My Lords, the House owes the Minister a degree of thanks for the effective and precise way in which he introduced the Bill, though I perhaps detected that, as this is a fairly modest Bill of only 30 clauses and four schedules and contains some measures of limited contention, he thought that this was a fairly straightforward exercise. As soon as my noble friend Lord Eatwell had made his contribution, however, the Minister probably realised that, in fact, there were going to be a series of challenges on some quite fundamental points. I am going to discuss those in some detail, but we all recognise that the great opportunities we have for following through the broad arguments put today are during the remaining stages of the Bill, on which we all will strive to be active. In my own party, the shadow Chancellor is carrying out a review of the very issues that have been commented upon in relation to this Bill, and my noble friend Lord McFall is due to serve on that committee, which will be chaired by David Blanchflower, formerly of the court of the Bank of England.
There have been a number of excellent contributions to the debate but I wish to acknowledge that of my noble friend Lord Eatwell, who has very considerable knowledge of these issues. He was unremitting in his trenchant criticism of certain aspects of the Bill. I assure the Minister that those issues will be presented further as we go along. In particular, questions of transparency and scrutiny have come out in this debate. I do not want to put words into the Minister’s mouth, but I hope he will accept that two key planks for the reforms the Government need to get right are in exactly these areas.
Furthermore, there were comments on the financial stability strategy and where the ultimate responsibility for that lies. Of course, this relates to the changes to the structure of the Bank and the new position of the Prudential Regulation Committee. We are bound to be interested in how effectively the Bank pursues financial stability strategies, against a background of its having to take some responsibility for the catastrophic failure that occurred in 2007-08.
There are two other areas that might have looked technical—the National Audit Office and the restrictive role envisaged for it in relation to the Bank—but it is quite clear from the comments of the noble Lord, Lord Bichard, that this idea will not be accepted in committee without the most vigorous debate. The Minister will also have noticed that several anxieties were expressed about the reverse burden of proof being abandoned before it had been significantly tried. We will certainly want to look at the Government’s reasoning behind that concept in the Bill.
Transparency and proper lines of accountability are key for any institution, particularly those whose decisions have such an impact on the public. They are also critical to the trust and confidence that people have in an institution. We need to ensure that the changes being made—particularly changes to the membership of the Court of Directors, the abolition of the Oversight Committee and the changed status of the Prudential Regulation Authority—meet those standards, a point made by my noble friends Lord Eatwell and Lord McFall, who made some trenchant comments on these matters.
On the Court of Directors, the Bill gives the Treasury the power, after consulting the governor, to remove or alter the title of deputy governor. That, along with the reduction in the number of non-executive directors on the court from nine to seven, will clearly alter its structure. The Bill also establishes that in future, alterations to the Court of Directors will no longer need to be done through primary legislation but will be subject to regulation. Who in the Treasury will determine the changes in relation to the deputy governor, and can the Minister outline how that decision will be taken? The Bill states that the Treasury can make changes to the Court of Directors after consulting the governor. Can the Minister say how that will work in practice, or be prepared to answer that fundamental issue in Committee?
Will the Minister go into more detail about the rationale behind the reduction in the number of non-executive directors on the court, and what does the Treasury regard as the benefits of this reduction? I
would also be interested to hear why the Minister feels it is appropriate to make these changes through secondary rather than primary legislation.
Noble Lords also commented on the disappearance of the Oversight Committee, which the Bill intends to abolish, of course. It was established by the Financial Services Act 2012 in order to keep under review the Bank’s performance. As part of that, it may commission reviews and keep track of the delivery of any recommendations. The Government need to explain why they think they can dispense with that body, and how effectively its functions will be carried out in a different way. They will be transferred to the Court of Directors. However, Clause 4(3) states that:
“The oversight functions of the court of directors (as defined by section 3A(2)) may be delegated to a sub-committee of the court consisting of 2 or more non-executive directors of the Bank.”
How on earth can this be removing a layer of governance, if the legislation gives enabling powers for another committee to be formed? There is an essential contradiction in the Government’s thinking on these issues. What safeguards are in place as a result of moving this committee in-house? Are the Government convinced that this will lead to self-evaluation, rather than some independent judgment? On the future make-up of the sub-committee for oversight, how far will oversight stretch if this function is being delegated to two non-executives? Previously, six non-executives were expected to perform that function. What prompted that change?
On the issue of transparency and oversight, the changes being made to the Prudential Regulation Authority and the reforms included in the Bill end the PRA’s subsidiary status and integrate its microprudential policy into the bank. The PRA board will be replaced by the Prudential Regulation Committee, which will be solely responsible for exercising the Bank’s functions as the PRA. We are concerned about whether this represents a downgrading, as it is no longer a freestanding committee, and we will want to explore that in Committee.
Turning to the financial stability strategy, the Bill moves the responsibility from the court to the Bank itself. What is unclear is how the various bodies that have previously been involved in developing this strategy will be affected by the proposed change. The Government’s impact assessment states:
“At present, the Bank’s financial stability strategy is set by the Court after consultation with the FPC … and HMT”.
It goes on to say:
“Making the Bank responsible for setting the strategy, and allowing the Court to delegate production of the strategy within the Bank”
—which is the essence of clause 5—
“will ensure that Court is responsible for the running of the Bank and that the Bank’s policy committees are responsible for making policy.”
We need to examine that further. Who in the Bank of England is responsible for producing the financial stability strategy? If it is the FPC, that needs to be made clearer than it is in the Bill.
The role of the MPC has been discussed in great detail as well, but I have a couple of technical points to make at this stage for the sake of clarity. The Bill makes changes to the make-up of the committee, the
requirement on the number of meetings and the publication of minutes. Does the Minister anticipate that this will improve the MPC's work, and how? What prompted the change? More fundamentally, I ask the Minister how these alterations really succeed in terms of protecting consumers of banking services.
Then there is the crucial question of the operation of the National Audit Office. I do not need to repeat, but I fully support, the remarks made by the noble Lord, Lord Bichard. He is right that the quality of independence, which is critical to a successful and proper audit, may be compromised in the arrangements made in the Bill. The Minister will have to address that issue, too. It is quite clear that the National Audit Office will continue to have independence in determining a value-for-money programme within the framework proposed: it is for the Government to make sure that that framework guarantees that position.
The noble Lord, Lord Lawson, raised the crucial issue of how we hold banks and financial institutions responsible—in terms of personal responsibility, as he saw it. He also introduced the issue of ring-fencing, although I would imagine that as far as the Government are concerned that is also a fairly contentious measure. Nevertheless, the noble Lord, Lord Lawson, is quite right to raise that issue within the framework of this Bill. I hope that it, too, will be pursued in Committee.
A number of noble Lords—my noble friend Lord McFall and the noble Lords, Lord Flight and Lord Sharkey, and others—raised the question of why in replacing the approved persons regime the reverse burden of proof was being altered. We are by no means convinced of the arguments on that front as yet. The Minister will be asked to make those points clear in Committee.
A number of other issues were raised. The noble Lord, Lord Naseby, introduced the issue of the mutuals. We could not possibly deal with a Bill of this kind without paying attention to their significant role. The right reverend Prelate commented on credit unions. They, too, have their proper place for consideration in this Bill. My noble friend Lord McKenzie identified the anxieties about the progress with regard to pensions advice—in what is one of the most crucial years for this, but it is only the first or second of crucial years. It is quite clear that we are going to have to wrestle with this issue of adequate advice for those who are seeking to change their position with regard to pensions and annuities. They will need a great help on that. Finally, my noble friend Lady Worthington raised quite fundamental issues about the financial strategy being responsive to environmental risks. We surely would be remiss if we did not take that into account as well.
This has been a fascinating debate. The Minister does not have to reply to every point at this stage—we would be here for an unconscionable time if he did—and we have the delights of Committee, Report and Third Reading ahead of us before the Bill completes its passage. But if the Government think that the Bill is a relatively modest one, and even one with limited contentious issues within it, what has been established this evening is that it has much that we need to challenge them on.
10.20 pm