Motion to Approve
That the draft Regulations laid before the House on 2 December be approved.
The Bank of England and Financial Services Act 2016 provides for ending the Prudential Regulation Authority’s status as a subsidiary of the Bank of England. It transfers the functions of the PRA to the Bank, and provides that when the Bank is acting as the Prudential Regulation Authority its functions are to be exercised through a new Prudential Regulation Committee, which will have a majority of external appointees.
Making the Bank the Prudential Regulation Authority, and requiring it to exercise its functions as the PRA through the Prudential Regulation Committee, a statutory committee on the same footing as the MPC and FPC, means elevating the microprudential role to the same level as monetary policy and macroprudential policy. This is an upgrade. It reinforces—to Bank staff but also to the public, to whom the Bank must be transparent and accountable—that the Bank is not simply an organisation dedicated to setting interest rates, but one with equally important macro and microprudential responsibilities. The Bank has told us that closer integration has increased the feeling among PRA staff that they are integral to the Bank’s mission and have broader opportunities for progression across the whole Bank.
Where do these regulations fit in? Lots of existing legislation contains references to the Bank, the PRA or both. Before the provisions in the Act ending the PRA’s status as a subsidiary can come into force, we need to make consequential amendments to existing legislation so that references to the Bank and the PRA continue to make sense once the Bank and the PRA are the same.
In some cases existing legislation applies to the Bank and the PRA differently. Where this is the case, we have maintained the existing difference. For example, the Terrorism Act 2000 excludes from that Act’s definition of the “regulated sector” business conducted by the Bank. It does not exclude business conducted by the PRA. These regulations maintain this state of affairs by specifying that the reference to the Bank in Schedule 3A to the Terrorism Act 2000 does not include the Bank acting as the PRA.
In other cases, existing legislation applies to the Bank and the PRA equally. I shall not go through the detail, but in these cases the regulations simply remove references to the PRA and confirm that references to the Bank include the Bank when it is acting as the PRA.
The regulations represent the final legal tidying-up necessary to implement the provisions of the Bank of England and Financial Services Act 2016, which ended the subsidiary status of the PRA. I beg to move.
I thank the Minister for introducing these regulations—and my speaking notes go on to say, “and I thank those who have spoken in this short debate”, but it has been short indeed. As has been identified, this is an uncontroversial statutory instrument, which makes consequential amendments to legislation where references to the Prudential Regulation Authority are made. We understand that these are tidying-up changes and have no intention of opposing this instrument.
I do not wish to keep your Lordships unduly, but it is important to mention what we regard as the wider implications of the primary legislation. The PRA, established by the Financial Services Act 2012—an exercise in which I participated, as I have with every piece of legislation to do with it ever since; that is why I now look so old—will be de-subsidiarised, giving the Bank of England control over microprudential regulation. The board will be replaced by the Prudential Regulation Committee, which will sit on the same statutory footing as the Monetary Policy Committee and the Financial Policy Committee.
As your Lordships will recall, our main concern was to ensure that those in positions of power and authority within the banking sector were properly accountable. However, we also queried the Government's rationale for bringing the PRA within the scope of the Bank of England. I would like to make two points. First, I start from the same position as I did at the end of 2015, when what is now the Bank of England and Financial Services Act was going through your Lordships’ House. As I said on the second day of Committee on 11 November 2015:
“I think the Bank will move its emphasis from the Monetary Policy Committee towards the FPC”.
The nature of our economy is changing. The powers of the FPC, including controlling the creation of credit, are absolutely fundamental to how efficiently the money system supports the economy, and hence are fundamental to the economy. Under the system which the 2016 Act abolished there were at least checks and balances.
I went on to say that the PRA was,
“a subsidiary—an independent company … governed by company law—and, therefore, there has to be an arm’s-length relationship between it and the FPC. Under the various terms of the Act, the FPC can create various macroeconomic tools, which it then hands down to the PRA. It hands those down not through some side-channels or influence but, because of that independent legal status, in a very formal way to its subsidiary, and I think that is healthy. I do not believe that in effect moving the PRA closer to the Bank—and, by definition, closer to the FPC—is a good thing. The present separation is working, and I think we should continue it”.—[Official Report, 11/11/15; col. 2005.]
Indeed, one of the benefits of subsidiary status—I should know, having headed a subsidiary company of a large organisation—is that one gets to focus on the business, so that there are clear lines of responsibility. As was brilliantly articulated by my noble friend Lord Eatwell, the 2016 Act muddies these lines of responsibility and, as he said,
“renders the governance structure of the Bank of England opaque”.—[Official Report, 9/11/15; col. 1851.]
The lines of demarcation set out in the Act relating to the PRC seem to add yet another layer of bureaucracy and complication to a new system which for all intents and purposes was functioning as it should. What specific work has been done since the Act came into force last year to ensure the same levels of accountability and transparency, and how will those qualities be visible to the general public?
Presuming that the Government do not take of heed of my advice, the PRA will be abolished and the PRC created. When will this transition take place? The Act states that an order will be introduced by the Treasury to give effect to the Act. Should we expect that order by the end of this Session? I thank the Minister in anticipation for her response. I am in no way saying that we are not impressed by the performance of the Bank of England. Nevertheless, the reasons she gave seemed rather fluffy to justify giving up the clarity that the present subsidiary status provides.
I am grateful to the noble Lord for his support for the regulations—and, indeed, for his dedication to the scrutiny of the 2016 Act and its subsequent children. He feels that the Act made the governance structure of the Bank of England opaque. I disagree: I welcome the changes, because I believe they make that governance better and clearer. Before the 2016 Act the MPC was a committee, the PRA was a subsidiary and the FPC was a sub-committee of the court, which is, of course, the Bank’s board.
With the changes in the Act, all three are now policy committees established on the same statutory basis, with clear statutory objectives and processes. The noble Lord asked what had happened since the Act came into force to improve accountability and transparency. Since it came into force last year, the National Audit Office has been able to conduct value-for-money reviews at the Bank for the first time, and the MPC’s new practice of publishing its minutes has swiftly become a legal requirement. Once the new PRC is created it will have to report every year on its resources and the independence of its operations, and produce a separate statement of accounts to ensure that the industry levy is limited to funding PRA functions.
My recollection is that the MPC has to report eight times a year, and the FPC, in practice, produces a report at least quarterly. Will the Prudential Regulation Committee produce regular reports of its activity—more regularly than annually?
The current plan is that it will report every year on its resources and the independence of its operations.
I will respond to the noble Lord’s question on timing. The provisions giving effect to the transfer will come into effect on 1 March this year—very soon—to ensure that the transition is aligned with the Bank’s financial reporting year.
The Bank of England has come a long way since it was established in 1694 to finance the war of the Grand Alliance against France. At that time, it only had 19 officials, including two doorkeepers. Now the Bank of England, including the PRA, has about 3,600 officials and has picked up a few additional responsibilities in the intervening 323 years. These regulations play their own small part in that process. I thank the House again for today’s exchange and commend the regulations to the House.