§ Lord McIntosh of Haringey
My Lords, I beg to move that this Bill be now read a second time. This Bill is a further step in our determination to modernise the British economy and to equip the country for the new global economy of the future.
First, it gives the Bank of England operational independence to set interest rates to meet the Government's inflation target. It will do so through one of the most open, accountable set of procedures of any central bank in the world. Secondly, the Bill implements the first stage in the modernisation and reform of supervision and regulation of the UK's financial services industry. The new Financial Services Authority launched last year will enjoy the confidence of consumers and industry alike, giving London and the UK industry as a whole a huge competitive advantage.
The Bill underpins our economic approach: to secure long-term stability and the promotion of high and stable levels of growth and employment. It enshrines our commitment to increased openness and accountability, which in turn leads to the enhanced credibility in monetary policy that the world now demands. The Bill will provide the stable platform business that the country needs, and it will increase confidence in this country's commitment to low inflation in the future.
Price stability—low inflation—is an essential precondition of achieving the Government's objectives of high and sustainable levels of economic growth and employment. Inflation hits business, savers and pensioners alike. It causes uncertainty. It discourages investment and in the end hits jobs. This country has paid a heavy price for a successive cycle of boom and bust. Because of that legacy, our long-term interest rates have been higher than they should have been, and higher than those in other countries.
The new framework will not only deliver low inflation but generate greater confidence in long-term decision making in Britain, which in turn will lead to lower long-term interest rates. We have seen some benefits already. Britain's long-term interest rates fell immediately following the Chancellor's announcement last May and they have remained lower since that time, falling by nearly a full percentage point—7.4 per cent. on 5th May and around 6 per cent. today.
In the modern economy, markets demand increasing openness and transparency in decision making. That is one of the purposes of this Bill. They want to know that the Government are fully committed to low inflation and have the determination to see that commitment through; where the institutions are in place to deliver that 1384 commitment; and where the responsibility of the Chancellor and the Bank are clearly set out. This Bill will enable us to deliver our economic objectives. We have the opportunity to usher in a new era of stability, a platform on which to build for the future. That is another milestone in our determination to modernise Britain's economy, creating a modern bank that can meet the new requirements of the 21st century in a global economy where clarity of purpose is essential.
Noble Lords will forgive me if I do not go through the Bill clause by clause. Rather, I should like to address in more detail the principal features of the Bill.
It sets in place a clear division of responsibility between the Chancellor and the Bank. The Chancellor will set the target for price stability, and he will do so every year. The target announced by the Chancellor last year provides a rigorous, open and precise definition—a target of 2½ per cent. The Bank has the responsibility for achieving that target and, subject to that, supporting the economic policy of the Government including their objectives for growth and employment. So the Bank and the world at large is quite clear as to the objectives: price stability in support of the objectives of growth and employment.
The composition of the monetary policy committee itself will ensure a broader base of decision making. No one individual can dominate. It is a blend of experience from the Bank and outsiders appointed by the Chancellor because of their knowledge and experience. And of course the decisions are free from party political manipulation. The interests of the country will come before the interests of the party of Government. Decisions will be made with the long-term interests of the economy in mind. The Bank will also be fully accountable, not just to the Chancellor but to Parliament.
First, the MPC has to meet rigorous reporting requirements. It will be required to announce all its interest rate decisions immediately. Minutes of each meeting will be published and if there is a vote then the voting record of each member recorded. The Bank's quarterly inflation report will be put on a statutory basis. It is another instrument of accountability—one of the principal ways in which the explanations of the MPC can be assessed and subject to scrutiny outside the Bank.
Parliament will have ample opportunity to scrutinise the Bank: through an annual debate following the publication of the Bank's annual report; also through the Treasury Select Committee, which has said that it intends to call MPC members to appear before it. The fact that all the information is published and that discussions and decisions are open will in itself create accountability. All that is new and is a direct result of our determination to modernise the decision-making process.
Secondly, there is a clear procedure when the Bank misses its target, which the Chancellor set out in his letter of 12th June 1997. If inflation is more than 1 percentage point higher or lower than the target, the Bank will be required to publish an open letter to the Chancellor. Again, there is complete clarity and transparency. In the letter the bank must set out the following: why the target was missed; what action it has 1385 taken; how long it will take to get back on target; and how the measures it proposes are consistent with the Bank's monetary policy objectives—price stability and its duty to support the Government's growth and employment objectives.
And thirdly, there will be an increased accountability through reform of the Bank's constitution. So Part I of the Bill makes much needed changes to the Bank's management structure to enable it to fulfil its new role. The court will be expanded, and it is our intention that it will reflect the diverse interests of the City, business and industry. It will also reflect the nations and regions of the United Kingdom. And it will hold the Bank to account.
The Bill also gives an enhanced role to the non-executive directors of the Bank who will ensure that the Bank performs its functions effectively and manages its resources efficiently. They will review the Bank's performance as a whole, including the procedures of the monetary policy committee, and publish their own report every year. There is a new post—that of the senior member—who will lead the non-executive directors. Those three measures all add up to far greater accountability than ever before.
Part I of the Bill makes provision for the Bank's finances to ensure a secure foundation for the future. The Bank has long been funded by a voluntary arrangement for the banking sector. Now we are putting the main features of the existing scheme on a statutory basis. Because we are doing that it is appropriate that all those who benefit from price stability and the Bank's role in the financial system should pay, which includes building societies as well as banks.
With the transfer of banking supervision to the Financial Services Authority, it is important to look at the overall impact on the financial sector of cash ratio deposits and the new charges to be levied by the FSA. I want to make very clear that the intention is that the overall cost to the financial sector should be no greater than before and probably less. Both the Bank and the FSA will bear down on costs to the industry and therefore the public. We will ensure not only that banking regulation is effective, but that the costs are fully justified. For that reason we have been consulting on the cash ratio deposits scheme during the passage of the Bill.
Perhaps I may now turn to Part III of the Bill, which transfers banking supervision from the Bank of England to the new single regulator, the Financial Services Authority. This is just the first step of a much wider reform which we promised and which was the result of consultation while we were in opposition. As the House will be aware, the Government are currently drafting a new Financial Services Reform Bill that will formally put in place a regulator with clout and respect at home and throughout the world. Last October we launched the FSA, which has taken over from the Securities and Investments Board. It will in due course take over from the supervisory functions of the self-regulating organisations, the insurance directorate of the Treasury, 1386 the Building Societies Commission and the Friendly Societies Commission. Nine regulators will be replaced by just one.
For years now there has been a consensus developing that reforms were necessary. The industry and the public knew that the present system had to go: it was cumbersome, expensive and fundamentally flawed in concept; it failed the public—look at the pensions scandal, my Lords. And it was an ineffective burden on business. It pleased no one. Regulation should be complementary to the business process and not a hindrance. It should give consumers and public alike confidence in the integrity of the system.
In the global economy, where markets are changing every day, where innovation and diversity are essential, the need for a new regulator that has power and flexibility has never been greater. The objective of the reform is again to enhance transparency and improve accountability through a simpler framework for the industry as a whole. The framework recognises that the industry is changing fast; that the traditional boundaries between banks, insurance companies and building societies are increasingly blurred. Many firms now offer a wide range of financial services.
That is why it is important in this Bill to start the reform process by transferring banking supervision to the FSA. The Bank of England of course retains responsibility for the stability of the financial system as a whole. But this Bill transfers supervision to the FSA.
There is another step in the modernisation of the old system. Clear divisions of responsibility between the Treasury, the Bank and the FSA are set out in a new memorandum of understanding, which was published last year and which is available in the Library of the House. The memorandum is based on principles of clarity, transparency, elimination of duplication and regular exchange of information between the three institutions. That is another first; never before have different responsibilities been so clearly set out. The memorandum also establishes a standing committee which will meet on a regular basis, and ensure an appropriate and co-ordinated response to any failure or collapse in the future. The Financial Services Authority, as the single regulator, will be able to provide effective and consistent regulation across financial services sectors. Traditional boundaries between those sectors are being eroded, and that process will doubtless continue. It is vital that we have a regulatory structure that reflects the way in which the modern financial services industry is structured. The new single regulator is also about clarity for the consumer. The ordinary person should not be faced by a vast array of different regulatory bodies, whose responsibilities are separated by boundaries that are obscure to the person in the street.
The same logic applies with equal force for complaints and compensation. So the single regulator will be matched by a single compensation scheme and a single independent financial services ombudsman. The FSA has published consultation documents on proposed arrangements for compensation and complaints. All this will be the subject of a further Bill that will be put 1387 before this House in due course. But given that the present Bill is the first step, let me say a few things about the new regulatory structure that we are working towards.
As the Chancellor announced when launching the new authority last October, the FSA will have a range of statutory objectives. These are: sustaining confidence in the UK financial sector and markets (working on an agreed basis with the Bank of England—the memorandum of understanding between the Treasury, the Bank and the FSA sets the framework for co-operation in this area); protecting consumers by ensuring that firms are competent and financially sound and give their customers confidence in their integrity, while recognising consumers' own responsibility for their financial decisions; promoting improvement in public understanding of the benefits and risks associated with financial products; monitoring, detecting and preventing financial crime; and pursuing these objectives in a way which is efficient and economic and ensures that costs and restrictions on firms are proportionate to the benefits of regulation; facilitating innovation in financial services; and taking account of the international nature of financial regulation and financial services business.
The FSA will be required to report annually to the Treasury on the performance of its functions and how it has sought to achieve its objectives. It will also be required to publish its budget for consultation and to publish estimates of the costs and benefits of proposed new or modified rules. The key to the FSA's regulatory role will be the authorisation of those carrying on business ill the relevant areas. It is consistent with having a single regulator that there should be a single authorisation requirement and a single process for considering applications. The particular activities which any particular authorised person may carry on within the scope of his authorisation will be determined by the FSA.
It is right to arm the regulator with an effective array of sanctions. This will ensure that we enjoy effective regulation. But the powers must be adequately balanced. The FSA must itself be subject to the discipline of a satisfactory appeals mechanism. We propose to create a new single tribunal to consider all disputes arising from the FSA's exercise of its powers against authorised persons. The tribunal will be entirely independent of the FSA and will be managed as part of the court service. This is an important advance on the present range of financial services appeal mechanisms which are set up and run on various lines.
As we have said, the FSA will be responsible for authorisation and regulation of all those insurance, deposit taking and investment businesses currently regulated by several separate bodies, including the professional bodies. The FSA will also have extensive supervisory powers over Lords.
§ Lord McIntosh of Haringey
My Lords, I meant to say Lloyd's. That would have been a useful change, would it not?
1388 Finally, in Part IV, there are two additional measures. First, the Bill makes provision to improve the efficiency of the gifts market through the transfer of the gilts registration and brokerage functions of the National Savings Stock Register with the Bank of England's registrars department. Secondly, the Bill also provides for the modernisation of the central money markets office which will allow the market to work with computer records alone. This will not only reduce costs but strengthen London's position as an international financial centre.
This Government have made and continue to make significant reforms to the institutions and the practice of economic policy in Britain. This Bill is an important part of those reforms. It gives operational independence for setting interest rates to the Bank of England. It does so through one of the most open and accountable set of procedures of any central bank. It reforms the governance of the Bank to reflect its new role and reflects current best practice. It secures the funding of the Bank through the statutory cash ratio deposits scheme, reforming the national financial reporting requirements of the Bank with more open financial disclosure and an up-to-date dividend policy, and with the transfer of banking supervision it represents the first step towards a new structure for financial regulation. I commend the Bill to the House.
Moved, That the Bill be now read a second time.—(Lord McIntosh of Haringey.)
§ 11.24 a.m.
§ Lord Mackay of Ardbrecknish
My Lords, I am grateful to the noble Lord for introducing the Bill. I have to say that he left me rather breathless with his gallop through the various provisions. I am not sure whether he gave us some new information concerning the Government's plans for the regulatory authority they intend to set up. Obviously we shall have to read the latter part of his speech with some care to see whether there is anything new there.
I have learnt since coming to this side of the House that, as always in these matters, one has to take a look at the Labour Party's manifesto before one decides how to tackle any particular issue. If it is in the manifesto, I have learnt that there is no point in trying to have a discussion with the Government as their answer to everything is, "It is in the manifesto". The manifesto states,We will match the current target for low and stable inflation of 2.5 per cent. or less. We will reform the Bank of England to ensure that decision-making on monetary policy is more effective, open, accountable and free from short-term political manipulation".I am not entirely sure whether that accords with the Bill in front of us. I looked further to the business manifesto which states,For the Bank of England we propose a new monetary policy committee to decide on the advice which the Bank of England should give to the Chancellor".This Bill goes a great deal further than that. Indeed, I do not believe that it fulfils the manifesto commitment; it goes much further. I suppose that it is perhaps the first Bill on which the Government cannot claim the 1389 safety—if I can call it that—of the Salisbury doctrine. However, the Minister should not get too worried about that remark.
On 7th February the Chancellor spoke of the policy which eventually appeared in the manifesto. He said,I believe that any consideration of whether to give the Bank operational responsibility for setting interest rates must be preceded by two steps. The Bank must demonstrate a successful record in its advice and build greater credibility".That was one of the steps. Within four days of 1st May the Chancellor decided that the Bank had demonstrated a successful record and in those four days had built that greater credibility. They are clearly quick builders at the Bank! Perhaps they should be recruited to build the millennium dome or even the new Scottish parliament building because both of those seem to need speedier builders than is the case at present. On the fourth day, with a metaphorical roll of drums and fanfare of trumpets, the Chancellor announced that he was going for an independent central Bank. When I heard that announcement I felt sure that we were on our way to obeying the Maastricht criteria, and on our way into the single currency.
However, as with so much else in this tinsel town of sound bites, the drums and the trumpets were not quite what they seemed. The Bank is not to get proper independence, only operational independence. Who will be the principal beneficiary? It will be the Chancellor and the Government who hope by this move that they can shuffle off responsibility for interest rates. I doubt whether that will be nearly as easy as the spin doctors hope. There are two reasons for that. First, the Chancellor sets the inflation target and, secondly, he appoints, or has a finger in the appointment, of all the members of the monetary policy committee.
On the first point, as we have heard, the Chancellor has told the Bank that it must aim for an inflation target of 2.5 per cent. I notice that the Minister did not add, "plus or minus 1 per cent". That makes a slight difference because those of your Lordships who do not need a calculator can quickly calculate that 3.5 per cent. is the upper limit of that target, which is a considerable weakening of the target set by Kenneth Clarke.
I have no doubts that the monetary policy committee will meet its target. It will, in the words of an old Scots expression, "Mak siccer"; that is, make sure. It will always err on the side of caution and it will always put interest rates up faster and higher, and reduce them slower than may be merited by a regard for the whole economy. Anyone who doubts that should look at Clause 11 of the Bill which states,In relation to monetary policy, the objectives of the Bank of England shall be—(a) to maintain price stability".In another place the Chief Secretary got into some difficulty reading his own Bill. He did not seem to understand that maintaining price stability took precedence over all other considerations. The clause further states,and subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment".1390 I repeat the words "subject to that". Quite clearly the maintenance of price stability is the principal function of the Bank. I have no doubt that later today some of your Lordships—there is certainly a distinguished roll call of speakers in this debate—will talk about the separation of monetary and fiscal power. Alternatively, as one of the Government's own Back-Benchers in another place, Diane Abbott—she is a critic of the policy—said, the Government are handing over,one of the most important levers of economic power to an unelected quango".Last week I read of the concerns of the Labour-dominated Scottish Affairs Select Committee in another place. It was not complimentary, or perhaps I should say hopeful, about welfare to work. Discussing unemployed young people it said,The committee did not feel that the implications of a possible slowdown in economic growth for the new deal"—that is, for young people—and other unemployed clients had been fully thought through".Indeed, it was a little before its time because Scottish unemployment figures this week started to increase again. That does not seem a good symbol of how successful welfare to work will be.
One of the members of the committee, Mr. John McAllion, pointed out that the Bank of England had raised interest rates five times since the Government gave it control over monetary policy. He is quoted in the Scotsman as saying,There is a macro economic policy being pursued by Government and the Bank of England which seeks to slow down the economy. That is the problem".And certainly the Scottish economy has now seen that; and the North of England too. I suspect that it will move south as the months progress.
My concern is that the Bank will be so determined to succeed in meeting the targets set for it by the Chancellor that it will indulge in monetary overkill; and that concern is clearly shared by some of the Government's own supporters. A read of the Bank minutes of 7th and 8th January lends weight to my concern. Three members voted for an increase in interest rates. At the most recent meeting, we know that three members also voted for an increase in interest rates—probably the same three although we do not know that yet. As Robert Chote said in a Social Market Foundation pamphlet,One danger is that the economy will suffer if the Bank uses its interest rate policy to pursue low inflation while the Government uses budgetary policy to pursue employment, growth and votes. This is a recipe for high interest rates, excessive Government borrowing and an over-valued pound".My second reason for concern surrounds the composition of the monetary policy committee. Your Lordships can see the composition set out in Clause 13. First, the governor and two deputy governors will be appointed by Her Majesty. That, as we know, is by the Government, or more specifically by the Chancellor. Those appointments are to be for five years. Two members have to be appointed by the governor after consultation with the Chancellor. They have to be appointed for three years. And four members are appointed directly by the Chancellor, also for three 1391 years. I do not think that there is a lot of independence there. This is really a quango bank—and this from the party which railed against quangos in the former government and made all sorts of blood curdling threats to quangos and quango members. And what do they do? They create a new quango and hand over to it control of monetary policy. And there is little in the Bill to tell us who might be appointed and how widely the members may be drawn.
I listened to the Minister talking about the court, but I am more concerned about the monetary policy committee. When I consider the current membership of the monetary policy committee it does not persuade me that the membership will be widely drawn. Unless one considers Oxford and Cambridge to be representative of the kingdom beyond London, the membership is certainly drawn from a narrow geographical base; and academia seems to be extremely well represented. It might not be a had idea to have someone from industry, although perhaps not the members from academia who some of your Lordships may think would be wiser and better on the monetary policy committee. But, so far as I can see, there is no one from manufacturing industry, and no one from any further north than whichever is the furthest north of Oxford or Cambridge.
As your Lordships will find out shortly, we shall be considering a Bill which will set up separate governments with considerable powers, in Scotland and Wales. Why should there not be someone on the monetary policy committee from almost anywhere else in the kingdom north of Oxford or Cambridge, but in particular from Scotland? That person would have knowledge of the Scottish economy. I believe that it will begin to operate slightly differently because the aims and objectives of the government in Edinburgh may well be different from the aims and objectives of the Government here. While I am on the subject, will any parts of the Bill fall within the areas to be devolved to Scotland or Wales?
It is not just the control of the appointments which worries me. It is the short term of office for the appointees: five years for the governor and two deputies, and three for all the rest. I would not go quite as far as the Fed in the United States which has 14-year terms. But perhaps we should look at other central banks. Perhaps they are better described as independent central banks. The Bundesbank, for example, has an eight-year term. Indeed, Gordon Brown, in a speech in May 1995 when speaking only of an advisory monetary policy committee, not one with operational independence, suggested a seven-year term.
Who is appointed, for how long, and how independent they will be are issues which the Government must address. Is there a danger that the Chancellor will pack the committee with like-minded people? Sir Samuel Brittan in his evidence to the Treasury Select Committee in another place put it better than I can when he said,Monetary economics is not a hard science. An attempt to confine the monetary policy committee to so called experts will simply enthrone the conventional wisdom of the moment".No doubt we shall hear more about that from some of the economists who will take part in the debate today.
1392 I am sorry that the noble Lord, Lord Eatwell, is not taking part. I nearly referred to him as my noble friend because in Treasury debates over the past three or four years we have been sparring partners across the Dispatch Box. I understand that the noble Lord teaches on a Friday and finds it difficult to be here. However, I should not like him to be left out of the debate. I could not help note what the noble Lord said to the Treasury Select Committee:Moreover, there is a tendency in monetary policy matters to regard certain propositions as 'obvious' and anyone who questions such propositions to be at best a nit picking academic and at worst a crank. Yet the notion that the theory of monetary policy is 'obvious' and 'pragmatic' is belied by the fact that the theory and practice of monetary policy has undergone quite radical revisions over the past 20 years".He went on to ask,If views held 10 years or 15 years ago were so obviously right then, why are they so obviously wrong now'?".I shall tempt some of the professors of economics who will speak later to debate that proposition for two or three minutes. Those interests are central to who is to be appointed to the committee, by whom, and for how long.
Another issue that I suspect Back-Benchers may raise is this. Is this semi-independent quango bank the forerunner of a proper independent central bank à la Maastricht? If the Prime Minister ever plucks up the courage of the Chancellor's convictions and decides that we should enter EMU, will we have another Bank of England Bill?
I turn briefly to other parts of the Bill. I wish to say a few words about Clause 37 and Schedule 7. It is an important clause dealing with disclosure of information by the Bank. In paragraph 3 of the schedule a table sets out those authorities to whom the Bank can disclose information and the functions for which such disclosure can be made. Sub-paragraph (2) then gives the Treasury the power by order to amend the table. The 11th report of the Select Committee on Delegated Powers and Deregulation said at paragraph 19,The power to amend the Table is potentially wide, and the appropriate degree of parliamentary control depends on the uses to which it will be put. The House may wish to consider whether it is not of such significance as to justify amending the Bill to provide for the affirmative resolution procedure, rather than the negative procedure currently proposed in the Bill".I think that the Delegated Powers and Deregulation Committee has been rather kind to the Bill. That is all the more reason for the Government to take on board its recommendation for change. I hope that in his summing up the Minister can assure the House that the Government will change the paragraph from the negative procedure to an affirmative resolution along the lines suggested by the Delegated Powers and Deregulation Committee.
I turn to that part of the Bill which removes from the Bank its supervisory role. It seems odd that the Bank cannot be trusted with banking supervision, yet it can be trusted with monetary policy and interest rates. I know that the failures of BCCI and Barings are used as examples of the failure of the current regulatory system. I certainly recall debates when I answered for the Treasury about Barings, and I am in no doubt that the Bank did not cover itself in glory in that case. But 1393 no regulatory system is infallible. No one can tell me, or your Lordships, that the super SIB would have done any better with regard to Barings. If the Minister thinks it would, perhaps he can tell us why, but without using the 20/20 vision of hindsight.
What does the removal of its prudential supervision do for the status of the Bank? What does the removal of its role in the bond market and public debt do for the status of the Bank? Can the Government be confident that they are is not diminishing the standing of the Bank?
The Government seem determined to create a super regulatory body with a huge range of regulatory responsibilities. I understand the possible attractions of greater simplicity—although I remain to be convinced that that will happen. I understand the attractions of a kind of one-stop shop for regulation. But is there not a danger that the range of its responsibilities may lead to its taking a broad overview of those responsibilities, and not looking in great detail at the individual parts of those responsibilities?
The creation of one body does not in itself mean better regulation. The creation of one body does not make the complexities of financial products any less. In the creation of the super body it will be essential that those involved do not become so absorbed in the creation and administration of the large bureaucracy that they cease to pay detailed attention to the financial markets they are to police.
Getting this matter right is essential for the health and reputation of the City. Getting it right is essential for the security of the individuals who entrust their money to the financial sector. And getting the position of the Bank right is essential for all of us, since we are all affected by interest rates—those with mortgages, those with savings, those in business, those in employment, and those seeking employment.
The ability of Chancellors, controlling both monetary and fiscal policy, to control inflation has been clearly proved by my right honourable friend Kenneth Clarke. His success was helped in part by the open structure he put in place to deal with the relationship between the Chancellor and the Treasury on the one hand and the governor and the Bank on the other. The Bank's advice was clear for everyone to see; the Chancellor's view and decisions were also there for all to see, and the wisdom of his judgment was there for all to see and to judge, and for the other place to call him into account. That fundamental answerability to Parliament, to the people, was there for all to see. That transparency, that responsibility and answerability is being removed by this Bill.
As so often, I am grateful to the noble Lord, Lord Healey, for explaining in his usual helpful and succinct way the attraction of this policy for the Government. It is a gimmick to be used as an apologia by failed Chancellors to shuffle off their failures on the Bank of England. I hope that the noble Lord is being less than charitable—but I fear.
§ 11.42 a.m.
§ Lord Taverne
My Lords, I hope to be brief. I shall say little about the detailed provisions of the Bill, and at Committee stage perhaps return to some of the questions discussed in another place; for example, about making the appointment confirmation procedure for members of the Monetary Policy Committee a matter for the Treasury Select Committee. Again, there may be points that we want to raise about the cash ratio deposits and the more detailed provisions of Part III.
We regard this as a good Bill. It is very much in line with the Liberal Democrat manifesto. We think it right to give operational control for short-term interest rates to the Bank. We think it right to isolate decisions on short-term interest rates from political considerations. Yet the Bill still maintains a degree of accountability. The Chancellor sets the target and there is a prominent role for the Treasury Select Committee. So, in general, we support the Bill.
However, I wish to examine some of the implications. I turn first to the benefits. The introduction of the Bill has had, and is likely to have, a beneficial effect on long-term interest rates. That is extremely important to business and investment, and one has to bear in mind that a 1 per cent. reduction in long-term interest rates is equivalent to something like £3½ billion a year lower expenditure to the Exchequer.
The second benefit—arguable, no doubt, on the Opposition Benches—is that the Bill paves the way for our entry into monetary union. If and when we do enter monetary union, it will require a relatively small change to the Bill. Again, the longer-term stability in inflation that is likely to be promoted will help to make the economy converge. But the issue I wish to raise is the implication of the Bill for fiscal policy.
The Monetary Policy Committee's sole task is its concern with inflation—although it can take into account external shocks. The Monetary Policy Committee is not concerned with exchange rate policy. Yet the level of the exchange rate is of vital importance to the economic future of this country, and indeed our relations with the European Union. We cannot say that we will simply leave inflation to be controlled by the Bank and not take account of the impact that will have on the exchange rate.
First, if the control of inflation is left entirely to the Bank, the only way of lowering the exchange rate is by squeezing inflation down through a recession, which will eventually enable the Bank to lower interest rates. But if consumption is high, ever higher interest rates in the shorter term will keep the exchange rate higher as well. We do not wish to see a situation whereby only through recession will the Bank be in a position where it can lower interest rates again.
Secondly, if we are to join a monetary union, as the Government seem to wish, then we shall need two years of a stable pound in relation to the euro. Whether that means joining the exchange rate mechanism is perhaps a matter for argument. What cannot be disputed is that very important criterion of a two-year period of stable relationship between the pound and the euro. But if 1395 interest rates are high, it will be a relationship with a high pound against the euro, which in the long term could do considerable damage to this country.
Once there is a firm commitment—perhaps following a "yes" vote in a referendum—no doubt the market will ensure stability. That is what has happened to the other likely entrants into EMU. The reason the lira is stable in its relationship with the other currencies is that the market expects, very reasonably, that Italy will be one of the founder members. Once the pound is committed to becoming a member of the euro, then it is likely that the market will ensure stability. However, it would be a serious consequence, as I said, if that were to be stability at a high rate.
We could, I suppose, rejoin the European exchange rate mechanism at a central rate, 15 per cent. lower than the present rate of the pound; and, combined with the clear intention then to join, it might for a while stay there—but only if we keep interest rates lower, and that is something which the Bank may not be able to do because it has a remit to control inflation.
There are only two ways in which the exchange rate can be brought down. The first would be through recession—I have already referred to that. The second would be through a more restrictive fiscal policy. To my mind there is no doubt which course the Chancellor should choose. He should create circumstances through his fiscal policy in which the Bank of England can lower interest rates. That of course means that the Chancellor would have to consider tax increases. There is a great deal of talk about the Chancellor's "war chest". That is irrelevant for this purpose.
If we need lower exchange rates and therefore lower interest rates, the only way to achieve that is through fiscal policy. I ask the Minister not necessarily to deal with the problem straight away but to make representations to the Chancellor and ask him, or someone else, to explain, if the analysis is wrong, why it is wrong. If it is right, is it really the intention of the Chancellor of the Exchequer to let interest rates rise until there is a recession, keeping the exchange rate high as a result, with all the consequent adverse effects on manufacturing? Will he leave it all to interest rates or is he ready to control consumption by fiscal means?
The Bill does not free the Chancellor of the Exchequer from responsibility for inflation. Fiscal and monetary policy must work together. What the Bill does is to remove political temptations to follow an irresponsible interest rate policy. But if the control of exchange rate policy is not a matter for the Monetary Policy Committee, in the end it is still a matter for the Chancellor himself and for fiscal policy.
§ 11.50 a.m.
§ Lord Roll of Ipsden
My Lords, I may not be able to stay to the end of the debate and if so I apologise to your Lordships now. I served on the court of the Bank of England for 10 years but I do not think that that creates an obligation to declare an interest in the parliamentary sense of the word. It has added considerably to my interest in these matters which started way back in the late 1920s and 1930s when 1396 I studied and taught economics. I believe that no one who lived through those years or who has studied their history can possibly underestimate the importance of monetary matters and the arrangement for managing monetary policy in our country, including the role of the central banks.
Perhaps I may remind your Lordships that that was a period which proved that errors are not the monopoly of any one party and that politicians can be as much subject to error as can central bankers. I remind the House that it was a Conservative Chancellor who took us back to the gold standard at the old rate in 1925 with the most baleful consequences, not only for our economy but for the whole of society.
I wonder whether new Labour remember that as well as what I might call "antique" Labour: it was a Labour Chancellor, the great iron Chancellor, Philip Snowden, who showed that by an unthinking and too close embrace of what was then called "sound finance" one could inflict enormous havoc on the economy and on our society.
Thus I approach the subject in a somewhat relaxed manner. Unlike the three previous speakers, I cannot refer to an election manifesto. Therefore, I have to refer entirely to my own experience as an economist, as a public official and, in the past 30 years or so, as a banker.
I referred to the experiences of the late 1920s and 1930s because I suspect that one way or another they have left their mark on the thinking of many people. I suspect that some of the anxieties about the Bill, to which I shall refer shortly and which may well be expressed in the debate, go back to the experiences of those days.
In its 300 years of history the Bank of England has undergone many changes. Even in the 10 years that I served on the court and certainly since, a lot of the ritual and ceremonial has been greatly eased. The court now meets once a month instead of once a week. The committee of the Treasury has been abolished and so on. But, oddly enough, the Bank of England has undergone few basic changes in that period and those changes have been at long intervals.
The first change after its foundation came 150 years later in the great Bank Charter Act of Robert Peel. That stamped its image on the Bank, the image of the bullion committee and the Ricardian economics and made the Bank what it was for almost the whole of the 19th century and the early years of this century. The Bank, allowing for the circumstances of the time, was the equivalent in economic matters of the British Navy. In the 19th century the British Navy was responsible for safeguarding the pax Britannica and the Bank of England was responsible for virtually preserving the world economic and financial equilibrium, the equilibrium Britannicum.
One hundred years later came the great change in 1946, the Bank of England Act of 1946 and the Bank Charter also of 1946. I remind your Lordships—if that is necessary—that it was just after the war in the days of the Labour government. That Act did two important things. First, it nationalised the Bank; it put the stock of 1397 the Bank in the Treasury. Secondly, it imposed upon the Bank the control, as regards policy, of the Chancellor by stipulating that the Treasury might give directions to the Bank. It has taken almost another 50 years for the next big change to occur. It is embodied in the Bill.
In the past few years there has been a great deal of debate. So far as I am aware, the question of the nationalisation or de-nationalisation of the Bank of England has not been seriously considered. There may be extremists of the Hayekian school who might wish to privatise the Bank, as they might wish to privatise money altogether. But I do not think that that is seriously considered.
However, the other matter, the control by the Treasury of the policy of the Bank has been debated a great deal under the heading: should the Bank be independent? The stimulus was perhaps what was happening elsewhere—in the Fed, the Bundesbank, and, more recently, the Bank of France, the Reserve Bank of New Zealand, the Bank of Italy, and so on.
Noble Lords may recall that when one of our number, the noble Lord, Lord Lawson, was Chancellor of the Exchequer, he came out in favour of the independence of the Bank of England. His cogently argued proposals are reproduced in his highly interesting memoirs, if noble Lords wish to refer to them. About four years ago I had the pleasure and privilege of chairing an independent panel of former high civil servants, former central bankers, economic academic experts, industrialists and legal experts from this country and elsewhere. I am gratified to say that the report produced at that time, which I have here, contains almost entirely the provisions of the Bill in broad outline and essence. We came out in favour of what we called an independent and accountable Bank of England which would have considerable control over monetary policy.
If I may refer to a non-central point of the debate, we raised the question of supervision to which the noble Lord, Lord McIntosh, devoted much attention. We did not make an absolute recommendation as regards supervision but we raised the question of whether it was right for an institution which was the lender of last resort also to be the supervisor of the very institutions for which it might have to provide succour in times of difficulty.
Of course, since then, the Government have decided—broadly speaking, rightly—to unify financial supervision and naturally the supervision of the banking system. The decision was not welcome in the Bank of England, although I suspect that that was largely due to the timing and the manner of the decision and its announcement rather than its substance. At any rate, once the decision to unify regulation and supervision is taken, it is difficult to see how banking supervision can be left out.
I come to the central point of the debate and the provisions of the Bill: the control of monetary policy. I believe that there is a good deal of misconception about this. It is somehow thought in many circles that monetary policy by itself can be controlled by one entity or another—whether it is the Governor of the Bank of 1398 England, the monetary policy committee of the Bank or the Chancellor of the Exchequer himself. Monetary policy is only one aspect of a whole arsenal of economic policies. Fiscal policy has been mentioned a great deal today. It is difficult to base any kind of judgment on the institutional arrangements by looking exclusively at one instrument of economic policy alone.
In the foreword to the report of the panel which I had the honour to chair, I make the point that monetary policy by itself cannot be guaranteed to achieve the objectives of stable economic policy. It can do a great deal to stabilise prices in certain circumstances, but even that it cannot entirely guarantee. That depends on many other things, including fiscal policy and micro and macro economic policies of all kinds. Therefore, to isolate one among the whole arsenal of economic policies is wrong.
Nevertheless, it is right that monetary policy in the strict sense of the word should be firmly placed upon the shoulders of the Bank of England, subject to the Chancellor fixing once a year the general objective of monetary policy. That is in line with the recommendations made in the report to which I referred and I have every reason to believe that it will work properly. Of course, it cannot be entirely separated from fiscal policy or indeed from any other government policy. As has been pointed out by the noble Lord, Lord Mackay of Ardbrecknish, it will be extremely important to see how it is fashioned when we know the Chancellor's Budget and the arrangements to be made within it which must somehow or other complement or supplement what is being done in regard to monetary policy now.
It is impossible to find a single means of ensuring monetary, fiscal, let alone economic, stability. It is a subject which requires the co-operation of a great many institutions. A great many policies must link together. In my view, the Bill before us—which I hope will not be delayed too long in its passage through the House—does a great deal to clarify those matters. It is right that the Bank of England should be given operational responsibility in relation to monetary policy, as defined in the Bill, subject to the annual decisions or the overriding decisions of the Chancellor which may occur in certain circumstances, as provided for in the Bill. The Bank can be called to account, and I am sure that if it fails in its task it will be.
The Bill deserves support. I hope that it will have a quick and easy passage and that it will contribute greatly to the better ordering of our affairs.
§ 12.2 p.m.
§ Lord Desai
My Lords, it is a humbling experience to follow the noble Lord. Lord Roll of Ipsden, whose books I used to read nearly 40 years ago—I am referring to economics in my undergraduate days.
In general I welcome the Bill, but we are merely legalising what has already happened. We therefore have little choice in relation to amending the Bill, except for the next round of monetary policy, and I have no intention of saying anything on that. This is a Bill which 1399 puts into statute what has already happened. We now have to consider what we think about what has happened.
In that regard let me say one thing. As the noble Lord, Lord Mackay of Ardbrecknish, said, in a sense in the last regime under Mr. Kenneth Clarke we already had the beginnings of transparency in the conduct of monetary policy. Though people used to mock it and call it the "Ken and Eddie Show", it was a significant innovation when the meetings between the Chancellor and the Governor were open and the minutes published and so forth. That transparency was a good first step in the context of monetary policy. Upon election, the Labour Government went one step further and the Ken and Eddie Show did not become the Gordon and Eddie Show: we reverted to the monetary policy committee.
In a sense, the transparency continues. Indeed, as the latest set of monetary policy minutes shows, we even learnt of differences between members of the monetary policy committee. I believe that to be an extremely good thing. One of the things that gave a mystique to monetary policy—quite unjustifiably in my opinion—was the secrecy which surrounded it. People never admitted to holding rival views in relation to monetary policy. Now we know—it is healthy knowledge—that there are genuine differences of opinion among people who have a lot of experience and who are looking at the same evidence but arriving at different results.
One thing I have learnt over the course of my career as a professional economist is that economics, especially when it comes to policy making, is more a matter of judgment and less a matter of technique. Therefore we require judgment. It is good to know that there exists a heterogeneity of views among the members of the monetary policy committee and it will be for the markets to judge how much to take that on board.
The first time we have a decision in which, let us say, four people are for raising interest rates and three are against, and interest rates rise, there will be much more trouble than when three people say raise the interest rates and the rates do not have to rise. At least we have some experience of that.
I am not a signed-up member of the independent central bank school. If we have to have it, it is a good way of having it, but I do not believe it is a magic formula. The independent central bank doctrine arises from an excessive admiration for the Bundesbank. I do not share that excessive admiration for the Bundesbank, certainly not from the way the German economy has developed over the past five years—nobody could have excessive admiration for the Bundesbank.
Be that as it may. Let me turn to the parts of the Bill in which I am interested; that is, Part II—monetary policy—and Part III. The noble Lord, Lord Mackay, invited me to comment on why it was, as my noble friend Lord Eatwell said, that the truths of yesteryear are the fallacies of today and how therefore we can rely on academics to run our monetary policy. I have always believed in the adage that academics are the worst people to run monetary policy because there is nobody better.
1400 Various things have happened over the past 20 years which have caused this major change in the way we think about macro economic policy. One material change is due to the fact that, following the breakdown of the Bretton Woods agreement and the development of various technological innovations, economies are much more open than they used to be. Capital movements are now perfectly legal—they were not legal under Bretton Woods—and therefore every national economy is subject to much more international fluctuations than before.
An analogy we used to use was a hydraulic analogy—pumping things up and down, or driving cars along highways. Now it is more like steering a ship. We are subject to wind, tide and waves. We have some control, but we are not completely sure where we are going. We may have to change our course and tack here and there, but we are much more subject to forces beyond our control which we must take into account when steering the ship forward. It is not like driving down a highway.
That is the first change. The second change is that, because of that change and partly because of a change in thinking, we have much less faith in policy as such than we used to have. When my noble friend Lord Peston was a student and in his first few years of teaching, economists had much greater faith. We knew about models; we knew about policy; we knew which policies we were able to change and what would happen as a result. Again, the analogy is that of the motor car. Now we know that, when the policy maker changes something, the people out there are not stupid. They can anticipate the change; they can take action which will counter the intention of the policy maker. Therefore, the effectiveness of policy as such is much less when markets are intelligent and international.
Whatever we do in terms of policy making, the first objective must be not to make things worse than they already are; just do not make a mess; indeed, set up a framework within which people know how you will function. People want a stable framework rather than a stable policy. Even as you may change from one day to the next, as long as people know the framework of decision making and that is laid down, your policy will not be thwarted by the market as much as it would be if you had not told it the story.
I say to the noble Lord, Lord Mackay, that those are two reasons why things change in economics. I am glad that when things change economists change their views. It would be much worse if economists did not change their views when things changed. However, it still remains the case that the co-ordination of monetary and fiscal policy is required for good policy. But, as many noble Lords have already remarked, it is not clear right now where the institutions of co-ordination of fiscal and monetary policy are in the present system.
Perhaps I may make an analogy with the European Central Bank. As noble Lords may be aware, Sub-Committee A of the European Communities Committee is taking evidence on the working of the European Central Bank. Whenever the question of the accountability of the European Central Bank is brought up the answer is given that there will be a great deal of 1401 liaison between ECOFIN—the Council of Finance Ministers—and the president of the European Central Bank. They will be attending each other's meetings. At the European level we will have institutionally embodied open and transparent co-operation between the fiscal authorities and the monetary authorities. Of course, the fiscal authorities will be much weaker after EMU starts than they are in particular countries right now. Even so, there will be a transparent mechanism.
In the present system there is a good deal of co-ordination. I have no doubt that the Chancellor can talk to the governor and so on. But it is not clear, post-Bill and the present arrangements, where the co-ordinating institutions in monetary and fiscal policy will be. It would be good over the next few months for my right honourable friend and the Government to clarify for us either by practice or by an announcement that these institutions exist and that we will benefit from them.
This is one of the reasons for the problem with the exchange rate. I have said before in the House and outside that we missed a chance in last July's Budget to have a much greater deflationary bite. That would have left an easier atmosphere for the Bank of England, which would not have had to rely so much on interest rates. This is a matter of judgment and people may disagree. It is said that fiscal policy is a blunt instrument and monetary policy is a smooth instrument for fine tuning. I do not believe a word of it. I still think that had the Chancellor done that when the economy was booming we would have had fewer rises in interest rates. I could be wrong and he could be right, but it remains true that the lack of co-ordination of monetary and fiscal policy shows up in an over-valued exchange rate. The over-valuation of the exchange rate is partly due to interest rate rises and partly due to the fact that sterling is a safe haven in the context of oncoming EMU, as people are very nervous about the Italians and the Spaniards joining the EMU, so they are all buying sterling and we are suffering a little from that.
From that point of view, price stability is the dominating objective of monetary policy. Price stability in a closed economy is sufficient to get growth or whatever else one wants. But price stability alone in an open economy does not take care of the exchange rate fluctuations. Therefore, we need something somewhere else to try to get the exchange rate down to a level which yields stability. The Government have already forecast a slow-down in the growth rate in the next calendar year and I am sure that my right honourable friend, when he presents the Budget on 17th March, will take the necessary counter-cyclical measures.
I am worried, although the noble Lord, Lord Roll of Ipsden, approved of it. about the division of responsibility as to lender of last resort and banking supervision. If you are going to be the lender of last resort, and if you are in charge of avoiding systemic risk in the banking system, as you have to be as the Bank of England, not having banking supervisory powers or the information banking supervision may give you requires that you have other open and transparently laid down sources of information. For example, how quickly will 1402 the Bank of England know that swift action may be required? We know from what happened with Barings that something can happen over a weekend and you have quickly to take a measure of whether a great amount of information is required. It is not clear to me from Part II and Part III of the Bill how the separation will work. It is perfectly desirable to have banking supervision with the FSA—I do not deny that—but that leaves the lender of last resort with insufficient information. I have to worry about that. I wish the FSA great success but we shall have to wait to see whether the FSA will be sufficient to take care of the problems that the Bank of England should have taken care of in addition to being lender of last resort.
In the meantime, I welcome the Bill and I wish it a speedy passage.
§ 12.18 p.m.
§ Lord Boardman
My Lords, I share a number of the reservations expressed by the noble Lord, Lord Desai, although I do not agree with all his conclusions. The most popular argument in favour of the Bill is the way in which other banks—the Bundesbank and the United States Federal Reserve Bank—have apparently, so it is said, been successful. That success needs some qualification. The noble Lord, Lord Desai, referred to a more recent example but history will recall that the Bundesbank was in existence in the 1920s during the time of the massive economic problems and inflation at fantastic rates after the First World War. It was also subject to pressure from its government on the merger of the Deutschmark and the East German mark. In neither case can it be said that it provided the independent safeguard for the economy and for inflation that was claimed. The Fed was in operation in the 1930s when there were massive problems in the United States. I mention those points as a reminder to those who quote a central bank as being an economic solution. It is not quite as clearcut as some would suggest.
As has been said several times today, economic policy is a mixture of fiscal policy and monetary policy. Until May of this year the Chancellor had control of the two levers of economic policy; namely, the fiscal lever and the monetary lever. He could work those as he believed best for the economy as a whole. If he wanted to, the Chancellor could reduce certain taxes in order to encourage growth. He recognised that if that should lead to pressure towards inflation he would be able, at a suitable stage, to control it on the interest rates. No longer will he be able to do so under this Bill. His responsibilities cover the areas of growth, unemployment and living standards for which he is accountable to Parliament. He has lost one of the powerful instruments which he could apply. The present position is that since May there have been five interest rate rises—a sixth is predicted—in order to control consumption. That has raised the value of the pound and severely cut our exports and attracted imports. These are matters which the Chancellor cannot control through interest rates. It has been said that the instruments left to him are fiscal ones, which may not be attractive or right to use at the present time.
1403 In contrast to what I believe would be the right strategy, he has taxed savings. He has introduced pension taxes and proposes them on PEPs and TESSAs to reduce investment. It seems absolutely illogical. It has been said that no previous Chancellor has attempted to make that move apart from my noble friend Lord Lawson who suggested very clearly when he was in office that it should be done. The proposal was rejected.
The Chancellor is responsible for a massive passing of the buck. He puts up interest rates, with the effect of that on mortgage borrowers and so on, and can then say, "It is nothing to do with us. It is entirely due to the Bank of England". It is as if he were turning to Marks & Spencer and saying, "The Bank of England is not mine. It has the Act which gives it authority to do these things."
However, when one analyses, as my noble friend did, who or what is controlling interest rates, it is something of a charade to say that the Bank is purely independent. I believe he called it a massive quango of nine appointments to the monetary policy committee. Only two of the appointments are in the hands of the Governor of the Bank of England and those are subject to consultation with the Chancellor. So all nine appointments are controlled by the Chancellor. One wants to hear why it could not be just a Treasury committee. It is in fact a Treasury committee, but if it were called that then the Government would take the blame for raising or lowering interest rates. Either move brings enemies. When interest rates are increased it hurts mortgage borrowers and so on. When they are reduced it penalises all those who rely on income from their savings in building society deposits and the like. To say to those who complain, "It is nothing to do with me; go along and see Mr. Eddie George" is just passing the buck.
Having said that, I am sure that the present membership of the monetary policy committee is highly competent. I do not doubt that it will act independently so far as it is able to do so. But it leaves the chairman with one lever only which he can apply and that is the fiscal lever. It is like riding a horse which has lost one side of its mouth. One has a very uncomfortable ride with very little control over where one is going to go. That is the kind of position that this Bill will leave for the Chancellor of the Exchequer.
There will be two bosses in charge of the economy, one elected and the other not. Yet both have a powerful influence on the economy. The old system provided the governor very much with the right levers. He could give very powerful advice to the Chancellor. The Governor's ultimate weapon was always to say, "If you don't like what I say and you are not prepared to take my advice, I shall resign". The prospect of the Governor of the Bank of England resigning put most Chancellors into a very worried state of mind indeed.
That is only the first part. What we have to visualise is the precedent being set for the establishment of the central bank of the EMU. The monetary policy committee will be replaced by six remote foreigners—five, if we promote one member ourselves—who will 1404 soon control our monetary policy and serve the interests of 14 other nations as well as ours. That is not a subject for discussion today. We shall no doubt have some interesting opportunities to do so in the future.
I turn to a few other points. The supervisory function of the Bank of England is now to be transferred to the Financial Services Authority. I am reminded of remarks made by the present Chief Secretary to the Treasury, Mr. Alistair Darling, to the City and Financial Conference in November 1996. He said,A blanket approach, the creation of a 'super regulator' won't do. I know that it makes for convenient shorthand hut the idea that if all the regulators are rounded up and put into one building then we will have a system that will solve all our problems simply won't wash. We believe that in the long run the primary distinction between financial stability and consumer protection should be looked after by different bodies".I very much agree with that. The Bank of England has a knowledge and expertise to judge systemic risks in the banking system. Many of the people who were trained and who practise in that field will be going across to the FSA. I doubt whether one can get any better supervision than that by the Bank of England or indeed anything equal to it. I know that it has its problems and that not everything has gone smoothly and well. But we should retain that facility.
As regards the credit ratio deposit scheme, I welcome very much the inclusion of the building societies. I hope that in due course the scheme can be extended to any similar credit institution. The rate at which credit ratio deposits are subscribed by the banks has been done in order to cover the whole of the banking operation including supervision. It is obviously important that there must be a substantial reduction in that now that the supervisory role has gone to the FSA, which will no doubt be making further charges.
There are a number of occasions when the Bank requires individual banks to provide privileged information which is needed for bank supervision and the like. There should be in the Bill a provision to safeguard the banks, if and when that arises, from any legal action for complying with any such requirement or an acceptance that if that safeguard cannot be obtained they need not comply with the request. When the Minister replies I hope that he will be able to give that assurance. There are a number of other points that will no doubt arise in Committee. We shall have an opportunity to raise them at that time.
§ 12.29 p.m.
§ Lord Peston
My Lords, I warmly welcome the Bill. My noble friend Lord McIntosh of Haringey reminded us that its introduction was an election commitment, but it is a sensible thing to do anyway. Apart from anything else, it legalises—that is probably the right word—the situation that has existed de facto since May 1997. The noble Lord, Lord Roll, reminded us that it is 10 years since the then Chancellor, now the noble Lord, Lord Lawson, first raised the matter when the then Prime Minister rejected it. That has always mystified me. I should have thought that what we are doing today is exactly the sort of thing that we could have expected a Conservative Government to do.
1405 Of course, 10 years is nothing in terms of making economic policy. The other day at Questions, when my noble friend referred to the aim of achieving global free trade by 2020, I was reminded that that would be almost exactly 200 years since David Ricardo laid the foundations for the theory of free trade. With regard to rational economic policy-making, it is probably sensible to think in terms of centuries rather than decades.
I should like to pay tribute to my right honourable friend the Chancellor of the Exchequer on his enormous courage, which this Bill emphasises. He actually did something which has been long overdue. Someone was required simply to say, "Do it". I hope that it will now be done. It looks as though the Bill is the first step on the road to meeting the Maastricht criteria as far as the independence of the central bank is concerned. Perhaps my noble friend will tell us later whether it is. We shall certainly explore that point in Committee.
Referring to the courage of my right honourable friend the Chancellor, I do not think that this is a matter of passing the buck. Not at all. My view is that if it all goes wrong, I do not see how a Chancellor will be able to blame the Bank of England. It will the government of the day and the Chancellor who will be crucified if it all leads to a disaster in macro-economic policy-making. I do not think that this lets him off the hook at all. Indeed, I am sure that noble Lords opposite and their colleagues in another place would not dream of letting the Chancellor off the hook. This is a sensible move in terms of economic policy-making.
Macro-economic policy can function efficiently with an independent bank, provided certain conditions are met. One condition is that the overall objectives of economic policy must be spelt out clearly. As noble Lords are aware, I regard low inflation as one valuable end, but it is only one of the many valuable ends which we ought to be seeking.
The other aspect of policy working is, as the noble Lord, Lord Taverne, put it, that the Treasury must adopt an active fiscal role. The Bill enhances the Treasury's role rather than weakens it. It places much greater obligations on the Treasury. At this point, I say that I welcome the new form in which the inflation target is to be put. Technically, it is much more sensible to specify a mean and then a range rather than an upper limit. Again, my right honourable friend the Chancellor has moved in the right direction.
Having been welcoming so far, my loyalty is tested by the current antics of the monetary policy committee. It appears to be split between leaving the interest rate unchanged or putting it up. However, what this country needs immediately, and as part of preparation for entry into EMU, is a significant lowering of the interest rate, which would then allow the rate of exchange to find a lower level in the market. That would restore the competitive position of United Kingdom industry, especially manufacturing industry. I do not believe that economic policy-making—not merely in the past year, but earlier—has given anything like enough weight to the real economy and to industry. I have listened to the remarks made by my noble friend Lord McIntosh—and 1406 I know why he makes them—but he is still much more worried about keeping the City and the financial markets happy than about those who are actually producing things. We do not have to go back to David Ricardo to remind ourselves that the financial system exists for one purpose and for one purpose only; namely, to make the real economy work better. It has no value whatever in its own right. Therefore, with regard to the monetary policy committee, I hope that what we observe is merely temporary insanity.
The noble Lord, Lord Mackay of Ardbrecknish, made a point about membership of the monetary policy committee with which I agree entirely. It is a completely non-party point because during the past 10 years or more that I have been a Member of your Lordships' House, many of my colleagues have asked how one can ever get to serve on any committee if one lives further north than Cambridge. It has nothing to do with parties; it seems to have everything to do with the London-Oxford-Cambridge triangle. We should do something about that. One or two of those serving on such committees should have not merely Scottish accents, but perhaps even Yorkshire or Lancashire accents. I agree with the noble Lord, Lord Mackay. I do not know the solution and whenever I am asked why an economist in other than London, Oxford or Cambridge is not asked to serve on such committees, I say, "I don't know, but I am in the right place".
I totally support the Bill with regard to moving the regulatory function away from the Bank of England. To put it as mildly as I can, the Bank's record in terms of regulation has been less than good. Here, I disagree with the noble Lord, Lord Mackay. I cannot believe that the new body will not do better. Indeed, on past experience I do not see how it could do worse.
I hope that the new legislation will not be as complicated as all other pieces of legislation on financial control have been. I should like at last to see a piece of financial control legislation that I understand and that other noble Lords—and the Minister!—understand. In that sense, I do not envy my noble friend Lord McIntosh: one day he will have to introduce that Bill to this House. I shall help him as much as I can with it! For now, I ask him a straight question: does my noble friend have any idea when we might get such a Bill?
The Government are rightly committed to openness and accountability in economic policy in general and therefore in monetary policy. I welcome everything that the Bill does to move us towards that end. Obviously, we shall examine such points in a great deal more detail when your Lordships sit as a Committee, but I should like now to ask one or two questions. It is probably not appropriate for my noble friend to answer them now, but I wanted to give notice that we shall want to raise such points later.
We are told that the new court will be responsible for the Bank's "objectives and strategy". One of my difficulties is that I have no idea what that could possibly mean. What are those "objectives" and what is the "strategy" separate from monetary policy? I hope that we can consider that in Committee. Does my noble 1407 friend Lord McIntosh agree that the transparency criterion ought then to be applied to the operation of the new court since its significance has been enhanced?
My own view is that as part of transparency, the Bank should publish its own economic forecasts. It publishes its inflation document now in which we get a snippet or two of its forecasts, which I never trust because I always wonder why certain bits have been included, knowing that a vast amount of other stuff is not there. The Bank should be asked to publish its forecasts in total.
On the question of transparency and accountability, I wonder whether your Lordships might want to consider whether one day we should set up a Select Committee on Economic Policy to take evidence, to hear witnesses and to publish reports on the conduct of the Bank of England and the pursuit of economic policy. I do not think that this is a matter that needs to be left only to the other place.
The question of the reserve powers has arisen. I know that my right honourable friend the Chancellor at some point said that they would be used only rarely. I think that we should table some amendments in Committee so that we can understand what "rarely" means and clarify what is meant by the expressions "the public interest" and "extreme economic circumstances". I can, however, well understand a Minister not wanting to spell out in detail what he would regard as "extreme economic circumstances".
The question has been asked—I have asked it myself previously: on a scale of independence, how independent will the new Bank of England be? It looks to me as though it will probably be as independent as the New Zealand Central Bank—although I am not sure. Partly because of the length of time for which members are appointed, it looks as though it will be rather less independent than the Fed and a good deal less independent than the Bundesbank. One way of dealing with the matter is to have some detailed discussion in your Lordships' Committee.
I should like to make two points about the reserve powers. If we enter EMU, as I believe we should, will those reserve powers be remotely compatible with the Maastricht requirements? I do not believe that they would. The question arises whether somewhere in the European Union the equivalent of those reserve powers should be given a proper statutory basis.
Clauses 11 and 12 are important, but what happens if the Bank of England fails to pursue the right objectives or claims that it has pursued them but has not succeeded? My noble friend has referred to the famous letter. We do not ever want to see such a letter because we do not want the Bank to fail. However, if there were such a letter, what would happen? In particular, are there any provisions for the sacking of the relevant people? The noble Lord, Lord Boardman, referred to the governor threatening to resign. I believe I am right in saying that on the whole governors of the Bank of England do not resign. Nowadays, no one appears to worry about firing anyone. Surely, a failed Bank of England monetary committee and governor should be told, "Goodbye—and there is no severance pay". I accept that that would be a radical departure.
1408 Clause 12(3)(b) makes reference to a notice to be laid before the other place. Why is there no provision for the same notice to be placed before your Lordships? When dealing with matters of this kind my noble friend the Minister used the word "Parliament". Given that he is not a person to make such a mistake, one wonders whether he is assuming that Parliament and the House of Commons are one and the same. Without wishing to be too prickly about your Lordships' rights and interests, I believe that when matters of that kind are laid before the other place they should also be laid before your Lordships so that they can at least say something about them.
Further, in Clause 12(1) the word "may" appears. Does my noble friend agree that in that context the word really means "must"? We have spent hours and hours in your Lordships' House discussing legislation in which the word "may" appears. The lawyers tell us that the word "may" means "must". If it does not mean "must", the whole clause makes no sense. Perhaps my noble friend can deal with that matter.
I believe my noble friend Lord Desai said that there was no point in amending this Bill and that noble Lords were simply here to talk about it and then allow it to pass into law. I hope that my noble friend the Minister does not take that view because there are all kinds of useful ideas that can improve the Bill enormously. I hope that he will provide us with an opportunity when we sit as a Committee to press upon him suggested amendments not of a very controversial kind which will improve the Bill in due course.
§ 12.43 p.m.
§ Lord Cockfield
My Lords, I felt it singularly appropriate that this debate should have been preceded immediately by Prayers. This is a subject that requires more than the degree of wisdom that is usually vouchsafed to man, let alone politicians. I am also greatly touched that during Prayers we had the presence on the Government Front Bench of the Government Chief Whip, which shows a degree of humility in the face of difficult issues rarely shown by the present Government.
It is now over 50 years since the control of monetary policy was seized by the Labour Government of 1945. The result has been absolutely disastrous. Monetary policy is simply the upmarket description of manipulating the value of money. During a period of over 50 years the value of the pound has fallen to four pence. This is a matter in which governments of all descriptions have participated.
§ The Earl of Longford
My Lords, I thank the noble Lord for allowing me to intervene. Does the noble Lord agree that over the past 50 years the standard of living in this country, more particularly that of the working class, has doubled? It is not a bad record when you think of it.
§ Lord Cockfield
My Lords, it is a splendid record, but one good record does not in any way justify a very bad one in another field of activity. In this particular field of activity the record is extremely bad. It can be 1409 fairly said that many of the problems in this country in both the social and economic fields are due to the failure of monetary policy. The relatively poor performance of the British economy—I accept that it has improved in recent years—is due in considerable measure to the way in which monetary policy has been used. Among other things, monetary policy has been responsible for inflation which has destroyed people's savings, particularly those on modest incomes. I do not know whether the noble Earl regards that as good or bad. I believe that it is one of the matters that has contributed to poverty in old age.
The way in which monetary policy has operated has resulted not only in a relatively poor performance in output but, in large part, it has been responsible for the boom-and-bust characteristic, or what used to be referred to as stop-go. We merely alter the names of exactly the same phenomena. Monetary policy and the way in which it has operated has been responsible for that and many of the other failings of the British economy. The poor performance of the British economy relative to other leading economies is due ultimately to poor education, training and management, indifferent investment and other factors of that kind. These matters must be tackled in themselves. No magic wand described as monetary policy can be waved to cure these problems. It does nothing of the sort. If anything, it does precisely the opposite.
Against that long background of failure in this field, one wonders why politicians have persisted with such an approach over a period exceeding half a century. There are various explanations of this. One of the simplest, and a very odd one, is that politicians show a singular inability to learn from experience. They fear that if they change their policies or show any tendency to learn as things go along, they will be accused of inconsistency or of changing their minds.
§ The Earl of Longford
My Lords, I thank the noble Lord for allowing me to intervene again. Is it true to describe the noble Lord as a distinguished politician who has served at the highest levels in government?
§ Lord Cockfield
My Lords, if the noble Earl wishes to be complimentary I am only too glad to accept his compliment. If he is accusing me of having changed my mind—which I have not—I also regard that as a compliment. Sometimes I regard that fact as a criticism. I quite welcome the intervention of the noble Earl on these matters. One of the factors is politicians' fear of being accused of changing their minds and reneging on policies.
There is another aspect. I refer to what is claimed to be the democratic legitimacy of governments. This is an argument that is used against your Lordships' House. It is said that the other place is elected. I believe that the other place, or indeed any politician, is elected to get things right, not to get things wrong. If politicians get things wrong, they do not have democratic legitimacy. One has only to look at what has happened over the past 50 years—of course the noble Earl's memory on these matters goes back much further even than mine—and 1410 one can see the way monetary policy has been used to further aims which are not entirely creditable. There it is.
The question that one immediately has to ask is, if politicians cannot and ought not to be entrusted with this particular function, why is it better to delegate it to bankers? That I regard as an open question. The only points that one can make are these: while the conduct of monetary policy in this and many other countries has never produced the results that were claimed for it, nevertheless, in some other countries, the independence of a central bank has produced greater stability in the value of money, and, on the whole, greater economic progress. That is one argument.
The second argument is of course that bankers are less subject to what are politely described as political pressures. In that respect, I do not agree with the noble Lord, Lord Peston, that there should be a hire-and-fire mentality as regards the Bank of England monetary committee, because the moment one brings that in, one subjects those people, once again, to political pressures. At any rate, I believe that there is a much better case, if one takes the view, as I do—I agree that it is not universally accepted—that a function of monetary policy is essentially to control the value of money. That is a function much better exercised not by governments who have a political interest—in the worst sense of that term—in this matter; it is something much better entrusted to someone who is independent.
That is where my criticism of the Bill comes. I give the Bill a cautious, if hesitant, welcome, but of course it is only one step in the right direction, because it creates a Bank of England which is not entirely independent. It is still far too much under the influence of politicians. That comes out particularly if one looks at Clause 12. It is not just that the so-called inflation target is to be fixed by the Chancellor of the Exchequer; it is that when one comes to Clause 12 it will be the Chancellor of the Exchequer who says what stability in prices means. We saw that in Alice Through the Looking Glass, and that is not a very good precedent for this sort of thing. We also find of course that it is the Chancellor of the Exchequer who will say what the economic policy of the Government is. That might strain his imagination from time to time, but, nevertheless, it is another area in which the parameters can be moved, in which the goalposts can be shifted, and in general matters can be fudged.
I do not agree with my noble friend Lord Mackay of Ardbrecknish in criticising the present Chancellor of the Exchequer for having got rid of this somewhat unwanted baby by handing it over to the Bank of England. I do not know what Mr. Brown's motives would have been, but I have always taken the view that, if government are doing a job which they should not be doing, and if government are doing a job which not only they ought not to be doing but which they are doing badly, then the right answer to that problem is to give it to someone else whose job it is to do it and, it is hoped, will do it well.
That was the argument that I always used in the case of privatisation: that it was absurd for governments to be trying to run industries, and running them badly, 1411 when they should not be running them at all, and should pass them over to someone who might do the job a great deal better. That view has been borne out by the experience of the past 10 years, or so, except for one or two blips recently into which it is, perhaps politest, not to go in any detail. Nevertheless, that is a main point.
I want to draw a clear distinction between monetary policy and fiscal policy. There is the big difference that fiscal policy deals with matters that the Government themselves are doing; it relates to the level of government expenditure; it relates to the level of taxation; it relates to the form of taxation. Those are all matters within the core responsibility of government. where they themselves can decide what happens. In the case of monetary policy, they are trying to alter part of the environment in the hope that people will react in a particular way. However, experience over the past half century shows that people, unfortunately no doubt from the Government's point of view, regrettably do not react in the way that the Government themselves hope.
I shall say merely that I have reservations about the Bill, essentially because, in my view, it does not go far enough; but, apart from that, it is a step forward, even if a hesitant and incomplete one.
§ 12.55 p.m.
§ Lord Shore of Stepney
My Lords, it is tempting to follow the noble Lord's observations on our experience in the post-war years. He has given an account of them which I do not think that everyone in the House is prepared to accept. Surely we have all to accept with some humility that the great aim of the post-war period of using economic policy to enhance prosperity, and, above all, to conquer the scourge of unemployment, has been extraordinarily difficult to reconcile with stable prices and an acceptable level of inflation.
I have to say straightaway, as I turn to the Bill itself, that I do not believe that it will make any great contribution to that end. Is the idea that Chancellors of the Exchequer are so—what?—feeble in their moral character that they cannot resist the short-term pressures of an approaching election? One or two have succumbed to that temptation, but, for the most part, they have been entirely honourable men who have sought to serve the country and to serve, in particular, those two objectives which I mentioned at the beginning of my remarks.
I am not therefore in favour of Chancellors, including the present one, down-sizing their job, abandoning very important controls over the economy. I use the word "down-sizing" because I am conscious that it is not just a matter of giving up direct control over interest rates, which is one of the crucial determinants of economic growth and prosperity in this country; it goes much further than that. My right honourable friend's aims are to strip the chancellorship completely. He wants to join, as we know—he has said it; he advocates it—an arrangement in Europe in which we have for ever abandoned any control over interest rate policy, any control over exchange rate policy, because we are part of a single market, even to accept serious and penalty-laden parameters on his own right to borrow.
1412 The aim—I put it in a simple way—is to give up the whole idea of macro-economic policy as being a responsibility of the Chancellor; and for the Chancellor, as it were, to transform himself into a Chief Secretary. That does not seem to me to be a satisfactory aim either for this Government or for the present Chancellor.
I have a major criticism of the measures in the Bill. I am not referring to what are, to my mind, rather minor measures about openness, greater supervision and supervising the very many different activities of the City. No, it is not that. I am concerned about the central abandonment of control over interest rates. Clause 10 sets out in terms the abdication by the Treasury of control over Bank of England interest rates. Clause 11 gives the Bank of England, hardly surprisingly, the duty to enforce an inflation policy laid down by the Chancellor of not exceeding 2.5 per cent.
What on earth does anyone believe will happen as a result of that? The weight of controlling inflation will inevitably fall upon the Bank of England. As we know, it has raised interest rates—in my view, given its terms of reference, perfectly sensibly—on five separate occasions. Moreover, in spite of the good results of recent economic indicators, it believes that it may have to raise them again. That is a proper reflection of its anxieties about inflation.
What has happened as a result and what was happening before the Government changed on 1st May? The exchange rate was rising rapidly and most disadvantageously for this country. In terms of the deutschmark and European currencies, we have managed to return to the level from which we fled, or were expelled, in total confusion on that famous day in 1992. We have not quite reached that stage yet and I hope that we will not.
The point was properly raised, almost surprisingly, by the noble Lord, Lord Taverne, of the implications of the rise in the exchange rate for fiscal policy. They must be spelt out. One cannot ignore what is undoubtedly the biggest threat to the ongoing prosperity of this country. which is the massive increase in the exchange rate as against the European currencies. That is not to mention the further undermining of our own competitiveness which follows from the appalling events in South-East Asia and the great devaluation crisis there.
Perhaps for a moment I may dwell on the effects which the exchange rate has already had. There is a mass of statistics and information, but for the sake of simplicity I frequently refer to the CBI's quarterly survey. It is up to date and covers about 1,000 firms of varying sizes throughout the British economy. It sends a regular questionnaire to its member firms. There is one question which it always asks and it is included in the January 1998 report. Firms are asked about their optimism about export prospects for the year ahead. The balance is given between those who are positive and those who are negative. The figure for January 1998 stands at minus 22 points. That is the present estimate of British industry of its export prospects in the years ahead. Two additional points are worth reporting. It is not just a snapshot at this moment in time, but what has been the volume of export deliveries during the past four 1413 months? The process is under way. The figure is minus 15 points in the balance between those whose exports had risen and those whose exports had fallen. Finally, there is a volume of export orders for the year ahead. Again, the figure is down on the balance between the positive and the negative at minus 21 points.
That is serious and it has provoked public concern. Incidentally, it has provoked the TUC and the CBI to lament and point to the dangers to employment and the future of our manufacturing industry. They are entitled to do that, but I am a little surprised, particularly at the TUC. Indeed, there is a certain irony. The TUC is complaining about high exchange rates when it and the CBI are committed to the European project of a single currency. Let them complain when that happens and who will listen to them? It is an extraordinary demonstration of what could well happen in the future.
I should also mention the dangers and penalties which this country has experienced as a result of exchange rate policy or the abandonment or temporary surrender of it. The noble Lord, Lord Roll, in his admirable history of this century, rightly pointed to the disastrous decision of a then Conservative Chancellor of the Exchequer in putting us back on the gold standard in 1924. He mentioned the other disastrous decision of the Labour Chancellor of the Exchequer, Lord Snowden, to return to the gold standard in 1931.
I would add two more recent decisions. Have we forgotten the disaster which occurred when we joined the exchange rate mechanism and found ourselves unable to control interest rates in the effort to maintain an exchange rate? What do we believe will happen if we as a country are so foolish—I do not believe that we shall be—to join the single currency and to abandon forever any possibility of controlling our own fortunes. I said "controlling" but I like the metaphor "navigating", used by my noble friend Lord Desai. Economic policy is not about control, it is about steering and navigation. If we give up the instruments of navigation, as we would be doing, we shall have no influence on our own future.
§ 1.6 p.m.
§ Lord Cobbold
My Lords, I am in the camp of those who welcome the Bill. I agree with the noble Lord, Lord Peston, that it was a forthright step of the new Labour Chancellor last year to grant operational independence to the Bank of England in the management of monetary policy.
Although I welcome the move towards independence, I cannot but feel a touch of sadness in respect of the other main feature of the Bill which deprives the Bank of its supervisory role over the banking system. This role, historically shrouded in the mystique of a relationship built up between the Bank and the City over the centuries, inevitably deprives the Bank of an important part of its traditional role. By and large, with some exceptions, it has performed that role with skill and discretion over the years, earning the respect not only of the City but of central banks and financial institutions throughout the world. There are good 1414 reasons for the new proposals, as explained by the noble Lord, Lord McIntosh. But nevertheless, it is sad to see the breaking of such a long-standing tradition.
There are some interesting contrasts, as was pointed out by the noble Lord, Lord Roll, between this Bill and the Bank of England Act 1946. In addition to nationalising the Bank, that Act formalised for the first time the Bank's powers of regulation of the banking system which are now being taken away. The 1946 Act, in the drafting and subsequent implementation of which my father played a key role as deputy governor, was introduced by the post-war Labour Government which, like our present Administration, had a very large majority. As had been noted by other noble Lords, attitudes at that time were very different.
While we are influenced by 50 years of battling with inflation, it was the great depression of the 1930s and its consequences that drove their thinking at that time. When the Bill was given its Second Reading in your Lordships' House in January 1946, Lord Pethick-Lawrence, for the Labour Government, made it clear beyond doubt that major decisions on monetary policy, domestic or external, were the final discretionary responsibility of the Chancellor of the Exchequer rather than of the Bank of England, which was not responsible to any body of public opinion. New Labour has certainly come a long way since then.
It is interesting also that in the House of Commons debate on the 1946 Act, Robert Boothby quoted Abraham Lincoln's famous statement that the privilege of creating and issuing money is not only the supreme prerogative of the government, it is the government's greatest opportunity. Money will cease to be master and become the servant of humanity. Democracy will rise superior to monetary power.
We have all learnt, possibly with one or two exceptions—for example, the noble Lord, Lord Shore—from the inflationary bruises of the past 50 years. We have seen and understand now the temptations of democracy. But certainly those old sentiments die hard and are still manifest in the Bill that we are considering today.
Indeed, as has already been said, Clause 11(b), gives the Bank a second objective beyond, although subject to, the maintenance of price stability; that is, to support the economic policy of Her Majesty's Government, including their objectives for growth and employment. Furthermore, in Clause 19 the Treasury retains reserve powers to give the Bank directions in respect of monetary policy if it is satisfied that the directions are required in the public interest and by extreme economic circumstances.
The implications of those reserve powers go beyond the purely philosophical. The Government have expressed their intention to join the European single currency if certain economic criteria are met. But one criterion they must meet in those circumstances is that the national central bank is independent and its statutes must be compatible with those of the new European central bank. It is doubtful, whether, with the reserve Treasury powers, the Bank of England, under the terms of this new Bill. will meet those criteria. Therefore, 1415 I join the noble Lord, Lord Mackay, in asking whether the Government are planning a second Bank of England Bill in a few years' time.
In practice, the Bank has already been operating for some months under the new monetary policy regime. It is significant that this week we have seen minutes of the first meeting of the MPC where there has been a difference of opinion on whether or not interest rates should be raised. There can be no doubt that the real tests of independence are still to come.
Indeed, I am concerned as we look ahead to a situation in which perhaps 11 nations have joined a single currency, with sterling remaining as a satellite currency on the outside. The sterling money market is deep and very liquid. There is a great variety of derivative instruments in which to operate. Sterling is indeed a trader's currency, a playground for foreign exchange dealers and for hedge funds. In the circumstances, and given differing phases in the economic cycles of this country and the euro area across the Channel, sterling could suffer from bouts of extreme volatility. In that event, the monetary committee of the Bank may be faced with some extremely difficult choices.
I am optimistic by nature and I wish it well but it will require very close liaison between the Treasury and the Bank to ensure that independence wins for the Bank the long-term respect of the British people.
Lastly, in that context, I believe that the Government should quickly announce the re-appointment of the present Governor. I understand that there may be something in the Financial Times this morning which I have not seen. That would be a confidence-inspiring gesture. With the difficult times which I believe may lie ahead, the Bank is best placed if it is in the hands of someone as experienced and respected as the present Governor.
§ 1.13 p.m.
§ Lord Randall of St. Budeaux
My Lords, I should like to look at the Bill before us today, which I fully support, in the context of Britain's entry into the European monetary system to see how it can contribute to that process. I appreciate that that does not fall entirely within the scope of the Bill and I recognise that there will have to be further legislation for that purpose. Nevertheless, the courageous and imaginative step of my right honourable friend Gordon Brown, Chancellor of the Exchequer, in creating an independent Bank of England in relation to monetary policy, is certainly a necessary step towards EMU membership.
Rather than making a wide-ranging economic speech today, I should like to look at some of the specifics in the Bill before us. I start by referring your Lordships' House to Part I, Clause 1, which refers to the court of directors of the Bank of England.
Presently, the Bank of England has a governor, a deputy governor and 16 directors of whom four are executive. Under this Bill, there will be a governor, two deputy governors and 16 directors all of whom will be non-executive. All those non-executive directors will form a committee of non-executive directors. It is 1416 interesting that that committee will be chaired by a very senior director appointed by the Chancellor. It is difficult to understand completely from the wording of the Bill what exactly that means, but I believe that we can assume that that person will be someone of considerable clout.
We know also that that committee of non-executive directors will have the power to set up specialist sub-committees for scrutiny, monitoring and reviewing. I believe that that is extremely significant. But also the committee of non-executive directors in particular will be empowered to review whether the monetary policy committee is doing its job properly—for example, whether it has carried out sufficient data collection about what is going on in the regions in order that the task of formulating monetary policy can go ahead properly. Therefore, it would seem that the new committee of non-executive directors will have a powerful scrutiny function.
The question that arises in my mind is how exactly the MPC and the committee of non-executive directors will work together, as they seem to have overlapping responsibilities. I very much hope that in Committee we shall be given a clearer understanding of that: alternatively, perhaps the Minister could comment on that in his winding-up speech.
It is clear that the committee of non-executive directors will have as its chairman a senior non-executive person who will be appointed by the Chancellor of the Exchequer to look after the interests of the shareholders of the Bank; that is, of course, the Government. The upshot is that we have a Bank of England advisory committee—namely, the monetary policy committee—which appears to have responsibility for advising the governor on monetary policy, being reviewed by the committee of non-executive directors headed by a very senior chairman appointed by the Treasury.
What is the consequence of that? It is that the Government, in devolving powers for determining interest rates to the governor of the Bank of England seem to be retaining influence over monetary policy through the MPC via the committee of non-executive directors. That is very significant.
The question that arises is whether the Government's approach to influencing monetary policy is reasonable. I believe that the answer must be an emphatic "yes". In fact, I wonder whether it even goes far enough. Perhaps I may explain to the House why I take that view. In the near future, there is no doubt in my mind that Britain will he joining the EMU. I was in Brussels on Monday talking to the commissioner responsible for such matters, and the thinking levels which prevail in Brussels and those which prevail in Britain seem to be at such variance that it makes such visits worth while. However, the European Bank itself will be extremely independent. If one looks at the Maastricht Treaty and the other treaty articles, it will be seen that, in treaty terms, the bank is unchallengeable. So the control of monetary policy will rest with the European Central Bank, and the committee of the ESCB (the European system of central banks).
1417 It is interesting to note that the executive of the European Central Bank will have five members and the committee of the ESCB, if I may put it that way, will have about 11 voting members, each of whom will be governors of the banks from the member states which have joined the EMU. So we are in a position, quite unlike that of the Federal Reserve, where the representatives of member states on the ESCB will have more votes than the executive directors of the ECB. That means that the power will rest with the ESCB.
Therefore, in the UK case, that means that the Governor of the Bank of England, currently Eddie George, will be a voting member of the ESCB and part of the group which determines interest rates and elements of monetary policy. The conclusion that I draw from that part of the Bill is that the monetary policy committee and the committee of non-executive directors will be key organisations in influencing the governor and, therefore, the ESCB. In that case, I believe that the Government are absolutely right in strengthening the committee of non-executive directors because its influence will be so very important when we join the EMU in the near future.
The question I would ask in that respect is whether the Government have gone far enough in emphasising the calibre of the members to be appointed to the Bank of England. It is a crucial committee. The Government have emphasised the importance of high qualifications for the senior member of the committee of non-executive directors, but I wonder whether we can go further. I shall be interested to hear the view of my noble friend the Minister on whether he feels that perhaps more could be said in Schedule 1 to the Bill about the calibre, or even experience, needed by members of the court. I am not suggesting that the schedule should go into too much detail on this, but I should have thought that we ought to have people with good sound banking experience, and certainly with good sound experience in scrutiny work. Those qualities should be mandatory, but I am not sure we necessarily need such detail in the Bill; but, my goodness, we should have an understanding in that regard. Does the Minister agree that the calibre of all non-executive directors is just as important as the calibre of the senior non-executive director appointed by the Chancellor of the Exchequer, which is referred to in the Bill? My inclination would be to table an amendment either in Committee or on Report. Nevertheless, I shall seek the advice of my noble friend in that respect.
I should like to say a few brief words about Clause 3(4) under which the Chancellor of the Exchequer may designate one of the directors to chair the subcommittee of non-executive directors. That person will indeed have considerable influence with the Treasury, the Bank and, ultimately, with the ECB and the ESCB. Perhaps my noble friend the Minister could tell the House what the working relationship will be between the senior non-executive director and the two deputy governors. One of those governors will have direct executive responsibility for monetary policy to support the Governor, while the other one will have responsibility for financial stability. So there is considerable overlap 1418 there. Much has been said in press reports about the Bank of England having complete independence for monetary policy. However, is it not the case that there will be more co-operation in arriving at interest rate decisions between the Bank and the Treasury than perhaps press reports have indicated?
I turn now to accountability and transparency about which I feel most strongly. I have in mind Clause 4 of the Bill which touches on the question of accountability. Again, in Brussels, I see a changing position in that area. When one talks about a strongly independent central bank, that does not seem to be consistent with the notion of accountability and transparency. Much debate is taking place on the matter with which I personally agree; namely, that one can and must have accountability and transparency with this banking system. Certainly, in order to carry the people along with the whole question of EMU and central banks, the EU believes that there is a need to be open about the affairs of the ECB and the ESCB.
At present, the proposals are that the ECB must produce a report every three months on the activities of the ESCB. Moreover, annual reports will be produced for the European Parliament, the Commission and, I believe, the Council of Ministers. Again, I may be wrong—and, if so, I shall seek my noble friend's advice—but deliberations certainly take place in the governing council of the Bank of England which are still being run in a confidential way. Such matters refer to monetary policy arrangements. I noted most carefully the remarks of my noble friend in his excellent opening speech that the quarterly report requirement would be put into statute. I believe he also said that other reports would be produced.
However, having said that, I should be grateful if my noble friend can tell me whether, despite what he said in his opening remarks, he believes that there will be further pressure for the Bank of England to be more open in its deliberations than is the case at present, although Britain will initially be outside the EMU. Does my noble friend agree that it would be desirable to look again at the question of openness in the Bill, so as to at least match the standards currently being considered in the European Union even though we will not be joining EMU in the first wave? There were other matters that I wanted to raise but time is cutting me short. I believe that the Bill is an excellent one and deserves the full support of this House.
§ 1.29 p.m.
§ Lord Stewartby
My Lords, I should begin by declaring certain interests. I am deputy chairman of an international bank and chairman of its audit committee. I am also a director of a building society. In the 1980s, as a Treasury Minister, I was responsible for the Banking Act of 1987. For four years until the end of last year I was a member of the Securities and Investments Board, latterly the Financial Services Authority. It is tempting to enter into the wide-ranging debate on monetary policy, as many other speakers have done. Although I wish to say a few words about that, I want to concentrate on certain matters relating to 1419 supervision which have not been so heavily covered in your Lordships' remarks so far but which constitute a major part of the Bill.
As regards monetary policy, it seems to me that the vital step was taken by my right honourable friend Mr. Kenneth Clarke when he was Chancellor in opening up a much more transparent discussion of policy decisions about interest rates, and that the present further step was sooner or later an inevitable consequence of that greater transparency because it was not reasonable to have a continuous debate as to whether there was a dispute between the Chancellor and the Governor, and whether it was politically derived, or how it was to be interpreted. It seems to me that the present proposals are themselves sensible and practical but the debate has correctly drawn attention to the fact that one cannot separate monetary policy in isolation from other aspects of the economy, as my noble friend Lord Cockfield and many others, including the noble Lord, Lord Roll, said. There will be tensions in that relationship. I do not necessarily believe that the Bill has provided all the answers, but it will be an evolving scene.
The most important consequence of these changes—which go back a few years—is that there is now an attempt by the monetary authority to anticipate future inflationary pressures. In the past there was too much of an inclination to take measures—particularly in relation to interest rates—only after the signs of substantial change in the economy had become all too evident, and at that stage, in arrears, it was necessary to implement much sharper interest rate moves in order to correct those positions. I believe that the present system and the one now proposed are designed to ensure that the monetary authority looks ahead and tries to anticipate what will be needed in the way of monetary conditions to ensure reasonable economic stability in terms of inflation. I do not think it is possible at this stage for any of us to guess how well it will perform, but I am sure this is the right way to approach the matter. It will not abolish the business cycle; no government and no monetary authority can do that. However, I hope that it will succeed in making that cycle less violent so that the economy does not become too over-heated or, if some slowing down is necessary, does not require a full-blown recession.
I turn to the supervisory matters in the Bill. When we were discussing what should be included in the Banking Bill in the 1980s we were faced with the potential conflicts of the Bank of England as a supervisor and as a lender of last resort to which noble Lords have alluded. At that time—I suppose one could fairly describe it as an interim solution—we felt that it was necessary to have some separation from the mainstream of the Bank of England for the supervisory process. That is why the Board of Banking Supervision was set up. It was a sensible step at that time, but the world has moved on. Banking and securities markets are increasingly overlapping and to have separate supervision for banking and for securities markets is no longer such an evident virtue as it was some years ago.
Other countries are moving in the same direction. There is a growing case now for ensuring that supervision of these coalescing markets—which are 1420 becoming increasingly international and therefore more complex—should be handled in a way which is separate from the traditional functions of central banking and notably monetary policy. That throws up some other difficulties of course. If the Bank of England is to remain responsible for the stability of the system, it needs a great deal of information about individual institutions. Whereas it was able to gain this through the supervisory role, it will now either have to have it at second hand, or it will have to duplicate part of the lines of communication between institutions and their supervisors.
A number of comments have been made about the costs of regulation and supervision. I am more concerned about the costs to the institutions which are being supervised than about the actual costs of running a regulatory system. My experience of the Financial Services Authority was of a cost-conscious organisation, tightly run and operating its budget in a disciplined way. It was run by high calibre, dedicated people who realised that they were spending other people's money and were cautious about it. Of course in any organisation economies can be made but I do not believe it to be an extravagant body in its nature. Indeed there should be possibilities for saving because some duplication in the current system should disappear with the integration of various forms of supervisors into the FSA. If you have a liberal financial centre with the reputation of the City of London, in order to be a world class financial centre it needs world class regulation and supervision. The proposals which we now have are likely to assist us in retaining that status for London.
I mentioned that markets are becoming more international. This means that the international dimension has to be taken into account by supervisors. That has added to the complication and the cost of supervising major international banking, insurance and other financial institutions. In my view the danger is that one has excessively detailed and intrusive supervision. Supervisors have to strike a balance between having the necessary level of understanding of the institutions they are looking after but not trying to tell insurance companies, banks and others how to run their businesses. Despite what the noble Lord, Lord Peston, said, I think that with one or two unfortunate exceptions the Bank of England has carried out its role pretty well. I hope that its approach to supervision can be preserved in the context of the new organisation.
However, the Financial Services Authority will face difficulties in that it has to look in two different directions. On the one hand it has to protect the position of the consumer at the retail level; on the other it has to ensure the soundness of big international institutions. My own view, from experience both as a practitioner and on the SIB, is that more emphasis needs to be placed on high level controls on defined lines of accountability and responsibility; on the calibre of the individuals at that level; and on the general culture of compliance throughout an organisation. I say in parenthesis that I doubt whether the Barings affair would have developed as far as it did with such catastrophic consequences if that company had had its equity publicly quoted and had followed the requirements of 1421 having an independent audit committee which asked awkward questions of the company's auditors. If that had happened I do not believe that it could have ended up the way it did. However, one can say that with the benefit of hindsight. We need to learn the lessons of these affairs. There is a triangular memorandum of understanding between the Treasury, the Bank of England and the Financial Services Authority designed to deal with the situation of there no longer being a bilateral relationship between Treasury and Bank but a triangular one and the lender of last resort not being the supervisor of institutions in the financial sector. I hope that this will work in practice. It is a sensible memorandum in its concept.
However, when serious problems arise, they come suddenly. It is difficult enough on a bilateral basis between Whitehall and the Bank to achieve rapid decisions in such cases. With a triangular arrangement I fear that it will take a little longer. I am also bound to wonder whether the traditional role of the Bank of England in assisting the stability of major companies in the economy as a whole, beyond deposit takers, will be catered for under the new arrangements. I remember the 1970s when there was a collapse of the property sector. The Bank of England was able to use its offices to secure lifeboat support in a way which went beyond the banking institutions themselves. Under the new arrangements I do not see how that will be provided for.
Finally, while I accept that the movement towards a very large omnibus regulator for financial activities of different kinds is now inevitable, and in many ways desirable, we have to accept that there are inherent problems of managing any large organisation. This will be a large, diverse organisation which will have to face in different directions at times. It will not be easy to run it in a way which meets all its objectives. It will need common standards, but it will need to apply them in different ways. This will be a tremendous task for the management of the authority. I have great confidence in Howard Davies and his team. I do not think that there could be better people to try to bring this about. But it is a major task. It is not one which has been attempted on this scale in any other country. I wish it well, but 1 have to keep my fingers crossed.
§ 1.41 p.m.
Lord Bruce of Donington
My Lords, every now and again Parliament has laid before it a Bill of a highly specialised nature, dealing with a specific section of our economic and financial activities and the institutions that administer them. It is right that that should be so. We have had today a quite limited but nevertheless penetrating analysis on the nature of the steps proposed and the effect of them on the immediate environment of those concerned. So far as it goes, that should be done.
However, we have to be careful that when we have considered these questions on their intrinsic merits, we have to restore them into the context into which they are taken. The context is the fortunes of the nation as a whole. Where do the steps to be taken lead us? What effect do they have on the ordinary lives of citizens?
1422 In our capacity as Members of Parliament, and in one House or the other, we are not only enjoined to examine the activities of experts, we have to take a general view as to what happens to the population as a whole. How do these steps affect them? How relevant are they to their happiness or unhappiness, their fortunes or misfortunes? The overriding duty of Government is not to consider matters in isolation but within the context of the nation's fortunes a whole.
I have but little qualification to address the House in what may be considered presumptuous terms. I remember well in October 1990 when all the political parties, and the Bank of England, took a decision to enter into ERM. I, together with a few of my colleagues in both Houses and of all parties, ventured to dissent from that proposition because we thought it would lead to considerable trouble. Who was right and who was wrong in those circumstances? The experts put forward and supported the proposal that we should enter the ERM—and nonsense! I remember it well. My own party started the issue off three days before the Conservative Party conference in the October. The Liberal Party had decided automatically anyway because they had been fond of it from the beginning. The Conservative Party had decided, and the Bank of England agreed. But who was right? In fact we were right.
I say this in order to defend the position of the politician as against the expert. My old chief, Aneurin Bevan, had the saying—I still regard it to be a profound truth—that the expert should be on tap, never on top. That event well illustrated that saying.
Today we are discussing a Bill which takes away specific powers from the Government and hands them to the Bank of England. I shall refer again later to the section of the 1946 Act. The section provides for directions to be given by the Treasury or the Government to the Bank of England. Section 4(1) of the 1946 Act—the noble Lord, Lord Cockfield, regards the policy as an unqualified disaster—states:The Treasury may from time to time give such directions to the Bank as, after consultation with the Governor of the Bank, they think necessary in the public interest".That is emphatic. There have been many endeavours today to demonstrate to this House that these provisions really do not mean what they say, that there is not really much difference anyway, that this has been unofficially always the position and that we need not bother much about them. But the words are specific in the Bill. The Bill states:In section 4(1) of the Bank of England Act 1946 … at the end there is inserted, 'except in relation to monetary policy'.That seems to be quite emphatic. It is so important that it has to be put in law. There is no question of any regulation or understanding. The step is so important that the House has to legislate for it. Moreover, it can only reverse it or give some amelioration for its provisions, under a later section of the Bill which requires a regulation to be laid for affirmative resolution within a period of 28 days—or whatever it is—when it is in the public interest, or when there is an economic event of some disastrous importance. What those circumstances are, one does not know, or whether they 1423 would have applied, for example, on 2nd September 1992, and how catastrophic that might conceivably have been.
What are the effects of this step? As we know perfectly well—and numerous examples have been given in this debate—there have been five or six "hikes" in Bank rates so far. What effect has that had? It is common ground and few would dispute it that the exchange rate of the pound has been such as to over-value the pound against both the dollar and the deutschmark. That in itself has had further consequences. The over-valuation has meant that British exporters are finding it increasingly difficult to export British products. On the other hand, importers find it very much easier to import from other countries as a consequence.
What are the results of exporters finding it more difficult and importers finding it easier to conduct their affairs? First, it must be remembered that the CBI comprises both importers and exporters, and that the importer section is probably highly gratified. That is reflected in the inconclusive nature of some of the voting. But what happens in the meantime? It means that more unemployment occurs. Firms are there to make a profit, and if they cannot export their goods and see even less prospect of orders materialising in the future, they will cut down on their labour force. The joint effect is that pressure is put upon the whole of British industry, because of the less competitive nature of our domestic manufacturers, which is unable to export so easily and, again, find it difficult economically to compete with imports entering the country. There is a "double whammy" effect.
But that is only part of the story. What is the other result of a rise in interest rates? Surely it is the effect on loans to the ordinary public—on mortgage rates, and so on. There is a diminution in spendable income for those who have taken out mortgages on their houses: they have less money to spend. If there is less money to spend, there is less effective consumer demand. Less consumer demand, together with competition from importers, once again has an adverse effect on British industry. Indeed, more than that, it affects the attitude of the ordinary person who is subject to the extra charges on income, and if they are unemployed, their employment prospects suffer.
Overall, there is a further effect, which has a further adverse influence on British policy. Concurrent with the events that I have described, there is a deterioration in the balance of payments, making the position even worse. It makes it more difficult for the Government to continue to look after the affairs of the ordinary person. And it is the ordinary person that we have not heard very much about. I have not heard from the Government, or from those who have supported the Government in this matter, any mention of full employment. To me, that is surprising. We are living in times when the figure for the unemployed in the United Kingdom is at least 2,800,000, and probably very much higher than that. Yet no observation has been made as to how the steps that are to be taken by the Bank under the new laws will improve the lot of those who, through no fault of their own in most instances, are unemployed.
1424 No indication has been given as to what, in view of the adverse circumstances created by an over-valued pound and an over-hyping of local interest rates, will happen to domestic investment. We all know perfectly well that although the bank rate may be 7¼ per cent., that is not the rate to small businesses. On any overdraft they arrange, the rate is more like 12 per cent. to 13 per cent., and in some cases 15 per cent. or more. That is also true of temporary loan facilities. Those are the facts. They certainly do not produce a sense of euphoria and well-being among the thousands of owners of small businesses upon which the future of this country is said fundamentally to depend. On the contrary, the tendency is that more small businesses are failing, and at an alarming rate. The evidence is that numbers of people are being deterred from setting up small businesses.
Those are the matters which, I respectfully suggest, have to exercise our minds as we consider the situation from our own perspective—which in some cases is limited to university precincts and academic institutions and is not always embarrassed by any contact with real life as it is lived by millions of our people. I pay honour to them. They are entitled to their point of few. The noble Lord, Lord Cockfield, spoke about what he regarded as the disasters of the Labour Government of 1945. Perhaps I may point out that in the quarter of a century that followed—and the credit belongs to the then Conservative governments as well as Labour governments—the inflation rate over the whole period did not average more than 3.6 per cent., which is perilously near the 3.5 tolerance mentioned earlier. Moreover, unemployment never exceeded 3 per cent. of the total as compared with the 22 per cent. it reached at one time (when the noble Lord, Lord Cockfield, was active in this House) at the hands of Sir Geoffrey Howe, as he then was.
We ought, therefore, to take a further look at this matter before we throw our hands up in ecstasy, even in Brussels, where, I observe today, the new parliamentary building has been opened, at a cost of some £670 million, to accommodate 700 MEPs for a certain number of weeks a year. We ought to take another look. Above all, when restoring the arguments to the setting from which they emerge, we should always have regard to the aim, which is not, unfortunately, explicitly stated in my party's manifesto, of full employment. Full employment—or employment where the unemployed are only marginally higher than the vacancies, which is the old definition—is of prime regard to our country.
I hope therefore that we may pause to reflect on these matters when, within a couple of years, the regulations have to come in suspending the existing amendment to Clause 4, which in certain grave economic circumstances, or certain unforeseen events, will soon be upon us unless we are very, very careful indeed.
§ 1.59 p.m.
§ Lord Sudeley
My Lords, I have two interests to declare, both concerned with Lloyds Bank, which, in the experience of the Independent Banking Advisory Service, has caused more complaints than any other bank.
1425 The first case concerns the loss of our two old estates in 1893. Whatever our debt accumulated through the agricultural depression at that time, that debt was covered twice over by very large assets. Nevertheless, we were defeated in our intention of selling one estate and keeping the other when the bank filed a petition for bankruptcy against us to force the immediate payment of the debt on the nail. Nothing was left. The bank is adamant that it has no information about why it did that. It was all so unnecessary when we had such large collateral.
The second case concerns the handling by the bank, as executor and trustee, of 63 freehold reversions in my grandmother's estate. In her will, my grandmother stipulated that no reversions of properties were to be sold until the leases fell in. The bank did the opposite and sold all the properties at what they would fetch at auction without reserves, when all auctions had rings. The bank insists that it has not kept records of the reasons for the sale.
The Bill is divided into two halves: the transfer to the Bank of England of control over interest rates and the transfer from the Bank of England of its old supervisory role to the Financial Services Authority.
To deal first with interest rates, we are told that the Bank of England is setting them in line with government policy to set the target on inflation. But who creates the inflation except the banks themselves, lending more money than they have? This scenario would be relieved if, in line with the thinking of the Christian Council for Monetary Justice, the meetings of which in another place are chaired by the Member for Great Grimsby, all laws protecting money lenders—that is to say usurers, who lend without risk—were rescinded and banks were therefore obliged to put the large resources at their disposal where they are needed, at risk in industry. That has happened in Germany to some extent, and more especially Japan. The Government have a great opportunity to improve the national economy as a whole.
To revert to the domestic difficulties created by usury, there is too much debt because the more debt is created the better banks do. Why, otherwise, do banks make excessive loans without ascertaining properly whether debtors can repay, only to involve themselves in a conflict of interests in their roles as creditor and service provider, usually to the detriment of the customer?
In advising on debtor strategy, owing to their obsession with liquidity or what is called the cardinal rule in business—that liquidity or cash flow is more important than capital—the banks ignore collateral when they should not, and at advanced level the banks simply do not have enough specialist expertise to deal with debt.
The body which does have that expertise is the Bankruptcy Association. Let me pay a quick tribute to its huge successes. It found that creditors accept informal arrangements for debtors because they see that the Bankruptcy Association's fees in setting up the arrangements are minimal. The association has reached agreements with banks and other lending institutions for 1426 as little as five pence in the pound and it has also saved hundreds of matrimonial homes, even where there has been a second charge on the property.
I turn to the supervisory role. We know that the Bill is the first stage. The second stage is to amend the Financial Services Act 1986. The second piece of legislation will be published in draft form for consultation in the summer. Perhaps I could offer a few comments on it.
What are the problems in the light of which, as perceived by the Independent Banking Advisory Service, the supervisory role under the Financial Services Authority needs enlargement? Banks are incapable of regulating themselves. There are three areas where the Independent Banking Advisory Service has identified abuse. The first is false affidavits. The Independent Banking Advisory Service has found that many affidavits sworn by bankers are untrue. Many statements are made deliberately and untruthfully to achieve the result which the bank needs. This is compounded by banks making contemporaneous notes of untrue events and conversations, to cover their position, should the case come to court.
Secondly, there is concealment of information. Banks have total control of their own records, and if they stonewall there is nothing anyone can do. If you sue the bank, it hides behind lack of documentation. If the bank sues you, documentation is found or discovered or there is further documentation to support the matter being raised.
Thirdly, there is abuse of the present unnecessarily complex legal system with its endless appeals. Banks use the legal system as a backstop to prevent serious complaints being fairly resolved. With the banks' vast resources providing expensive teams of legal advisers, the bank customer is outspent, outgunned, locked into a long process to the bank's advantage, regardless of the issue or complaint.
What are the solutions? The National Consumer Council urges that statutory force should be given to the code of practice provisions. The Government must empower the Financial Services Authority to make compliance with the banking code a licence condition, and the new regulatory body must be responsible to the Government, not to the banks.
I conclude with three detailed recommendations of the Independent Banking Advisory Service. First, there must be a public record available for inspection regarding serious complaints against a bank, together with the result and determination. Secondly, the new regulatory body must have power and clout, similar to those of Customs and Excise, with search powers. Banks do not provide discovery of documents to their detriment, even when subject to a court order. Thirdly, secret notes and memoranda regarding discussions and meetings with customers—often untrue and used in legal action later—must be outlawed. Instead, all notes and records of meetings where agreements on security and holding of assets are discussed are to be agreed with the customer and signed at the time.
Powerful though banks may be, they are, thankfully, sensitive to political pressure.
§ 2.7 p.m.
§ Lord Montague of Oxford
My Lords, when I read the minutes of the last meeting of the monetary policy committee, I found the following statement:An immediate move in interest rates—that means upwards—would send a clear and early signal to the labour market of the Monetary Policy Committee's determination to achieve the inflation target".I mention that because I want to move straight away into the composition of the monetary policy committee. I am an industrialist. Anyone who has run factories throughout the land and thinks that raising interest rates is sending a signal to the labour markets that we should curb a wage demand has not worked in any of the factories for which I have been responsible. When interest rates are increased, the first thing that happens is that the unions say, "Right, we want a corresponding wage increase". And that takes me to the composition of the members of the monetary policy committee.
At the moment we have eight economists. We have heard some wonderful things from the economists today, but the point made at the beginning by the noble Lord, Lord Mackay, in relation to the importance of having people from the sharp end, is extremely relevant. That is why I am pleased to read at Part II. Clause 13(4) of the Bill:The Chancellor of the Exchequer shall only appoint a person under subsection (2)(c)"—as a member of the monetary policy committee—if he is satisfied that the person has knowledge or experience which is likely to be relevant to the Committee's functions".I take heart from that. I interpret it as implying that the Chancellor will be moving in the same direction as the Fed. The equivalent of the monetary policy committee in the Fed has 12 members. I am sure that the House will be interested to know that only five are economists; three are bankers; one is an expert in business administration; one an expert in finance and insurance; one an entrepreneur with manufacturing knowledge and one experienced in financial institutions. The Fed seems to be doing quite a good job and I very much hope that we can learn from that.
Whatever we have depends on confidence; it is not only a matter of structure. It is therefore timely that there should be an article in the newspaper today to which it is appropriate to draw attention. It is imperative that there is confidence in the country in relation to the Bank of England, the monetary policy committee and the Chancellor. The example I give the House shows what might happen and what should therefore be avoided. The Financial Times contains a long and what seems to me to be an authoritative article indicating that next week it will be announced that Mr. George has been reappointed as the governor. It goes on to state that Mr. George has not yet been told about that; he will be told about it next week. However, Bank of England officials are already commenting on it. It also states that, contrary to what is in the Bill—that the governor will be appointed for a term of five years—consideration was given to appointing Mr. George for two years. However, that was reconsidered and it will in fact be five years.
1428 That kind of article is destabilising. It is the sort of thing that destroys confidence. I presume that it is the long hand of some spin doctor and I hope that, wherever the spin doctor may be, we can have less of spin doctors and more decisions taken and announced in a proper manner.
I turn to a further aspect of the new Bank of England with principal responsibility for interest rates. As I understand it, the Bank of England will be asked to audit itself. I wonder whether that is sensible. Again, as I understand it, and I may be incorrect, the audit will take the form of the quarterly edition of the Bank of England's inflation report. I hardly think that the Bank of England is likely to criticise itself and therefore I wonder whether there is a case for looking at who should be responsible for conducting an independent assessment of the Bank. I heard mention earlier today that it is something that could be undertaken by a committee of this House. That is a thought worth pursuing.
I turn to the new unifying body, the Financial Services Authority. For a period I was the chairman of the National Consumer Council. It was during that period that I frequently had to discuss with the then Minister responsible, Michael Howard, the extent to which the Financial Services Act was likely to be successful. Naturally, we were not in total agreement. I fear that the line that I had to take with him has proved correct; namely, that it absolutely failed to win consumer confidence. The new unifying body must have as an important objective the gaining of consumer confidence.
You do not gain consumer confidence when you speak and write in language which they cannot understand; you do not gain consumer confidence when there are adverts on the television with type of a size that cannot be read; and you do not gain consumer confidence when voice-overs on the television state requirements at such a speed that they are absolutely incomprehensible. I very much hope that the new unifying body will be sensitive to the needs of consumers and not just to the requirements of supervising their practitioners.
We have said nice things about the Bill which I think are totally justified. They lead on to nice things about the Chancellor, which I think are totally justified too. I want to draw attention to another decision the Chancellor has taken. It really has nothing to do with the Bill but you have to see these things in the round. It is worth mentioning how important I believe it to be for the country that the Budget has been moved to the spring. It has been destabilising for commerce that Budgets have turned up in November, the peak time of seasonal trading in the year, which has very often disrupted trading. That is another wise decision of the Chancellor.
Coming back to the minutes of the monetary policy committee and comparing those minutes with the minutes of the federal open market committee, which is responsible for the same matters in America, I draw to your Lordships' attention a difference between the two sets of minutes which I think might be valuable to 1429 consider. As we know from the last minutes of the monetary policy committee, the identity of the dissenters was given but no reason for their dissent. Of course you can follow the minutes and assume that where they did not follow the decision, that was naturally where the dissent came from, but it is not necessarily so. In the case of the minutes of the federal open market committee, they give an explanation for the reasons for dissent. The dissenters make a statement as to why they dissented. That could be very useful and I therefore draw that to your Lordships' attention.
I welcome the Bill, but it will not be about the nitty gritty; it will be about management competence. The management competence of the people involved can make it a success and lack of management competence can ruin it.
§ 2.16 p.m.
§ Lord Spens
My Lords, Friday the 13th is probably a good day to discuss the Bank of England. I took to bed the latest inflation report of the monetary policy committee. Normally its reports send me to sleep but this one made me sit up because of a sentence on page 9. It said:But there are few reasons to expect sterling's rise to continue".That surprised me because earlier this week I was doing some figure work based on the State of the Union speech of the President of the United States. In it he said he was quite certain that America would reduce its deficit of 11 noughts to one nought—in other words, it would balance the budget. I have also been reading the Chancellor's views on a balanced budget. It seems to me that they will both coincide at more or less the same time. Given that sterling and the dollar are the two world trading currencies of any consequence, the implications of that are quite frightening.
I put the figures into my computer, gave it a kick and out came some astonishing scenarios, which may or may not happen around the year 2000. The first is that the Stock Exchange valuations of then will be far in excess of what they are today. The market will go up and up and up both in America and here. The same will apply to exchange rates. That has already happened in Asia. People forget that in Asia there has been a devaluation of Asian currencies against sterling and the dollar on a massive scale. If these two scenarios come to bear, there is little doubt that sterling and the dollar will dominate the world in two or three years' time and will virtually destroy every other currency, including the Deutschmark.
My calculations show that there will be four Deutschmarks to the pound in two years' time. I am not an economist but I am an accountant and a banker. I can remember when there were four Deutschmarks to the pound. It was in my youth, in the days before we really started to devalue. If that happens, and if the Government have no policies to link—it is the absence of linkage which worries me—the sterling exchange rate to the monetary policy committee—we shall see blood on the streets, to quote a famous politician. We are already starting to see blood on the streets of France. It 1430 will not be long before that stretches to Germany. We shall see real problems in the common market. Although I am an EMU person, I do not believe that it will ever happen for those reasons. Under those circumstances I question whether this Bank will ever be independent.
I turn to supervision. I declare a passing interest in that I suppose most Members of this House know that I am currently suing the Bank of England, and principally their supervision department. I do not want anyone to think that I am biased in anything I have to say, because I am not. I am suing the Bank for "unlawful" interference in my employment contract. I stress the word "unlawful" because I believe that there has been a culture of incompetence and dishonesty in the supervision department of the Bank of England for some time.
I give two examples. The first is BCCI, which people dismiss, but which actually lost the best part of £10 billion not only for people, particularly Asians, in this country, but also for many people around the world. As a result, it has been swept under the carpet. I know that the noble and learned Lord, Lord Bingham, prepared a report, but it was a very poor one and was probably not based on any of the paperwork which has now come to light. There have now been some five trials of BCCI employees, culminating in the trial of a Mr. Gokal last year, when a great many Bank of England documents from the supervision department suddenly became available. I shall quote one such document. In 1984–85 BCCI lost £285 million. That loss was made up by a contribution from the parent company, which extracted the money from its staff benefit funds. That was picked up by Price Waterhouse, the auditors, and a paper was sent to the Bank of England. On that paper was a comment from the head of supervision, Mr. Quinn. Very simply, I would describe his comment as, "Blimey, they have nicked the pension funds". He actually wrote:We will of course have to meet to consider the implications for BCCI's future here and their solution in sequestering staff trust fund shares itself raises questions of legality and probity".That is really Bank of England talk for, "They have nicked the pension funds". That was something that Robert Maxwell was to do five or six years later. I am absolutely astonished that no one in the Bank of England resigned, was fired or anything else. Picking up the point made by the noble Lord, Lord Peston, people should have gone.
The person who was head of supervision when all this was happening was the present governor. He was promoted. The present governor is about to be re-engaged for a second term. The former governor at the time, and who obviously had the decision in his hands, is now a Member of this House. It is an astonishing culture. Nowhere else in business could that have occurred; absolutely nowhere could two people responsible for such a disaster have survived. Therefore the transfer of supervision is very important.
I would like to make one small point, which is an anecdote from my case. During the criminal trial a document turned up from the Bank of England. It is a document which I can only call an options paper; namely. "What to do with Lord Spens". There were 1431 three options, the first of which is the only relevant one because the other two were reasonable. The first I shall quote,To pressure Fenhalls [my chairman] into action by threatening reconsideration of recognition".That is why I am suing the Bank of England. What is interesting is that this paper went from the head of supervision to the supervisory board, which at the time was chaired by the governor and the deputy governor who were present. On the way, that options paper was passed to a lawyer. The lawyer presumably commented—it is in the minutes of the supervisory board meeting—that what they were proposing to do was illegal. However, two weeks later that is exactly what they did.
In those circumstances the Bank of England can have no credit for banking supervision in this country. The sooner that that is taken into the arms of someone such as the noble Lord, Lord Stewartby, the better for everyone. I recommend the Bill wholeheartedly.
§ 2.25 p.m.
§ Lord Thomas of Macclesfield
My Lords, I wish to make it clear right at the start that I very much support the Bill which seeks to modernise, to make more efficient, to make more accountable, and to improve the supervision of, the Bank of England. Indeed, until the noble Lord, Lord Spens, spoke a few moments ago I was surprised that earlier speakers had dismissed BICC and Barings as unfortunate accidents. In either case, we are talking about hundreds of millions of pounds.
The case of BICC brings another element of evidence to bear. I think that I am right in saying that no clearing bank lost a penny piece in that collapse. That was because we all made sure that we were never exposed to BICC on a daily basis—
§ Lord Thomas of Macclesfield
My Lords, I am sorry, I mean BCCI. We were not worried about the name. We were worried lest we were exposed to it. The club knew—we all knew—what the situation was, yet no action was taken. It is doubly damaging that many of those who lost money in the United Kingdom were members of a minority ethnic group.
Talking of the club again, now in terms of Barings, that bank, its institutions and people were undoubtedly held in too high a regard by the supervisors. I cannot believe that any other small and unfashionable financial institution would have been allowed to behave as Barings had been behaving for some considerable time. As someone who has been supervised personally for the past 20 years and come away with a completely clean bill of health, I totally support improving the supervision.
However, that is not my main point. I want to remind my noble friend on the Front Bench that there have been three major changes already. First, we have seen some of the larger building societies—some of the largest of their kind in the world—move to become banks. Secondly, we have seen the introduction of a new 1432 liquidity ruling, which we never had previously. Only in recent years has every financial institution had its own matrix to which it has to respond.
My third point relates to supervision being moved from the Bank of England. Since time immemorial, the tax—that is what it really is—on financial institutions has been that misnomer, cash ratio deposits (CRD). It has been calculated on eligible liabilities. I would not have made a big song and dance about it previously, but as the law is now changing, now is the time to reconsider it. That is despite the introduction of the new liquidity matrix under which all banks and building societies have to work.
It has very little to do with supervision; it is more a simple way to tax banks to pay for the Bank of England. However, it has now become a perverse action as well as inefficient. A prudent financial institution, particularly a smaller one, will always ensure that it has more retail deposits than retail lendings. In that way it is not dependent on the wholesale money market; it can act more prudently and it will not be banner headlines in the press or cause concern to the Bank of England.
By calculating on the basis of eligible deposits one is penalising banks that run their affairs in a more prudent way. I believe that the time has come to examine the matter again. The calculation has been made in that way for a very long time because it is regarded as neat and easy. It will not necessarily be in the interests of the big banks who are substantial borrowers in the wholesale money market but it will be a test to see whether the cartel among the big banks still operates.
The Bank of England has been a public sector organisation since 1947. Why does it require the tax on banks to be inflation proof? Effectively, it is inflation proof because as deposits increase as a result of inflation the tax collected goes up proportionately. Some noble Lords may have noticed a radical change—probably a revolution—in banking. One looks for enormous changes in productivity year on year. Should the Bank of England be exempt from that discipline? I ask my noble friend to consider how a provision can be written into the Bill to ensure that the Bank of England continues to improve its productivity and efficiency.
§ 2.31 p.m.
The Earl of Home
My Lords, at the outset I should declare what may be a conflict of interest in that I have worked for a bank in the City of London for the past 31 years which has been supervised by the Bank through good times and bad. My experience differs somewhat from that of the noble Lord, Lord Spens, and other noble Lords. In declaring a conflict of interest I admit an unashamed bias towards the admirable way that the Bank has operated during the past three decades that I have been in the City. Every institution has its own problems. Some of the Bank's alleged mistakes have been talked about today. I cannot, however, agree with the noble Lord, Lord Peston, that any institution must be better than the one that is there now. I can think of many other regulatory bodies around the world set up for a similar purpose which do not appear to be doing as well as the Bank of England in its current position.
1433 My noble friend Lord Mackay of Ardbrecknish commented on the unseemly haste with which the Chancellor announced the move envisaged in the Bill. In the interests of time and after a long parliamentary week, I shall not repeat those comments. I should, however, raise one point on the speed with which the Government acted in May. I do not believe that they took any notice of the international reputation of the Bank of England. That view is, I believe, shared by the noble Lord, Lord Cobbold. Perhaps the Government did not worry about how widely respected the Bank of England is. Central banks and other banks around the world set enormous store on the words of the Bank of England not only for its advice but for the way it looks after their subsidiaries in the City of London. The announcement that the supervisory function of the Bank was to be peremptorily taken away caused considerable international consternation. I know that because I was travelling overseas at the time of the announcement.
Can the Minister inform the House what briefing was given to our ambassadors and high commissioners around the world prior to or coincidentally with the announcement? I fear the answer may be that none was sent until some time after the event, but I should be delighted to be proved wrong. I make the guess that our long-suffering foreign service had to respond to some very alarmed central bankers and their inevitable questions without any knowledge of the Government's true intentions. The reaction I experienced among those central bankers was that, at best, the Government had treated the Bank of England in a most cavalier way. More often their reaction was worry that the new Government somehow knew that something was wrong with the Bank, and they wanted to know what had happened.
Most noble Lords have commented upon the composition and remit of the MPC. We have heard erudite remarks on monetary policy. I shall merely emphasise one or two points on that aspect of the Bill. One is that I am delighted to agree this time with the noble Lord, Lord Peston. He is concerned, like me, by Clause 19 under which the Chancellor reserves the ability to overrule the committee in extreme economic circumstances. That presumably gives him flexibility to do more or less as he likes if the going gets tough. But what are extreme economic circumstances? Does sharply rising unemployment give justification for the Treasury to intervene? Does a high level of bankruptcies also give just reason? Does a high level of repossession of houses by mortgagors constitute an excuse? Any of those circumstances can be caused by high interest rate movement set by the MPC. I only hope that a strong adverse movement in the opinion polls is not also deemed to be an extreme economic circumstance.
That part of the Bill gives the Chancellor the excuse to say in public that interest rates are not his fault if they go up. He will, I am sure, claim credit if they go down because of other measures that he has taken. But the Chancellor has already succeeded in hoodwinking many people. Indeed, he has hoodwinked the Member for Great Grimsby, Mr. Austin Mitchell, who said that the 1434 decision to give the governor the power to raise interest rates had already led to instability in that rates had been raised four or five times.
Until the Bill becomes law, neither the governor nor the MPC has the power to raise interest rates without reference to the Chancellor. Any movement we have seen since the election has therefore been the Chancellor's responsibility. Nonetheless he has succeeded in persuading one of his colleagues in another place that interest rate rises are no longer his problem. Interest rate rises are his problem. He cannot shirk that responsibility.
I turn to the Bank's supervisory functions and to the new FSA. Many noble Lords have today raised questions, and there are still some other unanswered ones. At present several different bodies oversee the operations of, say, an investment bank. Some of those, from my own experience, have been slow to act. They spend a long time coming to any conclusion. There is the real danger that by putting them all together extra layers of command will be created. The whole process of regulation could become even more bogged down than it is at present as checks are made interdepartmentally that what is being said does not affect anyone else.
It is far from clear from what has been so far said, and from what is in the Bill, that just because everything is under one roof the system will become more streamlined. Government spokesmen have said that there is competition between the various bodies at present. The new structure tells me nothing to allay my fears that external competition will not become internal competition. We can only hope that the Government are not here setting up a bureaucratic nightmare.
It is also far from clear—this was a point raised by the noble Lord, Lord Desai—what will happen to the concept of the lender of last resort, and when the Bank will be empowered to intervene. In response to a pertinent question in another place, the Economic Secretary to the Treasury said:The Government expect that interventions … will he extremely rare, and practised only if there were to be a serious systemic threat".— [Official Report, Commons. 11/11/97: col. 804.]The Minister went on to say that the memorandum of understanding between the Bank and the Financial Services Authority emphasises a need for co-operation and an exchange of information. I hope that that will not simply turn out to be a pious hope. Crises blow up very quickly, as we saw in 1967 and 1974. Unless that exchange of information is updated daily, almost hourly, much time will be wasted at the worst possible moment in trying to establish the facts and who agrees with them before anyone can start to concentrate on the remedy.
We need to know what evidence the Bank must require, first, from the FSA, which will then probably have to be put into a different form and submitted to the Treasury before it is allowed to intervene. Can it, on its own bat, set up a lifeboat, as it did so effectively in 1974? At what stage does the Chancellor give it permission to act?
In support of the remarks made by my noble friend Lord Stewartby, lifeboats have in the past not been launched just to rescue banks. In a much quieter way 1435 the Bank has also been the catalyst in persuading banks to assist other industries which are not in danger of sinking but have perhaps sprung a leak and need some temporary flotation bags. I do not see how, under the proposed structure of responsibilities, the Bank can continue that very useful function.
Indeed, during the course of regular supervisory meetings, the Bank picks up some very useful information about other sectors of industry. In future, if this intelligence is imparted at all it will go to an authority which has no interest in sectors other than those it supervises. I fear that a useful and informal two-way street of information will he lost to us.
There is a further aspect to the disclosure of information which is of great concern to banks and which was touched upon by my noble friend Lord Boardman. Increasingly, supervisors and regulators are asking for information which is, in effect, privileged. But supervisors understandably require and request it so that they can gain the full picture of the position of the individual institution. It would be helpful if the Minister could assure the House that when banks disclose privileged information to supervisors there will be adequate safeguards protecting them from legal action from third parties because they have been required to disclose that privileged information.
Obviously, banks want to be entirely open with the FSA. That is to everyone's advantage. But we live in an increasingly litigious society and we do not want a lawyer sitting beside us every time we have a meeting with the FSA. Assurances from the Minister at some stage during the passage of the Bill would be most welcome to the House and to the City.
Noble Lords also raised the question of the costs relating to the FSA. Many figures have been bandied about and it is hard to know which to believe. However, it seems to be agreed that at present some £75 million of the Bank of England's expenditure relates to public goods and that the cost is financed by cash ratio deposits. This rate is currently 0.35 per cent. of eligible sterling liabilities.
Given that the Bank will no longer have the supervisory function costs, banks and building societies—I believe that those two categories should be expanded in due course—which currently fund those costs should not have to carry the burden at the same rate as today's purely to fund the activities of a Bank which will be responsible largely for financial and monetary stability. The British Bankers' Association calculates that the rate could be reduced to only 0.1 per cent. of eligible liabilities in the comparatively near future which it believes would be a fair long-term rate. I am grateful to the Minister for his remarks on that topic during his opening speech and I hope that we shall be able to discuss the issue further during the passage of the Bill.
Fees for supervision are to be charged by the FSA so the Bank of England would be making an undue amount of money if the rate of CRDs is left where it is. It would be to everyone's advantage if, in future, the Bank were funded somewhat differently. I hope that the 1436 Government will review the system of funding sooner rather than later or, at any event, before the next piece of legislation envisaged by the Minister.
Perhaps the Government will look further at the way in which the FSA charges fees because that needs to be kept under review. In the debate in another place, the Economic Secretary to the Treasury said that,bringing under a single regulator nine different structures thus avoiding all the duplication that has caused such chaos in the financial community, will provide the opportunity for effective regulation at lower cost".The Minister himself said earlier that it is hoped that costs will be lower. The financial community has some doubts on that score. In particular, small institutions, which at present pay for the costs of one or two of the nine regulators, are understandably worried that they will now have to pay a proportion of the huge costs of the infrastructure of an institution which embraces nine different disciplines. Not surprisingly, those smaller institutions fear that their costs will far outweigh the benefits derived from reducing a small amount of the overlap.
Through the removal of the supervisory function of the Bank, I am extremely worried that the Government will make it a less attractive place in which to work and soon it will no longer be able to attract the admirable quality of staff which it has done in the past. I fear too that existing staff will start to look elsewhere as they see disappearing opportunities for widening the scope of their work. The Chancellor has taken away a large part of the rationale of the Bank and has given to it, probably only for a fairly short time, as we have heard today, a veneer of independence through the MPC.
I hope that the Government will take many of the points made during the course of the debate. Most have been made by noble Lords with practical experience of how the City of London works and who have a real desire to see that the pre-eminence of London as a financial centre is maintained.
The Government could further assist the morale of the Bank by confirming the report in the Daily Telegraph this morning of the re-appointment of the Governor of the Bank of England to which I, for one, although not all noble Lords in the Chamber, certainly look forward.
Other financial centres are snapping at the heels of London as the centre of the European financial world. We cannot afford to damage the morale and standing of one of our most respected institutions and I fear that that is what this Bill will do.
§ 2.49 p.m.
§ Lord McIntosh of Haringey
My Lords, perhaps I may begin by expressing my gratitude to all noble Lords who have taken part in this extremely wide-ranging debate. If one had to count the minutes of debate over the past nearly four hours, I would think that the proportion would probably be two to one—that is, two parts on wider economic policies and one part only on the detailed provisions of the Bill. However, I do not shrink from that and, indeed, I do not shrink from the responsibility of responding to the whole debate.
1437 Today's debate has not only been wide-ranging in scope, it has also been wide-ranging in time. We have heard a good deal of speculation about the future of economic and monetary union and British participation in it, and we have had some extremely fascinating speeches going back over monetary and economic policy for more than 50 years. We are especially grateful in that respect to the noble Lord, Lord Roll of Ipsden, and the noble Lord, Lord Cockfield. When the noble Lord, Lord Cobbold, referred to what he described as the horrendous nationalisation of the Bank of England in 1946 and spoke of the intervention of Lord Pethick-Lawrence in your Lordships' House in February of that year, I wonder whether the noble Lord, Lord Cockfield, realised that my noble friend Lord Longford, who intervened in his speech this afternoon, actually spoke in that debate in 1946. Of course, I should say that my noble friend spoke as Lord Pakenham rather than under his present Irish title. Nevertheless, perhaps the noble Lord would like to join me in looking back to the debates of 1945 and 1946. Indeed, they certainly are most fascinating.
I was struck today by the extent to which there has been a very general welcome for the Bill. Of course, that is tempered—it had to be tempered by definition from the Opposition Front Bench. It was tempered by the noble Lord, Lord Cockfield, who described his welcome to the Bill as being "hesitant". However, it was more than tempered in the cases of my noble friends Lord Shore and Lord Bruce regarding approval of future participation in European monetary union and, indeed, in far more of the wicked devices of the rest of Europe.
§ Lord Shore of Stepney
My Lords, I do not object at all to my noble friend the Minister, in his good humoured way, taking up the question of the link between all this and later developments towards the single currency. However, the weight of the remarks that I made, and of those made by others. was really aimed at the direct effect of what has been done on the exchange rate and the consequences that flow therefrom.
§ Lord McIntosh of Haringey
My Lords, I entirely accept that and I intend to refer to it in my later remarks, just as I shall refer to the many speeches which questioned the relationship between this Bill and European monetary union.
However, before I go any further—I was about to say to kick into touch, but I do not want to interfere with the noble Lord, Lord Spens, kicking his computer. In the trade it is called percussive maintenance, and the noble Lord may be grateful for that term of art in the future if he is to continue kicking it. Nevertheless, I want to kick into touch the issue of the reappointment of Eddie George. Noble Lords should not be misled by any speculation, especially conflicting speculation in press reports. An announcement will be made in due course on that issue.
The noble Lord, Lord Mackay, started by teasing us about our manifesto, our business manifesto and different statements over a period of up to four years. Indeed, I believe that his quotes from different 1438 Opposition spokesmen of the time went back to 1995. Of course, different things were said over the four-year period during which we consulted on what should happen about the Bank of England. The noble Lord. Lord Boardman, quoted Alistair Darling in 1996 and I have no doubt that he quoted correctly. However, the thrust of their teasing was that there was something wrong with announcing immediately after the election that we were going to hand over responsibility for short-term interest rates to the Bank of England; as, indeed, we did on 6th and 7th May. I take the issue extremely seriously. Like the noble Lord, Lord Taverne, I believe that we would have been extraordinarily irresponsible if, knowing that that was the right thing, we had not done it straight away. The noble Lord. Lord Taverne, has pointed out—as I did in my opening speech—that the immediate effect of that action was to decrease long-term interest rates thereby saving the Treasury hundreds of millions of pounds in unnecessary interest.
§ Lord Mackay of Ardbrecknish
My Lords, I am grateful to the noble Lord for giving way. If it knew that it was the right thing four days after the election, surely the Labour Party knew it was the right thing a couple of months before then when it wrote its manifesto?
§ Lord McIntosh of Haringey
My Lords, we have to react to things as the opportunity arises. It was not an issue that was raised at the time of the election. I am grateful for the support of the noble Lords, Lord Taverne and Lord Cobbold, and of my noble friend Lord Peston for the immediate action that we took. While I am referring to my noble friend Lord Peston, he referred to timescales in economic policy and looked back 200 years to David Ricardo. I seem to recall the bursar of an Oxford college who criticised the college's investment policy on the grounds that the past 200 years had been wholly exceptional!
We have had a great deal of debate on the wider issues of monetary policy. I am grateful in particular for the instruction which I have received from the noble Lord, Lord Roll, on this issue. He is quite right in saying that monetary policy is far from being the whole of economic policy. That is why it is not entirely relevant to this Bill for the noble Lord, Lord Boardman, to repeat the complaint which has frequently been made that what we have been doing leaves the Chancellor with only the fiscal tool rather than the control of interest rates. Although the noble Lord, Lord Cockfield, does not claim that monetary policy is all of economic policy, he takes a quite different view. He blames monetary policy for all other evils including, as I heard him, poverty in old age which strikes me as rather strange.
A number of noble Lords have poured scorn on the provision in the Bill for a clear and open inflation target. The noble Lord, Lord Mackay, thought that this was a loosening of the target compared with the previous government. The previous government had a range of 2.5 per cent. or less, which is considerably wider than the possible range we have now. I must point out to the noble Lord that under the previous government inflation 1439 went down to 2.5 per cent. over the whole 18 years they were in power. At least we have a clear and unambiguous target.
I cannot accept the comments of noble Lords that because we have a target for inflation we should have targets for all the other complex elements in economic policy. One cannot really have targets for inflation, the exchange rate, the interest rate, and employment and growth. If one did, one would tie one's hands in almost every respect in economic policy and one would guarantee failure. In the wide-ranging overview of economic policy to which we have been treated this afternoon, I think there has been an element of unreality. Price stability is not an end in itself. It is an end in the Government's thinking because it is a pre-condition for high and stable rates of growth and employment. I can express our view best by quoting Mr. Alan Greenspan in his Humphrey-Hawkins testimony in July 1997 when he said,Our objective has never been to contain inflation as an end in itself. hut rather as a precondition for the highest possible long-run growth of output and income—the ultimate goal of macroeconomic policy".I commend that to my noble friend Lord Peston who said in simpler but true words that it is a case of getting the real economy to work better.
I turn at last to the Bill and to the criticisms and comments that have been made about the Bill. The fundamental point to which noble Lords have referred concerns the operational autonomy given to the Bank of England to meet price stability. As many noble Lords have recognised, this gives the benefit of long-term stable policies and a macro-economic environment. I believe that point was recognised by the noble Lord, Lord Roll. It is one of the many long term measures that we are taking. It has been generally well received. My noble friend Lord Desai expressed modified rapture, if I may put it in Gilbertian terms, on independence, and worried whether we were not being seduced by excessive admiration of the Bundesbank. If he takes part in our Committee stage, he will see the extent to which our recipe is our own recipe and not one copied slavishly from other countries.
The Bill also strikes the right balance between independence and democratic accountability. It provides that the Government should set the target and the Bank deliver on it, as indeed, it has done. The Bank reports to Parliament regularly. It sends an open letter if it is missing the target of 1 per cent. above or below the 2.5 per cent., and it creates one of the most open and accountable systems of any central bank in the world.
My noble friend Lord Desai referred to the "Ken and Eddie show". I am happy to acknowledge to the noble Lord, Lord Stewartby, that the innovation which Mr. Kenneth Clarke introduced was indeed a proper precursor of what is being done now. This is not a privatisation of the Bank. It is not doing what I learn now the then Mr. Nigel Lawson wanted to do—to create the full independence of the Bank. The noble Lord, Lord Cockfield, recognised the extent to which the Bank is still under government control. Unlike him, a number of noble Lords welcomed that.
1440 My noble friend Lord Randall asked whether we would match the openness of the ECB and the ESCB. The provisions are already open and transparent. We publish the minutes of the decision-making committee. My noble friend Lord Montague says that the minutes should reflect the discussions. He echoes what my honourable friend Mrs. Helen Liddell said at Report stage in the House of Commons. It is certainly a matter that we shall consider.
I can do no more than acknowledge the point raised by a number of noble Lords, notably the noble Earl, Lord Home, about the disclosure of privileged information and the question of legal privilege. There is no change at present in the provisions of the Banking Act. But we are aware of the concerns of the British Bankers' Association and we shall certainly be addressing them.
A considerable amount of debate took place on the respective roles and membership of the monetary policy committee, the court, and the committee of non-executive directors. There was much criticism that they were too Oxbridge and London based—based too much on the financial services, with too little reflection of manufacturing industry in particular, and of the regions and country of the United Kingdom. Sir Sam Brittan was quoted as saying that the people on the monetary policy committee are those who are likely to reflect the conventional wisdom of the moment. In the absence of my noble friend Lord Eatwell, the noble Lord, Lord Mackay, spoke of my noble friend's reference to the need for practical experience. I rather think that my noble friend Lord Eatwell was saying in updated words what Keynes said in the general theory. He said that practical men who believed themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist. We might reflect on that when we consider the balance of membership.
I was grateful for the support for membership from the noble Lord. Lord Boardman. I was a little discouraged to hear from the noble Lord, Lord Cockfield, that we cannot trust either politicians or bankers. That makes life somewhat difficult when making appointments.
Let me make the respective roles clear. The monetary policy committee is responsible for the formulation of monetary policy. The committee of non-executive directors is responsible for reviewing the procedures of the monetary policy committee rather than policy. In response to my noble friend Lord Randall and other noble Lords, Clause 2(4) of the Bill states that the court's aim,shall he to ensure the most efficient use of the Bank's resources".So, to respond to my noble friends, Lord Montague and Lord Thomas, the combination of the court and the committee of non-executive directors does seem to cover the waterfront of ensuring that the Bank is well run.
My noble friend Lord Peston asked whether members of the monetary committee could be sacked. The answer is no—under Schedule 3, paragraph 9 only if they are unfit or unable to perform their duties, not for poor 1441 performance. There were conflicting views as to what was the appropriate term of office, so it is possible that we have got it right.
The result is that we have, in the provisions of the Bill relating to the governance and finance of the Bank of England, a modern bank, in line with the new role of the Bank and reflecting current best practice. There are provisions for greater financial disclosure; and there are greater provisions for a new secure source of funding through the cash ratio deposits. That was a matter of considerable controversy, and I shall not give definitive answers. My noble friend Lord Thomas in particular questioned the relevance of cash ratio deposits based on deposits rather than lending. He raised a question as to why the tax on banks should be inflation-proofed. I undertake to see that the matter is discussed with him before we reach the next stage of the Bill since he raises serious issues.
The functions of the Bank of England in relation to financial stability are set out very clearly in the memorandum of misunderstanding—I am in Freudian slip mode today, my Lords—the memorandum of understanding. Additionally its functions are fundamentally related to monetary policy. But they are also related to financial stability, which means, above all, the supervision of payment systems; agency functions for Her Majesty's Government, including the printing and issuing of notes; and commercial functions such as taking deposits. I do not think there is any lack of clarity as to the role of the Bank of England in relation to the Treasury and the Financial Services Authority.
A question was raised regarding the role of the Bank as lender of last resort and how that fits in with the provisions for the Financial Services Authority. My noble friend Lord Desai was particularly concerned about the separation and was worried, as were a number of noble Lords, about what is the necessity of avoiding crises such as Barings and BCCI. I was interested in the comments made by my noble friend Lord Thomas on BCCI. There is no way in which we can guarantee that fraud and abuse of that kind will not appear and cause damage before it is identified.
The purpose of the memorandum of understanding, if I may say so to the noble Lord, Lord Stewartby, is very much that there should be a rapid exchange of information. There is provision in it also that the Bank should collect information for the FSA so that we have the same unity of thrust in dealing with financial crime as we have at the moment; indeed, I hope considerably better.
The noble Earl, Lord Home, talked about the need for a lifeboat. I wondered whether he was referring to the analogy made by my noble friend Lord Desai of economic policy being navigation rather than decision. The immediate answer is that the memorandum of 1442 understanding provides for early Treasury involvement. It is an issue which we can discuss at length, if need be, in Committee.
The single regulator won general approval. The noble Lord, Lord Mackay, was worried about whether the single regulator could deal adequately with individual investments. But there was support for the single regulator, notably from Opposition Benches and the noble Lord, Lord Stewartby. There is a need to control the costs of the single regulator and it is necessary that the rules of the FSA should reflect the needs of the different kinds of businesses regulated. That is a matter to which we shall pay great attention. I hope that we shall be able to satisfy noble Lords in the later stages of the Bill.
I have left myself little time to deal with the issues with which I promised to deal about EMU and the reserve powers. I repeat what I said at the outset, that the Bill does not make the Bank compatible with EMU and is not intended to do so. The operational autonomy for the Bank is closer to the EMU model than the previous arrangements, but noble Lords are quite right to say that in two particular respects it does not meet the Maastricht requirements. The Government still have the responsibility of determining what is meant by "price stability". The Government retain reserve powers in Clause 19 for use under extreme economic circumstances. I say to my noble friend Lord Peston that I shall not attempt a definition; but I will say that it is intended that the powers should be rarely, if ever, used and they will need parliamentary approval if they are used.
I repeat to the noble Lord, Lord Mackay, that the commitment of the Government is that if and when we make progress to EMU we will need the prior agreement of the Cabinet, Parliament and the people of this country. I realise that none of that will satisfy my noble friends Lord Shore and Lord Bruce and we shall have to continue to disagree.
This is only the first step in regulatory reform, as has been recognised. I cannot say in advance of the Queen's Speech when the second stage will take place, but I can say that we are already working on the Bill. Some features of it have already been announced. We intend to publish a draft Bill in the summer and this Bill is seen as a first step towards a more comprehensive reform.
The noble Lord, Lord Cockfield, welcomed it as a first step, though hesitant and incomplete. I believe that it is less than hesitant and more than incomplete. I believe that it deserves the support of your Lordships at this time. I commend the Bill.
§ On Question, Bill read a second time.
§ Lord McIntosh of Haringey
My Lords, I beg to move that the Bill be committed to a Grand Committee.
Moved, That the Bill be committed to a Grand Committee.—(Lord McIntosh of Haringey.)
§ On Question, Motion agreed to.
§ House adjourned at fourteen minutes past three o'clock.