Financial Services Bill

It is a pleasure to follow the right hon. Member for Newcastle upon Tyne East (Mr Brown), most of whose comments I endorse. The regulators failed to see the crisis coming and were asleep at the wheel, so it is entirely right that the Bill abolishes the Financial Services Authority. In so doing, however, it gives new extensive powers to the Bank of England, and that poses a problem: will the newly created bodies—the Financial Policy Committee and the Prudential Regulation Authority—be as accountable as possible? In that respect, the right hon. Gentleman was right to touch on the democratic deficit. I had the privilege of sitting under the chairmanship of my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) on the Joint Committee, and I also sit on the Treasury Committee. Those two bodies have one thing in common: in respect of the Bill, both are concerned more than anything with the accountability of the Bank in its new form and with its new powers. I want to raise three points that the Government have not yet taken on board—they have taken on board some good points raised by the two Committees, but some are outstanding. First, to whom exactly will the PRA and the FPC be accountable? Let us remember how important and powerful these two bodies will be. The FPC will have an overarching responsibility to maintain financial stability, and it will be chaired by the Governor of the Bank of England. The PRA, also chaired by the Governor, will have macro-prudential responsibility for supervising significant financial institutions, particularly the banks. They will also have all sorts of macro-prudential tools, the details of which are yet to be designed—but they will include things such as loan-to-value ratios for mortgage lending, leverage ratios and so on. Those are hugely important tools that will affect the livelihoods and household finances of all our constituents. We are vesting that great power in two bodies, both of which will be sub-committees of the court of the Bank of England. The Treasury Committee was concerned about that and suggested that the court was not fit for purpose when it came to scrutinising the work of the FPC and the decisions of the FPC and the PRA, and it suggested abolishing the court and replacing it with a supervisory board with a greater spread of technical expertise on monetary and fiscal policy. At the moment, the court—I do not wish to be rude or impolite—is a rag-bag of industrialists, trade unionists and consumer champions, most of whom, frankly, do not have the skill, expertise or background knowledge to judge whether the FPC and the PRA are making sensible decisions. That is why we need a supervisory board to replace the court. As the Chancellor said in his opening speech, there will be a new oversight committee for the FPC and the PRA. However, that does not meet the concerns of the Treasury Committee, for one simple and stark reason. The terms of the oversight committee to which the Chancellor referred make it quite clear that it cannot pass judgment on, or conduct ex-post reviews of, the decisions that the FPC and PRA have made. All that the members of the oversight committee can do under the Bill is see that the FPC and PRA arrived at their decisions in a proper fashion. They cannot make a judgment on their merits. That point was returned to again and again in the evidence taken by the Joint Committee on the Bill and the Treasury Committee, and the Bill does not answer it. The second point that I wish to raise is about the role of the premier Committee in Parliament, the Treasury Committee, which is charged on behalf of Parliament with scrutinising the new bodies, the FPC and the PRA. The Treasury Committee has made it quite clear that there should be a statutory responsibility for either the court, if it remains, or, as we would prefer, a new supervisory board, to respond to any request for information made by the Treasury Committee, on behalf of Parliament. The Bank's record on responding to requests from the Treasury Committee is not bad, but it is not perfect. I adduce as evidence for my proposition the fact that at the end of last year the Governor—quite wrongly in our view—did not think it appropriate to produce the minutes of the court of the Bank of England for the Treasury Committee, to show us what it was saying and doing at the time of the RBS meltdown. My third and final point relates to the composition of that terribly important body, the Financial Policy Committee. The Treasury Committee strongly recommended—and still recommends—that a better balance must be found between the internal and external members of the nine-person Financial Policy Committee. My Committee proposed that the ratio of internal to external members should change from 5:4, which is what the Bill says it should remain, to 4:5—in other words, that a majority on the Financial Policy Committee should be external members. Why? For one simple reason. One of the besetting sins of the regulatory regime and the regulators who worked in it up to and during the crisis was that they were subject to group-think. They were all reinforcing each other's prejudices and established views. It was disastrous for UK regulatory management. My Committee believes that one way of countering that propensity towards group-think is to have externals who are not full-time executive members of the Bank of England, such as we have at the moment. Of the six professionals—so to speak—all of them except the chairman of the FCA are Bank of England officials. Many of us think that that is simply not a sustainable proposition. The Government have made concessions and done some thinking since the first publication of the Bill, as well as listening to the two Committees, which have made some powerful suggestions about the better accountability that the two powerful new bodies in the Bank of England must demonstrate to Parliament and the British people. Progress has been made, but there are three issues, which I have highlighted, that are still on the table. The Government have not taken them up, and the Treasury Committee insists that they need to be recognised in the new regime and new settlement. It is in that spirit that I make those points—speaking, I might add, for my Treasury Committee colleagues who are in the far east on an important fact-finding mission, who would make these points if they were here. Those points need addressing, and I am sure that in the Public Bill Committee they will be, but it is important that the record should show that the Treasury Committee is still not satisfied.