Financial Services Bill

I can speak to the effectiveness of the tripartite group during the middle and later stages of the financial crisis. I became a Minister in the Treasury in October 2008 and it seemed to me that the tripartite was in almost constant session for the next four months. I am not aware of the frequency of meetings before, but there is also provision for meetings of deputies, at which routine matters are conducted. I know that the Chancellor of the day and his predecessor had very regular meetings with the chairman of the Financial Services Authority, Sir Howard Davies, and with Mr Mervyn King, the Governor of the Bank of England. As I said, Amendment 20 ploughs a similar furrow to Amendment 1. It proposes an approach that the Government do not support. The model of the council is that of an effective forum for monitoring risk and co-ordinating a shared response. It is a model that has operated effectively during the crisis but the Government recognise that it can be improved upon. That is why the proposals are brought before the Committee today. I cannot support the noble Baroness in her amendment. Amendment 21 will provide further elements for the model for the council that the noble Baroness has put before the Committee in her amendments. The clause would give teeth to the decisions of the council and provide that the authorities should comply with these decisions. This amendment, coupled with Amendments 1 and 20, would effectively constrain the discretion of the Bank and the FSA as to how they perform their functions, as conferred on them by Parliament. That is why I continue to ask whether the Conservative Party is minded—even if not in the area of monetary policy—to seek to take powers away from the FSA or the Bank of England. Perhaps the noble Baroness will answer that point in her closing speech. Such an approach would be likely to be detrimental to the performance of those functions, because the Bank and the FSA would always be at risk of being second-guessed by the council and, ultimately, the Chancellor. I do not consider either of those outcomes to be desirable or consistent with the model that I seek to articulate. As I set out previously, in discussing Amendments 1 and 20, this is not the model that the Government are proposing. Our intention is that the council monitors and co-ordinates in a spirit of partnership, and that the members of the council take action as agreed between the parties. That action would not be driven by a statutory requirement but would be done on the basis of a co-ordinated and agreed approach. I cannot support the noble Baroness in her proposed new clause. I turn to Amendment 5. The draft of the statement provided for by Clause 1(5)—the council’s terms of reference—is available on the Treasury website. It provides an overview of the authorities’ financial stability responsibilities. This is intended to contextualise the detail on the council’s objectives and procedures. The statement also sets out that the authorities intend to revise the Memorandum of Understanding between the authorities. The MoU between the Bank of England, FSA and Treasury was first agreed between the authorities in 1997, and updated in 2006. It sets out the roles of each authority and how they work together to pursue financial stability. The Government made clear in another place that, as suggested in the draft terms of reference, the MoU would be updated with consolidated details of each authority’s role for financial stability. The Government recognise that this approach has not swayed the views of the House and that there is still a desire for the detail on roles and responsibilities to be included in the terms of reference. On this basis the Government are willing to accept opposition Amendment 5 and include the necessary detail in the statement produced under Clause 1(5). The noble Lord, Lord Hodgson of Astley Abbotts, referred to the fact that "the storm is still breaking". That is not how I see things. We must not be complacent but, in terms of the storm as I experienced it during the last couple of months of 2008 and the first two months of 2009, the weather conditions are much more tolerable now than they were. We have undoubtedly moved back to a position where the financial system and systemically important institutions are in a much stronger position in terms of funding, liquidity and capital than was the case. There is still scope to secure further improvement. I have answered the question of the noble Lord, Lord Stewartby, about where this council will be different from the previous arrangement. The difference will be in the transparency, the public minuting, the attribution of comments, the formal and open review of risk and the publication of an annual report. The noble Lord, Lord Higgins, asked about macro-prudential regulation. This is a very new concept to address an old problem. It is sometimes summarised in the press as taking away the punchbowl before the party has gone out of control or leaning against the wind. It will need a globally co-ordinated approach. It is high on the agenda for the G20 and the IMF. It raises some questions about whether monetary policy that targets consumer or retail inflation is necessarily appropriate as an instrument to address asset inflation, which was clearly at the heart of the crisis. Mr Greenspan has been very clear that this is something that was missed by the Federal Reserve. I am sure that other central bankers share a concern that they have yet to find the answer to that. I do not, however, agree with the noble Viscount, Lord Trenchard, that you cannot support macro-regulation and supervision without also being responsible for the micro. They are very different. Micro is about the regulation of individual institutions and judgments about their capital adequacy, the competence of the management and the sustainability and achievability of their business plans. Systemic risk is where the micros of individual institutions come together. Macro is about the broader economic context. You cannot establish macro policy without micro awareness. Nor can you have good micro-regulation focus, particularly on interconnectivity and complexity, if you do not also have macro awareness. The Council for Financial Stability will provide that overarching co-ordination. Under our structure, it is not necessary for micro and macro to be performed necessarily by the same bodies. My noble friend Lord Stoddart of Swindon asked whether Parliament will have a role in scrutinising the results of the wash-up. As the Committee knows, I am still relatively inexperienced—I think I am now right at the borderline of being able to use that as an excuse for not being quick enough on my feet in saying the right things. There are a number of things in Parliament that I have yet to experience, although I am looking forward with great excitement to the experience and joy of being re-elected to government in the next couple of months. But that is some time off.