Committee (1st Day) (Continued)
Clause 5: Financial stability strategy
5: Clause 5, page 4, line 26, leave out subsection (2)
My Lords, in moving Amendment 5 I will speak also to Amendment 6. Amendment 5 would omit the subsection that transfers the power for the creation of the financial stability strategy from the court to the Bank. Amendment 6 would specify in the Bank of England Act 1998 that the Chancellor of the Exchequer should be consulted in relation to the development and production of the financial stability strategy.
The maintenance of financial stability is arguably the overwhelming role of the Bank of England and its committees. If you look at what has gone wrong in the recent past, it has overwhelmingly been issues of financial stability that have impacted on the financial system and, much more importantly, on society as a whole, both in our country and across the world.
It is interesting to look at what is supposed to happen now. The appropriate part of the Act, which I can read from the consolidated document that the Treasury was kind enough to provide us with, is Section 9A—“Financial stability strategy”—which says:
“The court of directors must … determine the Bank’s strategy in relation to the Financial Stability Objective (its ‘financial stability strategy’), and … from time to time review, and if necessary revise, the strategy … Before determining or revising the Bank’s financial stability strategy, the court of directors must consult about a draft of the strategy or of the revisions … the Financial Policy Committee, and … the Treasury”.
That seems quite straightforward. It seems to put the court at the centre of the creation of the stability strategy, and to invite the right other parties to be involved.
Indeed, the importance of that process is demonstrated by the fact that it gains a place on my favourite piece of paper, which is a print-out of a splendid one-page summary on the Bank’s website, called “How we are governed”. It says:
“The FPC is a sub-committee of Court and its objectives are set by reference to the Bank’s Financial Stability Objective. The Bank’s Court is required by statute to prepare and publish a Financial Stability Strategy, in consultation with the FPC and HM Treasury”.
That is all very straightforward. Sadly, it has not been a great event so far. A strategy document was produced in 2013, called The Strategy for the Bank’s Financial Stability Mission 2013/14. It was five pages long and it was approved by the court on 25 September 2013. The strategy was revised and published in the 2014-15 report, which was signed by the chairman on 4 June 2014. If I read that document correctly, the strategy was reduced to one column and, while asserting a negative is always rather difficult, in the Bank’s 2015-16 report I could find no mention of a financial stability strategy in the ownership of the court.
It looks as though the Executive have to some extent pre-empted this part of the Bill by letting the responsibility of the court wither on the vine. My amendments are really simple and probing. What has happened to the financial stability strategy and what will happen under the new arrangements? Who will produce the financial stability strategy or have the Government effectively decided that the role of producing it should be subsumed into the FPC and, if it is being subsumed, where in the Bill or in the subsequent amended Act is that enabled?
My other area of concern about the situation is that, reading through the document, we find increasing references to HM Treasury’s input to the strategy. So on the one hand, you have responsibility for the strategy clearly drifting away from the court. As far as I can see, the Bill intends to take it away totally from the court and I would value confirmation of whether that is true. On the other hand, one seems to be having increasing input from Her Majesty’s Treasury. I do not wish to comment particularly strongly on whether that is a good or bad thing but I would certainly value the Minister confirming whether the Government intend to take this role away from the court and increase the role of HM Treasury in this important area. I beg to move.
My Lords, I thank the noble Lord, Lord Tunnicliffe, for his introduction to his amendments. We discussed the Bill’s changes to the arrangements for the financial stability strategy at Second Reading. I hope to address the issues raised during that debate and some of the points that the noble Lord has just raised again. As I said earlier, legislation generally confers powers and duties on the Bank of England in two ways: either directly on the Bank or on a statutory committee of the Bank, such as the Financial Policy Committee. Consistent with this approach, Clause 5 moves responsibility for determining and revising the Bank’s financial stability from the court to the Bank. I reassure the noble Lord and the Committee that the court, as the body responsible for managing the Bank’s affairs, will retain ultimate responsibility for determining the financial strategy. But by naming the Bank instead of the court, we would grant the court the ability to delegate production of the financial stability strategy to those best placed within the Bank.
I argue that this flexibility is important given the broad range of policy that the financial stability strategy covers, which obviously extends beyond the responsibilities of the Financial Policy Committee. For example, responsibility for resolution policy, regulation of financial market infrastructure, note issuance and macroprudential policy are held within separate parts of the Bank, but the financial stability strategy will need to cover all these areas and others to be truly comprehensive. The clause as drafted does not affect the court’s ultimate responsibility for determining the Bank’s strategy, while granting the court additional flexibility as to who within the Bank undertakes the work to pull together the actual document. As I have said, the court will be able to delegate production of the strategy within the Bank but, as the noble Lord, Lord Tunnicliffe, asks, who will be left holding the pen? It is for the court to determine who is best placed to produce the strategy, and this may shift over time as the Bank decides to prioritise particular elements of its responsibilities. However, it is clear that a document of this importance will require significant engagement by the Bank’s senior management. I expect that the Bank’s governors will all be heavily involved when the strategy is determined or revised. I should add that there is no intention to increase the role of the Treasury in the Bank’s financial stability strategy. As I have just said, the court will be responsible for the strategy, although it will be required to consult Her Majesty’s Treasury, as now.
Amendment 5, put forward by the noble Lords, Lord Tunnicliffe and Lord Davies, would undo the changes I have outlined. The amendment would limit the court’s powers to delegate the production of the strategy elsewhere within the Bank, as the court may not delegate any duty or power expressly conferred on it by statute. As the ultimate responsibility for determining the strategy would rest with the court in both cases, the amendment would have little impact on the governance or accountability of the Bank, but would curtail the flexibility of the court in determining who should produce the strategy. I hope that my remarks have reassured your Lordships that the court—I repeat, the court—will remain ultimately responsible for determining the Bank’s financial stability strategy and that all concerns about “amorphous entities” have been purged. For that reason I ask the noble Lord to withdraw the amendment.
The second amendment tabled by noble Lords seeks to ensure that the Chancellor must be consulted before the strategy is set or revised. The existing provision requires the Treasury to be consulted, and this is the more usual provision. This does not mean that the Chancellor is not consulted: the Chancellor would obviously be kept fully informed of anything as important as the adoption of a new financial stability strategy by the Bank. However, where the Bank is proposing a minor revision of the strategy, it may be more appropriate for a junior Treasury Minister to take the lead in considering the Bank’s proposals. Retaining the existing drafting provides this element of flexibility. The Bank is required to produce a financial stability strategy not every year but every three years, so the 2013-14 strategy is still current. Given that, the amendment is unnecessary, and I ask that noble Lords do not press it.
I thank the Minister for that response. He says that the court has delegated this to the Bank. The minutes of the court are now published, but when your total staff resource is half of one person, actually finding the information is quite difficult. I am not criticising the Bank, because I am all in favour of producing lots of information, and it is very open and all that sort of thing. However, the Minister has the machinery, while I do not, and I wonder whether he could dig out for me the appropriate minute which shows that transfer of responsibility and whether he can provide evidence that the court is responsible. The wording of the Act, as it stands before amendment, seems to suggest that this is an active responsibility, but I do not get a sense of that active responsibility. I am sure that could be evidenced with the publication of the minutes. I would be grateful for that.
I am sure the Minister is right to say that the 2013-14 statement is the current strategy, but there is a column in the 2014-15 account labelled, I think, “Strategy”. It would be good if he could look at these points and produce a letter which, like his first letter, references back into the parent documents to convince me about what he is saying and whether, although I am sure it is accurate, it is actively accurate in the way it involves the court. With those few comments, I beg leave to withdraw the amendment.
Amendment 5 withdrawn.
Amendment 6 not moved.
Clause 5 agreed.
Clause 6: Financial Policy Committee: status and membership
7: Clause 6, page 5, line 11, leave out “5” and insert “6”
My Lords, I will be very brief. This amendment would increase the number of non-executive directors of the FPC from the five proposed in the Bill to six. Exactly as with our proposal to preserve the NED balance on the court and our proposal to reject the abolition of the oversight committee, this amendment aims to preserve or strengthen the influence of the non-executive directors.
The Treasury has supplied a very helpful chart showing the current composition of the Bank’s governance structures. As things stand, the FPC consists of the governor, three deputy governors, the CEO of the FCA, one governor appointment—the executive director for financial stability—and four appointments by the Chancellor. These four people are the external members, the equivalent of non-executive directors. This means the FPC consists of five Bank officials, the CEO of the FCA and four non-executive directors.
The Bill before us changes this. It adds a deputy governor and one external member. In the words of the Treasury briefing note, it adds the latter to,
“maintain the existing balance between existing executive and non-executive members”.
Under the new arrangements, the composition of the FPC will be: six Bank officials, the CEO of the FCA and five NEDs. As the Treasury note says, this preserves the preceding balance, but it also highlights the position of the CEO of the FCA. We do not argue that she should not be a member of the FPC—on the contrary—but we are not convinced that she could be described as an external member, with the same independence of thought and action as the other truly external FPC members. Indeed, the Treasury note does not describe her as an external member. It simply lists her as “the CEO of the FCA”.
In many respects, the CEO is more like a Bank official than an external member. She depends for her job on the confidence of the governor and the Chancellor. What her organisation can or cannot do is in many respects controlled, or can be controlled or constrained, by the Bank or one of its organs. We saw what happened to the current FCA CEO’s predecessor: Martin Wheatley was summarily sacked by the Chancellor. I assume the governor, at the very least, did not oppose this. On balance, it would be entirely reasonable to conclude that the CEO of the FCA is not as independent of Bank influence as the truly external members of the FPC. In practice, that means that in the current and proposed FPC compositions, there will be a majority of Bank officials and Bank-dependent officials, and a minority of external members. We believe that that is unhealthy. We believe that accountability and scrutiny will be improved by having a more truly independent member on the FPC. It should also be true for the PRA, incidentally, and I will argue that case in Amendment 19. This amendment would raise the number of independent members of the FPC from the five proposed in the Bill to six. It does that to ensure a sufficiency of truly and unquestionably independent members on the FPC. I beg to move.
My Lords, I will try not to make this a habit, but I find the case persuasive.
My Lords, this has been a brief debate. I am sorry that it falls to me yet again to argue numbers with the noble Lord, Lord Sharkey, and I am afraid to disagree with his argument.
This is a superficially simple amendment which seeks to change the balance of the membership of the Financial Policy Committee by increasing the number of external members from five to six. The noble Lord, Lord Sharkey, was again correct in outlining the numbers on the FPC as they stand today: namely, the governor, the three deputy governors and the executive director for financial stability strategy and risk, who are the internal members; and the five other members, who I would describe as external, who are the chief executive of the FCA and the four members appointed by the Chancellor. There is also a non-voting member from the Treasury. This gives an equal balance of voting membership between the Bank executives and those from outside the Bank. The Bill adds two new members to the committee—the deputy governor for markets and banking and an additional external member—which preserves the existing balance between the executive and non-executive members of the committee.
We think that that is appropriate: it strikes the right balance between ensuring sufficient input from the Bank of England’s executive and internal expertise and supporting the external, non-executive members’ role of providing a challenge to members’ thinking. Crucially, the committee can draw on the expertise and resources of the Bank, while the non-executive members provide a strong challenge function by bringing outside perspectives and expertise to the committee’s discussions and preventing groupthink.
Although this has been a brief debate, it is an important one. Can the Minister describe why he takes the view that the chief executive of the FCA is not inherently different from a fully outside member of the FPC, particularly when prior legislation would indicate that there is a close family relationship?
I am certainly able to do that; I was just coming to that very point, I assure the noble Baroness.
We think that the balance of membership is appropriate, as the work of the FPC is one of the key elements of the Bank’s strategy to meet the financial stability objective. It is therefore essential that the Bank can be held accountable for its performance against that objective. The effect of the amendment would be to place the committee outside the Bank’s control.
I am sorry to interrupt the Minister again, but he said that the effect of this would be to place the committee outside the Bank’s control, so he is describing the chief executive of the FCA as part of the Bank family. That is the logic of that sentence.
I am sorry, but I do not think it is. If we say that the CEO of the FCA is one of the external members, that places it outside. I am coming to the question of whether you can describe the non-executive member as also external; I promise that I will come to that in a minute.
We should also consider the overall size of the committee. The noble Lord’s amendment would bring the number of voting members on the FPC to 13. Setting aside any superstitious concerns, there is a risk that the committee could become unwieldy and cumbersome. This could be particularly problematic for the FPC, as it is required to seek to make decisions via consensus, which of course becomes more difficult as it grows in size. The amendment would make the FPC the largest of the Bank’s policy committees. The MPC has only nine voting members and the PRC is likely to have 12 members. I believe that the additions to the FPC will be a net benefit to the FPC, but further expansion risks tipping the scales toward a detrimental impact on the workings of the committee.
I come to the question of the CEO of the FCA, to which the noble Baroness, Lady Kramer, referred. We are in no doubt that the FCA CEO should be counted as an external member of the FPC. The CEO of the FCA is not an executive of the Bank, and the FCA is entirely separate from the Bank.
There is no doubt that having the FCA CEO on the FPC is of huge value to the committee. It is true that her membership of the FPC brings particular benefits in terms of regulatory co-ordination, but she also has extensive relevant expertise, and, crucially, she brings an independent viewpoint and external challenge from outside Threadneedle Street, because the FCA is a completely independent body with a different set of objectives. It is also worth noting that this reciprocates the arrangement on the FCA board, where the chief executive of the PRA is counted, alongside the Treasury-appointed chair and the other members, as a non-executive. The CEO of the FCA is therefore eminently qualified to operate as an external, non-executive member of the PRA board.
In summary, the Government believe that it is appropriate to have an equal number of internal and external members, as the committee has today. This will ensure sufficient input from the Bank of England as executive and internal Bank of England expertise, while supporting the external, non-executive members’ role of providing a challenge to members’ thinking.
With those explanations in mind, I should be grateful if the noble Lord would withdraw his amendment.
I thank the Minister for that response. There is no argument about the value of the CEO of the FCA being on the FPC. I fear that I was completely unconvinced by the argument that one more external member would make the FPC collapse into chaos and disorder; that seems a bit far-fetched.
The difference between us is whether the independence that the noble Lord maintains that the CEO of the FCA has is true independence. The test he seems to apply is simply that, well, the FCA itself is kind of independent, so she is obviously independent. In fact, the Minister did not mention my major concern, which is the influence that the Bank itself has over the CEO of the FCA. I give way to my former noble friend.
My Lords, can the noble Lord explain why he thinks that the Bank has any influence whatever over the chief executive of the FCA? There are no provisions in statute that give any sense of influence, even, and I struggle to find where in practice you could point to where that influence could be deemed to exist.
There are two partial answers to the noble Baroness’s question. The first is, as I mentioned, that the chief executive of the FCA can be summarily dismissed, presumably either at the instigation of the governor or at least with his permission and consultation—
I ought to say two things to that. The chief executive of the FCA was not summarily sacked; as I understand it, he was informed that his contract would not be renewed, and there is a world of difference. As far as I am aware, there is no practical issue of the Governor of the Bank of England or any other senior official of the Bank of England having any locus in the decision whether to renew the chief executive’s contract. If the noble Lord has evidence of that, I should be happy to see it.
The fine distinction between being summarily dismissed and not having his contract renewed temporarily escapes me, but I am sure that it will come to me. The point I am trying to make is that I believe that the Bank has influence over the CEO of the FCA. I was asking the Minister—because he did not deal with this—to explain why he clearly believes that it does not have influence over the head of the FCA.
I also point out, as I did in my initial speech, that the PRA itself can act to restrain and constrain the activities of the FCA, as I am sure the noble Baroness knows. The PRA is an organ of the Bank, so the actual independence of the FCA is somewhat compromised by that arrangement. That was the point that I was trying to make.
However, having said all that, and not being terribly convinced by the Minister’s arguments—I am sure that we will want to return to this later—in the mean time, I beg leave to withdraw the amendment.
Amendment 7 withdrawn.
Clause 6 agreed.
8: After Clause 6, insert the following new Clause—
“Long-term systemic risk
After section 9C(3)(c) of the Bank of England Act 1998 (objectives of the Financial Policy Committee) insert—“(d) systemic risks to the long-term stability of the UK financial system attributable to long-term fundamental change, such as climate change, demographic change, and technological change.””
My Lords, today we are discussing a Bill that should have the long-term sustainability of the financial system at its heart. To that end, we are discussing provisions that would open up the Bank to further scrutiny, maintain existing scrutiny and guard against the possible repetition of groupthink. Amendment 8 would change the list of risks, as set out in the Bank of England Act 1988, that the Financial Policy Committee must consider in order to include long-term systemic risks to our financial stability.
These risks may arise from fundamental structural changes that have important implications for our financial system and therefore our long-term sustainable economic growth. There are some risks to longer-term financial stability that do not emerge within the typical time horizons of financial markets or the monitoring of the Bank. The time horizon of the Financial Policy Committee’s stability activities is not set in statute but according to the governor; it typically extends a little further than that of the Monetary Policy Committee, which is one to three years, but certainly no further than the outer boundaries of the credit cycle—around five to seven years. The danger is that, by the time fundamental structural changes that have been developing in the background are acknowledged by markets and regulators as an important issue for financial stability, it may be already too late. Unsustainable investments may have become embedded in institutions’ balance sheets, with capital locked into enterprises and business models that may have been rendered uneconomic as a result of long-term changes.
I will touch on three areas where risks are apparent over longer-term time horizons. The rise of new technology, which has already radically and permanently reshaped both the real economy and the financial industry, and future innovations such as machine learning, artificial intelligence and the rise of digital currencies, will have important implications for the wider economy and the robustness of our financial sector. Demographic change around the world is also reshaping economies, and with them their financial services industries. The increasingly ageing populations in developed economies will have implications for the pensions and the insurance industries. An IMF report found that if people live just three years longer than expected, in line with past underestimations, such an increase in longevity would add 9% to pension liabilities for private pension plans in the United States. These demographic changes have important implications and we must not be caught in just short-term thinking.
Lastly, we face the profound challenge of long-term changes in our natural environment, including the overarching risk of global climate change. This challenge has two elements: the implications of physical changes in the environment for the real economy, and the responses to that change from governments and other key actors as impacts become more apparent and policies are introduced. The financial services industry, like every other industry, will have to respond and adapt to climate change. The risk it presents, though relatively long term, should be integrated into prudential regulation now.
In recognition of these risks, Defra invited the Bank of England in 2013 to take part in an adaptation reporting cycle under the Climate Change Act. The Bank took part on a voluntary basis, and that is welcome. However, it was the PRA that undertook to respond to Defra’s request. The Financial Policy Committee’s response to the invitation was recorded in its minutes of the meeting of March this year:
“The committee’s central expectation was that the risks to financial stability were likely to be beyond the FPC’s typical policy horizon”.
That is precisely the problem that governor Mark Carney highlighted when he referred to the “tragedy of the horizon”. It is the problem I wish to raise by moving this amendment.
Of course, it is to be welcomed that the Bank is looking into the implications for the insurance industry, but as I said, this goes far beyond just insurance. Researchers from Oxford and Cambridge universities estimate that between 5% and 20% of the average diversified equity investment portfolio is at risk of re-evaluation as a result of climate change. The UK, although home to only 0.2% of the world’s coal, oil and gas reserves according to Carbon Tracker in 2013, listed in London alone reserves equivalent to 18.7% of the remaining global carbon budget. The over-representation of fossil fuels in our markets is a subject that I hope we can return to on Wednesday, as I have tabled another amendment on this theme.
To sustain economic development regulators must take into account long-term trends and changes that markets may fail to see. That means allowing time horizons to be determined not by the credit cycle, market behaviour or the Bank’s price stability objectives, but by the unknown future risks our financial stability regulators must be equipped to guard against. As global leaders will meet less than a month from now in Paris to discuss the long-term sustainability of the planet and climate change, it is right that, across all areas of policy, we ask what the implications are of this historic meeting. Making our financial sector more attuned to the risks of climate change and other long-term threats is something the UK can and should show global leadership on. Our current governor is already making the case. The Government can and should do more. I look forward to hearing the Minister’s response. I beg to move.
My Lords, I added my name to this amendment because this is a crucial discussion and an important opportunity to draw the Government’s attention to these issues. This Government, like many others and almost every speaker on financial issues in this House, have expressed their frustration with the short-termism that dominates the British financial services industry: a search for short-term profits rather than understanding the longer term perspective. Indeed, the Chancellor has often voiced frustration at the fact that UK pension funds are very unlikely to invest in the kind of long-term infrastructure projects he sees as essential for our country. Canadian pension funds will gladly invest, but not UK ones. We suffer from this ongoing blight. Of course, the ultimate frustration is that many of those who put their money into such pension funds would be absolutely delighted to see it invested in infrastructure, renewable energy and sustainable projects, because they are often looking for a 30 to 40-year horizon regarding the return on the money they invest. However, that is not the way the system works.
When the Bank of England was given responsibility for financial stability, there was an assumption that part of the thinking would then extend into that long-term arena, and that the Bank would be freed from the narrow and short-term issues of stability. In fact, I think the Chancellor talked about avoiding the stability of the graveyard and looking at the much longer term horizon. So far, the Bank has not used its wide range of powers or its influence to enter into that territory. Whether it is sustainability as defined by projects such as renewable energy, rail infrastructure or broadband, a wide range of projects need a response from the UK’s financial services. That surely requires the Bank to take some role, and to take cognisance of this issue. I hope that debates such as this will persuade the Treasury and Government to engage much more extensively in those conversations with the Bank in its various and many parts, and to consider whether the relevant committees should at least have regard to those priorities, and potentially see them as obligations and duties, given the important role that long-term investment plays in the future of the UK.
My Lords, listening to the debate this afternoon, it is clear that many have concerns about the power and influence of the Bank of England. However, I cannot help but feel that this amendment takes that concern a step too far. Much as I have great admiration for Mark Carney, I cannot imagine how he is expected to predict the effect of artificial intelligence. The duties we are putting on the Bank are already extremely far-reaching. The responsibilities now placed on the Financial Policy Committee are deep and will have a huge impact, but to ask it to range as far as this amendment is surely to demand something beyond common sense.
The role of ensuring financial stability is crucial. It means keeping our financial institutions on the straight and narrow, and watching out for problems. However, to ask for those decisions to be taken in the light of what may be happening 20 or 25 years from now is surely a step too far. The role of Government in thinking about such issues is clear, but we would be in very dangerous territory if we thought of the FPC as the arm of government to influence such decisions.
My Lords, I would like to join in this debate because, although I respect the expertise of the noble Baroness who has just contributed, I am rather more in sympathy with the arguments of my noble friend Lady Worthington and the noble Baroness, Lady Kramer. I hear what was said about placing obligations on the Bank, but we should also appreciate that we have the benefit of the present governor—on whom I have not lavished many plaudits this afternoon as I was rather concerned about the future structure of the Bank, for which he will be responsible. Nevertheless, we all recognise the governor’s merits in taking a wider perspective on aspects of the economy than has perhaps been the case heretofore. Certainly, the speech that he made not so very long ago, in September, to Lloyd’s of London, in which he said that climate change is the “tragedy of the horizon”, ought to wake all of us with alarm, but also make us ask how we can adjust and make responsive our institutions to the anxieties that obviously flow from the developing and clearly established dangers of climate change.
I realise that I may not be pressing at an open door when I deal with the Minister in his area. After all, he belongs to an Administration who have been presenting a series of closed doors to green policies in recent months, with the end of subsidies for offshore wind production; the granting of the right for fracking to be conducted in our national parks; the end of the Green Deal insulation for our homes; and the end of the zero-carbon standard for housebuilding. All those may look like small beer against the general perspective, but they are an indication that the Government are still far from persuaded of the significance of climate change, which stands somewhat in contradistinction to what the Governor of the Bank of England said in September. On this occasion, my support is with the governor.
Although the Financial Policy Committee will take into consideration systemic risks attributable to structural features, those attributable to the distribution of risk within the financial sector, and unsustainable levels of leverage, debt or credit growth—and I would not in any way, shape or form detract from the significance of those cardinal objectives that the committee is obliged to consider, which are well within the rubric that it has had for some time—I hope that, just as we seek to establish a somewhat longer-term perspective for our financial institutions on investment and the development of the economy, in that longer term we will also look at systemic risk which is some distance away but which, unless we take action now, will have calamitous implications for the economy and, of course, the wider world. While the Minister stresses the committee’s significance in its work of managing financial risks in the shorter term, as I am sure he will, I hope he will also accept that it would be nothing but advantageous for the committee to accept the signal from the governor himself that everyone concerned with the future welfare of our country needs to take into account the issues of climate change and how we can moderate it, because a failure to do so will render a great deal of our short-term measures wholly and totally inappropriate.
My Lords, I begin by thanking the noble Baroness, Lady Worthington, for sparing the time to meet me to discuss this amendment before today and repeat my offer that, should she wish to have further meetings with me or the Bank of England I am sure that I can happily facilitate it. I thank the noble Baroness, Lady Kramer, for once again making a very eloquent contribution to this debate.
I am sympathetic to the motives behind this amendment. Climate change, demographic change and technological change are important structural issues, as the noble Lord has just said, which could indeed have a very significant impact on financial stability. It is right that the macroprudential authority should be alert to these, and other, long-term systemic risks. However, as I hope other noble Lords will agree, in the light of what I am about to say, the amendment is unnecessary, so I do not feel able to accept it.
I start by stressing one point. The current legislation places no limit on the time horizon of the systemic risks that the FPC must consider in its assessment of the risks to the resilience of the UK financial sector. Therefore, the current legislation already provides for the consideration of long-term systemic risks such as those listed in the amendment. Indeed, at its meeting of March 2015, the FPC discussed precisely one of those risks: the risks to financial stability from climate change. This is evidence that the FPC has previously considered longer-term systemic risks, and may do so again in future, should it see fit. Although the FPC concluded that the risks from climate change would not materialise within its typical policy horizon, the Bank is also taking action on longer-term systemic risks through other channels, given the importance of these issues. I shall draw noble Lords’ attention to just three, although I am happy to meet to discuss the issue further.
First, the issue of climate change has been added to the Bank’s One Bank Research Agenda. I would be very happy to arrange for the noble Baronesses, Lady Worthington and Lady Kramer, to meet with Bank officials to discuss this issue in more detail. Secondly, the governor of the Bank is using his chairmanship of the Financial Stability Board to consider the risks that climate change poses for financial stability and the steps that could be taken to mitigate them, including through improved disclosure. I remind your Lordships of what the governor said in the speech to which the noble Lord referred. He said:
“With better information as a foundation, we can build a virtuous circle of better understanding of tomorrow’s risks, better pricing for investors, better decisions by policymakers, and a smoother transition to a lower-carbon economy”.
He set out in quite a lot of detail what he considered the most effective disclosures are—they are,
“consistent, comparable, reliable and clear”,
Thirdly, the Bank’s open forum will host a public discussion of some of the types of risks raised in this amendment, such as how financial innovation and technology can support the economy and how financial markets can regain their social licence. Those are just three of the steps that I would like to highlight. I would be more than happy to meet the noble Baroness again. I hope that what I have said addresses some of her points and that she will withdraw her amendment.
My Lords, I am genuinely grateful for how the Minister has responded to this amendment. It was intended to stimulate debate and elicit a reassuring response and, indeed, the Minister’s words have been reassuring. It is clear that the stakes are very high when it comes to climate change, and every aspect of government policy needs to think through the implications so that we do what we can in the time that we have to avert and limit the risk. It has been a significant new intervention from the governor to make this part of the Bank’s One Bank Research Agenda, and we hope that that will bear fruit.
I know that the governor is pursuing initiatives with the FSB that are international in nature. My point was to try to stress the fact that the UK sits at the global table when it comes to financial services, and the City of London makes such a valuable contribution, not only to our economy but globally, that we can show leadership here. We should not simply say that this can be sorted out by an international process. There are things that we can do as the UK Government and as we sit here now, with the legislation in front of us, to send a strong signal. But as I say, I am reassured.
On the issue of disclosure, more can be done now for us to start to think through what those standardised reporting requirements might be. I have tabled an amendment today that will enable us to have a further, more detailed discussion on that point.
Although there is no limit on the time horizons considered by the committee, I hope that over time the culture of the Bank will change through as many efforts as we can make and that in future, if there is a need for legal change, we might revisit this. Changing culture is a difficult thing. As the Minister said, every needle makes a difference, and I hope this needle will hit the mark and cause this debate to continue because this needs to be thought through now because it is incumbent upon us to act. I beg leave to withdraw the amendment.
Amendment 8 withdrawn.
Clauses 7 and 8 agreed.
Clause 9: Audit
9: Clause 9, page 7, line 12, leave out “reasonable”
My Lords, I shall speak also to the other amendments in this group. I will be brief. If ever I were cast before the Lord Mayor’s Show, it is in moving this rather marginal amendment when a huge, significant debate on the relationship of the Audit Commission to this legislation will take place as soon as we finish debating these rather minor amendments. I shall keep my remarks necessarily brief on this because I want to hear the more weighty contributions that are likely to be made on more fundamental aspects of the relationship of the Audit Commission to this Bill.
I think I can anticipate the Minister’s response to these amendments, particularly when he is at his most constructive, as he has been today. He will say that “reasonably” is used to limit excess, that it is a common legislative tool and that I have been at Westminster long enough to recognise that. I do, but I make no apology for the fact that I have introduced these amendments centred on “reasonably” merely to get some locus with regard to the important consideration of the National Audit Office. The Bill will allow the National Audit Office to initiate value-for-money studies across the entire Bank, other than for the financial audit of the prudential regulation functions of the Bank. It ought to be compatible with the—I hesitate on this word—desubsidiarisation of the PRA. The National Audit Office will be able to conduct any value-for-money study and is not to be concerned with the merits of the Bank’s general policy. It will consult the Bank of England regarding any proposed study.
Our amendments deal only with the practical arrangements between the National Audit Office and the Bank. They do not try to deal with conflicts that may present themselves between the Court of Directors and the National Audit Office or the proposed means by which various resolutions could be achieved. Nor am I seeking in any way, shape or form to pre-empt the much more substantial debate which is to take place in a few moments. However, we had a harbinger of that debate in the contributions by the noble Lord, Lord Bichard, at Second Reading, and the chair of the National Audit Office, Sir Amyas Morse, has also spoken publicly about his concerns. The issue is made more sensitive because of the Bill’s general approach to oversight and scrutiny, which we have covered in a series of discussions today. The National Audit Office’s concern with regard to its work mirrors many of the worries that we have already expressed about the Bill in its current form.
I hope it will be recognised that I am not going to press these amendments today. I am not even going to ask the Minister to give much more than a cursory reply to them. They were tabled against the background that at Second Reading we had an expression of real concern about the role of the National Audit Office as conceived in the Bill, and I cannot wait for that debate to take place. I promise the Committee I will play, if any, a small, supportive role. I beg to move.
My Lords, the noble Lord, Lord Davies of Oldham, is being rather modest about these amendments. I think they are rather good. However, I do not understand why he has proposed amendments to Clauses 9 and 10 but not to new Section 7G introduced by Clause 11, which relates to the main value-for-money study power. Not being limited in the way that these amendments imply would be at least as important to the new powers introduced by Clause 11.
I hope the Minister’s reply is not cursory because this is quite an important point. We do not very often legislate on public audit matters. I can remember doing the Public Audit (Wales) Bill, and there was no restriction on the Comptroller and Auditor-General for Wales reasonably requiring certain information. Reasonable time was in the Bill, but not a requirement to demonstrate that he reasonably required the information. It seems to me that the more you try to constrain an auditor, the more you allow an organisation which is being audited to run rings around that auditor. Having been in the auditing profession, I feel rather strongly that we should not try to restrict auditors but should make it as easy as possible for them to get whatever information they want.
My Lords, the noble Lord, Lord Davies of Oldham, is always modest, but on this occasion he is excessively so. I agree with my noble friend because the implication of putting the words “reasonable” and “reasonably” in these clauses is that somehow the National Audit Office would act unreasonably, and I do not believe that that is the case. Perhaps the Minister will tell us where else in the legislation governing the National Audit Office such clauses are applied. These are quite unnecessary words. It may well be that, given the more formal auditing functions of the National Audit Office, as against the value-for-money provisions, there might be some occasion when it is necessary to get hold of documents at an unreasonable time. I hope the Minister will respond to this and agree to delete the words which appear in the amendments.
My Lords, I support the noble Lord, Lord Higgins, and the noble Baroness, Lady Noakes. I was a member of the Parliamentary Commission on Banking Standards which looked at the word “reasonable” and concluded that it is a lawyer’s word. If it is a lawyer’s word, it costs a lot of money, and if it costs a lot of money, it can obscure the truth. Let us get rid of it and invest the authority in the Comptroller and Auditor-General which will save everyone time and money.
My Lords, as my noble friend Lady Noakes said, the noble Lord, Lord Davies, is once again being incredibly modest and reasonable about his reasonableness amendment. I think the amendments merit a full response, so I hope he will forgive me. I will try my best, and I will pick up on the point made by the noble Lord, Lord McFall. I heed what he said about this in the past.
I shall set out the Government’s position. Clause 9 gives the Comptroller and Auditor-General a new role in the financial audit process of the Bank. The Comptroller and Auditor-General will be consulted on the appointment of the financial auditor and on the work programme that that auditor sets out to deliver. The Comptroller and Auditor-General will have the right to attend the relevant parts of the meetings of the Bank’s audit and risk committee. This is intended to assist the NAO in conducting value-for-money examinations of the Bank under Clause 11.
Clause 10 provides for increased public scrutiny in circumstances where a Treasury indemnity has been granted to the Bank, or to a company of the Bank. Fortunately, times when a Treasury indemnity is deemed necessary are rare, but it is right that where there is a direct risk to public funds the Treasury can require the Bank to prepare a financial report on any activities that have been indemnified, so that the extent of the risk to public funds can be assessed, and that this report is subject to review by the Comptroller and Auditor-General. I agree that in both of these contexts the question of access to information is critical. It is central to the ability of the Comptroller and Auditor-General, assisted by the National Audit Office, to carry out effectively the roles defined for him in the Bill. So I am pleased that the noble Lord, Lord Davies, has tabled the amendments and that the issue has been raised, but I am unable to accept them.
To address my noble friend Lord Higgins’s point, the language used in the Bill regarding the Comptroller and Auditor-General’s access to information mirrors the relevant wording from the National Audit Act 1983, which provides in Section 8 that,
“the Comptroller and Auditor General shall have a right of access at all reasonable times to all such documents as he may reasonably require, for carrying out any examination under section 6 or 7”,
in the National Audit Act,
“and shall be entitled to require from any person holding or accountable for any such document such information and explanation as are reasonably necessary for that purpose”.
As far as I am aware, the inclusion of requirements of “reasonableness” in this section has not created difficulties for the Comptroller and Auditor-General in the context of value-for-money examinations carried out in relation to other public bodies, and I see no reason why it should cause a problem now.
Some may argue that the Bank would be able to use this reasonableness requirement to delay examinations, but if the Bank did not comply with its obligations under this clause then the Comptroller and Auditor-General would be able to seek an injunction from the courts to enforce his rights. As such, it seems to me that the amendment is unnecessary, and I ask the noble Lord to withdraw it.
My Lords, I am not going to withdraw it without first expressing my enormous appreciation for the support from the government Benches for what I had regarded as modest amendments. The noble Baroness, Lady Noakes, often expressed herself with great vigour against any proposals that I put forward when we were in government, but today I have found some favour with her when I did not quite anticipate it. Obviously the noble Lord, Lord Higgins, is always reasonableness itself, so I knew that he would speak very well on this matter.
The issue was not so much that I did not think it was worth airing the question of reasonableness. I accept very much the Minister’s coherent and proper response to this very short debate, and I think that we very much appreciated the tone that he adopted. The reason why I was concerned about these amendments at this stage was against the background that they are immediately before what we all recognise is a pretty substantial issue regarding the Bill, and I know that others are going to present that argument with considerable force. It seemed only reasonable if on this occasion I couched my expressions in modest terms. I promise not to make a habit of that, and beg leave to withdraw the amendment.
Amendment 9 withdrawn.
Amendment 10 not moved.
Clause 9 agreed.
Clause 10: Activities indemnified by Treasury
Amendments 11 to 13 not moved.
Clause 10 agreed.
Clause 11: Examinations and reviews
14: Clause 11, page 9, line 27, leave out from “section” to end of line 28 and insert “shall not be construed as entitling the Comptroller to question the merits of the policy objectives of the Bank, including in relation to monetary policy.”
My Lords, if I might be allowed a moment of personal explanation, I was advised earlier today by the clerks that the Addison rules of 1951, of which I have to admit I was not previously closely informed, might be argued to preclude someone who holds the position that I do of chair of the board of the National Audit Office from speaking on these issues or indeed from moving the amendment. I do not wish to put myself in the position of appearing in any way to act inappropriately or against the rules of the House so I readily, albeit reluctantly, agreed not to speak further in this debate. I hope, however, that the House will allow others who have supported the amendments that I tabled in good faith to move them.
I take that as a kind of personal statement.
My Lords, I shall move Amendment 14, which is in the group Amendments 14 to 18, concerning Clause 11 and the proposed audit arrangements for the Bank of England. As it stands, the Bill provides for the NAO to carry out value-for-money studies at the Bank, but it also imposes a number of constraints on this. First, before carrying out a study, the Comptroller and Auditor-General would have to consult the Court of Directors at the Bank. Secondly, if the court is of the opinion that an examination is concerned with the merits of the Bank’s general policy in pursuing the Bank’s objectives, then it can ultimately prevent the Comptroller from proceeding with an examination.
These provisions contrast sharply with the terms under which the NAO undertakes value-for-money studies in every other public body under the National Audit Act. That legislation gives the Comptroller and Auditor-General,
“complete discretion in the discharge of his functions … in determining whether to carry out any examination … and as to the manner in which any such examination is carried out”.
The National Audit Act prohibits the NAO from questioning the merits of policy objectives. As I will mention later, the NAO has never sought to cross that line. However, the Bill extends this prohibition to cover the Bank’s general policy in pursuing the Bank’s objectives, as well as giving the Bank an effective veto over which studies are undertaken.
That presents the NAO with several major problems. First, as the Comptroller and Auditor-General has said, it therefore gives an impression of greater accountability on the part of the Bank that is at odds with reality. Secondly, it undermines the independence of the NAO to decide what should be examined, and that independence is key to holding public bodies to account. Thirdly, if these provisions are agreed for the Bank, it will encourage others to challenge the independence of the office; perhaps every new body and many existing ones wish for the same ability to veto or limit the NAO’s work—to the great disadvantage of Parliament and the taxpayer, for both of which the NAO has long performed an invaluable function. This is not an issue, therefore, that can be limited to the particular circumstances of the Bank of England.
Why would anyone wish to impose these kinds of constraints on the NAO? Perhaps there is a concern that the Bank should not have its policy decisions examined. That would be entirely understandable, but the fact is that the NAO has had decades of experience of operating without questioning the merits of policy objectives. It has done so without any difficulty in the Ministry of Defence, including the security services, or indeed the Foreign Office, where it has recently been looking at how crises in Tunisia, Libya and Yemen have been handled. It is difficult to argue that if the NAO is capable of dealing satisfactorily with this level of sensitivity, it could not be trusted to steer clear of questioning policy objectives at the Bank.
I know it has been argued that there are no precedents for the equivalent of the NAO being involved with a national bank, but the Government Accountability Office in the US audits the Federal Reserve Board and the Federal Reserve Banks, with exceptions to the scope of their audits being made explicit, and including transactions for and with a foreign central bank; deliberations, decisions or actions on monetary policy matters; and transactions made under the direction of the Federal Markets Committee. The Comptroller and Auditor-General has made clear from the outset that he would be content it agree similar such exceptions in this country. These amendments seek in the case of Amendments 14 and 16 to bring the definition of “policy” into line with that used in the National Audit Act, Amendment 15 would delete the need for the Comptroller to consult the court before undertaking an examination, and Amendment 17 would remove the veto of the Bank’s Court of Directors over examinations.
I am having a slight problem with Amendment 14. It seems, effectively, simply to put back again the lines which the noble Lord seeks to leave out. That is to say, in each case it seems to say that the Comptroller will not question the merits of the policy objectives of the Bank.
I did not quite pick up on the noble Lord’s point.
I will try again. Amendment 14 says,
“leave out from ‘section’ to end of line 28”,
which is concerned with the question of whether the Comptroller can question the merits of the policy objectives of the Bank, and which effectively says, “No; the NAO can’t”. However, Amendment 14, which I may have totally misunderstood, seems effectively to put it back in the same way, except with the addition of the words,
“including in relation to monetary policy”.
In fact, the Comptroller and Auditor-General made it clear to me that he does not want to question the merits of the policy of the Bank, so if there is a misunderstanding there, we should sort it out, particularly when it comes to Report. However, that is certainly not the case, and he would not want to do that.
Amendment 18 deletes a provision which would apply Section 353A of the Financial Services and Markets Act 2000, which would restrict the ability of the Comptroller and Auditor-General fully and openly. As the Government have said on many other occasions, transparency is an essential ingredient of accountability. These amendments seek to ensure that the Bank is subject to a level of transparency necessary to ensure its proper management of its resources. Parliament and the taxpayers have the right to expect nothing less.
An article in the Financial Times at the weekend said that, globally today, central banks exercise unparalleled power and independence. Willem Buiter used to come before the Select Committee quite regularly and was a former member of the policy committee. He is now the chief economist at Citi and stated that presently, central banks,
“are punching well above their weight … This could lead to a backlash and to central banks losing their operational independence, even where this independence makes sense—in the design and conduct of monetary policy”.
When the former Governor King came before the Treasury Select Committee, which I chaired, he was very clear both in formal and informal settings that the integrity and credibility of the bank is essential if society is to have confidence in its monetary policy decisions. That being the case, the Bank should not be marking its own exam paper. It should be honest in its intentions and transparent in its actions, and it cannot tie the hands of the Comptroller and Auditor-General with the court holding a power of veto. In the short and even the long term, that does not serve the best intentions of the Bank or society. In that spirit, I beg to move.
My Lords, I will make a brief intervention in this debate as a former Treasury Minister and ex officio member of the PAC. As we have heard, Clause 11 sets up a new interface between two public institutions, both of which are independent: on the one hand the Bank of England, independent since 1997, and on the other the Comptroller and Auditor-General, who has been independent for a lot longer. In establishing this new interface, clearly one has to get the balance right.
From the exchange before the Treasury Select Committee last month, it is quite clear that the original drafting caused difficulties for the Bank of England and was amended. If one looks at Mr Roxburgh’s answer to a question posed by Helen Goodman, it is clear that there was an agreement that there had been a change in the drafting because of the reservations of the Bank of England. However, it is quite clear that the clause as now drafted causes difficulties for the other partner, namely the Comptroller and Auditor-General. The briefing note says that it “greatly limits” the Comptroller and Auditor-General’s freedom of action and that it does not provide him with,
“the independence that is essential to accountability”.
If one looks back at the C&AG, there is no history of him looking at policy issues in his investigations. There is of course concern that if the Bank of England is given an exemption of this nature, other institutions subject to audit by the C&AG might seek a similar exemption—the BBC is a possible example. At Second Reading my noble friend who wound up the debate said that the concerns that were ventilated then were,
“well argued and should be taken very seriously”.—[Official Report, 26/10/15; col. 1082.]
Obviously, it is important to avoid a public spat between two important independent institutions. The sensible way forward is for the Minister to promote bilateral discussions between the NAO and the Bank of England to see if they can come up with a memorandum of understanding, which, if necessary, might then be incorporated into the Bill if an amendment is necessary. However, there should be some discussions before Report so that there can be an agreement on the appropriate terms of trade between these two public bodies.
My Lords, I will briefly join in the debate. We have two very highly regarded independent organisations—the Bank of England and the NAO. I say to the Government that it is unfortunate that legislation has come forward without resolving the relationship between the two of them. This House should not be in this position today, and neither should either of those two institutions. I very much hope that the Government will take the advice proffered and bring these various parties together to get a resolution here. Both are key institutions that need to have their independence appropriately protected.
In answer to the question asked by the noble Lord, Lord Higgins, the two lines about which he was concerned a moment ago, which are taken out and replaced by what he read as almost two identical lines, almost get to the crux of this matter. The amendment strengthens that assurance that the NAO and the Comptroller and Auditor-General do not in any way seek to question the merits of policy objectives. It is trying to make that absolutely clear by putting in a stronger statement to that extent. The problem the NAO has, as the noble Lord, Lord McFall, said, is that due to the way in which the language is now drafted, the Bank effectively now has a veto over which studies are undertaken. Frankly, that is, I think, unacceptable to every party.
We in Parliament depend very much on the NAO and the reports it provides to us. It is very important for us to be able to receive that information, knowing that it is impartial and independent, for us to be able to perform the role we play. All the discussions today have talked of the importance of oversight. While we very much respect the Bank of England, we are all incredibly conscious that it has made very serious mistakes in the past which have cost us dear, and that we all need to play a role in interacting and making sure that we understand and are appropriately taking on our responsibilities toward that institution. Frankly, it is very hard to see how we in this House or in the other place can do that without effective reporting from the NAO.
I hope that the Government will take this matter away for reconsideration because these are significant concerns. I take great heart in hearing from the noble Lord, Lord McFall, that the Federal Reserve board in the United States is one of the bodies on this globe that most asserts its independence and integrity. The Federal Reserve accepts a similar kind of oversight from the US Government Accountability Office, and it seems to me that we have a template there. If it works for the Federal Reserve, surely it can work for the Bank of England.
I hope that these amendments will be taken exceedingly seriously. While the noble Lord, Lord Bichard, is not in a position to speak himself, there are many in this House, including the noble Lord, Lord Higgins, and the noble Baroness, Lady Noakes, who will be able to appreciate the importance of the points that he would have made had he had the opportunity.
My Lords, I support the amendments. I was deeply shocked to see that the Government proposed to give the Bank of England a veto over whether the Comptroller and Auditor-General could undertake a particular value-for-money study. I have believed for a long time that it has been an anomaly that the Bank of England has not been within the remit of the Comptroller and Auditor-General. I do not believe that any public body, however great and however independent, should be able to stand on that greatness and independence and say, “I do not want the National Audit Office or the Comptroller and Auditor-General to examine what I have been doing”. Public audit can be effective only when it is unfettered, and the concept of fettering the Comptroller and Auditor-General is, frankly, unacceptable.
My Lords, first, I express regret that I was not able to speak at Second Reading. I was preoccupied with the European Union Referendum Bill and other matters. However, I am certainly deeply concerned, as are other noble Lords, about the situation that now seems to have developed in the relationship between the Bank of England and the National Audit Office. I am sure that my noble friend was right in saying a moment or two ago that this ought to be resolved on Report. If necessary, that is what we will need to do.
I have a long history of involvement in this matter. I was much involved—this shows how long ago it was—when it was first suggested that the National Audit Office should carry out value-for-money investigations. However, it is very important to ensure that the NAO remains completely independent. I share the view expressed a moment ago that it would be wholly wrong for the NAO to have to get the permission of the people being investigated to carry out a review. I am extremely grateful to the noble Baroness, Lady Kramer, for explaining what I did not previously understand about the relationship between the amendment and the words being left out. I now understand the point that she made, which was extremely subtle, if I may say so.
Having said that, I am a little puzzled. I chaired the Treasury Select Committee for a decade or so and was succeeded by the noble Lord, Lord McFall. I was also a long-standing member of the Public Accounts Commission, which I chaired for some time. It is extremely important that we preserve the position of the NAO, and, as I said, I agree with those who say that it ought not to have to seek permission to carry out reviews.
I am just a little doubtful about what is meant by “policy”. This may turn out to be a rather fine line. For example, at the moment it seems to be the policy of the Bank, and indeed the governor, to give forward guidance on interest rates. That certainly needs inquiry as far as value for money is concerned, because the forecasts have been extraordinarily wrong on a number of occasions and a lot of people—for example, those renewing their mortgages—may have suffered considerably. In passing, I hope that the governor will reconsider whether that is an appropriate policy and perhaps no longer give forward guidance on interest rates.
The other points in relation to this matter have been made at Second Reading and in today’s debate. This is something that we have to resolve. We have to make sure that the relationship between the two bodies is maintained, otherwise the Comptroller and Auditor-General, very understandably, will have to think personally—the office of Comptroller and Auditor-General has always been a very personal one—about whether he can really operate in a situation where his independence is being questioned.
My Lords, I do not enjoy the role of opposition a great deal but, just for once, in the light of this debate I am glad that I am here this evening and not where the Minister is sitting. He has been presented with a very difficult situation. I assure him that it is not often that in this House we have not just the Official Opposition presenting a strong case on an issue but two very experienced Members on his own Benches—on this occasion, the noble Baroness, Lady Noakes, and the noble Lord, Lord Higgins—pressing the need for change in a Bill. The equally experienced—although more so in the other place than here—noble Lord, Lord Young, indicated that there has to be some way out and that it is time the Government pursued it. It certainly is.
What a mess the Government are in and what great difficulty, I am sure, the Minister will have in defending how they arrived at this ridiculous situation. Time is of the essence. Even if the Government stagger through this House without too much challenge—I am still not convinced about how sharp that challenge should be—the other place will consider this matter shortly and there will certainly be a great deal of difficulty down there unless change is effected. I accept what the noble Baroness, Lady Noakes, suggested: it is best to get it right in this House before Report, so the Minister does not have too much time.
My Lords, it is always nice to start off with some sympathy for my position from the noble Lord, Lord Davies. I thank all noble Lords who have spoken and made some very thoughtful contributions. I start by letting your Lordships know that detailed discussions are ongoing between the Bank, the NAO and the Treasury to find a way forward on this issue that all sides find acceptable. These discussions have not yet concluded but I hope to be able to update the Committee before Report.
I should like to set out the Government’s position and will address the amendments and the stand part debate relating to Clause 11 in one fell swoop. However, before I continue, I thank the noble Lord, Lord Bichard. He met me last week and talked me through the amendments that he had hoped to table for today. I thank him for engaging so constructively and I very much hope that that dialogue with me can continue, even if he is unable to contribute to this debate in Committee.
I begin by emphasising that by extending, for the first time, the NAO’s ability to conduct value-for-money reviews of the Bank, the Bill will deliver a significant increase in the transparency and accountability of the Bank to the public and Parliament. The Government are strongly of the view that enhancing the accountability of the Bank of England is in the public interest but it is also in the Bank’s interest—strengthening public trust in the Bank will only add to its credibility.
The issue of how the Bank uses public resources is long running, as my noble friend Lord Higgins said. There has been debate on it ever since the Bank was nationalised in 1946. While researching this debate, I came across correspondence on this issue from my grandfather, who happened to be a Permanent Secretary at the Treasury in 1946 and during the 1950s. So something in the Bridges genes means that we have to deal with these things, although I do not know quite know what that is.
Since the 1950s, the relationship between the Bank and the Government has clearly evolved. Now, we regard the independence of the central bank as critical to our economic security and prosperity. As the noble Lord, Lord McFall, said, independence has been an issue of debate not just here but elsewhere. As Ben Bernanke, a previous chair of the Board of Governors of the Federal Reserve System, said:
“A broad consensus has emerged among policymakers, academics, and other informed observers around the world that the goals of monetary policy should be established by the political authorities, but that the conduct of monetary policy in pursuit of those goals should be free from political control”.
As a number of your Lordships have said, today the Bank of England occupies unique territory in the foundation of the UK economy, and policy decisions by the Bank are of vital importance to everyone. To deliver its mandate effectively, it is essential that the Bank’s independent status is preserved.
The NAO also plays a vital role as Parliament’s auditor. Its own independence is crucial to ensuring that there is effective review of the effectiveness and efficiency of the public sector and for maximising public accountability. Parliament, and in particular the Public Accounts Committee, relies on the work of the NAO to scrutinise properly the value for money of taxpayer-funded activities. It is therefore important that the NAO be allowed to do its work in as unfettered a way as possible.
The Minister referred to the PAC. On the whole, we seem to be rather short of any input from the PAC, although it is, crucially, using the results of the NAO studies. Would the Minister at least consult them as to whether they have any views on the debate that we are considering now? The PAC has a very definite interest.
My noble friend makes a good point and I will be happy to mull it over.
Turing to the Bill, a number of your Lordships expressed concern that the provisions in Clause 11 fetter the independence of the Comptroller and Auditor-General. As your Lordships know, this view is shared by the NAO. Others, including the Bank, have been concerned to ensure that the proposals do not undermine the role of court and infringe upon the vital independence of our central bank. The position put forward in this Bill is therefore one of compromise, as my noble friend Lord Young of Cookham eloquently pointed out. It is a unique arrangement that seeks to strike a balance and protect the independence of two vital public bodies that, unsurprisingly, approach this issue from very different vantage points.
There are two main areas where the arrangements set out in the Bill are different from those that are typically put in place between the NAO and its counterparties. In both cases, the purpose of these special arrangements is to protect the operational independence of the Bank’s policy-making.
First, a bespoke carve-out has been designed to ensure that the Bank’s policy functions are out of the scope of the NAO’s value-for-money reviews. This reflects the differences between the policy objectives of the central bank versus those of a government department. I will turn to this issue in more detail when we come to specific amendments.
Secondly, we have designed the process to unlock disagreements between the Bank and the NAO over what constitutes policy. This is particularly important given the complexity of the Bank’s functions, which makes drawing this distinction especially challenging. To be clear, the process is this: if the court is of the opinion that an NAO review is seeking to examine policy, the court must notify the Comptroller and Auditor-General of its concerns. If, following consultation, the court is still of this opinion, the Comptroller must not proceed with the examination of that area. The Bill also requires that any such disagreement be made public to ensure transparency and to facilitate public and parliamentary scrutiny.
The arrangements set out in Clause 11 seek to increase the accountability of the Bank, while protecting its independent status and recognising the complex nature of its activities. I believe that the proposals are effective and transparent, but this is, as we know, a complicated area. This is why discussions between the Bank, the NAO and the Treasury are ongoing.
I will now turn to the tabled amendments. Amendments 14 and 16 seek to replicate the language of the National Audit Act 1983. It is well understood that the NAO is bound not to consider the merits of the policy objectives of any body with which it engages, but the Government believe this language to be difficult to apply in this specific instance. This is because, as a number your Lordships have said, the Bank of England has a unique role in the United Kingdom economy. The intent of the Bill is to convey the same meaning as set out in the National Audit Act 1983 but phrased in a way that is more applicable in the context of the Bank. Indeed, the policy carve-out is very similar to that which currently applies in the case of NAO oversight of the PRA. The Government do not believe, therefore, that this confuses or obfuscates the boundaries of the Comptroller and Auditor-General’s oversight.
Amendment 15 seeks to remove the requirement that the Comptroller and Auditor-General consult with the court of the Bank before the NAO initiates a value-for-money study. I understand that such consultation is standard practice and consistent with the normal manner in which the NAO goes about its work. The reason why it is particularly important here is due to the role that this Bill establishes for the court of the Bank in determining what constitutes policy. New section 7E in Clause 11 provides that the court may inform the Comptroller and Auditor-General if it considers that a proposed value-for-money study is concerned with the merits of the Bank’s general policy in pursuing its objectives. Consistent with this, the Bill provides that the court must be consulted prior to the initiation of any value-for-money study that the NAO wishes to carry out.
Amendment 17 is concerned with what happens when there is disagreement between the Comptroller and Auditor-General and the court. Clause 11 provides that, should the court continue to be of the opinion that an element of the Comptroller and Auditor-General’s review constitutes policy, the Comptroller and Auditor-General will be unable to proceed with the examination in relation to that policy, and will be unable to include the results of the examination which relate to that policy in any report produced. However, in order to provide the appropriate balance and to protect the role of the Comptroller and Auditor-General, where there is an unresolved disagreement, the nature of this disagreement must be published. This again will open up any disagreements to full parliamentary scrutiny.
A number of your Lordships referred to precedent. I do not believe that this sets a precedent for the NAO. The Bank of England is truly unique, in that no other organisation can claim to be the central bank of the UK or to play such a critical role in our economic prosperity and security.
Finally, I turn to new Section 7H. This does not place any restriction on the Comptroller and Auditor-General’s access to information. Therefore, I do not agree with those who argue that it would restrict the ability of the Comptroller and Auditor-General to examine the Bank fully and openly. This section would be relevant only in narrow circumstances in which the disclosure of certain types of information would be of serious detriment; this includes sensitive information on monetary policy and financial stability, for instance. Both these roles of the Bank are obviously highly market sensitive, and it is straightforward to imagine circumstances in which disclosure of information, even in aggregated form, would undermine financial or economic stability. Section 7H is included in this Bill to protect against such eventualities, while ensuring that the Comptroller and Auditor-General has full access to information held by the Bank. These same limitations apply to the regulators and, indeed, to the external auditors of the Bank. For these reasons, I reject the amendments to Clause 11 and beg that they should not be pressed.
The noble Lord, Lord McFall, raised the issue of the Federal Reserve and its audit. I would like to say briefly that it is important to note that, in the US, the debate is, as I mentioned, far from closed. Indeed, legislators, policymakers and commentators in the US have been engaging for a long while in similar discussions to those that we are having today. Just as in this debate, there are those who want a greater sense of accountability for the central bank and there are those who argue that the sufficient protection of central bank independence is important. Of course, there may be valuable insights to gain through inspecting the accountability frameworks of international central banks. That is something that the Government have done in drafting the legislation, and will continue to do as the Bill develops. But to suggest that there is an easy solution that we can transplant into this system from elsewhere is wrong.
To summarise, the provisions in this clause have rightly attracted a great level of debate. This level of debate is only proper because the provisions concern two incredibly important public bodies, and I expect that we will continue this debate as the Bill progresses. These clauses are an important step in increasing the accountability of the Bank. I ask that this clause stand part of the Bill.
My Lords, I thank the Minister for his reply. He made a point about the Federal Reserve, in respect of which there is a huge amount of engagement in the United States at the moment. Congressional members are knocking it about like mad. The status of the Federal Reserve is more in question than that of the Bank of England—that is accepted here. The point of these amendments is to ensure that the status of the Bank is maintained and that its independence is not questioned. The analogy with the Federal Reserve is a bit off the mark on that issue.
As my noble friend Lord Davies said, the Government are in a pickle. There has to be a lot of consideration before Report. The noble Lord, Lord Young, made a point about facilitating engagement between the Comptroller and Auditor-General and the Bank of England. According to my information, they have met but there is still a gap. To give an example from my own experience, when I was chairman of the Treasury Committee I was approached by the Treasury to ensure that the Bank of England was audited. I said to them, “Do your own business: I am not doing it for you. Engage in it”. I notice that three distinguished former Permanent Secretaries are sat on the Benches. I do not know what you call a trio of Permanent Secretaries, but the noble Lords should not worry: it would have to be something complimentary. My question to the Minister is: are the Treasury the fly in the ointment at this stage?
The noble Baroness, Lady Noakes, said that the Bank of England should be audited and that it can be effective only if it is. We are here to ensure that that effectiveness is maintained. The noble Lord, Lord Higgins, talked about value for money and the NAO being independent. This arrangement could end up in a public squabble between the Bank and the NAO, and that is not going to serve anyone’s interest, particularly when it comes to parliamentary scrutiny. That does not serve the Bill. A lot of thinking needs to be done on this issue. The noble Lord also made a quite radical point about the value for money of forward guidance. The Comptroller and Auditor-General does not want to go near that. He has been very reasonable—I have used that word before—in his ambitions and it is important to see where he comes from on this issue.
The Minister talked about increasing transparency, but where will it increase?
The Minister has suggested that there was a compromise. It would not appear to be a compromise as far as the release of information is concerned. The Comptroller and Auditor-General appears to take the view that the Government’s position on that issue is unacceptable. Can we be sure that that is not taken as settled? We also need to consider the question of releasing information.
There cannot be a compromise when the court has the veto at the end of the day and this has been public. We do not know where this is going to lead. I do not think there is a compromise at this stage.
Thinking off the top of my head—and I am in good company, because the Government are doing the same—given the need to bring people even further together, why can the Comptroller and Auditor-General not engage with the Governor of the Bank of England? Perhaps there could also be some third parties: wise heads such as the noble Lord, Lord Higgins, who has tremendous experience, and the former Permanent Secretaries. Why can they not sit down and say which areas the Comptroller and Auditor-General should have an opportunity to go over? Can we get that wise counsel before Report, so that we do not end up with a squabble? At the moment, there is a big gap between the governor and the Comptroller and Auditor-General that should be narrowed before Report. There is an opportunity to introduce a bit of common sense so that, on Report, we can all agree that the independence of the NAO and the Bank of England are important. Both institutions have a job to do in the best interests of the country, and the authority and integrity of both would thereby be increased. I seek the co-operation of the Minister in achieving a compromise before Report. I beg leave to withdraw the amendment.
Amendment 14 withdrawn.
Amendments 15 to 18 not moved.
Clause 11 agreed.