Financial Services Bill

My Lords, it a pleasure to find oneself among friends again as we start this Committee. The Minister will recall our Second Reading, only two weeks ago. We had a constructive and good-tempered debate then, from which he will have learned that we have considerable concerns about this Bill. The fact that more than 330 amendments have been tabled so far shows how deep those concerns are. I move Amendment 1 and speak to Amendments 5, 20, 21 and 26, which are in this group. These amendments return to a question that has been asked about the tripartite arrangements, on and off, since 2007: who is in charge? The Treasury Select Committee in another place put that question formally to the Governor of the Bank of England when taking evidence for its report, The Run on the Rock, published in 2008. The governor famously replied: ""What do you mean by ‘in charge’?"." In his later evidence, the Chancellor got close to saying that he was in charge when he said that, ""the Treasury is the backstop, if you like, in all these things—to be intimately involved"." The Treasury Select Committee concluded, in paragraph 284 of its report, that, ""we are concerned that, to outside observers, the Tripartite authorities did not seem to have a clear leadership structure. We recommend that the creation of such an authoritative structure must be part of the reforms for handling future financial crises"." Here we are again, 18 months or so later, considering a Bill that still does not address with clarity who is in charge. Last summer, the Government announced in their White Paper, Reforming Financial Markets, that they would set up the Council for Financial Stability. The Treasury Select Committee’s verdict is set out in its 14th report of 2008-09 as follows: ""we view the change as one which is largely cosmetic. Merely rebranding the Tripartite Standing Committee will achieve little by itself; what is required is an improvement in cooperation amongst its members, and a simplification and clarification of responsibilities for each of its members"." Legislation cannot achieve better co-operation between the three parties, but we can expect legislation to clarify responsibilities. I regret that the Bill does not do that. Under the arrangements that existed before the Northern Rock crisis, there was a Memorandum of Understanding between the three bits of the tripartite authorities. If this Bill becomes law, there will be formal terms of reference issued by the Treasury, a draft of which is already available, and a Memorandum of Understanding which is not available. The existing Memorandum of Understanding skirts around the issue of who is in charge. It says that a standing committee is a, ""principal forum for agreeing policy"," and for "coordinating or agreeing action". The draft terms of reference for the Council for Financial Stability, according to paragraph 15, are as a "monitoring and coordinating body"; the following paragraphs talk about considering things and discussing things. I do not expect the Memorandum of Understanding which will complement this to fill the gaping hole headed "Who is in charge?". During the evidence sessions in the Public Bill Committee in another place, my honourable friend Mr Mark Hoban asked who was responsible for financial stability. The answer seemed to be that the Bank did a bit, the FSA did a bit and the Treasury does a bit. That is exactly the position that appeared to obtain before the Northern Rock crisis revealed so clearly that the tripartite arrangements did not work. When pressed, the representatives of the Bank of England and the FSA gave some very interesting evidence. The FSA said that its role was secondary and the Bank, when asked whether there was a first among equals, said that that was obviously the Chancellor. Then the FSA muddied the waters a bit more by putting in a written memorandum which said it would give "considerable deference" to the others, and repeated that its role was "secondary". We are concerned about the lack of clarity in this new council, and that is why I have tabled the amendments in this group. Amendment 1 adds a new function for the council to those listed in Clause 1(3). As well as keeping financial stability under review and co-ordinating action, my amendment would add directing, ""the relevant authorities to act in accordance"," with their powers. Amendment 26 is a related definition amendment. It is nonsense to think that the council is worth having at all if all it does is discuss and co-ordinate. Also, the council seems to be predicated on unanimity at all times and on all issues. Suppose that having looked at an issue—increased leverage in the banking system, perhaps, or the emergence of a new way to slice and dice risk—the council wants the FSA to alter the way in which it regulates banks. If everyone agrees, there is no problem. But what if the FSA did not agree, or did not think it was a high priority compared with the other activities, which of course go way beyond prudential regulation and supervision? My amendment allows the council to direct the FSA to act in accordance with its powers. In another place, the Minister criticised this amendment because it did not go far enough in providing what he called, ""the necessary legal architecture for such an institutional framework".—[Official Report, Commons, Financial Services Bill Committee, 5/1/10; col. 236.]" However, he went on to say that this was about whether decisions would be made by majority vote, and how decisions would be enforced. I hope that the Minister today has a more incisive critique. A Government who can draft a Fiscal Responsibility Bill which had no enforcement mechanisms whatsoever for its fiscal targets cannot complain about an amendment which seeks to make plain how the decisions are to be transmitted to the relevant tripartite authorities. An alternative formulation for this concept is found in Amendment 21, which is based on the concept of the council actually making a decision—a notable absence from the current Bill. Amendment 21 is in the form of a new clause to be inserted after Clause 2; this is a sharper-edged version of Amendment 1. I can see no problem with the council telling the FSA or the Bank of England what to do, provided it was within its own statutory powers. However, there is a problem if the FSA and the Bank of England gang up on the Treasury: it would be pretty odd if two quangos could tell the Treasury what to do. It would certainly be undesirable, because those decisions could well involve taxpayers’ money and we do not want unelected bodies having powers like that. Therefore, I have tabled Amendment 20, which says that if there is no agreement on the exercise of the council’s functions the Chancellor should decide. This deals with the question that eluded the Governor of the Bank of England and the chairman of the FSA back in 2007. It fills a gap in this Bill; it says unambiguously who is in charge. Lastly, Amendment 5 in this group amends Clause 1(6). Subsection (5) refers to the Treasury preparing a statement about the exercise by the council of its functions, and subsection (6) says what the statement may contain, which includes, ""the objectives to be met by the Council"," the matters to which it must have regard, and its procedure. However, as in a lot of this Bill there is a great big hole where one would expect some substance. Amendment 5 adds to the list in subsection (6) by adding that it may, ""specify the responsibilities of each relevant authority in protecting or enhancing the stability of the UK financial system"." Since the council itself has no powers other than of reviewing or co-ordinating under the Bill, it has to work through the FSA, the Treasury and the Bank of England, and my amendment simply reflects that. The draft terms of reference to which I referred earlier do include reference to responsibilities—in fact, more than a page is spent on this—and the earlier Memorandum of Understanding did the same thing. Specifying the responsibilities is clearly important to those who drafted these documents, so it seems curious that the Bill remains silent on the matter. Is it conceivable that the terms of reference could ever be drafted under Clause 1(5) without specifying a responsibility? My party does not favour this Council for Financial Stability, as was made plain at Second Reading. We will come to that later. For the present, the Bill represents the Government’s decision to create this new council and our task in Committee is to make sure that, however ill conceived it is, the drafting at least deals with very important issues of substance which have been around for a long time and have been ducked. I beg to move.