My Lords, I refer noble Lords to my interests as declared in the register of interests. It seems to me that these clauses come to the nub of bank regulation in the Bill. The real question that we are looking at is whether it is better to have a stand-alone regulator or one which is integrated into the Bank of England, albeit with Chinese walls, a separate committee structure, independent directors and so on. To answer that question we have to consider why the FSA failed. The FSA was set up very much as a stand-alone organisation with its own rulebook, structures and independence from both the Treasury and the Bank of England, yet it completely failed to identify the problems that were building up in the banking system prior to 2008 and was unable to take action if it did identify those problems. However, there is increasing evidence that it was not even aware that problems were being created.
The noble Lord, Lord Sharkey, suggested that there are no problems with the PRA. That may well be true. Certainly, the PRA has operated well since it was created. I have had personal experience of dealing with people of excellent quality in the PRA and, indeed, of better quality than people in the equivalent
posts in the FSA. However, I warn that the PRA has not been tested in the way that the FSA was. There has not been a major financial crisis since 2008. The PRA has not had to face the same problems. Frankly, we do not know whether the PRA would be able to cope with a crisis of the magnitude of 2008 or whether indeed it would suffer from the same problems that the FSA suffered from.
Noon
Answering the question of why the FSA failed, my answer would be, as I suggested at Second Reading—at greater length than I am proposing to this morning—that the FSA failed because it had a lack of market intelligence, not because it did not know what was happening in the Bank’s structures or in terms of individual regulated people inside banks. What it did not know was what the banks were actually doing or, more importantly, planning to do. It did not know this in London or the UK’s financial services, but it certainly did not know it globally. The problems in 2008 were very largely created by global problems, not UK problems.
Integrating the PRA into the Bank of England will enable—I hope—the market intelligence to be passed informally to the PRA so that it will be able to react to market conditions and the ideas that are being generated in financial services, and to understand what is coming down the pipeline. I believe that that will enable the PRA or the PRC to be much more effective in anticipating future problems.
I have one question for my noble friend the Minister. It is unclear in all the briefing documents whether the Bank of England—indeed, it ought to be the Treasury as well—will operate with this informal connection of the sharing of intelligence and the sharing of understanding of what is going on in the domestic and global financial markets, in order to enable the new PRC to be able to operate in a way which anticipates the future and does not just react to the past.