House of Lords
Tuesday, 10 July 2012.
Prayers—read by the Lord Bishop of Chester.
My Lords, the Government currently cannot provide an estimate of the extent to which sugar intake will lead to future incidence of diabetes in England and Wales, because, on balance, there is no clear evidence that sugar intake alone specifically causes diabetes. Obesity increases the risk of type 2 diabetes. The habitual consumption of calories in excess of needs for a healthy body weight results in weight gain, irrespective of whether these are from sugar or fat.
My Lords, by 2050, on current trends, at least half of adults and a quarter of children are predicted to be obese, which will cause a huge epidemic of diabetes. Many experts agree that the excessive consumption of sugar is a factor in obesity and in diabetes. In fact, US scientists have concluded that sugar consumption levels are now so harmful that sugar should be controlled and taxed in the same way as alcohol and tobacco. Will the Minister give urgent consideration to taxing sugar in processed foods to help avert an imminent public health disaster?
My Lords, we keep the question of taxation under review in the light of emerging international evidence on its impact. That will include looking at the experience of the recently introduced tax on saturated fat in Denmark and what effect it has had on diet and health. With any fiscal measure, there is always a risk of unintended consequences, so we would have to look at this particularly carefully.
My Lords, did the Minister have a chance to see the report from the London School of Tropical Medicine and Hygiene, published earlier this month, which suggested that if obesity levels could be reduced, there would be sufficient food for 1 billion people worldwide. The report pointed particularly to the United States of America and at western Europe. Does this not both justify the Government’s campaign to reduce obesity and illustrate the truth of Gandhi’s remark that there is sufficient in this world for people’s needs but not for their greeds?
I agree fully with the noble Lord. In this area, the message has to be that a healthy balanced diet is what we should all aspire to. As I mentioned in my initial Answer, obesity is one of the prime drivers for diabetes. If people can moderate their calorie intake to match their energy consumption, the world will be a healthier place.
My Lords, the Minister will be aware that increased sugar consumption leads to obesity and, in my view, diabetes. Is he also aware of the many studies, including one from Princeton University, which show that sugar is potentially addictive and activates endorphins in the brain in a way similar to heroin—I could hardly put down my Jaffa Cake long enough to come and ask this question. Does he not agree that it is important to look at research that shows that scientists have made rats sugar-addicted in just one month by feeding them sugared drinks? Will he revisit the nutritional standards for schools, because 62% of British schools currently do not have tough nutritional guidelines that would reduce sugar consumption among British children?
My Lords, I am aware of that research, which my department is looking at very carefully, but I should put a health warning on it in that we do not yet accept the conclusion that sugar is addictive, although clearly in the case of young children those who get into the habit of consuming sugar are likely to continue doing so, so the noble Baroness is quite right that it is a risk factor in the young. The advice from the School Food Trust is of course to have a healthy diet at school. Many schools are adhering to that, and we are doing our best to promote that with our colleagues in the Department for Education.
My Lords, the Minister mentioned unexpected consequences. Does he agree that people who are afraid of eating too much sugar because they might get fat will turn to sugar substitutes such as aspartame? Is he aware that aspartame contains 10% methanol, which, uniquely in the human body, is turned into formaldehyde and has its own neurological hazards? Would he recommend having sugar or sweeteners?
My Lords, the Department of Health recognises that artificially sweetened or low-calorie drinks can play a role in helping people to reduce the number of calories they consume and offer a wide choice of low-calorie options. As for the safety of artificial sweeteners, all food additives, including sweeteners, are thoroughly tested for safety prior to approval and are subject to review by independent expert bodies. The Food Standards Agency considers that all approved sweeteners can be safely consumed at current permitted levels.
My Lords, this morning I was in a Waitrose and I looked at all the packets of cereals. Each one had a different sugar-based flavour, such as chocolate and apricot, and all the cereals contained sugar of different kinds. What is the Minister’s reaction to that?
My noble friend draws attention to an area of concern. Cereals of that kind are particularly attractive to children, although I would say that the good news here is that added sugar consumption among children has fallen during the past few years, which is perhaps a sign that the messages on the levels of sugar that children can safely consume is getting through to parents.
My Lords, I am grateful to the noble Earl for reminding us that a small reduction in weight maintained over time can reduce the risk of developing type 2 diabetes. I must admit that I wish that I knew that when I stopped smoking and piled on the weight. As a consequence, I am type 2 diabetic. It is true that small improvements in eating and drinking habits can reduce the risk. I ask the noble Earl, as I asked him last November, whether the Government will take this threat seriously and undertake to lead a major awareness programme about what to do to avoid type 2 diabetes.
My Lords, there is a great deal going on in this extremely important area. I am grateful to the noble Lord for emphasising its importance. There is a ring-fenced budget for public health, and weight gain is one of the key indicators in the public health outcomes framework. There is the Change for Life campaign, which has, I think, gained enormous credibility among the public and professionals. We are engaging with the food industry through the public health responsibility deal to take forward the calorie reduction pledge. There are NHS health check programmes, which are being rolled out throughout the country, and at GP level there are the nine tests which GPs are advised to undertake with diabetic patients. The rate at which those tests are being done has gone up very encouragingly over the past few years.
Club and Institute Union: 150th Anniversary
My Lords, the Government would, first of all, like to congratulate the Club and Institute Union on reaching its 150th anniversary. The Government themselves have no plans to commemorate this anniversary since these are private institutions. However, we are aware that the All-Party Group for Non-Profit Making Members’ Clubs, of which I believe the noble Lord is the secretary, has organised a commemorative event in Parliament on 11 July—tomorrow.
My Lords, I thank the Minister for that very positive reply. My heart fills with pride in appreciation of the vital and outstanding service that the Club and Institute Union has contributed to the cultural, social, educational and creative life of working- class communities throughout the length and breadth of Great Britain over these past 150 years, which we are joyfully celebrating this week. Will the Minister kindly draw the attention of all government departments to the present burdens borne by the CIU—and not just the CIU but also by Conservative, Labour, Liberal and British Legion clubs and many others—through years of pernicious legislation, and offer them some respite in these very harsh and difficult economic and social times?
My Lords, I am very aware of the traditional nature of the clubs involved—the work they have done for so long, the people they represent, those to whom they give a good time and those whom they support. I will of course draw the attention of other departments to the nature of these organisations as requested by the noble Lord.
My Lords, we are talking about private clubs, and I have no idea why private clubs close. The Government are doing their best to support small businesses such as clubs, and have already granted them rate relief from £6,000 to £12,000 until March 2013. They are also ensuring that rural rate relief is available to public houses in particular, not all of which will have the club connections that the noble Lord refers to. The Government are doing what they can to support small business, particularly in the country, and they do not have a role in the closure of the clubs that he mentioned.
My Lords, does my noble friend agree that a number of clubs affiliated to the CIU contributed significantly in their early days to advancing political education throughout our country? Thanks in part to them, by the 1880s 100 towns had their own local House of Commons modelled on Westminster. Of those for which information survives, 33 had Liberal majorities and 26 had Tory majorities—33 Liberal against 26 Tory. I offer this on a day when my Liberal coalition colleagues might need a little consolation.
My Lords, it is very welcome that the Government have acknowledged this 150th anniversary and the tremendous work that has been done during that period—particularly the work, although he is too modest to point it out, done by my very good noble friend Lord Bilston both in his own area of Bilston, in Wolverhampton, and here in Parliament in the all-party group. The only thing on which I would like any elaboration is the Minister’s referral to this, I think, as a small business initiative. These are much more than small businesses. As has already been pointed out from her own Benches, these clubs have provided much broader services to their communities over the years. In fact, I would almost suggest to the Minister that she might place them in the category of government business headed “the big society”, because we invented it long before anyone else did.
My Lords, it is always dangerous to align anything with anything. I was trying to suggest that there was an opportunity for small business rate relief for these clubs—I drew attention to that. If I inadvertently said that they were small businesses, clearly that is not what they are; they are private clubs that do a good job for their members and have all the attributes that noble Lords have suggested. They have a valuable history and have seen a lot of people through some very difficult times, as well as through some enjoyable times. As my noble friend behind me suggested, they also have some political involvement.
Prisons: Mothers and Infants
My Lords, sentencing in individual cases is a matter for the independent judiciary. Where a judge or a magistrate sentences a mother to custody, mother and baby units are made available to ensure that the best interests of the child are met, enabling the mother and child relationship to develop and to safeguard and promote the child’s welfare. The number of women imprisoned with babies has remained broadly stable at around 50 over the past two years.
I thank my noble friend for that answer. Essential, emotional attachments are made between mother and baby during the first 18 months of a child’s life, but imprisoned mothers with babies are often denied these necessary bonding opportunities because of the restricted environments they are placed in—even within the mother and baby units, which are often far away from the women’s homes. Will the Government encourage the courts to consider the welfare of the baby before sentencing the mothers to custody and can we please have more smaller, baby-friendly secure community units as an alternative?
My Lords, the Government are fully committed to reducing the number of women in custody, and that is already happening. Recent sentencing changes should help that further. If a woman or a man is a sole or primary carer, that should be considered as a mitigating factor in sentencing. Recent guidelines from the Sentencing Guidelines Council have reiterated this. There are seven small mother and baby units, the largest having 13 spaces, which support the development of mother and baby relationships. In deciding whether a mother and baby should be referred to one of these units, the interest of the child is paramount.
My Lords, bishops see the inside of prisons rather more than most Members of your Lordships’ House do. There is no more depressing aspect of a visit than to go to one of these mother and baby units. Can the Minister tell the House what proportion of these mothers are there for drug-related offences, when they are often not the prime movers in the trafficking?
The right reverend Prelate is right that prisons of any description can be very depressing places, as is seeing the situation of people within them. However, I have visited the mother and baby unit within Holloway prison. If mothers are sentenced to prison, they need to be extremely well supported, and I thought that the support being given in that mother and baby unit was very good. Within the prison, too, the support in terms of mental health, tackling drug addiction and other problems was being approached. It is extremely important that we do what we can to try to keep women out of custody. The legal changes made in the last Bill help to move us in that direction and that is one of our aims, because the right reverend Prelate is right that many people in this situation are themselves very vulnerable.
My Lords, given that most of these women are imprisoned for offences for which no male would be locked up, and given that, as the Minister said, there are seven mother and baby units in this country, would she acknowledge that that small number indicates that, for many of these women, if they have other children, they have to make the stark choice between applying for a place at a unit and keeping their baby but losing contact with their other children, or giving the baby up at a time when they are probably breastfeeding so that they can remain in contact with their other children? Finally, will she acknowledge that there is overwhelming public support in this country for the proposition that women who commit non-violent offences and who are mothers of small children should not be locked up at all?
I pay tribute to the noble Baroness for all her work in this area, which shifted the last Labour Government enormously in terms of what they did. We are building on that work. As I mentioned, one of the changes in the last justice Bill, LASPO, says, for example, that if it is unlikely that somebody is going to have a custodial sentence, they are not remanded in prison. That should help women who find themselves in that situation. Similarly, there has been a turning around of what happens if somebody breaches their community order. It was mandatory before that that should be escalated, which often meant that women in that circumstance ended up in prison. What is suggested now is that there should be a fine—and that, too, should divert women away from prison. There are a number of ways in which it is extremely important to approach this to try to ensure that women are kept out of prison when that is appropriate, but to ensure that they are well supported if they are in prison.
My Lords, can the Minister tell us at what age babies or very young children leave the mother and baby unit, and what arrangements are made to lessen the emotional trauma of a very young child being taken out of its mother’s care on a daily basis? What arrangements are put into place to lessen the anxiety for the mother and the child?
Babies stay in the mother and baby unit until about the age of 18 months, so that can vary. It is therefore part of the way that the best needs of the baby are assessed to look at the length of the mother’s sentence and whether in due course it is necessary to remove a baby because the mother’s sentence is longer than the baby unit would enable them to stay together. Looking at the best interests of the baby is what underpins whether a mother and baby are referred to a mother and baby unit.
My Lords, could my noble friend the Minister look at the international dimension of good practice, and could she invite the Children’s Commissioner to look at this particular issue, with the sole objective that the welfare of the child is of paramount importance?
The Ministry of Justice is always interested in international practice. Recently the Howard League sent through some interesting information about the situation in South Africa. Noting that, I would point out that the current policy in relation to mother and baby units is absolutely based on the needs of the child being paramount. It is surely right that that is the case.
Governor of the Bank of England
My Lords, the Financial Services Bill makes provision to strengthen the UK’s financial regulatory structure. The proposals will establish a new system of focused financial services regulation with the Bank of England at its heart. The current governor still has almost a year of his term to serve. My right honourable friend the Chancellor of the Exchequer has confirmed that the process of appointing a successor will not begin before the autumn. The new governor’s qualities will of course reflect the Bank’s new mandate.
I thank the Minister for his Answer. It is essential that the next governor is a man of unimpeachable integrity, or a woman of unimpeachable integrity—certainly a person who in all jurisdictions will command respect through their understanding of financial markets. Surely they will be required to be a person who has an intimate understanding of markets. The UK’s future problems are likely to have a substantial international context. Does the Minister agree that the next governor must have a character and position that enable him to have a strong, effective relationship with central bank governors in other jurisdictions, particularly the Middle East, China and the United States? If Her Majesty’s Treasury agrees with this, will it ensure that the next governor has these qualities?
First, my Lords, for the clarity of the noble and learned Lord, the Chancellor has said:
“When the time comes, the best person for the job will be appointed, whoever she or he may be”,
so he is very clear on that point. The noble and learned Lord goes on to make an interesting suggestion about one of the possible dimensions of the job, and I listen carefully to what he has to say on that point.
My Lords, under the Financial Services Bill that we have been debating, the new governor would need to be chair of, or to manage, the FPC, the FCA, the PRA and the Court of the Bank of England. That involves, of course, threats to financial stability, the removal or reduction of risks, enhancing the resilience of the financial system, educating the public and, above all, co-operating with the Treasury, which is quite a job as I am not sure it knows what all these things are. Does the Minister think that a man or woman exists who is capable of doing that job, or is he thinking of applying himself?
My Lords, the Bank of England is going to have a very large new mandate, and the points that the noble Lord makes are rather important to this. Whether on the MPC, the FPC or the PRA, the governor is going to be very well supported, not only by deputy governors but by a range of internal and external experts. Just for clarification, the governor no longer chairs the court; that is chaired by a non-executive chairman. I do not know how it was in the noble Lord’s day, but I am sure that co-operation with the Treasury is going to be the least of the new governor’s difficulties.
My Lords, I regret that in the Financial Services Bill we have not established a mechanism whereby Parliament can have a say in confirming the new superwoman or superman to take up this role. Will the Minister at least give us an assurance that the Chancellor will look for someone who breaks away from the mould of groupthink, which contributed so much to the financial crisis in 2008, and who, while having all the necessary financial and economic background, perhaps comes with some other, different experience so that we can burst the bubble that has been a real problem in financial regulation?
My Lords, does the Minister agree that the next Governor of the Bank of England, besides having the proven competence that has clearly grabbed the Minister’s attention, should also be a person of honour and integrity—the sort of person who, should he or she wrongly impugn anyone’s integrity, would at least have the grace and courage to stand up, admit it and apologise?
My Lords, if that is an oblique reference to my right honourable friend the Chancellor, I do not believe that an apology is needed. I agree with the noble Lord, Lord Tomlinson, that honour and integrity will be among the qualities needed by a future governor.
My Lords, Mervyn King has been a very distinguished governor and has made a major contribution to the science and art of inflation targeting, which is internationally recognised. Is it not desirable that in choosing his successor we choose someone not only of absolute integrity with great familiarity of the financial markets, and not just in the British amateur tradition, but someone who is a genuine monetary economist, is internationally respected in the field, and can hold his or her head high and deal on equal terms with Mario Draghi and Ben Bernanke, who are certainly in that category?
Equality Act 2010 (Age Exceptions) Order 2012
Motion to Refer to Grand Committee
Assets of Community Value (England) Regulations 2012
Motion to Refer to Grand Committee
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2012
Motion to Refer to Grand Committee
Financial Services Bill
Committee (3rd Day)
Relevant document: 4th Report from the Delegated Powers Committee.
Clause 3 : Financial Stability Strategy and Financial Policy Committee
46: Clause 3, page 6, line 7, at end insert “provided that such a direction does not conflict with the FCA’s consumer protection objective”
My Lords, Amendment 46 stands in my name and in the name of my noble friend Lord Eatwell. I shall speak also to Amendments 49, 52 and 67, which similarly stand in our names.
These amendments seek to ensure that when the Financial Policy Committee gives directions to the Financial Conduct Authority in the interests of financial stability, it does so in ways that do not conflict with the FCA’s duty to uphold consumer protection, that the Financial Policy Committee must take note of any representations from the consumer panel, and that where such directions, or indeed recommendations, are given, the FCA reports back to the Financial Services Consumer Panel as well as to the FPC.
If we did not know before last week about the detriment that can affect consumers where their interests are ignored, we must surely know now. Consumer trust in this industry has taken a body blow, and it is really important that regulators never for a moment forget the end-user—the saver, the borrower, the lender. The Financial Policy Committee is clearly not a consumer-focused body. It will take decisions that have a huge impact on consumers but it will not have the expertise to do it well. The FCA’s consumer panel is meant to represent the consumer interest. Without these amendments, we are allowing the panel to be ignored. We know what happens when the interests of clients are not placed centre stage.
I argued at Second Reading that our regulation must be consumer focused or it will never do the job. These amendments would help to achieve that. The FPC will take decisions that impact on consumers. The Minister knows this. In Committee last week, he said that a direction or recommendation from the FPC,
“could have a serious negative implication for the safety and soundness of individual firms or for consumers”.
He went on to say:
“The FPC will not necessarily be aware of those negative implications on … consumers”.—[Official Report, 3/7/12; col. 675.]
Quite so. There will be no consumer input into or consumer voice in the FPC.
The Minister seemed to think that the FCA would be aware of possible impacts on consumers, but the chief executive officer of the Financial Conduct Authority is from the industry. He knows the industry and understands its interests and perspective, but that is not the same as voicing consumer protection issues. Let us consider a possible FPC direction, such as a cap on loan-to-value at 90%. That would trap an existing 95% loan-to-value mortgage customer with a particular bank. That is hardly consumer choice or competition. Just this time last week, at the annual public meeting of the Financial Services Authority, Adam Phillips, chair of the Financial Services Consumer Panel, said:
“We remain concerned about the predicament facing so called ‘mortgage prisoners’—those with interest only mortgages and those trapped on the standard variable rate because they are unable to meet the affordability criteria—and have urged the FSA to act quickly to mitigate this situation. We also hope that the lessons learned in this process will be considered by the Financial Policy Committee when developing its strategy for dealing with asset bubbles”.
But who will be there to bring such lessons to the FPC if the consumer panel has no access? Similarly, any increased capital requirements decided by the FPC could be passed on to consumers in an opaque way by increasing rates and/or fees. Sometimes, I can almost hear some people in the City saying to us consumers, “Now don’t you worry your pretty little heads about this. It’s really just for us big boys”. Those big boys are exactly the people who have created so many problems for savers and investors.
When the FPC is considering big issues, how will the voice of the consumer be heard against the grain of the industry’s interests? Perhaps “grain” is not the correct term. We have learnt this morning that, at the cost of £90 million, there are some 800 lobbyists—one for each Member of your Lordships’ House—working to ensure that the financial industry’s case is heard at the highest echelons, be they the Bank, the Treasury, this House or another place. Is it any surprise that the still, small voice of the user—whose savings fund this industry, we should remember—are rarely accorded much precedence?
By contrast, these modest amendments are to ensure that not for one moment should the overall regulatory architecture ignore consumer protection. They hard-wire the consumer panel into consideration of the FPC’s biggest weapon—direction. Do we really need reminding that unless consumer confidence and trust return, unless the interests of consumers are centre-stage, no amount of shifting deckchairs on the regulatory deck will make a blind bit of difference? These modest amendments will simply help to keep consumers in every decision-maker’s eye. I beg to move.
My Lords, I support my noble friend’s amendments. I was particularly struck by her parting remark, which concerns a point that has bothered me a great deal during our deliberations up to now. The voices of the financial institutions are being heard loudly and at great length in your Lordships’ House on this matter. I do not criticise them for that—they have interests that they wish to see served—but we have interests of a different kind; namely, that we must be dispassionate. In particular, therefore, if the voices of consumers—which means ordinary people—are not heard at all, then something has seriously gone wrong with why we are bothering to try to reform the financial system anyway. If I were asked why we would take the Adam Smith view of everything, I would say that, ultimately, the whole economy exists for the sake of the consumer, and not for the sake of businesses. Businesses exist for the sake of the consumer. To have any doubt of the absolute necessity that the consumer’s voice is heard is to be mistaken. I therefore rise strongly to say that that voice should be heard mandatorily, and not if it just suits the body that takes the decisions.
My Lords, this group of amendments, which go to the issue of consumer protection, deals with the Financial Policy Committee’s use of its powers of direction and recommendation in relation to the Financial Conduct Authority. These powers are the key means by which the FPC will seek to implement macroprudential policy. I should say at the outset that we wholeheartedly agree with the noble Baroness about the importance of consumer protection, which indeed is why we are creating a dedicated consumer protection regulator in the FCA.
In the case of directions, noble Lords will be aware that the scope of the FPC’s power will be determined by the Treasury. Under new Sections 9G and 9K of the Bank of England Act 1998, as set out in Clause 3 of this Bill, the FPC will be able to direct the PRA, the FCA, or both, to implement “macro-prudential measures” that have been prescribed by the Treasury by order, subject to parliamentary scrutiny.
Amendment 46 seeks to limit the FPC’s ability to make such a direction if it would conflict with the FCA’s consumer protection objective. I understand the general motivation behind this amendment. Indeed, it would not be appropriate for the FPC to issue directions to the regulators without regard for whether they conflict with the statutory objectives of those regulators.
However, let me assure noble Lords that safeguards are built into the Bill to prevent this. Specifically, new Section 9E, as set out in Clause 3 of this Bill, provides that the FPC must, in exercising its functions in relation to the FCA, seek to avoid doing so in a way that would prejudice the advancement of the FCA’s operational objectives, including consumer protection.
This provision is contingent on the FPC being able to achieve its own objective for financial stability. That is right, given that financial stability must necessarily take precedence if the new regulatory system is to address the flaws revealed by the crisis. However, this places a clear obligation on the FPC to take into consideration the FCA’s objectives before acting, and, in subsection (2), to find a way to minimise any possible conflict. In addition, of course, the presence of the chief executive of the FCA as a voting member of the FPC means that the views of the FCA—and therefore of consumers—will be represented and taken into account.
More generally, I suggest that such conflicts are unlikely to arise often. In practice, it is likely that most of the FPC’s directions will be directed at the PRA, so there will not be significant potential for conflict to arise between stability and consumer protection. It is also worth saying that what really is in the interest of consumers is financial stability. If the FPC were to be given a tool, implemented through the FCA, the Treasury would take care to design it in such a way as to minimise the potential for conflict between financial stability and consumer protection.
Amendments 49 and 52 deal with the role of the Financial Services Consumer Panel in relation to directions made by the FPC to the FCA. Amendment 49 would require the FPC to take account of representations from the panel before issuing a direction to the FCA. The FCA will already be required to consider representations from the consumer panel with regard to its general policies and their compliance with its objectives under new Section 1R of FiSMA in Clause 5 of this Bill. This duty will continue to apply when the FCA is acting under direction from the FPC, so the panel will have ample opportunity to make its views known.
Amendment 52, which would require FCA-specific directions to be reported to the consumer panel, is rendered unnecessary by the Bill’s general provisions for openness. For example, under new Section 9J, to be inserted in the Bank of England Act 1998 under Clause 3, directions must be reported to the Treasury and, where appropriate, laid before Parliament. Under new Section 9R, the record of FPC meetings must specify decisions taken, including the decision to give a direction or to make a recommendation.
Likewise, the inclusion of recommendations within new Section 9R means that Amendment 67 is not necessary either. The amendment would require recommendations made by the FPC to the FCA to be reported to the consumer panel, but the general reporting requirement is already in place under new Section 9R. Even without these provisions, we would expect the FCA to keep the consumer panel—indeed all the statutory panels—aware of relevant decisions made by the FPC. However, the provisions that are already in the Bill provide a guarantee of openness. I therefore hope that the noble Baroness will feel able to withdraw her amendment.
Before my noble friend replies, perhaps I may add my support. The Minister’s reply enhances my concern about the depth of work being given to the Bank of England under this Bill. The Minister referred to the FPC, the FCA, the PRA and the MPC. I suggest that the Government look at all the initials that they are using in these clauses. They are somewhat confusing and might even confuse the new governor. The Minister’s reply briefly exposes the extent and breadth of this Bill. The reply to one modest group of amendments is, to say the least, somewhat comprehensive. I am sure that it might not be easily understood by many Members, let alone by people outside this House.
We are told now that consumer protection is to be decided by the Treasury and not by the Bank of England, which is being given powers under all those initials. It will be decided by the Treasury. Has it nothing else to do? Will the Bank of England have nothing else to do? The whole Bill needs to be looked at afresh, and I would not be at all surprised if, before we get to the end of it, it is not all withdrawn and started again.
Just to supplement my noble friend’s intervention, am I right that the Minister is trying to tell us in a nutshell that there is no problem whatever with consumer protection in connection with these amendments and that everything will be all right, as Dr Pangloss might put it?
My Lords, I thank my noble friends Lord Peston and Lord Barnett, who between them have been teaching me economics for 40 years. It is very nice to have their support now. I also thank the Minister for his response. Unfortunately, he does not answer the major question. He says that they will mitigate problems from any decisions. Under this amendment, we were trying to say that consumers should influence those decisions. We keep putting things right when they have gone wrong and we want a voice in those decisions. I do not think that those questions have been answered by the noble Lord; nor has he taken up the point that the chief executive of the FCA, who does not come from the consumer movement, does not have the feel of it. That is fine; it is a different job. I think that we will want to return to this matter, because clearly it is key to the Bill. For the moment, I beg leave to withdraw the amendment.
Amendment 46 withdrawn.
Amendment 47 not moved.
47A: Clause 3, page 6, line 16, at end insert—
“( ) An order under subsection (2) may only exclude or modify procedural requirements under FSMA 2000 where the Committee believe that this is necessary due to the urgency of the situation, and where this occurs the order must include an explanation of the reasons for excluding or modifying the procedural requirements of FSMA 2000.”
Lord Flight: My Lords, this amendment is not of huge importance but the point is this: the power in the new Section 9G(2) enables the FPC to issue directions which will require the PRA or FCA to exclude or modify existing procedural requirements under FiSMA, and this is likely to include the requirements on the PRA and FCA to consult on new rules. While I accept that under certain emergency circumstances it may be necessary and correct so to do, this should clearly not be a common occurrence, and this amendment seeks to limit the power to dispense with or modify these procedures by requiring a subsequent explanation and justification if they are so modified.
My Lords, I was hoping that the noble Lord, Lord Flight, would speak at much greater length on this matter, because I find this whole section of the Bill very difficult to understand. The notes on clauses—I do not know whether noble Lords have bothered to take a copy—are about the worst I have seen in my life. They simply repeat the clauses, with no explanation whatever. Therefore, I would like to ask, via the Minister—I am not sure how one does this in Committee —whether the central point here is to deal with an emergency where the emergency is such that you cannot wait? The noble Lord, Lord Flight, has not given us an example. I have had great difficulty thinking of one. Perhaps he could tell me later what particular sort of emergency he has in mind. The great stock market crash of 1929 is a relevant event from the point of view of financial instability. I am sure the noble Lord, Lord Flight, knows that Irving Fisher, then the world’s greatest economist, said at the time that there was no danger whatever of the stock market crashing, it would go on rising considerably.
If that situation repeats itself, our intervention would be too late. That is the problem. The real point is, technically, whether we could ever be early enough. Therefore, I just want to make sure that I fully understand what the noble Lord, Lord Flight, is saying, when he recommends this amendment, which otherwise sounds fairly sensible to me.
My Lords, I would like to add a word to what the noble Lord, Lord Peston, has said, in particular to ask my noble friend Lord Flight about the frequency with which this situation is likely to happen. Would it be an exceptionally rare event, because that may affect the way in which one approaches it?
My Lords, I will see if I can help a bit here. Amendment 47A seeks to prohibit the modification or exclusion of procedural requirements—that is, the requirement to consult—except for reasons of urgency. The reasons for the exclusion or the modification would also need to be included in the order. I should briefly explain why the Treasury has the ability to switch off or modify procedural requirements—the requirement to consult—which apply to action taken by the PRA and FCA on a tool-by-tool basis.
As the Government made clear in their February 2011 consultation document, in the case of some macroprudential tools, directions from the FPC will be very specific, requiring no discretion at all on the part of the regulator to implement them. Noble Lords asked for examples. In these cases—for instance, where the FPC is simply changing the level of a particular lever—consultation or cost-benefit analysis undertaken by the regulator would have little value and would introduce unnecessary delay into the process.
The Government believe that in these cases the FPC’s policy statement for the tool and its explanation of how the action is compatible with its objectives will provide much more valuable information about the action and its impact than any consultation by the regulators. However, I reassure the Committee that the Government do not expect to modify or exclude procedural requirements for most tools.
The Government will in due course publish a consultation document with proposals for the composition of the FPC’s initial toolkit, which will set out whether procedural requirements will be amended for any tools. In that case, there will be complete transparency regarding whether there has been any proposal by the Government to cut out the normal full consultation processes, and, if so, the reason will be clear. On the other hand, taking the question of urgent cases, if a delay in implementing an FPC direction could pose a risk to financial stability, both the PRA and the FCA already have, under their existing powers, the ability to waive consultation requirements in order to take action urgently.
Therefore, I hope I can assure my noble friend that on the one hand it will not be, in his words, at all common for consultation not to take place and it will be transparently set out; on the other hand, the power in new Section 9H(2) will not be needed in cases of urgency because that is already covered. On the basis of that explanation, I ask my noble friend to withdraw his amendment.
Amendment 47A withdrawn.
Amendments 48 to 53 not moved.
Future of Specialist Disability Employment
My Lords, with the leave of the House, I will now repeat a Statement made in the House of Commons by my honourable friend the Parliamentary Under-Secretary of State for Work and Pensions. The Statement is as follows:
“I would like to make a Statement on Remploy and I am sure honourable Members will agree that Remploy employees must be first and foremost in our minds today. That is why they have been notified first of the decisions of the Remploy board in advance of this Statement today.
In her independent review published last year, disability expert Liz Sayce made it clear that segregated employment is not consistent with equality for disabled people. The Sayce review sets out that money should support individual disabled people, not segregated institutions, as well as recommending that Remploy factories should be set free from government control.
It cannot be right that the Government continue to subsidise segregated employment, which can lead to the isolation of disabled people. This is no alternative to promoting and supporting disabled people in mainstream jobs, the same as everyone else.
I have been absolutely clear that the £320 million budget for disability employment services has been protected, but by spending it more effectively we can get thousands more disabled people into work. It is important that this money is spent in a way that is consistent with what disabled people want, consistent with this Government’s commitment to disability equality, and consistent with helping more disabled people live an independent life.
When Labour put in place the Remploy modernisation plan in 2008, it started a process with £555 million to put factories on to a proper financial footing. It closed 29 factories as part of this process. What is clear is that the performance targets it set were not realistic, the reduction in costs could not be achieved and the modernisation plan has failed. In 2010-11, factories made almost £70 million of losses—money that could have been used to support thousands more disabled people into work. That is why the Government took the decision to implement Liz Sayce’s recommendations in March to stop funding Remploy factories that have been losing millions of pounds, year after year, but committed to doing everything possible to minimise the number of redundancies.
Today I can inform the House that the Remploy board has considered in detail 65 proposals to take factories out of government control as part of a commercial process. These proposals have been scrutinised by a panel, independent of Remploy, established by the department. The Remploy board and the Government have done all we can to support bids and safeguard jobs. This includes a wage subsidy for disabled members of staff totalling £6,400 and professional advice and support worth up to £10,000 for employee-led bids.
On this basis, nine sites have had business plans accepted and will now move forward to the “best and final offer” stage, where detailed bids will be considered. Back in 2008, when the right honourable Member for Hodge Hill, then Chief Secretary to the Treasury, started this modernisation process and closed 29 factories, there was no such offer. No factories were given the opportunity to continue outside of government control. Remploy is hopeful that these negotiations may lead to the transfer of business and retention of jobs. At the current time, this does mean that 27 Remploy sites will no longer be operating. Details of these sites will be placed in the Library of the House. Remploy employees have been informed of the board’s decision this afternoon. The Remploy board will now move into a period of individual consultation with employees.
Undoubtedly, for those employees who have been told that their factories are closing, this is difficult news. But let me make one point absolutely clear. We are doing everything we can to ensure that Remploy workers who are affected will receive a comprehensive package of support and guidance to make the transition from government-funded sheltered employment into mainstream jobs.
We have put in place £8 million to guarantee tailored support for every single disabled person affected for up to 18 months, including a personal case worker to help individuals with their future choices, as well as access to a personal budget for additional support. We are using the expertise of Remploy Employment Services, which, despite difficult economic times over the last two years, has found jobs for 35,000 disabled and disadvantaged people, many with similar disabilities to those working in Remploy factories. We are working with the Employers Forum on Disability to offer targeted work opportunities for disabled people through the First Shot, including guaranteed interviews, job trials, work experience and training. We have set up a community support fund to provide grants to local voluntary sector and user-led organisations. We have protected the budget for specialist disability employment services of £320 million on average for every year of the spending review period, and we have added £15 million specifically to Access to Work. This means that 8,000 more disabled people will be able to be supported into work as a result of today’s announcements.
This is an ongoing process. Over the Summer Recess, I commit to keeping right honourable and honourable Members—and noble Lords—updated on the status of the business plans going through to the next stage. I will provide a further update on progress when the House of Commons returns in September. Our approach has been led by disabled people’s organisations and disabled people themselves, many of whom have welcomed the move to end the pre-war practice of segregated employment. I believe that it should be welcomed by all sides of the House. By spending these protected government funds more effectively we can support thousands more disabled people in work. What is more, we can spend it in a way that fits the needs and aspirations of disabled people in the 21st century by promoting disability equality and supporting disabled people in leading full and independent lives”.
My Lords, that concludes the Statement.
My Lords, I hear what the Minister said about the worthy objective of ending what I used to call “sheltered employment” and moving towards more integrated employment, but the Government on this occasion have a duty as an employer to employees who are incredibly vulnerable. There are already 515,400 disabled workers out of work in the UK, as well as 1.9 million people who are not disabled looking for work. I fear that unless there is a U-turn by the Government on closing the Remploy factories, the 2,800 disabled employees will be put on the scrap heap and most of them will never work again.
Quite simply, this is the wrong plan at the wrong time. To use another phrase: it is too fast and too deep. I am afraid that the Government have not understood all the implications of Liz Sayce’s report. She understood the need for change, but in making that change she also understood the need to involve the employees and the people who work hard in Remploy in ensuring that they have the possibility of a future. The Government have ignored those recommendations—in particular, about the time and speed of the implementation of these changes.
Why do the Government not honour the recommendations of Liz Sayce that they have chosen to ignore? Why do they not give factories six months to develop a business plan and two years before the subsidy is fully withdrawn? Why is there not a proper plan for transition that gives hope to people in work to remain in work? The viability of the Remploy factories could be decided not by a panel appointed by the department but by one that genuinely involves business and enterprise experts, as well as trade unions, rather than a simple unilateral action by the department. Will the Minister consider restarting the process on a proper basis that will enable businesses to examine whether they have a proper viable future? The public sector in each local authority area could be involved so that we can properly understand how government and local purchasing and employment policies impact on the viability of these factories.
I welcome the commitment in Liz Sayce’s report. The Government need to take a more flexible approach to transitional funding. Some of these factories—beyond those that the Minister has referred to—may need more time, particularly in areas with the highest unemployment. As we have heard today, some may need less. We are talking about the future of nearly 3,000 workers, and it is time for the Government to put the emphasis on ensuring the success of enterprises rather than saying there is no hope. I urge the Minister to look at this issue. It is not impossible to look at the tender process and to work in a way that meets the timeframe set down by Liz Sayce’s review. It is simply not credible to suggest that potential bidders can be drawn up at such short notice. With the number that we have got in the report and in today’s Statement, it is the clear position of the Opposition that not enough time has been given to the future prospects of these factories. I urge the Minister to consider these points and look at the whole picture and the impact of the proposals, which will mean thousands of workers having no future.
Let me clarify one or two points on the numbers. The noble Lord, Lord Collins, talked about 2,800 workers on the scrap heap. The actual figure for the 27 sites we are talking about today is 1,422, of which 1,212 are the disabled group. There is a second process starting in the autumn with the next 18 factories. Those are the numbers that we are talking about.
There were two questions on process. The length of time taken to get this through, end to end, is just over five and a half months from the commercial process launched by Remploy on 20 March, not including the time for locking down the approved bids. We have had 65 bids, which we have boiled down to bids for nine particular factories. There has been an open process during which we have also put in support to provide subsidy for the first two years of £6,400 in the first year, tapering down to £1,000 in the second year. We have tried to find ways for local groups to take part in this process, including finding funds to support employee-led bids. We have run a process which, within the context of commercial and legal obligation, has been transparent and open.
It would not be appropriate or necessary to restart the process as the noble Lord said. We need to remove uncertainty and get on and finish this process in a satisfactory way so that people can work out their futures and take advantage of the very considerable package of support that we are putting behind getting people into alternative work.
My Lords, the Minister will not be surprised that I protest about the decisions which have been made in relation to Remploy, because I have raised the issue previously in debate in this House. He will be aware, of course, that the unions representing their members in Remploy have already protested very strongly against the decisions that have been taken.
Although I understand what the Minister says about it being much better for workers to work with other people and not to be segregated, for many people segregated employment is the only work available and appropriate for them, particularly in the neighbourhoods in which they live. The local siting of Remploy factories is very important.
I believe that the decision has been taken on a number of grounds, not necessarily in favour of the individual workers. There is an ideological attitude here on the part of the Government, who prefer privatisation to publicly owned enterprises. This was a publicly owned enterprise, a government enterprise, which everyone felt for many years was entirely successful. Many of the workers do not seem to have the organisation to effectively protest, although apparently they all belong to unions.
There is also the question of the people who supervise these workers. Supervising disabled people often requires a great deal more skill than supervising in ordinary circumstances, and the people concerned are trained to deal with the disabled people for whom they are responsible.
This is an entirely bad decision. I challenged it when I understood that it was in the process of consultation, and the unions protested at the time. I very much regret that the Government have taken this decision. As my noble friend on the Front Bench said, I hope there will be an opportunity for reconsideration, because there should be reconsideration. This is an important matter to the people who are directly involved, and I would like to protest on their behalf.
My Lords, the first claim of the noble Baroness, Lady Turner, about segregated employment being the only employment available, is undermined somewhat by the fact that many of the jobs provided by Remploy Employment Services are in the areas where the factories are situated. Indeed it is having a great deal of success in getting jobs for disabled people in non-segregated employment—I think that the figure is roughly 12,000 jobs in those areas in the past few years. Clearly it is tough to get jobs for disabled people but Remploy Employment Services’ remarkable performance shows how, with the right strategies and policies, one can be successful in getting people into non-segregated employment—which is, of course, our central strategy.
I do not think that the noble Baroness really believes that this is an ideological public/private issue. It is about segregated and non-segregated employment and trying to spread money as efficiently as possible among the disabled community. When you compare an operation which lost £70 million in 2010-11 and cost £25,000 year-on-year for each worker supported with Access to Work’s one-off investment, in many cases, of just under £3,000 to help people into non-segregated employment, you have to take these basic value-for-money considerations into account. I therefore commend this approach, which is being done with great concern and care for the individual workers involved, as a far better way of spending our budget for disabled people in work.
I share my noble friend’s aspiration for getting the people currently with Remploy into integrated, paid employment. However, this proposal, by any other definition, is something of an experiment by putting so many people into the jobs market at this particular time. I think that he mentioned that each worker would have a mentor and assistance in getting back into work for 18 months. However, I wonder if he would agree that the House should receive a full report from him in 18 months’ time telling us how many people are in contracted paid employment and how many are not. I must say to him that, in evaluating value for money, it is not only the public money that his department spends that would come into the equation. For those who might not be in paid employment at the end of the 18 months we would have to take into account not only the money that they had perhaps drawn in unemployment benefit but also a much wider expenditure which might include things such as mental health costs, physical health costs and costs associated with family breakdown. Those sorts of things—the therapeutic values and costs associated with this group in terms of their stability in the workplace—are not only important to them personally, although that is the most important part, but also involve a cost to the public purse. I really feel that the House should be able to access that information in 18 months so that we can make a judgment on just how successful this experiment has been.
My Lords, the monitoring of what happened in the 2008-09 closures was not very good—I appreciate my noble friend’s point, and I will look into the nature of the reporting back. There will be information and, if I may, I will specify the nature and timing of the feedback in a letter. I appreciate the point. On value for money, the assessment is that, over the current and the next spending review periods, this move will be worth just over £200 million. That is the context in which we are talking.
My Lords, we are undertaking quite a major exercise around Access to Work, and one of the areas that we are working on is exactly the noble Viscount’s point about making employers feel comfortable. When Remploy began after the war, manufacturing was a major part of our economy. It is quite hard to be full steam in a steelworks, for instance, if you have a physical disability. As the economy has moved over to the service sector, it is very different, and the idea that many disabled people—certainly physically disabled people, around whom the concept of Remploy was developed—cannot do a whole stream of mainstream jobs is incongruous today. That is what we are talking about in the modernisation process. As I said, there is an issue about mental health. There, we are trying to push Access to Work so that people with mental health issues are pulled in and involved. We have a lot of work still to do about stigma. The Mind campaign has been extraordinary in starting to turn attitudes, and we need to get right behind it. That is a big and important issue to get employers behind.
My Lords, I shall make a couple of points. First, the point made by my noble friend Lady Browning about reporting back is vital. This is probably the final public step of the process of looking at those with disabilities as individuals as opposed to people who are put away in blocs. I have always felt that the Remploy factories were on a time limit, and the previous Government accepted that. It is never the right time to make that change, and it is particularly unfortunate that it has to be done now, at a time of high unemployment. Can my noble friend assure me that in this process, those who are placing people outwith the specialist teams—normal job centres and secondary support services—are given greater briefing, particularly in the areas where people are being made unemployed? This may well be a useful test case for those who are providing better services overall. Unless we get that process right across the board, we will have merely pockets of good practice, not good practice overall.
I thank my noble friend for that point. As I said, I will outline exactly how we will report back and timings. The more important point is the level of support we are providing in this case, where we have the personal help and support package, which is considerably tailored with consultation at every stage with, most interestingly, a specific caseworker per person, so people’s individual requirements are analysed and taken into account, plus a fund to help people in. In this case, there is a lot of tailored support. One lesson may well be how important individual caseworkers are in helping people.
I have been following the development of this policy area, and it is very difficult. I understand the comments of the noble Lord, Lord Collins, about timing, but I disagree with him. I also disagree with him on his interpretation of the Sayce report. Liz Sayce, who did sterling service to this House and others by writing her report, is looking much more long term and I think that her long-term principles are absolutely correct. We have to get the implementation right to look after the individuals who will be directly and, in some cases, starkly affected by this change. I want an assurance from my noble friend that there will be a comprehensive package of support for the individuals affected.
In particular, as it affects these workers that we are all so concerned about this afternoon, transport access through the Access to Work programme is vital, because a lot of these factories and establishments are in very hard labour market areas. They may have to look further afield to find employment opportunities that are appropriate for their special circumstances.
I am reassured to hear my noble friend mention the individual personalised package. I am also reassured by his undertaking to report back. It seems strange to me that we spend £320 million or £330 million on disability specialist employment services but £7,000 million on disability unemployment services. As the architect of the famous DEL-AME switch I will be looking to him in the longer term—and I hope that these short-term problems are sorted out—to use his ingenuity to try to lever some of the money out of disability unemployment support to employment support in the future.
I support what is being suggested. I just hope we get the individual support packages correct.
My Lords, I thank my noble friend, who understands this area as well as anyone in the House.
This is not easy—it is a change in direction. However, it does reflect a world which is moving on, away from the physical disability area, into the mental health disability area. There is a lot of work to be done there. We need the money to be used very efficiently. In terms of efficiency, roughly half of the money spent on Access to Work is in achieving things that would not have happened otherwise. In other words, there is, in the jargon, not too much dead weight. Clearly one of the objectives of any Government must be to ramp up the level of efficiency and reduce the level of dead weight as we direct the money to help people who particularly need it. As noble Lords will know, that is something I am trying to push hard, in every direction that I possibly can.
Financial Services Bill
Committee (3rd Day) (Continued)
54: Clause 3, page 7, line 40, after “Committee” insert “and the public”
My Lords, I shall address Amendment 54, in my name and that of my noble friend Lady Hayter. I will also speak to Amendments 55, 57, 58 and 61. I apologise to the Committee if there is some confusion over the grouping with respect to these amendments. We asked this morning for this amendment to be degrouped from the amendment tabled by the noble Lord, Lord Flight, which deals with something rather different.
I will preface my remarks by saying that over the next several groups we will examine the exceptionalism of the Financial Policy Committee. This committee is an experiment, and it has powers transferred from persons who have the authority of election behind them and are part of the executive, to an administrative function. These powers are substantial: they manage the supply of credit, and possibly, if particular measures were handed over to the FPC, they will manage the demand for credit. Hence, it will have a major impact on the overall macroperformance of the economy.
There is also the potential for the FPC to be in conflict with the Monetary Policy Committee—the MPC—which controls the price of credit. That contradiction could be a serious element in the overall operation and management of the economy. The exceptionalism of the FPC, in our view, requires exceptional scrutiny and consultation as this experiment unfolds. I call it an experiment because we do not as yet know how effective these administrative measures are going to be. We do not as yet know even what they will be in content, so a degree of extra scrutiny and consultation is required at every stage to ensure that major mistakes are not made and that we design effective procedures and secure public acceptance for the role of the Financial Policy Committee.
Amendment 54 introduces a minor element, which has wider significance than might at first appear. It simply introduces the expression “and the public” into those who must be consulted with respect to the makings of an order. The public here is a term of art, meaning those who have a direct interest in this area. It would essentially involve the industry and perhaps a few specialist academics or others who have a particular interest in the field. Amendment 54 seeks, as does Amendment 55, to introduce the possibility of that wider consultation, which I believe is vital if this experiment—and it is an experiment—is to succeed.
Amendment 57 simply adds to the requirements for consultation by providing a back-up. When there is some failure to consult, perhaps because of the urgency of a particular measure, that failure should be,
“subject to scrutiny by the Treasury Select Committee”,
in a way which has been recognised in other parts of the Bill. Amendment 61 adds to the conditions associated with urgency that there should be a statement published within 10 days of an urgent measure on which consultation has not taken place. Those four amendments provide a wider framework of consultation for this experiment than is provided in the Bill. It seems to me that they are entirely unexceptional and would be widely welcomed throughout the financial services industry, and indeed the policy community.
Amendment 58 is a little different and really should have been degrouped, but we feel we should not go too far in our enthusiasm for degrouping. Here we have a slightly different element that focuses, however, on the exceptionalism of the Financial Policy Committee because that committee has a particular responsibility for measures that are specific macroeconomic controls. I simply do not see how that responsibility can be in any way transferred to the FCA or the PRA, which do not have such a responsibility in their objectives or their specification of roles. This seems to be a major mistake in the drafting of the Bill. It is also unnecessary with respect to the directions by the FPC, since the ability of the FPC to authorise the exercise of discretion is covered in proposed new Section 9G(5). This part is therefore going too far, as the necessary role for the FPC is already covered.
This is a dangerous amendment—no, it is a dangerous position, not a dangerous amendment. It is a very beneficial amendment, which would remove a potential danger in the sense that the provision, as drafted, takes these experimental powers which we are handing to the FPC and allows them to be generalised outwith that very special framework that we are creating in the Bill. I urge the Government to accept Amendment 58. All the powers that the committee needs are covered by proposed new Section 9G(5) and this position is entirely unnecessary.
In dealing with the exceptionalism of the Financial Policy Committee, therefore, the amendments I am discussing in this group enhance the underpinning of consultation that will provide validity and acceptance to the powers of the FPC and remove what was perhaps an unwitting extension of those powers, which might undermine the entire project. I beg to move.
Apart from the slight slip, I agree with everything my noble friend said. Indeed, I would say that it is not the only major mistake in this Bill. There are lots of major mistakes; indeed, there is total confusion. My noble friend has referred to only part of it. The plain fact is that when he talked about the FCA or the FPC, I was not quite sure which one we were talking about. There is also the PRA, which I forgot to mention. The macroprudential is also very important. I do not know where it fits into all this and where the responsibility will lie. To say that it is confusing is to put it mildly. As I have said before, this Bill is a dog’s breakfast—I think that is the phrase. This Joint Committee that is being set up—perhaps the noble Lord can tell us when—was supposed to deal with everything very quickly. However, we are rising in a couple of weeks’ time, and if the Joint Committee is not set up soon it will be October before it is. Perhaps the noble Lord knows, because he knows everything about this Bill.
The plain fact is that responsibility ultimately rests with the Treasury. On the previous group of amendments, we were told that the Treasury will issue another document. The one thing we are not short of on this Bill is documents. We have two huge volumes, one with the schedules and one with the clauses, plus Treasury amendments and all kinds of working papers. Frankly, if my noble friend is confused, anyone involved with this Bill is bound to be confused because it is totally confusing. I hope that the Minister will be able to reply comprehensively about how the whole thing will work and where the responsibility lies. I assume that ultimately it will lie with the Treasury, not with the FCA or the PRA or whoever. Who else will be responsible for financial stability? It must be the Treasury. No doubt, the Minister will be able to tell us. I strongly support my noble friend.
My Lords, first, I support my noble friend Lord Barnett in his remarks about this Joint Committee of both Houses, about which we had a great row last week and were even divided on. We would certainly like to know when it will be set up and when it will appear in detail in the business statement. Having said that, I have two or three questions.
My noble friend is quite right to use the word “experiment”, but I hope he will agree that the whole Bill is an experiment. We have not had anything like this placed before us in this form, certainly in my quarter of a century here. That does not mean that it is an experiment that should not take place, but it does mean that we must be immensely careful when it comes to implementation. In particular, the one thing that we do not want to do is what I am afraid all Governments do: look at the past and then repeat the errors of the past willy-nilly. This is not a party political point; it is part of the nature of our political system. We need to make absolutely certain that we do not repeat the errors of the past.
One slight point which my noble friend knows I will disagree on is the phrase,
“subject to scrutiny by the Treasury Select Committee”.
I would always want to add “and the Economic Affairs Committee of your Lordships’ House”, but again we have had that argument before, and the cliché “flogging dead horses” is not my stock in trade.
What troubles me much more is that I cannot see how what is said in the Bill does not lead to clashes with the MPC and what it seeks to do. There is an enormous blurred area of who is responsible for what. After all, if one knows any monetary economics, one knows that the MPC’s role is certainly to produce financial stability. That is the whole point of a correct monetary framework, yet there are these other bodies doing the same thing. I know that we went through this again last week and were told that the governor of the Bank—I add the now mandatory remark, “whoever he or she may be”—will be chairing both committees, but it is still a Herculean task for the governor to ensure that two different committees do not have a decision-making process that leads to conflict.
My last question is due to my ignorance of parliamentary procedure. Could the Minister say a bit more about what the phrase “by order” means? Does it mean putting an order before both Houses that is not amendable by us, or not? Apart from that, as I say, my support is strong.
I am always grateful to my noble friend or anyone else who wants to take the heat on challenging questions. We will come back to the nature of orders.
On the question of what the experiment is here, the experiment that has failed is that of creating the FSA, and we now need to go back to putting the Bank of England at the heart of matters, which is what this is all about. I rather preferred the noble Lord, Lord Eatwell, referring to a “project”, which he did at the end of his speech, rather than an “experiment”. It is indeed a major project.
To dispose of the not entirely relevant question about the Joint Committee on banking ethics and standards, the procedural Motion to set up that committee will be before us very shortly. There is not much more that I can usefully add. I do not think it is directly relevant to these amendments, but I am sure that that Motion will come forward very soon.
It is directly relevant because the Minister has argued constantly that these are times of crisis and that we need to act quickly. He keeps arguing that and blaming the previous Government for the crisis rather than his own Government’s continued mistakes. It is therefore very relevant for us to know when this committee is going to be set up and who will be on it.
I am sure that we will not have to wait for very long. I shall address what is more directly the subject of these amendments and the question about possible conflicts between the FPC and the MPC. While it is conceivable that the two committees might seemingly appear to be taking conflicting action, I do not actually believe that that is likely to be the case as each committee’s actions will be designed to address very different aspects of the economy and the financial system. That said, there are mechanisms in place to ensure that conflict does not arise. The committees will share information and briefing in order to aid co-ordination, and the Bill makes provision for joint meetings of the two policy committees if at any time that is required. The Bank has also said that it agrees with the Treasury Committee’s recommendation on this question and that the governor should consult the chairman of court if a conflict arises. It is unlikely, but the Bill makes provision through joint meetings and the consultation with the chairman of court.
I turn to the specifics of Amendments 54 and 55. These amendments seek to require the Treasury to consult the public before making any order which makes macroprudential tools available to the FPC. I agree with the noble Lord, Lord Eatwell, that effective consultation on macroprudential tools is essential, but this amendment is not the best way to achieve it. The practice of public consultation on important matters of policy and legislation is now well established and is engrained in good government practice. My honourable friend the Financial Secretary said in another place:
“As a matter of course and as part of the usual statutory instrument process, I expect that the Treasury will consult on macro-prudential tools”.—[Official Report, Commons, 28/2/12; col.46.]
The Government have already committed to a consultation on their proposals for the FPC’s initial toolkit and will produce a draft statutory instrument as a part of that consultation. The Bill as currently drafted does not prevent the Treasury from consulting the public. The Government have already shown their willingness to consult on macroprudential tools and demonstrated their commitment to transparency by asking the interim FPC to make public recommendations regarding its tools.
I do not quibble with the term “public”. From what the noble Lord said, I suspect that he might have been expecting me to come back and say that this is not for the public, but for consultation with the industry. I accept the context in which he uses the word “public”. That is not my objection. It is good practice to do it. We are doing it. The FPC has been asked to make public its recommendations regarding tools. However, it may not always be appropriate to consult the public, which is why this requirement should not be in the legislation. Not all macroprudential orders will make large changes to the FPC’s direction powers. It is possible that some orders will contain only minor and technical changes and in this instance a three-month public consultation would be unnecessary. The previous Government rightly recognised the risks of undertaking full public consultation in cases where it is not necessary. Their own code of consultation listed seven criteria, one of which stated:
“Keeping the burden of consultation to a minimum is essential if consultations are to be effective and if consultees’ buy-in to the process is to be obtained”.
The Government have stated that they will, in compliance with the principles of good government, consult the public when material changes to the FPC’s direction powers are proposed and in non-urgent cases. I hope that that provides reassurance which the Committee seeks.
My Lords, while we are on this point and before the noble Lord, Lord Sassoon, moves on to other elements, I am grateful for his clarification on this issue of consultation. I heard that we expect the Treasury to consult and there is nothing to prevent it consulting. I was seeking that the Treasury be required to consult.
Turning to the point which the noble Lord has just raised about the consultation criteria, which is enormously helpful, would it not be appropriate to write the criteria in to the conditionality with respect to when the Treasury should consult? Then we will not have simply an expectation or a desire and we will not be saying that there is nothing to prevent consultation. We will be saying that the Treasury should consult in all circumstances other than those specified under the consultation criteria. Would that not be helpful?
My Lords, of course that could be done, but I make the point again that it is now engrained in the principles of good government that there should normally be three months’ public consultation. There is a code of consultation that the previous Government put out. It sets it all out very clearly, including the point about burdens and so on that I read out. In its full richness, it cannot easily be drafted in legislation. Indeed, if we were going to do it in this Bill, I imagine there could be hundreds of other Bills in which it could be spelled out. I suggest that the Committee should not only take comfort from the standard governmental practice but from the fact that we have already indicated what we are going to do with the FPC toolkit. I believe we have covered it all and do not need to burden this Bill with a lot of detail any more than other Bills are burdened with it.
Amendment 57 seeks to provide that the reasons for making an order without consulting the FPC or the public be subject to scrutiny by the Treasury Select Committee. While I agree that accountability to Parliament will be important and the provisions within the Bill reflect that, I believe, as I have said on other occasions, that it is for parliamentary committees themselves to decide what they will scrutinise. I would expect the Treasury Committee to take a great interest in any circumstances where the Treasury felt it necessary to create a new macroprudential tool on an urgent and therefore possibly not-consulted basis.
I suggest to the Committee that it would be inappropriate for the Government to use primary legislation to force the Treasury Select Committee to scrutinise something. It must be a decision for the committee itself. The committee has already taken great interest in the interim FPC and I hope that this will continue. For those reasons I believe that Amendment 57 is neither appropriate nor necessary.
We then get to Amendment 58—I was going to say “the dangerous amendment”. It seeks to deal with what the noble Lord says is a potentially dangerous situation. He was entirely clear in his reasoning. The amendment seeks to remove the FPC’s ability to confer discretion on the PRA and the FCA as part of a direction.
The noble Lord says that it is the Treasury’s ability to confer discretion. Whoever’s ability to confer discretion it is—I am just turning back to the drafting of the amendment, which really means looking at the clause as well. I will do that as I speak. I believe it is the FPC’s ability to confer discretion, but whether it is the FPC or the Treasury, the purpose of the provision is to allow the direction-making entity to take advantage of the expertise of the PRA and the FCA. Indeed, the noble Lord is completely right. I have now checked the text and it is the Treasury. However, the point is the same. We need to take advantage of the expertise of the PRA and the FCA which hold the expert knowledge relating to the supervision of individual firms. This provision allows the Treasury to take advantage of that expertise in its directions. For example, if the direction required the PRA to require firms with large exposures to hold additional capital, it would be for the PRA to decide which firms had large exposures. That would be something for the supervisor—the regulator—to do. Therefore, I believe that the amendment would unnecessarily hamper the ability of the direction to have proper effect.
Shall we deal with it as I go along? It would be easier for the Committee if we deal with Amendment 58.
There is a mistake here. The text of the Bill says that the Treasury may make an order which,
“may confer a discretion on … the FCA or the PRA”.
In other words, the Treasury has direct macroprudential tool access to the FCA or PRA, not via the FPC. Proposed new Section 9G(5) describes the correct procedure, in that a discretion that could be given to the PRA or the FCA comes via the FPC. In other words, it comes via the macroprudential authority—the institution that is responsible for macroprudential measures. The example given by the noble Lord is particularly pertinent in this case. If there were a requirement to increase the capital that is relative, let us say, to large exposures or to other risk-weighted measures, then that must be a decision of the FPC. I do not see how the Treasury could give that macroprudential role in any shape or form directly to the FCA or the PRA.
If the provision’s wording was that an order may confer a discretion on the Financial Policy Committee, which may then be transferred to the FCA or the PRA at the will of the Financial Policy Committee, the point that the noble Lord has just made about expertise would be entirely well taken. However, if we are to maintain the integrity of this experiment, or indeed project, then we must maintain the FPC as the focus for macroprudential regulatory management. That is why I referred to this element as dangerous, in the sense that it undermines that clear structure within the Bill.
My Lords, according to these provisions, when the Treasury specifies what macroprudential measures the FPC may exercise, the Treasury may, in relation to those macroprudential measures, confer functions on the regulator. It is intended that this is likely to be used for minor matters such as definitions. For example, the Treasury could provide that the FPC may impose additional capital requirements on exposures to residential property, and that the PRA, as the microregulator, would define the meaning of “residential property”.
There is, therefore, a web of interlocking provisions here, which I fear I did not do justice to in my first attempt to cut through this. Would it help the noble Lord if I take this one away, write to him and copy it to the other Members of the Committee who are here, to try to explain how these provisions will work together? I do not believe that there is any gap here, because it is ancillary to the basic directions that will come via the macroprudentials of the FPC. But there may be some ancillary matters, particularly definitional ones, where the expertise of the PRA or the FCA would be operative and for which we need therefore to keep this element and not to close this off in the way that Amendment 58 seeks to do. I will write to try to set that out more clearly. I am grateful to the noble Lord for that.
Amendment 61 would require the FPC to publish a policy statement within 10 days of a direction being made in relation to a measure made before the FPC had been able to issue a statement of policy under new Section 9L to be inserted into the Bank of England Act 1998 under Clause 3. Again, the Government agree that transparency and openness will be vital to ensure sufficient accountability for the FPC and the use of its tools. However, I believe that this amendment is not appropriate.
The Bill already provides that a policy statement is produced and maintained for each of the Bank’s macroprudential tools. This would also apply to those measures granted using the emergency procedure. However, if a situation were urgent, it would be counterproductive to require the FPC to wait until it has drafted and published a statement of policy before it could use that tool.
We would expect the FPC to produce a statement of policy for the tool as soon as reasonably practical afterwards, assuming that the tool remains in the FPC’s toolkit. I suggest that the requirement in Amendment 61 would be excessively restrictive.
I am very puzzled by the Minister’s answer. That may be because I do not understand what a macroprudential measure is. Macro normally means economy-wide: it does not mean dealing with a specific bank in trouble or anything like that. I would take it to mean that the whole financial intermediation process was in danger of going wrong. I am finding it very hard to believe that, as a matter of urgency if the FPC was acting to deal with that, it would not immediately draft a statement. The idea that it will take time to say, “We have got a crisis on our hands and we are acting” is preposterous. It rather takes us back to the amendment tabled by the noble Lord, Lord Flight, which carried the same kind of message. Surely, the point for the Minister to emphasise is that he wishes to make it clear that all of us take it for granted that the relevant decision-making body should do exactly what my noble friend says.
My Lords, the requirement is there for the statement to be made. Indeed, it would be the full expectation that a statement would be made. We believe that the Bill does not need any extra amendment in relation to statements that relate to macroprudential measures where they are exercised as a matter of urgency. The statement has to be made in any case.
Perhaps I may help the noble Lord. I think that there was a slight misunderstanding in what he said in his initial answer on this amendment. He said that if there were an urgent situation, it would be inappropriate to wait for a statement to be made. That is not what this amendment says. It in no way prevents urgent measures being taken immediately. It simply says that if that is the case—as the noble Lord said, as soon as possible, and as I say, within 10 days—a statement should be produced. Surely, it is appropriate to give confidence and comfort to the markets that they can have some degree of expectation that a measure taken in urgency would be subject to a statement within a timeframe which is known to the markets and therefore provides them with appropriate comfort.
My Lords, I do not believe that any additional requirement needs to be put in. The FPC already has transparency requirements at the heart of what it does. I completely agree that in certain cases, if it was an urgent matter, 10 days would not be the answer. It would make a statement based on the merits of the case either immediately, or on some other timescale. The Treasury would need to lay secondary legislation on an urgent basis to create the new tools required. Regardless of this provision, the laying of this secondary legislation would involve a public statement about the need for the tool and how it would be used. There is another backstop. If the new tool was required to be created, Parliament would immediately have a statement in front of it to back up the secondary legislation.
For a variety of reasons, Amendment 61 is redundant. On the basis of some partial explanations, and my commitment to write to him—particularly to explain in more detail how I believe the matters around Amendment 58 will operate—I ask if the noble Lord will withdraw his amendment.
I am grateful to the noble Lord. Having a committee process where we go backwards and forwards on each particular amendment is helpful and removes the need for me to make a long summing-up speech. I will simply focus on Amendment 58, which has been the main matter of substance within this group which has exercised us, especially after the noble Lord clarified the issues of the consultations so well. Amendment 58 is still a serious problem, and I look forward to the noble Lord writing to me about it. Once I have his views in writing, perhaps we can consult further to find an appropriate way of sustaining the position of the FPC in the way that I have described. In the mean time, I beg leave to withdraw the amendment.
Amendment 54 withdrawn.
Amendment 55 not moved.
56: Clause 3, page 7, line 43, at end insert “and the Deputy Governor for Financial Stability”
And now, my Lords, for something completely different. One of the objects relating to the governance of the Bank of England which we discussed in the first two days in Committee, and which is now coming up again, is to increase the collegiality of decision-making within the Bank, particularly with respect to this project. It seems that the deputy governor for financial stability is going to have an important role in the development of the FPC, the development of its activities and, indeed, its overall credibility and acceptance. It therefore seems entirely appropriate in these circumstances that the deputy governor for financial stability should be given a special status within the legislation, both in respect to consultation with the Treasury when an emergency order is introduced, and with respect to the discussions with the Chancellor of the Exchequer after the publication of the Financial Stability Report.
Amendment 56 seeks to place the deputy governor for financial stability within the framework of consultation when there is an emergency order. Overall responsibility rests with the governor. However, surely the deputy governor, who has the prime responsibility, should be consulted when there is likely to be an emergency order. Moreover, when the Treasury and the Bank have their formal discussions, which are required by the Bill, following the publication of the Financial Stability Report, it is surely appropriate that the person responsible for that report—the deputy governor for financial stability is the acting element in this respect—should be part of those conversations, as we require in Amendment 79.
If the Government accepted these amendments, we would feel much more comfortable about the overall governance structure of the Bank. It would acquire a more collegial framework, which we strongly feel is very appropriate to the development of these new measures. I beg to move.
My Lords, these amendments reprise an argument that was raised by the shadow Chancellor during the Bill’s Second Reading in another place.
As the noble Lord, Lord Eatwell, said, Amendment 56 would require the Treasury to inform not only the governor but the deputy governor for financial stability when it considers that there is insufficient time for the FPC to be consulted on the introduction of a new macroprudential tool.
Amendment 79 would place in the Bill a requirement for the deputy governor for financial stability to attend the biannual meetings between the Chancellor and the governor following the publication of the FPC’s annual stability report.
Clearly the Bank plays a crucial role not only in relation to the management of the UK’s economy but specifically, under the Bill, in relation to macroprudential and microprudential regulation. In fulfilling these very important responsibilities, we expect the Bank to act as the serious and respected organisation that it is. This means that the senior executives of the Bank will work as a team to determine the best course of action to achieve the Bank’s objectives and comply with the legal obligations placed upon it. The governor is the leader of that team and, working closely with his senior executives, will ultimately take the key decisions within the Bank.
It is clear that the success of the new regulatory structure, which, rightly, we are spending so much time debating, relies heavily on the relationship between the Treasury and the Bank of England, and I believe that the Bill provides the necessary clarity of responsibilities. However, it also depends on the personal relationships at play here, particularly between the most senior leaders of the two bodies—the Chancellor of the Exchequer and the Governor of the Bank of England. One of the major problems leading up to the financial crisis was that the tripartite committee did not meet at principals level during the previous decade.
Therefore, there are clearly things that need to be legislated for, and this is not what the noble Lord is in any way seeking to argue against, but it is important background to this discussion. The Chancellor and the governor must meet regularly to discuss financial stability. That is why the Bill and the regulatory structure that it establishes place at the heart of the matter the institutional relationship between the Treasury and the Bank, and the personal relationship between the Chancellor and the governor.
I do not see any reason to attempt to insert into that relationship a further statutory channel of communication. First, I just do not believe that it is needed. The Treasury ministerial team regularly meets the current deputy governor for financial stability and the chief executive of the FSA. There is also a constant dialogue between the deputy governor and senior Treasury officials via meetings, phone calls and e-mails. The same was true under the previous Government, as I know, since I was part of it for three years, and it was very effective at working level. That has not changed and it will not change under the new structure. In practice, the deputy governor may well attend the biannual meetings between the two principals. If the Treasury notified the governor that a new macroprudential instrument needed to be introduced on an urgent basis, the deputy governor would be well aware of that.
I will just point out one slight correction that is relevant to this, which is that the FPC is responsible for the financial stability report to the deputy governor. That is relevant to the discussion of this amendment because it shows that we should not excessively personalise the relationships or draw attention to particular individuals if that risks, as it may do in this instance, causing confusion about who is responsible for what. I agree that the relationship with the two leaders of the bodies, the Treasury and the Bank of England, should be hard-wired in, as we have done. In practice, the deputy governor is, and will be, very much involved in all the relevant discussions. Amendments 79 and 56 are not necessary and go too far.
There is a strong argument here that such a provision could be positively unhelpful by opening the door to the possibility that the Bank may be divided and encouraged to speak with more than one voice. There is a risk of recreating elements of dysfunctionality that were in the system as it used to exist. I do not want to overplay this, since the main argument is the earlier one. However, I do see a slight but secondary danger that this provision could be built on in the wrong circumstances. On the basis of the earlier explanations, I hope the noble Lord, Lord Eatwell, will withdraw this amendment.
My Lords, the noble Lord’s comments have been very valuable. The Government have continuously argued that the tripartite system set out by the previous Government did not work because of its structure. He has now admitted that it did not work because the principals did not work it and did not meet. That is a very different issue. The fact that the principals did not meet, and that we now find the need for them to meet in primary legislation, illustrates that it was not the structure that was wrong but the people working in it that went wrong.
I agree with the noble Lord that the Bank should work as a team. I am very much in favour of that. However, we have to distinguish between the captain of the team and those who take the penalty kicks. We may want Martin Johnson to be the captain but we want Jonny Wilkinson to take the kicks. In those circumstances, the particular specialist role of the deputy governor for financial stability seems to be an important element in effective communication between the Treasury and the Bank. Moreover, the noble Lord expressed, in a careful way, that this might expose differences in the Bank’s position and suggested that this might create dysfunctionality. There are differences in this Committee, but this Committee is not dysfunctional. It is making progress. The differences between us are highlighting, as it is their role to highlight, some problems in the Bill that can make it a better Bill, which is our entire objective. I do not accept that differences within a reasonably run organisation necessarily lead to dysfunctionality. That seems to be Sir Humphrey rampant, determined that there is a singular position.
The whole issue of governance of the Bank is still somewhat in the air. This is one element that we wished to put in the Bill and felt would be enormously helpful. Now the noble Lord has recognised that the tripartite system did not fail because of its structure, but because of the personalities who failed to work it, I hope that he will consider the value of these amendments when we return to them on Report.
I was confused before we started and my noble friend and the Minister have confused me even more. They talk about teams; apparently there is a Treasury team and a team from the PRA, MPC or FCA—I am not sure which it is. There are various teams who will be meeting to solve a crisis if it arises. The Chancellor of the Exchequer, of course, would know nothing about all of this. The people who know something about it might be here with us, including the noble Lord, Lord Sassoon, who is a member of the team, apparently. Maybe he will take the penalty kicks.
We are talking about possible serious financial crises and stability. At the end of the day, the Chancellor will be held responsible if something goes wrong with financial stability. There could be as many teams as we liked, but the Chancellor would ultimately have to accept responsibility, even if he knew nothing about it. I am sure that any Chancellor—I am looking at one now—would know everything that was going on in his team.
I am confused about what the clause or the Bill will do to help us in this matter. My noble friend’s amendment might help, although we are told by the Minister that it could “excessively personalise”. I am blessed if I know what that is supposed to mean, but no doubt the Minister will tell us. At the moment, I am more confused than ever. I thought that I understood a few things about financial matters but, listening to the exchange between my noble friend and the Minister, I am confused more than ever.
Perhaps before I sit down I can help my noble friend. We are discussing what is perceived to be an essential failure of the previous system. The failure was that the people responsible for working it did not take advantage of the tools that were provided. Here in the Bill, as the Minister pointed out, the Government have rightly insisted that the Treasury and the Bank convey information to each other, consult each other and act collectively when necessary. That is appropriate, and I commend the Government in that respect. I simply think that they have not gone far enough.
If my noble friend were to ask himself who would know most about a macroprudential measure in the Bank, surely that would be the deputy governor, because that is his job. My noble friend is saying that the Treasury should consult. I would argue that the Treasury is sensible enough to know that it should consult the one person who would know what was going on.
Just to reinforce what I said, neither the Government nor this side have entire confidence in the consultation procedure between the Bank and Treasury as it has taken place in the past. The Government are seeking to reinforce that confidence, and I wanted to reinforce it further. But at this stage I beg leave to withdraw the amendment.
Amendment 56 withdrawn.
Amendments 57 to 61 not moved.
62: Clause 3, page 8, line 32, at end insert—
“(1A) If the Treasury considers it appropriate to proceed with the making of an order under section 9K, the Treasury may lay before Parliament—
(a) a draft order, and(b) an explanatory document.(1B) The explanatory document laid under subsection (1A) must—
(a) introduce and give reasons for the order,(b) explain why the Treasury considers that the order serves the purpose in section 9K, and(c) be accompanied by a copy of any representations received from the FPC or the Governor.(1C) The Treasury may not act under subsection (1A) before the end of the period of 12 weeks beginning with the day on which the consultation began, unless the order is made in accordance with section 9K(2)(b).
(1D) Subject as follows, if after the expiry of the 40-day period the draft order laid under subsection (1A) is approved by a resolution of each House of Parliament, the Minister may make an order in the terms of the draft order.
(1E) The procedure in subsections (1F) to (1J) shall apply to the draft order instead of the procedure in subsection (1D) if—
(a) either House of Parliament so resolves within the 30-day period, or(b) a committee of either House charged with reporting on the draft order so recommends within the 30-day period and the House to which the recommendation is made does not by resolution reject the recommendation within the period.(1F) The Minister must have regard to—
(a) any representations,(b) any resolution of either House of Parliament, and(c) any recommendation of a committee of either House of Parliament charged with reporting on the draft order, made during the 60-day period with regard to the draft order.(1G) If after the expiry of the 60-day period the draft order is approved by a resolution of each House of Parliament, the Minister may make an order in the terms of the draft order.
(1H) If after the expiry of the 60-day period the Minister wishes to proceed with the draft order but with the material changes, the Minister may lay before Parliament—
(a) a revised draft order, and(b) a statement giving a summary of the changes proposed.(1J) If the revised draft order is approved by a resolution of each House of Parliament, the Minister may make an order in the terms of the revised draft order.
(1K) For the purposes of this section, an order is made in the terms of a draft order or revised draft order if it contains no material changes to its provisions.
(1L) In this section, references to the “30-day”, “40-day” and “60-day” periods in relation to any draft order are to the periods of 30, 40 and 60 days beginning with the day on which the draft order was laid before Parliament.
(1M) For the purposes of subsection (1L), no account is to be taken of any time during which Parliament is dissolved or prorogued or during which either House is adjourned for more than four days.”
My Lords, the noble Lord, Lord McFall, is unable to be with us this afternoon because he is en route to receiving an honorary degree tomorrow, which I am sure the Committee will agree is well deserved.
This is another amendment that the noble Lord, Lord McFall, and I have tabled to ensure that the issues covered in the first report in this Session of the Treasury Select Committee in another place are properly debated. I am pleased to see that the noble Lord, Lord Eatwell, has added his name to the amendment. The noble Lord, Lord Eatwell, has already emphasised the importance of the macroprudential tools which are covered by new Sections 9G to 9M. I am sure that the thrust behind these new sections will command general support, but the detail of the new tools must be approached with very great care. My noble friend does not like the term “experiment”, but most of us think that if something looks like an experiment and sounds like an experiment, it is an experiment. We cannot get away from the fact that, because these macroprudential tools have not been used before in this country, nor is there much international experience to go by, we are talking about something very new which should receive very considerable scrutiny. Not even the Bank of England claims a monopoly of wisdom on what these macro- prudential matters should be.
This experimental phase will run for some time. The measures that are initially specified will almost certainly vary over time, as the focus of risks to financial stability changes and as experience is gained of working with the measures. We have something that is very new and, as the noble Lord, Lord Eatwell, has also pointed out, these are very powerful tools to be placed into the hands of the FPC. We have already seen the FPC’s first shot at what it believes those macroprudential tools should be. It has suggested a countercyclical capital buffer, sectoral capital requirements and a leverage ratio. At that time the FPC said that some other measures, such as loan-to-value ratios and loan-to-income ratios, would need public support before they were introduced. I would like to suggest that all the potential measures need public support and therefore there has to be proper debate before it would be wise to introduce them. The Government have, correctly, decided that the new measures cannot simply be set by the FPC or the Bank. They have to be prescribed by the Treasury by order, and that order is subject to parliamentary approval. That meets the point which troubled the noble Lord, Lord Peston, a little while ago.
So far, so good. The measures are to be initially specified by the Treasury, not left to the Bank and the FPC, and they have to be approved by Parliament. The problem is that new Section 9M prescribes the draft affirmative procedure. This procedure is, of course, better than the ordinary affirmative procedure which is, in turn, better than the negative procedure. However, none of these procedures is, in truth, more than a rubber stamp. Oppositions know this only too well, but that knowledge seems somehow to evaporate when they find themselves on the government Benches. Some of us still remember.
The importance of the macroprudential measures lies not in their technical specification and potential impact on financial stability, though those are very important issues. The equally important issues are the consequences of using the measures and their impact on the wider economy. These matters need proper scrutiny and debate both in Parliament and, as we discussed earlier, outside. Once the FPC has been granted these measures they will be able to use them without any further parliamentary intervention. The price for getting these wrong could be very high and so Parliament needs to be very sure that it understands the potential impact of the powers and that it has an opportunity to amend or circumscribe them if that is appropriate. The only way we can get a proper debate in these terms is through the use of the super-affirmative procedure, and that is what the amendment proposes.
The Treasury Select Committee in another place believes that the super-affirmative procedure is appropriate and fully in accordance with Erskine May, which describes the procedure as used,”
“in enactments where an exceptionally high degree of scrutiny is appropriate”.
It is inescapable that these measures fall into that category. It is generally the case that Governments never start out thinking that the super-affirmative procedure is the right one. However, the will of Parliament does sometimes prevail over the Executive in this area.
The Government recently accepted in the Public Bodies Act 2011 that their powers to wind up such hugely important bodies as the Home Grown Timber Advisory Committee or the Railway Heritage Committee should be subject to the super-affirmative procedure, but it appears that they have yet to be convinced that granting these massive new powers to the FPC is of that importance. It is a no-brainer that the super-affirmative procedure should be used and I hope that my noble friend will be prepared to accept that that is the case.
I am aware that the Delegated Powers Committee, which I hold in the highest regard, has not raised objections to the affirmative procedure in the Bill. That is interesting but not conclusive. The final arbiter on these matters is Parliament. The Delegated Powers Committee acts as an early warning system of problems for Parliament to address. The committee does not act on behalf of Parliament to approve particular procedures.
In responding to the Treasury Select Committee, the Government have raised concerns about timing and, in particular, the impact of recesses. This is a red herring. We are not generally dealing with matters which need to be introduced immediately. However, if the FPC woke up one morning with an urgent need to acquire a new macroprudential tool, one’s first reaction would be that that was surprising. However, if that were genuinely the case and the Treasury were committed, my Amendment 62 does not remove the ability to act with urgency. The powers set out in new Section 9M for the made affirmative procedure can be used when the Treasury is convinced of the urgency of the matter.
When the Governor of the Bank of England came to talk to a number of us last week, he rightly emphasised the accountability of the Bank and the FPC to Parliament. Accountability is an ex post concept: Parliament also has to have the ability to be involved fully ex ante in the formulation of important matters such as the macroprudential measures, and the super-affirmative procedure is the only proper way to proceed. I beg to move.
My Lords, I support my noble friend Lady Noakes in her Amendment 162. Like my noble friend, I believe that there should be stronger parliamentary scrutiny of the macroprudential tools.
While I accept that there must be flexibility to grant the FPC new tools quickly in rare and urgent circumstances, I still agree with the Treasury Select Committee’s report on the accountability of the Bank of England. As the legislation stands, approval by the House of Commons requires only a 90-minute debate in a general committee and a decision without debate in the House. Like the Select Committee, I recommend that the Government amend the draft legislation to require debates on orders prescribing macroprudential measures to be held on the Floor of the House and not be subject to the 90-minute restriction. The House would benefit from prior scrutiny of such orders by the committee. This view is supported by the Joint Committee on the draft Financial Services Bill, which agrees that there should be a system of enhanced parliamentary scrutiny of these important tools. Like my noble friend Lady Noakes, I was disappointed. Although I respect enormously the Delegated Powers Committee, I felt that its arguments for not wishing this were not as substantial as I would have liked.
My Lords, I, too, support the noble Baroness, Lady Noakes, in her amendment. I also commend the Treasury Select Committee on having done such a good job in presenting the arguments for appropriate scrutiny of elements in the Bill.
As the noble Baroness, Lady Noakes, pointed out, the measures which the Financial Policy Committee is to have in its hands are extremely powerful. Let us consider introducing a leverage ratio in British banking. That notion has not existed within the structure or organisation of British banking. It would change entirely the relationship between the liability side and the asset side of the balance sheet of British banks. It is a major measure which thereby deserves appropriate consideration of the sort set out in the amendment.
Let us consider also the other tool which the FPC is claiming as appropriate for itself: pro-cyclical provisioning. Pro-cyclical provisioning involves enormously complicated decisions, both in the banking sector and in accountancy. Accountants tend to be very hostile to the notion of provisioning since it can be used to hide profits. It is a standard procedure which was common in the Enron case. If we are going to formulate a structure of pro-cyclical provisioning which not only achieves the goals that the FPC and all of us want but satisfies the complex needs of appropriate accounting—we have seen recently how accounting can be misused in the banking sector—these measures require very careful scrutiny. As the noble Baroness said so clearly, a 90-minute debate, which is then a rubber stamp, is entirely inappropriate. The procedure set out in the amendment would not only provide that level of scrutiny but contribute to the public confidence in these procedures which is vital if we are to achieve the goals which we have set out for the FPC.
My Lords, I remind the Committee by way of background that we are discussing adverse, exogenous shocks to the financial intermediation process. Those shocks are impossible to forecast and extremely hard to recognise even when they hit the system. My understanding of why we require macroprudential measures is that it improves the way in which the system works so as to be able to cope with those shocks. It is partly to protect the system of financial intermediation and partly to improve its effectiveness and efficiency—so we have no difficulty about that.
However, if we need these instruments, it follows that in a democracy—and I still include your Lordships’ House as part of our democracy—Parliament must be able to scrutinise them appropriately. As the noble Baroness, Lady Noakes, is well aware, I am not an expert on all the different kinds of orders, and she simply lost me on them, but I ask her whether the measures set out in her amendment give Parliament, including your Lordships' House, a full right to scrutinise the introduction of the macroprudential measures and—here I got a bit lost—to amend them in the sense of saying to the Government, “We think that what you are doing is right, but you can do it in a rather better way.”? If that is what the amendment says, and I see the noble Baroness nodding, the Minister has a duty to the House to say, at the very least, that he will take it away and think it through.
My Lords, I support the noble Baroness, Lady Noakes, in a way, although the amendment would add even more confusion to the Bill than is already there. My noble friend Lord Peston referred to the fact that it is about shocks. I hope it is not an urgent shock, because the amendment would give time for draft orders to be laid for a period of up to 60 days or before the end of a period of 12 weeks. Then there must be orders in both Houses. I assume that both Houses would also take advice from their Select Committees. All that will be going on while urgency is required. I find the whole thing as confusing as my noble friend does. We are told at the end of the amendment that if this shock arises when the House is not sitting, all kinds of other things happen. As my noble friend said, if the noble Lord, Lord Sassoon, cannot clarify the whole thing for us in asking for the amendment to be withdrawn, we should be glad if he would take it away to think about it further and let us know what he or someone else thinks about it.
My Lords, I am very much in favour of scrutiny by this House. I cannot pretend to be an expert either on the different varieties of orders or on the different measurements and tools that the FPC might introduce, but I would be concerned about a mechanism in this House that enabled tools to be amended. Although we have some experts, the capacity to understand the internal workings of a tool with sufficient precision to be able to introduce an amendment to a ratio strikes me as not the particular skill of a legislature or this House. We can raise questions about it or require that it be dismissed because the Government have not sufficiently made their case, but to amend it is not a skill with which we are particularly equipped.
For that reason, and with great respect to the House, it seems to me that the capacity for amendment is inappropriate in this case. The capacity to force the Government to make their case and to judge on that case is entirely appropriate, but not the capacity to substitute; that worries me.
My Lords, I have considerable sympathy with the amendment. I declare my interest as a former member of the court from 2004 to 2008. I fully support the creation of the Financial Policy Committee—I think that it will become the most important committee in the Bank—but I am deeply anxious about the governance of the Bank and the lack of appropriate oversight from the court, the oversight committee as envisaged or, indeed, Parliament.
The Minister is in many ways the architect of this restructuring of regulation, as part of a project which he led for the Opposition, having ceased to work in the Treasury. I understand his thinking in evolving the proposals, but events have moved on. In the light of what we now know about the Bank of England, we must ask whether it is still right to put so much authority in the hands of the Bank without appropriate accountability.
When I was a member of the court, I sat in on a meeting of the Financial Stability Committee. That would have been in 2006 or 2007. At that meeting, one of the governors proposed that as a mechanism to cope with the crisis, the Bank should buy half a dozen or a dozen bicycles in order that members of the Bank could move swiftly and anonymously around the City. That tells us a huge amount about where the Bank sits in terms of its understanding of the complexity of financial markets. Some of the things that we have seen over the past few weeks have simply raised more questions about the wisdom of putting so much power in the hands of the Bank.
We are also about to have a piece of legislation to implement the recommendations of the Independent Commission on Banking. Having been intimately involved in the Government’s response to the banking crisis from 2008 onwards, I would point out that the losses incurred in the British banking system—at HBOS, Lloyds and Royal Bank of Scotland—largely occurred within the ring-fence. The losses of $5 billion which we have seen recently reported in London from JP Morgan took place within the ring-fence as envisaged by the Vickers report. The noble Baroness, Lady Kramer, looks somewhat sceptical about that. Those losses occurred within the treasury operations, or the investment office, of JP Morgan, and as such lay within the ring-fence rather than outside it. In being sympathetic to this amendment, and hoping that at the very least the Minister will go away and reflect on that, I think that the Minister will have to rethink some of the fundamental building blocks of this legislation—in particular the great powers and responsibilities that we are placing in the hands of the Bank of England—before we reach its next stage. These are powers and responsibilities that the Bank of England has historically not had and, in my judgment, is still not equipped to exercise.
If we are to do this then, at the very minimum, we must ensure that the Bank and its various agencies, including the Financial Policy Committee, are properly accountable to a court which is clear about its functions and clear about who it reports to. As a former member of the court I know that it was never clear who we reported to. It must also be clear about its parliamentary accountability.
It is always entertaining to have one of the Second Reading speeches of the noble Lord, Lord Myners. I am not sure what it had to do with this particular amendment—which is to do with super-affirmative procedures in respect of orders made by the Treasury—but, anyway, we did talk extensively about governance of the Bank of England over the last couple of sessions, and there will no doubt be other opportunities to talk about them. Here we are talking about an amendment that seeks to require macroprudential orders to be subject to the so-called super-affirmative procedure. Although I was not going to question the competence of Parliament to get into the detail of the macroprudential tools, my noble friend Lady Kramer did make a powerful point about the level of scrutiny that is appropriate to tools that are—yes—very important but also highly technical.
I say that in the context of believing that proper parliamentary scrutiny of these tools will be important to the overall accountability. That is why the Bill, as has been noted, requires the macroprudential orders to be subject to the affirmative procedure. As the Committee would expect, the Government maintain that that strikes the right balance between accountability and timeliness. Orders cannot be made unless a draft is laid before and approved by resolution of each House of Parliament.
I will of course draw attention to what the Delegated Powers and Regulatory Reform Committee had to say, although my noble friend Lady Noakes dismisses its remarks as “interesting but not conclusive”. As a statement of fact, it is clear that its remarks are not conclusive. However, I take issue with her when she dismisses its remarks as “interesting”, because I think that we should take the consideration of the DPRRC very seriously on matters such as this. For the help of the Committee I shall quote the relevant paragraph, because I think that it shows that the DPRRC has thought about this matter in detail. It states:
“The importance of the power is recognised by the application of the draft affirmative procedure or, in urgent cases, the 28-day ‘made affirmative’ procedure … The Joint Committee on the Draft Bill and the House of Commons Treasury Select Committee have recommended an enhanced affirmative procedure for the non-urgent orders, based on that in the Public Bodies Act 2011. But the affirmative procedure provided for in the Bill should be a sufficient safeguard against inappropriate use of these powers.”
I really do not think that we should dismiss what the committee has said.
Before I go on to underline the point about the question of time it might help the Committee—specifically, in answer to my noble friend Lord Northbrook and others who have talked about a 90-minute rubber stamp and so on—if I say that my right honourable friend the Chancellor made an additional commitment on this when he reaffirmed in another place the Government’s commitment to full scrutiny. He said that he would be happy, if agreed through the usual channels, to debate these tools on the Floor of the House. The Government have therefore made a commitment, recognising the importance of these tools, to go further than the strict requirements of the procedure in the Bill as it stands. I hope that that will help my noble friends and the Committee generally to understand that we want to do something that recognises the importance of these tools but without locking ourselves into a super-affirmative procedure, which creates the potential for unacceptable delays even in non-critical circumstances. What may be a non-critical circumstance at the start of a procedure that takes a minimum of 124 days may, in the sort of market conditions we have now, be urgent by the time we are well into those 124 days.
My Lords, one of our difficulties in discussing this matter is that no one has mentioned a specific macroprudential measure. We are discussing them totally in the abstract, so perhaps I might mention a couple and say why the positive approach might well be relevant. If we look back to the corrupt practices of the past on the part of financial intermediaries, I suppose the worst of them was the mixing up of a package of toxic and non-toxic assets and then marketing them as if they were non-toxic. I would assume that for the relevant body here, if it was confronted with this, it would be relevant to introduce a macroprudential measure to say that that is simply not going to happen. It would describe the measure and intervene. The Minister shakes his head. Is he saying that that is not an example of a macroprudential measure?
I would say that examples of macroprudential measures are things such as leveraged ratios. If we are talking about the mis-selling of products, that is generally not going to be a question of macroprudential tools but a conduct matter that the FCA would deal with. They would not be the sorts of things covered in the macro toolkit of the Financial Policy Committee, as the noble Lord describes it.
Speaking as an economist, that sounds complete nonsense to me. I point out to the Minister that the measure I have just described was at the centre of the collapse of both the British and American financial systems in the post-2007 era. This is precisely what these financial intermediaries were up to and precisely what led to the enormous damage that all the economies have suffered. How the Minister can possibly say that that is not a relevant tool is completely beyond me. I could give him some more examples, but let us leave it at that one.
The only question then is whether the noble Baroness, Lady Kramer, is right that if it were introduced as an order we could not debate it in a way to be able to say that the Government’s method of dealing with this problem could be bettered. That is the only point at issue here. I would not like us to do this all the time. I would simply like us—and I mean the other place at least as much as us—to have the power to be able to say, “We can see that you’ve identified the problem and that you’ve got a solution, which you’re introducing by this order, but we think you could do it better this way”. That is all I am arguing and I cannot see what is unreasonable about it.
I thank the noble Lord, Lord Peston, for giving way on that because I am again working in murky waters here. The Minister may correct me but I think the example that he referred to was of a leverage ratio, in which the assets had to be weighted in some way for their riskiness or toxicity. There would be an argument for using those weights within a leveraged ratio, would there not? You can use risk weights on anything, I say, having used them. However, that is not the kind of detail we would want to get into on the Floor of this House. My argument is that it would become so highly technical. If there is an amending capacity, that is exactly where we will take ourselves—and without a series of blackboards and three academics to lead us through it, I am not sure we could manage, frankly.
Perhaps I might intervene on whether there is the power to amend or not. Debating under super-affirmative procedure is not like considering a Bill. There are no amendments tabled and voted on but there is the ability of either House to pass a resolution saying what it thinks. Much as the noble Lord, Lord Peston, articulated, either House would be able to consider whether it thought that the tools were up to the job. More importantly, as I tried to explain in my opening remarks, Parliament could consider the potential impact of using those tools and say to the Government whether it thought the tools appropriate in the context of the wider impact, not simply the narrow impact, on the regulation of financial institutions. The super-affirmative procedure does not allow a specific amendment process but it allows Parliament to say, “Government, we think you have got this wrong”. It is in contradistinction to any of the other procedures where we have the nuclear option: we either accept the order or we do not accept it. It is a more deliberative and amenable process, in particular for considering these very new tools which are being talked about. I hope that helps the Committee.
My Lords, this has been a helpful additional go-round of the tracks because it illustrates, I suggest, that with the procedures already in the Bill and the commitment that my right honourable friend the Chancellor has made to debate the toolkit on the Floor in another place—the same could apply here, clearly, subject to the usual channels agreeing it—we have in substance exactly what my noble friend wants to achieve. We have that without locking ourselves into the difficulty that goes with the 124 days, plus Recess time, which we can get locked into in cases that may be either minor ones where none of this is warranted or, more particularly, ones that started off not being urgent but then became more so. Having had this useful go-round and with the reassurance I have given of what the Chancellor has committed to, I ask my noble friend if she will withdraw her amendment.
My Lords, the Minister has not appreciated the difference between the affirmative procedure and the super-affirmative procedure. Simply having a debate can have only one outcome, of approving or not approving the order, and that is the fundamental flaw. It is the thing that we all learn in opposition and that all Governments forget. Whether or not additional time is allowed or whether a different procedure is adopted in the other place may well improve the quality of debate but it cannot change its outcome. In your Lordships’ House, it is always open to us to have a debate on a draft order on the Floor of the House by the simple mechanism of any noble Lord tabling some kind of Motion disagreeing with it. That will automatically bring it into the Chamber. That is not the problem; the issue is the outcome.
The super-affirmative procedure is a more deliberative procedure; it allows views to be expressed without going so far as to say, “We are not having it”—the outcome of which is usually described as very harmful. That is why the House has a general practice of not voting orders down, because it is such a dangerous thing to do. That is why this super-affirmative procedure gives each House of Parliament more opportunity to debate all the issues contained within the order. It may be that we need a greater range of ways of handling this; however, all the methods of handling an order other than the super-affirmative can allow only acceptance or rejection of the whole. That is a difficult thing for the House to do—to put itself in the position of disagreeing with the whole.
The other issue is delay, although I do not see an issue here. The issue is about whether we take the right amount of time to get the thing right. The Government have available in the Bill, unaffected by my amendment, the ability to put something through on an urgent basis. Nobody would dream of circumscribing that power, because it may well be necessary. Even in the middle of the process to get a new measure through, if it was suddenly decided that it was so important that it had to come in urgently, the Government could default to that procedure. As I said earlier, the timing issue is therefore a red herring. The issue is about whether government can give the proper amount of time and consideration to these important new measures.
I will consider carefully what my noble friend has said, but my first instincts are that he has not said enough to convince me that the super-affirmative procedure is not the appropriate procedure for these new measures. I beg leave to withdraw the amendment.
Amendment 62 withdrawn.
Amendments 62A to 67 not moved.
Amendment 68 had been withdrawn from the Marshalled List.
Amendment 69 not moved.
69A: Clause 3, page 10, line 18, at end insert—
“Explanation9QA Duty to prepare explanation
(1) In connection with the exercise of any of the specified powers, the Financial Policy Committee must prepare an explanation of—
(a) the reasons for the Committee’s decision to exercise the power, in the way in which it is being exercised, and(b) the Committee’s reasons for believing that the exercise of the power, in the way in which it is being exercised, is compatible with the duties of the Committee under the following provisions—(i) section 9C(1) (as read with section 9C(4)), and(ii) section 9E.(2) The specified powers are—
(a) the power to give a direction under section 9G;(b) the power to make recommendations under section 9N, so far as relating to the exercise of the Bank’s functions in relation to payment systems, settlement systems and clearing houses;(c) the power to make recommendations under section 9O, so far as relating to the exercise by the Treasury of their power to make orders under any of the provisions mentioned in subsection (2) of that section;(d) the power to make recommendations under section 9P.(3) The explanation required by subsection (1) in relation to the duty in section 9E(3)(a) must include an estimate of the costs and an estimate of the benefits that would arise from compliance with the direction or recommendation in question, unless in the opinion of the Committee it is not reasonably practicable to include such an estimate.”
My Lords, this group of government Amendments 69A, 69B, 76A, 76B and 76D seeks to strengthen the transparency and openness of the decision-making procedures of the FPC. We have already debated the government amendments providing the FPC with a secondary objective for economic growth. The Government are making the changes to this group of amendments in response to those who have argued that the FPC should be required more explicitly to balance the demands of financial stability and economic growth.
Amendment 69A supplements this important addition by requiring the FPC to prepare an explanatory statement when exercising its powers of direction and recommendation in relation to the PRA, FCA, the Treasury or the Bank in relation to the Bank’s regulatory functions. Such statements must clearly explain how the FPC considers the exercise of its powers to be consistent with its objectives, including both its primary stability objective and its secondary objective for economic growth—the “brake” which prevents the FPC taking any action that would seriously damage long-term growth. The statement must also explain the FPC’s view of the compatibility of its actions with its duties under new Section 9E, which require it to have regard to the Bank’s financial stability strategy; to the need to avoid, as far as possible, requiring the PRA or FCA to act in a manner prejudicial to their own objectives; and to the important principles in regulation of proportionality, transparency and international co-operation and co-ordination. Amendment 76A requires the statement to be published in the next financial stability report.
The effect of these amendments will be to ensure that all interested parties—Parliament, the financial services industry and members of the public—will be able to examine, and indeed challenge, the balance that the FPC seeks to strike between stability and growth. I hope that noble Lords will agree that these are important additions to the FPC, increasing its transparency and accountability, and that they will therefore agree to them.
However, the Government are going further than this. Once the FPC has taken action, through its powers of direction and recommendation, Amendment 69B requires it to keep any open action under regular review. In the case of extant directions—that is, directions which have not been revoked—the FPC must review them at least annually. In the case of recommendations, the FPC must make arrangements to keep under review those recommendations it considers to be of continuing relevance. This will ensure that, once it has taken a specific action, the FPC will from time to time consider whether that action remains necessary and proportionate.
Amendment 76B requires the FPC to publish summaries of such reviews in the financial stability report, once again providing for improved openness and accountability. These are important procedural additions which underline the Government’s commitment to establishing the FPC as a balanced and proportionate macroprudential regulator. I beg to move.
As I listened to the Minister, it seemed to me that he was implying that there may be times when the FPC has no recommendations outstanding. Surely, however, the FPC will always have recommendations outstanding. It will always have a preferred leverage ratio or a gearing ratio or a deposit to loan or some other of the macroeconomic tools that it has to apply to the banking sector. I am not sure how keeping recommendations under review and reporting on them actually works in a situation in which there will always be recommendations in place. I cannot envisage a situation in which the FPC will say, “We have no views on anything, and therefore there is nothing that we need to be reporting and monitoring”. I may have misunderstood the point; if I have, I apologise, but I would appreciate some guidance from the Minister.
My Lords, we broadly welcome these amendments, in the sense that they are adding to the overall scrutiny and assessment of the activities of the FPC and thereby reinforcing, we believe, its general acceptability and strength of purpose. However, I want to raise a warning flag with respect to new Section 9QA(3), in which it is argued that the FPC will have to prepare,
“an estimate of the costs and an estimate of the benefits that would arise from … the direction or recommendation in question”.
These are macroeconomic measures. It is virtually impossible to provide a simple numerical estimate of the cost or benefit of a macro measure. There will be either a tendency to overestimate the costs, or a tendency to overestimate the benefit, in this particular case. Presenting an assessment in quantitative terms will give spurious precision and, indeed, spurious credibility to a particular measure. I assure the Minister that for any macro measure, I could write an entirely credible report saying that the costs exceeded the benefits and an equally credible report saying that the benefits exceeded the costs. This is simply extending the whole notion of cost-benefit analysis beyond the range in which it can effectively operate. It would be valuable to take account of an attempt to describe in broad qualitative terms the costs and benefits. However, please let us not have the spurious precision of numerical calculations of variables which, by their very nature, cannot be expressed in precise terms.
My Lords, I am grateful to noble Lords for those questions. The noble Lord, Lord Myners, says that effectively there will always be a recommendation that is extant. He is probably right about that. The requirement is to review regularly any recommendations that have a continuing effect, and that includes any recommendations to set or maintain any particular level of leverage or capital, as the noble Lord suggests. I broadly agree with him, actually.
The noble Lord, Lord Eatwell, is right to say that a cost-benefit analysis is a difficult thing to do. That does not mean that the committee should not attempt it, so that at least interested parties have an opportunity to review it and make their comments.
Amendment 69A agreed.
69B: Clause 3, page 10, line 18, at end insert—
“Review9QB Duty to review directions and recommendations
(1) The Financial Policy Committee must—
(a) before the end of each review period, review each direction given by it under section 9G, other than a direction revoked before the end of the review period, and(b) prepare a summary of its conclusions.(2) A review period is—
(a) in relation to the first review, the period of 12 months beginning with the day on which the direction was given, and(b) in relation to subsequent reviews, the period of 12 months beginning with the day on which the previous review was completed.(3) The Financial Policy Committee must maintain arrangements for the review at regular intervals of any recommendations that it has made under any of sections 9N to 9Q and are of continuing relevance.”
Amendment 69B agreed.
Amendments 70 to 74 not moved.
74A: Clause 3, page 12, line 9, leave out “Committee’s objectives” and insert “objectives set out in section 9C(1)(a) and (b)”
Amendment 74A agreed.
Amendments 75 and 76 not moved.
Amendments 76A to 76C
76A: Clause 3, page 12, line 9, at end insert—
“(4A) If during the reporting period the Committee has made any decision in relation to which section 9QA requires the preparation of an explanation, the financial stability report must include the required explanation.”
76B: Clause 3, page 12, line 9, at end insert—
“(4B) If during the reporting period the Committee has completed the review of a direction or recommendation, the financial stability report must include a summary of the review.”
76C: Clause 3, page 12, line 14, leave out “subsection (3) or (4)” and insert “subsections (3) to (4B)”
Amendments 76A to 76C agreed.
Amendments 77 to 88 not moved.
89: Clause 3, page 14, line 12, at end insert—
“9WA Financial Stability Advisory Panel
(1) There will be a Financial Stability Advisory Panel.
(2) The membership of the Panel will be—
(a) the Deputy Governor for Financial Stability;(b) 6 members appointed by the Treasury, subject to approval by the Treasury Committee of the House of Commons;and the members appointed under paragraph (b) will be academics, members of staff of international organisations, practitioners, or others with particular skills in the analysis of systemic risk. (3) The Financial Stability Advisory Panel will—
(a) provide written advice to the Financial Policy Committee concerning the analysis of systemic risk;(b) once a year prepare a report assessing the analysis of systemic risk by the Financial Policy Committee over the preceding 12 months (the first report to be twelve months after this section comes into force);(c) assess the effectiveness of measures prescribed under section 9K in the attainment of the financial stability objective of the Bank;(d) assess the effectiveness of directions and recommendations of the Financial Policy Committee under sections 9G and 9N in the attainment of the financial stability objective of the Bank;(e) prepare an annual report on matters referred to in section 9WA(3) to be presented by the Supervisory Board of the Bank, and subsequently published on the Bank website.”
My Lords, the development of macroprudential regulators, the instruments for introducing macroprudential regulation, is a common theme in the UK, the European Union and the United States. Different models have been developed for the institution that is to be responsible for macroprudential regulation. In our own model, the Financial Policy Committee, we see what could be called a “central bank model”, where the alternative voices being brought to the table are to be represented by the independent members of the FPC. It will fall to them to challenge Bank of England house thinking and provide alternative perspectives. There is only a very small number of external members on the FPC and finding members with the experience and skills necessary to perform the role that we demand of them is, as has already been seen, very difficult, although at the moment we have an excellent group in the shadow FPC. An alternative model, which has been adopted by the United States Financial Stability Oversight Council, pursues a more stakeholder-oriented approach in which the appropriate voices from stakeholders actually have a direct role in the organisation of macroprudential measures within the United States.
Both the central bank model that we have pursued, which also applies to the European systemic risk board, and the stakeholder model have disadvantages. The key disadvantage of our central bank model is that we do not have enough diversity of opinion or access to new research and critical assessments of FPC measures that the stakeholder model might have. The problem with the stakeholder model is that the United States may find that its Financial Stability Oversight Council becomes mired in differences of opinion from different stakeholder interests and has difficulty in pursuing the coherent macroprudential policy that is required of it.
As we know, this whole area is, as I said earlier, an experiment—or, if the Minister prefers, a project. We are dealing with areas and matters that at present are uncertain. There is little agreed analysis or clear empirical assessment of how some of these tools will actually work. We will find out. We are going to experiment. We therefore need to harvest the widest possible spectrum of analysis. The amendment proposes that there should be a financial stability advisory panel, not a panel that is intimately involved in designing and implementing the measures. Those independent voices are provided by the independent members of the FPC but they are necessarily compromised by their role in dealing with very sensitive matters as they might have conflicts of interest if they have a wider role in the financial services industry. The financial stability advisory panel could contain individuals with such conflicts of interest because they would not have a role in actually managing the macroprudential organisation of the FPC.
The amendment suggests that we have this financial stability advisory panel providing that diversity of view from academics, perhaps from members of staff of international organisations such as the Bank for International Settlements, which is making a lot of the running in the development of macroprudential tools, and potentially from others who have particular skills in the analysis of systemic risk. It will be their responsibility to provide written advice to the FPC, prepare an annual assessment of the FPC’s performance, look at the effectiveness of individual measures and assess the effectiveness of particular directions and recommendations in the context of an annual report or assessment. This cannot do anything but good. It is simply an institutionalisation of the detailed examination, the variety of voices and the consideration of effectiveness that are so necessary in providing both coherence to the FPC and its general acceptance. A panel of this sort, given the responsibilities that are set out in the amendment, would add significantly to the effectiveness of the Financial Policy Committee. I beg to move.
My Lords, I was interested to hear the comments from the noble Lord, Lord Eatwell, on the nature of the work that will face the panel. It sounds like something that overlaps considerably with the Board of Banking Supervision in the late 1980s. Obviously that was working in different circumstances, but each of the bodies require, or required, people of an unusual stripe who combine a practical experience of banking, and the difficult areas that it brings with it, with a particular canniness in identifying areas where they think that things are not as they should be, particularly in cases where that is not always evident until later when events have already taken place.
Are the would-be members of the panel now shadowing the work that will be theirs in statutory form as a result of the Bill? It is terribly important to get the people involved carrying a great deal of weight and clout but at the same time having inquiring minds—something that will help us to ferret out areas that have been unsatisfactorily dealt with. I will not say more now, but I am pleased that some of the reasons for having a panel such as this—20 years ago or more it was called the Board of Banking Supervision, or the BoBS—have been recognised as important in today’s different but difficult circumstances.
My Lords, I have considered carefully over the last 24 hours whether I should say what I am now about to say to the House, but I have decided that it is right to. My noble friend’s amendment, which I support in principle, says in proposed new Section 9WA(2)(a):
“The membership of the Panel will be … the Deputy Governor for Financial Stability”.
In light of his answers yesterday to the Treasury Select Committee, it is completely wrong that the present deputy governor for financial stability should be given these responsibilities on this financial advisory panel, or any other responsibilities for financial stability. In the course of the performance yesterday, during which I assume that his answers were entirely honest and frank, he effectively made a plea of guilty to incompetence and complacency at a quite heroic level. He admitted having chaired a meeting at which several people said that there had been discrepancies between the LIBOR rate and the rate at which banks had been paying for deposits on the interbank market. In his defence yesterday, he said he thought that some of those discrepancies might have been due to transactions intermediated through brokers, but he did not ask what the position was. He did not pursue it. He did not make an attempt to discover what the real facts were. That was astonishingly negligent, to put it mildly.
The other incident, the conversation that he had with Mr Diamond of Barclays, which has been so much in the public mind in the last week or so, also casts a strange light on his actions in carrying out his responsibilities in the Bank of England. He said that he was under great pressure at the time and that there was a great financial crisis, so much so that he was not able to make a note of even very important telephone conversations. I assume that the conversation was not a casual one, but that it was deliberate and designed to achieve a particular purpose. The only purpose that it could have achieved, and the only effect that it could have had, would have been to have persuaded or encouraged Barclays to understate the cost that it was paying for deposits on the interbank market. Clearly, Barclays could not do anything about the actual cost that it was paying. It would have been taking on deposits at as low an interest rate as possible. There have been some strange things going on. I have little confidence in the personality of the present deputy governor of the Bank responsible for financial stability.
There is a defence of his actions which noble Lords might have seen in yesterday’s Financial Times. It was the first letter in the paper, with the heading going something like “Tucker and Barclays saved the British financial system”. The argument was that it was correct in difficult circumstances, when banks were being squeezed on the interbank market or the interbank market was drying up, to give a false impression of what was going on by recording and publishing false LIBOR statistics. I do not accept that defence. First, it is not a defence that either Mr Diamond or Mr Tucker is making. Secondly, even if it were their defence it would be wrong. It is important that no financial stability organisation or anyone concerned with financial stability should be tempted to believe that by falsifying statistics in a difficult situation that is contributing to a solution. That risks undermining not merely the credibility of the index that you are falsifying, but every announcement and index. If the Bank of England was prepared to collude with a clearing bank to falsify the LIBOR statistics, the markets would immediately assume that collusion might take place if it was convenient in other circumstances, and that perhaps regulators and banks would collude to understate their provisions. As soon as that rumour or suggestion got about, there really would be a crisis.
That is a road down which no one should go. I do not accept that defence of Mr Tucker’s actions. It is not of course the defence that he has been making. He has no defence because he has confessed to an extraordinary act of negligence. Had he not undertaken it, had he not let that meeting go past—and yesterday there were suggestions that at the time he had other evidence that the LIBOR market was not as straight and transparent as it ought to have been—the crisis that we have experienced recently would not have occurred. I am sorry to have to make these harsh comments about a man whom I have not met and whom I had not heard until I listened to his evidence yesterday. However, in present circumstances, it seemed to me important that if one felt sufficiently strongly about such a matter one should raise it in the House.
My Lords, I take note of my noble friend’s comments, but I feel compelled to say a few words in response. Without drawing the ire of the Minister, I can link it back to the subject of the amendment.
I worked with Mr Tucker, the deputy governor, during the banking crisis. We should wait for the outcome of the Treasury Select Committee’s report and the Joint Committee report. It is wrong to say that if the manipulation of the LIBOR-setting process had not occurred we would not have had the global financial crisis. It was undoubtedly bad and reprehensible, in the words of Mr Diamond, but it did not itself cause the crisis. Listening to Mr Tucker yesterday and reflecting back on the extraordinary circumstances of October 2007, I sympathised with him. The banking system was on the verge of complete collapse. It is still not fully appreciated how close we came to the edge of the cliff. In those circumstances, when one seemed constantly to be in meetings and constantly to be on the telephone, not taking notes of meetings is pretty forgivable. I was delighted that Mr Tucker was able to settle the issues arising from Mr Diamond’s file note about the senior Whitehall figures. I look forward to the Chancellor of the Exchequer responding to the clarity that Mr Tucker has brought there.
Reflecting on my noble friend’s amendment, I ask whether we are creating positions in the Bank of England and in the architecture which are simply beyond the talents of any one person to fulfil? Mr Tucker is one of the outstanding candidates to be the next governor. He is not the only one, but it is not a long list and it has got decidedly shorter in the past seven days. Two people previously spoken about as candidates, Mr Varley and the noble Lord, Lord Green, have probably dropped off in the past few days, so it is not a strong list.
Looking then at the FPC and its oversight, where are we going to find the people with the necessary talents to do this job? We are on the horns of a dilemma. On the one hand, you want knowledgeable people—people who do not have to be taken through everything step by step, but come to the issues with a good and clear knowledge and the ability to spot where the critical questions lie. On the other hand, you do not want to start these committees with people who in some way are conflicted by their current employment, their past employment, their pension arrangements and so forth.
I do not have a view about whether the shadow FPC is doing a good job. I think one or two of its members appear to be. Mr Robert Jenkins, in particular, appears to be an independent spirit who is not in any way caught up in the groupthink and consensus that I associate with much of the heart of the Bank. The simple fact is that most members of the FPC have a career background in investment banking. They have a career background in the very activity which was associated with the global financial crisis. I think we have a problem here. How do we get the right people into the right committees and the right courts and the offices of governor and deputy governor? No architecture makes sense if we are creating it on the presumption that we can find people of integrity, raw talent and understanding to fill the jobs when that is not a realistic assumption. I think the heart of the matter raised by my noble friend in his amendment is: how can we be satisfied that the people sitting on the FPC are appropriately competent and are managing conflicts of interests, as they probably will always have conflicts as a prerequisite for qualification to sit on these various committees?
My Lords, that was a very interesting exchange between my noble friends Lord Davies and Lord Myners on the crucial question of how these matters should operate. I would like to add a point in favour of my noble friend’s amendment on the basis of work I have done on how the new European system is operating. I had a conversation in Brussels recently with André Sapir, who is on the board of the European Systemic Risk Board, about the role of independent economic expertise in assessing systemic risk. On that board, the independent economists have made a decision that they will not rely on the internal expertise of the European Central Bank, precisely for the reason that the noble Lord, Lord Eatwell, said. We are operating in a very uncertain world and no one really knows what the right road map is. What we need is the maximum amount of well informed, independent expertise on these matters. I feel very strongly that this amendment should be supported.
My Lords, before I start on the amendment, I shall say in response to the noble Lord, Lord Davies of Stamford, that the deputy governor for financial stability is a very fine and highly respected deputy governor. As the noble Lord, Lord Myners, said, it is for the Treasury Select Committee to assess what he said yesterday.
Turning to Amendment 89, it would create an advisory panel with a two-fold brief: first, to advise the FPC on systemic risks to financial stability; and, secondly, to assess and report upon the effectiveness of the FPC in assessing systemic risks to financial stability, the macroprudential tools provided by the Treasury to the FPC and the actions taken by the FPC. The membership of the panel would include the deputy governor for financial stability and a number of external members appointed by the Treasury, drawn from a range of relevant professions, including academia.
The Bill already creates, in the FPC, a committee on which the deputy governor for financial stability sits, together with external members, some of whom may indeed be academics. The noble Lord, Lord Eatwell, was good enough to compliment the external members of the interim FPC. Let me give some details of the specific expertise of the current external members to give a flavour. Alastair Clark has, in addition to extensive real-life experience, degrees from Cambridge and the LSE and is an honorary visiting professor at the Cass Business School. Robert Jenkins, who the noble Lord, Lord Myners, referred to, not only has extensive experience of trading and asset management but is also an adjunct professor at the London Business School. Donald Kohn, in addition to extensive experience in financial regulation in the US also has academic experience. Michael Cohrs has experience at senior level in the private sector in investment banking but is also a Harvard MBA and an adjunct professor at Beijing University. We want, and we have, multifaceted people. We agree with the noble Lord regarding the need for extensive broad experience, including academic experience, but we do not think this needs to be set down in legislation.
The additional construct of the advisory panel would not add to the Government’s proposals. I think the noble Lord, Lord Myners, is right that what is important is that we get the FPC right. If the FPC wants to take advice, it is entirely able to do so, but it should have the autonomy to do so on its own terms if it is to be properly responsible for financial stability. It might be argued that the advisory panel will fulfil an important function by assessing the performance of the FPC. Like the MPC, the FPC’s primary route of accountability is directly to Parliament, including to the Treasury Select Committee, which holds it to account via scrutiny of its published meeting records and financial stability reports. In addition, the Bank’s newly created oversight committee will be responsible for overseeing the FPC’s performance and will have an explicit remit for commissioning and publishing a review into the FPC’s policy performance.
I have two further concerns with this aspect of the amendment. First, it seems odd that a committee chaired by an executive of the Bank who is a member of the FPC and responsible for providing advice to the FPC should also be expected to assess its performance. Secondly, and more importantly, the Government have already brought forward amendments, which were debated and agreed two weeks ago, to create the independent oversight committee that I just referred to with responsibility for carrying out performance evaluation. So in this respect, too, the effect of the amendment would be to duplicate responsibilities, blur accountabilities and diminish focus, so I ask the noble Lord, Lord Eatwell, to withdraw the amendment.
The Minister used the word “independent” on several occasions relating to oversight. Noble Lords will remember that when the Monetary Policy Committee was established, there was quite a brouhaha about whether the independent members of that committee should have access to independent advice. The Bank resisted that so the independent members had to rely upon the Bank’s own economists. It was only after a threat of resignation by one of the independent members of the MPC that they were granted the ability to appoint, I believe, a single researcher.
The culture of the Bank does not foster independence. It is a very hierarchical organisation. The view of the Bank is the view of the governor. The court has recently announced three independent reviews into aspects of the Bank’s conduct. They are all quite interesting because they date from October 2008. None of them will actually look at the real errors that were made by the Bank, which were pre-2008. We really want to ask what the Bank was doing in 2006 and 2007. These reviews exclude any examination of Northern Rock, and I think one could argue that if it had been handled in a different way, it might have had some impact on how the UK was impacted by the global financial crisis.
I put down a Question on these independent reviews. The independent reviewers were appointed through a process led by the governor. The independent reviewers do not have their own secretariat. They are reliant upon the Bank’s staff for support, so I put it to the Minister that for this approach to operate, it is important that the FPC has access to truly independent advice. In my view, advice that comes from career employees of the Bank can never have that element of total independence that is necessary in order to achieve the objective that I believe the Government have for the FPC and which my noble friend has at heart when proposing this amendment.
I will, if I may, respond on that point. The noble Lord, Lord Myners, is right, and my noble friend Lord Sassoon acknowledged earlier, that previously the Bank was slow to recognise the MPC external members’ need to have access to dedicated support. The Bank has learnt its lesson.
Gosh, that is a bold statement. In replying to the comments made by the noble Lord, Lord De Mauley, I would point out that he has overlooked two crucial elements that underpin the logic of this amendment. First, there are indeed highly skilled and independent members of the Financial Policy Committee, but they are involved in making the decisions and the recommendations. They are the organised part of the organisation which will in due course be responsible for what happens. They are not in any sense an evaluative mechanism. They are adding grist to the mill of a decision-making mechanism; an evaluative mechanism is a different thing altogether.
Secondly, the noble Lord referred to the role of the new oversight committee. I would remind Members of the Committee that the oversight committee will be composed of members of the court; it will not be anybody outwith the internal structure of the Bank. I am enormously disappointed—the most disappointed I have been with anything I have done in relation to this organisation—that the Government have not taken this on board. We are trying to formalise a continuous process of debate, review and assessment by people who have high levels of skill in this area but who are not otherwise involved. That is what a truly effective advisory panel should do. I was struck by my noble friend Lord Liddle’s comments on what is happening at the European Systemic Risk Board. As the noble Lord, Lord Stewartby, said, we want people with the right sort of skills doing this sort of assessment. He is absolutely right.
I ask the Government to think again on this issue. This area can contribute significantly to the overall success of the FPC. I assure the Government that I will return to this matter at later stages, but for now I beg leave to withdraw the amendment.
Amendment 89 withdrawn.
Clause 3, as amended, agreed.
Amendment 90 not moved.
Schedule 1 : Bank of England Financial Policy Committee
Amendments 91 to 96
91: Schedule 1, page 170, line 11, leave out “Bank” and insert “Oversight Committee”
92: Schedule 1, page 170, leave out lines 12 to 14
93: Schedule 1, page 170, line 32, leave out “Bank” and insert “Oversight Committee”
94: Schedule 1, page 170, line 35, at end insert “Financial Policy”
95: Schedule 1, page 170, line 42, leave out “Bank” and insert “Oversight Committee”
96: Schedule 1, page 171, leave out lines 3 to 5
Amendments 91 to 96 agreed.
Schedule 1, as amended, agreed.
Clause 4 : Further amendments relating to Bank of England
96A: Clause 4, page 14, line 35, at end insert—
“( ) Within a year of commencement of this Act, the Bank of England shall publish a review of the effectiveness of coordination by the regulators of the exercise of their functions relating to membership of, and their relations with, the European Supervisory Authorities (namely, the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority), and their relations with other regulatory bodies outside the United Kingdom.”
My Lords, Amendment 96A stands in my name and that of my noble friend Lord Eatwell. Despite the increasing importance and powers of the new European Systemic Risk Board and its three ESAs—including, on occasion, the power to override our own regulators—the Bill’s new architecture does not map with theirs. So while Europe cuts by area—with a committee for banking, one for securities and markets and one for insurance and occupational pensions—the Bill divides between prudential and conduct. As AXA warns,
“There is a significant danger that the new structure will diminish the UK’s capacity to influence European regulators as”,
“new ... bodies will be organised along different lines to the European Supervisory Authorities”.
London First, which represents over 200 of London’s leading employers, including many in the financial world, expresses similar concerns about the new framework not mapping onto that of Europe. While it welcomes the establishment of an international co-ordinating committee, it remains worried about the committee’s effectiveness unless it is appropriately resourced and staffed.
We have ceded powers to the EU on many areas of financial services regulation, but there are areas where we may want to retain powers; for example, to impose higher capital requirements on banks. There are also areas for future negotiation where it is imperative that we give leadership and have a good negotiating stance and team in order to have a good outcome. That depends on good preparation within domestic regulators—and that will require considerable co-ordination, which we will rely on a committee to produce.
Our own European Union Committee warned about the mismatch between our new structure and that of the ESAs last July, but the Government did not appear to take much heed of the potential problem. Perhaps the Government are right, and whichever way one cuts and divides, there will not be a brilliant fit. However, given the Government’s commitment to,
“ensuring that the UK authorities … take a leadership role in the ESAs”,
and given the importance of Europe in regulating, in standard setting and in influencing our financial regulators, it might be wise to have a built-in review to check whether we have got it as good as it could be, and to give this House and the other place a chance to see whether any adjustments are called for in the light of experience.
The Governor of the Bank of England has said that the new architecture is,
“a bit by way of an experiment”.
He went on to say that we,
“need to experiment and see how it evolves”
in regard to the whole schema, which he thought should be revisited after five years. In the case of our relations with the European bodies, however, we cannot wait that long. Decisions are being taken even as we meet.
These overlaps—or underlaps—are not theoretical. We know that Michel Barnier, the EU Commissioner overseeing financial services, is to amend EU market abuse rules in the light of the LIBOR scandal. Much of this work will overlap with the probe led by Martin Wheatley of the FCA which is examining almost the same issues. While the EU initiative is likely to complement Mr Wheatley’s conclusions on whether to apply criminal penalties to the manipulation of LIBOR or any other indices, there is potential for a clash over whether to regulate this or other indices.
Clear, focused input into EU thinking is therefore essential for the UK markets. We must ensure that we have the processes and structures right to make sure that those decisions suit our needs. This amendment seeks the information needed to help us assess what adjustments might have to be made to ensure that the decisions taken both here and in Europe really are as good as they can be. I beg to move.
My Lords, I completely take the main thrust of the noble Baroness’s amendment, which is that the lack of mapping of our structure onto the European regulatory structure potentially creates problems. We have certainly heard from bodies in the City that they also are concerned that the particular issues that arise in their areas might not be well represented. There is a particular concern about the FCA and ESMA, given the FCA’s inevitable consumer centre-of-gravity and the perceived problem of issues relating to proper representation of the markets in Europe. So I completely buy the need to keep this under review. I question, however, whether the Bank of England is the right body to do that. If we need to hard-bake some kind of review process into the Bill, the review ought to be done by the Treasury, because it is the Treasury that could do something about it if it is not working well.
My Lords, it strikes me that this amendment points an important finger at a number of territories. In some ways the mismatch concerns me less; there are always likely to be mismatch problems. For starters, I was disappointed that the previous Government, as it were, gave away power in the territory of financial regulation to Europe. Substantial things are happening: we have MiFID 2; the banking supervision proposals; and, following on from those, the recent proposals arising from greater European economic and financial union. First, I would like to know that the UK parties batting for the UK are doing a good job and have raised all the issues. Secondly, I agree with the noble Baroness, Lady Noakes. I am not certain whether this is a Treasury or a PRA matter but the PRA at least has the lead for the regulators in negotiating with the EU bodies. I should like to know how the Bank of England thinks it has done in dealing with the issues and protecting British interests.
The MiFID 2 proposals are coming up and I think that they could be extremely damaging to the UK if they went through as presently proposed. A lot of work needs to be done for them to be workable. If there were no public review or airing of what has been going on and the issues, it would perhaps be—in a fast-changing territory—somewhat undesirable. However, I am not quite sure what the right mechanism is for achieving what I seek to achieve.
My Lords, I rise briefly to support my noble friend Lady Hayter’s amendment. She has drawn attention to a crucial issue for the United Kingdom. The fact is that we benefit greatly from the existence of the European single financial market. I believe that one of the reasons why so many overseas banks base themselves in London is that we are part of a single regulated market. There are grave dangers for us in going down the road of separating ourselves from that single market.
It is important that we keep very closely in touch with European developments at all times. It is a very fast-moving scene. As we understand the results of the last European Council, banking supervision within the eurozone will be put under the European Central Bank by the end of this year. I noted with interest the Governor’s comment, as reported in the Financial Times at any rate, that this would make it easier for the Bank of England to deal with regulatory issues because there would be, as it were, a single telephone number to ring in the European Central Bank. It is also the case that the UK has a critically important influence in the European Systemic Risk Board. It is vital that we play a crucial role in that board, of which the Governor of the Bank of England is the deputy chair.
Britain’s position is given a special status given that we are the financial centre of the European single market. The governors of the central banks who make up that body are alive to London’s concerns at all times. It is very important that we play a major role there. It is therefore crucial that we keep these issues under review. I do not think that the way in which the Government have handled the proposals for a banking union is in the UK national interest. It is a bit rich to say, “It is none of our business because this is to do with the eurozone”, but then to complain that the creation of this thing might mean that there was an inbuilt majority against Britain on all financial regulatory decision-making. It is rather contradictory.
The position we have to adopt is that although we are not in the eurozone and will not be in the eurozone, we have to sustain the single financial market. That involves us having the closest possible relationship with the relevant European bodies and keeping abreast, in terms of our own arrangements, with developments there. For those reasons, I strongly support my noble friend’s amendment.
I also strongly support my noble friend’s amendment, which was very well conceived and—if I may say so—very persuasively moved. I also agree very much with my noble friend Lord Liddle in the way that he approaches this problem. I think that there are four major issues on which the House needs to ponder carefully. The first is the emerging mismatch between the evolving structures in financial regulation on both sides of the channel. Something has already been said about that so I will not go into it any further.
The second issue is subjective, but I fear that it is very difficult to deny. It is our declining influence in matters of financial regulation and supervision around the world. Many of us can remember a time when the British were regarded as great experts in these things. We obviously were brilliant because we had such a successful financial services industry. Therefore, when we said something about financial regulation, supervision or the right way of creating a framework for a thriving financial services industry, whether it was said in Washington, New York, Brussels or Frankfurt, it was listened to with great attention. We naturally had a very strong influence. I am sorry to say that a combination of the Euroscepticism of this new coalition Government and our recent failings in financial regulation and supervision—one thinks of the failings of the FSA in matters of RBS and so forth, and now the terrible and very upsetting scandal of LIBOR fixing, which I will not go into any further—inevitably will, and is, undermining the influence that we used to have. That is a very worrying situation.
There is, thirdly, the competitive issue, which we will come on to in later amendments. It is quite clear that as the framework for financial regulation diverges between this country and the continent, there is always a danger of competitive advantages changing, and possibly not in our favour. One of the obvious examples of which people are well aware is the possibility of lower capital-adequacy ratios on the continent. Presumably, particularly in the light of the crisis that we have all been through, they will always be set at a fairly sensible prudential level. However, there may be significant differences—for example, in retail deposit insurance schemes—which would lead people to want to hold their accounts on the continent rather than here. All kinds of things could emerge from regulatory and supervisory initiatives that would change the competitive balance. We need to be very alert to that.
Finally, the jury is out on whether or not it is in the national interest for us to be part of the emerging European banking union. I can see a great many theoretical reasons why it might be very strongly in our interest to join, but I do not have the slightest hope of persuading colleagues in the House today of that. Indeed, I am happy to wait and see, but we need to keep the matter under review. The regular review which my noble friend proposes in this amendment is exactly the kind of procedure and discipline that we want.
All British institutions involved should be aware that they are being reviewed in this matter; that their collaboration and effective participation in European structures is being watched; that they are expected to use their influence as effectively as they can on our behalf; and that they should be very conscious of the role they are playing. All that is very important and we need to monitor the results. We need, a few years after it comes, to be able to look back over the record as revealed by these reviews and otherwise—quite pragmatically and open-mindedly, without dogmatism or emotionalism—and to take a rational decision on the best way of achieving the national interest going forward.
I support the amendment proposed by my noble friend Lady Hayter. Not only are we poorly mapped on to the new European financial regulators, but we are poorly represented in relation to our weight in financial services in Europe. We are under-represented, in fact. We are where we are, but this is one of the areas on which, in a year’s time, it would be useful to have a review and to see how best we might change or adjust our position, either by adjusting our own institutions, or by hoping to make greater progress in Europe. However, financial services are key to this country. Immense amounts of regulation being debated in Europe at the moment, and we are not quite in the best position to be doing all this. I very much welcome the idea of a review in a year.
My Lords, I have one comment to make on the text of the amendment. Just to have a report for one year seems such a limited objective. If it is worth doing at all, I do not understand why there is no language allowing for continuity. It was said that the noble Baroness, Lady Hayter, was providing for that. However, the actual language is:
“Within a year of commencement… the Bank of England shall publish a review”,
et cetera. It is to be a one-off. The idea is a good one. Have a regular review, and you can see whether things change. Whether it is going to be embarrassing for the governor, representing the Bank, to say what his relations are with all the other regulatory bodies outside the UK, I do not know. A case could be made for an independent body to produce this. However, the governor and the Bank probably have the information that is needed.
I add as a footnote that we need to keep in mind the terrible damage that has been done by the LIBOR scandal. There was an article in the Independent last week deploring the damage that it will do to the good name of the financial industry in this country. They are the sort of factors that are rather important.
My Lords, we have had an interesting run-around this issue. There have been quite a few divergent voices about the way of handling the challenge that is the subject of this amendment.
First, I certainly did not read this amendment as relating to the mapping of the UK structure as it will be against the European structure, because the start of this amendment talks about,
“a review of the effectiveness of coordination… and their relations with, the European Supervisory Authorities”.
This seems to go very much with the responsibilities under the co-ordination memorandum. I have a bit of trouble in my mind matching this up with the substantive concern of the noble Baroness, Lady Hayter of Kentish Town, which I understand.
I start with the question as to whether the UK architecture does or should adequately map against the new European supervisory authorities. I do not believe it is necessary for the responsibilities of domestic regulators to exactly map on to the corresponding ESA for engagement with them to be effective and well co-ordinated. The regulatory systems of other EU member states do not match up with the activities-based structure of the ESAs. Of course, as has been discussed already, the European architecture is itself likely to be moving around, so that we are probably not going to be aiming at a fixed target. Although it has been stated that the City has had some concerns about the mapping, the broad consensus in the evidence given to the Joint Committee was that having a different regulatory structure to that of the ESAs, will not present any issues for the UK authorities in representing the UK’s interests. The Government have accepted the recommendation of the Joint Committee, and the Bill requires that the international organisations’ MOU establishes an international co-ordination committee, so we have fully responded to the concerns of the Joint Committee in this area.
I do not believe that the noble Baroness, Lady Cohen of Pimlico, is right to say that we are under-represented. For example, the FSA’s senior officials have very important positions within ESMA. We have already heard that the governor of the Bank of England is the chair of the European Systemic Risk Board. As the noble Lord, Lord Liddle, pointed out, the special position of the UK is represented in that way. So we should not undersell the way we are getting on now, or overstress the need for an exact mapping, which was not found to be necessary by the Joint Committee. Nevertheless, I absolutely agree with the noble Baroness in moving this amendment that clear, focused input to EU discussions is absolutely essential—I think that was how she put it.
The question then is, how much scrutiny will there be, and how will we know how effective this has been? The noble Baroness suggested a review within one year. The noble Lord, Lord Davies of Stamford, talked about a review after a few years. The noble Lord, Lord Neill of Bladen, suggested that if it is worth doing once, we should do it every year, or at least periodically. There is a wide divergence of views on how often it should be done. Perhaps more importantly is the question of who should do it, and whether there are other ways in which it will be done without this amendment. I agree with my noble friend Lady Noakes—the point was also indirectly made by my noble friend Lord Flight. If anybody should be responsible for ensuring effective co-ordination on international matters, it should be the Treasury, not the Bank because, as my noble friend says, it has the powers to do something about it. The Treasury will also be in the chair of the international co-ordination committee, which the Joint Committee asked to be established. If anybody should do it, it should be the Treasury.
My noble friend Lord Flight also talked about the Bank having primacy—that was not exactly his word—in taking most of the strain in the interface with Europe. However, as my noble friend Lady Noakes said, the FCA has a very important relationship with ESMA. It is difficult to say who is going to be taking more of the strain; it will depend partly on which directives are being negotiated at the time.
I agree with the noble Baroness and my noble friends that light needs to be shed on this. Let me say how this will be done. First, Schedule 3 to the Bill requires the new regulators to include in their annual reports an account of how they have complied with the international co-ordination duty. That will be the first line of public reporting. Secondly, the National Audit Office will have the ability to investigate and report on the economy, efficiency and effectiveness of both regulators and to lay those reports before Parliament. Thirdly, the Treasury Committee may also wish, and is likely to want, to undertake periodic enquiries into the effectiveness of the regulators regarding their interactions with international bodies.
I believe there are comprehensive provisions that will hit the right target. The noble Baroness raises an important issue. I am glad we have had a chance to discuss it, but I would ask her to withdraw her amendment.
First, I thank those who have contributed to the debate and have spoken very much, I think, in support of what I have been saying. I thank the noble Baroness, Lady Noakes, the noble Lords, Lord Flight and Lord Neill of Bladen, and my noble friends Lord Liddle, Lord Davies and Lady Cohen.
I am surprised that the Minister did not quite know what was coming. I said all this in my Second Reading speech, which I thought would be a little clue to what this was going to be about. However, I think that there is wide acceptance of the mismatch between the new architecture and what exists across the water. The Minister said that there were divergent voices. I do not agree. I think everyone is saying that we need to look at this issue. The noble Lord, Lord Flight, may be right that it would be better for Her Majesty’s Treasury to do it rather than the Bank of England, but that is quite a small point compared with the thrust of the amendment, which is that this matter needs to be reviewed.
This issue raises quite important questions, as I saw when I helped to regulate actuaries. Many of the rules were written down in Europe through CEIOPS, as it was called at the time. We did not have direct access to CEIOPS; we had to go to the FSA, which was our representative on it, and that made the negotiation much more difficult. Therefore, this is not an easy matter and it will be very important to review how the international co-ordination committee is coping, how effective our input is, whether what we are doing really is sustaining and enhancing the single financial market and whether we are properly, adequately and well represented on it.
The noble Lord, Lord Neill of Bladen, may well be right that a regular review is needed. We proposed a one-off review because our domestic architecture is new and it may need some adjustment. However, the Minister is right: it is an EU moving target, so it may well be that a review will be required more often.
I hear what the Minister says about the NAO looking at this and the possibility of reviews by the Treasury Select Committee. However, it seems to me that the commitment to produce the evidence should come from the Treasury rather than the Bank of England, and any of those bodies could then take a view on the information. In particular, it needs to be automatically brought before Parliament so that this House and the other place are able to opine on whether adjustments should be made.
I am very happy to withdraw the amendment at this stage but I hope that we will be able to come back to this matter to look for an appropriate way of building in a review. I beg leave to withdraw the amendment.
Amendment 96A withdrawn.
Clause 4 agreed.
Schedule 2 : Further amendments relating to Bank of England
Amendments 97 and 98
97: Schedule 2, page 174, line 3, at end insert—
“(8A) After paragraph 12 insert—
“Publication of record of meetings12A (1) The Bank must publish a record of each meeting of the court—
(a) before the end of the period of 6 weeks beginning with the day of the meeting, or(b) if no meeting of the court is subsequently held during that period, before the end of the period of 2 weeks beginning with the day of the next meeting.(2) The record must specify any decisions taken at the meeting (including decisions to take no action) and must set out, in relation to each decision, a summary of the court’s deliberations.
(3) Sub-paragraphs (1) and (2) do not require the publication of information whose publication within the time required by sub-paragraph (1) would in the opinion of the court be against the public interest.
(4) Publication under this section is to be in such manner as the Bank thinks fit.””
98: Schedule 2, page 174, line 3, at end insert—
“(8B) In paragraph 14(1), for “it” substitute “the Oversight Committee”.”
Amendments 97 and 98 agreed.
98A: Schedule 2, page 174, line 3, at end insert—
“( ) In paragraph 13, for sub-paragraph (3)(a) substitute—
“(a) a director of the Bank to chair its meetings (“the chair of the Court”), and”.”
My Lords, I think that I can be very brief in moving this amendment. Its purpose is to close a gap between the Government’s clearly stated intent and the language in the Bill. I am sympathetic to those who have drafted the language, because the complexities of the Bank of England Act 1998, as amended by the Banking Act 2009, make it quite hard to follow through a single train of thought, and I suspect that that is what has caused a trip-up in the language in this instance.
On the first day in Committee on this Bill on 26 June, the Minister was absolutely clear that the oversight committee—whose existence and procedures he put forward and the Committee accepted—should be made up of non-executive members of the Court of the Bank of England, and that its chair should also be a non-executive member. However, the language in the Bill does not allow that train of thought to follow through. It would permit the Chancellor to appoint the governor or deputy governor to the role of chair of the court and hence see that individual put into the position of chair of the oversight committee. I shall not bore the Committee at this point by trying to track through that but I assure noble Lords that that is the consequence of the current language. I simply say to the Government that I hope that someone can go away and fix this more elegantly than I have been able to do and, on that basis, I shall not be pressing the amendment.
My Lords, I do not know whether anyone else wants to come in on this but it may be helpful if I speak now. This amendment in the name of my noble friend Lady Kramer returns us, as she says, to the territory of not only Bank of England governance but nomenclature, which we discussed at some length two weeks ago. As my noble friend says, one of the changes made in the Banking Act 2009 was intended to amend the Bank of England Act to require the court to be chaired by a director, which, as we established two weeks ago, means a non-executive member—again, as my noble friend pointed out. However, she has gone further because it is only my noble friend, with her razor-sharp eye, who has noticed that the relevant provision inserted into the Bank of England Act 1998, while allowing the court to be chaired by a director, does not require that it be so. That is clearly not correct.
Therefore, although I cannot accept the amendment as drafted because it does not cover all the necessary ground to give full effect to this change, I assure my noble friend and the Committee that we will go away and draft the necessary changes. I thank my noble friend for bringing this to the Committee’s attention.
More generally, I am aware from the discussion that we had two weeks ago that there are some irregularities in the terminology in the Bank of England Act which I certainly had difficulties with and I think that other Members of the Committee did too. A prime example of this is that the so-called Court of Directors includes the executive members of the court who are not, and cannot be, directors. This is plainly absurd. To say that this is all justified because the Bank has been in existence for 300 years so we just have to live with it is not the right approach. As I think I wrote following the first day in Committee, I will consider further whether any other changes might be made to the 1998 Act to clarify these terms, making them more consistent with current usage. We cannot proof the legislation against further changes over 300 years but we can at least try to update a few things.
With thanks to my noble friend, I ask her to withdraw her amendment, as she has already indicated she will do.
Amendment 98A withdrawn.
Amendments 99 to 101
99: Schedule 2, page 174, line 4, leave out “No provision of this paragraph” and insert “Nothing in sub-paragraphs (2) to (6)”
100: Schedule 2, page 174, leave out lines 34 to 38 and insert—
“(b) for sub-paragraph (2) substitute—“(2) The terms and conditions on which a person holds office as a member of the Committee appointed under section 13(2)(c) are to be such as the Oversight Committee may determine.”, and(c) omit sub-paragraph (3).”
101: Schedule 2, page 174, line 42, at end insert—
“(7A) In paragraph 9—
(a) in sub-paragraph (1)—(i) for “Bank” substitute “Oversight Committee”, and(ii) in paragraph (a), for “the Committee’s meetings” and “the Committee’s consent” substitute “meetings of the Monetary Policy Committee” and “that Committee’s consent”, and(b) omit sub-paragraph (2).”
Amendments 99 to 101 agreed.
101ZA: Schedule 2, page 175, line 13, after “Bank’s” insert “functions under the Financial Services and Markets Act 2000, of its other”
My Lords, this is a large group of minor and technical government amendments that I hope we can dispatch very quickly. The amendments address a number of technical issues such as updating the Bill to accommodate changes in European law made since the Bill was introduced, amending some rogue references to the FSA in FiSMA, making consequential amendments to enactments that have been passed since the Bill was introduced and making other technical improvements. I am happy to discuss them, or write in more detail, if any Member of the Committee would like to discuss them. I beg to move.
I will just say that I am very happy to accept the assurances from the Minister that, first, these are technical amendments and, secondly, that he would be very brief in what he said today. I have tried to see whether I could speak for longer than he did. I have not been through every amendment but did look at a sample. Each one I sampled was, indeed, technical and minor.
Amendment 101ZA agreed.
Schedule 2, as amended, agreed.
Clause 5 : The new Regulators
Amendments 101ZB and 101ZC
101ZB: Clause 5, page 15, line 25, leave out “or”
101ZC: Clause 5, page 15, line 26, at end insert “or
(d) a qualifying EU provision that is specified, or of a description specified, for the purposes of this subsection by the Treasury by order.”
Amendments 101ZB and 101ZC agreed.
101ZD: Clause 5, page 15, leave out line 31
My Lords, I am standing in again for the noble Lord, Lord McFall, in respect of the amendments that are in our joint names. In moving Amendment 101ZD, I shall speak also to Amendments 101B and 118B, which continue on from the concerns of the Treasury Select Committee in another place as expressed in its first report in this Session.
These amendments concern the FCA’s strategic objective, which was the subject of debate on our first day in Committee when, unfortunately, I was not able to be here. The effect of the amendments is to remove the strategic objective set out for the FCA and leave it with its so-called “operational objectives”. The FCA would then have simply objectives.
The FCA’s objectives have been amended quite considerably since they first saw the light of day in a draft nearly two years ago, but it seems to have been a case of two steps forward and one step back. The Treasury Select Committee believes that the Government should aim at simplicity and clarity when framing statutory objectives and that the existence of a separate strategic objective adds confusion. When the Government responded to the Treasury Select Committee’s earlier recommendation in this regard, they said both that the strategic objective,
“has a valuable role in supplementing the operational objectives”,
“it operates as a check and balance on the operational objectives”.
As the Treasury Select Committee has noted, that is rather contradictory and the Government appear confused. It is difficult to disagree with that conclusion.
The Government also said that the strategic objective acted as a mission statement for the FCA. The Minister repeated that two weeks ago when he responded to the group of amendments led by Amendment 42. The Treasury Select Committee’s view, as set out in paragraph 4 of the 28th report of the 2010-12 Session, is that:
“A ‘mission statement’ has no place in primary legislation. At best”,
“adds nothing. It may be harmful. Multiple tiers of objective risk adding to complexity and diffusing the focus within the FCA”.
Under new Section 1A, the FCA has not only this mission statement-cum-strategic objective but also has three operational objectives, a requirement to promote competition in the interests of consumers, two “have regards” and four functions. As the Treasury Select Committee has pointed out, this really is not clear and simple. I might have understood why the Government had used this contorted formulation if it had been repeated for the PRA or the FPC. However, the Bill does not take this multiple-levels-of-objective route for those bodies, nor was it the route taken for the FSA under FiSMA. I regard it as an unusual formulation for bodies created by statute.
The Minister said last week that there were precedents for this framework but he did not cite them. Perhaps he will do so today so that we can judge whether they are good precedents. The noble Lord also did not explain why this formula is good for the FCA but not for the other bodies in the new financial stability universe. Again, perhaps he will do so today.
When the Minister replies, can he also explain what,
“so far as is reasonably possible”,
means in the opening words to new Section 1B(1)? Surely, the FCA should always act in accordance with its objectives, strategic or otherwise. What do the words mean? How could the FCA possibly act in a way that was not compatible with its objectives? I do not have a specific amendment on this point for Committee and the drafting of the Bill does not permit any sensible stand part debates, but I hope that the Minister can explain this when he responds. I beg to move.
My Lords, I have an amendment in this group of a slightly different variety but I have enormous sympathy with what the noble Baroness, Lady Noakes, has said about the strategic objective. When I first read the Bill, my note in the margin said “vacuous”. This notion that “relevant markets … function well” really is gamma minus stuff. It is pathetic and does not mean anything at all. One immediately asks for a definition of “function well”. We find that the objectives for competition, integrity and consumer protection are all defined, but there is no definition of what “function well” might mean.
Moreover, not only is this expression vacuous but it has no separate life. Whenever the FCA’s objectives are referred to in the Bill, it is the other objectives—the consumer objective, the integrity objective, the competition objective and the operational objectives—that are referred to. This strategic objective only has coherent life in other references in the Bill in so far as it lives through these more concrete proposals. If it is to be left as it is, it adds nothing other than spurious solidity and real complexity to the structure of objectives for the FCA. I have tried to give it some life. In our Amendment 101D in this group, my noble friend Lady Hayter and I have added the phrase,
“in the best interests of society as a whole”,
to the term “functions well”. That phrase captures the concept of the social optimum as defined in classical welfare economics. One does not want the technicalities of welfare economics within the definition of the Bill, but serving the best interests of society as a whole is the sort of expression that is used by Professor Amartya Sen in his discussions of evaluations of philosophical propositions relative to the social good. By adding,
“in the best interests of society as a whole”,
I would hope to provide this previously vacuous statement with some structure that could be referred to as a mission statement. Although I take on board the objections of the noble Baroness, Lady Noakes, to mission statements, I must say that I tend to agree with them. A mission statement could provide some framework within which the other operational objectives could be seen. For example, on the competition objective, one would look at the objective of stimulating competition in terms of the best interests of society as a whole. There may be circumstances in which the stimulation of competition is not in the best interests of society as a whole perhaps because it causes some distortion to the operation of the market, but, more generally, we would expect the encouragement of competition to act in the best interests of society as a whole.
We have a simple binary choice. Either we must give this vacuous statement some substance or we should remove it from the Bill, as proposed by the noble Baroness, Lady Noakes. What we should not do is leave this statement, which can do no good other than cause a bit of innocent amusement about how silly some clauses in the Bill might be.
I wanted to be clear whether that amendment had been spoken to and on whether we should have something with substance in the provision or take it out all together.
It will not surprise the Committee if I say at the outset that, unlike my previous responses when I have been very accommodating or have tidied things up, I cannot support this group of amendments to delete the FCA’s strategic objective. The Government recognise the importance of getting the objectives of the FCA right. As my noble friend Lady Noakes said, there has now been a considerable period in which we have made substantial changes on the objective question since the first proposal, so we are, and have been, listening. It is perhaps worth going over where the suggestions for improvement have come from.
The Government took note of calls from the Independent Commission on Banking and others on the objective proposed in the draft Bill that,
“protecting and enhancing confidence in the UK’s financial system”,
needed to be changed. The Bill now provides that the FCA’s strategic objective, as has been noted, is,
“ensuring that the relevant markets function well”.
That change has been broadly welcomed, by the Independent Commission on Banking, and by consumer and industry stakeholders alike. Even the Treasury Committee considers that the revised drafting is,
“a significant improvement on the proposal in the draft Bill”,
as in its report of 31 May this year.
Let me attempt to reprise the argument, without delving into classical welfare economics and areas that are a bit beyond me. The Treasury Committee may assert that a mission statement has no place in primary legislation but the Government believe that it is right to enshrine something as important as the FCA’s overall purpose in primary legislation, whether or not we call it a mission statement. It is the FCA’s overall purpose.
I do not agree with my noble friend’s suggestion that this creates an unduly complex or maybe contradictory set of objectives. The three operational objectives of consumer protection, effective competition and market integrity are matters that the FCA must seek to advance. In doing so, it must bear it in mind that ultimately it should be done in a way that ensures that markets function well rather than being damaged or undermined. We believe that that is worth setting out clearly. Why is that? The FCA will have a diverse number of functions, roles and responsibilities, ranging from protecting the potentially inexperienced consumer in retail markets to policing wholesale markets to spot an act of misconduct, such as the one that has come to light over the manipulation of LIBOR. It will take on the functions of the UK listing authority and will also have a strong role in promoting effective competition. These are very different jobs with superficially different objectives and goals but we want the strategic objective to act as an overarching goal so that anybody working in the FCA in future, when asked what the ultimate purpose of their work is, can say very clearly that it is to ensure that markets function well.
Will the noble Lord indulge me? What does function well mean? “Function well” for whom? Does it mean functioning well for a consumer? Does it mean functioning well for a trader? Does it mean functioning well in terms of working smoothly without any hiccups but not allocating resources terribly well? Does it mean allocating resources efficiently? All those things come under the term “function well” but contradict one another. What does it mean, and for whom?
My Lords, in giving those four examples the noble Lord knows very well that the first and fourth of his examples very much fit the bill, and the second and third very much do not. This is all about markets that work essentially to assist the end user of those markets. It has nothing within it to do with working well for a trader or something superficial that all looks smooth on the surface but does not provide the end result of liquidity, price discovery or choice for consumers. The noble Lord knows very well that it would be impossible within the compass of such a piece of legislation to try to define the well working of a market, but the Bill spells out the main ways in which the FCA will seek to promote the well functioning of markets—those operational objectives that I touched on.
Those operational objectives give clues and pointers to the FCA. It will be for the FCA’s board to consider if and when it needs to consider these questions of well functioning markets. I believe that it will be well equipped with its expertise to consider market by market what well functioning means. I see absolutely no problem with this. However, there needs to be something that brings together the FCA’s very diverse and individual functions, roles and responsibilities.
That relates to one of the questions asked by my noble friend Lady Noakes, who asked why the FPC and the PRA do not have strategic objectives. It is precisely because they have much more narrowly focused objectives that they do not need the overall strategic objectives that the FCA needs because of the breadth of its responsibilities. I agree with my noble friend and others that we have not provided this strategic objective for the FCA on some whim. We have not put it in for the FPC and the PRA because it is not necessary. It is precisely because of the diversity and the potentially conflicting nature of the objectives of the other bodies that we believe it is right to have it in the case of the FCA.
By the same logic, the strategic objective will act as a check and balance. If, say, the FCA seeks to advance its consumer protection objective by placing detailed requirements on firms, we want it always to ask itself whether what it is doing contributes to the ultimate end goal of ensuring that markets function well. What functioning well means will be determined with some commonality across all markets, but some of it will be market-specific, particularly depending on whether it is a consumer or a wholesale market. This is no afterthought. It reflects the Government’s desire to enshrine regulation which seeks to ensure that markets can do their job.
My noble friend also asked a question about how the FCA could act in a way that was not compatible with its objectives. There are examples which we need to take into account, one of which might be a short-selling ban which is, arguably, in the interests of end-consumers but is a measure which is not normally thought to be compatible with a well functioning market.
I thank my noble friend for that example, in which a short-selling ban could be introduced because it was compatible with one of the operational objectives yet was incompatible with the strategic objective. What, then, is the point of having the strategic objective sitting in this Bill?
My Lords, I have explained why a strategic objective is necessary in order to tie together the very disparate responsibilities of the FCA. Nevertheless, in answer to my noble friend’s question about the “in as far as reasonably possible” carve-out, I give her an example of why there will be circumstances where those words are necessary. It is entirely compatible with the need for the general, overarching statement to admit and allow for the possibility that there will occasionally be instances of conflict with that overarching objective. We have done that in the Bill and this does not in any way invalidate it.
I turn briefly to Amendment 101D in the name of the noble Lord, Lord Eatwell. This seeks to extend the FCA’s strategic objective to ensure that markets function in the best interests of society as a whole. Consistent with what I have already said about the well functioning of markets, I support the sentiment underpinning the amendment. We want markets which serve the wider economy, underpin growth and contribute to a more prosperous society as a whole. We are not talking about markets that are working exclusively for those who are operating in them. This sentiment is very much part of what drives this whole programme of financial services reform.
Having said that, I am conscious about the amendment for two reasons. First, it is not the FCA’s job to decide what is ultimately in the best interests of society. The FCA is being set up as a focused, tough and proactive conduct-of-business regulator. If its new style of conduct regulation contributes to ensuring that the financial sector serves the wider economy, that is good and what we want to see. However, I suggest that deciding what benefits society as a whole cannot be the role of a financial services regulator.
Secondly, and linked to that, is an important question of expectations. The FCA will have some important powers but it is questionable whether we could argue that it has all the powers to deliver a market that benefits all of society all of the time.
There are difficult judgments to be made here, not least because there will always be trade-offs between policy choices. It is my strong belief that these societal choices are, ultimately, for the governor and not the regulator. I cannot, therefore, support Amendment 101D. I may be proved wrong in just a moment, but I sense that I have not completely won over my noble friend—no, I will not be proved wrong. However, she is always very reasonable about these things and she recognises the very considerable way that the Government have moved on the FCA’s strategic objective. I ask her to withdraw her amendment.
My Lords, I am glad that my noble friend has cleared that up because I heard him say “governor” too. Perhaps there was a small slip, but Hansard will doubtless make sure that what he intended to say is recorded as having been said.
I thank the noble Lord, Lord Eatwell, for his support for my amendments and I agree with him that the current drafting is not much more than a vacuous statement. The Minister said that this is going to be an overarching goal, that it is going to be a check and balance but the first example he gave me, of short-selling, means that it can be ignored. This seems to be some form of window dressing. It is trying to appear that the Government agree with as many people as possible. It probably has no meaning whatever and it is therefore possibly something that we do not need to get overexcited about. It certainly does not add to clarity in the Bill. I shall think further on what my noble friend has said before we return to this on Report. For now, I beg leave to withdraw the amendment.
Amendment 101ZD withdrawn.
House resumed. Committee to begin again not before 8.30 pm.
Alcohol Strategy: Role of Drinks Industry
Question for Short Debate
My Lords, I begin by declaring my interests. I am a former chief executive of the Portman Group and the Drinkaware Trust, and a former member of the Alcohol Education and Research Council and the Advertising Standards Authority. Currently I am a paid consultant to two drinks producers, Brown-Forman and Heineken, but I emphasise that neither company has asked or suggested that I table this debate, nor have they had any discussions with me about it.
Despite these connections, I would be the first to say that when it comes to irresponsible behaviour the industry has certainly not been blameless. I joined the Portman Group in 1996 at the time alcopops burst onto the market and I saw some dreadful examples of products and marketing campaigns that were inexcusable and that would now breach every rule in the book of the codes of practice that were subsequently developed and which apply today. However, I believe the industry has come a long way and is now genuine in its intentions to promote responsible drinking and prevent misuse. I also believe the industry is effective in its actions and, indeed, has been a helpful model to other sectors.
Promoting responsible drinking and being a successful, profit-making business are not conflicting, mutually exclusive objectives. I am pleased that the latest alcohol strategy and the responsibility deal acknowledge the industry as a key partner and press exactly the right buttons to stimulate innovation and link the industry ever more closely into the community partnerships which are, frankly, the only way in which we will ever make a lasting impact on the drinking culture in this country.
The situation is not altogether negative. Latest figures from the Office for National Statistics show that the vast majority of people—78%—are drinking within government guidelines. Per capita consumption fell from 9.5 to 8.3 litres between 2004 and 2011, putting the UK a fraction above the European average and lower than France, Spain and Austria. According to the ONS, young people’s binge-drinking is at its lowest ever recorded level, and fewer children aged 11 to 15 are trying alcohol than ever before. Drinking at harmful levels is falling and drink/drive fatalities have fallen by 85% since 1979.
Yet there is still a significant minority who do drink to excess and cost the UK economy a staggering £21 billion every year. Alcohol-related hospital admissions are up and alcohol-related deaths have doubled since the early 1990s. Alcohol-related violent crime has fallen significantly but still accounts for nearly 1 million incidents every year. Individuals, families, communities and businesses are being damaged.
To tackle these problems, the Government are right to treat the industry as a key stakeholder who can have a significant positive impact. This is partly about demanding strict standards of commercial behaviour which prohibit the industry from doing things such as targeting its marketing to under 18s and linking alcohol with sexual success, and a host of other strict and detailed rules which are policed by the Portman Group, the ASA and Ofcom.
However, it is also about what the industry can do proactively. For example, 61 companies fund the Drinkaware Trust, now a charity under independent governance with trustees from many sectors, including health professionals. Almost all ads for alcoholic drinks now carry the Drinkaware website address and that attracts 300,000 people a month. In-kind media support from industry totals £26.5 million, significantly exceeding the Government’s target of £15 million. This also compares positively with the Government’s spend on alcohol campaigns of only £4.65 million for the past two years. Perhaps the Minister will tell us whether this is likely to go up.
However, it is the Responsibility Deal that demonstrates the most imaginative and transformative potential of corporate responsibility. Nowhere else in Europe has achieved anything like it—and all without red tape.
It has four key commitments. First, to take 1 billion units of alcohol out of the market by 2015 by reformulating existing brands to contain less alcohol and by innovating to bring new, lower-strength brands on to the market, helping more people to drink within the guidelines by providing a wider choice of lower alcohol products. This is significant because it shapes the drive to reduce consumption in a consumer friendly way: the issue becomes one of drinks, not of alcohol.
Secondly, the industry will help consumers understand units better and it has pledged that by December 2013 over 80% of the products on the shelves will carry clear unit content, the Chief Medical Officer’s guidelines and a warning about drinking while pregnant. It is well on track to fulfil this commitment, with over 60% of labels and containers already complying with 18 months still to go. Mandatory labelling would almost certainly need EU legislation and take years to achieve, so the UK industry is leading the way by doing this voluntarily.
The third pledge is to provide more support for communities to develop local schemes such as Best Bar None, Purple Flag, community alcohol partnerships and business improvement districts. This is vital because alcohol harms in the UK vary hugely across different regions. For example, data from the North-West Regional Health Authority show rates of alcohol specific mortality and liver disease in Blackpool at nearly three times the national average; hospital admissions in Liverpool, nearly 2.5 times the national average; and binge drinking in north Tyneside, 1.5 times the national average.
One of the reasons these community schemes work is because they offer a win-win outcome. For example, in Durham there has been a 75% increase in trade in pubs which run the Best Bar None scheme because it makes the pub a safer and more attractive place to go. At the same time, figures suggest an 87% decrease in violent crime.
Finally, under the responsibility deal, producers have committed continued support to Drinkaware, not only by paying their dues and sitting back but by using their brand marketing to promote the charity’s campaigns and government guidelines. During the last FA Cup competition, for example, more than 50 million football fans saw Drinkaware branding through a beer sponsorship which featured Drinkaware on the stadium perimeter. Every sixth ad shown at the matches carried the Drinkaware message. We know that it had a positive effect because during the two semi-final matches in April there was a 30% increase in direct traffic to the Drinkaware home page.
Being a partner in the alcohol strategy of course means, by definition, that there are other groups involved too. The industry should not be the scapegoats for all the blame when something goes wrong. Pubs often get it in the neck for offering so-called 24 hour drinking when in fact only a minute percentage of the UK’s licensed premises have a 24-hour licence, and most of those are in airports or hotels. The fact is that we have seen a reduction in consumption since we have had a relaxation in the licensing regime.
Producers often get it in the neck, too, for their advertising but, as I said earlier, there are stringent restrictions on the content, placement and timing of alcohol ads and the new strategy has given a clear mandate to the ASA and the Portman Group to review the rules further.
Supermarkets often get it in the neck for selling alcohol too cheaply—I find some of their discounting practices very worrying—but even price is not a straightforward issue. There is certainly a proven link between price and consumption but I am not so sure that there is a proven link between price and harm. After all, alcohol is even cheaper in France and yet alcohol harms there are falling. Our real target should be the drinking culture and harmful patterns of drinking, whatever the price of the stuff.
Other partners include parents, and one might ask why, according to Drinkaware, most parents do not plan to talk to their children about alcohol until well past the age when they are likely to have had their first drink.
Law enforcement, too, has a role. One might ask why you can count on one hand the number of prosecutions of licensees for selling drink to customers who are already drunk, when this has been against the law for years. Voluntary initiatives on the part of the industry should be a complement to, and not a substitute for, proper law enforcement. I would be grateful for the Minister’s comments on that point.