues that votes on new clauses will be taken at the end of the Bill proceedings.

Clause 1 ordered to stand part of the Bill.

Clause 2

Term of office of non-executive directors

Question proposed, That the clause stand part of the Bill.

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I am glad that you are finding it as confusing as I am, Mr Wilson, that there is a group 2 and a clause 2 and what have you. Clause 2 enables the Government to extend the appointment of a non-executive director. The standard length of appointment for a non-executive director is currently four years, and this will be maintained following the passage of the Bill. However, if necessary, the Government will have the power to extend the appointment by up to six months. If the individual is subsequently reappointed to the court, the length of their new tenure will be reduced by the length of the extension.

The ability to extend a non-executive director’s appointment provides a number of key benefits. First, the ability to extend the terms of appointments by a few months enables the end dates of non-executives to be staggered, which supports smooth transitions in membership, preventing a significant change in personnel at any one time. Secondly, should a member of the court resign or retire unexpectedly, extending the term of one or more non-executive directors can provide resilience during a potentially turbulent time. Finally, enabling this extension will bring the court in line with the FPC and the MPC, whose members can already have their term extended by up to six months.

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I will be brief, because the Opposition are happy with the proposal to provide for the extension of the term of office of non-executive directors. However, we feel that this is an opportunity to highlight again the important role that non-executive directors can and should play, a point made effectively by my hon. Friend the Member for Bassetlaw in the debate on clause 1. There was a clear suggestion in the other place that the Government believe that a smaller body of non-executive directors on the court would be more efficient, and the Minister has made that clear again. I take this opportunity to reiterate the point that it is necessary to ensure broad representation and the appointment of active and dedicated members. As my hon. Friend has indicated, the world would not come to a stop if there was broader representation, both geographically and in terms of life experience.

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I warmly welcome—warmly—this clause, as I do the Minister’s confirmation to the hon. Member for East Lothian that the Government have no intention of removing the trade union representative from the court. I warmly welcome that. It is an exceedingly sensible approach that will resonate well beyond this place. This clause should be unanimously adopted.

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Excuse me if I faint from astonishment, Mr Wilson. I do not think that that has ever happened to me before with the hon. Member for Bassetlaw.

Question put and agreed to.

Clause 2 accordingly ordered to stand part of the Bill.

Clause 3

Abolition of Oversight Committee

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I beg to move amendment 10, in clause 3, page 4, line 5, after “would” insert “materially”.

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With this it will be convenient to discuss the following:

Amendment 11, in clause 3, page 4, line 7, leave out “may” and insert “shall”.

Amendment 12, in clause 3, page 4, line 11, after “directors” insert—

“and

(c) for the review to be conducted by a person who is not an employee or director of the Bank.”

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The abolition in clause 3 of the oversight committee was clearly a very controversial part of the original Bill, as evidenced at each stage of the debate in the House of Lords. My colleague in the other place, Lord Tunnicliffe, supported Lord Sharkey in seeking to challenge it. Labour Members believe that the abolition of the oversight committee is an attack on accountability within the Bank, and yet another example of the Government rolling back recent legislation. I am sure that we will come to that topic on another day.

Not only is the reverse burden of proof or the presumption of responsibility being removed before it is even implemented, but the oversight committee was established only in the Financial Services Act 2012, as hon. Members will remember. The Government clearly felt unable to sustain their line of argument, and in amending the clause to allow a majority of non-executive directors the power to initiate reviews, they have made a welcome concession. It remains our view that the abolition of the committee is a retrograde step. We are yet to be convinced that affording the non-executive directors this power without the existence of the previous forum for discussion will mean that power can be exercised effectively. Perhaps the Government can say how they believe the non-executive members will discuss their concerns outside of the meetings of the court. Will they have to organise something akin to a stand-alone non-executive directors meeting? Perhaps such a forum exists, and the Minister can inform and enlighten me about it.

Following the negotiations in the other place, we have decided to allow this change in the Bill to be made. We will keep a watching brief on how it works over the coming months and we will seek to take advice from the non-executive directors on how they feel it has affected their ability to carry out their oversight functions.

We have proposed a number of amendments to improve the clause, particularly amendment 12, which seeks to increase the authority of the non-executive directors. On Report in the Lords, the Government stated that the initiators of a review among the non-executive directors would determine that they have the power to decide who should carry it out. It could be someone external or someone internal, from the independent evaluation office.

During a Treasury Committee hearing, the Governor was questioned at length, and told the Chair of the Committee that the IEO’s work is set by the court. Therefore, our amendment seeks to give the non-executive directors a duty to bring in external expertise and analysis to conduct such a review into the work of the Bank. Amendments 10 and 11 would further clarify and strengthen the Bill in that regard.

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I, too, had reservations about the abolition of the oversight committee. I warm to it to the extent that we have clarified, or are in the process of clarifying, the role of the court in a narrower sense as a proper functioning board of a wider organisation, although the Minister’s responses in the previous debate have given me some cause for concern.

It is important to grasp that the existing oversight committee is nothing more than the non-executive directors meeting as a body, so the existing oversight body gives some official grounds for the non-executives to meet. I have been on many boards where it was quite the norm for non-executives to meet informally, and one trusts that the non-executives on the court are of sufficient experience to be able to do that. Nevertheless, there must be a worry if the current ability to meet separately and to be resourced as the oversight committee is taken away. Therefore, the amendments being proposed to the clause are a useful way of just stressing on the part of Parliament that what I have described is what we expect the non-executives to do.

It might be important to consider circumstances where the non-executives might want to discuss the overall direction of the Bank. We have had one such experience in the last couple of years. The major activity of the Prudential Regulation Authority, which is soon to be the Prudential Regulation Committee, has been to conduct the stress tests on the banks. It does so under separate legal obligations from Europe. The stress testing is a highly extensive and highly resource-driven activity, and there were issues in the first round of stress testing because resources were clearly being directed from other parts of the Bank to help the PRA to do its job. There were issues about who was making decisions, and about whether enough resources and staff time were being made available from the other parts of the Bank to the PRA. A number of the non-executive directors became slightly alarmed about how the stress tests would be conducted and about the availability of the necessary resources.

There can be quite significant points when the non-executive directors would have to say, “We are worried about the deployment of resources by the executive directors. We want to stand back and look at how this is being done.” The non-execs must have the power as a body to lean against the significant influence of the executive. The Bank of England is one of the major institutions of the UK and of global banking, and the Governor of the Bank, Mr Carney, for whom I have a great deal of respect, is one of the most senior central bankers in the entire world. Leaning against him when he says, “Do this or do that,” is difficult. The amendments would give the non-executives some backbone, so when they are worried about the direction of resources they can say, “Whoa.”

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My view is similar to that of the hon. Member for East Lothian, in that I do not object to removing the oversight committee if the functions are effectively outlined. In addition to the example of the stress tests, there are various potential events—some would call them calamities, others opportunities—that would affect the structure and ethos of the Bank of England. They include British exit from the European Union or Scottish independence. They would require the court to act effectively and strategically. If there is a feeling of conflict in direction—direction being what should happen and what people should spend their time on—the ability to draw in external reserves and expertise is key. The power to do that has to be there.

Amendment 12 in particular would be useful to the Government and would complement their approach. I put it to the Minister that it would be helpful, given the direction of travel. I tend to concur with the Treasury Committee’s general view on this point, but only if the court is right and the non-execs have that power. The Treasury Committee, on behalf of Parliament, has made it clear that bringing the non-execs from the court into the Treasury Committee and having that dialogue in public and producing transcripts of it, which has not happened in the past, will be an important feature in the future.

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The line-by-line consideration of this provision in the other place and here this morning has been extremely helpful. Before I speak to the amendments, let me give the Committee an example of the problems in the oversight committee’s current arrangements which I think will inform our debate. The hon. Member for Bassetlaw mentioned the 2013-14 foreign exchange market investigation, which sought to establish whether any Bank officials were involved in or aware of the FX market manipulation. In October 2013, the Bank’s governors initiated an extensive internal review, and they regularly briefed the court at its meetings from November 2013 onwards. In March 2014, it became clear that an independent investigation would be appropriate. The oversight committee took over the investigation and appointed Lord Grabiner QC. That is a very good example of the oversight functions. In practice, the executive needed to join the oversight committee discussions for the oversight functions to work and be effective, both as the investigation progressed and once attention turned to delivering the recommendations. It would be better practice to make the oversight functions the responsibility of the whole court. That is the purpose of the clause.

I welcome the opportunity to speak to the amendments and to explain the improvement in the oversight arrangements at the Bank of England and the power we have ensured for the court’s non-executive majority. The Bill brings the court closer to the model envisaged by the Treasury Committee, which called for a board with powers to conduct ex-post reviews of the performance of the Bank; for board members to be authorised to see all the papers submitted to the Monetary Policy Committee and the Financial Policy Committee; and for the board to be responsible for reviewing the processes of the Bank’s policy committees. Making the oversight functions the responsibility of the whole court makes it clear that every member of the court, executive and non-executive, can be held to account for the use of these functions. No member of court can claim that the oversight functions were not their job, since they will now rightly be the responsibility of all.

That replaces the current arrangement in which there is effectively an oversight committee overseeing the work of an oversight board. That is neither efficient, nor best practice. In fact, on Second Reading my right hon. Friend the Member for Chichester (Mr Tyrie), Chair of the Treasury Committee, put it well when he said:

“The oversight of the executive will be the responsibility of the court itself, rather than a sub-committee. Even though it was not called a sub-committee, it was, in fact, a sub-committee, and a weaker committee than the court.”—[Official Report, 1 February 2016; Vol. 605, c. 668.]

During the Bill’s passage through the House of Lords, we introduced the power, which has been welcomed by members of that House, that this amendment seeks to alter. This part of the Bill ensures that a majority of non-executives can always initiate performance reviews without needing to secure the agreement of a majority of the whole court. If just four non-executive directors want a review, they will be able to initiate it. Under our proposal to give more powers to the non-executive directors to do their job effectively, the initiators of a review would determine who should carry it out. This could be someone external or someone internal, including the Bank’s relatively new Independent Evaluation Office. The amendment would take away their discretion and make the new Independent Evaluation Office irrelevant.

The Bank’s Independent Evaluation Office reports directly to the non-executive chair of court. A few months ago, it published a review into the Bank’s use of forecasting—a clear example of where an internal review is appropriate. In our opinion, Lord Grabiner’s inquiry into Bank officials’ awareness of market manipulation in the foreign exchange market was an example of where an external review was appropriate.

The Bank’s non-executive directors, as we have heard in a previous debate, are selected for their ability to bring new perspectives and experience and to challenge and scrutinise the Bank’s executive. It is right to give them the powers to ensure they are able to fulfil this role. The amendment would send a message that we do not trust the non-executive directors to do their job. For the discretion of those high-quality non-executives to determine what reviews should be carried out and who should carry them out, it would substitute a conveyor belt of external reviews.

Those commissioning a review, whether the court as a whole or the non-executive directors, are best placed to decide whether an internal or external review is most appropriate. The Bill rightly allows that discretion for the whole court and for the non-executives. The amendment would take away that choice, which we think would be bad news for effective oversight. I hope the hon. Member for Leeds East has listened to the arguments. We all agree that the important power in the Bill for the non-executives to act independently to initiate reviews of the banks should not be constrained in this way, and I hope that after due consideration, and after the extremely valuable debate in both Houses, he will withdraw his amendment.

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We do not intend to divide the Committee on the amendments to clause 3, although I will make one observation. I might get the quote wrong, but I remember a line in Shakespeare’s “Julius Caesar”:

“I come to bury Caesar, not to praise him.”

The oversight committee was praised by the Minister, but now, under clause 3, it is to be buried. It was praised by the Minister in response to an intervention by my hon. Friend the Member for Bassetlaw, and now we see that it is about to be buried, which we regret. We welcome the concessions that have been made. We do not wish to press the amendment, but we reserve the right to return to these issues on Report. I also point out that the Internal Evaluation Office can continue, tasked by the court. The amendment refers to decisions by non-executive directors. Internal evaluation is the Bank marking its own homework, which should worry us all. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

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The clause gives the oversight functions previously delegated to the oversight committee, which has been a sub-committee of the court, to the full court. What do we gain by making the oversight functions the responsibility of the whole court? We want to keep those functions, which we all agree are important, and now every member of the court, executive and non-executive, can be held to account for the use of those functions. Should something go wrong, no member of court could ever claim that the oversight functions were not part of their job. They will now rightly be everyone’s responsibility.

We have heard how that arrangement was endorsed by my right hon. Friend the Member for Chichester on Second Reading, but it is worth harking back to what the Parliamentary Commission on Banking Standards recommended when it set up the oversight committee. In its report, the commission endorsed the Treasury Committee’s recommendation that the Bank’s board should be responsible for conducting the ex-post reviews of the Bank’s performance and we believe that that is precisely what the Bill will achieve. The commission went further—I am sure that hon. Members will have read its report before arriving this morning. On page 482, the commission rejected the oversight committee created in the 2012 Act. The commission denounced the committee and despaired that

“It, rather than the Court as a whole, will be responsible for monitoring the Bank’s response to, and implementation of, the recommendations of any review it commissions.”

It is therefore important to stress that, through the Bill, the court as a whole will be made responsible for ensuring oversight of the Bank.

We have also talked about how the clause will enable full and frank discussion involving both the executive and the non-executive majority on how best to exercise the court’s oversight functions. The non-executives bring challenge, scrutiny and outside experience while the executive minority provides the in-depth knowledge of the Bank’s operations. By abolishing the oversight committee, we bring the court closer to the model envisaged by the Treasury Committee, which called for: a board with powers to conduct ex-post reviews of the Bank’s performance; board members to be authorised to see all the papers submitted to the MPC and the FPC; and the board to be responsible for reviewing the processes of the Bank’s policy committees.

It is important to emphasise that the Bill protects the ability of those non-executive directors to initiate performance reviews. We do not need them to secure the agreement of a majority of the whole court. Should a majority of non-executives wish to initiate a review, the rest of the court will not be able to block it. The initiators of such a review would determine who should carry it out. It should be someone external or internal, including the Bank’s new Independent Evaluation Office.

The clause safeguards the non-executives’ oversight of the Bank and provides additional protection against the emergence of groupthink. I commend the clause to the Committee.

Question put and agreed to.

Clause 3 accordingly ordered to stand part of the Bill.

Clause 4

Functions of non-executive directors

Question proposed, That the clause stand part of the Bill.

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I can canter right through the clause, which requires the court to establish a sub-committee of at least three non-executives to determine the remuneration of the Governor and deputy governors. Clearly, we would not want the executive to set its own pay, so to require that that power be delegated to at least three non-executives brings the legislative requirements for the Bank’s remuneration committee in line with UK corporate governance code. The current remuneration committee has four members.

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I too will be brief. I will not be cantering as I know very little about horses, but as we have already discussed non-executive directors in the debate on our amendment to clause 1, I have nothing further to add.

Question put and agreed to.

Clause 4 accordingly ordered to stand part of the Bill.

Clause 5

Financial stability strategy

Question proposed, That the clause stand part of the Bill.

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This will be more of a trot—[Interruption.] There are no Trots opposite me today, obviously.

Clause 5 will provide the court of directors with an express power to delegate the production of the financial stability strategy within the Bank. Subsection (3) makes it clear that the court retains the ultimate responsibility for any delegated duty or power, including its duties in relation to the financial stability strategy. The clause will allow the Bank to utilise its internal expertise to produce the strategy, while maintaining a clear line of accountability to the court. The drafting reflects the discussion in the other place, where it was felt that the Government’s initial proposal lacked sufficient clarity. Those concerns were addressed by the Government amendments that bring us the clause as it stands today. I hope that the Committee agrees that the clause will afford the Bank the necessary flexibility when producing the strategy while ensuring that the court will be held to account for its contents. I commend the clause to the Committee.

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In the debates on the clause both on Second Reading and in Committee in the Lords, it was argued that it should not simply confer on the Bank the power to set the financial stability strategy. The original proposal was vague, but although it was subsequently clarified by the Government amendment that conferred the power on the court of directors, the Opposition are not convinced that that is sufficient.

The impact assessment says:

“At present, the Bank’s financial stability strategy is set by the Court after consultation with the FPC…and HMT.”

It goes on to say that making the Bank responsible for setting the strategy and allowing the court to delegate its production within the Bank will ensure that the court is responsible for the running of the Bank and the Bank’s policy committees are responsible for making policy. The clause does not make it clear exactly what the financial stability strategy is supposed to be. All it does is create a power and impose the responsibility to create such a strategy relating to systemic risk in the UK financial system.

I shall repeat a concern raised by my colleague Lord Tunnicliffe regarding the financial stability strategy, because the response in the other place was not sufficient. Lord Tunnicliffe highlighted how a five-page strategy document was produced in 2013; it was then revised and published in the 2014-15 report, wherein it had been reduced to one column. In the Bank’s 2015-16 report, there was no mention of a financial stability strategy in the court’s ownership. Will the Minister confirm the importance of the financial stability strategy? It should be clear who is responsible for such a strategy.

Clause 5 creates a problem. A future financial stability strategy will emerge from somewhere within the Bank of England. It would be preferable if the people who are to be directly responsible for its production were identified in the Bill, rather than responsibility being conferred on the court with powers to delegate elsewhere. It would make most sense if the people made responsible for producing the strategy were the members of the Financial Policy Committee, as we have set out in new clause 6, which we will discuss later.

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The debate on the clause is very important, because the little-discussed danger is that we are creating an all-powerful Governor who determines, in his or her ultimate wisdom, a financial stability strategy for the country—as if everything will then be fine.

The current Governor obviously has a bit more time on his hands because interest rates have not risen since 2009. The MPC, with its monthly meetings having gone down to eight a year, has not had a great deal to do other than maintain the status quo. In some ways, that is precisely the problem that was there previously. Before the 2008 crisis the Governor was responsive—looking at things, making speeches about what had happened in the past month or two and trying to tweak the system—and examination of the underlying problems in the system, in the sector and on occasion in the economy as well simply did not happen. The danger is that we again become complacent about such things. That is precisely why the Treasury Committee was keen to see an enhanced and powerful court of directors taking responsibility. It would be useful to have a clear statement from the Minister, endorsed by Parliament, that the model being created is not that of the all-powerful Governor, and nor is it one that we expect to see in future.

The Treasury Committee is a wonderful body, with great membership over the years and reasonable membership even to this day, but a clear message about what is expected of it by Parliament would be valuable: the Committee, on behalf of Parliament, is expected to hold the court to account properly and effectively. That has not been the case over the past decade. The chair of court has appeared, but the non-execs have been invisible. With the court having a more important role, it is critical that the Treasury Committee be given a clear indication by Parliament that it is expected to give a reasonable amount of its time to holding the court to account publicly for the new powers, whether the Committee likes it or not, or does it joyously or reluctantly.

It will be useful to hear from the Minister about those two points, so that we get her views on the record.

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In itself, the clause is innocuous. It is a tidying-up operation, but lurking beneath it is a danger. Standing back from the restructuring of the policy committees of the Bank, we appear to be ending up with an exercise in bureaucratic symmetry—a committee to do this and a committee to do that, micro, macro, prudential or supervision, and the Monetary Policy Committee. The different committees are not supposed to talk to each other, doing discrete policy. That looks all right—someone is doing it—but what we are in fact ending up with is what I want to underline to the Minister and, through her, to the Treasury team.

The danger is that in creating bureaucratic symmetry, we have not got very far in creating a workable regulatory regime that is robust enough to meet the next crisis. One of the problems is that we are creating a silo for fiscal stability—basically, checking when a bubble arises and stopping it—and a silo for monetary policy, but the two are not talking to each other, so we are in danger of creating conflicts between the two main policy committees.

It is perfectly possible for the Monetary Policy Committee to go in a separate direction. At the moment it is refusing to raise interest rates, but that is leading to the committee in charge of fiscal policy and financial stability starting to discuss whether it should use its financial buffers to slow down a bubble in the housing market. It is possible, but a bit crazy, for the two different committees to take two different stances when the whole point of putting financial stability and monetary policy under the same roof—the Bank—was meant to be a co-ordinated policy.

Assigning responsibility for financial stability to the Financial Policy Committee does not get us off the hook of someone somewhere laying down broad policy objectives. The MPC has broad monetary policy objectives—I think that in the present climate of deflation, they are probably the wrong ones—but the FPC has very vague guidelines as to what it should be doing, and so suddenly we discover, in default, that the only person in the land who is actually overseeing all the different policy options is the Governor himself, and he is not even getting clear enough direction from the Treasury. By all means support clause 5 as a tidying-up operation, but it still leaves big holes in terms of who is actually laying down the major policy directions for the committee.

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Opposition Members have suggested that the Bill, in and of itself, makes a change to the power and importance of the role of the Governor of the Bank of England. I would submit that the Governor of the Bank of England is an incredibly powerful and important appointment, but I would not say that the statutory powers of the Governor are increased from their already elevated level by the Bill. Obviously, he is the one who has a role across all the different committees, but he has always had a very important role.

The hon. Member for Leeds East is absolutely right to highlight the fact that in the other place there was extensive debate on the precise wording of the clause. Convincing arguments were made to change it and the Government tabled amendments to provide the court with an express power to delegate determination of the strategy. That is a change from the original intention after the consultation undertaken in the summer. To be clear, it will be for the court, as the governing body of the Bank, to decide who is best placed to set and review the strategy.

The hon. Member for Bassetlaw asked specifically about the role of the Treasury Committee in continuing to scrutinise the role played by the Bank of England, the Governor and the court. I see nothing before us today that would change the current arrangements whereby the Committee has an important role in taking evidence.

Hon. Members asked about the co-ordination between the Monetary Policy Committee and the Financial Policy Committee. They are independent committees with separate objectives. It is important that the Governor sits on both committees and is able to see what is going on in both committees, but we think it right to strike a balance to ensure that each of the committees remains focused on its individual remit while fostering interaction between monetary and macroprudential policy.

There has been a good debate in both Houses, illustrating the value of line-by-line scrutiny. I think that we have landed in the right place and I commend clause 5 to the Committee.

Question put and agreed to.

Clause 5 accordingly ordered to stand part of the Bill.

Clause 6

Monetary Policy Committee: membership

Question proposed, That the clause stand part of the Bill.

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With this it will be convenient to discuss new clause 6—Financial Policy Committee: procedure

“In paragraph 11 of Schedule 2A to the Bank of England Act 1998, after subsection (7) there is inserted—

‘(7A) The Financial Policy Committee shall inter alia at least each year commission and publish promptly external research into the level of systemic risk to the stability of the financial system in the UK.

(7B) As soon as reasonably practicable after each meeting of the Financial Policy Committee, the Bank shall publish a record of the meeting before the end of the period of 6 weeks beginning with the day of the meeting.””

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It will be useful to consider the new clause, tabled by the hon. Members for Leeds East and for Wolverhampton South.

Clause 6 brings the Financial Policy Committee into line with the Monetary Policy Committee and the Prudential Regulation Committee. It makes the Financial Policy Committee a policy committee of the Bank, rather than a sub-committee of court.

Aligning the statutory status of the Financial Policy Committee with that of the Monetary Policy Committee and the proposed Prudential Regulation Committee will simplify and bring greater clarity to the governance of the Bank. Clause 6 also adds the deputy governor for markets and banking as a member of the Financial Policy Committee. That is a role with clear read-across to the work of the FPC, and it is right that the committee should have the benefit of the deputy governor’s expertise. A new external member will also be added by the clause, in order to maintain the balance between executive and external members. That will ensure there continues to be a strong challenge function on the committee, to avoid the risk of groupthink.

While clause 6 deals with the status and membership of the Financial Policy Committee, new clause 6 would impose two requirements on the committee. I will address each of those requirements in turn. Proposed new subsection (7A) would require the FPC to commission and then publish external analysis of the level of systemic risk in the UK. I hope I can convince the Committee that that subsection is unnecessary.

The Bank of England Act 1998 already requires in section 9W the Financial Policy Committee to produce a financial stability report twice a year and for that report to set out the committee’s views on the stability of the financial system, including its assessments of the strengths and weaknesses of that system. The FPC draws on many sources in order to make that assessment, both from within the Bank and externally. For example, the Bank undertakes a systemic risk survey of market participants that seeks their views on risks to the financial system. The results of that survey are published alongside the financial stability review.

There are already commentators outside the Bank who provide analysis of financial stability. To name but a few, the International Monetary Fund undertakes the annual article IV process to assess the economic performance and financial stability of the UK and produces a global financial stability report; the Organisation for Economic Co-operation and Development produces papers on UK financial stability; and the European Systemic Risk Board publishes an annual assessment of systemic risks in the financial system of the EU. All of that is before I even mention the legions of financial sector analysts who produce reports every day on a wide range of financial stability issues.

If the Opposition are concerned that the Financial Policy Committee’s reports might be a product of Bank groupthink, I can reassure them that the existing legislation has provisions in place to prevent that. As I mentioned, the external members of the FPC provide outside views and challenge to the executive members of the committee, helping to prevent groupthink. The Government place great importance on that challenge function, which is why clause 6 increases the number of external FPC members by one, so as to maintain the ratio of executive members to external members. External members of the FPC have dedicated staff within the Bank so that they can undertake analysis and research upon issues of interest to them, which ensures that the external members have sufficient resources to undertake independent analysis.

As well as the provisions in the 1998 Act, the Bank has taken many steps to seek out views from external sources. The Bank has a long-standing tradition of engagement with other central banks, international organisations such as the Financial Stability Board and academics. Indeed, the Bank currently has an ambitious agenda of research—the “One Bank” research agenda—which extends across all the Bank’s areas of responsibility and is an excellent example of the Bank’s open and collaborative approach. The Chancellor was one of many guest speakers at the Bank’s open forum on 11 November last year, which I hope Opposition Members were able to attend, alongside academics and members of the financial services industry. The Bank sought external views on a range of topics.

Proposed new subsection (7B) would require the Financial Policy Committee to publish a record of its discussion within six weeks of each policy meeting. I am sure the hon. Members for Leeds East and for Wolverhampton South West will be reassured to hear that, under the Bank of England Act 1998, there is already a requirement in section 9U for the FPC to publish a record of its policy meetings within six weeks of them taking place. I hope I have convinced the Committee that clause 6 should stand part of the Bill and that new clause 6 is unnecessary. I hope the hon. Member for Leeds East will not press the new clause.

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As the Minister explained, the Financial Policy Committee is to be transformed into a committee of the Bank of England. As she explained, it had existed previously as a sub-committee of the court. Again, we see what one commentator, Professor Alastair Hudson, described as a spaghetti of committees. Perhaps we need to look at simplifying them so that the people we represent can understand better the system that is intended to serve them.

The FPC should be a body that takes a much more visible role when there are systemic challenges to the UK financial system. The problem that is created by the so-called spaghetti of committees issue is that it is unclear when and if it will relate to finance as opposed to economic policy more generally, and when it will relate to systemic risk rather than simply to the solvency risk associated with an individual financial institution. The spaghetti of committees issue means that the individual bodies have to fight for their role within the regulatory structure, instead of having their regulatory role clearly established by statute.

We believe that considerable thought should be given to how the FPC could play a more active role in the creation of policy relating to systemic risk. At one level, the body that is supposed to analyse the highest levels of risk to the UK economy ought to be one that regularly takes the lead in relation to policy formulation in that context. The Minister explained and reiterated quite rightly how many external views are published, but it would be helpful for the economy as a whole if the views of the members of the FPC were given greater publicity.

Our intention in proposing new clause 6 is to propose requirements on the FPC to regularly publish external research into the level of systemic risk to the stability of the financial system in the UK. I note the points that the Minister has made on that. Furthermore, as we seek greater transparency, we have again sought publication of a record of the meetings of the Financial Policy Committee within a reasonable timeframe. I am delighted that the Minister has clarified that that is indeed the case, and that that takes place within six weeks. I am reassured by much of what she has said regarding the provisions of section 9W of the 1998 Act on research and surveys and the provisions of section 9U on the publication of that research. Given that, and given the comments made by the Minister, we will not press new clause 6.

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The shadow Minister is such a moderate these days. I am feeling nervous, because new clause 6 is an excellent amendment that I wholeheartedly endorse. If we look at the FPC’s membership, they have huge experience of being in companies that have not paid a great deal of tax in the United Kingdom, so some expertise is brought to bear. The multinational structure of the UK economy, lauded as being the most open in the world, is also a potential systemic risk. The tax avoidance scandal demonstrates the scale of that potential systemic risk, not only in terms of the amount of money we are not getting in—that is an ongoing problem—but in terms of the structure of our economy.

For example, if some of the commentators are right about the response of capital to a British exit from the European Union, and if that coincided with a collapse in the euro, our economy would be vulnerable. The FPC needs the ability to work through the scenarios and the options and to see whether our structures are sufficiently good—I put it to the Minister that they are not and that we remain hugely vulnerable. That is one reason.

The second reason is that our housing market has a perverse structure that is worse than that of any other advanced economy. We have an absurdity that we have not been able to deal with, whereby there is huge housing price inflation in London and the south-east, yet the vast majority of houses we are building are in areas such as mine. They take a long time to sell because there is not a huge amount of demand for that new housing, but there is plenty of land and plenty of people willing to build housing, especially if the Government subsidise it. The Government are pressing for more and more housing, yet at the same time they face a systemic risk in the housing market. That is not a problem created by this Government; it goes back several generations. If the housing bubble were to burst in a range of different ways, that would be a fundamental problem.

The third systemic risk, which we saw in 2008, is the level of indebtedness. It was the American sub-prime market that led to the chain of events that caused the world financial crisis, not a specific collapse in this country, but we are hugely vulnerable. We, as a nation, are far too indebted. What is different now from any time in our history for both the corporate sector and individual households is that interest rates are at a record low. There is therefore a whole generation of people—two generations, in effect—whose expectations and economic behaviour is predicated on permanent low interest rates.

Commentators machinate—the Treasury Committee machinates at great length—about whether there will be a 0.25% increase in interest rates, yet we only need to go back 25 years and they were at 15%. That is part of the systemic risk. We therefore do not want to rely on the same old commentators—the OECD or the IMF—who got it wrong before 2008 and are using the same old paradigms.

The FPC should do precisely what the new clause suggests: ensure robustness in the British system. In a sense, that is the point of the FPC; otherwise, it has no point at all. What is proposed in the new clause is exactly what is needed. Indeed, we probably need more than that, but it is a good start. It will get minds concentrated on the scenarios and the options and, critically, whether the financial culture in this country’s businesses and households is sufficiently understanding to deal with the shock to the system that could come and which, by definition, will be outside our national control. That seems to be the point.

I will end on this point. It is quite a feasible scenario that at 7 o’clock in the evening of 12 March, after the German regional elections, the German media will be announcing the end of Chancellor Merkel. It is also a feasible scenario that the main opposition party—Labour’s sister party, the Social Democratic party—will come an unprecedented fourth. It is being seen as the most significant political day in 50 years in Germany, and it will have a huge immediate impact on the euro and the stability of the eurozone. We do not have an approach to dealing with that, because we presume that such major shocks to the system are not going to come. That is precisely the point of having the FPC and that is why the new clause is such a good one. We ought to be robust.

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I would certainly be very concerned if the hon. Member for Leeds East were developing a reputation as a moderate, not least because that might cause him not to be put forward as a Labour candidate at any future election. That would be a very worrying development. My analysis of his political point of view is that no one in this country could describe him as a moderate. This may be the first occasion on which he has been described as such. “Trot” might have been a more appropriate description of some of his political views, but I digress in an entirely inappropriate way.

I want to respond to some of the points raised and indeed to the important speech made by the hon. Member for Bassetlaw about the fact that the UK is an open economy. Therefore, by its very nature, it is open to economic developments in the rest of the world. He highlighted three topics with which the Financial Policy Committee should rightly be concerned. The first was the importance to financial stability in this country of the UK Government being able to receive tax revenues in order to pay for public services. He will know that it is incredibly important in this regard that we work with other countries and, notably, the OECD on the base erosion and profit shifting work, which is an important matter, perhaps not so much for this Committee but for other Committees in this House. That is an incredibly important issue on which we work internationally.

I reassure the Committee that, in terms of the overall resilience of the UK banking sector today, compared with the resilience at the time of the last shock, it does appear to be increasingly resilient. We would like to put that on record. The aggregate capital ratio, the common equity tier 1 ratio, is currently 12% for the banking system as a whole, which is a full 3.7% higher just since the end of 2013. The major UK banks all came through their stress test with the FPC at the end of last year without being asked to raise more capital. The FPC concluded that the UK banking system would have the capacity to support lending to the real economy even in the context of a severe global economic slowdown triggered by a downturn in the emerging economies.

The hon. Member for Bassetlaw also mentioned the housing market. Again, I think that it would be really valuable for the Committee to put on the record that the Government have granted the FPC powers of direction regarding residential mortgages and are also consulting—I hope that Opposition Members will support this—on extending its remit to cover powers regarding buy-to-let mortgages as well. Those are important points.

The hon. Gentleman also mentioned the rise of private sector borrowing. On that point, we argue that progress has been made to improve the personal financial position of households in the UK. Household debt relative to income has fallen from 168% in 2008 to 142% at the last reading. That includes both mortgage and unsecured debt. The FPC does study these numbers very closely. It stated, the last time that it looked through them, that given the actions that it has taken household indebtedness currently does not pose an imminent threat to financial stability, not least because underwriting standards are currently more prudent than in the past. Of course, however, the FPC must and will continue to monitor the household sector and will take further action if necessary.

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I appreciate the Minister’s overview of the financial markets and how stable they are. Obviously, she has not read the financial press this morning. The whole basis of the international bank resolution regime that we have brought in since 2008 is based on convertible bonds. The convertible bond market has gone berserk in the past two days. Constant default rates on commercial paper covering bonds have spiked by a whole number of points. Let me assure the Minister that the markets are not anywhere near as quiescent as she tells us.

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Again, the hon. Gentleman puts words into my mouth that I did not utter. However, I did want to point out that the FPC looks at the financial sector’s resilience. No one would deny that the markets are going through rough and troubled times, but the FPC’s role is important and I hope he will agree that its powers to look at different aspects of the economy have improved the architecture of financial regulation since the last crisis. I highlight the way in which the Bank of England, as part of its monetary policy remit, has kept inflation as low as it has.

The hon. Member for Leeds East pointed to the “spaghetti” of the Bank’s organisation. I agree that we need clarity to be able to tell our constituents about how the architecture works. I share that objective. The Bill improves the pasta-related shapes of financial architecture. I would argue that the current situation, with a subsidiary and so on, is more like spaghetti. When I was trying to think of an appropriate pasta-related analogy for what the Bill does in establishing new architecture that we can explain to our constituents in simple terms, I came up with the idea of three ravioli—independent, but, importantly, in the same bowl.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.

Clause 7

Monetary Policy Committee: membership

Question proposed, That the clause stand part of the Bill.

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With all this talk of food, I was hoping that we might break for lunch. I am not sure what time we will do that, but I will deal with clause 7, which I think will be quite brief. It makes the deputy governor for markets and banking an ex-officio member of the Monetary Policy Committee. Previously, the only ex-officio members of the committee were the Governor, the deputy governor for monetary policy and the deputy governor for financial stability.

As I set out in my remarks on clause 6, following the expansion of the Bank’s responsibilities, the Government and the Bank made a number of new appointments, including the creation of the post of deputy governor for markets and banking. It is currently held by Dame Minouche Shafik and she sits on the MPC as one of the two members appointed by the Governor of the Bank of England after consultation with the Chancellor of the Exchequer. The clause formalises that arrangement and ensures that expertise for monetary policy operations is maintained on the committee.

The clause also reduces the number of members of the committee who may be appointed by the Governor of the Bank of England from two to one, ensuring that the committee’s current balance is preserved. It provides that anyone appointed as a member of the committee by the Governor must carry out monetary policy analysis in the Bank and it gives that member the title of chief economist of the Bank.

In addition, the clause formalises existing practice in relation to conflicts of interest by introducing a statutory requirement for the Chancellor to take account of the interests of potential appointees in deciding whether they would be able to do the job. I do not think that the clause will be controversial.

Question put and agreed to.

Clause 7 accordingly ordered to stand part of the Bill.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Two o’clock.

The Committee consisted of the following Members:

Chairs: Mr Graham Brady, † Phil Wilson

† Baldwin, Harriett (Economic Secretary to the Treasury)

† Burgon, Richard (Leeds East) (Lab)

† Caulfield, Maria (Lewes) (Con)

† Cooper, Julie (Burnley) (Lab)

† Donelan, Michelle (Chippenham) (Con)

† Fysh, Marcus (Yeovil) (Con)

† Hall, Luke (Thornbury and Yate) (Con)

† Kerevan, George (East Lothian) (SNP)

† McMahon, Jim (Oldham West and Royton) (Lab)

† McGinn, Conor (St Helens North) (Lab)

† Mak, Mr Alan (Havant) (Con)

† Mann, John (Bassetlaw) (Lab)

† Marris, Rob (Wolverhampton South West) (Lab)

† Mullin, Roger (Kirkcaldy and Cowdenbeath) (SNP)

† Newton, Sarah (Truro and Falmouth) (Con)

† Skidmore, Chris (Kingswood) (Con)

† Tolhurst, Kelly (Rochester and Strood) (Con)

† Wood, Mike (Dudley South) (Con)

Matthew Hamlyn, Fergus Reid, Committee Clerks

† attended the Committee

Public Bill Committee

Tuesday 9 February 2016

(Morning)

[Phil Wilson in the Chair]

Bank of England and Financial Services Bill [Lords]

Before we begin, I have a few preliminary points. Please switch electronic devices to silent. Tea and coffee are not allowed during sittings. Members may, if they wish, remove their jackets during Committee meetings. Today, we will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication. In view of the time available, I hope we can take those matters formally, without debate.

Ordered,

That—

(1) the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 9 February) meet—

(a) at 2.00 pm on Tuesday 9 February;

(b) at 11.30 am and 2.00 pm on Thursday 11 February;

(c) at 9.25 am and 2.00 pm on Tuesday 23 February;

(2) the proceedings shall be taken in the following order: Clauses 1 to 13; Schedule 1; Clauses 14 to 16; Schedule 2; Clause 17; Schedule 3; Clauses 18 to 20; Schedule 4; Clauses 21 to 38; new Clauses; new Schedules; remaining proceedings on the Bill;

(3) the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Tuesday 23 February.—(Harriett Baldwin.)

Resolved,

That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Harriett Baldwin.)

Copies of any written evidence that the Committee receives will be sent to Members and made available in the Committee room and online.

We will now begin line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room. It shows how the selected amendments have been grouped together for debate. Amendments grouped together are generally on the same or similar issues. A Member who has put their name to the leading amendment in a group is called first. Other Members are then free to catch my eye to speak on all or any of the amendments within that group. A Member may speak more than once in a single debate.

Please note that decisions on amendments take place not in the order in which they are debated, but the order in which they appear on the amendment paper. In other words, debate occurs according to the selection and grouping list, and decisions are taken when we come to the clause that the amendment affects. I hope that that explanation is helpful. I will use my discretion to decide whether to allow a separate stand part debate on individual clauses and schedules following the debates on the relevant amendments.

Clause 1

Membership of court of directors

I beg to move amendment 9, in clause 1, page 1, line 7, at end insert—

“(2A) In section 1(2)(e), at end insert “who shall include four designated representatives including—

(i) Practitioner Representative,

(ii) Smaller Business Practitioner Representative,

(iii) Markets Practitioner Representative and

(iv) Consumer Representative.”

With this it will be convenient to discuss the following:

New clause 2—Composition of the Court of Directors of the Bank of England

“In making nominations to the Court of Directors of the Bank of England, the Chancellor of the Exchequer must have regard to the importance of ensuring a balanced representation from the nations and regions of the United Kingdom.””

New clause 5—Publication of transcripts of meetings of the Court

“In paragraph 12A of Schedule 1 to the Bank of England Act 1998, replace the word “record” with the word “transcript” in each place where it occurs.””

Clause stand part.

It is a pleasure to serve under your chairmanship, Mr Wilson, and to serve opposite the Minister.

On part 1 of the Bill, which is on the Bank of England, it is our intention to make the case for increased transparency and increased accountability at the Bank. At a time when the financial services sector, as the political system does, faces a lack of public support and public trust—or rather, not as much as we would like—it is in the interests of the sector as a whole and the Bank of England itself for it to present itself and its decisions in the most open way possible.

Clause 1 relates to membership of the court of directors. Amendment 9 regards representation on that court. We accept the proposals in the clause regarding membership of the court, but I note that concern was expressed in Committee in the House of Lords about a potential reduction in the number of non-executive directors in the court. Will the Minister clarify the number of non-executive directors that the Government foresee sitting in the court? In the light of amendment 9, which is in my name, and new clause 2, tabled by Scottish National party Members, the Government should make use of the option of nine non-executive directors in the legislation to ensure the widest possible representation and fullest possible input into and scrutiny of the Bank’s work through the court.

Through amendment 9, we seek to amend the Bank of England Act 1998 to insert a requirement that, of the nine non-executive directors, four be designated as representatives of specific practitioner sectors, including a consumer representative. We recognise that the court, as it stands, includes representatives of a variety of backgrounds, including, historically, the trade union movement. We welcome that and believe that that tradition and representation should continue.

To improve that representation, we propose drawing on the practice at the Financial Conduct Authority and the categorisation of its statutory panels to ensure that a practitioner representative for larger firms, a smaller business practitioner representative for smaller firms, a markets practitioner representative and a consumer representative are included. That is all I have to say directly in relation to amendment 9.

We believe that providing transcripts of the court’s proceedings, such as Hansard provides of our own discussions in Parliament, allows for rich scrutiny of lines of argument and is a clear way to increase transparency and public awareness. In the United States of America, it is the practice to broadcast meetings of the chairs of the various Federal Reserve banks. In the new clause, Members have not asked the Bank to go that far, but we believe that that is a positive example. The aim is to enable the public to understand what is going on and to allow greater scrutiny of the Bank of England’s valuable work.

I want to speak to new clause 2, which is a probing amendment. My response will be determined by the Minister’s response. We are asking that, when making nominations to the Bank’s court of directors, the Chancellor should have due regard to the importance of ensuring balanced representation from the UK’s regions.

Overall, the Bill is useful in tightening regulation and in refocusing the organisation and direction of the Bank of England. In particular, there is much merit in tidying up the operation of the Bank’s three main committees overseeing micro and macroprudential activity and the operation of the Monetary Policy Committee and, if that is accepted, in ensuring that the Bank’s court becomes essentially the organiser of the organisation, with responsibility, as the main oversight, for how the Bank’s operation works and for ensuring that there is managerial competence and value for money and that resources are well deployed between the Bank’s various functions.

It has been generally recognised over the years that the court has sometimes had an ambiguous position halfway between being a proper corporate board and a policy-making institution. The Bill, correctly, separates the policy functions that go to the committees, leaving the board with the essential corporate governance. That is a step forward. My point is that, if we do that —if we redefine and concentrate the board’s activity—we must look at the composition of the board and ensure that it is fit for purpose—a new board for a new competence.

The composition of the current board is a little too narrow. I accept that it has moved beyond the days when the court consisted simply of City grandees. In recent years, appointment to the board has widened; the international influence has widened. It includes a South African and an American. There is some industrial representation, but by and large there is still a feeling in the wider financial community outside London and in the wider industrial and commercial communities outside London that it is too City focused. For a board that is about not simply managing the City, but managing the central bank, it would be in the interests of the central bank and of commanding the respect of the central bank if there were a wider remit in relation to appointments to the board.

In the new clause, I am trying not to be too specific. A board should not be federalised; it should not consist of delegates. A board has overall responsibility. I presume that most people around this table have been on the boards of companies, large and small. I have been on at least two dozen boards in my rather geekish lifetime. When boards have discussions about who should be on them, they say, “Well, what experience do we have? Who is not represented? What area of competence do we need that will help the board to function?” That is perfectly proper.

I am just saying that, given the key role that the Bank of England plays in the UK, there should be more representation of the regions and nations of the UK. That is particularly the case because the banking community is no longer concentrated simply in the City of London. There are operations in Manchester, Bristol, Glasgow, Edinburgh, Cardiff and beyond, and the industries and sectors there want to feel some confidence that the Bank of England listens to them.

I know of course that the Bank of England has long had a system of agents. I suppose that many of us around the table will have met the agents in our region over the years. However, the agents have a different function. We are talking about a new board for a single bank.

Let me say—I hope that the Government will respect this—that the principle has already been conceded in one respect, which has been referred to. It has been traditional since the post-war period for the Bank to have a representative of the labour movement, the trade union movement, on the grounds that labour and capital were the two great elements of the economy. Given that that principle has already been conceded, all we are talking about is extending it.

My final point is that the distinguished Governor of the Bank of England, Mr Carney, of course comes from Canada, where the principle is already accepted. There is a rule that, in composing the board of the Bank of Canada, due consideration should be given to the provinces being represented. There is not a rule that every province has to be represented on the board of the Bank of Canada; it is not as specific as that and nor should it be. However, if we look at the board of the Bank of Canada, we see that, strangely enough, all the provinces are represented. Mr Carney is perfectly comfortable with that, so we are not trying to impose a burden that he has not had to face in the past.

I will comment on new clause 2, in the name of the hon. Member for East Lothian. As I said, we see merit in the proposal for wider geographical representation on the board and we believe that it complements our proposals to ensure that different stakeholders are represented. We would be interested to hear a little more detail if possible. He spoke about different centres of employment—Birmingham is one example—but I would be interested to hear specific comments on whether this proposal relates to personal residency or employment and, crucially, does the SNP believe that devolved bodies should make recommendations to the Chancellor?

To clarify, our new clause 5, on the publication of transcripts of meetings of the court, is a small tidying amendment, but we hope that it would have a significant impact by opening up the discussions of the court to wider scrutiny and that it would ensure increased transparency and accountability. That is why I will seek a Division on new clause 5 and why I invite all hon. Members to consider voting for it.

It is an honour and a privilege to serve under your chairmanship, Mr Wilson. The issue of the court and its lack of transparency— the amendments attempt to bring in some transparency—is one that has bypassed the majority of commentators and the general public. Hidden in the rather grand depths of the Bank of England, the court holds significant potential power, yet it has become embodied by not a concept of nepotism within the financial sector, but something akin to that. Perhaps “revolving door” is a better term. Someone goes in one door, they fail and go out of another door, and then they turn up in the same industry and at the same heights, time and again.

The criteria for who is on the board have always been shrouded in some secrecy. The hon. Member for East Lothian raised the question of the representation of the labour movement. That is a good and interesting point to examine in this context, because it remains the case today that Mr Prentis of Unison is on the court, as was Mr Brendan Barber of the TUC before him. I believe that Mr Bill Morris was on the court before that, and Mr Gavin Laird was too, in the distant past. Indeed, I used to see the papers that Mr Laird received at the time and the contributions he made. If they had been listened to at the time it would have had a significant impact on British competitiveness. Mr Laird used to argue repeatedly, very eloquently and in beautifully scripted speeches, that we were in danger of overemphasising the importance of finance at the expense of manufacturing. That is an issue not only for the Government, but for the Bank of England itself. Industry, as opposed to finance, needs to be in at the Bank. That is a fundamental weakness, because at present it is financiers as opposed to industrialists who are evident at the Bank, not so much in the expertise but in the mindset and the thinking which lead to decision making. The Bank thinks as financiers do, and it does not think more widely.

In the same way, my hon. Friends on the Front Bench propose to broaden the court with consumer champions and others who are missing at the moment. The Chancellor is decisively, deliberately and calculatedly removing consumerism and the consumer interest from regulation. Why? Because that is seen as a barrier to the ever onward growth and recovery of the big banks, not least RBS and Lloyds. Some commentators are speculating that there might be a fuel tax increase. That is quite wrong, in my view. What the Chancellor wishes to do is maximise his returns on the sale of shares in RBS and Lloyds. In itself, that is very sensible, and it is something that the Bank of England would support, does support and will support. However, speed and timing are critical in all of this. We have the Bank of England being unduly influenced by the Chancellor and the Treasury, while at the same time it is losing external influences from the world of industry. That includes both the employer and, potentially, the trade union influence.

There is the intriguing possibility of a more regional Bank. What would the world come to if there were people in the Bank of England who did not live in London or, more likely, in the commuter belt outside London? How would the world survive? It is a shame that my hon. Friends did not go even further and suggest that the court ought to meet not in the hallowed chambers on the third or fourth floor of the Bank, but in Manchester, Birmingham, Cardiff, Edinburgh, Aberdeen or Sheffield, in order that the public can see and hear it and get a feel for it. That would be an easy, significant win, and I am sure that the Bank’s representatives listening in will take note of that. I commend the amendments to the Committee; they are excellent and should be agreed.

May I say what a pleasure it is to serve under your chairmanship, Mr Wilson? I will speak to clause 1 and why it should stand part of the Bill before dealing with the amendments.

The clause makes the deputy governor for markets and banking a member of the court of directors—an important position that is not currently a statutory member of court. It also provides enhanced flexibility to add or remove a deputy governor or alter the title of a deputy governor, as well as the corresponding ability to make changes to the composition of the court, the Financial Policy Committee, the Monetary Policy Committee or the new Prudential Regulation Committee where a deputy governor is added or removed. Those important provisions will simplify the governance of the Bank.

Following the expansion of the Bank’s responsibilities through the Financial Services Act 2012, a deputy governor for markets and banking was appointed with responsibility for reshaping the Bank’s balance sheet, including ensuring robust risk management practices. That important position is currently filled by Dame Minouche Shafik, who is not a statutory member of court. We have talked about regional diversity this morning, but she ticks many boxes in terms of other forms of diversity, having been born in Egypt, worked a lot in America and being a British citizen. The clause amends the Bank of England Act 1998 to make that deputy governor a member of the court, ensuring equal status for all the Bank’s deputy governors and simplifying the Bank’s governance structure.

It should be noted that the power to add or remove a deputy governor will not permit the Treasury to remove a deputy governor or change his or her title while that deputy governor is in office. The measure will ensure flexibility for future need. At present, changes such as the creation of the new position of deputy governor for markets and banking can only be affected through changes to primary legislation. Instead, as a result of the clause, the Government will in future be able, by order and after consulting with the Governor, to adjust the size and shape of the Bank’s senior management team to meet future requirements—for example, to bring in new expertise if that proved to be necessary.

The hon. Member for Bassetlaw asks why we are changing the number of non-executive directors on the court. To be clear, that change is not being made by the Bill. The Bank of England Act 1998 requires up to nine non-executive directors, and following retirements there are currently seven non-executive directors on the court. A smaller board will be better for the Bank. The strong view of the Bank’s non-executive chair, Anthony Habgood, is that a smaller board makes for more effective challenge and accountability of the executive. When there are fewer non-executive directors, each member has greater opportunity to pose questions to executive members and to debate with them. A larger court might encourage a round table of individual speeches, rather than enabling effective back-and-forth discussions with and challenge to the executive.

Other than remarks from an individual, what is the evidence base from analysis of input over years for the Government seeing the reduction as being quantified in better input?

The hon. Gentleman serves as a member of the Treasury Committee, and I believe he was also a member of that Committee in the previous Parliament, so he will remember that it produced a report in 2011 called “Accountability of the Bank of England” which recommended that the court’s membership be reduced to eight—smaller than we propose. It emphasised that a smaller court would allow for

“diversity of views and expertise”

while still being

“an efficient decision-making body”.

He may want to go back and look at the evidence base that the Committee looked at. It is important to emphasise that the Bill does not make a change in terms of the membership, which remains at possibly up to nine.

Does the Minister therefore believe that the Cabinet should be reduced in size?

The Cabinet, as the hon. Gentleman knows, has fluctuated in size over the years. On the evidence base, we are obviously talking about the experience of the Bank of England having in the past, particularly in the run-up to the financial crash, had a significantly larger court. I think there were 19 members in the run-up to 2009, and it was thought that that was a very large and unwieldy body. I think it still falls short of the number of people who currently attend Cabinet. There is a range of different views of effectiveness, but the important point to emphasise is that the Bill does not intrinsically make any changes to what is already there, although in practice we currently have seven non-executive directors on the court.

Importantly, the Bill also provides for the continued balance of internal and external members on the MPC, the FPC and the newly formed PRC. Following the addition or removal of a deputy governor, the Government may make a corresponding change to the number of members appointed by the Chancellor in the case of the FPC or PRC or the Governor in the case of the MPC.

New clause 5 would require the court to publish transcripts of its discussions within six months. I agree completely with the hon. Member for Leeds East that transparency is critical. The Bank of England makes decisions that affect all of us and it must be accountable to the public, and enhancing transparency is central to that. That is why I am so pleased to bring this Bill to the Committee: it makes governance of the Bank much more transparent in several ways. First, it makes the entire court responsible for the oversight functions. No longer will an oversight committee oversee the work of an oversight board. Every member of the board, executive or non-executive, will be clearly responsible for oversight of the Bank.

Secondly, the Bill removes a greater barrier to transparency and unnecessary complexity. In 2013, the Parliamentary Commission on Banking Standards noted the complexity of the present regime. It said:

“The accountability arrangements of the new structures”—

that is, the structures that exist now—

“are more complex than those of the previous regulatory regime. The PRA is a subsidiary of the Bank, and the FPC is a sub-committee of the Court of the Bank.”

The Bill will change the FPC’s status from a sub-committee of the court to a committee of the Bank and will end the PRA’s subsidiary status, establishing the Bank’s three policy committees on a common statutory footing.

The final and perhaps most significant means of enhancing transparency is bringing the whole Bank into the purview of the National Audit Office for the first time in its history. Allowing the NAO to conduct value-for-money reviews across the Bank will increase its accountability to Parliament and to the public. In turn, this will build greater public trust in the Bank’s operations and governance, supporting its vital independence role in the UK economy.

I agree with the hon. Member for Leeds East that transparency is important: it improves accountability and ultimately makes the Bank’s governance better. However, I disagree with him that mandating transcripts of court sessions will make governance better. As hon. Members are aware, the court is now required to publish the minutes of every meeting within six weeks. That was not always the case, but I am glad to see that the court has published historical records of its minutes, including those during the financial crisis. Through this, Parliament and the public now have greater insight into the governance of the Bank and the key decisions made. Transcripts are a different matter entirely.

We are fortunate in this debate because the impact of transcripts on Bank discussions has already been examined by Governor Warsh in his review, “Transparency and the Bank of England’s Monetary Policy Committee”. He said:

“Creating a safe space for true deliberations is among the most critical indicia of organisations that make good decisions, according to the leading academic and empirical literature and my own observation”.

I am sure we all want a court that makes good decisions. The alternative would be extremely costly for all of us. Governor Warsh looked at the MPC’s two discussion days and found that the different nature of the day one and day two discussions required different approaches to transcript publication. It makes sense to see which of those days is most like a court session and what Governor Warsh recommended. Day one is when the MPC members deliberate, challenge the evidence before them and question one another—exactly the kind of role that the court performs very effectively. Day two is very different. In Governor Warsh’s words:

“With few exceptions, the deliberations are nearly complete, policymakers are heard, and their judgments tallied.”

I think it is clear that day one is closer to the deliberations and discussions of a board.

I thank the Minister for explaining Governor Warsh’s views, but I would like to challenge his view that the academic literature is all one way. In fact, some of the academic literature points out that in more private settomgs, people are more prone to groupthink.

As a distinguished academic himself, the hon. Gentleman will know that academics often differ in their points of view. It is clear that in this case the distinguished Governor Warsh has come down in one way, and here in our deliberations we have come down in favour of producing a transcript, and Hansard performs that incredibly valuable role for us. I will make some further points, which I hope will convince him of the wisdom of the position that the Government are taking on transcripts.

When Governor Warsh looked at releasing transcripts of the day one deliberations, which he described as “safe space” deliberations, he found that

“Should the transcripts of the Day 1 deliberations be made public, the quality of the deliberative process would risk being materially impaired, to the detriment of sound policymaking.”

He went on to make a clear recommendation that

“the Day 1 policy discussions should no longer be recorded nor should they be transcribed.”

Publication of transcripts of meetings of the court would have a “chilling effect” on discussion and the quality of debate and harm decision making. I therefore hope that the hon. Member for Leeds East will not press his new clause.

Having gone through in some detail an analysis of whether transcripts of meetings of the Monetary Policy Committee should be made available, on which there has been a thorough debate, including with members of the MPC, the Minister translates that to an amendment relating to the court. In relation to the court, what is the evidence base that suggests that the hearings or decision making of the court, as opposed to the MPC, would in some way be restricted by a transcript?

The hon. Gentleman makes an important point. The court oversees the MPC, the FPC, and the PRC under the proposals in the Bill. We have not discussed yet—I will be happy to do so—the fact that on the prudential side of discussions, the people on that committee will looking at material that constitutes, by any judgment, non-public information on the soundness of important financial institutions in this country. I am sure that, as a member of the Treasury Committee, the hon. Gentleman will agree that such material ought to be treated as extremely market-sensitive in any circumstances.

The Minister is now jumping to a third body. The amendment relates to the court. The court does not make decisions on interest rates. The court does not delve into the financial situation of individual banks or other financial institutions. The court oversees; the court is strategic. Will she explain the relevance of her case in relation to the court, as opposed to the committee dealing with prudential regulation or with monetary policy?

I would have thought that it spoke for itself. The fact that the court is overseeing all these different committees, some of which will be considering material that is non-public information—

rose—

If the hon. Gentleman will allow me, I will give way to him when I have replied to his previous point. We are proposing the publication of a record of the court’s meeting, and I agree with him that it is important for that record to be in the public domain. There is a clear difference between that record and a transcript.

I thank the Minister for giving way again. I have the advantage over her of having been in the deliberations of the Treasury Committee on these matters. There is a world of difference between decision making on interest rates or the examination of whether a particular financial institution is in danger of collapse and going into that in a committee and the role of the court. The Minister seems to misunderstand the role of the court. Has she looked at and understood the transcripts the discussions of the Treasury Committee and the banking review on the question of the court? She is talking about different bodies. This amendment is about the court. The Minister said, in response to my earlier intervention, that this is self-evident. No, it is not self-evident—

Order. This is an intervention.

It is a precise intervention. Would the Minister like to comment?

In responding to the hon. Gentleman’s intervention I will be a little bit cheeky, if I may, and highlight the fact that even that august body, the Treasury Committee of this House, sometimes meets in private. There is a need for a safe space for discussions at certain points. We agree with the hon. Gentleman that it is important to have a degree of transparency in terms of the court. We think that the record provided is adequate. I hope that the hon. Gentleman will not press the amendment.

Will the Minister give way?

I would like to move on, but I will take another short intervention.

I thank the Minister for giving way. Debate is important. The Minister now cites in evidence the Treasury Committee, which is a good example. The reason that minutes and transcripts of Select Committees are available is because of the strategic overview and public accountability that they provide. That is the whole point about the court. It is not making decisions on the minutiae or on the specifics. It is providing an overview and oversight, on precisely the same democratic logic as a Select Committee. That is the point of this excellent amendment. The Minister does not seem to understand the point of the court and what it is there for.

With great respect to the hon. Gentleman, I do understand that. Perhaps he would like some further examples. The court plays an important role in relation to emergency liquidity assistance at the time of a financial crisis. We have to agree as a Committee that there will be times when the court is discussing something that we do not want to have transcribed and put into the public domain. Personally, I thought that Governor Warsh was very convincing in comparing what happens on day one of the Monetary Policy Committee and what can happen at other times—not necessarily all the time—and how a record will be published. The hon. Gentleman will vote one way and I will vote another. I do not agree with the amendment.

Amendment 9 would require representation on the court of particular sectors, and require the Chancellor to have regard for balanced regional and national representation on the court. Obviously, the Bank of England plays a central role in the UK economy, and its policy decisions are vital to everyone in the United Kingdom. I therefore entirely agree with hon. Members about the importance of the Bank of England giving careful consideration to how its policy decisions affect people throughout the country. This is at the heart of the Bank’s mission of promoting the good of the people of the United Kingdom by maintaining monetary and financial stability—indeed, that is precisely what the Bank does.

I will give a few examples. The Bank has representatives around the country; those agents work from 12 agencies, in Scotland, Wales, Northern Ireland and the regions of England, to gather information from businesses operating across many different sectors, including financial and non-financial firms. The regional agents, often joined by the Bank’s governors and members of the policy committees, regularly meet and hold panel discussions with companies of a range of sizes across the UK to gauge economic conditions and inform the Bank’s monetary policy and financial stability work. I trust that all members of the Committee have had an opportunity to observe that activity in their constituencies. If they have not, I strongly recommend that they do so, because those Bank activities are extensive. To give hon. Members an idea of how extensive they are: in 2014-15 the agents visited some 5,200 companies drawn from firms in all sectors and in all corners of the country; also, panel discussions were held with 3,700 businesses. Undoubtedly, the Bank goes to great lengths to ensure that it develops a detailed understanding of the conditions for businesses in all sectors across the whole United Kingdom.

In addition, the Prudential Regulation Authority’s practitioner panel ensures that the interests of those who must put the PRA’s rules into practice are communicated to the regulator. The panel includes representatives of banks, insurers, building societies and credit unions. The Financial Conduct Authority’s consumer panel has a statutory right to make representations to the PRA, and the FCA chief executive sits on the Financial Policy Committee and the PRA board, and will sit on the new Prudential Regulation Committee.

Through this Bill we are going further in ensuring that the regulators take into account the diversity of business models operating in the financial sector. Specifically, we are making it clear that both the PRA and the FCA must take account of the differences between different types of firm, including mutuals, whenever they are discharging their general objectives. We argue that these amendments are unnecessary and, indeed, unhelpful. They would cloud the appointments process.

Does the Minister not accept that there is a difference between being consulted and having a right to be consulted and having a right to feel that one is represented on a deliberative body?

There is, but the purpose of the deliberative body, as we have heard, is effectively to act as the board of the Bank of England, supervising the different committees. Prior to the financial crisis, members of the court were often selected specifically to represent a range of sectoral interests, including many of those proposed in the amendments. The first problem with the amendments is that requiring representatives of different sectors and regard to regional representation will entail a much larger and therefore oversized and dysfunctional court. Before the financial crisis, when the court had non-executives specifically to represent different interests—why stop at the four listed in the amendment?—the court had an incredible 16 non-executives, rendering it far too large to operate effectively and unable to hold the executive properly to account.

I think the Minister may have been in error when she implied that the new clauses would introduce a requirement. Our new clause 2 simply says

“the Chancellor of the Exchequer must have regard to the importance”

of balanced representation.

The hon. Gentleman is right to highlight that difference. Of course, what the Chancellor of the Exchequer would have regard to is the quality and ability of those individuals to perform the function they are asked to perform. The Banking Act 2009 sensibly limited the court to nine non-executives, and in practice we have now reduced the number of non-executives to seven while keeping that non-executive majority, which means that the court is now sufficiently small to form an effective body that can challenge the executive. The amendments before the Committee would inevitably mean a return to a large, inefficient and ineffective court.

A second problem with amendment 9, which would require sectoral representation on the court, is that it would give rise to conflicts of interest. The amendment calls for several practitioner representatives on the court. We have tried that in the past, too. During the crisis, the conflicts of interest meant that some of those on the court who could have been of most assistance to the Bank had to leave the room for the most important decisions, such as on liquidity provision to the markets and on individual firms. That hampered the court’s ability to respond effectively.

Does the Minister agree that her statement about the ineffectiveness of the board, because of its narrow composition during the crisis, makes our point that we need wider representation across the country, across areas and across industrial sectors?

I do not think anyone disagrees with the idea that we would want to have a range of different abilities and skills on the court of directors. What we are fighting against in opposing the amendments is the propensity of such amendments to lead to a larger and larger group of individuals on the court. Importantly, in relation to highlighting the potential for conflicts of interest, the conflicts policy now makes it clear that, among other restrictions, members of the court should not accept or retain any interest that is in conflict with membership and should not normally be associated with a PRA or Bank-regulated firm, whether as a director, employee or adviser. That ensures that the wide-ranging expertise—we all agree that that is necessary—appointed to the court can be deployed without obstacles, and leaves the court better equipped to respond to a crisis. The amendment would unravel those arrangements, and I argue that we should oppose it; we should not allow it to take us backwards.

The third and most important concern about the amendments is that they would impose unnecessary and undesirable constraints on appointments to the court. In the past three years, the court has been transformed. The Chancellor has appointed the highest-quality team, with significant experience of running large organisations and deep expertise in matters relevant to the Bank. The Government look far and wide for the best candidates, with roles advertised in the international press. Let me be clear: obviously, there are highly competent and highly qualified individuals who work in the sectors proposed and from all the regions across the UK. The amendments would constrain the appointments process utterly unnecessarily, potentially preventing us from forming the highest-quality, most experienced board for one of the most important institutions in the country.

The Minister lauds this dramatic improvement in the court during the past three years. Can she give a specific example of a key decision made by the court during the past three years that has benefited by that enhanced performance?

Not off the top of my head. I cannot specifically think of anything, other than to highlight the fact, in relation to the previous life of the court, when we were dealing with a much larger organisation, that all the reviews since the financial crash have highlighted the unwieldiness of that organisation and the lack of clarity in terms of conflicts of interest as being among the underlying imperfections in the financial regulation that we inherited in 2010.

The decision in Sweden, for example, to move to negative interest rates, the collapse in oil prices, the mistake that the Chancellor made with the timing of the RBS shares sale and the successful prosecution in relation to LIBOR are all issues that have originated within the past three years. Did the court in its wisdom say anything about any of them in giving advice to the Bank?

As the hon. Gentleman will be aware, a number of different independent reviews have been commissioned by the oversight committee during the past few years. I completely dispute his point about the sale of RBS shares. Given how much lower they are today, I would have thought he would welcome the fact that the Government were able to sell the first £2 billion-worth in the market last August. He and I will clearly vote along different lines on this matter. The Government feel that the amendment would constrain the appointment process, to the detriment of effective decision making in the court and in effect, therefore, to the detriment of the Bank’s overall effectiveness. Undoubtedly the court should have a breadth of experience and knowledge, and we certainly want different perspectives to be brought to bear.

It is also important that the court is able, when necessary, to commission the kind of review about which the hon. Gentleman speaks. There has been the Plenderleith review to increase emergency liquidity assistance capabilities and the Stockton review, which made recommendations on how the Bank communicates its forecasts. We have even spoken this morning about the Warsh review, which has made the very recommendations that we are considering, regarding MPC procedures and the governance of the Bank of England.

The current court contains a remarkable collection of experience and talent. Among the directors are the chief executive of a major telecoms provider.

The Minister is being very sporting in giving way this morning. Can I take it from the tenor of everything she has said that the place for the trade union representative on the court, which we have had since world war two, is now in jeopardy?

I do not know where the hon. Gentleman would get that impression from. It is important that we have a chief executive of a major telecoms provider, a chief executive of a major power utility, a private equity specialist, a leader of a global information services group and a leader of a major public sector trade union. The chair, Mr Anthony Habgood, is one of the most experienced and respected company chairmen in the country.

There has always been, since world war two, a place reserved on the court for a leading trade union figure. That is not written down anywhere, but it has always been accepted. Will it continue?

Nothing in my remarks this morning has suggested any change whatsoever in that policy, but it is important that the best people are selected for the roles and we do not accept the Opposition amendments, which would further constrain the selection process. I hope we can all agree that every member of the court, wherever they are from, should consider in their decision making the Bank’s impact on everyone in the UK, across the UK, not just in one region or one individual sector.

The amendments call for a different kind of court, made up of representatives from UK regions and representatives of narrow interests, and that would result in a court riven by conflicts of interest. We have tried that kind of court before and we know how the story ends. I hope that members of the Committee agree that we should not allow the amendment to take us back there.

We will not seek to divide the Committee on the amendment, but we might, of course, revisit the matter on Report.

On new clause 5, we have heard powerful interventions from the hon. Member for East Lothian, and insightful ones from my hon. Friend the Member for Bassetlaw, who speaks, on this and other matters, not only with great experience because of his role on the Treasury Committee but with great common sense about transparency and representation. I am disappointed, therefore, by the Minister’s lack of support for the new clause. She says that she supports transparency but, with respect, I do not believe that she has offered greater transparency in this regard, not even with the compromise of an above-the-line and below-the-line model for transcripts, which is used by local authorities and school governor boards. On that basis. I will wish to press the new clause to a Division and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

I remind colleagues that votes on new clauses will be taken at the end of the Bill proceedings.

Clause 1 ordered to stand part of the Bill.

Clause 2

Term of office of non-executive directors

Question proposed, That the clause stand part of the Bill.

I am glad that you are finding it as confusing as I am, Mr Wilson, that there is a group 2 and a clause 2 and what have you. Clause 2 enables the Government to extend the appointment of a non-executive director. The standard length of appointment for a non-executive director is currently four years, and this will be maintained following the passage of the Bill. However, if necessary, the Government will have the power to extend the appointment by up to six months. If the individual is subsequently reappointed to the court, the length of their new tenure will be reduced by the length of the extension.

The ability to extend a non-executive director’s appointment provides a number of key benefits. First, the ability to extend the terms of appointments by a few months enables the end dates of non-executives to be staggered, which supports smooth transitions in membership, preventing a significant change in personnel at any one time. Secondly, should a member of the court resign or retire unexpectedly, extending the term of one or more non-executive directors can provide resilience during a potentially turbulent time. Finally, enabling this extension will bring the court in line with the FPC and the MPC, whose members can already have their term extended by up to six months.

I will be brief, because the Opposition are happy with the proposal to provide for the extension of the term of office of non-executive directors. However, we feel that this is an opportunity to highlight again the important role that non-executive directors can and should play, a point made effectively by my hon. Friend the Member for Bassetlaw in the debate on clause 1. There was a clear suggestion in the other place that the Government believe that a smaller body of non-executive directors on the court would be more efficient, and the Minister has made that clear again. I take this opportunity to reiterate the point that it is necessary to ensure broad representation and the appointment of active and dedicated members. As my hon. Friend has indicated, the world would not come to a stop if there was broader representation, both geographically and in terms of life experience.

I warmly welcome—warmly—this clause, as I do the Minister’s confirmation to the hon. Member for East Lothian that the Government have no intention of removing the trade union representative from the court. I warmly welcome that. It is an exceedingly sensible approach that will resonate well beyond this place. This clause should be unanimously adopted.

Excuse me if I faint from astonishment, Mr Wilson. I do not think that that has ever happened to me before with the hon. Member for Bassetlaw.

Question put and agreed to.

Clause 2 accordingly ordered to stand part of the Bill.

Clause 3

Abolition of Oversight Committee

I beg to move amendment 10, in clause 3, page 4, line 5, after “would” insert “materially”.

With this it will be convenient to discuss the following:

Amendment 11, in clause 3, page 4, line 7, leave out “may” and insert “shall”.

Amendment 12, in clause 3, page 4, line 11, after “directors” insert—

“and

(c) for the review to be conducted by a person who is not an employee or director of the Bank.”

The abolition in clause 3 of the oversight committee was clearly a very controversial part of the original Bill, as evidenced at each stage of the debate in the House of Lords. My colleague in the other place, Lord Tunnicliffe, supported Lord Sharkey in seeking to challenge it. Labour Members believe that the abolition of the oversight committee is an attack on accountability within the Bank, and yet another example of the Government rolling back recent legislation. I am sure that we will come to that topic on another day.

Not only is the reverse burden of proof or the presumption of responsibility being removed before it is even implemented, but the oversight committee was established only in the Financial Services Act 2012, as hon. Members will remember. The Government clearly felt unable to sustain their line of argument, and in amending the clause to allow a majority of non-executive directors the power to initiate reviews, they have made a welcome concession. It remains our view that the abolition of the committee is a retrograde step. We are yet to be convinced that affording the non-executive directors this power without the existence of the previous forum for discussion will mean that power can be exercised effectively. Perhaps the Government can say how they believe the non-executive members will discuss their concerns outside of the meetings of the court. Will they have to organise something akin to a stand-alone non-executive directors meeting? Perhaps such a forum exists, and the Minister can inform and enlighten me about it.

Following the negotiations in the other place, we have decided to allow this change in the Bill to be made. We will keep a watching brief on how it works over the coming months and we will seek to take advice from the non-executive directors on how they feel it has affected their ability to carry out their oversight functions.

We have proposed a number of amendments to improve the clause, particularly amendment 12, which seeks to increase the authority of the non-executive directors. On Report in the Lords, the Government stated that the initiators of a review among the non-executive directors would determine that they have the power to decide who should carry it out. It could be someone external or someone internal, from the independent evaluation office.

During a Treasury Committee hearing, the Governor was questioned at length, and told the Chair of the Committee that the IEO’s work is set by the court. Therefore, our amendment seeks to give the non-executive directors a duty to bring in external expertise and analysis to conduct such a review into the work of the Bank. Amendments 10 and 11 would further clarify and strengthen the Bill in that regard.

I, too, had reservations about the abolition of the oversight committee. I warm to it to the extent that we have clarified, or are in the process of clarifying, the role of the court in a narrower sense as a proper functioning board of a wider organisation, although the Minister’s responses in the previous debate have given me some cause for concern.

It is important to grasp that the existing oversight committee is nothing more than the non-executive directors meeting as a body, so the existing oversight body gives some official grounds for the non-executives to meet. I have been on many boards where it was quite the norm for non-executives to meet informally, and one trusts that the non-executives on the court are of sufficient experience to be able to do that. Nevertheless, there must be a worry if the current ability to meet separately and to be resourced as the oversight committee is taken away. Therefore, the amendments being proposed to the clause are a useful way of just stressing on the part of Parliament that what I have described is what we expect the non-executives to do.

It might be important to consider circumstances where the non-executives might want to discuss the overall direction of the Bank. We have had one such experience in the last couple of years. The major activity of the Prudential Regulation Authority, which is soon to be the Prudential Regulation Committee, has been to conduct the stress tests on the banks. It does so under separate legal obligations from Europe. The stress testing is a highly extensive and highly resource-driven activity, and there were issues in the first round of stress testing because resources were clearly being directed from other parts of the Bank to help the PRA to do its job. There were issues about who was making decisions, and about whether enough resources and staff time were being made available from the other parts of the Bank to the PRA. A number of the non-executive directors became slightly alarmed about how the stress tests would be conducted and about the availability of the necessary resources.

There can be quite significant points when the non-executive directors would have to say, “We are worried about the deployment of resources by the executive directors. We want to stand back and look at how this is being done.” The non-execs must have the power as a body to lean against the significant influence of the executive. The Bank of England is one of the major institutions of the UK and of global banking, and the Governor of the Bank, Mr Carney, for whom I have a great deal of respect, is one of the most senior central bankers in the entire world. Leaning against him when he says, “Do this or do that,” is difficult. The amendments would give the non-executives some backbone, so when they are worried about the direction of resources they can say, “Whoa.”

My view is similar to that of the hon. Member for East Lothian, in that I do not object to removing the oversight committee if the functions are effectively outlined. In addition to the example of the stress tests, there are various potential events—some would call them calamities, others opportunities—that would affect the structure and ethos of the Bank of England. They include British exit from the European Union or Scottish independence. They would require the court to act effectively and strategically. If there is a feeling of conflict in direction—direction being what should happen and what people should spend their time on—the ability to draw in external reserves and expertise is key. The power to do that has to be there.

Amendment 12 in particular would be useful to the Government and would complement their approach. I put it to the Minister that it would be helpful, given the direction of travel. I tend to concur with the Treasury Committee’s general view on this point, but only if the court is right and the non-execs have that power. The Treasury Committee, on behalf of Parliament, has made it clear that bringing the non-execs from the court into the Treasury Committee and having that dialogue in public and producing transcripts of it, which has not happened in the past, will be an important feature in the future.

The line-by-line consideration of this provision in the other place and here this morning has been extremely helpful. Before I speak to the amendments, let me give the Committee an example of the problems in the oversight committee’s current arrangements which I think will inform our debate. The hon. Member for Bassetlaw mentioned the 2013-14 foreign exchange market investigation, which sought to establish whether any Bank officials were involved in or aware of the FX market manipulation. In October 2013, the Bank’s governors initiated an extensive internal review, and they regularly briefed the court at its meetings from November 2013 onwards. In March 2014, it became clear that an independent investigation would be appropriate. The oversight committee took over the investigation and appointed Lord Grabiner QC. That is a very good example of the oversight functions. In practice, the executive needed to join the oversight committee discussions for the oversight functions to work and be effective, both as the investigation progressed and once attention turned to delivering the recommendations. It would be better practice to make the oversight functions the responsibility of the whole court. That is the purpose of the clause.

I welcome the opportunity to speak to the amendments and to explain the improvement in the oversight arrangements at the Bank of England and the power we have ensured for the court’s non-executive majority. The Bill brings the court closer to the model envisaged by the Treasury Committee, which called for a board with powers to conduct ex-post reviews of the performance of the Bank; for board members to be authorised to see all the papers submitted to the Monetary Policy Committee and the Financial Policy Committee; and for the board to be responsible for reviewing the processes of the Bank’s policy committees. Making the oversight functions the responsibility of the whole court makes it clear that every member of the court, executive and non-executive, can be held to account for the use of these functions. No member of court can claim that the oversight functions were not their job, since they will now rightly be the responsibility of all.

That replaces the current arrangement in which there is effectively an oversight committee overseeing the work of an oversight board. That is neither efficient, nor best practice. In fact, on Second Reading my right hon. Friend the Member for Chichester (Mr Tyrie), Chair of the Treasury Committee, put it well when he said:

“The oversight of the executive will be the responsibility of the court itself, rather than a sub-committee. Even though it was not called a sub-committee, it was, in fact, a sub-committee, and a weaker committee than the court.”—[Official Report, 1 February 2016; Vol. 605, c. 668.]

During the Bill’s passage through the House of Lords, we introduced the power, which has been welcomed by members of that House, that this amendment seeks to alter. This part of the Bill ensures that a majority of non-executives can always initiate performance reviews without needing to secure the agreement of a majority of the whole court. If just four non-executive directors want a review, they will be able to initiate it. Under our proposal to give more powers to the non-executive directors to do their job effectively, the initiators of a review would determine who should carry it out. This could be someone external or someone internal, including the Bank’s relatively new Independent Evaluation Office. The amendment would take away their discretion and make the new Independent Evaluation Office irrelevant.

The Bank’s Independent Evaluation Office reports directly to the non-executive chair of court. A few months ago, it published a review into the Bank’s use of forecasting—a clear example of where an internal review is appropriate. In our opinion, Lord Grabiner’s inquiry into Bank officials’ awareness of market manipulation in the foreign exchange market was an example of where an external review was appropriate.

The Bank’s non-executive directors, as we have heard in a previous debate, are selected for their ability to bring new perspectives and experience and to challenge and scrutinise the Bank’s executive. It is right to give them the powers to ensure they are able to fulfil this role. The amendment would send a message that we do not trust the non-executive directors to do their job. For the discretion of those high-quality non-executives to determine what reviews should be carried out and who should carry them out, it would substitute a conveyor belt of external reviews.

Those commissioning a review, whether the court as a whole or the non-executive directors, are best placed to decide whether an internal or external review is most appropriate. The Bill rightly allows that discretion for the whole court and for the non-executives. The amendment would take away that choice, which we think would be bad news for effective oversight. I hope the hon. Member for Leeds East has listened to the arguments. We all agree that the important power in the Bill for the non-executives to act independently to initiate reviews of the banks should not be constrained in this way, and I hope that after due consideration, and after the extremely valuable debate in both Houses, he will withdraw his amendment.

We do not intend to divide the Committee on the amendments to clause 3, although I will make one observation. I might get the quote wrong, but I remember a line in Shakespeare’s “Julius Caesar”:

“I come to bury Caesar, not to praise him.”

The oversight committee was praised by the Minister, but now, under clause 3, it is to be buried. It was praised by the Minister in response to an intervention by my hon. Friend the Member for Bassetlaw, and now we see that it is about to be buried, which we regret. We welcome the concessions that have been made. We do not wish to press the amendment, but we reserve the right to return to these issues on Report. I also point out that the Internal Evaluation Office can continue, tasked by the court. The amendment refers to decisions by non-executive directors. Internal evaluation is the Bank marking its own homework, which should worry us all. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

The clause gives the oversight functions previously delegated to the oversight committee, which has been a sub-committee of the court, to the full court. What do we gain by making the oversight functions the responsibility of the whole court? We want to keep those functions, which we all agree are important, and now every member of the court, executive and non-executive, can be held to account for the use of those functions. Should something go wrong, no member of court could ever claim that the oversight functions were not part of their job. They will now rightly be everyone’s responsibility.

We have heard how that arrangement was endorsed by my right hon. Friend the Member for Chichester on Second Reading, but it is worth harking back to what the Parliamentary Commission on Banking Standards recommended when it set up the oversight committee. In its report, the commission endorsed the Treasury Committee’s recommendation that the Bank’s board should be responsible for conducting the ex-post reviews of the Bank’s performance and we believe that that is precisely what the Bill will achieve. The commission went further—I am sure that hon. Members will have read its report before arriving this morning. On page 482, the commission rejected the oversight committee created in the 2012 Act. The commission denounced the committee and despaired that

“It, rather than the Court as a whole, will be responsible for monitoring the Bank’s response to, and implementation of, the recommendations of any review it commissions.”

It is therefore important to stress that, through the Bill, the court as a whole will be made responsible for ensuring oversight of the Bank.

We have also talked about how the clause will enable full and frank discussion involving both the executive and the non-executive majority on how best to exercise the court’s oversight functions. The non-executives bring challenge, scrutiny and outside experience while the executive minority provides the in-depth knowledge of the Bank’s operations. By abolishing the oversight committee, we bring the court closer to the model envisaged by the Treasury Committee, which called for: a board with powers to conduct ex-post reviews of the Bank’s performance; board members to be authorised to see all the papers submitted to the MPC and the FPC; and the board to be responsible for reviewing the processes of the Bank’s policy committees.

It is important to emphasise that the Bill protects the ability of those non-executive directors to initiate performance reviews. We do not need them to secure the agreement of a majority of the whole court. Should a majority of non-executives wish to initiate a review, the rest of the court will not be able to block it. The initiators of such a review would determine who should carry it out. It should be someone external or internal, including the Bank’s new Independent Evaluation Office.

The clause safeguards the non-executives’ oversight of the Bank and provides additional protection against the emergence of groupthink. I commend the clause to the Committee.

Question put and agreed to.

Clause 3 accordingly ordered to stand part of the Bill.

Clause 4

Functions of non-executive directors

Question proposed, That the clause stand part of the Bill.

I can canter right through the clause, which requires the court to establish a sub-committee of at least three non-executives to determine the remuneration of the Governor and deputy governors. Clearly, we would not want the executive to set its own pay, so to require that that power be delegated to at least three non-executives brings the legislative requirements for the Bank’s remuneration committee in line with UK corporate governance code. The current remuneration committee has four members.

I too will be brief. I will not be cantering as I know very little about horses, but as we have already discussed non-executive directors in the debate on our amendment to clause 1, I have nothing further to add.

Question put and agreed to.

Clause 4 accordingly ordered to stand part of the Bill.

Clause 5

Financial stability strategy

Question proposed, That the clause stand part of the Bill.

This will be more of a trot—[Interruption.] There are no Trots opposite me today, obviously.

Clause 5 will provide the court of directors with an express power to delegate the production of the financial stability strategy within the Bank. Subsection (3) makes it clear that the court retains the ultimate responsibility for any delegated duty or power, including its duties in relation to the financial stability strategy. The clause will allow the Bank to utilise its internal expertise to produce the strategy, while maintaining a clear line of accountability to the court. The drafting reflects the discussion in the other place, where it was felt that the Government’s initial proposal lacked sufficient clarity. Those concerns were addressed by the Government amendments that bring us the clause as it stands today. I hope that the Committee agrees that the clause will afford the Bank the necessary flexibility when producing the strategy while ensuring that the court will be held to account for its contents. I commend the clause to the Committee.

In the debates on the clause both on Second Reading and in Committee in the Lords, it was argued that it should not simply confer on the Bank the power to set the financial stability strategy. The original proposal was vague, but although it was subsequently clarified by the Government amendment that conferred the power on the court of directors, the Opposition are not convinced that that is sufficient.

The impact assessment says:

“At present, the Bank’s financial stability strategy is set by the Court after consultation with the FPC…and HMT.”

It goes on to say that making the Bank responsible for setting the strategy and allowing the court to delegate its production within the Bank will ensure that the court is responsible for the running of the Bank and the Bank’s policy committees are responsible for making policy. The clause does not make it clear exactly what the financial stability strategy is supposed to be. All it does is create a power and impose the responsibility to create such a strategy relating to systemic risk in the UK financial system.

I shall repeat a concern raised by my colleague Lord Tunnicliffe regarding the financial stability strategy, because the response in the other place was not sufficient. Lord Tunnicliffe highlighted how a five-page strategy document was produced in 2013; it was then revised and published in the 2014-15 report, wherein it had been reduced to one column. In the Bank’s 2015-16 report, there was no mention of a financial stability strategy in the court’s ownership. Will the Minister confirm the importance of the financial stability strategy? It should be clear who is responsible for such a strategy.

Clause 5 creates a problem. A future financial stability strategy will emerge from somewhere within the Bank of England. It would be preferable if the people who are to be directly responsible for its production were identified in the Bill, rather than responsibility being conferred on the court with powers to delegate elsewhere. It would make most sense if the people made responsible for producing the strategy were the members of the Financial Policy Committee, as we have set out in new clause 6, which we will discuss later.

The debate on the clause is very important, because the little-discussed danger is that we are creating an all-powerful Governor who determines, in his or her ultimate wisdom, a financial stability strategy for the country—as if everything will then be fine.

The current Governor obviously has a bit more time on his hands because interest rates have not risen since 2009. The MPC, with its monthly meetings having gone down to eight a year, has not had a great deal to do other than maintain the status quo. In some ways, that is precisely the problem that was there previously. Before the 2008 crisis the Governor was responsive—looking at things, making speeches about what had happened in the past month or two and trying to tweak the system—and examination of the underlying problems in the system, in the sector and on occasion in the economy as well simply did not happen. The danger is that we again become complacent about such things. That is precisely why the Treasury Committee was keen to see an enhanced and powerful court of directors taking responsibility. It would be useful to have a clear statement from the Minister, endorsed by Parliament, that the model being created is not that of the all-powerful Governor, and nor is it one that we expect to see in future.

The Treasury Committee is a wonderful body, with great membership over the years and reasonable membership even to this day, but a clear message about what is expected of it by Parliament would be valuable: the Committee, on behalf of Parliament, is expected to hold the court to account properly and effectively. That has not been the case over the past decade. The chair of court has appeared, but the non-execs have been invisible. With the court having a more important role, it is critical that the Treasury Committee be given a clear indication by Parliament that it is expected to give a reasonable amount of its time to holding the court to account publicly for the new powers, whether the Committee likes it or not, or does it joyously or reluctantly.

It will be useful to hear from the Minister about those two points, so that we get her views on the record.

In itself, the clause is innocuous. It is a tidying-up operation, but lurking beneath it is a danger. Standing back from the restructuring of the policy committees of the Bank, we appear to be ending up with an exercise in bureaucratic symmetry—a committee to do this and a committee to do that, micro, macro, prudential or supervision, and the Monetary Policy Committee. The different committees are not supposed to talk to each other, doing discrete policy. That looks all right—someone is doing it—but what we are in fact ending up with is what I want to underline to the Minister and, through her, to the Treasury team.

The danger is that in creating bureaucratic symmetry, we have not got very far in creating a workable regulatory regime that is robust enough to meet the next crisis. One of the problems is that we are creating a silo for fiscal stability—basically, checking when a bubble arises and stopping it—and a silo for monetary policy, but the two are not talking to each other, so we are in danger of creating conflicts between the two main policy committees.

It is perfectly possible for the Monetary Policy Committee to go in a separate direction. At the moment it is refusing to raise interest rates, but that is leading to the committee in charge of fiscal policy and financial stability starting to discuss whether it should use its financial buffers to slow down a bubble in the housing market. It is possible, but a bit crazy, for the two different committees to take two different stances when the whole point of putting financial stability and monetary policy under the same roof—the Bank—was meant to be a co-ordinated policy.

Assigning responsibility for financial stability to the Financial Policy Committee does not get us off the hook of someone somewhere laying down broad policy objectives. The MPC has broad monetary policy objectives—I think that in the present climate of deflation, they are probably the wrong ones—but the FPC has very vague guidelines as to what it should be doing, and so suddenly we discover, in default, that the only person in the land who is actually overseeing all the different policy options is the Governor himself, and he is not even getting clear enough direction from the Treasury. By all means support clause 5 as a tidying-up operation, but it still leaves big holes in terms of who is actually laying down the major policy directions for the committee.

Opposition Members have suggested that the Bill, in and of itself, makes a change to the power and importance of the role of the Governor of the Bank of England. I would submit that the Governor of the Bank of England is an incredibly powerful and important appointment, but I would not say that the statutory powers of the Governor are increased from their already elevated level by the Bill. Obviously, he is the one who has a role across all the different committees, but he has always had a very important role.

The hon. Member for Leeds East is absolutely right to highlight the fact that in the other place there was extensive debate on the precise wording of the clause. Convincing arguments were made to change it and the Government tabled amendments to provide the court with an express power to delegate determination of the strategy. That is a change from the original intention after the consultation undertaken in the summer. To be clear, it will be for the court, as the governing body of the Bank, to decide who is best placed to set and review the strategy.

The hon. Member for Bassetlaw asked specifically about the role of the Treasury Committee in continuing to scrutinise the role played by the Bank of England, the Governor and the court. I see nothing before us today that would change the current arrangements whereby the Committee has an important role in taking evidence.

Hon. Members asked about the co-ordination between the Monetary Policy Committee and the Financial Policy Committee. They are independent committees with separate objectives. It is important that the Governor sits on both committees and is able to see what is going on in both committees, but we think it right to strike a balance to ensure that each of the committees remains focused on its individual remit while fostering interaction between monetary and macroprudential policy.

There has been a good debate in both Houses, illustrating the value of line-by-line scrutiny. I think that we have landed in the right place and I commend clause 5 to the Committee.

Question put and agreed to.

Clause 5 accordingly ordered to stand part of the Bill.

Clause 6

Monetary Policy Committee: membership

Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss new clause 6—Financial Policy Committee: procedure

“In paragraph 11 of Schedule 2A to the Bank of England Act 1998, after subsection (7) there is inserted—

‘(7A) The Financial Policy Committee shall inter alia at least each year commission and publish promptly external research into the level of systemic risk to the stability of the financial system in the UK.

(7B) As soon as reasonably practicable after each meeting of the Financial Policy Committee, the Bank shall publish a record of the meeting before the end of the period of 6 weeks beginning with the day of the meeting.””

It will be useful to consider the new clause, tabled by the hon. Members for Leeds East and for Wolverhampton South.

Clause 6 brings the Financial Policy Committee into line with the Monetary Policy Committee and the Prudential Regulation Committee. It makes the Financial Policy Committee a policy committee of the Bank, rather than a sub-committee of court.

Aligning the statutory status of the Financial Policy Committee with that of the Monetary Policy Committee and the proposed Prudential Regulation Committee will simplify and bring greater clarity to the governance of the Bank. Clause 6 also adds the deputy governor for markets and banking as a member of the Financial Policy Committee. That is a role with clear read-across to the work of the FPC, and it is right that the committee should have the benefit of the deputy governor’s expertise. A new external member will also be added by the clause, in order to maintain the balance between executive and external members. That will ensure there continues to be a strong challenge function on the committee, to avoid the risk of groupthink.

While clause 6 deals with the status and membership of the Financial Policy Committee, new clause 6 would impose two requirements on the committee. I will address each of those requirements in turn. Proposed new subsection (7A) would require the FPC to commission and then publish external analysis of the level of systemic risk in the UK. I hope I can convince the Committee that that subsection is unnecessary.

The Bank of England Act 1998 already requires in section 9W the Financial Policy Committee to produce a financial stability report twice a year and for that report to set out the committee’s views on the stability of the financial system, including its assessments of the strengths and weaknesses of that system. The FPC draws on many sources in order to make that assessment, both from within the Bank and externally. For example, the Bank undertakes a systemic risk survey of market participants that seeks their views on risks to the financial system. The results of that survey are published alongside the financial stability review.

There are already commentators outside the Bank who provide analysis of financial stability. To name but a few, the International Monetary Fund undertakes the annual article IV process to assess the economic performance and financial stability of the UK and produces a global financial stability report; the Organisation for Economic Co-operation and Development produces papers on UK financial stability; and the European Systemic Risk Board publishes an annual assessment of systemic risks in the financial system of the EU. All of that is before I even mention the legions of financial sector analysts who produce reports every day on a wide range of financial stability issues.

If the Opposition are concerned that the Financial Policy Committee’s reports might be a product of Bank groupthink, I can reassure them that the existing legislation has provisions in place to prevent that. As I mentioned, the external members of the FPC provide outside views and challenge to the executive members of the committee, helping to prevent groupthink. The Government place great importance on that challenge function, which is why clause 6 increases the number of external FPC members by one, so as to maintain the ratio of executive members to external members. External members of the FPC have dedicated staff within the Bank so that they can undertake analysis and research upon issues of interest to them, which ensures that the external members have sufficient resources to undertake independent analysis.

As well as the provisions in the 1998 Act, the Bank has taken many steps to seek out views from external sources. The Bank has a long-standing tradition of engagement with other central banks, international organisations such as the Financial Stability Board and academics. Indeed, the Bank currently has an ambitious agenda of research—the “One Bank” research agenda—which extends across all the Bank’s areas of responsibility and is an excellent example of the Bank’s open and collaborative approach. The Chancellor was one of many guest speakers at the Bank’s open forum on 11 November last year, which I hope Opposition Members were able to attend, alongside academics and members of the financial services industry. The Bank sought external views on a range of topics.

Proposed new subsection (7B) would require the Financial Policy Committee to publish a record of its discussion within six weeks of each policy meeting. I am sure the hon. Members for Leeds East and for Wolverhampton South West will be reassured to hear that, under the Bank of England Act 1998, there is already a requirement in section 9U for the FPC to publish a record of its policy meetings within six weeks of them taking place. I hope I have convinced the Committee that clause 6 should stand part of the Bill and that new clause 6 is unnecessary. I hope the hon. Member for Leeds East will not press the new clause.

As the Minister explained, the Financial Policy Committee is to be transformed into a committee of the Bank of England. As she explained, it had existed previously as a sub-committee of the court. Again, we see what one commentator, Professor Alastair Hudson, described as a spaghetti of committees. Perhaps we need to look at simplifying them so that the people we represent can understand better the system that is intended to serve them.

The FPC should be a body that takes a much more visible role when there are systemic challenges to the UK financial system. The problem that is created by the so-called spaghetti of committees issue is that it is unclear when and if it will relate to finance as opposed to economic policy more generally, and when it will relate to systemic risk rather than simply to the solvency risk associated with an individual financial institution. The spaghetti of committees issue means that the individual bodies have to fight for their role within the regulatory structure, instead of having their regulatory role clearly established by statute.

We believe that considerable thought should be given to how the FPC could play a more active role in the creation of policy relating to systemic risk. At one level, the body that is supposed to analyse the highest levels of risk to the UK economy ought to be one that regularly takes the lead in relation to policy formulation in that context. The Minister explained and reiterated quite rightly how many external views are published, but it would be helpful for the economy as a whole if the views of the members of the FPC were given greater publicity.

Our intention in proposing new clause 6 is to propose requirements on the FPC to regularly publish external research into the level of systemic risk to the stability of the financial system in the UK. I note the points that the Minister has made on that. Furthermore, as we seek greater transparency, we have again sought publication of a record of the meetings of the Financial Policy Committee within a reasonable timeframe. I am delighted that the Minister has clarified that that is indeed the case, and that that takes place within six weeks. I am reassured by much of what she has said regarding the provisions of section 9W of the 1998 Act on research and surveys and the provisions of section 9U on the publication of that research. Given that, and given the comments made by the Minister, we will not press new clause 6.

The shadow Minister is such a moderate these days. I am feeling nervous, because new clause 6 is an excellent amendment that I wholeheartedly endorse. If we look at the FPC’s membership, they have huge experience of being in companies that have not paid a great deal of tax in the United Kingdom, so some expertise is brought to bear. The multinational structure of the UK economy, lauded as being the most open in the world, is also a potential systemic risk. The tax avoidance scandal demonstrates the scale of that potential systemic risk, not only in terms of the amount of money we are not getting in—that is an ongoing problem—but in terms of the structure of our economy.

For example, if some of the commentators are right about the response of capital to a British exit from the European Union, and if that coincided with a collapse in the euro, our economy would be vulnerable. The FPC needs the ability to work through the scenarios and the options and to see whether our structures are sufficiently good—I put it to the Minister that they are not and that we remain hugely vulnerable. That is one reason.

The second reason is that our housing market has a perverse structure that is worse than that of any other advanced economy. We have an absurdity that we have not been able to deal with, whereby there is huge housing price inflation in London and the south-east, yet the vast majority of houses we are building are in areas such as mine. They take a long time to sell because there is not a huge amount of demand for that new housing, but there is plenty of land and plenty of people willing to build housing, especially if the Government subsidise it. The Government are pressing for more and more housing, yet at the same time they face a systemic risk in the housing market. That is not a problem created by this Government; it goes back several generations. If the housing bubble were to burst in a range of different ways, that would be a fundamental problem.

The third systemic risk, which we saw in 2008, is the level of indebtedness. It was the American sub-prime market that led to the chain of events that caused the world financial crisis, not a specific collapse in this country, but we are hugely vulnerable. We, as a nation, are far too indebted. What is different now from any time in our history for both the corporate sector and individual households is that interest rates are at a record low. There is therefore a whole generation of people—two generations, in effect—whose expectations and economic behaviour is predicated on permanent low interest rates.

Commentators machinate—the Treasury Committee machinates at great length—about whether there will be a 0.25% increase in interest rates, yet we only need to go back 25 years and they were at 15%. That is part of the systemic risk. We therefore do not want to rely on the same old commentators—the OECD or the IMF—who got it wrong before 2008 and are using the same old paradigms.

The FPC should do precisely what the new clause suggests: ensure robustness in the British system. In a sense, that is the point of the FPC; otherwise, it has no point at all. What is proposed in the new clause is exactly what is needed. Indeed, we probably need more than that, but it is a good start. It will get minds concentrated on the scenarios and the options and, critically, whether the financial culture in this country’s businesses and households is sufficiently understanding to deal with the shock to the system that could come and which, by definition, will be outside our national control. That seems to be the point.

I will end on this point. It is quite a feasible scenario that at 7 o’clock in the evening of 12 March, after the German regional elections, the German media will be announcing the end of Chancellor Merkel. It is also a feasible scenario that the main opposition party—Labour’s sister party, the Social Democratic party—will come an unprecedented fourth. It is being seen as the most significant political day in 50 years in Germany, and it will have a huge immediate impact on the euro and the stability of the eurozone. We do not have an approach to dealing with that, because we presume that such major shocks to the system are not going to come. That is precisely the point of having the FPC and that is why the new clause is such a good one. We ought to be robust.

I would certainly be very concerned if the hon. Member for Leeds East were developing a reputation as a moderate, not least because that might cause him not to be put forward as a Labour candidate at any future election. That would be a very worrying development. My analysis of his political point of view is that no one in this country could describe him as a moderate. This may be the first occasion on which he has been described as such. “Trot” might have been a more appropriate description of some of his political views, but I digress in an entirely inappropriate way.

I want to respond to some of the points raised and indeed to the important speech made by the hon. Member for Bassetlaw about the fact that the UK is an open economy. Therefore, by its very nature, it is open to economic developments in the rest of the world. He highlighted three topics with which the Financial Policy Committee should rightly be concerned. The first was the importance to financial stability in this country of the UK Government being able to receive tax revenues in order to pay for public services. He will know that it is incredibly important in this regard that we work with other countries and, notably, the OECD on the base erosion and profit shifting work, which is an important matter, perhaps not so much for this Committee but for other Committees in this House. That is an incredibly important issue on which we work internationally.

I reassure the Committee that, in terms of the overall resilience of the UK banking sector today, compared with the resilience at the time of the last shock, it does appear to be increasingly resilient. We would like to put that on record. The aggregate capital ratio, the common equity tier 1 ratio, is currently 12% for the banking system as a whole, which is a full 3.7% higher just since the end of 2013. The major UK banks all came through their stress test with the FPC at the end of last year without being asked to raise more capital. The FPC concluded that the UK banking system would have the capacity to support lending to the real economy even in the context of a severe global economic slowdown triggered by a downturn in the emerging economies.

The hon. Member for Bassetlaw also mentioned the housing market. Again, I think that it would be really valuable for the Committee to put on the record that the Government have granted the FPC powers of direction regarding residential mortgages and are also consulting—I hope that Opposition Members will support this—on extending its remit to cover powers regarding buy-to-let mortgages as well. Those are important points.

The hon. Gentleman also mentioned the rise of private sector borrowing. On that point, we argue that progress has been made to improve the personal financial position of households in the UK. Household debt relative to income has fallen from 168% in 2008 to 142% at the last reading. That includes both mortgage and unsecured debt. The FPC does study these numbers very closely. It stated, the last time that it looked through them, that given the actions that it has taken household indebtedness currently does not pose an imminent threat to financial stability, not least because underwriting standards are currently more prudent than in the past. Of course, however, the FPC must and will continue to monitor the household sector and will take further action if necessary.

I appreciate the Minister’s overview of the financial markets and how stable they are. Obviously, she has not read the financial press this morning. The whole basis of the international bank resolution regime that we have brought in since 2008 is based on convertible bonds. The convertible bond market has gone berserk in the past two days. Constant default rates on commercial paper covering bonds have spiked by a whole number of points. Let me assure the Minister that the markets are not anywhere near as quiescent as she tells us.

Again, the hon. Gentleman puts words into my mouth that I did not utter. However, I did want to point out that the FPC looks at the financial sector’s resilience. No one would deny that the markets are going through rough and troubled times, but the FPC’s role is important and I hope he will agree that its powers to look at different aspects of the economy have improved the architecture of financial regulation since the last crisis. I highlight the way in which the Bank of England, as part of its monetary policy remit, has kept inflation as low as it has.

The hon. Member for Leeds East pointed to the “spaghetti” of the Bank’s organisation. I agree that we need clarity to be able to tell our constituents about how the architecture works. I share that objective. The Bill improves the pasta-related shapes of financial architecture. I would argue that the current situation, with a subsidiary and so on, is more like spaghetti. When I was trying to think of an appropriate pasta-related analogy for what the Bill does in establishing new architecture that we can explain to our constituents in simple terms, I came up with the idea of three ravioli—independent, but, importantly, in the same bowl.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.

Clause 7

Monetary Policy Committee: membership

Question proposed, That the clause stand part of the Bill.

With all this talk of food, I was hoping that we might break for lunch. I am not sure what time we will do that, but I will deal with clause 7, which I think will be quite brief. It makes the deputy governor for markets and banking an ex-officio member of the Monetary Policy Committee. Previously, the only ex-officio members of the committee were the Governor, the deputy governor for monetary policy and the deputy governor for financial stability.

As I set out in my remarks on clause 6, following the expansion of the Bank’s responsibilities, the Government and the Bank made a number of new appointments, including the creation of the post of deputy governor for markets and banking. It is currently held by Dame Minouche Shafik and she sits on the MPC as one of the two members appointed by the Governor of the Bank of England after consultation with the Chancellor of the Exchequer. The clause formalises that arrangement and ensures that expertise for monetary policy operations is maintained on the committee.

The clause also reduces the number of members of the committee who may be appointed by the Governor of the Bank of England from two to one, ensuring that the committee’s current balance is preserved. It provides that anyone appointed as a member of the committee by the Governor must carry out monetary policy analysis in the Bank and it gives that member the title of chief economist of the Bank.

In addition, the clause formalises existing practice in relation to conflicts of interest by introducing a statutory requirement for the Chancellor to take account of the interests of potential appointees in deciding whether they would be able to do the job. I do not think that the clause will be controversial.

Question put and agreed to.

Clause 7 accordingly ordered to stand part of the Bill.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Two o’clock.

Bank of England and Financial Services Bill [ Lords ] (Second sitting)

The Committee consisted of the following Members:

Chairs: Mr Graham Brady, † Phil Wilson

† Baldwin, Harriett (Economic Secretary to the Treasury)

† Burgon, Richard (Leeds East) (Lab)

† Caulfield, Maria (Lewes) (Con)

† Cooper, Julie (Burnley) (Lab)

† Donelan, Michelle (Chippenham) (Con)

† Fysh, Marcus (Yeovil) (Con)

† Hall, Luke (Thornbury and Yate) (Con)

† Kerevan, George (East Lothian) (SNP)

† McMahon, Jim (Oldham West and Royton) (Lab)

† McGinn, Conor (St Helens North) (Lab)

† Mak, Mr Alan (Havant) (Con)

Mann, John (Bassetlaw) (Lab)

† Marris, Rob (Wolverhampton South West) (Lab)

† Mullin, Roger (Kirkcaldy and Cowdenbeath) (SNP)

† Newton, Sarah (Truro and Falmouth) (Con)

† Skidmore, Chris (Kingswood) (Con)

† Tolhurst, Kelly (Rochester and Strood) (Con)

† Wood, Mike (Dudley South) (Con)

Matthew Hamlyn, Fergus Reid, Committee Clerks

† attended the Committee

Public Bill Committee

Tuesday 9 February 2016

(Afternoon)

[Phil Wilson in the Chair]

Bank of England and Financial Services Bill [Lords]

Clause 8

Monetary Policy Committee: procedure

Question proposed, That the clause stand part of the Bill.

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The clause is the last one to do with the governance of the Bank of England; the others we covered this morning.

The clause amends the existing statutory requirement to publish the Monetary Policy Committee minutes within six weeks of the occurrence of the meeting so that they will be published as soon as is reasonably practicable. That, too, was a recommendation of the Warsh review, which set out that it would improve “effective communication” of the MPC’s policy judgment and stated:

“Publishing the details of the vote contemporaneously would bolster individual members’ independence and accountability.”

The MPC accepted the recommendation and since last August has published the minutes of its policy meeting at the same time as its policy decision. The clause simply formalises that arrangement, enhancing the transparency and accountability of MPC practices.

The clause also reduces the number of times that the Monetary Policy Committee is required to meet each year, changing the requirement to meet at least once a month to a requirement to meet at least eight times in each calendar year and at least once in every 10-week period. That, too, is implementing a recommendation of the Warsh review, which concluded that the change would bring the Bank’s practice into line with that of

“other leading advanced-economy central banks”

and support effective policy making.

The clause also amends the quorum rules in line with the changes to the MPC membership that I set out in my remarks on clause 7. Finally, clause 8 formalises processes and strengthens procedures on conflicts of interest for the MPC that are already delivered in practice.

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Clearly, the decisions of the MPC are important for the financial markets. In essence, those markets may react immediately upon seeing the detailed minutes of the MPC meetings. A system in which all discussion between committee members was made public would be the ideal, because financial markets and, importantly, the general public would then understand the discussions being held behind closed doors. Running as a distant second to that is the less desirable policy of simply producing minutes of the meeting. The minutes, however, record only a general sense of the participants’ contributions. However, we have tabled no amendments to the clauses on the Monetary Policy Committee while the former committee member David Blanchflower conducts a review commissioned by the shadow Chancellor. We look forward to returning to debate the MPC in another forum at a future date, when we will be pursuing our amendments on the measure.

Question put and agreed to.

Clause 8 accordingly ordered to stand part of the Bill.

Clause 9

Audit

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I beg to move amendment 14, in clause 9, page 7, line 15, at end insert—

“(6A) The Comptroller may enquire into the Bank’s success in achieving its stated policy objectives but shall not enquire into the desirability of such objectives having been set.

(6B) Reports by the Comptroller into the functioning of the Bank shall be published promptly unless in the opinion of the Treasury Committee of the House of Commons such publication would be likely materially adversely to affect the stability or functioning of the UK’s financial or banking system.”

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With this it will be convenient to discuss amendment 21, in clause 11, page 11, line 30, at beginning insert—

“Subject to sections 7E(3) and 7ZA(6A) of the Bank of England Act 1998,”

I remind the Committee that if amendment 14 is withdrawn or negatived, amendment 21 falls.

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Here we turn to the role of the National Audit Office and the new proposals to afford the NAO power to investigate the functions of the Bank. This is a positive development, which we welcome, but it is important to get the legislation right and to ensure that no loopholes are left to prevent the NAO from conducting its necessary work.

The Comptroller and Auditor General was clearly concerned about the proposals in the Bill as published that would have allowed the court of directors a veto over the new powers for the NAO. There was significant discussion, however, at the Treasury Committee and at all stages in the other place. At the Treasury Committee Andrew Bailey said that the issue was to do with

“getting the boundary right between what is appropriate, in my view, which is value for money in terms of the way we run the Bank of England, and questioning the basis of monetary policy, which would not be in my view appropriate.”

Our amendment fits in with that, though I expect that the Government will disagree with us.

The draft memorandum of understanding that the Minister provided the other day stated that the comptroller does not expect to second-guess expert discussions by Bank officials. The amendment asserts that the comptroller may inquire into the Bank’s success in achieving its policy objectives. We believe that that does not encroach beyond the boundaries of questioning the merits of policy decisions, but would assist the National Audit Office in ascertaining whether the Bank is delivering value for money. Amendment 21, which is consequential on amendment 14, would require that reports by the comptroller into the functioning of the Bank be published promptly to allow relevant Select Committees, should they wish, as well as other Members of the House, to make an assessment of the National Audit Office’s findings.

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We are moving on to the part of the Bill that covers the role of the National Audit Office and the publication of its reports. One of the Bill’s objectives is to enhance the Bank of England’s accountability and clauses 9 to 11, which allow the National Audit Office to conduct value-for-money examinations of the Bank for the first time, are key in that respect.

The independence of the Bank and of the National Audit Office, which are two vital public bodies, was carefully considered in developing the arrangements, and I believe that the clauses in the Bill strike the appropriate balance. It is probably best if I first set out some background on the important role of the National Audit Office’s value-for-money studies in supporting transparency to Parliament and the public.

The National Audit Office scrutinises public spending on behalf of Parliament. It reviews whether public bodies have used public money efficiently, effectively and with economy and makes reports on those issues to Parliament. In carrying out its work, the NAO is precluded by the National Audit Act 1983 from reviewing the merits of policy objectives. That is the case in relation to all the bodies with which it currently engages and the Bill ensures that the same restriction will apply in relation to its oversight of the Bank.

That is an important point in relation to amendment 14, which I believe is unnecessary. The amendment states that

“The Comptroller may enquire into the Bank’s success in achieving its stated policy objectives but shall not enquire into the desirability of such objectives having been set.”

The Bill as drafted will have that exact effect. The comptroller will be free to question the Bank’s success in achieving its policy objectives, but not the merits of the objectives. The Bill reinforces that by setting out specific areas in which the NAO cannot question the merits of the Bank’s policy decisions. That extra protection, which has been agreed to by both the Comptroller and Auditor General and the Governor, reflects the crucial importance of protecting the independence of the Bank’s policy decisions.

In all of those areas, the Bill will allow the NAO to examine the economy, efficiency and effectiveness of the implementation of policy decisions and of the resources underpinning them, but not the merits of the decisions themselves. Specifically, the Bill carves out the merits of policy decisions taken by the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Committee, the merits of policy decisions taken by the body within the Bank responsible for the supervision of financial market infrastructures and the merits of policy decisions taken by the body within the Bank responsible for the exercise of its resolution functions, but where the Bank has used its statutory resolution powers in relation to a financial institution in difficulty, the NAO would be able to consider any resolution policy decisions relating to the institution concerned. That is particularly important given that the Bank is now the resolution authority for the UK and has primary operational responsibility for financial crisis management. In future, therefore, the NAO will be able to examine the role of the Bank in interventions like Northern Rock—it is a shame that the hon. Member for Bassetlaw is not in his place to hear that exciting news. That bespoke arrangement recognises the unique and crucial role that the Bank plays in UK economic policy. I believe that it strikes the right balance and will bring about a significant improvement in the Bank’s accountability.

The second part of amendment 14 would require the comptroller to publish reports promptly, unless the Treasury Committee judges that publication was likely to have a material adverse effect on financial stability. Again, I submit that that is unnecessary. Adequate protections are already built into the legislation to prevent the disclosure of certain types of sensitive information. Proposed new section 7H of the Bank of England Act 1998, inserted by clause 11, will ensure that the comptroller is subject to the same limitations on disclosure as the FCA in relation to information received by the Bank. Those limitations are set out in the Financial Services and Markets Act 2000 and will restrict the NAO from disclosing information held by the Bank for the purposes of monetary policy; financial operations intended to support financial institutions for purposes of financial stability; and the provision of private banking services.

Furthermore, the subject of sensitive information is covered by the memorandum of understanding between the NAO and the Bank, which ensures that there is a codified agreement between them on how sensitive information should be treated. It makes it clear that there may be instances in which the Bank is prohibited from disclosing information. Where that is the case, it will explain why that is the case to the comptroller. The memorandum also makes it clear that there may be situations in which the Bank is able to disclose information to the comptroller but legal restrictions apply to onward disclosure or publication.

In terms of the timing of publication, Parliament has rightly delegated to the comptroller discretion over the content of NAO reports and the timing of their publication. He acts independently on Parliament’s behalf, and it is important that he is able to use his judgment on how Parliament and the public are best served.

I hope that I can reassure the Committee by saying that once the comptroller has signed off a report for publication, there is an in-built incentive to lay it in Parliament and publish it within a short timeframe. Prompt publication mitigates the risk of the report’s conclusions being overtaken by events. Moreover, the process from completing the report to publication is very simple. Typically, it takes between two and four days, but it can be speeded up if required.

Amendment 21 seeks to disapply the restrictions on the disclosure of specially protected information that the National Audit Office has received from the Bank for certain reports by the Comptroller and Auditor General. As I have said, information is specially protected from time to time if it is held by the Bank for the purposes of monetary policy or for financial operations supporting financial institutions to maintain financial stability. A good example, which we heard about this morning, is emergency liquidity assistance.

The reason why restrictions are placed on the disclosure of such information is that its publication could harm the financial stability of the UK or adversely affect the Bank’s monetary policy operations. A report by the NAO on the extent to which the Bank has achieved its financial stability objective could, in fact, be destabilising if, for example, it revealed market-sensitive information about financial operations undertaken by the Bank to preserve financial stability in a particular period.

I trust that all Committee members will agree that those restrictions on disclosure are entirely appropriate and, indeed, vital. I urge the hon. Gentleman not to press his amendment.

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My colleagues and I have listened to what the Minister has said. She went, with characteristic detail, into the Government’s position on this matter. My hon. Friend the Member for Bassetlaw, who is not in his place, scolded or praised me—I do not know which—for moderation earlier. We did not press our amendment to a Division on that occasion, but having listened to what the Minister has said, and because transparency is a key principle when it comes to the work of the Bank of England and we want to expand that transparency, we seek a Division on amendment 14.

Question put, That the amendment be made.

Division 1

9 February 2016

The Committee divided:

Ayes: 6
Noes: 10

Question accordingly negatived.

View Details

Clause 9 ordered to stand part of the Bill.

Clause 10

Activities indemnified by Treasury

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I beg to move amendment 15, in clause 10, page 7, line 37, at end insert—

“(6A) The Treasury must lay before Parliament a copy of any report it receives under subsection (5) within one calendar month of receipt.”

As the Bill reads, clause 10 applies where the Treasury gives an indemnity or guarantee to the Bank in respect of an activity or series of activities that it undertakes. Our amendment 15 simply seeks to maximise transparency and accountability with regard to this by requiring the Treasury to publish a copy of such a report within a reasonable timeframe. We hope that the Government will accept this amendment.

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If I may, I will speak to clause 10 at the same time as speaking to amendment 15. Clause 10 obviously defines the process which will deliver greater oversight of activities undertaken by the bank or a company of the bank, where that activity has been indemnified by the Treasury. In such circumstances, the Treasury takes on the risk of the activity and will bear any associated losses. It is right that the Bill allows for full NAO oversight of these activities.

The occasions on which the Treasury grants an explicit indemnity to the Bank of England are very rare. Examples include the provision of emergency liquidity during the financial crisis and, more recently, the asset purchase facility, which is the vehicle by which the Bank of England has purchased £375 billion of Government bonds to deliver the Monetary Policy Committee’s quantitative easing policy. Clearly, these are very different examples. The former relates to an operation undertaken on the Bank’s balance sheet to provide assistance to an institution in distress. The latter case is an example of an activity undertaken by a subsidiary company of the Bank. Given the Bank’s varied role, it is difficult to predict every circumstance in which an indemnity of a Bank activity might be considered necessary in the future. Clause 10 allows for discretion to be applied to each case of indemnified activity. In some circumstances a financial audit may not be required. However, the objective of this clause is clear. It will facilitate greater accountability of indemnified activities where this is appropriate.

Amendment 15 would require the Treasury to lay a report on activity indemnified by the Treasury before Parliament one calendar month after receiving it from the Bank. Let me say first that Treasury indemnities of specific Bank activities are very rare. I have cited a couple of examples. In the example of the provision of emergency liquidity during the financial crisis, clearly the information being shared between the Bank and the Treasury would have been extremely sensitive. It would have included commercially confidential material and potentially information that put at risk the stability of the wider financial sector. It is clear from just that one example that publishing a report of this kind could really work against the public interest in the future, especially if the Treasury were bound by a specific statutory deadline. The Treasury must retain that flexibility over whether and when such reports should be published. I urge the hon. Gentleman to think hard about that and withdraw the amendment, while urging the Committee to agree that clause 10 stand part of the Bill.

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I mentioned earlier the possibility of compromise on the part of the Government when it comes to balancing the protection of information they believe needs to be confidential because of financial risk with the requirement for transparency. I mentioned the practice of having some matters under the line and some over the line in local authorities and on boards of school governors. I encourage the Government to think further about that possibility in relation to the areas where transparency has been requested. We reserve the right to return to the matter on Report but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 10 ordered to stand part of the Bill.

Clause 11

Examinations and reviews

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I beg to move amendment 1, in clause 11, page 9, line 11, at end insert—

“(b) the economy, efficiency and effectiveness with which a Bank company has used its resources in discharging its functions.”

Amendments 1, 2 and 3 extend inserted section 7D of the Bank of England Act 1998 to enable the Comptroller and Auditor General to examine the economy, efficiency and effectiveness of Bank companies, as well as the Bank itself. “Bank company” is defined by amendment 3.

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With this it will be convenient to discuss Government amendments 2 to 6.

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Mr Wilson, you will have to bear with me, because we have quite a few Opposition amendments to this clause to cover and I will seek your guidance on when you would like me to touch on those. I will start with Government amendment 1 and move on to Government amendments 2 to 6.

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Can I just ask you to stick to the first group of the Government amendments? We can then move on after that debate.

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Thank you, Mr Wilson. That is what I am trying to do. I am just buying some time while I go through great wodges of paper here, to ensure that I do not rush ahead.

I will speak to Government amendments 1 to 6 on National Audit Office oversight of Bank subsidiaries. As we know, the Bill makes provision for the first time for the NAO to initiate its value-for-money studies of the Bank of England. As we have discussed, that delivers an important increase in the accountability of the Bank and its operations. The intention in the Bill was to grant the NAO these powers to the Bank in the broadest sense, subject to the bespoke policy carve-out, which also features in the Bill, protecting the independence of the Bank’s policy decisions, but as the Bill is drafted, the NAO’s powers to conduct value-for-money examinations in relation to companies owned by the Bank differ from its powers to conduct value-for-money examinations of the Bank itself. That was not the Government’s policy intention. The amendments will ensure that the NAO’s value-for-money powers apply on the same terms to the Bank, its subsidiaries and other Bank companies that are indemnified by the Treasury.

I will briefly outline the inconsistencies that arise through the current drafting. First, the NAO would have powers to conduct value-for-money examinations of Bank companies that have been indemnified by the Treasury only where the Treasury has directed the company concerned to send its accounts to the NAO, as provided for in section 7C of the Bank of England Act 1998, inserted by clause 10 of this Bill, and the NAO’s examination would be made under the powers given to it in section 6 of the National Audit Act 1983. Those NAO examinations would not, therefore, be subject to the bespoke policy carve-out that has been defined in the Bill. Secondly, under the Bill as drafted, subsidiaries or companies of the Bank that do not benefit from a Treasury indemnity would not be within the scope of NAO examination.

I hope that the Committee agrees that we should make the NAO’s power to initiate value-for-money examinations applicable on the same terms across the Bank, its subsidiaries and other companies indemnified by the Treasury in which the Bank has a minority interest. The amendments seek to do just that.

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Having considered this matter and listened to the Minister’s detailed explanation, I can confirm that we will not oppose amendment 1.

Amendment 1 agreed to.

Amendments made: 2, in clause 11, page 9, line 12, leave out

“of the Bank (however described)”

and insert

“(however described) of the Bank or the Bank company”

Amendment 3, in clause 11, page 10, line 3, at end insert—

““Bank company” means—

(a) a company which is a subsidiary undertaking of the Bank, within the meaning of section 1162 of the Companies Act 2006;

(b) a company not within paragraph (a) in respect of which a direction under section 7C(2) has effect;”

Amendment 4, in clause 11, page 10, line 16, at end insert “or a Bank company” —(Harriett Baldwin.)

This amendment extends inserted section 7D(11) of the Bank of England Act 1998 (which provides that section 6 of the National Audit Act 1983 does not apply to the Bank) to Bank companies. Section 6 provides for economy, efficiency and effectiveness examinations by the Comptroller and Auditor General.

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I beg to move amendment 16, in clause 11, page 10, line 19, at end insert

“and the Comptroller must lay a copy of the first memorandum of understanding to be prepared, and of any subsequent revisions, before both Houses of Parliament”.

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With this it will be convenient to discuss the following:

Amendment 17, in clause 11, page 10, line 26, after “procedure” insert

“which may be reviewed by the Treasury Committee of the House of Commons”

Amendment 18, in clause 11, page 10, line 32, at end insert—

‘(3) The Comptroller must lay before Parliament a copy of the Memorandum within one calendar month of its preparation.”

Amendment 19, in clause 11, page 10, line 32, at end insert—

‘(4) The Treasury Committee of the House of Commons may in its absolute discretion enquire into the genesis and contents of the Memorandum.”

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There was significant discussion of the extent to which the Comptroller and Auditor General is to be involved in the audits of the Bank during the Treasury Committee autumn hearings attended by the Chancellor and the Governor of the Bank of England and at various stages of the Bill’s passage through the other place. From statements made by the National Audit Office’s chair, Lord Bichard, and from the Chairs of the Treasury Committee and the Public Accounts Committee, I am aware that positive movement is believed to have been made following significant early criticism.

On Report in the House of Lords, the Government spokesperson said that

“to protect the Bank’s independent status the Bill provides for a policy carve-out from the scope of NAO value-for-money reviews”—[Official Report, House of Lords, 15 December 2015; Vol. 767, c. 1996.]

and that there had been significant discussions between the Bank, the NAO and the Treasury. We welcome the removal of the original proposal to allow the court a veto over NAO investigations. I thank the Minister for forwarding to my office yesterday a copy of the memorandum of understanding being discussed by the Bank and the NAO. I understand that it may be approved or finalised in the days ahead. I stated on Second Reading that I had written to the Minister asking that the memorandum be published during the lifetime of the Bill, and she acknowledged in her response that that would be her preference, so I am pleased that that has been possible.

I believe the draft memorandum has been circulated only to members of this Bill Committee—I hope the Minister will correct me if I am wrong and it has been seen anywhere else. We tabled amendment 16 to require that the memorandum be published and laid before both Houses of Parliament, which it appears will now happen. I also recognise that amendment 18 is somewhat repetitious on this point. We may require further discussion on the draft memorandum on Report. When it appears, it will have been finalised or approved by all parties to it. My initial reading of the draft memorandum is that it does not move us on significantly, in that both sides are able to publish letters that set out whether they agree with each other’s proposals to carry out or refuse an investigation, but there is no clear information in the memorandum on how such a dispute would be resolved. Of course, resolution is key in such matters.

We tabled amendments 17, 19 and 20 to allow for further scrutiny of the dispute procedure. It is our view that a role for the Treasury Committee could be a useful one, where such a dispute was left unresolved and it was clear the procedure was not working.

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I speak as a member of the Treasury Committee, although obviously I do not speak for the Committee. I remind the Minister of the Committee’s view that one of our principal roles is to protect value for money on behalf of the taxpayer. Regulatory bodies are often, for very good reasons, concerned with regulating and may be remiss when it comes to consideration of value for money. This is particularly important because regulatory functions have to be carried out effectively, and there is a cost in terms of resources: sometimes regulators do not have these resources, and sometimes resources are put in in the wrong way. The Select Committee is keen to ensure that the auditor plays a distinct and effective role. I underline to the Minister that, regardless of formal decisions here, the Treasury Committee has an ongoing brief to ensure that the relationship between the Bank and the auditor runs smoothly and the auditor is allowed to do his business.

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I thank the hon. Member for Leeds East for his good summary of the deliberations so far on this. As I said in my letter to him last week, I did push both the Comptroller and Auditor General and the Governor on whether or not they would allow the draft memorandum of understanding to be shared with this Committee. I confirm that yesterday we were able to send copies of that draft memorandum of understanding to all members of this Committee, the Chair of the Treasury Committee and the Chair of the Public Accounts Committee, which of course scrutinises and works most closely with the National Audit Office. That is the extent to which the draft memorandum of understanding has been shared at this point.

The expectation, as I understand it, is that the court will meet on Thursday, and that is the forum in which amendments to the current draft may be suggested or approved. I assure hon. Members that as soon as we have the final version, the memorandum can be more widely disseminated—certainly in time for Report and Third Reading. Amendments 16 and 18 are therefore not necessary.

Amendments 17 and 19 would give the Treasury Committee express powers to consider various aspects of the memorandum. I am sure that the hon. Members for East Lothian and for Bassetlaw know that the Treasury Committee already has the power to examine all matters connected with the policy and administration of the Bank of England and can choose what inquiries it undertakes. In addition, the National Audit Office works closely with the Public Accounts Committee, so one can imagine conversations taking place between the Chairs of those two very important Committees about what aspects they want to look at. If the Treasury Committee or indeed the Public Accounts Committee determines that it would be appropriate to conduct an inquiry into the memorandum of understanding, it could do so. The amendments might suggest that the powers of the Select Committees to conduct inquiries are in some way limited to those powers that have expressly been given to them in this primary legislation. That would be an unfortunate suggestion, so I hope that the amendments will not be pressed.

The hon. Member for Leeds East asked about arbitration in a dispute resolution process. The memorandum of understanding sets out the dispute resolution process, as required by the Bill, but we should not expect that process to be called upon. We expect that the Comptroller and Auditor General would be able to reach an agreement with the Bank regarding his work, in the same way that he does with all the other public bodies with which he engages. The dispute resolution process set out does not call upon any independent arbiter. The draft document simply indicates that the Bank and the Comptroller and Auditor General are both content with attempting to resolve any disputes between themselves, and that they commit to the publication of their difference of view where any disputes remain unresolved. If this is a framework with which they are both content, I do not see any need to involve a third party in that process. When we have received the final version of the memorandum of understanding and are considering the Bill again on Report, I am sure that we will return to this question. On that basis, I urge the hon. Gentleman to withdraw the amendment.

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Again, I welcome the Minister’s confirmation that the court will consider the draft memorandum further on Thursday and that it will be approved or amended that day. I also welcome the fact that the final version will be more widely circulated in time for Third Reading and Report. We recognise that events have overtaken our amendments and therefore will not pursue them. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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I beg to move amendment 20, in clause 11, page 11, line 6, after “must” insert “promptly”.

We wish to make the point that we need the report to be published promptly. Otherwise, for example, the Treasury Committee, with all its expertise, cannot review using its powers, as the Minister has just referred to.

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With regard to amendment 20 and the Treasury value-for-money reports, new section 7F of the Bank of England Act 1998, which is inserted by clause 11, preserves the existing power for the Treasury to commission value-for-money reviews of the way the functions of the Prudential Regulation Authority are exercised by the Bank. There is an equivalent power for the Treasury to commission such reviews of the functions of the Financial Conduct Authority. Taken together, these important powers ensure that the Treasury can carry out cross-cutting reviews of the operation of financial regulation in this country.

Amendment 20 would require the Treasury promptly to lay before Parliament any reports it receives following reviews into the PRA. It is, of course, vital that those reports are made available to Parliament to inform its deliberations into the regulation of financial services. Indeed, the Treasury is already required to lay reports into the operation of the PRA and the FCA before Parliament and to publish them. I assure the hon. Gentleman that the Treasury takes its obligations to this House very seriously and is concerned to fulfil them in good time. I am happy to confirm that any such reports will indeed be promptly laid before the House. There is no need for that requirement to be in the Bill.

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I welcome the Minister putting on the record her desire for the reports to be published promptly. I would welcome it even more if she would, therefore, accept the amendment in order to insert the word “promptly” into statute. That would be one of many pieces of history that I am sure she will make in her role of shadow City Minister.

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Actual City Minister.

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I do apologise for the role reversal. I was even called a moderate today so we are getting confused, although I am most moderate. I invite the Minister to reconsider her position on the amendment. Or shall I assume, unless she intervenes, that the matter is closed?

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I am afraid the hon. Gentleman has not convinced me at this stage. I am sure we will return to this on Report.

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Like the Minister, we have put on record our thoughts on this matter. Although we reserve the right to return to it at a later stage, we will not be pushing for a vote, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: 5, in clause 11, page 11, line 20, leave out “only”.

Amendments 5 and 6 amend inserted section 7G of the Bank of England Act 1998 to provide that where the Comptroller is examining a Bank company under inserted section 7D, he will have access to documents and information held by that company and its auditors.

Amendment 6, in clause 11, page 11, line 24, at end insert—

‘( ) In the case of an examination under section 7D(1)(b), subsection (1) also applies to documents in the custody or under the control of—

(a) the company to which the examination relates;

(b) the auditor or auditors of that company.”—(Harriett Baldwin.)

Question proposed, That the clause, as amended, stand part of the Bill.

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At this point I will simply commend clause 11 to the Committee. I cannot be certain of the Committee’s enthusiasm, but I cannot imagine that anyone disagrees with a clause that will increase the Bank’s accountability while protecting its independent status and recognising the complex nature of its activities. The clause, as amended, will achieve that.

Question put and agreed to.

Clause 11, as amended, accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Sarah Newton.)

Adjourned till Thursday 11 February at half-past Eleven o’clock.

Written evidence reported to the House

BoE 01 Institute of Directors

The Committee consisted of the following Members:

Chairs: Mr Graham Brady, † Phil Wilson

† Baldwin, Harriett (Economic Secretary to the Treasury)

† Burgon, Richard (Leeds East) (Lab)

† Caulfield, Maria (Lewes) (Con)

† Cooper, Julie (Burnley) (Lab)

† Donelan, Michelle (Chippenham) (Con)

† Fysh, Marcus (Yeovil) (Con)

† Hall, Luke (Thornbury and Yate) (Con)

† Kerevan, George (East Lothian) (SNP)

† McMahon, Jim (Oldham West and Royton) (Lab)

† McGinn, Conor (St Helens North) (Lab)

† Mak, Mr Alan (Havant) (Con)

Mann, John (Bassetlaw) (Lab)

† Marris, Rob (Wolverhampton South West) (Lab)

† Mullin, Roger (Kirkcaldy and Cowdenbeath) (SNP)

† Newton, Sarah (Truro and Falmouth) (Con)

† Skidmore, Chris (Kingswood) (Con)

† Tolhurst, Kelly (Rochester and Strood) (Con)

† Wood, Mike (Dudley South) (Con)

Matthew Hamlyn, Fergus Reid, Committee Clerks

† attended the Committee

Public Bill Committee

Tuesday 9 February 2016

(Afternoon)

[Phil Wilson in the Chair]

Bank of England and Financial Services Bill [Lords]

Clause 8

Monetary Policy Committee: procedure

Question proposed, That the clause stand part of the Bill.

The clause is the last one to do with the governance of the Bank of England; the others we covered this morning.

The clause amends the existing statutory requirement to publish the Monetary Policy Committee minutes within six weeks of the occurrence of the meeting so that they will be published as soon as is reasonably practicable. That, too, was a recommendation of the Warsh review, which set out that it would improve “effective communication” of the MPC’s policy judgment and stated:

“Publishing the details of the vote contemporaneously would bolster individual members’ independence and accountability.”

The MPC accepted the recommendation and since last August has published the minutes of its policy meeting at the same time as its policy decision. The clause simply formalises that arrangement, enhancing the transparency and accountability of MPC practices.

The clause also reduces the number of times that the Monetary Policy Committee is required to meet each year, changing the requirement to meet at least once a month to a requirement to meet at least eight times in each calendar year and at least once in every 10-week period. That, too, is implementing a recommendation of the Warsh review, which concluded that the change would bring the Bank’s practice into line with that of

“other leading advanced-economy central banks”

and support effective policy making.

The clause also amends the quorum rules in line with the changes to the MPC membership that I set out in my remarks on clause 7. Finally, clause 8 formalises processes and strengthens procedures on conflicts of interest for the MPC that are already delivered in practice.

Clearly, the decisions of the MPC are important for the financial markets. In essence, those markets may react immediately upon seeing the detailed minutes of the MPC meetings. A system in which all discussion between committee members was made public would be the ideal, because financial markets and, importantly, the general public would then understand the discussions being held behind closed doors. Running as a distant second to that is the less desirable policy of simply producing minutes of the meeting. The minutes, however, record only a general sense of the participants’ contributions. However, we have tabled no amendments to the clauses on the Monetary Policy Committee while the former committee member David Blanchflower conducts a review commissioned by the shadow Chancellor. We look forward to returning to debate the MPC in another forum at a future date, when we will be pursuing our amendments on the measure.

Question put and agreed to.

Clause 8 accordingly ordered to stand part of the Bill.

Clause 9

Audit

I beg to move amendment 14, in clause 9, page 7, line 15, at end insert—

“(6A) The Comptroller may enquire into the Bank’s success in achieving its stated policy objectives but shall not enquire into the desirability of such objectives having been set.

(6B) Reports by the Comptroller into the functioning of the Bank shall be published promptly unless in the opinion of the Treasury Committee of the House of Commons such publication would be likely materially adversely to affect the stability or functioning of the UK’s financial or banking system.”

With this it will be convenient to discuss amendment 21, in clause 11, page 11, line 30, at beginning insert—

“Subject to sections 7E(3) and 7ZA(6A) of the Bank of England Act 1998,”

I remind the Committee that if amendment 14 is withdrawn or negatived, amendment 21 falls.

Here we turn to the role of the National Audit Office and the new proposals to afford the NAO power to investigate the functions of the Bank. This is a positive development, which we welcome, but it is important to get the legislation right and to ensure that no loopholes are left to prevent the NAO from conducting its necessary work.

The Comptroller and Auditor General was clearly concerned about the proposals in the Bill as published that would have allowed the court of directors a veto over the new powers for the NAO. There was significant discussion, however, at the Treasury Committee and at all stages in the other place. At the Treasury Committee Andrew Bailey said that the issue was to do with

“getting the boundary right between what is appropriate, in my view, which is value for money in terms of the way we run the Bank of England, and questioning the basis of monetary policy, which would not be in my view appropriate.”

Our amendment fits in with that, though I expect that the Government will disagree with us.

The draft memorandum of understanding that the Minister provided the other day stated that the comptroller does not expect to second-guess expert discussions by Bank officials. The amendment asserts that the comptroller may inquire into the Bank’s success in achieving its policy objectives. We believe that that does not encroach beyond the boundaries of questioning the merits of policy decisions, but would assist the National Audit Office in ascertaining whether the Bank is delivering value for money. Amendment 21, which is consequential on amendment 14, would require that reports by the comptroller into the functioning of the Bank be published promptly to allow relevant Select Committees, should they wish, as well as other Members of the House, to make an assessment of the National Audit Office’s findings.

We are moving on to the part of the Bill that covers the role of the National Audit Office and the publication of its reports. One of the Bill’s objectives is to enhance the Bank of England’s accountability and clauses 9 to 11, which allow the National Audit Office to conduct value-for-money examinations of the Bank for the first time, are key in that respect.

The independence of the Bank and of the National Audit Office, which are two vital public bodies, was carefully considered in developing the arrangements, and I believe that the clauses in the Bill strike the appropriate balance. It is probably best if I first set out some background on the important role of the National Audit Office’s value-for-money studies in supporting transparency to Parliament and the public.

The National Audit Office scrutinises public spending on behalf of Parliament. It reviews whether public bodies have used public money efficiently, effectively and with economy and makes reports on those issues to Parliament. In carrying out its work, the NAO is precluded by the National Audit Act 1983 from reviewing the merits of policy objectives. That is the case in relation to all the bodies with which it currently engages and the Bill ensures that the same restriction will apply in relation to its oversight of the Bank.

That is an important point in relation to amendment 14, which I believe is unnecessary. The amendment states that

“The Comptroller may enquire into the Bank’s success in achieving its stated policy objectives but shall not enquire into the desirability of such objectives having been set.”

The Bill as drafted will have that exact effect. The comptroller will be free to question the Bank’s success in achieving its policy objectives, but not the merits of the objectives. The Bill reinforces that by setting out specific areas in which the NAO cannot question the merits of the Bank’s policy decisions. That extra protection, which has been agreed to by both the Comptroller and Auditor General and the Governor, reflects the crucial importance of protecting the independence of the Bank’s policy decisions.

In all of those areas, the Bill will allow the NAO to examine the economy, efficiency and effectiveness of the implementation of policy decisions and of the resources underpinning them, but not the merits of the decisions themselves. Specifically, the Bill carves out the merits of policy decisions taken by the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Committee, the merits of policy decisions taken by the body within the Bank responsible for the supervision of financial market infrastructures and the merits of policy decisions taken by the body within the Bank responsible for the exercise of its resolution functions, but where the Bank has used its statutory resolution powers in relation to a financial institution in difficulty, the NAO would be able to consider any resolution policy decisions relating to the institution concerned. That is particularly important given that the Bank is now the resolution authority for the UK and has primary operational responsibility for financial crisis management. In future, therefore, the NAO will be able to examine the role of the Bank in interventions like Northern Rock—it is a shame that the hon. Member for Bassetlaw is not in his place to hear that exciting news. That bespoke arrangement recognises the unique and crucial role that the Bank plays in UK economic policy. I believe that it strikes the right balance and will bring about a significant improvement in the Bank’s accountability.

The second part of amendment 14 would require the comptroller to publish reports promptly, unless the Treasury Committee judges that publication was likely to have a material adverse effect on financial stability. Again, I submit that that is unnecessary. Adequate protections are already built into the legislation to prevent the disclosure of certain types of sensitive information. Proposed new section 7H of the Bank of England Act 1998, inserted by clause 11, will ensure that the comptroller is subject to the same limitations on disclosure as the FCA in relation to information received by the Bank. Those limitations are set out in the Financial Services and Markets Act 2000 and will restrict the NAO from disclosing information held by the Bank for the purposes of monetary policy; financial operations intended to support financial institutions for purposes of financial stability; and the provision of private banking services.

Furthermore, the subject of sensitive information is covered by the memorandum of understanding between the NAO and the Bank, which ensures that there is a codified agreement between them on how sensitive information should be treated. It makes it clear that there may be instances in which the Bank is prohibited from disclosing information. Where that is the case, it will explain why that is the case to the comptroller. The memorandum also makes it clear that there may be situations in which the Bank is able to disclose information to the comptroller but legal restrictions apply to onward disclosure or publication.

In terms of the timing of publication, Parliament has rightly delegated to the comptroller discretion over the content of NAO reports and the timing of their publication. He acts independently on Parliament’s behalf, and it is important that he is able to use his judgment on how Parliament and the public are best served.

I hope that I can reassure the Committee by saying that once the comptroller has signed off a report for publication, there is an in-built incentive to lay it in Parliament and publish it within a short timeframe. Prompt publication mitigates the risk of the report’s conclusions being overtaken by events. Moreover, the process from completing the report to publication is very simple. Typically, it takes between two and four days, but it can be speeded up if required.

Amendment 21 seeks to disapply the restrictions on the disclosure of specially protected information that the National Audit Office has received from the Bank for certain reports by the Comptroller and Auditor General. As I have said, information is specially protected from time to time if it is held by the Bank for the purposes of monetary policy or for financial operations supporting financial institutions to maintain financial stability. A good example, which we heard about this morning, is emergency liquidity assistance.

The reason why restrictions are placed on the disclosure of such information is that its publication could harm the financial stability of the UK or adversely affect the Bank’s monetary policy operations. A report by the NAO on the extent to which the Bank has achieved its financial stability objective could, in fact, be destabilising if, for example, it revealed market-sensitive information about financial operations undertaken by the Bank to preserve financial stability in a particular period.

I trust that all Committee members will agree that those restrictions on disclosure are entirely appropriate and, indeed, vital. I urge the hon. Gentleman not to press his amendment.

My colleagues and I have listened to what the Minister has said. She went, with characteristic detail, into the Government’s position on this matter. My hon. Friend the Member for Bassetlaw, who is not in his place, scolded or praised me—I do not know which—for moderation earlier. We did not press our amendment to a Division on that occasion, but having listened to what the Minister has said, and because transparency is a key principle when it comes to the work of the Bank of England and we want to expand that transparency, we seek a Division on amendment 14.

Question put, That the amendment be made.

Division 1

9 February 2016

The Committee divided:

Ayes: 6
Noes: 10

Question accordingly negatived.

View Details

Clause 9 ordered to stand part of the Bill.

Clause 10

Activities indemnified by Treasury

I beg to move amendment 15, in clause 10, page 7, line 37, at end insert—

“(6A) The Treasury must lay before Parliament a copy of any report it receives under subsection (5) within one calendar month of receipt.”

As the Bill reads, clause 10 applies where the Treasury gives an indemnity or guarantee to the Bank in respect of an activity or series of activities that it undertakes. Our amendment 15 simply seeks to maximise transparency and accountability with regard to this by requiring the Treasury to publish a copy of such a report within a reasonable timeframe. We hope that the Government will accept this amendment.

If I may, I will speak to clause 10 at the same time as speaking to amendment 15. Clause 10 obviously defines the process which will deliver greater oversight of activities undertaken by the bank or a company of the bank, where that activity has been indemnified by the Treasury. In such circumstances, the Treasury takes on the risk of the activity and will bear any associated losses. It is right that the Bill allows for full NAO oversight of these activities.

The occasions on which the Treasury grants an explicit indemnity to the Bank of England are very rare. Examples include the provision of emergency liquidity during the financial crisis and, more recently, the asset purchase facility, which is the vehicle by which the Bank of England has purchased £375 billion of Government bonds to deliver the Monetary Policy Committee’s quantitative easing policy. Clearly, these are very different examples. The former relates to an operation undertaken on the Bank’s balance sheet to provide assistance to an institution in distress. The latter case is an example of an activity undertaken by a subsidiary company of the Bank. Given the Bank’s varied role, it is difficult to predict every circumstance in which an indemnity of a Bank activity might be considered necessary in the future. Clause 10 allows for discretion to be applied to each case of indemnified activity. In some circumstances a financial audit may not be required. However, the objective of this clause is clear. It will facilitate greater accountability of indemnified activities where this is appropriate.

Amendment 15 would require the Treasury to lay a report on activity indemnified by the Treasury before Parliament one calendar month after receiving it from the Bank. Let me say first that Treasury indemnities of specific Bank activities are very rare. I have cited a couple of examples. In the example of the provision of emergency liquidity during the financial crisis, clearly the information being shared between the Bank and the Treasury would have been extremely sensitive. It would have included commercially confidential material and potentially information that put at risk the stability of the wider financial sector. It is clear from just that one example that publishing a report of this kind could really work against the public interest in the future, especially if the Treasury were bound by a specific statutory deadline. The Treasury must retain that flexibility over whether and when such reports should be published. I urge the hon. Gentleman to think hard about that and withdraw the amendment, while urging the Committee to agree that clause 10 stand part of the Bill.

I mentioned earlier the possibility of compromise on the part of the Government when it comes to balancing the protection of information they believe needs to be confidential because of financial risk with the requirement for transparency. I mentioned the practice of having some matters under the line and some over the line in local authorities and on boards of school governors. I encourage the Government to think further about that possibility in relation to the areas where transparency has been requested. We reserve the right to return to the matter on Report but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 10 ordered to stand part of the Bill.

Clause 11

Examinations and reviews

I beg to move amendment 1, in clause 11, page 9, line 11, at end insert—

“(b) the economy, efficiency and effectiveness with which a Bank company has used its resources in discharging its functions.”

Amendments 1, 2 and 3 extend inserted section 7D of the Bank of England Act 1998 to enable the Comptroller and Auditor General to examine the economy, efficiency and effectiveness of Bank companies, as well as the Bank itself. “Bank company” is defined by amendment 3.

With this it will be convenient to discuss Government amendments 2 to 6.

Mr Wilson, you will have to bear with me, because we have quite a few Opposition amendments to this clause to cover and I will seek your guidance on when you would like me to touch on those. I will start with Government amendment 1 and move on to Government amendments 2 to 6.

Can I just ask you to stick to the first group of the Government amendments? We can then move on after that debate.

Thank you, Mr Wilson. That is what I am trying to do. I am just buying some time while I go through great wodges of paper here, to ensure that I do not rush ahead.

I will speak to Government amendments 1 to 6 on National Audit Office oversight of Bank subsidiaries. As we know, the Bill makes provision for the first time for the NAO to initiate its value-for-money studies of the Bank of England. As we have discussed, that delivers an important increase in the accountability of the Bank and its operations. The intention in the Bill was to grant the NAO these powers to the Bank in the broadest sense, subject to the bespoke policy carve-out, which also features in the Bill, protecting the independence of the Bank’s policy decisions, but as the Bill is drafted, the NAO’s powers to conduct value-for-money examinations in relation to companies owned by the Bank differ from its powers to conduct value-for-money examinations of the Bank itself. That was not the Government’s policy intention. The amendments will ensure that the NAO’s value-for-money powers apply on the same terms to the Bank, its subsidiaries and other Bank companies that are indemnified by the Treasury.

I will briefly outline the inconsistencies that arise through the current drafting. First, the NAO would have powers to conduct value-for-money examinations of Bank companies that have been indemnified by the Treasury only where the Treasury has directed the company concerned to send its accounts to the NAO, as provided for in section 7C of the Bank of England Act 1998, inserted by clause 10 of this Bill, and the NAO’s examination would be made under the powers given to it in section 6 of the National Audit Act 1983. Those NAO examinations would not, therefore, be subject to the bespoke policy carve-out that has been defined in the Bill. Secondly, under the Bill as drafted, subsidiaries or companies of the Bank that do not benefit from a Treasury indemnity would not be within the scope of NAO examination.

I hope that the Committee agrees that we should make the NAO’s power to initiate value-for-money examinations applicable on the same terms across the Bank, its subsidiaries and other companies indemnified by the Treasury in which the Bank has a minority interest. The amendments seek to do just that.

Having considered this matter and listened to the Minister’s detailed explanation, I can confirm that we will not oppose amendment 1.

Amendment 1 agreed to.

Amendments made: 2, in clause 11, page 9, line 12, leave out

“of the Bank (however described)”

and insert

“(however described) of the Bank or the Bank company”

Amendment 3, in clause 11, page 10, line 3, at end insert—

““Bank company” means—

(a) a company which is a subsidiary undertaking of the Bank, within the meaning of section 1162 of the Companies Act 2006;

(b) a company not within paragraph (a) in respect of which a direction under section 7C(2) has effect;”

Amendment 4, in clause 11, page 10, line 16, at end insert “or a Bank company” —(Harriett Baldwin.)

This amendment extends inserted section 7D(11) of the Bank of England Act 1998 (which provides that section 6 of the National Audit Act 1983 does not apply to the Bank) to Bank companies. Section 6 provides for economy, efficiency and effectiveness examinations by the Comptroller and Auditor General.

I beg to move amendment 16, in clause 11, page 10, line 19, at end insert

“and the Comptroller must lay a copy of the first memorandum of understanding to be prepared, and of any subsequent revisions, before both Houses of Parliament”.

With this it will be convenient to discuss the following:

Amendment 17, in clause 11, page 10, line 26, after “procedure” insert

“which may be reviewed by the Treasury Committee of the House of Commons”

Amendment 18, in clause 11, page 10, line 32, at end insert—

‘(3) The Comptroller must lay before Parliament a copy of the Memorandum within one calendar month of its preparation.”

Amendment 19, in clause 11, page 10, line 32, at end insert—

‘(4) The Treasury Committee of the House of Commons may in its absolute discretion enquire into the genesis and contents of the Memorandum.”

There was significant discussion of the extent to which the Comptroller and Auditor General is to be involved in the audits of the Bank during the Treasury Committee autumn hearings attended by the Chancellor and the Governor of the Bank of England and at various stages of the Bill’s passage through the other place. From statements made by the National Audit Office’s chair, Lord Bichard, and from the Chairs of the Treasury Committee and the Public Accounts Committee, I am aware that positive movement is believed to have been made following significant early criticism.

On Report in the House of Lords, the Government spokesperson said that

“to protect the Bank’s independent status the Bill provides for a policy carve-out from the scope of NAO value-for-money reviews”—[Official Report, House of Lords, 15 December 2015; Vol. 767, c. 1996.]

and that there had been significant discussions between the Bank, the NAO and the Treasury. We welcome the removal of the original proposal to allow the court a veto over NAO investigations. I thank the Minister for forwarding to my office yesterday a copy of the memorandum of understanding being discussed by the Bank and the NAO. I understand that it may be approved or finalised in the days ahead. I stated on Second Reading that I had written to the Minister asking that the memorandum be published during the lifetime of the Bill, and she acknowledged in her response that that would be her preference, so I am pleased that that has been possible.

I believe the draft memorandum has been circulated only to members of this Bill Committee—I hope the Minister will correct me if I am wrong and it has been seen anywhere else. We tabled amendment 16 to require that the memorandum be published and laid before both Houses of Parliament, which it appears will now happen. I also recognise that amendment 18 is somewhat repetitious on this point. We may require further discussion on the draft memorandum on Report. When it appears, it will have been finalised or approved by all parties to it. My initial reading of the draft memorandum is that it does not move us on significantly, in that both sides are able to publish letters that set out whether they agree with each other’s proposals to carry out or refuse an investigation, but there is no clear information in the memorandum on how such a dispute would be resolved. Of course, resolution is key in such matters.

We tabled amendments 17, 19 and 20 to allow for further scrutiny of the dispute procedure. It is our view that a role for the Treasury Committee could be a useful one, where such a dispute was left unresolved and it was clear the procedure was not working.

I speak as a member of the Treasury Committee, although obviously I do not speak for the Committee. I remind the Minister of the Committee’s view that one of our principal roles is to protect value for money on behalf of the taxpayer. Regulatory bodies are often, for very good reasons, concerned with regulating and may be remiss when it comes to consideration of value for money. This is particularly important because regulatory functions have to be carried out effectively, and there is a cost in terms of resources: sometimes regulators do not have these resources, and sometimes resources are put in in the wrong way. The Select Committee is keen to ensure that the auditor plays a distinct and effective role. I underline to the Minister that, regardless of formal decisions here, the Treasury Committee has an ongoing brief to ensure that the relationship between the Bank and the auditor runs smoothly and the auditor is allowed to do his business.

I thank the hon. Member for Leeds East for his good summary of the deliberations so far on this. As I said in my letter to him last week, I did push both the Comptroller and Auditor General and the Governor on whether or not they would allow the draft memorandum of understanding to be shared with this Committee. I confirm that yesterday we were able to send copies of that draft memorandum of understanding to all members of this Committee, the Chair of the Treasury Committee and the Chair of the Public Accounts Committee, which of course scrutinises and works most closely with the National Audit Office. That is the extent to which the draft memorandum of understanding has been shared at this point.

The expectation, as I understand it, is that the court will meet on Thursday, and that is the forum in which amendments to the current draft may be suggested or approved. I assure hon. Members that as soon as we have the final version, the memorandum can be more widely disseminated—certainly in time for Report and Third Reading. Amendments 16 and 18 are therefore not necessary.

Amendments 17 and 19 would give the Treasury Committee express powers to consider various aspects of the memorandum. I am sure that the hon. Members for East Lothian and for Bassetlaw know that the Treasury Committee already has the power to examine all matters connected with the policy and administration of the Bank of England and can choose what inquiries it undertakes. In addition, the National Audit Office works closely with the Public Accounts Committee, so one can imagine conversations taking place between the Chairs of those two very important Committees about what aspects they want to look at. If the Treasury Committee or indeed the Public Accounts Committee determines that it would be appropriate to conduct an inquiry into the memorandum of understanding, it could do so. The amendments might suggest that the powers of the Select Committees to conduct inquiries are in some way limited to those powers that have expressly been given to them in this primary legislation. That would be an unfortunate suggestion, so I hope that the amendments will not be pressed.

The hon. Member for Leeds East asked about arbitration in a dispute resolution process. The memorandum of understanding sets out the dispute resolution process, as required by the Bill, but we should not expect that process to be called upon. We expect that the Comptroller and Auditor General would be able to reach an agreement with the Bank regarding his work, in the same way that he does with all the other public bodies with which he engages. The dispute resolution process set out does not call upon any independent arbiter. The draft document simply indicates that the Bank and the Comptroller and Auditor General are both content with attempting to resolve any disputes between themselves, and that they commit to the publication of their difference of view where any disputes remain unresolved. If this is a framework with which they are both content, I do not see any need to involve a third party in that process. When we have received the final version of the memorandum of understanding and are considering the Bill again on Report, I am sure that we will return to this question. On that basis, I urge the hon. Gentleman to withdraw the amendment.

Again, I welcome the Minister’s confirmation that the court will consider the draft memorandum further on Thursday and that it will be approved or amended that day. I also welcome the fact that the final version will be more widely circulated in time for Third Reading and Report. We recognise that events have overtaken our amendments and therefore will not pursue them. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

I beg to move amendment 20, in clause 11, page 11, line 6, after “must” insert “promptly”.

We wish to make the point that we need the report to be published promptly. Otherwise, for example, the Treasury Committee, with all its expertise, cannot review using its powers, as the Minister has just referred to.

With regard to amendment 20 and the Treasury value-for-money reports, new section 7F of the Bank of England Act 1998, which is inserted by clause 11, preserves the existing power for the Treasury to commission value-for-money reviews of the way the functions of the Prudential Regulation Authority are exercised by the Bank. There is an equivalent power for the Treasury to commission such reviews of the functions of the Financial Conduct Authority. Taken together, these important powers ensure that the Treasury can carry out cross-cutting reviews of the operation of financial regulation in this country.

Amendment 20 would require the Treasury promptly to lay before Parliament any reports it receives following reviews into the PRA. It is, of course, vital that those reports are made available to Parliament to inform its deliberations into the regulation of financial services. Indeed, the Treasury is already required to lay reports into the operation of the PRA and the FCA before Parliament and to publish them. I assure the hon. Gentleman that the Treasury takes its obligations to this House very seriously and is concerned to fulfil them in good time. I am happy to confirm that any such reports will indeed be promptly laid before the House. There is no need for that requirement to be in the Bill.

I welcome the Minister putting on the record her desire for the reports to be published promptly. I would welcome it even more if she would, therefore, accept the amendment in order to insert the word “promptly” into statute. That would be one of many pieces of history that I am sure she will make in her role of shadow City Minister.

Actual City Minister.

I do apologise for the role reversal. I was even called a moderate today so we are getting confused, although I am most moderate. I invite the Minister to reconsider her position on the amendment. Or shall I assume, unless she intervenes, that the matter is closed?

I am afraid the hon. Gentleman has not convinced me at this stage. I am sure we will return to this on Report.

Like the Minister, we have put on record our thoughts on this matter. Although we reserve the right to return to it at a later stage, we will not be pushing for a vote, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: 5, in clause 11, page 11, line 20, leave out “only”.

Amendments 5 and 6 amend inserted section 7G of the Bank of England Act 1998 to provide that where the Comptroller is examining a Bank company under inserted section 7D, he will have access to documents and information held by that company and its auditors.

Amendment 6, in clause 11, page 11, line 24, at end insert—

‘( ) In the case of an examination under section 7D(1)(b), subsection (1) also applies to documents in the custody or under the control of—

(a) the company to which the examination relates;

(b) the auditor or auditors of that company.”—(Harriett Baldwin.)

Question proposed, That the clause, as amended, stand part of the Bill.

At this point I will simply commend clause 11 to the Committee. I cannot be certain of the Committee’s enthusiasm, but I cannot imagine that anyone disagrees with a clause that will increase the Bank’s accountability while protecting its independent status and recognising the complex nature of its activities. The clause, as amended, will achieve that.

Question put and agreed to.

Clause 11, as amended, accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Sarah Newton.)

Adjourned till Thursday 11 February at half-past Eleven o’clock.

Written evidence reported to the House

BoE 01 Institute of Directors

Enterprise Bill [ Lords ] (Second sitting)

The Committee consisted of the following Members:

Chair: Ms Karen Buck

† Argar, Edward (Charnwood) (Con)

† Barclay, Stephen (North East Cambridgeshire) (Con)

† Bardell, Hannah (Livingston) (SNP)

† Brennan, Kevin (Cardiff West) (Lab)

† Brown, Alan (Kilmarnock and Loudoun) (SNP)

† Churchill, Jo (Bury St Edmunds) (Con)

† Creagh, Mary (Wakefield) (Lab)

† Esterson, Bill (Sefton Central) (Lab)

† Flint, Caroline (Don Valley) (Lab)

† Frazer, Lucy (South East Cambridgeshire) (Con)

† Howell, John (Henley) (Con)

Lewis, Brandon (Minister for Housing and Planning)

† McKinnell, Catherine (Newcastle upon Tyne North) (Lab)

† Mackintosh, David (Northampton South) (Con)

† Morden, Jessica (Newport East) (Lab)

† Pawsey, Mark (Rugby) (Con)

† Solloway, Amanda (Derby North) (Con)

† Soubry, Anna (Minister for Small Business, Industry and Enterprise)

Joanna Welham, Committee Clerk

† attended the Committee

Public Bill Committee

Tuesday 9 February 2016

(Afternoon)

[Ms Karen Buck in the Chair]

Enterprise Bill [Lords]

Clause 1

Small Business Commissioner

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I beg to move amendment 38, in clause 1, page 1, line 11, at end insert—

‘(c) to consider complaints from small businesses relating to their access to finance, and, where the Commissioner considers it appropriate, to make recommendations to the Secretary of State about measures that should be taken to improve small businesses’ access to finance.’

This amendment would extend the remit of the Commissioner to receive complaints about the access of small businesses to finance, and would enable the Commissioner to make recommendations to the Secretary of State about measures to improve small businesses’ access to finance.

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With this it will be convenient to discuss the following:

Amendment 39, in clause 1, page 1, line 11, at end insert—

‘(2A) The complaints at subsection 2(b) include complaints from

(a) small businesses relating to cash retentions and

(b) construction firms regarding cash retention by companies.’

This amendment would make it clear that the Small Business Commissioner’s remit included complaints from small businesses about cash retentions and from construction firms about cash retention by other companies.

New clause 12—Payment practices: protection of retention monies in the construction industry

‘(1) Any clause in a construction contract or related contract enabling a party to withhold retention monies shall be of no effect unless, upon their withholding, the monies are deposited forthwith in a retention deposit scheme authorised by the Secretary of State.

(2) Where a clause is rendered ineffective under this section any retention monies already withheld and not placed in a retention deposit scheme must be refunded in full to the party providing them.

(3) For the purpose of section (1) the Secretary of State shall make regulations to govern arrangements for establishing and operating retention deposit schemes.

(4) Arrangements under section (3) must be arrangements under which a body or person (“the scheme administrator”) undertakes to establish and maintain a retention deposit scheme (“the scheme”).

(5) The regulations made under section (3) must include requirements relating to—

(a) the selection and appointment of the scheme administrator;

(b) the funding and management of the scheme; and

(c) the release of retention monies from the scheme.

(6) Where the Secretary of State is satisfied that a proposed scheme complies with the regulations made under section (3) he may give authority for the proposed scheme to operate as a retention deposit scheme.

(7) The Secretary of State may delegate his power under subsection (6) to the Scottish Government, Welsh Government and Northern Ireland Executive.

(8) The monies held in the scheme must solely be retention monies and any interest accruing on the monies.

(9) In this section—

“construction contract” has the same meaning as in the Housing Grants, Construction and Regeneration Act 1996.

“retention monies” refers to monies which are withheld from monies which would otherwise be due under a construction contract, the effect of which is to provide the paying party with security for the current and future performance by the party carrying out construction operations of any or all of the latter’s obligations under the contract.’

This new Clause would require retention monies provided for within construction industry contracts to be placed in an approved retention deposit scheme.

New clause 16—Information on the Enterprise Investment Scheme and Seed Enterprise Investment Scheme

‘The Secretary of State must publish information and guidance, for investors, about the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme.’

This new Clause would place a requirement on the Secretary of State to publish information and guidance on the availability of Enterprise Investment Scheme and the Seed Enterprise Investment Scheme, which provide tax relief for investors in early stage small businesses.

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Welcome to our deliberations, Ms Buck. It is a pleasure to serve under your chairmanship.

This group of amendments and new clauses covers access to finance, cash retention, the enterprise investment scheme and seed enterprise investment scheme, and how they relate to the small business commissioner. When we talk about the small business commissioner’s remit being extended to cover complaints about access to finance, it is not so much about dealing with specific complaints about specific funding applications, but about having someone who will listen to small businesses’ concerns about access to finance, who can signpost them to help them navigate the system—one of the roles that the Government do envisage for the commissioner—who can take complaints about flaws in access to finance and who can advocate at a high level for small and medium-sized enterprises, something which the US Small Business Administration does extremely well.

In the 2014 Department for Business, Innovation and Skills small business survey, 39% of SMEs said that they had difficulty in getting the money they wanted when applying for finance. For microbusinesses, that figure rose to 42%. It was 32% for small businesses and 25% for medium businesses. Some 48% of SMEs had difficulty accessing finance through bank loans. For Government grants, it was 53%. It seems odd that the small business commissioner’s remit would be so narrow as to overlook such a basic issue faced by so many SMEs. Most small businesses who talk to me say that late payment is the No. 1 issue, but that is closely followed by a lack of access to finance, as borne out by the Federation of Small Businesses, which is why this is such a potentially important area of interest for somebody called a small business commissioner.

If the commissioner is to offer a signposting service, although that is not what is needed on late payments, it would certainly suit the question of access to finance, particularly when it comes to the opportunities of peer-to-peer lending and Government contracts, because SMEs cannot navigate the system and do not know what is available to them. As the Chair of the Business, Innovation and Skills Committee told us on Second Reading last week:

“The problem of access to finance remains a pertinent issue for firms, which is why the Select Committee has launched an inquiry into it. If the Bill’s purpose is to make the UK the best place in Europe to grow a business, why does it not tackle access to finance? If the Government are serious about ensuring growth, why does the Bill not put in place measures to facilitate an expansion of scale-ups to power employment and economic growth?”—[Official Report, 2 February 2016; Vol. 605, cc. 837-838.]

Lord Mitchell, using his vast experience in business, spoke on the matter during deliberations in the Lords and discussed the problems in various Government schemes, saying that there had been good growth in non-Government schemes, but not so much in Government initiatives. He said that the market for alternative finance had grown, but

“largely as a result of the paralysis of the high street banks”—[Official Report, House of Lords, 3 March 2015; Vol. 760, cc. 129-130.]

Challenger banks have made good progress—Metro Bank and Aldermore, and Santander, if it can be regarded as a challenger bank, are changing the landscape. Peer-to-peer lending has taken off and is providing an interesting opportunity for many small firms. The changes are welcome and most hon. Members would accept that the traditional high street banks have not done the job of providing good sources of finance, to smaller businesses in particular, over many years. Having alternative sources of finance stepping in is welcome.

We need to know what is happening, and this is where the opportunity for the small business commissioner comes in. We need to know whether what is happening or what is changing is adequate.

Lord Mitchell gave the example of a start-up company from Merseyside, similar to the one I quoted earlier. A start-up company director found access to government funding so incomprehensible she gave up searching—a young entrepreneur with a tech start-up in the north-west, a prime example of the sort of start-up the Government have said repeatedly that they want to help to get off the ground. When she ran her postcode on the Government site she was presented with several hundred schemes for Wales and Scotland. When she entered her details for updates on suitable funding schemes she could bid for, she received a call from a company that wanted several hundred pounds upfront, not to help her put together bids, but to navigate the Government website on her company’s behalf, and email her with a list of schemes she could bid for. Many companies exist to charge start-ups for understanding the Government funding scheme for them. While this is clearly an example of entrepreneurialism on one level, I suggest it says more about the difficulties in navigating the Government’s funding processes.

A small business commissioner would be in a very strong position to represent the interests of small businesses, especially start-ups, when it comes to championing their interests on access to finance, whether from Government or elsewhere. Traditional lending is not doing the job that it needs to do. Alternative finance is a major opportunity and the small business commissioner should be a part of that.

Research undertaken by Everline and the Centre for Economics and Business Research towards the end of last year found that although small businesses have big growth plans for 2015, they are unable to carry them out due to a lack of finance and talent with the right skills. In the current market, most SMEs will only approach larger banks when seeking finance, even though the process can be time consuming and the rejection rate is about 50%. Those small businesses have the potential to drive growth and employment in the UK but are hampered by not only a lack of finance but a lack of confidence in trying to access the working capital they need—more than half think that traditional lenders are not interested in lending to them, and they may well be right, given the feedback that I have received.

Although a large number of alternative finance providers are willing to lend, and might also have more suitable product solutions, small business owners often are not even aware of their existence. As a result, small businesses need support to increase their knowledge of other finance options and prevent banks from always being the default choice. That should ultimately improve the supply of cash flow to viable small businesses who need additional working capital to aid growth, fill a cash gap or take advantage of a market opportunity.

How can we improve access to finance for small businesses? There is clearly a significant demand for easier access to finance for small businesses. To date, the market has been dominated by banks, whose products are often not adequately tailored to the specific requirements of small businesses. Particularly problematic are short-term cash flow needs, which demand a level of control and flexibility around speed of access and repayment timeframes that simply is not available from traditional lenders.

The small business commissioner could provide two things, if we are considering the scope of the office, both of which sit logically with the signposting and advocating approach that the Government want the office to take. They both also offer a shift from a person who reacts to complaints to one who actively supports SMEs and helps them to grow. The first thing it could provide is an accessible signposting service that offers clear advice to SMEs about the finance options available to them and helps them to capitalise on alternative funding, similar to that offered by the Small Business Administration in the United States. The other provision is also similar to what is offered by the US system. It would give the interests of small businesses on the issue of access to finance a real voice before Government. So much of the problem is not about whether the money is there or not, but about making sure that the Government do the right thing in making SME funding available. The Public Accounts Committee report in 2013 made many of the same points: SMEs do not know what is available to them, or their appeal rights, and the Government are not doing enough to link them to finance options.

Let me move on to cash retentions. Cash retentions in the construction industry are a particular problem of late payment covered by this group of amendments. They have been particularly problematic over many years, particularly for smaller firms in the supply chain. For example, a firm in my constituency, Jenkins, showed me the shelf full of files of cash retentions from contracts it has been involved in—some of them reaching back two or three years or more, some five, six or even 10 years.

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I am looking at the amendments—does the hon. Gentleman think that they are really necessary? Clause 1(2)(b) refers to “payment matters”, and clause 4(4) defines “payment matter” as relating to a request for payment, which generally relates to a question of supply. Is it not possible to say that cash retentions, which are in effect a request for payment, are included in the Bill? Would that definition not give some flexibility to the small business commissioner to focus on what really matters to him, whether that is late payments per se or some aspect of late payment?

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That is an interesting point. I am sure that the Minister will have some theories in response to that intervention. This was debated at length in the Lords, and the Minister there accepted that cash retentions are an important, separate set of issues. I am sure the Minister will talk in detail about why the Government have agreed to set up a review of the issue and make proposals. These are very much probing amendments to consider this particularly acute issue of late payment within the construction sector. That is why we have tabled the amendments and why the Lords spent so long on this issue and a similar amendment.

Cash retentions in the construction industry are withheld as a form of security to encourage firms to return to remedy defects. In practice, the prime motivation for the withholding can be to improve the working capital of the withholding party. In our deliberations this morning, we talked about some of the problems of late payment being used as a form of working capital, or to support treasury in the public sector; a similar point applies in the construction sector. Cash retentions are ultimately funded by small and medium-sized enterprises in construction supply chains. Each year, small businesses lose millions of pounds of retention moneys because of upstream insolvencies or because they give up chasing the release of the moneys. New clause 12 is designed to ring-fence retention moneys by placing a statutory obligation on organisations withholding retentions to deposit moneys in a retention deposit scheme. It should be noted that retention moneys legally belong to the party from whom they have been withheld. They are required to be released to that party—half on handover of the work and the other half normally 12 months later. In practice, the period is considerably longer. I mentioned Jenkins, a firm in my constituency where that has often been the case, but where it is common for it to take three or four more years.

Subsection (1) of new clause 12 states that unless the party withholding retention moneys deposits them immediately in a deposit retention scheme, any contractual clause enabling such withholding has no legal effect. Any moneys previously deducted must be returned in full. Construction firms already have a statutory right under part 2 of the Housing Grants, Construction and Regeneration Act 1996 to suspend their work for non-payment. The retention deposit scheme could be modelled on the tenancy deposit schemes introduced by regulations issued under the Housing Act 2004, as amended by the Localism Act 2011. Currently, three tenancy deposit schemes are Government-approved. Landlords of shorthold tenancies must place tenants’ deposits in one of these schemes. Tenants’ deposits are provided as security for the performance of the tenants’ existing and future obligations; retention moneys serve the same purpose.

One of the schemes is run by a not-for-profit enterprise. The Dispute Service Limited, not surprisingly, operates a scheme called the Tenancy Deposit Scheme. The scheme held—at least when my notes were written—more than a million deposits. It is funded by the interest earned on the deposits and any excess profit is channelled into a charitable foundation to be used to raise standards in the letting sector of the property industry. I am informed that the CEO of the scheme has already expressed his interest in expanding the scheme for the purpose of depositing retention moneys. Therefore much of the new clause reflects the requirements of the Housing Act 2004 in so far as they relate to tenancy deposit schemes.

The new clause gives power to the Secretary of State and to the devolved Administrations, if the Secretary of State decides to devolve that power, to introduce regulations for the purpose of approving prospective retention deposit schemes and their governance. The regulations will need to address other matters—for example, the resolution of disputes over the release of retention moneys. Statutory adjudication in the construction industry already exists under the 1996 Act. Furthermore, certain construction contracts may need to be excluded from the scope of the regulations, such as domestic householder contracts. The Act excludes domestic contracts and a number of other types of contract.

The new clause would transform an industry in which most of the added value is provided by small firms. With retention moneys properly protected, small firms will be able to offer the moneys as security for further lending to improve cash flow, helping them to grow and improve their productivity. Furthermore, it will reduce the huge losses suffered by those firms as a result of upstream insolvencies and having to give up chasing an outstanding retention. More than £3 billion of retention moneys are outstanding at any one time. Ultimately, that sum is financed by small firms in the industry. This new clause would give them the protection and security they need and deserve.

Fifty-two years ago, a Government report, the Banwell report, recommended the abolition of retentions. Twenty-two years ago, a joint construction industry/Government report, the Latham report, recommended that cash retentions should be protected in a trust account. The Select Committee on Business, Innovation and Skills recommended, in 2002 and 2008, the phasing out of the cash retention system because it was outdated and unfair to small firms. Agreeing this amendment would finally realise all those ambitions, as well as helping the Government to realise the ambition of zero retentions by 2025.

New clause 16 addresses the enterprise investment scheme and the seed enterprise investment scheme. Both schemes deliver to the firms taking part in them. They were introduced by the previous Labour Government and, for the firms involved, are very successful, particularly in sectors such as tech, where the seed enterprise investment scheme is extremely important. However, very few business people and very few advisers, either accountants or lawyers, are aware of the schemes. That is the reason for tabling new clause 16. Again, if we talk about signposting being a prime responsibility of the small business commissioner, these are exactly the kinds of schemes that would fit very well into those responsibilities.

As we said earlier, this is an opportunity to boost enterprise and provide opportunities for small businesses to gain access to much-needed finance, particularly in start-up and in the early days. Everybody in this Committee and across the whole House would support opportunities to boost small business to grow the economy. Giving the commissioner that responsibility would be extremely helpful. On the matter of the enterprise investment scheme and similar schemes, the Institute of Directors was very supportive of giving this responsibility to the commissioner. It made the same point that not enough of its members are aware of the opportunities that exist and agrees there is potential for improvement.

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I am not minded to allow a stand part debate on clause 1. If any Members want to make any general remarks, this would be the right time for them to do so.

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It is a pleasure to serve under your chairmanship, Ms Buck. I want to focus on the issue of retentions, which relates to amendment 39 and new clause 12. I spoke about retention on Second Reading, and one of the reasons I wanted to serve on the Bill Committee was to push for this.

We have already had two votes—very much partisan votes—on amendments that I had imagined were uncontroversial. This is a major issue for the industry, so I was hoping for some cross-party consensus on these amendments. I note the intervention from the hon. and learned Member for South East Cambridgeshire, which seemed to be an intervention against new clause 12 and amendment 39. If the setting up of the new small business commissioner was a way of addressing this long-standing issue, I do not think the business experts would be lobbying so hard for these amendments to resolve it. Also, if this was a method of dealing with it, it seems strange that the Government should set up a review specifically to looks retentions. That seems counterintuitive to me.

Just to recap the main issues, retentions are basically to do with a cash-flow problem. Retentions usually equate to about 5% of the cost of a job, which is held until the end of the maintenance period, which is usually a year after completion and commission of the main job. That 5% quite often equates to the profit margin, especially for small companies, so if major companies are not releasing these retentions, then companies do not have access to their profits. That is a major cash-flow issue, and it does not take a genius to see that if there is no profit, there is no company in the long run.

We heard earlier that up to £3 billion can be held at any one time in retentions. Last year, £40 million was lost due to insolvencies—that is, one company going bust that was holding retentions that were due to other companies. Those companies lose that money and, of course, end up paying off workers.

The cash-flow issue also means that companies cannot invest in training and apprenticeships. I tried to draw a parallel on Second Reading, in that one good aspect of the Bill is the attempt to create new apprenticeships in England and Wales, yet retention actually prevents the creation of apprenticeships in the engineering industry. These are specialist apprenticeships, which can lead to rewarding and well paid jobs. We should be doing everything we can to sustain that industry, to sustain those jobs and that training.

The suggested model is for a retention deposit scheme, modelled on a tenancy deposit scheme. This accords with housing legislation in this country and legislation in other countries that, as we have heard, have already looked at resolving the matter of retentions. Retentions in trust still provide a waiver over subcontractors who pay cash retentions. It is still a method of getting subcontractors back on site if there are defects to be fixed, or it provides money that can be accessed to pay for the defects. More importantly, it means that subcontractors can get the money that is legitimately due to them.

I urge Members to think carefully about amendment 39, which would help to address the question of cash retentions, and new clause 12, which would resolve the matter once and for all.

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It is a pleasure to serve under your chairwomanship, Ms Buck.

I want to speak briefly to amendment 38 and new clause 16. Small and medium-sized enterprises have a vital role in driving the UK’s economic recovery, and it is a vital task of Government to ensure that finance is available to them to encourage investment and growth.

We welcome the findings of the British Business Bank’s small business finance markets report, which was published this month. It paints an encouraging picture of lending to small businesses in the past year, with an increase in equity finance for smaller businesses—there was growth of 43% in the year to October 2015. Bank lending, which continues to be the main form of finance for smaller businesses, continues to improve too, but obviously there are still significant challenges there.

However, as was mentioned earlier, 56% of smaller businesses are looking to grow their turnover this year. It is essential that suitable finance should be available to support those growth ambitions and that the Government should not rest on their achievements of the past year. By accepting the amendment, which we support, the UK Government would give the small business commissioner the power to champion lending for small businesses and to make constructive recommendations to the Government on how to encourage lending to SMEs.

As for new clause 16, we recognise that new rules were introduced for venture capital trusts, enterprise investment schemes and seed investment schemes by the Chancellor, and that the scheme would be a mechanism for incentivising investment in small enterprises. Again, we support the new clause, and encourage the Government—I hope we can see some cross-party consensus—to bring forward details and guidance about the availability of the scheme. What we are talking about is somewhat of a marketing exercise, but it is a question of getting the information out. All too often—certainly when I worked in the private sector, in the oil industry—the schemes that were available were various. Companies were not aware of what was available. It is important that we market schemes and put them out there, so that as many companies as possible take up opportunities.

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It is a pleasure to serve under your chairmanship, Ms Buck. I join the hon. Member for Sefton Central in welcoming you to your Committee Chair role for the first time. I am sure that we will all do all we can to make your experience one that you will remember enjoyably.

I will speak to the amendments—and oppose them—beginning with cash retentions. We had an extremely good debate just the other week in Westminster Hall. It was called by the hon. Member for Upper Bann (David Simpson), who rightly brought the matter before the House yet again. It is fair to say that there is absolute cross-party agreement about the need to reform cash retentions in the construction industry. I am very open about it: I think they are outdated and I do not think they are fair. They are particularly unfair to small businesses.

If the Committee will forgive me, let me say that the amendment has come too soon, and the reason is the work we are doing. We have set up a full review, and I am grateful to the Construction Leadership Council. Andrew Wolstenholme, the chief executive of Crossrail, is overseeing a full review of cash retentions in the construction industry. His work will not be completed until some time in March. His review will then come forward with recommendations.

It could be that the trust—an idea that I am familiar with—is the best way to make sure we sort out the problem of cash retentions, but there are other ideas that were debated in Westminster Hall. For example, a better way to do it might be some sort of bond scheme. Many hon. Members will be familiar with that from section 106 agreements in our work in our constituencies. To make sure that roads in housing developments are completed, the developer has to put money into a bond scheme.

There may be merit in what is being proposed, but now is not the time to do it. I think that the hon. Members for Livingston and for Kilmarnock and Loudoun have come to it too soon, because there may be alternatives. It may be that, as a result of Mr Wolstenholme’s review, other things might need to be added to legislation in the future. I think it has come too early, though I have huge sympathy for where it is going in its thrust.

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I am grateful to the hon. Lady for her comments. I appreciate that we are in the middle of a review, but is she not tempted to put this in legislation, given there is such support for it across the parties and the industry? I met with the specialist contractors association recently. We are talking about businesses that are going out of business because of this issue. I wonder whether the hon. Lady would consider a pilot scheme—perhaps we will write to her collectively.

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Everybody is jumping too quickly. Let us have the review. One of the big mistakes we make in this place, whichever party is in control, is that we often rush into legislation in a knee-jerk way. What is important is that we all agree there are problems that need to be solved. Let us trust Mr Wolstenholme to do a thorough review and come up with recommendations. Those will then go out to public consultation. If legislation is needed, we can draft that, with, it is hoped, cross-party support—that would be marvellous. We can then make sure that we address every single feature of it and get the right result for our construction industry.

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May I say what a pleasure it is to serve under your first chairpersonship, Ms Buck? I want to say how much I concur with the Minister. I have run a construction firm for over two decades and retention has blighted that industry for that time. If we rush at this and get the wrong solution, we will merely be knotting the ball of wool in a different place. That will not serve any construction firm well, small or large. I welcome the review and look forward to being able to work on a cross-party basis, because we all have builders and we all need builders and small businessmen to work with those large companies, so that the system is not sclerotic but works well.

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I absolutely agree with my hon. Friend. Only yesterday I met somebody with whom I specifically discussed the problem of the retention scheme and the adverse effect it has on small businesses. I hope that this matter would not necessarily need to be pushed to the vote, if only because we are in agreement. We are all going in the right direction, but now is not the time.

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I hear what the Minister is saying about not rushing in with a knee-jerk solution, but let us not be kidded: this problem has been around for a long time. It is not that this solution came from nowhere recently; it has been mooted before. Is it not the case that when the Bill was in the other place, an amendment was tabled that effectively put a review on a statutory footing in the Bill, which was not passed? Therefore it seems a bit contradictory that we are now having a review. How can we have any comfort that the review is going to come to something? The opposite of a knee-jerk reaction is a Government review that kicks things into the long grass. I am not saying that the Minister wants to kick it into the long grass, but there is always a risk that things get delayed and delayed. We want to do something now, but how can we get a firm commitment that it is going to happen?

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Order. I gently reinforce the fact that we must have short interventions, not speeches.

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Apologies, Ms Buck.

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I know that we do not know each other well, but the hon. Gentleman can be assured that this Minister gives absolutely her word that this matter is not going to be kicked into any long grass. In fact it is very short grass, which has only just grown, because the review will be completed by March and then recommendations will go out to public consultation. If legislation is required as a result of that consultation, I will be happy to be the Minister to take that through.

I do not wish to chide the hon. Gentleman, but he may not realise that there is a statutory adjudication scheme already in place for disputes in relation to the construction retention problem that we know is there. That system does exist. I know that small businesses often do not want to go to the adjudicator because they are fearful of complaining about a big business and souring relations—they fear that future business relations will be damaged—but it must be said that the system does exist. I wanted to put that on the record.

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Until the Minister made that point, I think the whole Committee was with what she was saying about legislating in haste and repenting at leisure, but she then seemed to say not that she was looking forward to legislation in the next Queen’s Speech—which seemed to be the road she was going down—but that she thought what was already in place might well be adequate. Is that what she is telling the Committee?

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No—the hon. Gentleman knows I do not mean that. Do not be silly.

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If not, she must clarify it on the record. That is why we are here. She does not need to look at the clock every five minutes. We need to hear it and have it on the record.

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Some might say I was being slightly patronised there, Ms Buck, but I am sure that that was not the hon. Gentleman’s intention. There will be a review, which will report in March, from which a series of recommendations will go out for public consultation. I am very keen that we reform the retention system in the construction industry. If anyone wants me to repeat that, I will say it yet again, because I have said it not only in this Committee, but in the Westminster Hall debate last month: it needs reforming and we need to get on with it. I could make the point that some people were in government for 13 years and did not deal with the problem, but that would be churlish of me and I would not do such a thing. Nevertheless, the point I am making is that there is an adjudication system to help those companies that suffer.

I have also conceded that I am told on very good authority that, for reasons that we know and understand, the existing system is not working as we would like it to. In any event, I think it is out of date and unfair and it needs sorting out. I would be delighted to be the Minister who sorts it out once and for all, so that we have a modern, fair system that protects those who need to take care of all the snags and things that come to light after a build has been completed and, at the same time, ensures that the money is there so that they can make good any defects. There is a way to sort it out. It might not be what is proposed in the amendment—there might be a better way to do it—but those are exactly the things that the review will explore.

Amendment 38 specifically says that the new small business commissioner would consider complaints relating to access to finance, not complaints about whether or not small businesses have knowledge about the various schemes. One of my predecessor’s achievements was bring together as many of the Government’s schemes as possible through one portal: the British Business Bank. If someone wants access to finance, they can go to their bank or to their accountant and ask for advice, or they can seek the advice of the Federation of Small Businesses. Equally, they can google it, and one of the results will be the British Business Bank, which gives all the details of all the various schemes, not only those operated by the Government—start-up loans being an extremely good example—but also advice on peer-to-peer lending, the angel schemes, crowdfunding and so on. We are beginning to see a real change in the amount of information available, especially from that one-stop-shop, the British Business Bank, so that small businesses know where to go if they are looking for finance.

The amendment, though, is about small businesses’ complaints about their access to finance. With respect, the Financial Ombudsman Service already deals specifically with such complaints. Were we to extend the role of the small business commissioner, all we would be doing is duplicating an existing system that everyone seems to accept is working well. As I said earlier, we learned from the consultation that the one thing no one wants is the duplication of services.

The Financial Ombudsman Service is working well, and it has respect. Small businesses can go there to make their complaints; Members may well have referred their constituents. We already have exactly the device required. I argue strongly that expanding the remit of the small business commissioner would not be appropriate when it comes to finance, because we already have a very good system. Small businesses are within the remit of the Financial Ombudsman Service if they have a turnover of less than €2 million and fewer than 10 employees. So it is there for the microbusinesses.

The Financial Conduct Authority is currently consulting on whether even more small businesses should be given access to the FOS. The FOS analyses the complaints it receives from microbusinesses and reports on them every year. It also publishes occasional stand-alone reports, such as, in August 2015, “Micro-enterprises and financial services—a review of complaints”, which had the express purpose of highlighting areas of good practice and promoting change where it is needed. Access to finance for businesses is also regularly considered by Select Committees.

With respect, I really believe that the amendment would represent an unnecessary extension of the remit of the small business commissioner. Again, we must make it very clear that the primary function of the small business commissioner is to address the big problem that all small businesses complain about, which is late payment. That is where I want his or her focus and resources to be.

I turn to other matters. I think I have dealt with cash retentions in the construction industry, but I want to deal with the other amendment, which deals with the enterprise investment scheme and the seed enterprise investment scheme. Details are already published, with guidance and information, on gov.uk. We in BIS support and complement this work with promotional activity. Again, with respect, I really do not think the amendment is necessary, because what it wants to achieve is already being done.

I think that is it, unless there is anything else I need to add. I ask for the amendment on cash retentions to be withdrawn because I honestly think we are going to make huge progress very quickly and we are all on the same page. I respectfully suggest that the other amendment is just not needed: we do not need to extend the remit of the small business commissioner in this way, because others are doing the job very well for small businesses.

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Let us deal with access to finance and the EIS and seed schemes. The Minister needs to read the whole of amendment 38 to consider where it is going. If the word “complaints” were replaced by the word “representations”, it might be easier to follow. The point is for the commissioner to make recommendations to Government about improving access to finance; that is the intention behind the amendment, as I thought I had explained. That is also in the explanatory statement that came with the amendment, but I will not pursue the point by pushing it to a vote.

When the Minister says that late payment is the priority, I understand that. Clearly, one has to start somewhere and that is what the Government want to do. However, as I said in my opening remarks, the second issue—it is a very big second issue—is access to finance. It is really important that we get to grips with that as well. Please understand the importance of the amendment and what it is driving at.

The Minister commented on the schemes and their advertisement on the gov.uk website. I understand that. The point I made earlier was that not enough businesses are finding them. That is why if the small business commissioner has a signposting role, he or she should use it as much as possible. Perhaps the Minister will take that away and consider it.

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We want the small business commissioner to have his or her own website, and I want there to be portals—the hon. Gentleman understands these things—so somebody can click on something that says “access” and go through to the various information. That is terribly common on so many websites, so I want there to be that sort of access. The hon. Gentleman makes a very good point, and we agree that one-stop shops are the way to get information about a lot of this work out there.

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That is a fair point. I will come back to some of the challenges and our concerns about the portals. Many small businesses do not use the web, so encouraging greater digital use is one of the many challenges for the Government.

There is great concern about retentions. The amendment has cross-party support, and hon. Members who spoke made their points extremely well. Often, between 2.5% and 5% of moneys are retained under the cash retention system, so it is massively difficult for small businesses to be as effective as possible. The hon. Member for Kilmarnock and Loudoun made a point about businesses not taking part in apprenticeships and not investing in the future as a result of the scale of retention.

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Does the hon. Gentleman agree that it is important that the review and these proposals are added to the Bill before Report?

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It is incredibly important that that happens as quickly as possible, but SNP Members are in the same position as us: we are ultimately dependent on the Government for this to work, so we have to take the Minister’s bona fides. She is now on the record as saying that she will take action. I made the point that the recommendation was first made 52 years ago and it has been made on numerous occasions since. The problem is that businesses do not understand why we are waiting and why the Government and Parliament are taking so long to act. It is probably not until we come to this place that we start to understand why.

The Minister said it is too soon. A similar point was made in the Lords, and Labour peers accepted similar comments from Baroness Neville-Rolfe. We will wait and see for now, but if the review is finalised in March, the Bill’s Report stage may happen at about the same time.

I leave this thought with the Minister: if there is the opportunity, will she consider tabling amendments to take that into account? Let us challenge her Department and officials to table such amendments on Report to satisfy Members on both sides of the House. With that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn,

Clause 1 ordered to stand part of the Bill.

Schedule 1 agreed to.

Clause 2

Small businesses in relation to which the Commissioner has functions

Question proposed, That the clause stand part of the Bill.

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The clause deals with the definition of small businesses. I do not intend to detain the Committee for long on this subject, but it is important to consider what it says. There have been wide-ranging debates in the Lords and here about what the small business commissioner ought and ought not to do. The clause, which defines the small business commissioner and who they will serve, is an opportunity to reflect on the importance of exactly that remit.

Although debate on the Bill has covered a variety of issues, I believe that on both sides it has had at its heart the recognition of the value of small businesses to the UK economy. Members across the House have had an opportunity to offer valuable support to the companies and entrepreneurs that fall within the definition laid out in the clause. The debate is an opportunity to speak about the importance of small businesses, but the Bill carries an opportunity to boost the prospects of companies all over the UK.

What are we talking about when we lay down these technical definitions of a small business? There are now thought to be 5.2 million small businesses in the UK. They employ 48% of the UK’s workforce and, on the back of sheer hard work, account for 33% of private sector turnover. The definitions laid out in the clause single out incredibly hard-working people. My wife still runs a small business and is a constant reminder to me of how much effort and how many sleepless nights it takes to start, grow, run and maintain a business—all those things and more. The Bill is for those who deserve our support on late payment, which is one of the most vexing issues facing small businesses today and one that we simply have not done enough to resolve. It is also one of the issues that my wife lobbies me on almost daily.

The Bill presents us with an opportunity radically to change the outlook for some of the most important contributors to our economy. It offers the small businesses in the definition some level of support or guidance on late payments, but it could serve the business owners or the budding entrepreneurs also captured in the definition who have brilliant ideas but do not have the knowledge base needed to grow. It could serve the businesses that are struggling with not only late payments but investment challenges, ongoing legal disputes, access to finance, lack of mentoring and difficulties with public sector and private sector clients.

The clause captures a body of people whose challenges go far beyond late payment and who need far more than supportive words and signposting to systems that, as time has shown us, simply have not tackled the problem. All the challenges they face are tackled by specialists in big companies, but the definition in the clause demarcates a group who largely are so busy keeping the wheels of local economies turning that they do not have time to be legal or financial experts. The Bill is an opportunity for us to provide them with real support.

Beyond the technical definitions laid out in the clause are the owners of 5.2 million small UK businesses. If they are not watching this debate, they will still feel over the coming months and years the outcome of whether we focus on limited support for the specific challenge they face or whether we take this chance to offer meaningful answers to some of the key issues that stifle their growth and prosperity—and by extension, the growth and prosperity of the local economies in which they operate.

We would like the small business commissioner’s remit to go much further than the one in the Bill. Even if we just focus on late payments, it does not take a great deal of prodding of the definitions to see how limited the scope of support is. One fifth of UK small businesses—more than 1 million firms—have experienced or come close to insolvency as a result of a total estimated by BACS to be £26.8 billion in outstanding late payments. Sage estimates a significantly higher figure—I cannot remember it.

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It was £55 billion.

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I thank my hon. Friend. The Government’s proposed small business commissioner is likely, according to the Government’s own predictions, to help just 500 small businesses a year. The commissioner will serve as a signposting service to mediation services that already exist and have failed to deal with the crippling problem of late payment in the past. In fact, it was the Minister’s colleague, the hon. Member for Huntingdon (Mr Djanogly), who said on Second Reading:

“On capacity, the new £1.1 million SBC website should handle 390,000 disputes from 70,000 businesses, yet the SBC will deal with only 500 complaints a year. That gives rise to the question of what will happen with the rest of the disputes and what the real impact of the proposal will be. Could the site cope with the workload of significant numbers qualifying for assistance? That remains unclear.”—[Official Report, 2 February 2016; Vol. 605, c. 828.]

That is just the website, which the Minister mentioned. The small business commissioner will employ only a handful of staff, and there is nothing in the Bill to say that they will be legal, financial or even business experts.

We have to be honest when we look at the definitions laid out in the clause. The aspiration to support small business is lofty and laudable, but it prompts a question: without the legal clout of the Australian small business commissioner or the wide-ranging agreement with the US Small Business Administration, and without anything like the budget or staff numbers of either of them, how many such companies is the legislation actually likely to help?

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I will keep this as short as I can, because I do not think that there will be a vote on the clause.

I agree with a large part of what the hon. Gentleman says. The clause defines small businesses that may access the commissioner’s functions as those with a headcount of fewer than 50 people. Financial thresholds may also be applied under secondary legislation—for example, if it transpires that there are businesses with relatively few employees, but high financial worth. They might be excluded from the commissioner’s scope, because our emphasis is small business.

I think Lord Mendelsohn talked about the “asymmetry of power”; the measure is about small businesses, especially very small businesses—the actual definition for small business is 250 employees, but we are taking that down to 50 and fewer, because those businesses simply do not have the sort of power that other, bigger businesses have. We want to redress that and to change the balance.

Perhaps the small business commissioner will not at the moment deliver as we all want them to deliver, but it is a terrifically good beginning to have someone in situ specifically looking after the needs of small businesses, concentrating on the primary role—I will be boring by repeating this—of tackling the problem of late payment, because that is the big issue that troubles the majority of small businesses. The commissioner will be their champion.

I hope to be—I like to think I am—the champion of small businesses, and that is why I was appointed. I do not know whether there has been a small business Minister before and, although I do other things as well—I seem to do everything—the emphas