My Lords, I have given notice that we oppose Clause 1 standing part of the Bill and, for the convenience of the Committee, I have grouped Clauses 2, 3 and 4 stand part with Clause 1, as my reasons for opposition strike at the totality of these clauses and not merely at Clause 1.

The Council for Financial Stability is not much more than the tripartite arrangements given a fancy title. A couple of pages of legislation cannot create substance when none exists. We know that the only reason why the tripartite arrangements are being preserved in the Bill is that they were invented by the Prime Minister, and there is no recorded occasion when he has admitted that he personally has got something wrong. It is not in his nature.

That the tripartite arrangements failed is not just the opinion of my party; it is also the opinion of the Labour-dominated Treasury Select Committee in another place. That is what it found in its report on Northern Rock, entitled The Run on the Rock. Turf wars between the three parties meant that even when issues were identified nothing was done. The tripartite authorities had hardly met formally at principal level until the Northern Rock crisis. The bank issued careful analysis of the excessive leverage building up, but the three did not sit down to discuss the issues. In a rational world, the Government would have looked at the arrangements and concluded that they were bust and needed to be radically overhauled. Instead, we have the cosmetic, window-dressing solution of these clauses, which make the parties meet to discuss the analysis that each produces. If anyone thinks that this is more than a superficial approach, they need look no further than the evidence of the Financial Secretary to the Public Bill Committee in another place when he said:

“What we are doing through the Council for Financial Stability is formalising arrangements that have already been in existence”.—[Official Report, Commons, Financial Services Bill Committee, 8/12/09; col. 5.]

There we have it.

This Bill will give us nothing more than the failed tripartite arrangements. There is nothing in this new council to give us any confidence that they will not fail us again. Doubtless, if exactly the same circumstances arose, while those on the council have the memory of the recent financial crisis still in their minds, the same mistakes will not be made. The Banking Act 2009, which we supported, created more efficient tools in the special resolution regime. We will have no confidence that the old arrangements in their new clothes will be able to anticipate, let alone respond, to any new crisis. As the director of the Building Societies Association said when he gave evidence to the Public Bill Committee in the other place:

“Of itself it is not going to prevent the next bubble, it is not going to prevent the next banking crisis”.—[Official Report, Commons, Financial Services Bill Committee, 10/12/09; col. 70.]

We oppose these clauses because they do not address the fundamental flaws in the structure created in 1997 by the Prime Minister. The big idea of the first few days of the then Chancellor was monetary policy independence for the Bank of England, which has been widely supported. But he was not content with one big idea; he had to have another one, which involved wrecking the link between the detailed work of banking supervision, which we now refer to as micro-prudential supervision, and the overall understanding and analysis of developments in financial markets, which we now refer to as macro-prudential supervision.

The Prime Minister deluded himself that he was generating value by creating the huge organisation of the FSA out of the various supervisory bodies already in existence and transferring to it the Bank of England’s banking supervision role. We now know that he destroyed value because the dislocation between micro and macro-prudential supervision meant that the build-up of excessive debt went almost unnoticed and was certainly not acted upon. The Bank of England, with its rather ill-defined non-statutory function relating to financial stability, did analyse it, but nothing happened in practical terms. The Chancellor was not interested because excessive borrowing was what was underpinning the illusion of a bust-free boom. The FSA, if it was interested, did nothing.

Even the Prime Minister knew back then, in 1997, that he was playing a dangerous game and that the system would be more vulnerable with three separate players in the area of financial stability. At least, I think that that is why he created the tripartite authorities with their own memorandum of understanding. He must have realised that his new structure had gaps and that something needed to compensate for that. It did not work and this country is paying the price for the failure of the tripartite arrangements.

The Government’s narrative has always been that all of the problems derived from the global financial crisis. We do not deny the existence of the global financial crisis, but the way that it hit the UK, which has a uniquely high dependence on the financial services sector and a small number of systemically important organisations, can be laid at the door of the tripartite arrangements. The UK cannot blame what happened wholly on the rest of the world because the architecture created by the Prime Minister when he was Chancellor was itself a big part of the problem when put to the test.

That is the background to my party’s policy, which is to ensure that never again will micro-prudential supervision of systemically important organisations be severed from macro-prudential supervision. The shorthand for this is returning banking supervision to the Bank of England, but it is of course much more than that. Under our proposals the bank will assume more responsibilities than it shed in 1997.

We all know that there is not one model of supervision in the main financial centres and that the impact of the global financial crisis cannot be correlated with any particular supervisory architecture. However, it is interesting to note that the US has recently decided that the Federal Reserve Bank will continue to supervise systemically important banks. The tide is not running towards the separation of macro and micro-prudential supervision.

In addition, we will be separating out of the FSA its consumer functions and placing them in a separate consumer agency. Anyone in the City will know that, until the last couple of years, the FSA was dominated by its treating-customers-fairly agenda. I do not know how or why this happened; that will repay careful study at some time. In our view it contributed to the FSA’s lack of focus on prudential supervision. This, too, will not be allowed to happen again. Both consumer protection and prudential supervision are important, but they are not the same and they should not be confused in the same body.

Whether or not the population of our country allow my party to form the next Government in a couple of months’ time remains to be seen. If we do form the next Government, we are quite clear that Clauses 1 to 4 of this Bill are not part of our vision of the future arrangements for financial stability. However, even if we do not form the next Government, we would still oppose these clauses. They are half-baked for the reasons that I have outlined in other amendments today. They do not answer who is in charge or deal with the powers that are needed. Most importantly, they are a mere cosmetic patch applied to conceal what ought to be made plain—that the tripartite arrangements did not work and are unlikely to deliver in future. For these reasons we oppose these clauses standing part of the Bill.

My Lords, we disagree with both the analysis and the prescription that the noble Baroness has just given. In terms of the analysis, she places a pretty large burden on the tripartite arrangement—the architecture for the problems which we faced in the UK—and yet she said that the Chancellor was not interested in the asset bubble. From evidence that he gave when I was a member of the Economic Affairs Select Committee of your Lordships’ House, we know that the Government did not believe that the Bank of England should worry about asset bubbles either. Let us suppose that, at that stage, only two bodies were responsible for supervising the macroeconomic financial situation—a Chancellor who was uninterested, and a Government who did not believe, that the bank should be worrying about bubbles. Would that have changed the way that matters went? No, it would not. The Government and regulation were caught up in the bubble just as much as the banks were. Therefore, to argue for the collapsing of three into two, when the heads of the two were not interested, as the noble Baroness has just said, seems not to be an effective analysis of why we got into the mess that we did.

My Lords, I support my noble friend Lady Noakes in her opposition to these clauses standing part of the Bill. I firmly believe that it is necessary that the Bank of England should again assume ultimate overall responsibility for financial supervision. Call it macro, micro or what you will, the separation of the macro from the micro was undoubtedly a contributory cause of all parties’ eyes being somewhat off the ball as the financial crisis developed.

The noble Lord, Lord Newby, suggests that three-quarters of those who work in the City do not agree with my party’s solution to the problem, to re-empower the Bank of England as being in overall charge of financial supervision. However, what answer does the noble Lord think he would get if he asked people who work in the City whether they think that the FSA has correctly and properly conducted financial supervision over the 10 years or more that it has been in existence? He might find that, again, at least 75 per cent of those who answered said no. In my experience, most people think that the FSA was too much an internal organisation, having meetings with itself or going to harmonisation conferences all the time and not actually spending enough time on prudential supervision. Why? Because it was separated from the real, ultimate responsibility for the macro-prudential supervision, which was at the Bank of England.

Whether the FSA is completely abolished, or is simply made to report to the Bank of England with regard to prudential supervision, does not matter so much. If the noble Lord asked people in the City whether they thought that the FSA ought to report ultimately to the governor or to the Bank of England, again he would find that a majority of practitioners supported that view.

It is clear that Clauses 1 to 4 are purely cosmetic and that the financial stability council is no different in composition or function from what was there before. It is a totally inadequate response to what has happened, and therefore I wholly support my noble friend’s opposition.

My Lords, I cannot recall an occasion in either House when a debate has had such a surreal atmosphere about it. We know that it is inconceivable that this clause will become law, yet we are going through the motions of debating and amending it. We have had a number of interesting debates on various aspects of economic management, but the reality is that this clause simply formalises the failure of the tripartite system. Instead of getting rid of it, the clause continues the process and merely seeks to ensure that the people in the tripartite system do their job in the way which they ought to be doing without any legislative provision whatever.

One of the important things that we need to do about regulation in the City is to restore the authority of the regulators. It used to be the case that the authority of the Governor of the Bank of England was hugely influential. It used to be said that even his raising his eyebrows was sufficient to terrify bankers. That is no longer the case, but we can do something to avoid a situation where authority is divided between the governor on the one hand, with his historic role in these matters, and the FSA on the other. Therefore I believe that the proposals put forward by my party concerning this are entirely to be supported, and that the continuing division of authority as the Government propose in the Bill is certainly a mistake.

We have debated a number of aspects of this clause, but I want to raise one other point. There is at the moment a fashion to invent new economic expressions, of which the most pervasive is that of quantitative easing, when all one used to refer to was increasing the money supply. Now we suddenly have another: macro-prudential regulation. It is not the least bit clear what that means. In fact, it is likely to lead to considerable confusion because there are two separate things.

The first is the macroeconomic management of the economy. It is certainly important, to avoid future disasters of the kind that we have just had, that that should be operated properly. However, that is rightly the concern of the Treasury and to some extent the Bank of England, with the powers which the present Prime Minister gave it back in 1997-98—although, as I have pointed out on many occasions in this House, monetary policy was not transferred to the Bank of England; all that was transferred was the right to set a single interest rate in the hope that other people would follow. Control of the money supply continued to be taken away by the then Chancellor of the Exchequer by removing the Debt Management Office from the Bank to the Treasury. We therefore have an extremely unsatisfactory situation regarding the macroeconomic management side.

However, we also have the question of microeconomic management and regulation, which at the moment falls to be undertaken jointly by the FSA and, to some extent I suppose, by the Bank. The use of that expression “macro-prudential regulation” totally confuses the distinction between macroeconomic management on the one hand and micro-regulation on the other. That might affect major banks of a very significant size that may put forward or introduce macroeconomic instability into the economy. However, that is really a separate operation from macroeconomic management. It is important not to use this expression, which I believe is rather fashionably used by the FSA, to confuse one thing with the other. Having said that, I remain of the view, as my noble friend knows, that this clause is mere window dressing. It is not likely to do more than formalise the problems we have faced over the past few years, and to that extent it is not the way to go forward.

My Lords, I believe this is the answer to the noble Lord, Lord Newby, as to why it is wrong to persist with the FSA in its present form. If you start a very important and large institution, which had forebears, and it is a failure, it is very seldom—I should like the noble Lord, Lord Newby, to find me an example—that anyone can put the culture and performance of that institution right. Institutions acquire a character of their own in their very early years. When it goes well, it is brilliantly unchangeable, whoever happens to be in charge. But if they acquire the wrong character right at the beginning, it is virtually impossible to put them right.

My Lords, I apologise to the noble Baroness that I was not in the Chamber to hear her speech, but I was watching it on the monitor. I am afraid she provoked me to come across here to intervene in the debate on this clause standing part.

At one point she said that one of the problems with the FSA was that it was taking too much time engaging in consumer protection. I declare my interest as chair of Consumer Focus. That canard, which has run through quite a lot of commentary on the failures of the banking regulation system, is a complete misinterpretation. We have to ask ourselves what the banking system is for. The banking system is not for itself, nor is it for the City of London. It has a good benefit on the balance of payments in making a profit, and we should recognise that, but essentially the banking system is to provide the oil and the money to ensure that the rest of the economy and society operate. Its responsibility is to its depositors, to those who take loans from it and to the other people who take up its financial services. It is therefore an absurd argument to say that the regulator has undermined the industry by forcing it to take too much notice of its customers. If you step back and think whether it could make sense to apply that to any other industry, then the absurdity becomes apparent.

I had some criticisms of the FSA and the way it pursued its consumer protection agenda—I still have, and I still have some concerns that the Bill might be slightly diluting that. However, the alternative which the noble Baroness and, as I understand it, the Conservative Party are proposing is the abolition of the FSA and the complete separation of the issue of supervision of the financial system from its responsibility to its customers. There will be another quango with no leverage and much less authority which will look after consumer protection. That is a move in completely the wrong direction. We need to associate all forms of supervision of the financial sector with its responsibilities to the business and individual consumers of the services of that industry. If that fails, then it is not just the banking system or a few banks which fail; it is the whole economy, with wider implications for society, individuals and families.

This is admittedly a pretty substantial failure of financial regulation here and in other parts of the world. However, if the conclusion we draw is that the regulators should stop worrying about consumers, whether they are businesses or individuals, and start worrying solely about macroeconomic affairs, then that is the wrong conclusion. The two have to go together. The banks have to operate on a prudential basis, and they should be supervised more effectively by the regulator in that regard. That also has to go for the way in which the banks are performing a service to the rest of us.

Therefore, the solution that seems to be behind the opposition to this clause standing part, and the policy of the Opposition in this regard, is taking us down a blind alley. I much prefer, with a few criticisms which I may voice later in Committee, the approach that the Government are taking, to tighten up the regulation and leave a regulator which is looking after both sides of the performance of the financial sector, and not just one.

My Lords, I, too, support my noble friend in opposing that these clauses stand part of the Bill. In the past three or four hours we have teased out of the noble Lord, Lord Myners, several interesting aspects of these clauses. We are essentially formalising an existing structure. It did not work that well and a lot of the top people did not turn up, but good deputies came so that was all right. When push came to shove, it did not work at all well, so we will put some more bells and whistles on it and give it a bit more formal structure, which will now make it fit for purpose.

We have had no answer as to how it will work with three independent bodies, each with its own independent strategies. How will they be co-ordinated, how will they pull together and how will they avoid duplication and overlap? Some of the points that the noble Lord, Lord Whitty, made are applicable here. Who will take responsibility for some of the points that he has raised? Where I agree with the noble Lord, Lord Newby, is over the need for some analysis. We need to consider carefully how we can draw the best lessons from the crisis that we have been through and are still going through. It is a shame, therefore, that the Government saw fit to oppose my noble friend’s amendment, which sought after the truth.

As the noble Lord, Lord Desai, told us, the financial world is cyclical by nature. It is said, in the vulgar phrase, that the City is a battle between fear and greed. At the moment, fear has the upper hand but it will not have the upper hand for ever. In this case, the Government are following the old saying that generals prepare to fight the battles of the last war. This structure is designed for the last war. The next war will not at all be in this shape. We are creating a bureaucracy and structure that will not help us to look forward; it looks backwards. Because this structure is not fit for purpose, I support my noble friend in opposing that this clause stand part.

My Lords, I also support my noble friend Lady Noakes. Before so doing, I will say how much I agree with the comments of my noble friend Lord Higgins about the corruption of language. It seems that every time the Government have something unpleasant to say, they invent a new word and hope that people will not notice what it means.

I have already made known my views on splitting authority for any enterprise, let alone one that is as important to the well-being and prosperity of Great Britain as the financial services industry. I will not waste the Committee’s time by repeating those arguments, except to say that the Minister has not been in the least convincing that, with responsibility split three ways, there is anything but another disaster in the making. It has been clear from our debate, as several of my noble friends have pointed out, that the proposed arrangements are nothing but the old ones in a different piece of rather shoddy wrapping paper. There is nothing fundamentally new. I wish only that there was some way that the Government could come to their senses and see that they are in the act of perpetuating a horror story.

My Lords, I will pick up the remarks made by the noble Lord, Lord Whitty, about the FSA. It is rather remarkable that we are asked to stand here and say that the FSA is the most magnificent organisation and should be left in place. It seems quite obvious that the FSA has failed abysmally. This is despite the assurance that I have been given by the noble Lord, Lord Myners, and which was mentioned earlier when we discussed my amendment, that all the people responsible for banking regulation have been moved over into the FSA. So in theory, if everything was going to go on as it was before, under the Bank of England, the regulation of banks would continue and that would all go very smoothly. Quite clearly, when we look at Northern Rock, that was not the case. Northern Rock was an abysmal failure, and much of the blame has to be placed at the feet of the FSA.

One of the problems which the noble Lord, Lord Whitty, might admit is that when it comes to regulation, the people who are sharp and on-the-ball and make a lot of sense go off and make money and earn enormous bonuses and God knows what else. The people who cannot do it—and I hate to say this and have no wish to demoralise the FSA—are the people who end up working as regulators. So they are all behind the curve anyway and the people they are trying to regulate are a hell of a lot cleverer than the people in the FSA.

If we look back on the Bank of England, it had a much better reputation for being slightly ahead of all the people it was trying to regulate, rather than behind them. That is certainly not true of the FSA, which proved itself to be very good at protecting consumers—taking up complaints from people who had invested their money wrongly—and I have no objection to the role it played doing that. However, when it came to the big decisions, as to whether it should actually move in on Northern Rock, and deem the whole of its business plan completely faulty, totally indefensible and unworkable because it was borrowing short-term money and lending long, that is when the FSA completely failed. Therefore, I cannot understand why we should have any confidence in the FSA.

My Lords, I support my noble friend Lady Noakes in her opposition to Clauses 1 to 4. This Bill is the Government’s response to the worst financial crisis in living memory, but it leaves a discredited regulatory regime firmly in place. The failure of the tripartite authorities to anticipate, prevent or even mitigate the damaging effects of the crisis is there for all to see. However, rather than tackling the confusion inherent in the regulatory structure, which led the Governor of the Bank of England to ask who was in charge, the Bill simply puts the tripartite standing committee on a statutory footing, operating under terms of reference practically identical to the Memorandum of Understanding that governed the old standing committee.

This measure is misconceived, because it fails to get to the root of regulatory failure. We need real regulatory reform, learning the lessons of the financial crisis. Real reforms mean an enhanced role for the Bank of England, including putting it in charge of prudential supervision of all significant institutions. As the noble Lord, Lord Hamilton, has said, in the old days, the Bank of England genuinely seemed to be ahead of the game. But in cases such as Northern Rock, it seems to me that the FSA supervisors had expertise only in insurance matters, so no wonder they failed to realise that Northern Rock’s lending was expanding at a completely uncontrollable rate, and it was lending at 120 per cent of property values. I support my noble friend.

My Lords, this has been an extensive and interesting debate, with a number of cross-currents. The Government’s position is quite clear: we seek to retain these clauses in the Bill. I emphasise the context in which we are working. In the White Paper Reforming Financial Markets, the Government undertook a considered analysis of the financial crisis. I understand the points noble Lords have made about things that went wrong. Of course things went wrong: that is why we had a White Paper and why we have legislation derived from it.

However, let us be clear when we are critical of the existing standing committee and the wider tripartite arrangements, which we have sought to reform, that in so far as our institutional framework did not stand up effectively to the crisis that occurred, nor did any other institutional frameworks. The simple fact is that the Opposition make a great deal of criticism of the structure that was in place in the United Kingdom, particularly regarding the Financial Services Authority—and I of course recognise the validity of that criticism. That is why we are proposing reforms of the FSA; but one cannot conclude from that that the structure was wrong, particularly as the Opposition in all their contributions have not indicated why other institutional structures different from this framework also failed. They suggested that we are fighting the last war, which is always an easy epithet to put to anyone concerned with analysing a problem in order to do better in the future, but it is at least as important to learn the lessons of the past to make the reforms necessary to ensure that we make a better fist of the situation in the future.

It is what the regulators actually do and the judgments which they exercise that count. The creation of an institutional framework whereby the regulators can exercise their judgment is important, but that is what counts—the judgment. I accept what noble Lords have said—that there were mistakes made by the FSA. They have been well documented. Over the past two years we have rehearsed in this Chamber and the other place weaknesses in the position. That is why this Bill provides for an operation of the three institutions that is different from what obtained in the past. However, I shall not accept that the institutional structure per se was responsible for the financial crisis which overwhelmed every significant economy in the world. Every institutional structure failed accurately to foresee that position.

The Minister is stretching his argument a little too far. Why was Canada not “overwhelmed”? I use his word.

The noble Baroness points to an economy of far less significance than that of the United Kingdom. All the economies that are more comparable to the UK economy, and therefore are subject much more to the challenges of financial actions by significant actors, followed the pattern which we followed. In many ways, it is a reasonable analysis to say that others went earlier. After all, in terms of the real problems with regard to the banks’ toxic assets, the issue was much more apparent and happened earlier in the United States of America than it did here. Noble Lords identified that Northern Rock was a serious failure. Indeed it was, but I cannot remember any noble Lord from the Opposition rushing to support the Government when we actually produced legislation to deal with Northern Rock. I cannot remember any commitment to match the Government’s action in those terms. I understand that the Opposition did not object. There is a difference between not objecting to what the Government are doing and being at the forefront of action that should be taken. When the Government moved in on Northern Rock, there was plenty of critical comment about that.

My Lords, the Minister is getting a bit carried away this evening. If we look back at the Northern Rock legislation, it was not just that my party did not object; we took every possible step to assist the passage of that Bill, which of course involved dispensing with all the usual intervals and expediting the process. As it happens, I was not here but my noble friend Lord Hunt handled that Bill with my noble friend Lord De Mauley. I am well aware that my party bent over backwards, not only here but in another place, to ensure that that legislation went through.

My noble friend Lady Noakes forgets the huge effort this side of the House put in the January before last to get the Banking Act through in record time to assist the Government.

I certainly accept that point on the Banking Act. We all recognise that, but it is against a background where the Government were being constructive in their response to the nature of the problem. I give credit to the Opposition on the Banking Act: there was considerable assistance there. Yet no opportunity was lost to suggest a failure of government, when in fact Northern Rock presaged what we then saw of the great difficulties with American banks and subsequently with the British banking system.

I emphasise that it will not do for the Opposition to suggest that what went wrong at that time was something different, separate and unique—the result of the institutional structure operating in Britain at that time. That will not hold, even with the point about Canada. I doubt the extent to which the noble Baroness can stretch that example. The institutional structure in Canada is somewhat closer to the system that the Government are proposing in this Bill than it is to the noble Baroness’s proposals and her party’s position on the situation. I am not prepared to accept that challenge either.

The issue here is learning from the past and being in a position to make the right judgments, not merely changing the institutional structures. It will not do to move specific responsibilities from one body to another, as the noble Baroness suggests—thereby suggesting, in passing, her criticism of the Government because blame attached to the FSA indicates that the structure was at fault. We will not see a significant improvement in the position by just moving the furniture of the institutional structures. The Government are concerned that we learn the lessons of the past with regard to the institutional structure and how it functioned, but guarantee that we have a framework in which its judgments are more effective and accurate in the future. After all, the main institutional functions—those of a central bank, a financial regulator, and a financial and economic ministry or Treasury—are central to the maintenance of financial stability in every major economy. They may reach different positions on the nature of their institutions but they all have those three concepts to underpin their approach to financial stability. The United Kingdom position is no different from that.

Would the Minister agree that the major cause of this, the devil in this country, was asset price inflation—the bubble? Who in this new, glorious world that lies ahead of us is going to be responsible for stopping that in future?

It is clear that we need maximum insight, intelligence and appreciation of the factors that led to the bubble creating the crisis. This Bill indicates how the three institutions that I just identified are bound to play their part. The three functions have to be fulfilled in every economy with regard to financial stability. The essence is to make sure that they work effectively together to guarantee that we do not repeat weaknesses of the past. Clearly the communication and understanding between them about the development of that bubble was why the catastrophe occurred.

Therefore, we conclude that the tripartite model is the right one. We intend to remain committed to the approach of having a single, independent financial services regulator in the form of the FSA, but it has to work better and we intend that it will. The council builds on the existing model, which the Government continue to believe is the right one, but it will bring real improvements compared with the old standing committee functions. Most importantly, it places financial stability arrangements on a more formal, transparent and accountable basis. We will make sure that there is more formality, for example, because the terms of reference are in the Bill laid before Parliament. We will make sure that there will be more transparency, as there will be quarterly strategic discussions which are publicly minuted.

Perhaps I may ask the Minister the question that I asked the noble Lord, Lord Myners, when he was here. Why, when almost every organisation in every country throughout the entire world runs a single chain of command rather than dividing it into three, should it suddenly work so well for him when he divides his chain of command into three?

Why does the noble Lord think that under the structure there will be a chain of command of three equals? When I have finished describing how it is intended to work, I will indicate—and it is also described in the Bill—where authority lies. His model, to which I imagine he, as a loyal Back-Bencher, and his Front Bench subscribe, also has divided command. Who is meant to be the decision-taker under the Conservative model? Is it the Governor of the Bank of England or the Chancellor of the Exchequer? Within the framework put forward by the Opposition, is there not a bifurcation of function and therefore the potential for collision of command? The noble Baroness shakes her head, but she is going to resolve that situation in the same way that we are with regard to the tripartite position; namely, it will be essential that the structure is open and accountable, and the three will have to work together in terms of effective co-operation. Of course, each organisation will have a single command and clearly defined responsibilities, but we are guaranteeing that we will set out in the framework of the Bill the constraints of partnership required to resolve that issue. There will be a need to work together—something that manifestly failed with regard to the FSA and the other organisations during the build-up to the last financial crisis.

I was going on to indicate that the third dimension that we are concerned about is accountability. The annual report on the council by the Treasury will enable full parliamentary scrutiny each year of the progress by, and work of, the council. That will underpin the structure in an open and accountable way and help to produce the remedies to the situation that obtained in the past. Within this framework I also want to emphasise that, even under the model that has been put forward by the Opposition this evening, the crucial issue will still be the exercise of judgment. It will not be the institutional structure that is crucial but the judgment to which it gives effect. We maintain that the FSA still has a valuable and important role to play within the structure—a role greatly advanced by the framework that the Bill creates in relation to all three institutions. The Bill creates a much more formal structure. It establishes a Council for Financial Stability to replace the standing committee and its membership is clear: the Governor of the Bank of England, the chairman of the FSA and the Chancellor as chair. Within that framework and following our White Paper, the Bill indicates the lessons which needed to be learnt from the crisis which we have all been through and which has been so painful for the economy and for our people. Building on that, we will create a structure which, in Clauses 1 to 4 of the Bill, is absolutely crucial and which I defend, advocate and propose.

I cannot let the Minister’s long reply go unanswered because there are important points on this clause and the other three clauses dealing with the Council for Financial Stability. The noble Lord, Lord Newby, challenged me on why three-quarters of the people he met did not believe in the prescription put forward by my party. I cannot say whom he meets in the City, but that is perhaps reconcilable with the view of my noble friend Lord Trenchard that three-quarters of the people do not think that the FSA is effective.

If you ask people in the City whether they want change, on the whole they say no, and that they prefer the devil they know. But if you ask another question about whether there is a joined-up approach between macro and micro-prudential, they will agree with us. It depends which question is asked and it depends whether they want the FSA to be abolished or whether they want more effective macro and micro-prudential regulation. They are different aspects of the policy. I accept that there can be different views. We say that the most important thing is the joining up again of macro and micro-prudential supervision. I apologise to my noble friends who cannot bear those terms; I have got rather used to using them. Although I accept that they are inelegant, they have meaning to those of us who have learnt how to use them.

I say to the noble Lord, Lord Whitty, that I am sorry if he misunderstood what we are trying to say about consumer protection. I think he suggested that our proposals for a new consumer protection authority would have no leverage and no authority. That is absolutely not what we wish to create. Putting consumer protection and prudential supervision together means that probably neither is done completely effectively. We certainly believe that consumer protection masked the other. That is why we believe that we will have better consumer protection with a dedicated consumer protection agency. It is not our desire to create a weak piece of the system; our intention is to create something that is a strong part of the system. I hope he understands that.

I thank my noble friends who have spoken, all of whom have supported the fact that the FSA failed, the tripartite arrangements failed and this Bill has a cosmetic response. The Minister seems to be in denial about that. He said that our policies would have a bifurcation function, but that is not so. We are reuniting macro and micro-prudential supervision. The Government’s proposals keep them apart. The Minister has not rebutted our charge that these are merely cosmetic changes which create no change in substance. We will return to these clauses at another time, either on the Floor of this Chamber or in the process that we discussed earlier, known as wash-up. That is all I have to say on Clause 1 stand part.

My Lords, this is a rather shorter topic than my last one. The amendment would add a new subsection to Clause 2. Under Clause 2(1) the Council for Financial Stability must meet in each quarter of each calendar year, which is a rather curious formulation. It could mean that the council met at the end of one quarter and then again at the beginning of the next, with perhaps only a few days between so-called quarterly meetings. I hope that in practice the council will not meet in this way. My amendment would give transparency to meeting dates by requiring the council to publish them at least 12 months in advance.

There is a substantive reason for making meeting dates well in advance. The Bank of England’s Monetary Policy Committee is required to meet monthly and the outcome of those meetings is watched carefully by financial markets. The Bank, being mindful of that, publishes the meeting schedule of the MPC well in advance. The meeting dates of the MPC are already well known for 2011. The meeting dates for the Council for Financial Stability may never have the high drama of the monthly decision on interest rates. The minutes of the first meeting that I have seen have nothing in them to interest markets, let alone move them. Nevertheless the topics discussed could become much more relevant to financial markets over time if, for example, it was clear that the council was watching excessive leverage building up or was considering actions necessary to counter it. It is just as likely to be on another topic, but I cite leverage because we are familiar with it as an issue from the recent financial crisis.

If the way in which the council works becomes part of the framework of information which markets look to, some certainty about its meeting schedule would be highly desirable. That is what has been suggested by the British Bankers’ Association. I hope that the Minister sees the sense of that. I beg to move.

My Lords, I salute the keenness with which the noble Baroness greets the council, in that she wants the dates well in advance and scheduled as early as possible. Of course we share the same ambition for early scheduling of quarterly meetings, and the terms of reference indicate that they should be scheduled well in advance. We have a little concern about a statutory requirement to schedule them 12 months in advance. After all, there might be global economic or political events that make the proposed dates difficult. We do not believe that a statutory requirement is appropriate. The terms of reference are a more appropriate vehicle for such procedural matters. If the noble Baroness persists and indicates in her wind-up that she feels very strongly about this, I would recognise that the terms of reference could have a firmer commitment and we might reconsider this in drafting the final version, with the intention of a more significant form of schedule than the one that dissatisfies the noble Baroness at the moment.

The Minister seems to have had a transformation over the past few minutes now that we have moved on to Clause 2. Perhaps it was Clause 1 that he could not quite cope with. I was going to return to the attack to explain the difference between quarterly meetings and others that might take place, but since he has been so helpful in his response, I am sure that it can be dealt with appropriately. I therefore beg leave to withdraw the amendment.

My Lords, Amendment 13 concerns the reports published by the Bank of England and the FSA dealing with risks to financial stability. Under Clause 2(2) the Council for Financial Stability must consider any such reports at its next quarterly meeting. I shall leave aside the leisurely approach to risks that this timetable implies. I would hope that if the FSA or the Bank of England produced a report which highlighted serious risks, perhaps imminent risks, the Council for Financial Stability would not sit back and content itself with the fact that a meeting was already scheduled for, say, two months’ time. Clause 2(6) allows the council to meet more often than quarterly and we have to hope that the council would meet when necessary. As I understand it, the shadow council is already meeting more than quarterly.

My amendment merely says that the council must publish its response to the risks identified in a report from the FSA or the Bank of England either in the minutes of its meetings or otherwise. The importance of ensuring that the response of the council is visible is that this element of response was clearly absent from the way in which the tripartite authorities operated.

I have referred already this evening to the Minister in another place, who said:

“What we are doing through the Council for Financial Stability is formalising arrangements that have already been in existence”.—[Official Report, Commons, Financial Services Bill Committee, 8/12/09; col. 5.]

It is clear that the Bank of England’s warnings on excessive debt, as set out in its financial stability review, were not acted upon. It is also true that the Bank did not make a big fuss about it, but the warnings were there, however sotto voce, and the tripartite authorities ignored them. We have to be sure that the Council for Financial Stability does not make that mistake again.

When this amendment was debated in another place, the Minister said that it was unnecessary because all this is dealt with in the terms of reference, which will be issued under Clause 1(5), which we debated earlier. I put it to the Minister that that is not an adequate response. The terms of reference are subject to no parliamentary procedure and will say whatever the Treasury wants them to say from time to time. But let us assume that the current draft of the terms of reference represent what the Treasury intend to issue formally if this Bill becomes law. Does it do what my amendment asks for?

Perhaps I may read what the terms of reference say at Annex A about minutes. It states:

“Minutes of the quarterly meetings of the Council dealing with strategic matters will be published. These will be the meetings where, amongst other matters, the Bank’s FSR”—

the financial stability report, “the FSA’s” financial risk outlook—

“and the annual report on the”—

Council for Financial Stability—

“will be discussed … A final minute to be published no later than one month after the meeting ... As necessary, minutes will attribute comments to individuals ... Discussion of all matters involving firm-specific or market sensitive issues will not be included in published minutes”.

There is absolutely nothing in the terms of reference which requires the minutes to be substantive.

Anyone who has experience of boards, whether in the public or the private sector, will be aware that there is a spectrum of minuting practice. At one end, there is the blow-by-blow account of what was discussed. At the other extreme, there is the minimalist school, which records not much more than the headings of any papers discussed, together, where necessary, with the formal decision.

Under the terms of reference, the minutes could be anywhere on the spectrum. My amendment seeks to ensure that the minutes contain the response to risks identified by reports which the council considers. These minutes will be a public document and the Government have stressed that they are an important component of transparency. As we have debated earlier today, the Government have claimed that transparency is one of the key features of the new arrangements, but the Bill does not ensure that, in this key area, the council’s response to risks is achieved. I beg to move.

My Lords, Clause 2(2) is very strange in several respects. It suggests:

“Where the FSA or the Bank of England publishes a report setting out its opinion of the risks to the stability of the UK financial system, the Council must consider the report at the … next quarterly meeting”.

Is it not for the council to decide whether there are risks to the stability of the UK financial system, rather than the Bank or the FSA? If the idea is to have a tripartite arrangement, surely the three of them and the council, as such, should express a view on the fact that there are risks to the stability.

Secondly, should these bodies publish a report on “a risk” to the stability rather than “the risks”? Will they publish a report every quarter, every six months or whatever, and say, “There are risks to the economy; these are they”; or will they specifically say, “We foresee a particular risk”, which I would have thought would be the more appropriate way of doing it?

At all events, in relation to my noble friend’s amendment, surely it is not enough to go through the procedure here and then, the report having been considered by the council, for the council not to say what it proposes to do about the risks that have been mentioned. Presumably it will not simply sit there and say, “We have received this report. There are risks to the UK economy”, and that is it. My noble friend’s amendment is entirely appropriate.

My Lords, I, too, support my noble friend’s amendment for the reasons outlined by my noble friend Lord Higgins. To have different risks put up by different groups is a recipe for disaster and misunderstanding. We need a unified approach and a unified response. One of the problems in the background to the crisis we have had was that businesses, whether in the wider economy or financial services, were not clear as to exactly what the risks were. There were different views of what the risks were. Therefore, a clear statement of what the response to the risks should be would send a signal to the country—whether within the City or within industry at large—on the dangers that lie ahead and what the council believes is the appropriate response. It is a way to stop bubbles growing as it enables a clear response to be made to them.

The Minister was generous in his response on Amendment 12. I cannot see why he cannot be generous in response to this amendment too. It is very important to get clarity in this area so that everyone is at exactly the same place in the economic cycle.

My Lords, I hesitate to stretch the concept of generosity at the Dispatch Box too far, although I hope to give a constructive response.

We certainly share both the ambition outlined by the noble Baroness in her opening speech and the position put forward by the noble Lords, Lord Hodgson and Lord Higgins. In our concept, the quarterly meeting exists to provide transparency through the minutes of the council’s deliberations on strategic issues that are in the wider public interest; it will consider the risks. That is the point that the noble Lord, Lord Higgins, emphasised. It is the responsibility of the council to discuss these matters. The Government are clear that they want the council’s assessment of risk, and its consideration of possible actions and options for mitigating the risk, to be open to the public. That is the concept behind the openness of this operation.

The terms of reference of the council, which we have published in draft, stipulate that such reports by the Bank and the FSA must be considered in three ways: a summary of the report must be discussed; the risks must be assessed; and the council must consider its response, including what options for mitigating action should be taken. All these issues will be part of the council’s report because they will have been discussed and minuted. I therefore do not think that the Government’s approach is vastly different from that intended by the noble Baroness.

As an additional constructive point, I can offer to commit that the minutes will cover the substantive items on the agenda and that the terms of reference will be updated to reflect this. We will then be in no doubt as to what the total responsibility of the council will be. The identified risks and the actions proposed will be in public arena, which is where we and, I believe, the noble Baroness want them to be.

The Minister said, “and the actions proposed”. That is precisely what my noble friend’s amendment is about. However, it is not clear from the Bill that any action will be taken at all.

If the FSA and the Bank of England produce a report, why is there no provision for a report to the council from the Treasury?

If the noble Lord is saying that there is no obligation to produce a report on action not taken, that is of course the case. However, if action is taken, it will be in the minutes of the council and therefore in the public domain. I do not see any objection to the way in which the council is expected to act or to the way in which the nation will be able to see both the assessment of risks and the action taken—if any there is—recorded in the minutes. I cannot really see, therefore, the nature of the anxiety of the noble Lord, Lord Higgins.

We are seeking to emphasise what after all is an underpinning concept of the council: that it must be open, transparent and accountable. I have described a structure which has the same objective as the noble Baroness. I understand that she thinks that we should go about it slightly differently, and I have said that we may update the terms of reference to take account of the position that she set out in her amendment.

We could carry on debating the transparency that may be achieved for the Council for Financial Stability for a good long time, but I do not think that it would serve the interests of Members of the Committee. I shall read carefully in Hansard how the Minister has offered to take this forward, for which I am grateful. I beg leave to withdraw the amendment.