My Lords, once again I thank the noble Lord, Lord Sharkey, for provoking a very interesting debate and for the thoughtful contributions that he, the noble Baroness, Lady Kramer, the noble Lord, Lord Tunnicliffe, and my noble friend Lord Carrington of Fulham have made.
The noble Lords, Lord Tunnicliffe and Lord Sharkey, absolutely got to the nub of the matter here. We are seeking a PRA that is effective and independent, and getting the balance right between those two aims, and making sure that we achieve both, is absolutely crucial. I would argue that the proposed changes will increase the PRA’s effectiveness—making it better still, to address the point made by the noble Lord, Lord Tunnicliffe—but do not undermine its independence.
Let me first address the issue of increasing effectiveness, and I will try here to steer clear of management-speak. The governor has explained the links—I have crossed out the word “interdependencies” that was in my brief—between monetary and financial stability and why, therefore, it is right that both these macroeconomic policy responsibilities should rest with the central bank. The Bank is also committed to implement a set of changes to its internal organisation, aiming to ensure that different parts of the Bank work even better in pursuit of its twin aims of monetary and financial stability. The Bill builds on and reinforces these organisational reforms.
Ending the subsidiary status of the PRA will reinforce the Bank’s efforts to strengthen its capacity to work effectively across its responsibilities. At Second Reading, it was suggested that ending the PRA’s subsidiary status and creating the Prudential Regulation Committee might represent a downgrade of the prudential regulation function—a point that has been alluded to. I entirely disagree with that. I would argue that this change will have the precise opposite effect. Placing the Prudential Regulation Committee on the same footing as the MPC—and, with our changes, the FPC—means elevating the microprudential role to the same level as monetary policy and macroprudential policy.
This is, I would argue, an upgrade that reinforces not just to the Bank staff but to the wider 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 an integral part of the Bank’s mission and have broader opportunities for progression across the whole Bank. This can only assist recruitment of the best people to the supervisor, which I am sure is something that all your Lordships will support.
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A second benefit from ending the PRA’s subsidiary status is enabling the members of the new committee to devote more time to microprudential policy and operations—the noble Lord, Lord Tunnicliffe, spoke about the need for focus.
The governor explained to the Treasury Select Committee that the change will,
“liberate … a portion of the time of the members of the PRA Board that is spent duly exercising their responsibilities as directors of a company”,
while noting the important responsibility that PRC members will continue to have for ensuring that the prudential regulation functions are adequately resourced —a point I will come on to shortly. The governor concluded that,
“time is freed up to do their core job—what they are there for—which is to provide guidance on judgment-led supervision”.
For example, the PRC will no longer have to spend so much time discussing IT provision, as this will be a concern for the Bank at large and ultimately its governing body, the court. Equally, whereas the PRA board had to be involved in discussions on staff terms and conditions and recruitment, the new committee will be able to leave these important concerns to the wider organisation and focus on its role in supervision.
A third benefit of the changes is increased clarity of governance. As the Parliamentary Commission on Banking Standards noted in discussing the existing regime:
“The accountability arrangements of the new structures are more complex than those of the previous regulatory regime”.
Ending the subsidiary status of the PRA and establishing the PRC, MPC and FPC on the same basis simplify and clarify Bank governance. We are clear that these benefits must not come at the expense of undermining the PRA’s strong brand or the operational independence of the PRA’s supervisory decisions, and that transparency around the use of the levy that will continue to fund the PRA’s activities must be maintained.
Let me address the second point, on independence. It is worth explaining what “independence of the PRA” actually means. As I am sure your Lordships will know, the Basel core principles on banking supervision suggest that legal safeguards should ensure that a regulator has,
“operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources”.
The Bill provides for all these important safeguards. For a start, Clause 12(2) is very important: it provides that the Bank’s PRA functions may be exercised only through the new Prudential Regulation Committee. The Bank may not exercise its prudential regulation role in any other way.
As we discussed in relation to the previous amendment, the committee will have a clear majority of external members, with at least seven externals compared with five internal members. It is important to note that this is an increase in the weight of external members on the existing PRA board, where only a majority of one is required.
Next, the Basel core principles call for transparent processes and sound governance. Schedule 1 to the Bill sets out clear processes for the new committee’s decision-making. The core principles also stress “adequate resources”. Every year, the committee will report directly to the Chancellor on the adequacy of its resources as well as on the independence of its operations.
Next in the list of protections is a requirement for the Bank to ensure separation between resolution and supervisory functions. This makes sure that the UK remains compatible with relevant European Union directives that insist on such a separation.
Finally, the Bill grants a strong statutory role to the PRA’s chief executive. He will be responsible for the day-to-day management of the PRA and implementation of the prudential regulation strategy. This includes responsibility for how resources are allocated among
different teams, managing policy development and overseeing supervisory decisions that do not reach the level of the committee.
The current chief executive, Andrew Bailey, gave his view of the protections for the PRA’s continued operational independence at the Treasury Select Committee in the other place on 20 October. He said:
“I think the Bill has in it sufficient protection of the independence of the PRA. It is very clear in the Bill that the PRA continues to exist as the prudential supervisory authority for banks and insurers … The independence protections are maintained, and that, I can assure you, has been and will continue to be a very strong focus of mine. Desubsidiarisation simplifies the Bank of England’s governance”.
Therefore, the Bill provides important safeguards to protect against the dangers of groupthink. With those reassurances, I commend Clause 12.