Bank of England and Financial Services Bill [ Lords ] (Third sitting)

George Kerevan Excerpts

Thursday 11th February 2016 Public Bill Committees

Finally, I can confirm that again we have nothing further to add to clause 17 and schedule 3, which has been grouped with these clauses, and will not push amendments to them to a vote.

[George Kerevan (East Lothian) (SNP)]

Like other Members, I add my delight at serving under your chairmanship on this bright morning, Mr Brady.

There is no best way of constructing the Bank and its regulatory functions. In this instance, however, having set up a structure, I think we should let it work itself out and see what the issues are, rather than tear it up so quickly. From that perspective, I will support the line of argument followed by the hon. Member for Leeds East.

May I remind the Minister and the Committee that we have been here before? There was a long period when the Bank was effectively the prudential authority, and it did not do a good job. One can mention the Bank of Credit and Commerce International. One can mention Barings. The Bank failed at the very simple task of examining the imminent failure of major banking institutions and not ensuring that that did not happen before it became a public catastrophe.

For that reason, in the Bank of England Act 1998, prudential conduct responsibility was taken away from the Bank and invested in the Financial Services Authority. That model, as we saw subsequently, did not work, in the sense that completely separating prudential conduct from the Bank led to a chasm between the two agencies in terms of who was letting whom know and who was responsible for tidying up.

In a sense, the halfway house that we now have, where we have put prudential conduct into the orbit of the Bank but kept it semi-discrete, is better than what we had before. Will it work in the long run? I doubt that any bureaucratic system ever works in all circumstances, but we have set it up; let us test it to destruction before we make another bureaucratic change. From that point of view, we have a model that seems to work.

The issues brought up in the Treasury Committee related particularly to the resources that were deployable to the PRA to conduct its activities and whether the main board of the Bank was providing sufficient financial and staff resources to the PRA to allow it to do its work. My worry is that the change proposed by the Government makes it too easy for the Bank’s main board to ration resources for the soon-to-be PRC. It would be better to leave a degree of independence within the PRC, so that if it comes to a debate over resources, the PRC has some muscle and can go public if it feels that it is not getting the physical and staffing support it needs from the main board.

We may need to come back to the structure of the Bank at some point; the Minister may want to reflect on that. As I said in the previous sitting, we are in danger of creating too many committees of the Bank. We may be in danger of reinforcing a silo mentality, even though the Governor serves on all the different committees. We may have to discuss at some point whether we need to separate the Monetary Policy Committee and the Financial Policy Committee, but we should certainly test the prudential part of the administration in its present form. Changing it now simply because we will get a better and prettier bureaucratic chart is not a sufficient reason.

[Harriett Baldwin]

As I am sure you are aware, Mr Brady, desubsidiarisation of the PRA is not something they talk about very often down at the Dog and Duck, but it is incredibly important. Committee members have raised important issues, to which I would like to respond.

If one were in the pub discussing the Bank of England, the extent of people’s knowledge of what it does probably would stop with the changing of interest rates; the hon. Member for Leeds East made that point clearly. He said that the change represented a downgrade of the incredibly important microprudential responsibilities of the PRA, but I would argue that it is an upgrade, in the sense that it gives the PRA the status of a committee—the Prudential Regulation Committee—that has the same status as the Monetary Policy Committee. That reinforces to not only Bank staff but drinkers in the Dog and Duck and the public at large that it is an incredibly important function. I completely agree with hon. Members who raised that point.

The microprudential responsibilities of the prudential regulator are extremely important. The hon. Member for East Lothian made the important point that, in the 300 years of history of the Bank of England, until its independence under the Bank of England Act 1998, there were obvious failures. Firms did fail, and no one should be under the illusion that we are in a zero-failure regime for banks.

However, it is clear that the decision to separate that microprudential function and move it to the FSA created a system that was tested to destruction. That separation under the failed regulatory regime of tripartite arrangements meant there was insufficient communication between the microprudential regulation at the FSA and the day-to-day liquidity challenges that banks were experiencing in the markets in the run-up to the crash. That seems to me the strongest possible argument for having moved the microprudential function back to the Bank of England. I am glad that Committee Members have supported that important change. By following the logic of that argument, one is compelled to see that it makes sense to go one step one further, and change the PRA from being a subsidiary into being at the heart of the Bank with the same status as the Monetary Policy Committee.

By making the points he did, the hon. Member for East Lothian has made my argument for me—for having that much closer feeling of all staff being part of one Bank, which is the agenda that the Governor has set out. That not only gives a much higher status within the organisation to the incredibly important function of microprudential regulation but it reinforces the ability of the organisation to communicate with the important other parts of the organisation, and gives them more time to do it. They will not have to worry about all of the responsibilities of being a separate company.

[George Kerevan]

indicated assent.

[Harriett Baldwin]

I am glad to see that the hon. Gentleman, a thoughtful and intelligent man, is nodding vigorously as I make my argument.

The hon. Member for Leeds East asked what prompted the decision. It was very much the one-Bank agenda that the Governor has followed. He argues that it makes sense to have different points of view and not be captured by groupthink. Although I agree with the importance of having a range of views on these committees, I would counter that argument by saying that the tripartite arrangements were so clearly inadequate that that difference meant that no one spoke to each other about what they were seeing.

I hope that the Treasury Committee returns to evaluate how the transition has worked. I want to reassure hon. Members on resources, because they are incredibly important. We want to ensure that the microprudential function does not have to compete for resources or find itself starved of them. It is important to note that the levy will continue to provide those resources. No changes are being made under this legislation to the available resources for microprudential regulation.

The hon. Member for Leeds East mentioned the importance of the role of the Governor. Of course, the Governor is an incredibly important person who sits on all the committees. That is an important function of having a one-Bank organisation. He is obviously a very responsible person. With those responsibilities comes accountability, not only through the Chancellor but to Parliament through the Treasury Committee. I emphasise that that arrangement does not change as a result of these clauses.

Having reviewed all the questions raised against making the changes, I insist that the changes will improve the Bank of England’s governance.

--- Later in debate ---

Our amendments are very reasonable. As I set out earlier, on the spectrum of the two interlinked issues to which I referred—the reverse burden of proof and the width of the net—we are in between the Scottish National party, which is a bit too far one way, and the Government, who are a bit too far the other. Therefore, as reasonable people—as moderates, no doubt—the Government will think again and accept our excellent amendments, although I appreciate that when they do that, they may say to us, “On Report, we will need to tweak the wording a bit.”

[George Kerevan]

I will be reasonably brief, because the hon. Member for Wolverhampton South West has covered a lot of the points. The burden of our amendments 34 and 35 is to preserve the existing Financial Services (Banking Reform) Act 2013, which has not yet come into force—it comes into force next month—with regard to the reverse burden of proof. I think that at this stage, before the reverse burden of proof has been tried, to take it out of the legislation sends the wrong signal to the financial community. That is the most serious issue. We could argue the rights and wrongs of what is the best possible kind of regulatory regime, but much of this depends on mood, culture and signals.

The senior managers in the financial community in the City of London have been worried about the import of this legislation—there is no doubt about that. I understand that in their circumstances, because I have met many of them and they are not going out of their way to impose regulatory infractions. I think there is a new mood in the City, with people trying to get it right. Some senior managers were fearful of the extent of the legislation, but it would have been better to have tried to talk to them and explain it than, by withdrawing it, to imply that something was wrong and that it was too onerous. The signals were all wrong.

First, given the fragile nature of public opinion about the banking system, one would implore the Minister that withdrawing the legislation is not a good thing to do. What we are engaged in today is not an exercise in bank bashing, but trying to find a regulatory system that not only works, but finds the public confidence we desperately need. We need only look at the fact that since the autumn banking shares across western Europe, including the UK, have collapsed by about 37%. That shows that the markets are jittery about what is going on in the banking system. I press that on the Minister.

Secondly, where did the idea of the so-called reversed burden of proof come from? It has got into the legislation, and it came through the Parliamentary Commission on Banking Standards. We then have to ask: did the commission come up with the idea? Did its members suddenly think, “That would be a good idea”? There was lobbying on behalf of key figures in the regulatory community and the political sphere who said, “This is a good idea and you should look at it.” I gently say to the Minister that some people who raised that idea originally have now run for cover, and I think that sends the wrong signal. It suggests that in the regulatory family and within Government people are willing to press legislation home. That is dangerous for clarity in such a regime.

Thirdly, the one argument that has been brought up that one should pay heed to about the reverse burden of proof is proportionality. In widening the senior managers and certification regime through the legislation, which is the correct thing to do, there is a danger that we place onerous burdens on smaller companies or make them fear that such burdens will be put on them. I accept, as the hon. Member for Wolverhampton South West said, that there is a reasonable case for splitting the application of the reverse burden of proof between senior managers in the major systemic institution banks and funds and the smaller companies. How far I am prepared to press my amendments will depend on how emollient the Minister will be, but even if that is to be applied as a blanket rule, it is ultimately up to the PRA and the FCA to decide at what point they use their powers.

I remind the Minister that there has to have been a regulatory infraction before the reversed burden of proof comes into play—something serious has to have been proved to have gone wrong by either the FCA or the PRA, or by both. The senior named managers in their sphere of operation are already culpable for something having gone wrong, so all the legislation says is, “You have to prove why you got it wrong. You were in charge, you were on the deck and something has gone wrong.” It does not pick on that manager randomly. Something has gone wrong in their sphere of operation, so it says, “Why did that happen? You were responsible. Tell us what went wrong.” Even in the sphere of the current legislation and widening the certification regime, it is still up to the FCA or the PRA to say to a senior manager, “Tell us.”

I am willing to say that if that makes things clearer and helps get over the proportionality argument so that we can keep the degree of scrutiny and responsibility for the same managers in the systemic institution, that might be the way to go. So far, the Government have been in wholesale retreat from the original legislation of only two and a half years ago. They are sending the wrong signal in doing that, and the Minister has to explain why, when there are alternatives, she feels the need to take this measure off the statute book.