§ 3.7 p.m.
§ Read a third time.
§ Clause 15 [Publication of minutes of meetings]:
§ Lord Barnett
moved Amendment No. 1:Page 6, line 43, at end insert—("( ) The Bank shall publish at the same time forecasts of all macro-economic variables considered by the Monetary Policy Committee as background to their deliberations.").The noble Lord said: My Lords, my noble friend Lord Peston apologises that he is unable to be present today and I am happy to move this amendment of behalf of us both.
Amendment No. 1 is straightforward and I look forward to hearing that my noble friend will be able to accept it. The objective of the amendment is to ensure that the Bank provides us—that is, the House of Lords as well as everybody else—with all the necessary statistics and forecasts on which the Monetary Policy Committee makes its decisions. It is vital for us to know them because, if we do not know the basis of the decisions of the Monetary Policy Committee, if we do not know what its assumptions are about the outlook of the principal economic variants, we will not be able to interpret, for example, its minutes. It is crucial therefore that we have that information.
It would be equally impossible to check whether the committee sought to comply with the requirements to support the Government's economic policy which are written into the Bill, albeit regrettably coming second after inflation—about which my noble friend and I tabled an amendment in Committee and the Minister felt unable to accept. I regret that and perhaps he will now have second thoughts in that regard. I look forward to hearing from him on that point also.
It is important that the implications for the exchange rate—though that will not be necessary once we are members of the European Central Bank, which I hope 12 will not be too far ahead—and employment are understood. I put that in only to upset my noble friend Lord Bruce of Donington. It is not very relevant. My noble friend knows that I love him dearly and that I always try to give him something to deal with.
It is important to ensure that when the Bank of England and the Monetary Policy Committee collect regional, sectoral and other information for the purposes of formulating monetary policy they are able to let us know what their assessments and assumptions are. Without that information, we will not be able to conclude in this House, in another place and elsewhere whether the decisions taken are reasonably correct. That is another reason why it is important that the amendment should be accepted.
Furthermore, it is important that the Monetary Policy Committee sets out in ways which do not confuse or mislead financial markets precisely what is the background to their policy decisions. Transparency is crucial. There is a serious problem between independence and transparency. I speak as one who supports the idea of giving the Bank of England and its Monetary Policy Committee the power to decide on interest rates. However, it is equally important that there should be transparency and accountability to both Houses of Parliament and to the public at large. The amendment seeks to enable this House to come to a clear conclusion on the reasons behind the decisions of the Monetary Policy Committee on interest rates.
It is vital that we in your Lordships' House and not just the Treasury Select Committee of another place should have a say in this matter. I want to make it clear to my noble friend the Minister that, whatever he is able to tell us today, my noble friend Lord Peston and I intend to press the matter further and that a Select Committee of your Lordships' House should be able to consider the issue and look at the whole reasoning behind the decisions of the Bank of England and the Monetary Policy Committee.
I have the honour to chair a sub-committee of the European Communities Select Committee. However, as I am sure my noble friend will know, that committee is extremely busy with many other issues and certainly would never have time to look closely at what the Monetary Policy Committee and the Governor of the Bank of England are doing. I know that it is not for my noble friend to say whether there should be such a Select Committee. However, my noble friend Lord Peston and I intend to ask the Leader of the House to set up such a committee. I hope your Lordships will agree that what we are proposing is not unreasonable. I hope particularly that we will not be told that we cannot have such a committee because of administrative reasons or a shortage of Hansard reporters or of committee rooms. That would be intolerable and I am sure my noble friend would not put that forward as an excuse for not having such a Select Committee. I am delighted to see the noble Lord, Lord Ampthill, who is a former Chairman of Committees, nodding in agreement.
I know that my noble friend the Minister will not be able to tell us today that he is willing to recommend the setting up of such a committee. However, whatever he 13 says and whatever anyone else says, my noble friend and I have every intention of pressing this matter strongly. It is crucial both for the present monetary committee and eventually for the European Central Bank that there should be a Select Committee of your Lordships' House that is able to give proper consideration to what those bodies are doing. I beg to move.
§ 3.15 p.m.
Lord Bruce of Donington
My Lords, the noble Lord has been kind enough to mention his anxiety that I ought to be convinced of the wisdom of the remarks he has made. I have to tell your Lordships that, for reasons I will not go into this afternoon but which will become known in due course, I have been excluded from all committees connected with the European Community. I shall not go into the reasons—possibly the anniversary of the occasion would be appropriate for that.
I am quite sure that the noble Lord would he only too anxious to help the Government on this because he is seeking a concession. If the noble Lord had enlarged his speech just a little—he is always very brief—by a list of what he considers to be the economic variables, that would have been helpful. The noble Lord is skilled in these matters both professionally and as a former member of the Council of Ministers. He is well aware of the nature and extent of the economic variables which he has dealt with in general terms. I wonder whether, possibly a little later in the debate, he will consider acquainting the House and the Government as to the economic variables he has in mind. Will he also take into account the possibility of all the economic variables not relating to the same period, being available in accelerated or de-accelerated form, and state what other characteristics he considers ought to be taken into account by all reasonable people to whom these matters should be explained in quite simple terms so that the House as well as the Government may be able to arrive at some reasonable consideration of these matters?
Will he also answer the question—when he complies with my request as I am sure he will he able to do—whether at the same time these various variables have reacted against one another, particularly where they do not relate to identical periods? In other words, I should like him to inform the House as to the extent to which he and possibly the Government are committed to the new science of econometrics, which pays increasing reference to what is called the government model, presumably being the computer model. If the noble Lord can clarify the position a little, it would be for the material use not only of myself, who is not important in these matters, but of the House as a whole.
§ Lord Eatwell
My Lords, I wish to lend my support to the proposal of the noble Lord, Lord Barnett, that there should be a committee of this House to examine the performance of the Monetary Policy Committee of the Bank of England. As noble Lords will know, the Treasury Committee in another place is charged with that responsibility. It will also be charged with the responsibility of examining the performance of the Financial Services Authority. Taken together, those are 14 very heavy responsibilities indeed. It would be entirely appropriate for the work of the Treasury Committee in another place to be supplemented by an appropriate committee of your Lordships' House or perhaps by the formation of a joint committee of both Houses. Given the new position of the Bank of England as defined in the Bill, and given the new independent regulator who will have extraordinary powers over the whole financial industry in this country, Parliament will have a heavy responsibility of review and assessment of the activities of the Bank and the FSA. A committee of this House or, as I would prefer, a joint committee would be appropriate to consider such heavy new responsibilities.
§ Lord Mackay of Ardbrecknish
My Lords, it gives me some pleasure not only to follow the noble Lord, Lord Eatwell, but also to agree with everything that he said about the need for a committee of this House, or perhaps a joint committee, to examine the policies of the Monetary Policy Committee and how it reaches its decisions. As we know from previous Sittings on this Bill and from the way in which the MPC has behaved to date, decisions of that committee are extremely important and many people will be affected by them. I referred at Question Time to the exchange rate. Anybody who is involved in selling abroad will be most interested to learn the basis on which the MPC makes its decisions in any given month. Therefore, it is important that the MPC should publish the forecasts that it has used when reaching its conclusions, so that the outside world can have confidence in its decisions.
That is why I think that the amendment in the name of the noble Lord, Lord Barnett, is sensible, and that is why I support it, as I support the point made not only by him but also by his noble friend Lord Eatwell about the need for this House to have a committee to examine the MPC.
§ Lord McIntosh of Haringey
My Lords, I am grateful to my noble friend Lord Barnett for raising this matter again. Clearly, it is of interest to the House and I am happy to be able to respond to it. I am also grateful to my noble friend for speaking to the amendment in a way in which I could understand. My noble friend Lord Peston occasionally places me out of my depth, so I am grateful that my noble friend Lord Barnett did not do that on this occasion.
The MPC is committed to providing the best and fullest possible explanation of its members' thinking. It has already progressed from publishing just an inflation fanchart to publishing a chart also for growth; and it has most recently added a further set of charts illustrating the implications if interest rates were to follow the course implied by market expectations.
The Bank does not have a single economic model which generates a single forecast, but forecasts play an important part in the MPC's decisions, and when members hold differing views the Bank may provide forecasts based on different assumptions to reflect the range of views. I am reminded at this point of Casey Stengel, the manager of the New York Yankees, who uttered a word of warning about forecasts saying 15 that they were peculiarly difficult, particularly when relating to the future. That might be true in this instance also.
The MPC would expect to continue to vary or expand the range of its published forecasts where there was a clear value in doing so. However, it does not favour publishing point forecasts, but rather charts or tables which show clearly the inherent uncertainty of any economic forecast. That brings us back to Casey Stengel. Also, given the number of possible forecasts, the MPC would be trying the patience of its audience if it was to attempt to publish in the inflation report all the possible outcomes of each set of assumptions.
Nevertheless, it has no wish to withhold the details of its forecast where these would be helpful to promoting understanding of the way it is approaching its task, and it is committed to the following. First, it is planning to publish its suite of economic models, and it hopes to do this later this year: outside forecasters and others will then be able to assess these and to use them. Secondly, it expects to indicate further in the text of the report the main implications for employment, the balance of payments and other variables of the different forecasts that it illustrates in the report. Finally, of course, the MPC will be prepared to consider reasonable requests from the relevant parliamentary committee to make available, in fanchart form, details of the MPC's forecasts that are not published in the inflation report.
I can confirm that the Bank is keen to have the widest possible scrutiny of the proceedings of the MPC, including all forms of parliamentary scrutiny. As the House will know, it is not for me to decide whether there should be a special committee of your Lordships' House or a joint committee, but I am sure that the Select Committee on Liaison and the powers that be will have noted that noble Lords on both sides of the House have requested such a committee and noted also what I have said about the Bank and the Treasury welcoming the widest possible scrutiny. In the light of those assurances, I hope that my noble friend will be prepared to withdraw his amendment.
§ Lord Barnett
My Lords, I am obliged to my noble friend for his reply. I am sorry that my noble friend Lord Bruce has been kept off Select Committees. I do not have the faintest idea why, except that it is just possible that his views are reasonably well known. It is not my job, however, to put my noble friend on or off a committee, so I cannot really reply to that point. I would always be happy to see my noble friend—I cannot say that I would always be happy to "hear" him because sometimes I hear him just a little too often and just a little too loudly. However, at least I know his views, whether or not he serves on a Select Committee.
I am obliged for the support of my noble friend Lord Eatwell and the noble Lord, Lord Mackay of Ardbrecknish, with regard to my point about the need for a Select Committee of this House or a joint committee. I noted, and was pleased to hear, my noble friend on the Front Bench expressing his "sort-or support which I am sure that the Select Committee on 16 Liaison and the Lord Privy Seal will note with great interest. I look forward in due course to such a committee being established.
I am grateful to my noble friend Lord McIntosh for what he said. I appreciate—I have always appreciated—the fact that the Bank of England will always supply the maximum amount of information possible. I have never had any doubts about that. Indeed, what my noble friend has said today goes a long way towards replying to my noble friend Lord Bruce of Donington. I have no doubt that with the information and the variables which he set out, it will be possible for a Select Committee of this House, or a joint committee, or another place, to consider the matter fully. I note that my noble friend does not always quite understand economists—or at least one economist. I do not believe that for a minute. I am sure that my noble friend fully understands economists and all that they have to say, whether that be my noble friend Lord Peston or anyone else. My noble friend Lord McIntosh is too bright not to understand these matters.
I was interested in the view of forecasting given by the New York Yankees. I wish that my noble friend could forecast what will happen to Manchester United this season as that might be even more interesting. I very much appreciate the point about forecasting and the future. It is not always easy to know the forecast for tonight's weather, let alone that for weeks, months or years ahead, yet we sometimes seem to rely on forecasts given on the economy by all kinds of strange people.
Having said that, I am happy with the reply given by my noble friend and with what he said about the kind of reports that the Bank of England would be willing to commit itself to supplying. I know that my noble friend Lord Sefton, who spoke in Committee, would be happy to see regional reports also on how the Bank's policies will affect different parts of the country. Given what my noble friend Lord McIntosh has said and the commitments given by the Bank, I am very happy to withdraw the amendment.
Amendment, by leave, withdrawn.
§ 3.30 p.m.
§ Lord Eatwell
moved Amendment No. 2:After Clause 22, insert the following new clause—LISTED MONEY MARKET INSTITUTIONS: INCLUSION ON THE LIST(". In section 43 of the Financial Services Act 1986, after subsection (1) there is inserted—(1A) The Authority shall have rules and practices to secure that a person included on the list referred to in this section is fit and proper to he included on that list.".").The noble Lord said: My Lords, in moving Amendment No. 2, I should like to speak also to Amendments Nos. 3 and 4. Noble Lords may be aware that I am an independent member of the board of the Securities and Futures Authority. Although much of what I have to say this afternoon is motivated by my experiences in that position, my remarks are made, and my amendments have been tabled, in a purely personal capacity.
I first moved similar amendments in Committee and I am grateful to my noble friend Lord McIntosh for discussing them with me since then. I am also grateful 17 to Mr. Howard Davies and his staff at the Financial Services Authority for giving up some of their valuable time to discuss the amendments with me. I remain convinced of the importance of the issues raised in these amendments. While not repeating the whole case made at Committee stage, I shall make a brief and, I hope, convincing case for the Government's urgent consideration of these issues.
The case rests upon the need to minimise risks to the integrity of financial supervision between N1, the date at which the supervisory functions of the Bank of England are transferred by this Bill to the new Financial Services Authority, and N2, the date at which the statutory responsibilities of the other regulatory authorities, notably the present self-regulatory organisations (SROs), are also transferred to the FSA. It is currently estimated that about two years will elapse between N1 and N2.
However, at N1 not only the supervisory staff of the Bank of England but virtually all of the staff of the SROs will be transferred to the FSA. Their services will then he contracted back to the SROs in order to enable them to maintain their statutory regulatory duties under the Financial Services Act until such time as the new financial services reform Bill becomes operative in a couple of years' time.
Therefore, the staff of the Financial Services Authority will be responsible for virtually all financial regulation as of 1st June this year. Prior to the implementation of the new Finance Bill they will be performing their duties under different statutory frameworks and according to a number of different rule books. As I pointed out in Committee, in some important instances this will result in the same people regulating exactly the same kinds of businesses but in quite different ways. This lack of coherence is particularly acute in the case of those firms listed as exempt under Section 43 of the Financial Services Act and whose investment business has therefore typically been regulated up to now by the Bank of England and not the Securities and Futures Authority which, under the Act, has the main responsibility for regulating such business.
As a result of the Bill before us and the working agreement between the new Financial Services Authority and the FSA, these Section 43 firms will be regulated by the same people as unlisted firms which are currently the responsibility of the SFA but according to quite different rule books. Therefore, the same people will regulate the same kind of investment business but according to different rule books; the difference being due entirely to the history of which firms in the past had been regulated by the Bank of England and which by the SFA. I believe that that situation is not only incoherent but confusing and even dangerous. It is exactly the kind of regulatory incoherence that can be exploited by wrong-doers. Moreover and perhaps more importantly, as we have seen in the Far East in recent months, financial storms can appear out of a clear blue sky. If between N1 and N2 a major business crisis were to be associated with incoherence in the regulation of investment business the reputation of the new system which the Government rightly seek to introduce could be placed in jeopardy.
18 My amendments are an attempt to enhance regulatory coherence among listed and unlisted firms with respect to all investment business during the period between N1 and N2. The amendments achieve that goal by the simple device of ensuring that the listing of all institutions under Section 43 follows criteria that are more in line with the registration procedures used to regulate firms conducting identical investment business which are currently regulated by the SFA. Accordingly, the investment business conducted by listed firms will be regulated in a manner more akin to the regulation of investment business by unlisted firms. The criteria that I propose essentially replace the informal procedures used up to now by the Bank of England. Those informal procedures may have been appropriate for a regulatory authority which was also responsible for the conduct of monetary policy and the maintenance of liquidity, but they are totally inappropriate to the new Financial Services Authority.
I accept that in no way can these three amendments result in the complete harmonisation of regulatory rules and procedures for all investment business. That would require a new and highly complex financial services Bill. But I believe that the two areas covered in my amendments—the criteria by which firms and individuals are deemed fit and proper and the enforcement of conduct of business rules—go to the heart of the matter. The incorporation of these amendments will remove a large amount of ambiguity and incoherence which is the inevitable product of the gap between N1 and N2.
I turn now to Amendments Nos. 2 and 4. These amendments require that clear rules be formulated for establishing that institutions, and most importantly the individuals comprising those institutions, are fit and proper to conduct investment business. They achieve coherence in the characterisation of what is fit and proper by requiring that rules which stem from what used to be called the SIB principles should be applied by all investment business regulated by FSA employees. Under Section 43 of the Financial Services Act there are at present no specific criteria that govern how companies are listed. The Bank of England procedure is fundamentally informal. Amendment No. 50 replaces that informality by requiring that in order to be listed all institutions conducting investment business shall be deemed fit and proper to conduct such business according to the specific rules and practices of the new Financial Services Authority.
Amendment No. 4 is the most important of all. The amendment requires that to be included in the list each institution must satisfy itself that its employees are fit and proper persons to carry out their designated functions and that for such positions as the authority designates persons appointed are approved by the authority. We seek to ensure that individuals are fit and proper—fit in terms of having acquired the appropriate qualifications. Again, the procedures of the Bank of England are essentially informal. Certainly, the Bank requires that all senior management of listed firms should be fit and proper, but exactly how fitness and propriety are defined is not embodied in a set of formal rules. In particular, the Bank of England requires that only senior management, not traders, should be licensed 19 as fit and proper, whereas the Security and Futures Authority requires that such persons conducting investment business should be listed and regulated as fit persons. The value of this is that in the enforcement activities of the regulator subtle differences can be drawn between the activities of firms and the activities of individuals employed by those firms. That is an important part of the regulatory process which the Bank of England at present does not pursue.
Amendment No. 3 requires the authority to ensure that listed firms obey conduct of business rules appropriate to the kind of investor with whom they are dealing and the costs involved. I believe it is vital that Bank of England informality be replaced with modern rules. As far as concerns the conduct of the Bank of England, it seeks to regulate business by means of its code of conduct set out in the so-called Grey Book. But the terms of the code are not rules. The code defines best practice but the rules demand a minimum satisfactory performance. Conduct of business regulation is the fundamental protection which the supervisory system offers to individuals. In a modern regulatory system surely it is imperative that what is appropriate should be embodied in clear rules and that those rules are attuned to the characteristics of the counterparty. It would be a nonsense if the investment business conducted by listed firms was subject to a best practice code while identical investment business conducted by unlisted firms was subject to clearly defined conduct of business rules. This amendment ensures that conduct of business regulation is formal, clear and coherent rather than informal, unclear and incoherent.
These three amendments replace the informality of Bank of England procedures with the more formal rules required of a modern regulator. They will ensure that coherent rules and practices define which firms and which individuals are fit and proper. They will also ensure that all business, not just some, is conducted according to a clearly defined set of rules so that the same SFA staff regulate the same kind of business in the same way. I quite understand that the development of a coherent structure is an important part of the very hard work that the SFA will be carrying out between N1 and N2. If the Government believe that these amendments are premature I understand that position, although I disagree with it.
In those circumstances, I should be grateful if my noble friend would at least provide some comfort by answering three questions. First, do the Government intend that in future individual registrations should be the rule in what were previously listed firms? As I said earlier, I regard that as the most important element in establishing an effective modern financial regulatory system. Secondly, do the Government intend that in future the conduct of business rules should apply to all firms, whether previously listed or unlisted; and, thirdly, what steps do the Government expect the FSA to take to achieve maximum coherence in the regulation of investment business between N1 and N2? I beg to move.
§ Lord Shaughnessy
My Lords, will the noble Lord elaborate in respect of subsection (2D) of his amendment which provides:A condition of the kind referred to in subsection (2C)(a) or (b) above may make different provision for different cases"?
§ Lord Eatwell
My Lords, with the leave of the House, the important point with respect to subsection (2D), which refers to the fitness and propriety of individuals, is that the particular regulations of fitness and propriety may be different, for example, for a senior executive officer from those required for a trader on the desk. It provides the flexibility for the authority to define appropriate fitness requirements for people at different positions within an investment organisation.
§ 3.45 p.m.
§ Lord McIntosh of Haringey
My Lords, I am grateful to my noble friend for raising this matter again. I appreciate that it was not possible for him to do so on Report. I recognise his expertise as a director of the FSA, and his proper concern, which we share, to ensure that the highest regulatory standards are established from the outset.
As I explained in Committee, the Bill merely transfers the existing regime for supervising money market institutions from the Bank to the FSA. More general reform of the regulatory system, is, and has always planned to be, in a second Bill.
First, I shall set out, as far as I can, what the powers of the FSA will be under the second Bill, and then I shall talk about the transitional arrangements about which my noble friend asked me. In case there is any confusion, I should say that the second Bill will, of course, be a financial services Bill and not a finance Bill.
The Government's aim is to make the FSA a more effective regulator with the necessary statutory powers, drawing on the best of each of the existing systems. There has been much support for the less-prescriptive approach to regulation which has been adopted hitherto for these wholesale market institutions. I appreciate that my noble friend does not share that view, but it is a view that is widely held.
The Government recognise the importance of the wholesale-retail split. We intend that the FSA should have the scope to adopt both code-based and rule-based systems for players in different markets. Code-based rules can be more effective, and less easy to circumvent, than detailed prescriptive rules. That depends upon the type of business the firms are doing and the sort of counterparties with which they are dealing.
The important point is to ensure that the FSA has the powers to make appropriate rules in respect of all the businesses that it authorises. I can assure the House that it will have. It is important that its rule-making and supervision are subject to statutory objectives to protect investors, depositors and policy-holders, and to maintain confidence in the integrity of the markets. Again, I can assure the House that that will be the case. A statutory objective to ensure that the requirements it imposes are proportionate to the benefits that they bring in terms of 21 meeting those other objectives, is also necessary, and again I can assure the House that it will be. Those powers and objectives will apply equally to authorised firms whether or not they were listed under Section 43.
I can also assure my noble friend that we are considering what powers the FSA ought to have to discipline individuals holding key positions in authorised firms—he made a particular and legitimate point about that—bearing in mind, the objectives that I have mentioned. Again, the FSA's powers will apply equally to authorised firms which were listed and those which were not. I hope that those assurances meet my noble friend's concerns about the future regime.
The answer in respect of my noble friend's two final questions is yes: do the Government intend that in future individual registrations should be the rule in what were previously listed firms? Yes. Do the Government intend that in future conduct of business rules should apply to all firms whether previously listed or not? Again, the answer is yes.
I turn now to the transition period. My noble friend talked about the need for the FSA to achieve maximum coherence during the transition period. Again, I can assure him that the FSA is adopting an approach that maximises continuity and ensures a carefully managed integration of the different regimes. The current rules book will continue.
SFA staff that come across to the FSA will continue to act on behalf of the SFA in applying the SFA rules to SFA firms for the time being. Equally, in the wholesale markets supervisors from the Bank will continue to supervise the Section 43 firms, and will do so according to the same rules. From the start, it will be the same firms being regulated or supervised, under the same rules, and by the same supervisors.
In the meantime, we do not accept that the wholesale markets regime established by the Bank under Section 43 of the Financial Services Act is inadequate. If there are any difficulties, of course the FSA can bring forward changes to the listing conditions.
The important point that the House should recognise is that we should not make ad hoc changes to the wholesale markets regime through this Bill which may not fit in with the final regime under the second Bill. It would send the wrong message to those markets. It would involve potential costs to business in implementing two different sets of changes, especially coming on top of preparing the euro and resolving the year-2000 millennium bug problem. It is important that we should not chop and change and undermine the attractiveness of London as an international financial centre.
My noble friend used strong words. He talked about ambiguity and incoherence. I hope that in my exposition of our policy I have reassured him, at least to some extent.
In Amendment No. 2 my noble friend proposes to introduce an explicit fit-and-proper test for wholesale market firms. Most of the Section 43 firms are banks or members of the SFA, so they are already subject to a fit-and-proper test. Indeed, the vast majority of 22 Section 43 firms is subject to a fit-and-proper test by the Bank. My noble friend would not be adding all that much by the implementation of Amendment No. 2.
My noble friend spoke next to Amendment No. 4. He proposes a power for the FSA to introduce a statutory system of regulation for individuals in capacities that the FSA may determine. That reflects contractual powers which are already used by two of the three existing self-regulating organisations, including the FSA, and a similar regime is in the process of being introduced by the third.
Finally, in Amendment No. 3 my noble friend talks about an explicit rule-making power. The FSA will have powers to make rules or establish principles for the conduct of business along the lines of the existing code. In exercising that power, the FSA will, in all cases, be informed by the overall statutory objectives we are to introduce, including the protection of consumers and the duty to ensure that the costs imposed by regulation are proportionate to its benefits.
My noble friend's third final question relates to what steps the Government expect the FSA to take to achieve maximum coherence in the regulation of investment business between the passage of this Bill and the next financial services Bill. Perhaps my answer has been set out—and I apologise—at too great length, but I hope that on that basis my noble friend will feel able to withdraw his amendment.
§ Lord Eatwell
My Lords, I am grateful to my noble friend for that reply. He reiterated the Government's devotion to the notion that there is a black and white split between wholesale business and retail business and that their regulatory procedures should be different. The Government should take great care over that proposition. There is a significant grey area between wholesale and retail businesses. When Baring failed, a number of ordinary individuals were not paid their salaries and could not pay their mortgages during that week. Individuals were affected by what happened in wholesale markets on the other side of the world. It is enormously important to realise that behind all wholesale business there are individuals who will be affected by the nature of its conduct.
I am given considerable comfort by the fact that the FSA appears to be taking a more flexible view than that taken by my noble friend. It has not, for example, organised the Financial Services Authority in a manner which takes note of that split. The organisation of the FSA is along functional lines and does not divide wholesale and retail businesses. I hope that the differences in the nuances between wholesale and retail businesses will be recognised by the Government.
I am greatly reassured by my noble friend's confident "yes" that individual registration will become a characteristic of previously listed and unlisted firms in the financial services Bill. I am sure that the entire industry will take considerable comfort from that.
I focused in particular on the transition period between N1 and N2. My noble friend made an important point in arguing that the rule books of the Bank of England and the FSA would be run by different people 23 at the FSA between N1 and N2. I had not understood that. I had believed that the organisation of the FSA was such that the same people would regulate investment business according to the different rules. If there are to be separate persons I believe the coherence of regulation during that period will be greater than I had previously feared. I am grateful to my noble friend for that new piece of information.
Finally, he suggested that my amendments appeared to be ad hoc and would result in firms chopping and changing the regulatory procedures to which they were subject. I was a little puzzled when he then said that Amendment No. 2 did not add much. If it did not add much how could it lead to considerable chopping and changing? However, given that that is nitpicking and given the reassurances and additional information which my noble friend has provided today, I am happy to withdraw my amendment.
Amendment, by leave, withdrawn.
§ [Amendments Nos. 3 and 4 not moved.]
§ Clause 28 [Board of Banking Supervision]:
§ Lord Eatwell
moved Amendment No. 5:Page 12, line 20, leave out (", who shall chair the Board,").The noble Lord said: My Lords, in moving Amendment No. 5, I shall speak also to Amendment No. 6. It was moved in a slightly different form in Committee and I am grateful to my noble friend for discussions which have taken place since then.
The objective of the amendment is to ensure that one of the lessons learnt during the Baring affair is not forgotten; namely, that supervisory authorities should be subject to assessment and examination by an authority which is not only independent but seen to be independent. We discussed that issue in respect of Amendment No. 1 in that, under the new Bill, the Treasury Committee in another place will be charged with the responsibility of overseeing the activities of the Financial Services Authority.
Noble Lords will remember that the investigation into the conduct of the supervisory authorities of the Bank of England with respect to the Baring affair was conducted by the Board of Banking Supervision, to which Clause 28 refers. The Board of Banking Supervision has not only the investigatory role, which was thrust upon it at that time, but, under the Banking Act 1987, it has the statutory duty to advise the Governor of the Bank in the exercise of his or her supervisory functions. Under the Banking Act the board is chaired by the Governor.
Noble Lords will recognise that that structure—a committee chaired by the chief executive of the Financial Services Authority replacing the Governor—is contained in Clause 28. Therefore, the executive head of the institution responsible for supervision is deemed the appropriate person to chair the committee responsible for investigating whether that supervision is conducted in a satisfactory manner and advising the organisation on the conduct of its activities.
24 My amendment seeks to change the provision for chairing the Board of Banking Supervision. Noble Lords may remember that at the time of the publication of the report of the Board of Banking Supervision into the Baring affair the value of the report was called into question in your Lordships' House, in another place and in the financial press when it was revealed that the conclusions had been drafted at meetings of the board chaired by the Governor and by Mr. Quinn, who was at that time the executive director of the Bank of England responsible for supervision.
No one has suggested—and I am certainly not suggesting—any impropriety in the operation of the Board of Banking Supervision or on the part of the Governor and Mr. Quinn. But what was correctly suggested at the time was that the report of the Board of Banking Supervision should not only be independent but it should be seen to be independent by virtue of having been prepared under an independent chairman.
I am sure that the Government are totally in agreement with that sentiment. In the new era of regulatory openness and institutional transparency, it is totally unacceptable for an individual with the authority of a chief executive to chair the body designed to advise and monitor the institution for which he or she is responsible. Amendment No. 5 removes that embarrassment. Amendment No. 6 requires that the chairman of the Board of Banking Supervision be elected from among the independent members of the board.
As I said in Committee, I am sure that the drafting of Clause 28 was a slip on the part of the Government. My simple amendments prevent the new FSA inheriting unfortunate and embarrassing practices from the Bank of England. I understand that the Board of Banking Supervision will not survive N2, but I believe that it is appropriate to send a signal to the markets and to all those involved in the financial services industry that in the new regulatory apparatus openness and independence will be the key characteristics defining the supervisory activity and the monitoring of that activity. I beg to move.
§ Lord Mackay of Ardbrecknish
My Lords, in some ways, although not entirely, the amendment parallels one which I tabled to Clause 3, which referred to the sub-committee of the Court of the Bank of England. At an earlier stage, I suggested that the members of the court should appoint their own chairman to the sub-committee, but the Government were absolutely determined that the Chancellor of the Exchequer may designate one of the members as chairman. I believed that that was wrong and I still believe that is wrong, but the Government got their way.
Today's amendment is similar, although I suspect more important and I listened with care to the noble Lord, Lord Eatwell. I remember the Friday afternoon when we in your Lordships' House spent some considerable time discussing the affairs of Baring. I can certainly say that the noble Lord made the point which he has just made fairly forcibly in my direction because I had to answer for it at that stage.
25 It seems to me that if the Board of Banking Supervision is to be seen as independent, it should not have a chairman of the authority as the chairman of the board. I believe that the noble Lord has made an eminent case that one of the six independent members should be the chairman and that the independent members should make the decision as to which of their number it should be.
After all, rather like the court, the six independent members will not be picked off the street at random. They will be appointed jointly by the Chancellor of the Exchequer and the chairman of the authority. Therefore, quite clearly they will have the confidence of both of those gentlemen as people of some substance and considerable knowledge in that field. On that basis, I believe that it is right and proper that the six independent members should decide for themselves which of their number should be chairman. I have some pleasure in supporting the noble Lord, Lord Eatwell.
§ 4 p.m.
§ Lord McIntosh of Haringey
My Lords, I am grateful to both noble Lords who have spoken for explaining the motivation behind the amendment. I should say straightaway to the noble Lord, Lord Mackay of Ardbrecknish, that I do not follow him in his analogy with the amendment to which the House disagreed at an earlier stage.
I should explain that the board was set up originally to advise the Bank rather than to discharge any executive functions. Therefore, under those circumstances, we believed that it was proper for it to be chaired by the Governor. It has not been our approach in this Bill, as has become clear, to change the banking supervision regime in the course of transferring it to the FSA, although we have proposed to increase slightly the Board of Banking Supervision's independence by reducing the number of executive members from three to two.
However, in Committee I undertook to consult on those amendments. We have consulted Howard Davies, the chairman of the FSA, and through him the non-executive members of the board. Having done so and having confirmed that they are content with that change in their role, I am happy to accept my noble friend's amendment.
In accepting it, I wish to reinforce what my noble friend Lord Eatwell confirmed: that this does not imply any criticism of the past conduct of the board or of any of its members or, indeed, of the Governor and other executives who sat on the board. I wish to reiterate the point which my noble friend made that we do not propose to retain the board in its current form when we bring forward our further legislative proposals. That would not be in keeping with the wider responsibilities of the FSA. But the FSA has consulted on the form of practitioner input in the longer term. On that basis, the amendments have our support.
§ Lord Eatwell
My Lords, I am extremely grateful to my noble friend for accepting the amendments. Perhaps I might add to his remarks concerning the Governor and Mr. Quinn. Of course, the purpose of the amendments 26 does not suggest any lack of confidence in the abilities of Mr. Howard Davies, chief executive of the FSA, who is doing a truly excellent job. The amendments seek merely to establish a clear independent framework for the Board of Banking Supervision between N1 and N2.
I am grateful also for the support of the noble Lord, Lord Mackay, who rejected exactly those propositions at the time at which I advanced them; namely, at the time of the Barings affair. But there is of course more rejoicing in heaven for one sinner that repenteth, and I am delighted to hear of his repentance on this matter. Having said that, I am extremely grateful to the Government for supporting the amendment.
On Question, amendment agreed to.
§ Lord Eatwell
moved Amendment No. 6:Page 12, line 27, at end insert—("( ) The independent members shall elect one of their number to chair the Board.").On Question, amendment agreed to.
§ Schedule 3 [Monetary Policy Committee]:
§ Lord Mackay of Ardbrecknish
moved Amendment No. 7:Page 23, line 8, at end insert ("or( ) he has been the Governor or a Deputy Governor of the Bank").The noble Lord said: My Lords, in moving this amendment I shall speak also to Amendment No. 8. I suppose that it would be too much for me to expect that the success rate of the noble Lord, Lord Eatwell, might carry over to at least one of these two amendments.
We have been over this ground before and I have tabled the amendment in this way partly because I placed the amendments wrongly the first time and the Minister was able to have some sport at my expense because of that, but also because of something he said on Report on 23rd March.
I shall go over the ground quickly because I do not suppose that there are many noble Lords who have not been present during other stages of the Bill. Essentially, the Monetary Policy Committee will have nine members. I described five of them as the home team. They are people from the Bank —the Governor, two deputy governors, as there will be two in the future and two people who are employed by the Bank in senior executive positions. Then there will be four others who are appointed by the Chancellor and they will come from outside. They will bring their outside expertise—at present it is three from universities and one from commerce—to meetings of the Monetary Policy Committee. Your Lordships will know that the meetings of that committee are extremely important as regards the economic life of this country and for everyone who lives in it, whether they be mortgage holders, in employment, seeking employment or running businesses, especially in the export business, given the high value of the pound at present.
What bothered me rather when I looked at this matter was that there did not seem to be any way in which the hands of a future Chancellor might be tied as to who he 27 could appoint as the away team. I was concerned in particular by the fact that two of the four current away team members—and I mean it as no reflection on them—had been in the past senior officials. One was at the Bank. Professor Goodhart was the chief adviser to the Bank in 1980. One was at the Treasury. Sir Alan Budd has been the Chief Economic Adviser at the Treasury since 1991. Therefore, two out of the four members have had some fairly high powered, in-house experience of the home team. In the case of one that is not so long ago and somewhat longer ago in the case of the other.
That is why I questioned whether in this part of the schedule as a disqualification for appointment we should suggest that no senior employee of the Bank or the Treasury could re-emerge as one of the four non-Bank members of the Monetary Policy Committee. I have slightly refined that to mention Treasury officials at Grade 3 or above or:office of equivalent rank in the Bank".That is my general point.
However, the first amendment comes from an exchange which the noble Lord, Lord McIntosh, had with me on Report. At that time I asked whether there was any reason why the Chancellor could not appoint a former governor or deputy governor of the Bank as one of the away team. The noble Lord, Lord McIntosh, said that,there is no formal exclusion for a former governor or deputy governor".—[Official Report, 23/3/98; col. 1016.]Therefore, it was not just a case of thinking that the teams were home and away. It was almost the school versus the old boys. Although I do not suppose that the present Chancellor would act in that way, one cannot guarantee the actions of future chancellors. He might decide that a previous Governor was a safe pair of hands. Noble Lords who have served in government will recognise the minute, "AB was the Governor some years ago. The Chancellor will remember he was a perfectly sound man and can be relied upon on all occasions. We suggest that now he has a nice job at a university as a part-time professor, he is eligible to become one of the four wise men who will help the Monetary Policy Committee". The Chancellor may think that that is a good idea and will sign his initial at the top and off the minute will go.
I do not suggest that a future Chancellor would try to pack the committee with previous Governors, deputy governors and senior employees. Perhaps the Minister can give an assurance on the record that that certainly would not be the Government's intention and that in writing into the Bill that four members of the Monetary Policy Committee should not be employees of the Bank of England, they have absolutely no intention of the positions being taken by former Governors and deputy governors.
In a way, I am less concerned, although I am still concerned about senior employees of the Treasury and senior employees of the Bank being on the MPC as part of an "away team". Indeed, I was extremely concerned when the Minister raised the doubt in my mind about former governors or deputy governors. I hope therefore 28 that the Minister can give me some assurance, at least as regards my first amendment, at this Third Reading stage.
§ Lord Barnett
My Lords, as always, I followed the noble Lord's argument with great interest. I also noted the opportunity that it gave him to refer, once again, to the high exchange rate. I thought that he was going to tell my noble friend the Minister how he would reduce that rate, but I was not too disappointed because I did not really expect him to do so. However, perhaps the noble Lord can tell us why he has restricted the disqualification in Amendment No. 8 to,a Treasury official at Grade 3"?Why did he not specify Grade 2 or Grade 4; or, indeed, why not specialist Treasury advisers, like perhaps my noble friend Lord Eatwell? Can the noble Lord tell the House why he decided on this particular disqualification level? In other words, why did he stop at that point?
§ Lord Mackay of Ardbrecknish
My Lords, with the permission of the House, I shall try to answer the noble Lord. This refers back to the Committee stage and something that the noble Lord, Lord Newby, said about the more broadly-based amendment that I tabled at the time. The noble Lord pointed out to me that, in the course of their careers, many people spend a year or two at various levels in the Bank—but less so in the Treasury—and that it would not be very fair to exclude them. I picked Grade 3 and above, because in the departments in which I served, including the Treasury for which I was a spokesman, Grade 3 and above are the senior, serious players at the top of the scale. I am just asking whether it would be right for them and their equivalents at the Bank of England to end up as the "away team" members of the MPC.
§ Lord Newby
My Lords, I am grateful to the noble Lord for reminding me of what I said in Committee. We have sympathy with the view that one does not want the MPC to be too full of home players, as opposed to away players. However, in my mind at least, I believe that there is a slightly different definition as regards the group of people whose membership of the MPC one wants to limit. The phrase that comes to my mind is not so much "home and away" but rather the concept of the "charmed circle", which goes slightly beyond former employees of either the Bank or the Treasury.
It seems to us that on the MPC we should seek to achieve a rather broader membership than the normal group, comprising not just officials but also advisers and chums of officials who one might suggest to Ministers for the committee and who might equally be seen as a well-known safe pair of hands. Instead of the two amendments that have been tabled today—although we would also welcome an assurance from the Minister as requested by the noble Lord—it seems to us that there are two better methods to achieve that aim. First, there is the proposition that we sought to put forward earlier in our debates; namely, that the nations and the regions of the UK should be better represented on the MPC; and, secondly, we believe that there should be confirmation hearings of members of the MPC so that 29 no Chancellor of the Exchequer would run the risk of being seen to fill the MPC with chums, whether officials or otherwise. Therefore, although we have some sympathy with the thinking behind the amendments, we doubt whether they represent the best way to achieve the noble Lord's aim.
§ 4.15 p.m.
§ Lord McIntosh of Haringey
My Lords, I admire the noble Lord, Lord Mackay, for coming back with a third version of what he made clear in Committee he wanted to do. His amendment in Committee was profoundly defective in the sense that it would have excluded him, as a former Minister, from membership of the MPC. His amendment on Report was defective in the sense that it proposed a power to remove a member of the MPC rather than restricting the ability of the Chancellor of the Exchequer, or anyone else, to make appointments to the MPC.
It is with great sadness that I have to tell the noble Lord that his amendments on Third Reading are also profoundly defective. They are defective because Schedule 3 to which they relate refers not only to what he calls the "away team" but also to the home team. If the noble Lord looks again at Schedule 3, he will see that it refers back to Clause 13(2)(b) and (c)—(b) being the home team and (c) being the away team, as he would call them. Therefore, the effect would be that no person who has held office of the equivalent rank to Grade 3 in the Bank could be one of the two members appointed by the Governor of the Bank of England after consultation with the Chancellor of the Exchequer. I am afraid that it would not work in that way.
The amendments also would not work because, as the noble Lord will have realised from our previous debates on the Bill, this legislation establishes the statutory basis for the MPC for the first time. Therefore, the appointments to the committee are not simply carried over automatically from the existing appointments to the non-statutory committee: they are being made for the first time. In that case, Alan Budd and Charles Goodhart, would be excluded under the noble Lord's amendments. When I challenged the noble Lord on that point on Report, and said that these were anti-Budd and anti-Goodhart amendments, he denied the charge. However, it is as true now as it was then. Therefore, the amendments simply could not go into the Bill as presently drafted and there is little opportunity left to discuss them.
The noble Lord's intent is of course the same as it was on Report; namely, that the Chancellor of Exchequer should not appoint former senior Bank or Treasury officials to the MPC. I am afraid that my answer is the same. As I said last week, there is no basis for excluding former Treasury or Bank officials from the MPC. The important point is that such appointments should be made on merit. Clause 13(4) requires the Chancellor of the Exchequer to appoint those he is satisfied have the relevant knowledge and experience in such matters. There is no justification for further narrowing the field as regards potential candidates.
30 The Government firmly believe that positions on the MPC should be filled by the best people for the job. That judgment must be made on the basis of their current knowledge and experience. If we go down the route of excluding particular types of people, the credibility of the MPC will suffer. The noble Lord's proposal would not enhance confidence in that committee; indeed, even if the amendments had been correctly drafted, they would in fact do the opposite. Therefore, I invite the noble Lord to withdraw them.
§ Lord Mackay of Ardbrecknish
My Lords, I am grateful to the noble Lord, Lord Newby, for what I might call his "generalised" support of the principle that I am trying to achieve by way of this amendment and, indeed, the principle that I was trying to put forward with my previous amendments. I am rather sorry that the noble Lord's generalised support did not extend to particular support as regards making one of the members of the MPC a person who would be nominated by the Chancellor of the Exchequer on the advice of the First Minister of the Scottish Parliament. However, as that is still in the legislation—and I very much trust that the other place will not try to overturn it—at least one of the members of the MPC is unlikely to come from the magic circle.
I have to say that I am not very pleased with the Minister's response. I take his point about paragraphs (b) and (c) of Clause 13(2), but I was really only looking at paragraph (c). It still seems to me that the Minister does not appreciate the kind of reaction which would occur if a future Chancellor of the Exchequer were to appoint someone who had been a very senior figure—indeed, right up to the level of the Governor of the Bank of England—to the MPC. If any future Chancellor of the Exchequer were to do so, I believe that there would be some degree of attack on the whole principle as regards whether or not the "four members" now under discussion were actually independent people drawn from outside.
§ Lord McIntosh of Haringey
My Lords, I am grateful to the noble Lord for giving way because it enables me to make clear a confusion which I may have introduced when I said that the Monetary Policy Committee has to be reappointed when the Bill receives Royal Assent. I should make it clear that the Chancellor has said that he will appoint the existing four outside members. Therefore when the Monetary Policy Committee is formally constituted it will contain two ex-senior officials of the Bank and Treasury, but it will not contain any ex-governors or deputy governors.
§ Lord Mackay of Ardbrecknish
My Lords, I suppose one has to be thankful for small mercies. As no doubt the noble Lord said to me on a number of occasions in the previous parliament, I am not considering what the present Chancellor will do; I am considering what future Chancellors can do. I cannot believe that the Minister thinks the number of people for these four posts will be drawn from such a limited field that future Chancellors will need to consider also former governors or former deputy governors, and that if we exclude governors and 31 deputy governors we shall narrow the field of selection for a future Chancellor. That does not say much for the economists, business and commercial people in this country from whom I am sure the Chancellor could draw a pretty long list of nominees. However, clearly I shall not make much progress. If the Minister and I are around when a Chancellor of the Exchequer in the future says that he is not bound by anything and that he will appoint a former governor to the Bank, I shall look forward to discussing with him the fuss that will arise when one of the "away team" is just an ex-player from the "home team". I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ [Amendment No. 8 not moved.]
§ Lord McIntosh of Haringey
My Lords, I beg to move, That the Bill do now pass.
It has never been my belief that there should be substantive retrospective debate on the Question that this Bill do now pass. We do enough chewing of the cud as it is without reviving Second Reading speeches or things that we forgot to say in Committee, at Report or on Third Reading. I shall confine my remarks to thanking those who have taken part in the proceedings on this Bill at all stages. I have benefited enormously from the behind-the-scenes support of my noble friend Lord Haskel and also from the active participation of my noble friends Lord Peston, Lord Barnett and Lord Eatwell with, in the second XI, so to speak, the noble Lords, Lord Thomas of Macclesfield, Lord Montague of Oxford and Lord Sefton.
I have been grateful, as always, for the constructive opposition. I think that should apply to the Liberals, but it applies also to the noble Lord, Lord Mackay of Ardbrecknish and the noble Earl, Lord Home. The noble and learned Lord, Lord Mackay of Drumadoon, also took an active part, as did, in particular, the noble Lords, Lord Boardman and Lord Stewartby, from the Back Benches. I am grateful to all of them. From the Liberal Democrat Benches the noble Lords, Lord Newby and Lord Taverne, made a positive contribution to our considerations. Above all, I am grateful to the Bank of England Bill team in the Treasury, led by Stephen Pickford. I am grateful also to all of his colleagues for the support that they have given during the passage of the Bill. I beg to move.
Moved, That the Bill do now pass.—(Lord McIntosh of Haringey.)
§ Lord Mackay of Ardbrecknish
My Lords, I shall say just a few words. I have absolutely no intention of repeating my Second Reading speech even if I could remember it. Nothing used to irritate me more than when people at this Dispatch Box repeated Second Reading speeches at this stage.
I am grateful to those who advised my noble friend Lord Home and myself on certain aspects of the Bill. I am particularly grateful to my noble friend Lord Home for help with the second part of the Bill. We certainly explored some of the details of the first and second parts in Committee. We were grateful to the Minister and his 32 team for some of the detailed replies that we received although I cannot say I was grateful for all of them. That certainly would not hold true as regards this afternoon. However, I was grateful to the Minister for the courteous way in which he replied to us.
I am grateful to a number of my noble friends who took part at the Committee stage in the Moses Room—some of whom are present this afternoon—and at the Report stage and today's stage. Rather a select number of noble Lords took part in discussions on the Bill. Perhaps it is one of the defects of the Moses Room stage that what I might call the "passing trade" misses out on a Bill. I shall reflect on that in future. At Report stage we heard interesting comments from people who were not present in the Moses Room. It is a pity they were not present at the Committee stage. I am grateful to all my noble friends who have taken part and to other noble Lords for making this a brief but interesting Bill.
§ Lord Newby
My Lords, I join the noble Lord, Lord Mackay, in thanking the Minister and his team for the way in which they have handled the Bill. As regards the discussions in the Moses Room, I shall long remember the seminar on the concept of price stability. It was not a debate on amendments; it was a seminar. We were all engaged in that discussion for a long time. I believe that it enlightened all of us. I am sure that students of economics will no longer need to read the textbooks of the noble Lord. Lord Peston, but will read the relevant part of the Committee stage of the Bill to discover the various definitions of price stability.
We on these Benches have a particularly partisan reason for being pleased that this legislation is heading for the statute book. We approve of it in principle. However, it also means that a well-known vote winner will no longer appear in Liberal Democrat economic policy; namely, the independence of the Bank of England. Those of my colleagues who have pounded the streets for many years advocating that independence will be grateful that this measure has now been so successfully dealt with.
We all recognise that in some respects the Bill is a transitional measure and that in due time we shall discuss the European monetary committee in another guise in terms of the European central bank when we discuss the euro. I look forward to those discussions. I hope they will be undertaken with the same generosity of spirit which has characterised our consideration of this Bill.
§ Lord Boardman
My Lords, I shall mention two fundamental aspects of the Bill. I shall not make a Second Reading speech. I very much regret two provisions. First, the Bill passes control of the monetary policy of this country from the Chancellor to the Bank of England. I believe that the Government will regret that as the years pass, and no doubt they regret it now. Secondly, I regret that they have removed the supervisory role from the Bank of England which it has held for a long time. It has made mistakes but nevertheless it has acquired great experience in that role. 33 I think both those steps are fundamental mistakes and I personally regret them. Subject to that, I wish the Bill well.
On Question, Bill passed, and returned to the Commons with amendments.