Financial Services Bill

Public Bill Committee, 20 March 2012.

James Gray (Conservative, North Wiltshire)

Despite the popular clamour to the contrary, I am back among you.

Clause 48 - Further provision that may be included in orders under section 47

Chris Leslie (Labour, Nottingham East)

Good afternoon, Mr Gray. What a pleasure it is to be back in Committee discussing the Financial Services Bill under your firm but fair hand. Hopefully, we are now in the final straits. This is the last programmed week of debate; we have already had several occasions to debate whether more time should perhaps be given to discussing the Bill, but that issue is for another occasion.

The clause relates to mutual societies and the transfer of functions between various regulators in respect of how we regulate the financial well-being and conduct of the mutual and building society sector. It provides for several orders that are consequential to the preceding clause, 47, and the transfer of some provisions under the Financial Services and Markets Act 2000 which would not otherwise be applied or disapplied without its provisions.

The Government have published a draft mutuals order to help inform, in theory, our debate. I do not know whether members of the Committee have had a chance to read the 42 pages of technical statutory changes proposed by the draft mutuals order, but if the document is a definition of “helpful”, I am not sure what an “unhelpful” document might look like. However, I should not disparage the Minister’s efforts. It is always useful to have draft arrangements put before the Committee, but it is a matter of regret that no explanatory notes are attached to them.

Will the hon. Gentleman at least share my regret that, by the time we reach the end of such an important document, bang on page 42, we think, “Hold on a minute, hopefully some light might have been shone on some of the technical provisions in the draft mutuals order”? I did look online for such detail, but the key information was missing. I should be grateful if the hon. Gentleman said when the explanatory notes will be published; it certainly would be useful if it were in time for our discussions on Report. If not, I hope they can be made available before consideration of the Bill in the other place. I understand that the Government will publish a consultation paper “later this year” on their general policy approach and the detail of the order. That paper might relate to the state of the explanatory notes; I am not sure whether the hon. Gentleman can explain what will be in the consultation paper and when it is likely to be published, but such information would be useful.

Obviously, the Government are considering whether the Prudential Regulation Authority’s objective should be applied to various other functions under the mutual legislation, which is part and parcel of the consultation process. I accept that it is not easy to go back through previous legislation and disentangle the question of which of the two new regulators should have responsibility for what. However, given that we are trying to apply the concept of prudential regulation to some friendly societies Acts, credit union Acts and so forth, it would be useful if the Minister gave us a flavour of what, if anything, will be different in the PRA’s oversight of certain matters. It would also be useful if the Minister gave us a fairly straightforward and simpler explanation of whether any substantive points are buried in either the clause or the draft mutuals order.

My question—perhaps this is what I was looking for in the explanatory notes—was about the consultation on the arrangements. My understanding is that the consultation document will focus predominantly on the PRA’s objectives and how they will be applied to mutuals legislation. Why are the FCA’s objectives not included in the consultation? I might have missed something, but it would seem that the consultation question should have both in parallel.

The draft mutuals order—again, I might have missed something in reading it because there was no explanatory note—talks about the transfers to the FCA or the PRA as though the question of which regulator will step in at which moment has been left as a grey area. That approach is peppered throughout the order. It is as though, in drafting the order, the Minister has hedged his bets, making reference to both regulators just so that one or the other will capture the issues. Why are we leaving it for the regulators to carve up responsibilities between themselves in certain circumstances?

Sheila Gilmore (Labour, Edinburgh East)

Does my hon. Friend sense a potential problem here for mutuals? At the moment there is uncertainty as to what will happen in the future, at a time when we should be encouraging them to have confidence to grow.

Chris Leslie (Labour, Nottingham East)

That is absolutely right. There is a broader point, to which I will come, which will include some of those questions. One of the implicit downstream consequences of transferring some of the regulatory responsibilities for mutuals and building societies to the FCA and the PRA concerns whether we aid and enhance the ability of the mutuals sector to grow and flourish, or whether we cloud and confuse its ability to navigate through the regulatory system. Consequently, will it be materially disadvantaged in the regulatory system when compared with the plc model?

I know that some of my hon. Friends on this Committee not only represent their own political party, but are Co-operative Members of Parliament. Indeed, I am a Labour and Co-operative Member of Parliament, as are my hon. Friends the Members for Kilmarnock and Loudoun and for Islwyn. It is rarely noted that we represent two different political parties. I mention that because it is highly relevant to clause 48 and other clauses before us. It is important to take the opportunity to challenge the Government on their professed desire to support the co-operative principles and the mutuals model, and their claim to support diversity in financial services more generally.

I want to get from the Minister a sense of a number of specific things. Primarily, I want to ask him about the commitment on page 9 of the coalition agreement, which states that the Government will

“bring forward detailed proposals to foster diversity in financial services, to promote mutuals and create a more competitive banking industry.”

Given that we are talking about transferring responsibilities between regulators, which regulator will be the champion for the mutuals model? Who will actively encourage the benefits that can flow from a non-plc corporate form? Will either of the regulators have any responsibilities for such matters, or will neither?

It is a moot point under which clause in part 3 the issue arises, but this one seems as good a clause as any under which to discuss it. Ultimately, the Treasury ought actively to seek to diversify the financial sector. Therefore, by corollary, the Treasury ought to take steps to promote options for mutual enhancement of various corners of the financial services sector. However, I am sceptical about whether the Treasury is fulfilling such a function, and we should therefore ask which of the regulators might do so.

I suspect the Minister will tell us that the regulators are neutral, hands-off and not in any way concerned about the specific model in the mutual sector. That is a great pity, particularly given the disadvantages that might hit the sector. The Minister will know that there was a very long discussion about whether the mutual sector was at a regulatory disadvantage in respect of the capital instruments that might be classified as core tier 1 capital under prudential requirements regulations—the Basel III arrangements—but I understand that some progress has been made on that in the form of the EU capital requirements regulations.

Will the Minister confirm whether he believes that good progress has been made on those European arrangements? To what extent were the UK Government party to advocating the resolution of the concerns raised? We have not tabled amendments about that, because we sense that changes are in train. Many people, however, are anxious about the mutual sector being at a material disadvantage, because it does not have equity in the usual sense that plcs do, and therefore the mutual sector does not have the same constitutional set-up to enable it to prove its capital reserves and capital base.

Will the Minister explain about the draft mutuals order and the consultation? Will he clarify what the Government’s intentions are and why the FCA’s objectives are not part of that consultation process? Will he let us know what is happening about the capital instruments and, more broadly, will he say which regulator will champion such issues? Certainly, Opposition Members are interested in knowing more.

Mark Hoban (Conservative, Fareham)

It is a pleasure to serve under your chairmanship this afternoon, Mr Gray.

This clause is an odd place to have a general discussion about mutuals. We touched on them during the stand part debate on clause 22 in relation to proposed new section 138K of FSMA. I pointed out—perhaps not to the hon. Gentleman, but to the hon. Member for Kilmarnock and Loudoun—that there is a specific duty on both regulators to consult where a rule has a particular impact on the mutual sector, in that the regulator must prepare a statement setting out the impact on it of a rule or regulation. It is a significant strengthening of the relationship between the regulators and the mutual sector for them to have to take into account the particular nature of that sector.

The hon. Gentleman raised the issue of the capital requirements directive IV and the availability of capital instruments for building societies. I have to say that, when we came into office, the impetus behind the mutual sector, despite the number of Opposition Members professing to support it, had rather run out of steam. As a consequence of the work that this Government have done with the Building Societies Association, CRD IV has been altered through consultation to ensure that an instrument is there, which we broadly believe is available to building societies. That is a sign of the coalition living up to its commitment to support mutuality. Proposed new section 138K is also a sign that we are living up to our commitment.

By publishing the mutuals order in January, we sought to inform Parliament and the public, as the Bill progresses through the House, that the Government will publish a consultation paper towards the end of the summer. There will be an informal consultation period to gather views from the industry and the wider public on the policy approach and the detail of the order. The consultation will include views on whether the PRA’s general objective should be applied to its functions under the mutuals legislation. We welcome informal views from members of the industry, including the BSA, in advance of this. There will be a more formal conversation once the mutuals order is published. We expect the explanatory notes to be published as part of that wider consultation.

The hon. Gentleman asked why the draft mutuals order has a PRA objective applied, and not the FCA’s. The point is that the Government are considering whether the PRA’s general objective could be applied to its functions under mutuals legislation. The draft mutuals order has been published with the PRA objective applied to help Parliament and the public’s understanding prior to the consultation in the summer. We have not applied the FCA’s objectives, partly because the FCA has a wide range of objectives and responsibilities under the mutuals legislation. Trying to apply the FCA’s objectives to its functions under mutuals legislation would potentially increase the complexity of the FCA’s decision making with regard to mutuals. Part of the problem is that the Financial Services Authority’s functions are not currently applied to its functions under the mutuals legislation, so we are taking the process a step further.

The hon. Gentleman asked what would be different about the PRA’s oversight of mutuals compared with the FSA’s. Consistent with its general approach, the PRA will take a more forward looking and judgment-led approach to regulating mutuals than has happened in the past. That reflects a general shift in approach by the PRA. Broadly, the prudential regulation of mutuals will map on to the PRA’s regulation of deposit takers or insurers, and, of course, for conduct of business purposes, responsibility will rest, as with other financial services companies, with the FCA.

The provisions in the Bill and the work that we are doing with mutuals more broadly are consistent with commitments in the coalition agreement. We want to see greater diversity. It is encouraging that the Co-op, for example, has preferred bidder status for the divestment of Lloyds bank branches. That will be a significant strengthening of mutuality in this country, which we should welcome.

Chris Leslie (Labour, Nottingham East)

I apologise if the Minister has touched on this already—I might have missed it—but will the explanatory notes for the draft mutuals order be published shortly?

Mark Hoban (Conservative, Fareham)

They will be published alongside the consultation paper.

Chris Leslie (Labour, Nottingham East)

I am grateful to the Minister for outlining that. I am not quite clear that I have got my head around the difference between the consultation on the PRA’s and the FCA’s objectives. There is a broader discussion to be had. We will shortly be touching on some of it when we debate clauses 50 to 53 in respect of the Government’s wider strategy on mutuality and building societies. I am not convinced that there is sufficient rigour or seriousness within the legislation or the regulators when it comes to matters affecting mutuals or building societies. However, I understand the Minister’s points on clause 48 and on the capital requirements directive, so I do not feel the need to contest this clause.

Clause 49 - Evidence

Chris Leslie (Labour, Nottingham East)

Clause 49 is an odd one. It is about the circumstances where the Treasury—not the regulator—would issue a certificate to define where a

“property vested in a person immediately before a transfer order takes effect has been transferred as a result of the order”

and whether that is to be defined as conclusive evidence of the transfer. It would be helpful if the Minister could explain why on earth this clause is necessary. I hate to say it, but the explanatory notes are entirely unhelpful in shedding any light on this circumstance. Will he explain what certificate the Treasury would issue to a mutual on property vested in a person immediately before a transfer order?

We discussed the draft mutuals order in our debate on clause 48, which relates to the transfer of functions to mutual societies. The draft order mentions certificates only once. Under the amendment to section 90(8) of the Friendly Societies Act 1992, it states that the FCA

“must keep a copy of the direction; and…issue a registration certificate to the transferee…The registration certification must specify a date as the transfer date for the transfer.”

There is no mention of a certificate issued by the Treasury. Will the Minister explain why the draft mutuals order does not discuss the Treasury certification process? Will he clarify the circumstances in which those certificates would be issued?

Mark Hoban (Conservative, Fareham)

The clause arises from clause 47, which we discussed last Thursday, and clause 48, which we just ordered to stand part of the Bill. The hon. Gentleman should look at clause 48(2), which discusses the powers for the Treasury to make a transfer order. One power, under subsection (2)(b), is for the

“provision for the transfer of any property, rights or liabilities held, enjoyed or incurred by any person in connection with transferred functions”.

The certificate just confirms that the property has been transferred.

Chris Leslie (Labour, Nottingham East)

It is rather strange that the Treasury is involved. Would it not normally fall to one of the regulators to issue a certificate? Why is it specifically the Treasury maintaining this particular function and not another appropriate body? That is what I wanted clarification on from the Minister. It is difficult to gauge it from the Bill and it is certainly difficult to gauge what on earth its point is from the explanatory notes. There have been a number of occasions where the wording of the clause is simply cut and pasted from the Bill into the explanatory notes. I do not quite see why the Treasury is retaining this function. Will he as the Minister sign certificates relating to property transfers? That is presumably the consequence of the clause. What capability does the Treasury retain to properly test and fulfil those obligations under that particular certification process? He will get my point. I do not understand why the Treasury is involved and I would be grateful if he explained that.

James Gray (Conservative, North Wiltshire)

This is becoming something of a question and answer session for the Minister.

Mark Hoban (Conservative, Fareham)

The Treasury issues the certificates because it is given the power to do so under clause 48. I find it rather odd that we are back on this point, having just had a stand-part debate on that clause, which did not seem to cover its contents. The Treasury is given powers under this clause to issue orders because there may be reasons why we have to amend the legislation relating to mutual societies. That is part of the architecture of the provision that is carried forward from FSMA 2000.

Chris Leslie (Labour, Nottingham East)

I accept that this is not a question and answer session, but a stand part debate. However, when I see the Minister holding aloft a copy of the Bill and flicking through it, I sense that he might be busking a little in relation to why the provision has appeared in the Bill. It may have come as a consequence of FSMA, but why?

I thought the point of the architecture of the new regulators set up by the Minister was that they would be arm’s length bodies that would take on much of the detailed and, presumably, operational activity. I thought that he was telling the Committee that Her Majesty’s Treasury would be strategic and policy-focused, yet under the measure, it seems that he will get out his quill pen and sign a bunch of certificates. Perhaps in a dusty corner of the Treasury there are some skilled civil servants whose job it is to make recommendations about property transfer certification. I did not think that the Treasury was quite so grand these days. I thought he was thinning down its operations and delegating matters to other bodies.

I am surprised that little light has been shed on the provision, and the lack of answers and elaboration leaves me in a dilemma. Do we go along with the measure, accept the Minister’s assurance and nod it through? Do we say, “It’s only another clause—let’s just let the thing roll,” or do we hope that inspiration will strike him at any moment and an answer will be forthcoming? I hope the latter. If that inspiration is of a strong calibre, he might want to intervene, but if he is not inspired, perhaps because the inspiration prompts more questions than it answers, he might not wish to do so. I should love to give him another opportunity if he can explain why the Treasury is retaining the function. I am grateful that he wants to intervene.

Mark Hoban (Conservative, Fareham)

The powers in the clause are significant: we are talking about the power to transfer

“property, rights or liabilities held, enjoyed or incurred by any person in connection with transferred functions”.

When such important rights are transferred, it is entirely appropriate that the Treasury be engaged to certify them. The function goes way beyond a regulator’s usual powers. I am sorry that I am waving about a copy of the Bill, but I thought it would be helpful for the Minister to be familiar with it—I had assumed that the same went for the hon. Gentleman. The provision is all as stated in the Bill. There are more pressing and interesting matters to move on to.

Chris Leslie (Labour, Nottingham East)

That intervention was useful, because it clarified that the Minister’s justification for the provision is: “It is self-evident.” Opposition Members want clarity on the legislation, but his answer is, “There it is in the Bill. This is an important function, which the Treasury must fulfil.” I counsel him to ask questions about the provision, because the spotlight has not been shone sufficiently on to particular corners of mutuality and building society legislation. The Treasury will retain functions that might be transferable. I am not saying that that is wrong, but it is a symptom of insufficient attention being given to that sector of the financial services industry.

Mark Durkan (Social Democratic and Labour Party, Foyle)

The Minister said that clause 49 ensures that the Treasury will clarify exactly what is transfer, but the clause heading is “Evidence.” The certificate can be issued at any time; it does not necessarily have to be issued at the time of the transfer order. Is it designed to deal with any issue of contention, with any controversy that may arise or with any legal dispute, by stating that the Treasury will answer any dispute simply by issuing a certificate?

Chris Leslie (Labour, Nottingham East)

Yes. Again, it looks as if the Treasury will fulfil almost a quasi-judicial function. I can envisage a circumstance where the Minister, standing bewigged in the court of property rights and opinions, has to arbitrate between various property transfers. That would be a bizarre state of affairs for the Treasury. The provision might be necessary, but that should be self-evident. I apologise to the Committee if that is the case and I am simply blind to the reason why the provision is necessary.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I have been listening carefully, and it strikes me that once again we are talking about problems that arise from the cut-and-paste nature of various parts of the Bill. Surely it would have been better to have looked at some of the proposals in more detail, and I hope that the Minister might still commit to doing so.

Chris Leslie (Labour, Nottingham East)

Indeed, and that is the theme I am warming to in this part of the Bill in respect of mutuals and building societies. Not enough rigour or attention has been paid to the sector, despite the protestations of the coalition agreement. The Government appear to be in cut-and-paste mode; there are no explanatory notes here, and there is no strong explanation about residual powers for the Treasury there. That is my general concern.

Mark Durkan (Social Democratic and Labour Party, Foyle)

In that vein, do we not return to the serious discrepancy in the Bill, namely that the FCA and the PRA will both deal with mutuals on different matters, but the PRA will not be able to issue guidance? It will have no statutory basis for guidance, but the FCA will. Will that not leave the mutual sector in a state of confusion, if it will be able to rely on advice or guidance from the FCA but will have no basis of guidance from the PRA?

Chris Leslie (Labour, Nottingham East)

Yes. That is another concern, which did not occur to me as much as it did to my hon. Friend. It is a downstream consequence of the structural changes that are being made. I do not wish to go over the ground I have covered, and I think I have made my point. I will not oppose clause 49 stand part because there probably is a justification for the provision continuing, although the Minister has not been very articulate in explaining what it is. Perhaps we will look at the matter another time, in another place.

Clause 50 - Repeals in Part 21 of FSMA 2000

Chris Leslie (Labour, Nottingham East)

Clause 50 repeals several sections in part 21 of the Financial Services and Markets Act 2000, for example subsections (1) and (2) of section 334, which relate to the Friendly Societies Commission. It is important to have a smooth transition process from individual organisations—such as the Registry of Friendly Societies or the Building Societies Commission—to the FSA, and beyond to other regulators. Many of the powers that are being transferred are already largely redundant because of changes made by previous clauses.

Will the Minister clarify why the Government are repealing subsections (1) and (2) of section 334, regarding the Friendly Societies Commission, but not subsections (3) and (4)? Subsections (1) and (2) give the Treasury order-making powers to provide for functions from the Friendly Societies Commission to be transferred to the then FSA, and to provide for the Friendly Societies Commission to cease to exist. Those subsections are going, but the Government are leaving

“enactments relating to friendly societies which are mentioned in part 1 of schedule 18 to FSMA”

and other provisions in section 334 relating to the Friendly Societies Commission. If the Friendly Societies Commission is defunct and has gone or is going— I think it has gone—why are we retaining subsections (3) and (4)?

Mark Hoban (Conservative, Fareham)

Clause 50 addresses functions that were transferred to the FSA when FSMA was enacted in 2000. Clearly, given that those functions are now with the FSA, part 21 is no longer required. The listed bodies, such as the Registry of Friendly Societies, the Building Societies Commission and the Building Societies Investor Protection Board, are now defunct, so there is no point in retaining those sections.

As the hon. Gentleman touched on, section 334 (3) and (4) of the 2000 Act addresses amendments to legislation. Those subsections, therefore, need to stay in force. If we repeal subsections (3) and (4), the amendments that they permit would also have to be repealed, which we do not want. If we want to retain those amendments, subsections (3) and (4) must remain. The drafting has been carefully designed to ensure that what needs to remain in force remains in force.

Chris Leslie (Labour, Nottingham East)

I am grateful to the Minister for that explanation, or I think I am. I read the clause slightly differently, as if some of the Friendly Societies Commission provisions will continue for an organisation that is no longer extant. I take the Minister’s assurance on that.

Clause 51 - Building societies: creation of floating charges

Chris Leslie (Labour, Nottingham East)

Clause 51 looks technical and detailed, although it is short and sweet. Government Members welcome the clause’s updating of the Building Societies Act 1986. My hon. Friends will recall that that particular Conservative Administration introduced legislation that liberalised the rules on building societies. The 1986 Act, of course, allowed widespread demutualisation of the building society sector. My hon. Friends will know the saga that occurred thereafter.

Clause 51 makes further changes to the 1986 Act—the previous Administration made a number of changes—that will hopefully go some way towards strengthening the defences of the mutual sector. The Minister, like my hon. Friends, has said elsewhere on a number of occasions that the actions of demutualised ex-building societies played a part in the growth of sub-prime lending in this country. As a Labour and Co-operative Member, therefore, I want to ensure that we introduce provisions that properly regulate and defend the good name and honour of the non-plc, mutual sector. That excessive risk-taking—that dash for profit—and the associated risks were hastened and amplified following demutualisation. My general thesis is that, had we had more protection for the building society and mutual sector, we might not have seen such difficulties with Northern Rock and other previously mutual financial services institutions. To that end, I would be grateful if the Minister put on record his view on the importance of building societies with particular regard to their role in ensuring a stable financial services sector.

Specifically on clause 51, the previous Government gave the Treasury secondary legislative powers to allow building societies to create what are known as floating charges where such a move might be necessary for stability. As far as I understand it—as a layman in such issues—a floating charge is a form of security interest giving preferential rights over a fund of changing assets that floats, or hovers, until its conversion or crystallisation into a fixed charge. A body of case law and common law governs many such floating charge arrangements. In literature on these matters, there is a lot of discussion about the ambiguity of some of that common law and whether, over the past 100 years or so, there has been sufficient definition about how the courts define floating charge arrangements. They have often been cited as legal devices created by lawyers, without necessarily requiring any statutory or legislative support.

Floating charges give a certain degree of latitude to transfer circumstances, where building societies might, for various reasons, need to be subsumed or merged with other entities. Will the Minister explain why the clause goes further at this time than in the past? The only safeguard I can see built into the provisions is a reliance on European definitions of “participants” in debt payment systems. Does the Minister feel that that offers adequate protection to building societies?

The clause amends the Building Societies Act 1986 to legalise the application of floating charges. Apparently, there is an existing prohibition against floating charges, which inhibits the building societies sector’s ability to access private sector funding. An exemption to the 1986 general prohibition against floating charges was made by the previous Government, to enable assistance to distressed building societies to be made. In 2010, my noble Friend Lord Myners proposed changes to a series of arrangements for building societies, and an order was made. Although there was a consultation on the floating charge arrangements, he did not in the end decide to proceed with the particular floating charge provisions before the Committee today.

At the time, he said that in light of further consideration on the floating charge proposition, he had decided to make a more limited order that would enable building societies to do certain things, but would not allow the floating charge arrangement to be implemented. He felt that a wider order might result in floating charge arrangements being made in a way that would not necessarily relate to financial assistance. He said that it

“would have given a general and indefinite permission to building societies to grant floating charges so that they could access settlement and payment and settlement systems directly. To do that would increase risk in the sector, and goes beyond the intention of the policy”.—[Official Report, House of Lords, 18 March 2010; Vol. 718, c. GC282.]

The orders at that time only enacted a couple of provisions, and not the one in the clause. The crux of the issue is why the Government feel now—but not then—the need to implement the provision, and why those risks have apparently disappeared in the intervening period.

Mark Hoban (Conservative, Fareham)

This is not quite what the hon. Gentleman thinks it is. We still maintain the general prohibition on floating charges. It is clear, however, that if a building society wishes to participate in the sort of payment and settlement systems that banks take part in, it needs to be able to give a floating charge to enable such participation. The fact that building societies cannot participate in the settlement and payment systems means that they cannot really compete on a level playing field with banks, and do not offer as good a deal to their customers as a consequence. It is a very limited amendment to section 9B of the 1986 Act and the prohibition on floating charges. It also happens to have been requested by the Building Societies Association. I hope that with those reassurances, the hon. Gentleman will allow the clause to stand part of the Bill.

Chris Leslie (Labour, Nottingham East)

I do not understand what is achieved. Can the Minister set out the purpose of the change in layman’s terms? The clause is probably perfectly rational, but if he explained that, it would help to give the Committee a better grasp of why it is necessary.

Mark Hoban (Conservative, Fareham)

I think that I have explained: it is to permit participation in settlement systems. It is done at the request of the BSA. That is the reference in subsection (3) to subsection (4). It explains why we need to introduce the change. I am not sure that I see the controversy about something that is in the interests of building societies and their customers.

Chris Leslie (Labour, Nottingham East)

I am not entirely satisfied with that answer. I do not think that it is adequate simply to regurgitate the words in the Bill—or in the rather unhelpful, in this case, and useless explanatory notes—and say what the effect of the floating charge arrangement is. It would be nice to have a sense of why the circumstances now require the change. What is the practical application? What building societies are we talking about? Does the Minister have particular company circumstances in mind to which this might apply? He has his head down and wants to plough on, so I will not stand in his way, but I am not very happy with his explanation of why the changes are necessary.

Clause 52 - Power to direct transfer of building society’s business

Chris Leslie (Labour, Nottingham East)

Clause 52 is probably the clause that relates most closely to the issues of the existence and continuance of the building society and mutuals sector. The series of changes to the Building Societies Act 1986 hopefully helped to stem the tide of demutualisation that afflicted the building society sector when some decided to move to a plc model, and we know what happened then. In fact, we are close to the 25th anniversary of the 1986 Act, which allowed all that to take place. None of the 10 then building societies that demutualised exist independently now, whether that is Abbey, the Halifax or others. Bradford & Bingley building society—based in Shipley, the constituency that I used to represent—was a fine mutual institution that demutualised, and we know the saga that came from that.

Clause 52 puts the Banking Act 2009 powers on an equal footing with the original 1986 demutualisation powers, which are relevant to this discussion.

Fabian Hamilton (Labour, Leeds North East)

My hon. Friend mentioned Bradford & Bingley building society, but the largest building society at the time was the Halifax, which swallowed the famous Leeds Permanent building society, and we all know what happened to the Halifax.

Chris Leslie (Labour, Nottingham East)

Absolutely. That is why, when we are talking about transferring building society businesses from a mutual to perhaps another form of mutual or, in this case, company, we have a duty to learn the lessons of what went wrong in the 1986 Act and to ask whether we are doing the right thing to protect a model that is already under some stress.

I am pleased to say that the building societies that weathered the storm have been doing a lot better recently, and more power to them. They are important players in diversifying the sector, but I worry whether enough is being done proactively to support the sector, never mind to create a level playing field.

Chris Evans (Labour, Islwyn)

To underline what my hon. Friend is saying, is he aware that Moody’s has upgraded six building societies’ stand-alone ratings? That is a good comparison with what he has said about those that are no longer in existence following demutualisation or their being swallowed up by larger entities.

Chris Leslie (Labour, Nottingham East)

There is logic in the way that the building societies market has developed subsequent to that consolidation process. However, that also comes with its own advantages and disadvantages. We have discussed such matters previously, and, when we were discussing the sector’s diversity, my hon. Friend the Member for Foyle mentioned that credit unions, which are a different form of mutual, have taken up much of the space in terms of the small-scale, micro-finance participants. I worry, however, that there is gap in the provision of financial services in that mid-scale non-plc structure, which may not be there for much longer, and we need to be mindful of that.

I do not want to detain the Committee for too long, but clause 52 seeks to update the Mutual Societies (Transfers) Order 2009, which was taken through in another place before the last general election. Just so hon. Members are aware, the clause amends the Building Societies Act 1986 to give the FSA—currently—powers to direct a mutual

“to transfer its business to a company that is the subsidiary of a mutual”.

There may be some sound reasons for that, and I would like the Minister to say what particular companies or subsidiaries of building societies he has in mind with that change. I know that it is unlikely that the Minister will be tempted to name the names of existing mutuals that may have subsidiary company structures beneath them, but a change obviously took place when the Britannia building society merged with the Co-op. That move was facilitated by the changes made by the previous Administration and would have been prevented by the rigidities within the old building society legislation. We need to take steps to allow flexibility to such building societies. In many ways, the change is probably useful, but I have several questions for the Minister.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Does my hon. Friend agree that many people actively choose to use building societies because of their structures, because of the membership model, and because of the opportunity for them to participate in, or at least have an influence on, decision making? They would want reassurance that, whatever the Minister intends to do here, the ability of those organisations’ members to have a say will not be undermined in any way.

Chris Leslie (Labour, Nottingham East)

That is true, and we want to ensure that the added value that comes from being a member, rather than purely being a customer, is protected and supported, which is why I was trying to get a sense from the Minister of what specific cases he has in mind. Would particular building society arrangements be applicable under clause 52?

However, we must be careful with the business of membership. My hon. Friend will be familiar with the concept of carpetbaggers, which was the phrase used at the time, meaning people who would open an account with a building society with a view to obtaining shares in the windfall that would flow from demutualisation. My hon. Friend the Member for Leeds North East mentioned such building societies as Leeds Permanent, Halifax, Abbey, and Bradford & Bingley. In the rush to demutualisation, the floodgate was opened for some of those by the 1986 Act.

Sheila Gilmore (Labour, Edinburgh East)

I may be wrong and perhaps my hon. Friend will correct me, but I do not recall that the 1986 arrangements were necessarily specifically intended to encourage demutualisation. In effect, a loophole was found that allowed people to start that process. A lot of people were perhaps tempted, without understanding the full implications, to go with something that offered some quick gains. Is there anything in the clause that could open up those loopholes, in particular subsection (2)(b)?

Chris Leslie (Labour, Nottingham East)

I do not know. To be fair to the Minister, the clause is probably proposing a useful small change in respect of transfers between mutuals and other mutuals, although some of their structures will have plc or limited company forms beneath them. My question is whether clause 52 has sufficient strengthening powers within it to deal with some of the challenges that the building society sector faces today. Might there be other transfer scenarios not envisaged by clause 52 that ought to be in the legislation?

The building societies eventually got wise to the carpet-bagging technique and devised what is known as the “poison pill” strategy to counteract the thirst of the carpetbaggers to get those windfall gains. They required in their constitutions that any windfalls from those shares should be given to charities; essentially they could not be pocketed by the customer. That sutured the problem to a degree. However, I am not yet convinced that we have properly solved that particular problem. It has not arisen much subsequently but it is a saga relevant to clause 52.

Chris Evans (Labour, Islwyn)

I remember that time. Many building societies were under hard pressure to demutualise, not through the Government—accepted—but the media. Many of the carpetbaggers referred to by my hon. Friend had well funded media and advertising campaigns. They specifically targeted members of the building society to vote for demutualisation. How does my hon. Friend envisage overcoming that if the situation arises again?

Chris Leslie (Labour, Nottingham East)

As I said, I get a sense that a lot of building societies have taken matters into their own hands and changed their constitutions. A lot of those roads have been closed off. It is important to note that, under the current legislation, the scope for mutual societies to transfer their business is quite limited. That usually means they are permitted to transfer their business only to another mutual of the same category, for example, from a building society to a building society. Otherwise they may transfer to a company and become demutualised, leading to the loss of mutual status and membership.

The previous Government took steps to increase the options available to building societies, allowing them to transfer to a subsidiary of another mutual society under a simplified procedure. I mentioned before that of Britannia to the Co-operative Group in 2009. That was made possible to retain the business within a mutual ethos as well as provide for members of the transferring mutual to have rights in that holding mutual. Therefore, that 2009 transfer order has stood the test of time. I am presuming that these proposed changes are consequential to that.

Why does not clause 52 properly pick up the promise that the Minister made in the coalition agreement, when talking about fostering the diversity of the financial services sector and promoting mutual? We have nothing in the Bill other than this small cluster of clauses to go on when it comes to those arrangements. Do not just take my word for it, Mr Gray. The hon. Member for Cardiff North (Jonathan Evans) chairs the all-party parliamentary group on building societies and financial mutuals, which published a report on this issue in July. The Minister appeared to give evidence at its hearings, as did the current chief executive of the PRA. Having heard the evidence, that group came to some very important and quite startling conclusions. Its first conclusion was that

“HM Treasury appears to have taken a reactive stance to the mutual sector—beginning to deal with important issues such as building society capital, but little else of substance.”

It went on to make this recommendation:

“It is imperative that the Coalition urgently adopts a comprehensive policy strategy to implement its Coalition Agreement commitment to promote mutuals.

HM Treasury should act as a strong advocate for mutual businesses, in particular in its dealings with the Financial Services Authority and subsequent new regulatory authorities.”

This is where the recommendations to that all-party group are extremely relevant. It argued that the Treasury

“should pro-actively promote the interests of financial mutuals within Government, and ensure that balance is given to understanding and promoting mutuals across all Government departments”.

Fabian Hamilton (Labour, Leeds North East)

Does my hon. Friend agree that while the clause goes some way towards supporting and strengthening mutuals, it does not go far enough? Moreover in hindsight, had some of those former mutuals not demutualised, the financial crisis we faced in 2008 might not have been as extreme.

Chris Leslie (Labour, Nottingham East)

This is one of those lessons that has to be learnt. A stronger mutual sector during the financial crisis would not have been disadvantageous; it would have been a protection. It would have ensured that those key decision makers had different motivations and so might not have taken as many risks. The key point I was coming to was the all-party parliamentary group’s specific recommendations:

“Legislation establishing the new regulatory authorities must include ‘Promoting mutuals and fostering diversity’ within the statutory objectives.

Moreover, Regulators should be statutorily committed to take account of diverse business structures.

An overall Head of Mutuals policy should be appointed at the newly formed PRA.”

That latter recommendation was resisted by the PRA during the hearings by the all-party group but it is perfectly reasonable. One of the other interesting adjuncts is that the group also recommended that some sort of diversity index be created as a proxy for testing whether the level of diversity in the financial services sector is improving or worsening. That is a useful idea.

Teresa Pearce (Labour, Erith and Thamesmead)

I have listened with interest to what my hon. Friend has said. I agree that the price of demutualisation is a bitter pill that taxpayers have had to swallow. I am also interested that 65% of complaints received by the banking ombudsman are about banks and only 2% are about building societies. That demonstrates the good model of consumer service that we are looking to achieve with the Bill. Does he agree that we need not just to protect building societies but to help them to flourish so that we have that diversity in the high street?

Chris Leslie (Labour, Nottingham East)

Indeed, it is important that we have more challenge to the plc model. It does matter. Corporate structure feeds through into the attitudes of those companies towards their customers and their members. If an organisation is owned by its customers it stands to reason that it will treat them with more respect and more courtesy than if they did not have those additional rights over it. That is something we should advocate.

Why has the Minister not taken up some of the recommendations in the all-party parliamentary group’s July report? He has had ample time to reflect on some of those and move forward with them. Given the inclusion of this promise in the coalition agreement I was under the impression that that some pressure would have come to bear from Liberal Democrat Members on Conservative Members about strengthening the building society and mutual model. It appears not to be the case. We do not see these provisions in the clause or the other suite of clauses in part 3 of the Bill. That is a great shame.

The Building Societies Association and others have made their own representations to Ministers about the need for improving the regulatory frameworks so that they support and work with the grain of the mutual sector far more successfully. It would be important if the Minister could deal with those particular points.

I have asked specific questions about some of the provisions under the clause, especially whether the hon. Gentleman had cases in mind for the changes that regulators will transfer. The explanatory notes refer to the Financial Services Authority having the residual powers under the clause, but they do not set out whether the PRA or the FCA will take them on from the FSA. It is always slightly worrying when I see references in the explanatory notes to the FSA continuing to have certain responsibilities, but it is the broader matters of defending and supporting mutuality, learning the lessons from the demutualisation saga and taking the opportunity to improve the Bill that I particularly wanted to press.

Fabian Hamilton (Labour, Leeds North East)

It is a pleasure to see you in the Chair this afternoon, Mr Gray. I want to continue one of the themes that my hon. Friend has discussed, and to pose one or two more questions to the Minister. The Secretary of State for Business, Innovation and Skills, a senior member of the Liberal Democrat party, on 23 February 2010 just before the general election said:

“While the Liberal Democrats have no fundamental ideological opposition to selling the taxpayer stakes in the nationalised and semi-nationalised banks—indeed we support re-privatisation—there is no hurry and every reason to show patience. UKFI now believes that it will be a state shareholder for at least five years. Experience in Korea, Sweden, Israel and in the US would lead us to believe that the optimal time frame for disposal of nationalised or semi-nationalised assets is probably close to 10 years. That is the time needed to sort out and restructure banks, manage bad assets and restore normal, safe lending…Sweden still owns almost 20% of a bank that it bailed out in the early 1990s (Nordea). We should not rule out the taxpayer taking interests in Northern Rock, Lloyds and RBS for similarly long periods.”

Why have the coalition Government sold off Northern Rock in such a rush, and at such a huge loss to the taxpayer? Will the Bill, in fact, help prevent such a fire sale? Surely it would have been better to have waited for the economy to recover before selling off the assets at rock bottom prices. Does the Minister believe that the clause and part 3 of the Bill, in general, would have prevented a rushed sale like that from taking place, and perhaps will prevent one in future? Does he agree that what has happened represents poor value for taxpayers? Will the clause ensure that proper consideration is given to the need for greater diversity and competition in the banking sector in future?

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I had not intended to contribute to the debate now but a number of important points have been made. However, before I proceed I should refer to my entry in the Register of Members’ Financial Interests in respect of being a Labour and Co-operative Member.

My hon. Friend the Member for Nottingham East referred to several issues in relation to the principles of mutuality and the problems that have existed about demutualisation. Those of us with a strong commitment to the mutual sector want to hear not only about protections for existing mutuals, but how, proactively, the Minister proposes to ensure that, as is stated in the coalition agreement, financial services will

“promote mutuals and create a more competitive banking industry.”

I am not entirely sure how the Government intend to do that. I am also aware of the recommendations set out in the all-party group’s report, to some of which the Minister has responded.

In his remarks, will the Minister tell us a bit more about what he proposes to do and about how his performance in promoting mutuals will be measured? We need to know how the Government will promote mutuals, and what staging posts will be used to measure success and to ensure that the right approach is taken and—importantly—that there is continued consultation. I hope to hear more from the Minister, who I am sure can respond to those points and to the ones raised earlier.

Mark Hoban (Conservative, Fareham)

Before I turn to the clause, I am happy to respond to the comments made in the debate, which has gone wider than what, as I shall explain, is a narrow power. The coalition agreement commits us to the promotion of mutuality, and mutuals have an important role to play in financial services. I point out that some mutuals suffered financial distress during the financial crisis—I think that the first use of the Banking Act 2009 powers was for the Dunfermline building society—so the question has to be seen in proportion. The mutual sector also has issues that need to be resolved, and that is one reason why we have driven forward the debate on CRD IV, which is a good example of how we are promoting the mutual sector.

On Northern Rock, the hon. Member for Leeds North East quoted at length the remarks of the Secretary of State for Business, Innovation and Skills. The deal that the previous Government agreed with the European Commission for rescuing Northern Rock required it to be sold within two years. That is not a matter for this Government; it is yet another legacy of the Labour Government that we have had to deal with. We encouraged mutuals to come forward with bids for Northern Rock, which was well documented in one of our recent publications.

Mark Hoban (Conservative, Fareham)

I was just saying that we had sought bids from mutuals, as indicated by the document on the sale of Northern Rock published earlier this month. No mutual made it through to the final round, but we are keen to promote mutuals. I understand that the Building Societies Association is trying to devise a diversity index.

Chris Leslie (Labour, Nottingham East)

I know that the Minister wants to move on, but on Northern Rock, surely he approached the Competition Commissioner in the European Commission for an extension, beyond the end of 2013, of the state aid arrangements in respect of the sale of Northern Rock. I would have expected the Treasury to seek that.

Mark Hoban (Conservative, Fareham)

The previous Government signed up to the commitment for disposal, which was the right thing to do. The sale was in the interests of the Northern Rock business and, as demonstrated by the Deutsche Bank financial analysis that is documented in the report we published, in the interests of taxpayers. To have kept Northern Rock in public hands for longer would have led to the destruction of value. I counsel the hon. Member for Nottingham East, who takes a keen interest in the matter, to look at the report, which sets out the issues clearly.

I am wary that the clause is not about the sale of Northern Rock, and I am sure that you, Mr Gray, would like me to come back to order. [Hon. Members: “Hear, hear.”]

I do not want to repeat my earlier point about the provision in clause 22, which ensures that the FCA and the PRA produce a report looking at the impact of regulation on the mutuals sector; that would be repetitious. However, that commitment is there.

Karen Bradley (Conservative, Staffordshire Moorlands)

My hon. Friend will be aware that my constituency has a great history of mutuality and co-operatives, with both Leek United and one of the main centres of the Co-operative—the old Britannia base—being located there. Will the Minister reassure the members of those mutuals and my constituents who are employed in them that nothing in the Bill will make their lives more difficult or threaten the mutuals’ status?

Mark Hoban (Conservative, Fareham)

Indeed. Nothing in the Bill will threaten their status. New section 138K, to which I referred earlier, will help the mutuals sector.

Returning to clause 52, the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 allowed Britannia and the Co-operative to come together, because the Act enabled mutuals of two different types to merge without members—in this case Britannia—losing the benefits of mutuality. That was an important piece of legislation, steered through this House by a former colleague, Sir John Butterfill. It was occasionally known as the Butterfill Bill in tribute to his work.

Clause 52 seeks to build on the 2007 Act. It will extend the regulators’ existing power under section 42B of the Building Societies Act 1986, enabling them to direct the transfer of a building society to a subsidiary of a mutual. It will ensure that section 42B will be updated to take into account provisions of the 2007 Act. It will enable the smoother transfer of building societies into subsidiaries of mutuals. I remind Opposition Members that the clause strengthens mutuality, because it could be used in situations in which a building society is in financial distress. To ensure that it remains viable and to protect the interests of its members, the FSA could direct that it be transferred into a subsidiary of another mutual. Those are the circumstances in which I would envisage the clause being used. Currently, there are no circumstances in which I would expect such powers to be used.

The clause is not about carpetbagging or demutualisation, but about finding another tool to strengthen the mutuals sector. It is a further example of the work that we have done in pursuit of the coalition Government’s agreement.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I hear what the Minister says about protecting and strengthening, but a point was raised about the promotion of mutuality. How do the Government intend to do that and by what standards will that be measured? How will this particular clause help? Will the Minister explain what the Government intend to do?

Mark Hoban (Conservative, Fareham)

I started my remarks, both after and before the Division, by referring to this matter. I mentioned some of the things that we are doing—such as CRD IV —at the beginning of our proceedings this afternoon. We have had previous debates—on clause 22, for example—along similar lines, so I do not want to trespass on the Committee’s patience. As I said, the measure is an example of what we are doing to promote mutuality: it would ensure that regulators have a full suite of powers to enable them to intervene when a building society is under pressure or when we want to see ownership transferred to another mutual. That will help to protect and strengthen the sector.

Chris Leslie (Labour, Nottingham East)

I am grateful to the Minister for his patience. Will he specifically address the provisions that could have been in clause 52, as recommended by the all-party group on building societies and financial mutuals? It said that it wanted a specific regulator to have a duty to promote mutuals and foster diversity, and it recommended that the PRA should have a

“Head of Mutuals policy”.

Why has the Minister not taken the opportunity to do that?

Mark Hoban (Conservative, Fareham)

Again, that would be micro-management. It is not for me or the House to decide upon the organogram of the PRA. The PRA will decide what is appropriate. Clause 22 and new section 138K impose a specific duty on the PRA and the FCA that gets the regulator to think very carefully about the impact of its rules on mutuals, which is an important step.

In a previous sitting, we debated the context of social investments. Customers of all financial institutions expect a level playing field and the same protection, whoever they deal with. They expect an institution to remain sound and solid. They do not expect special favours, which would perhaps reduce the protection available to them and give them a worse deal. We need to see consistency, and that is why it is appropriate that we do not favour one sector over another. Opposition Members would be concerned if we had a special pro-listed company objective. We do not. It is right that we have a level playing field across the sector, and that is underpinned by new section 138K.

Sheila Gilmore (Labour, Edinburgh East)

I understand the position that the Minister outlines about a level playing field, but is there not a problem? Sometimes a level playing field can conceal problems and differences. For the social enterprise sector, and indeed for the mutual sector, the form of regulation that might be appropriate for other financial organisations may be inappropriate, which might result in there not being a level playing field. Such organisations could be disadvantaged by inappropriate regulation.

Mark Hoban (Conservative, Fareham)

Again, I refer to proposed new section 138K. Under subsection (4):

“The regulator must prepare a statement setting out…its opinion whether or not the impact of the rule is significantly different from the impact of the proposed rule on…the persons within subsection (3)(a)(i), and…those persons as compared with persons within subsection (3)(a)(ii)”.

That provision takes up the point about distinction—that regulation might have different impacts on mutuals compared with organisations in the non-mutual sector. It underpins not only the concept of a level playing field, but the understanding of the differential impact of regulation on different types of entity. The right provisions are in place, and clause 52 helps the mutuals sector. We should make progress.

Chris Leslie (Labour, Nottingham East)

I am disappointed by the Minister’s response. Of course, it is important to focus on the questions in clause 52 that relate to transferring business in a mutual to another mutual arrangement, but other protections are missing that might have been included. I was not the only one to entreat that the clause take a more proactive and positive stance on the mutual model; in his own commitment in the coalition agreement, the Minister said that he would promote mutuals.

The fig leaf that the Minister keeps citing is new section 138K in clause 22, which provides for rules and guidance for the regulators. However, the provision ensures only that a statement will be written about what happens to the mutual sector—it does nothing to promote it. He might think that that fulfils the coalition agreement, but I am convinced that many people will think it does not. Why does clause 52 not include provisions that address not only the concerns of the all-party group, but the promises made in the coalition agreement? He has not dealt with those matters satisfactorily.

The clause relates to transfers of mutual business. The Northern Rock deal must stand as one of the worst as far as the taxpayer is concerned. I wish the new venture well and hope it succeeds, but it virtually gives away the asset from the taxpayer. With £250 million stripped from Northern Rock’s assets to fund the purchase—[Interruption.]

James Gray (Conservative, North Wiltshire)

Order. I am sorry to interrupt the hon. Gentleman. I have been fairly generous so far in allowing a Second Reading-type debate, but we ought to return to the specific question of whether the clause should stand part of the Bill. We should not be discussing the sale of Northern Rock. The specific question is that the clause stand part of the Bill.

Chris Leslie (Labour, Nottingham East)

In discussing that question, we must understand whether the provisions that govern the transfer of business—perhaps of a mutual in distress—to the public sector, to another mutual or to a subsidiary of the mutual learn the lessons of the circumstances that most recently inform us.

In the case of the Northern Rock transfer to a private company, not to another mutual, the Minister says, “Well, the advice from Deutsche Bank and others is in the public domain.” I am not sure that that is so. I think that there was a cursory summary document about the transfer. If there are to be further business transfers with other consultants being brought in to advise on them, as in the case of Northern Rock, we must have more transparency in public information. I got the impression that the Minister was saying that that Deutsche Bank advice would be published. If that is so, we would welcome that.

The hon. Member for Staffordshire Moorlands, whose contribution I welcome, mentioned the Co-operative and the Leek United building society in her constituency. Nothing in the clause may threaten the building society model, but there is certainly nothing substantive to promote the mutual sector. We are voicing those concerns today.

Praying in aid new section 138Kin clause 22 does not address the problem, but it would be invidious to oppose this minor, specific improvement in the clause. My hon. Friends and I are concerned about the elements that are conspicuous by their absence. I do not want to oppose the clause, but I regret that the Minister has missed the opportunity to fulfil his commitment to the coalition agreement.

Clause 53 - Interpretation of Part 3

Chris Leslie (Labour, Nottingham East)

Normally we would not discuss such a small clause, which relates to the interpretation of part 3, but I have a quiz question—a little bit of light relief—for the Minister. Will he explain in layman’s terms what is meant by subsection (2):

“In this Part a reference to a person’s functions under an enactment includes reference to the person’s functions under any other enactment as applied by that enactment”?

What, exactly, does that mean? I should be grateful if the Minister elaborated, because, again, the explanatory note simply repeats that rather tortuous sentence.

Mark Hoban (Conservative, Fareham)

The subsection clarifies that references to a person’s functions under an enactment include references to the same person’s functions under any other enactment, as applied by the first enactment. That provision is needed because some legislation listed in clause 47(2) applies to functions in other legislation. The subsection ensures that changes to other mutuals legislation that we made under a mutuals transfer order would take place upon enactment.

Chris Leslie (Labour, Nottingham East)

The hon. Member for West Suffolk understood that—it was clear to him—but I am afraid that I am a simpler fellow and do not quite understand that sentence structure. The Minister seemed simply to read subsection (2), although perhaps he paused and put a little bit of emphasis on particular words, but I still do not understand why the explanatory note did not state more clearly what this provision was for.

I do not know whether the subsection is necessary, but in such matters I suppose that we have no choice but to take the Minister’s word for it, although I do not like doing that.

Clause 54 - Duty of Bank to notify Treasury of possible need for public funds

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 173, in clause 54, page 134, line 2, at end insert—

‘(3) The first case requires the Bank of England, FPC, FCA or PRA to provide the Treasury or the Secretary of State with an early warning of the possibility that a notification of a material risk to public funds may be given, and full information about the circumstances.’.

James Gray (Conservative, North Wiltshire)

With this it will be convenient to discuss the following:

Amendment 176, in clause 54, page 134, line 3, leave out ‘first’ and insert ‘second’.

Amendment 177, in clause 54, page 134, line 6, leave out ‘second’ and insert ‘third’.

Amendment 178, in clause 54, page 134, line 15, leave out ‘third’ and insert ‘fourth’.

Chris Leslie (Labour, Nottingham East)

Part 4 deals with the collaboration between the Treasury, the Bank of England, the Financial Conduct Authority and the Prudential Regulation Authority and was featured in significant detail on Second Reading. I have significant worries, all the way to clause 63, about both the drafting and content of this procedure. The context is that, by creating an additional organisational change, the Minister has framed the Bill in such a way as to cloud and obfuscate lines of accountability and decision making within the arrangements. Memorandums of understanding are needed, as are other duties, to co-ordinate the various bodies and organisations, and that necessitates changes to the clauses in part 4, some of which have changed since the original draft of the Bill last summer, in response to a number of concerns and worries voiced by both the pre-legislative scrutiny Committee and the Treasury Committee. Amendment 173 has been grouped with amendments 176 to 178. Broadly speaking, they relate to the notification of a material risk to public funds that the Bank of England is obliged to give the Treasury, and the need, in our view, for changes to ensure clarity about who will receive what warning and the downstream consequences of that.

Clause 54(1) states:

“Where it appears to the Bank of England that there is a material risk of circumstances within…the following cases…the Bank must immediately notify the Treasury.”

Our substantive amendment 173 would insert a change in relation to the first case, with the other amendments relating consequentially to the second and third case, and so on.

We believe it would be preferable for an early warning system of that formal notification of risk to be instituted in the Bill. It would serve a number of purposes. First, it is necessary for the Bank, FPC, FCA and PRA to have a more proactive stance when scanning the horizon for potential future risks, and not simply wait until financial assistance is expected and required. It would be better to have incentives and structures within the system to allow that informality, that early warning process, to come into place. We are not the only ones to have thought about that; other organisations have also done so.

David Rutley (Conservative, Macclesfield)

Will the hon. Gentleman give the Committee further detail of what the early warning system would look like? I understand the point he is making but, presumably, like most financial services organisations, the Bank would have risk logs and other related materials that it uses on an ongoing basis, and is probably in dialogue with the Treasury anyway.

Chris Leslie (Labour, Nottingham East)

That is what we are trying to tease out from the Minister. There are a number of reports that might be useful. The PRA will have a document called the proactive intervention framework—the PIF—which it has already said it will rely on. There is concern that some of those secondary and subsidiary activities might not manifest themselves to the Treasury, because they will all be guarded and cloistered within the Bank of England. Specifically, there is a bigger debate in another clause about the extent to which this clause invests powers in the Bank of England generically or in the individual person of the Governor of the Bank of England. That is why we need something more than a simple notification when on the brink of a potential crisis. We need a series of early warning potentials that can be exercised.

Lorely Burt (Liberal Democrat, Solihull)

I have a concern, which may or may not be appropriate, and I am interested in the hon. Gentleman’s view. If there is a formal requirement for notification, will the markets have any knowledge of that? If these warnings are going to and fro all the time, would that not have an unsettling effect on the markets?

Chris Leslie (Labour, Nottingham East)

The Bill anticipates that. The hon. Lady makes an important point, because such warnings or discussions could spook people and the markets. There are occasions when the Treasury and the Bank of England can decide not to publicise those warning processes and that notification arrangement precisely for the reasons she gives. The Bill already deals with some of those circumstances quite adequately, so there is no particular disagreement between us and the Minister on that point.

However, the Treasury needs to be given a heads-up on the potential risk to public funds, rather than such circumstances suddenly emerging in a formal way. I accept that it is difficult to draft and frame legislation to capture that concept, but ensuring that we have that system in place in a way that specifically empowers all regulators—not just the Governor—is an important principle. According to my reading of the Bill, the Governor has a responsibility to make such a notification.

Mark Hoban (Conservative, Fareham)

May I point out clause 54(1) to the hon. Gentleman? The obligation is not on the Governor; it is on the Bank.

Chris Leslie (Labour, Nottingham East)

As the Minister knows, this issue has come up during our debates, but it is not clear in the legislation whether the deputy governor, a chief executive of the PRA or other officials at the Bank can make that notification. [ Interruption. ] The Minister scoffs, but I had presumed that we should read subsection (1) to mean that the Governor will decide when the Bank makes a notification. Am I wrong? I will give way to the Minister if I am and if it is not the responsibility of the Governor alone to make that notification.

Mark Hoban (Conservative, Fareham)

The responsibility rests with the Bank of England—it is clear and in the Bill. The Bank of England has the responsibility to make the notification. If we had meant the Governor, we would have said “the Governor”. If it was meant to be a Doorkeeper, it would have said “a Doorkeeper”. If it was meant to be a Clerk, it would have said “a Clerk”. It is the Bank of England.

Chris Leslie (Labour, Nottingham East)

The Minister does not understand my point, which is that if, for argument’s sake, a responsibility fell on the Treasury to notify the Bank of England, one would naturally assume that the legislation would be interpreted to mean that the Chancellor of the Exchequer—otherwise known in the legislation, I think, as the Secretary of State—has that responsibility and therefore would be able to decide when a notification was given. The Minister may feel this to be a small point, but it came up significantly on Second Reading. As I read the clause, it would not be possible for the deputy governor or the head of one of the other regulators to make a notification should the Governor disagree with it. In this legislation, the “Bank of England” is taken to mean matters which the Governor sanctions. The Minister can stand up and say that the legislation is clear and it says “the Bank”, but he must accept that there is an important point here. We are creating new regulatory structures and setting up this architecture with all these other regulatory responsibilities, but we are then at risk of gagging them, preventing their voicing concerns about policy matters that may have a downstream consequence on the taxpayer, unless they get the agreement of the Governor of the Bank of England when making a particular notification. That is our key point.

We are going slightly wider than the amendment that we are discussing, Mr Gray, but we will come to those points in future amendments. With amendment 173, I want to establish the principle that the early warning of a material risk to public funds ought to be made in a strong way. I am delighted to see three members of the Treasury Committee here, and I am simply taking a leaf from that Committee’s 21st report, in which the hon. Members for Hereford and South Herefordshire and for Wyre Forest considered the circumstance and made their recommendations. In some respects, the amendment is a bit of plagiarism on my part; I merely copied some of their suggestions and tabled an amendment that would, hopefully, facilitate their view on the issue.

Mark Garnier (Conservative, Wyre Forest)

I would be grateful if the hon. Gentleman referred to the specific clause in the report.

Chris Leslie (Labour, Nottingham East)

Paragraph 166 of the Treasury Committee’s 21st report says that the Committee is concerned about material risks becoming apparent too late to the Treasury. The Committee recommended that the Bill

“require the Bank to give the Chancellor an early warning of the possibility that a notification of a material risk to public funds may need to be given, and full information about the circumstances.”

The report also stated in paragraph 165 that

“definition is crucial; it determines what notice the Treasury will receive and therefore how much time it will have to prepare for a crisis and consider alternative courses of action.”

I share the concerns of the hon. Members for Wyre Forest and for Hereford and South Herefordshire, and of my hon. Friend the Member for Erith and Thamesmead, who served on the Committee when the report was published. That is why I tabled my amendments in that vein. I hope the Government will agree to their provisions.

The issue has been of concern to others as well. The British Bankers Association stated on page 3 of its briefing on the crisis management aspects of the Bill that it is concerned that the notification process as framed might have perverse consequences:

“Given that the MOU stipulates that the Bank should notify the Treasury of a material risk to public funds and specifically that ‘if in doubt’ it should ‘tend towards notification’ it is possible that one outcome of the MOU as currently drafted would be to bring forward the point at which the PRA (as the new authority responsible for triggering the SRR), under the Bank’s governance structure, would determine that a firm has met the conditions for resolution. Since recovery is invariably a better option than resolution, it would be an unfortunate consequence of the duty to notify if it resulted in the PRA having less tolerance in its judgment concerning whether the threshold criteria were irrevocably breached. At the very least, this introduces a further area of uncertainty to an already subjective test which remains the subject of considerable nervousness in the market.”

Mark Hoban (Conservative, Fareham)

Does that not argue for later notification, not earlier? Does it not argue against the hon. Gentleman’s amendment rather than in favour of it?

Chris Leslie (Labour, Nottingham East)

No. My interpretation of the BBA’s concern is that some degree of earlier warning arrangement would help to ensure that a series of flags, traffic lights, or whatever the Minister wishes to characterise a warning process as, might gently begin to raise concerns or awareness of a situation developing within the Treasury. Rather than that information being hoarded within the Bank of England, it would be far better to have some process of dialogue. That is why it is important that the amendment be made, in order to put an early warning in the pipeline. That is the purpose of amendment 173.

Sheila Gilmore (Labour, Edinburgh East)

Is the concern that if the procedure involves only formal notification, either it would be made too soon, which could cause actions to be taken or concerns to be promulgated needlessly within the financial system, or it would held back too late? Would not an earlier step give a gradation in that process?

Chris Leslie (Labour, Nottingham East)

My hon. Friend is entirely correct; she has got the gist of the amendment we have tabled. These are complicated arrangements, but they are necessitated not by the current state of affairs but by the particular structural reforms the Chancellor and his Ministers are deciding to make by vesting such significant powers in the Bank of England in this way. Therefore, we have a duty to spend a little more time figuring out what those early warning processes—those traffic light warning processes—are going to be in the run-up to that formal presentation of a notification of “material risk” to public funds.

It is good that clause 54 requires that notification, and there are a number of circumstances when it would be expected to be used. However, it is important to have a preliminary step—the early warning arrangement—so that we can learn the lessons from the Treasury Committee’s careful and thoughtful scrutiny of the Bill, and particularly of the point about notification. It was in the hope that we could facilitate the Minister’s acceptance of the Treasury Committee’s recommendations that we tabled the amendment.

Mark Hoban (Conservative, Fareham)

What we have sought to do through these crisis management arrangements is to create some clarity, whereas under the previous regime there was confusion as to who is responsible in these circumstances. In fact, the hon. Gentleman’s amendment would re-create that confusion where the Bill tries to create clarity.

Let me explain why the hon. Gentleman’s amendment is unnecessary. First, as we have made clear in our response to the Treasury Committee, the duty on the Bank to notify the Treasury of a risk to public funds already achieves the amendment’s aim. The notification process is designed to be triggered early enough that an additional early warning system is not necessary. If we are not careful, there could be an early warning of an early warning of the early warning; however, we have designed this notification process to ensure that an additional layer of complexity is not required.

Clause 54 sets a low bar for notification. For example, in analysing a firm or a group of firms, if the Bank thinks that a situation could arise in which, as clause 54(4)(b) says,

“the Treasury might reasonably be expected to regard it as appropriate”

to use public money, a notification must be made at that point. We should note the conditionality implied in that language:

“might reasonably be expected to regard it as appropriate”.

We are talking about a relatively early stage of the process. The provision is designed so that the Bank cannot wait until the need to use public funds actually materialises. As clause 54(1) makes clear, the Bank must make a notification as soon as it believes

“that there is a material risk of circumstances…arising”

in the future in which public funds might need to be used. So it is not the quantum of public funds that matters; it is the risk of that need arising. Therefore, in the scenario the hon. Gentleman describes—where the Bank is aware that at some future point a risk to public funds could arise—the Bank should be making a notification under the existing duty, and not requiring some sort of early warning mechanism.

In addition, to underscore this process the draft memorandum of understanding makes it clear that there must be no surprises for either institution. It also spells out that, where the Treasury independently identifies a possible risk, it can ask the Bank to consider whether the notification threshold of “material risk” has been reached.

As I have said, the hon. Gentleman’s amendment would create confusion by adding additional regulatory bodies to clause 54. The clause is based on the premise that the Bank and the Bank alone is responsible for notifying the Chancellor of risks to public funds. If, therefore, the Bank fails for some reason to notify the Chancellor in time, it is absolutely clear and transparent where accountability for that failure would lie.

There was some discussion about whether it would be better to have earlier or later notification, and whether earlier or later notification would increase or decrease the risk of intervention. Let me be clear to hon. Members about this. The Bank of England’s duty to notify the Treasury of a risk to the public funds is entirely separate from the Prudential Regulation Authority’s decision about whether a firm should be put into the special resolution regime.

Where a firm is in difficulties and one or more of the potential options to resolve the firm—if it fails—would involve the use of public funds, the Bank should notify the Treasury. In most circumstances, that will be well in advance of any decision to trigger putting the firm into the special resolution regime. A notification of risk to public funds does not mean that the firm will definitely fail, or that public funds will definitely be used in the case of failure. Therefore, a notification of a risk to public funds would have no impact on the PRA’s assessment of a firm’s ability to meet its threshold conditions.

It is important to separate the two processes. We are trying, via the clause and the MOUs, to ensure that any risk that public funds might be used is brought to the Treasury’s attention as soon as possible. It is unnecessary to add an early warning system to that which is already in place. That would not be appropriate, given that we are talking about the use to which public money will be put under the PRA, the Financial Policy Committee and the Financial Conduct Authority.

Chris Leslie (Labour, Nottingham East)

I am grateful to the Minister for his response. I understand to a degree why he does not want to introduce a caveat into the provision, but I still believe that the notification procedure’s current design will result in a series of risks. Indeed, the Treasury Committee has been particularly keen to highlight that.

These provisions could lead to situations in which there is no adequate dialogue between the Bank and the Treasury. The Treasury is the steward of public funds, and if taxpayers’ funds are likely to be affected the clause would be triggered, but that could lead to indirect circumstances that may hit the public purse. That is what we want to capture in the amendment.

I accept that it is difficult to address this issue in the Bill, which is why we drafted amendment 173 as we did. An early warning and a notification of material risk would add some broader, contextual information to help the arrangements. This is an important issue, particularly given that the Treasury Committee suggested that the Bill address it, so I will not withdraw the amendment. I want to test the Committee’s will, especially given the presence of some members of the Treasury Committee.

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 179, in clause 54, page 134, line 5, at end insert

‘or where there is a risk to relevant markets functioning well, fairly, efficiently and transparently.’.

James Gray (Conservative, North Wiltshire)

With this it will be convenient to discuss amendment 180, in clause 61, page 137, line 29, at end insert

‘which must include risks which significantly impact upon the safety and soundness of PRA-authorised persons, or which put at risk relevant markets functioning well.’.

Chris Leslie (Labour, Nottingham East)

Amendment 179 relates to how best we define material risk, and to cases where the notification of material risk needs to be presented. Amendment 180 relates to clause 61 and the memorandum of understanding in circumstances of crisis management. It states that the memorandum needs to make provision for what the Treasury and the Bank regard as material risk. I know that you are following the Bill closely, Mr Gray, and that you will recognise the two phrases in the amendments, which relate to the responsibility of the Prudential Regulation Authority and the strategic objective of the Financial Conduct Authority. Amendment 179 also refers to the strategic objective of the FCA. It goes a little further toward the strategic objective that we had hoped would be in the Bill, but for the Minister’s resistance to the amendment that we tabled at the time. We wanted to ensure that such situations encapsulated risks relating to relevant markets functioning well, fairly, efficiently and transparently.

The Bill and the draft form of the memorandum of understanding are too vague about the role of the FCA and the PRA in circumstances of material risk to public funds. Therefore, the amendments seek to ensure that the definitions also encompass these FCA and PRA matters, and, implicitly, we hope that they will be involved by the Governor in assessing whether a material risk exists. We had a prelude a moment ago to the debate we are likely to have on amendments relating to clause 58(1) and the duty that falls on the Bank of England, in generic terms, to make this notification of material risk. My concern is that that is not precise enough. It will probably be taken that the Governor will have the power to make the recommendation. It would be preferable for the FCA and PRA, as newly formed, free-standing—or supposedly free-standing—regulators to also be able to make their views known about material risks to public funds. That is the rationale behind the amendments—to ensure that markets function where that is already a strategic objective of the FCA.

Surely, if there is a material risk because markets are functioning badly, inefficiently or in a non-transparent way, the Chancellor should be notified and therefore made aware of whether action needs to be taken. Poorly functioning markets can have a significant impact on monetary policy and on public funds. For example, there are a number of circumstances where policy measures have needed to be taken because of deteriorations in market activity. We have not just dreamt this up. The pre-legislative scrutiny Committee, in its report on the Bill in paragraph 140, said:

“The definition of the term ‘material risk’ should be subject to parliamentary approval and not left to a Memorandum of Understanding.”

We agree. The definition is too vague. It needs to include these concepts, particularly as they affect the PRA and FCA.

Will the MOU be revised from time to time? Could that be done in a way that redefines material risk, without necessarily going through any parliamentary scrutiny process? In other words, could this MOU arrangement be amended to include prudential regulatory concerns or conduct concerns? Would the Minister expect that?

We would not expect necessarily a formulaic definition but it would be helpful if the Minister can explain why he thinks the term has not been fully fleshed out in the Bill. We suggest that it needs to include some of those conduct and prudential concerns as there are worries that the Bill is not explicit enough on that definition. There are also concerns that without a clear view as to what a material risk might entail, the Bank might not consider a material risk to be relevant or there might be circumstances where a material risk has arisen but the Treasury is not notified. We are just trying to table amendments to ensure that we capture as many circumstances of material risk to public funds, both direct and indirect, as possible. I hope the amendment is helpful, and I should be grateful if the Minister gave a sense of what he regards as being within that definition.

Mark Hoban (Conservative, Fareham)

I made clear in the debate on the previous group of amendments that material risk refers to the likelihood of the use of public funds. It is an early warning system. That is clear. The MOU will be able to be revised. It is not a document that is set in stone. That could include changes to what is meant by material risk. Let us be very clear about what we are trying to achieve here through this MOU. It is not an all-purpose MOU. It is designed to deal with the issue of the use of public funds in a crisis. The purpose of the process set out here is to ensure that the Treasury is aware of and can take action to mitigate the risks to public funds.

Decisions to use public funds to resolve a financial crisis are for the Government to take, usually the Chancellor personally. The use of taxpayer money is rightly reserved to the Government. The clause ensures that the Treasury is always informed when there is a material risk to public funds in the future, in order to allow the Chancellor to make a timely and informed decision based on detailed analysis from the Bank and the Treasury itself.

The same does not apply to the objectives of the PRA and the FCA. Ensuring that the relevant markets function well is the FCA’s responsibility; the safety and soundness of PRA-regulated firms is the PRA’s responsibility. The Treasury is ultimately and solely responsible for the use of public funds. It is not ultimately or solely responsible for ensuring that markets function well or for promoting the safety and soundness of firms. The rationale for creating a formal notification process does not apply in the same way to well-functioning markets and the safety and soundness of funds in the same way as it does to the protection of public funds.

These issues move into the area of the Treasury’s direct responsibility if they have the potential to put public funds at risk. That is where the existing duty on the Bank will kick in. The additions proposed by the hon. Gentleman are both unnecessary and potentially confusing. We recognise that the FCA and the PRA will inform the Treasury when they are managing significant issues that are of wider public interest but do not impact upon public funds. The FCA and the PRA will keep the Treasury informed of these matters, not least because it is Treasury Ministers who will need to explain these issues to Parliament where necessary.

This type of communication already goes on routinely between the Treasury and the FCA. The hon. Gentleman suggests that the chief executive of the FCA or the chief executive of the PRA would be in some way scared of coming to Ministers to talk about these issues. I can assure him from the conversations that I have with Martin Wheatley, who is running the conduct business unit in the FCA, that he has no problems at all about coming to see me to talk about issues. In the same way, I have regular meetings with the chief executive of the FSA and the deputy governor for financial stability. They are all at liberty to come to talk to us about these issues, so there is that dialogue, but that does not relate to the memorandum of understanding and the duty of the Bank to notify the Treasury about the possible need for public funds. The amendments are not necessary, because they would again create confusion about what the duty is meant to achieve. We now have clarity, where we had confusion under the old regime.

Chris Leslie (Labour, Nottingham East)

I think that I understand the Minister’s logic in that he does not want to open the floodgates in the definition of material risk now; he wants to keep it relatively prosaic in so far as it is set out in the MOU. I asked about the MOU and the extent to which it will be subject to parliamentary scrutiny because those are big questions.

Ultimately, we have to step back and recognise that our constituents have grave concerns about why so much taxpayer’s money was put on the line by circumstances that were not properly captured ahead of the crisis. We cannot expect the regulators at that time to have known in hindsight about needing to capture such a set of issues, but in designing a new set of arrangements, we should ensure that material risks encapsulate the set of questions for which the two new regulators will properly have responsibility.

I am sure that it is true that the current chief executives of the FCA and PRA are very good at being vocal, meeting Ministers and communicating such questions. We read that we are losing the chief executive of the PRA, and a new deputy governor of the Bank of England is due to be appointed by the Governor of the Bank.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman has now made that point twice. The deputy governor is appointed by the Crown, not by the Governor of the Bank of England.

Chris Leslie (Labour, Nottingham East)

That is quite interesting. Will the Minister confirm that the Governor will not finally sign off the appointment, and that the deputy governor will be appointed by the Crown on the advice of Ministers?

Mark Hoban (Conservative, Fareham)

The appointment is made by the Crown.

Chris Leslie (Labour, Nottingham East)

On the advice of Ministers—it is sometimes difficult to get a simple answer from the Minister. I do not think that the Crown makes decisions without the advice of Ministers. If it is a ministerial appointment, that is important because it might imply that, to a degree, there are lines of accountability back to Ministers, which would not be the case if the Governor made that appointment directly.

I do not know whether, under any statute, the deputy governor is necessarily—I may be wrong—always the chief executive of the PRA. Might it not be possible for the chief executive of the PRA to be different from the deputy governor for prudential regulation? I do not think that the two are inextricably linked, although we have assumed that the two will always be one and the same. I do not think that that is specified in statute, but I may be wrong.

Mark Hoban (Conservative, Fareham)

We are in danger of returning to clause 1.

Chris Leslie (Labour, Nottingham East)

It was silly of me to have such a memory lapse about something very important. With such clarity about the issues, I concede that it is important to recognise that there may be scope for prudential regulation concerns to come to the attention of Her Majesty’s Treasury that go beyond what is contained in clause 54 on the notification of material risk. I was trying to establish that point, and the Minister has been exceptionally helpful in clarifying it. I do not want to labour the matter, so I will heed the Minister’s comments. I do not think that he has sufficiently set out his definition, but I hope that when we discuss the MOU we can consider that again.

James Gray (Conservative, North Wiltshire)

Order. Before we recommence, the usual channels have told me that it would be convenient if the Committee suspended for dinner at 7.15 pm for 45 minutes. I understand that there may be Divisions in the Chamber at 8 pm, so the Committee will recommence at the conclusion of one or more votes. If agreeable, we will continue our deliberations until about 7.15 pm and then suspend the Committee for 45 minutes for supper.

I think that the hon. Gentleman was in the process of seeking leave to withdraw amendment 179.

Chris Leslie (Labour, Nottingham East)

Looking around the Committee, I think that it may be necessary to withdraw the amendment. I have made my point, so I beg to ask leave to withdraw the amendment.

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 174, in clause 54, page 134, line 7, after ‘England,’, insert ‘FPC, FCA,’.

James Gray (Conservative, North Wiltshire)

With this it will be convenient to discuss the following:

Government amendment 98

Amendment 175, in clause 54, page 134, line 13, after ‘Bank,’, insert ‘the FPC, the FCA,’.

Government amendments 99 and 100.

Chris Leslie (Labour, Nottingham East)

In many ways, the amendments go to the heart of the Second Reading debate on 6 February between the shadow Chancellor, my right hon. Friend the Member for Morley and Outwood (Ed Balls), and the Chancellor. Despite the Chancellor’s protestations at my right hon. Friend’s concerns about certain voices being excluded from the new regulatory structures, I am pleased that the Government have tabled amendments to the Bill following those exchanges. We wanted to effect a particular change to the Bill, and the Government have—at last—conceded something and recognised the need to ensure that some of the gaping holes are plugged in clause 54 by improved references to the communication of warnings about material risk to public funds.

We welcome the Government’s amendments; they are an improvement to the current Bill. It is right for the Financial Conduct Authority to be included in the list of bodies affected if a notification were triggered, or if the Treasury

“might reasonably be expected…to incur expenditure”

of public funds.

Amendments 174 and 175 are similar in tone to the Government amendments, but we have added the Financial Policy Committee. It would seem strange for the new body that is tasked with responsibility for macro-prudential and broad financial stability not to be able to pull that trigger and notify the Treasury of a change. The Minister will say, of course, that the Bill does not exclude the potential of the Financial Policy Committee to act in such a way, but it does not explicitly allow it. Because of the overly-ambiguous drafting of clause 54(1), simply allowing the Bank of England to act does not give the FPC that responsibility. We have therefore tabled the amendment in the hope of clarifying whether the FPC would formally be able to have that level of dialogue with Her Majesty’s Treasury in such circumstances.

We have given the new Financial Policy Committee significant powers, but clause 54 seems to place a lot of the power to trigger an early warning notification about a risk to public funds in the hands of the Governor of the Bank of England. It is entirely possible to envisage circumstances in which the Governor takes issue with the FCA, the PRA, deputy governors or even the majority on the Financial Policy Committee, and uses that power to override their misgivings and refuses to make such notifications.

We are trying to help the Government put some sense into the convoluted structure they have constructed by allowing the various channels to be tasked with the responsibility of safeguarding the system and, by extension, protecting the taxpayer. Under the Bill, there is a risk that the Governor might judge not to inform the Chancellor that perhaps the deputy governor believes there to be a material threat to stability. If the Governor makes a personal judgment, and for whatever reason dismisses the views of others, there could be a danger that important voices would not be heard by the Chancellor.

There are strong differences in judgment within the Bank of England about appropriate safeguards against moral hazard, for example, so we want to broaden lines of communication in relation to warnings of material risks to public funds. Although we welcome the Government’s amendments, the Minister should explain why the FPC is not included in the list.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman should have thought about to which part of the clause our amendments were tabled before he repeated them and inserted the words “and the FPC”. The second case sets out the position whereby people are exercising their respective powers under parts 1 to 3 of the Banking Act 2009. The FPC does not have responsibilities when it comes to the exercise of powers under parts 1 to 3 of that Act. That is the special resolution regime.

If the FPC were to revisit the regulatory perimeter, it might decide that the FCA should exercise some micro-prudential responsibilities in relation to deposit takers. If the FCA does exercise a micro-prudential responsibility in respect of small deposit takers, it would need to have powers under parts 1 to 3 of the Banking Act 2009, which is why we chose to insert the reference to the FCA into lines 7, 13 and 14 of the clause and why we did not choose to insert a reference to the FPC. It is not about duty to notify the mature risk per se, but the exercise of powers under the Banking Act, and those powers do not extend to the FPC.

Chris Leslie (Labour, Nottingham East)

The Minister is envisaging a hypothetical situation when the regulatory perimeter is extended for micro-prudential responsibilities to the FCA, but he does not envisage that there will ever be circumstances in which that might also apply to the Financial Policy Committee. That is a rather strange approach. There could indeed be circumstances in which some of those references relate specifically to the provisions of the Banking Act 2009 or other special resolution regimes, and I can understand the justification in drafting terms for not including the FPC in one reference or elsewhere. However, the hon. Gentleman did not deal with my core point, which was why not allow the FPC to make those representations directly to the Treasury. It would be helpful and clear if, for the avoidance of doubt, it was possible for the FPC to make such representations.

Mark Hoban (Conservative, Fareham)

The hon. Gentleman made that case when he spoke to amendment 173.

Chris Leslie (Labour, Nottingham East)

I am making the case again in respect of amendments 174 and 175. It is an important point that needs to be made. I do not know what the Minister’s intervention was intended to achieve, but we shall want to return to such matters at a later date. It is important for the FPC to be given a voice to ensure that if it has collective concerns, even if they clash with the views of the Governor, it is allowed to have a dialogue directly with the Chancellor. It is a system of early warnings and notifications of risk. What would be the reason for deliberately preventing that voice from being heard? For the avoidance of doubt, it would be better to allow for that possibility. It is therefore important to test the Committee’s view on that point. I will not press both amendments 174 and 175, but I will test the Committee’s views on amendment 174.

James Gray (Conservative, North Wiltshire)

Order. I am not all that inclined to allow a stand part debate on clause 54, given that we have had a fairly extensive debate on it already. I suspect it might be better to put the Question.

Chris Leslie (Labour, Nottingham East)

On a point of order, Mr Gray. I accept that we have discussed a number of amendments to clause 54, but they were in only three groups, which is a relatively modest number in amendment terms.

The provisions of clause 54 extend beyond those that we have amended and relate to, for example, the public funds test and the role of the European Commission in the deposit guarantee scheme. Given that we have not touched on them in the amendments, not to mention discussed the concerns that the Treasury Committee has raised, it would be helpful if we had an opportunity to test the Minister on a couple of questions.

James Gray (Conservative, North Wiltshire)

I understand the point of order. It is matter for my discretion as the Chair, none the less, because of the breadth of the clause in question, I am prepared to allow a brief stand part debate on clause 54.

Chris Leslie (Labour, Nottingham East)

You are generous, Mr Gray, and I am grateful for your flexibility and wisdom in showing such judgment in the Chair. May I say again what a pleasure it is to serve under your chairmanship?

The concerns that the Treasury Committee voiced about clause 54 are important, because it stated that “material risk” was not adequately defined. I can tell by the facial nuances of the hon. Member for Wyre Forest, and to a lesser extent those of the hon. Member for Hereford and South Herefordshire, that they know what I am talking about in terms of the 21st report of the Treasury Committee.

The Minister, articulate as he always is on such points, has not shed sufficient light on what he regards material risk to be, and it is important that he take the opportunity to set out what he thinks it will be. Is the definition simply that in the memorandum of understanding, namely, that it is broadly those questions in the proactive intervention framework in the PRA’s report or is it broader than that? Given that it is not in the Bill, will he at least commit to finding an opportunity for parliamentary scrutiny of the MOU? As I understand it, there is no affirmative resolution procedure for that important and crucial document. My hon. Friends will be aware of the importance attached to those questions, given that they clearly relate to crisis scenarios for which we need to ensure clarity, that lessons are learned, that we have clear definitions and that we are prepared for the next situation, if and when it occurs, without fumbling around for definitions. That is the purpose of the arrangements.

In my point of order, I mentioned the public funds test. The arrangements to finance the resolution of failed institutions are evolving because of a series of legislative initiatives. In particular, the European Commission has announced its intention to develop a regime under which member states should ensure that they have arrangements in place, such as a ex ante financial resolution fund, to

“cover the costs incurred in connection with the use of resolutions tools”,

reflecting the Financial Stability Board’s belief that resolution should be

“feasible without resort to public funding”.

The existing tri-partite arrangement has joined the banking industry in supporting the principles that banks not taxpayers must pay for failures. In agreeing that the depositor guarantee scheme can be used to contribute to resolution costs and be leveraged to meet the requirements for a national resolution fund required by the forthcoming EU directive, the British Bankers Association has observed:

“The European Commission appears to be open to the notion that DGS could be used to meet resolution costs, particularly as the European Directive on Deposit Guarantee Schemes is likely to introduce a requirement for national DGS funds to be partly ex ante financed…Together these developments reduce the likelihood that public funds would need to be utilised to resolve a failed institution. As such, it is important to consider whether the material risk to public funds test proposed in the Bill is crafted in a way which ensures its future relevance and the engagement of the Chancellor when there are risks to financial stability which do not involve the use of public funds.”

The BBA has been quite exercised about that question, and it makes a reasonable point. It suggests that the proposed public funds test might be too restrictive to ensure that the Chancellor is engaged at an appropriate point when conditions are deteriorating rapidly. It believes it would be advisable to align the MOU and the Bill with the provisions in the Banking Act 2009 by requiring the Bank to notify the Treasury whenever there is an actual or likely need to invoke the special resolution regime.

Can the Minister offer reassurances that he is mindful of the EU directives on deposit guarantee schemes? Were they taken into account in the drafting of the Bill? Does he anticipate that it might be necessary to change legislation further at a later date, in the event that the directive on deposit guarantee schemes is used to meet resolution costs? That is a specific query about the Bill.

I want to raise a couple of other issues with the Minister. On page 134 of the Bill, as drafted, lines 22 and 23 state:

“A public funds notification must give a general indication of the matters giving rise to the notification.”

That has a ring of insufficiency about it. Will the Minister clarify what is meant by the reference in the Bill to “general indication”?

Although this may be a slightly lesser point, line 24 states:

“A public funds notification must be given or confirmed in writing.”

If a person notifies the Treasury of a material risk to public funds through a telephone call or a face-to-face meeting, would there perhaps be an e-mail, or a hard copy follow-up? Will more robust procedures be set out in the Bill? Sometimes circumstances will be fast-moving, and I worry—

James Gray (Conservative, North Wiltshire)

Order. Before he continues, I warned the hon. Gentleman that I would interrupt him at 7.15 pm, even if he were on his feet at the time. It is the magic hour, and I suspend the Committee until 8 o’clock, or as soon thereafter as the Divisions in the main Chamber have been completed.

Chris Leslie (Labour, Nottingham East)

It is a pleasure to be back in this finely poised and balanced Committee debating clause 54.

I have made most of the detailed points that I want to raise so, in essence, I need the Minister to give us a little more of a sense of how he considers that the concept of material risk should be better defined in accordance with the points made by the Treasury Committee. Will he say something about the public funds test and, in particular, about whether the European directive on deposit guarantee schemes will be used to meet resolution costs, and whether that will have a downstream effect on the provisions of the Bill? Does he think that there is a little ambiguity in some of the later provisions in the clause, such as the phrase “general indication”?

Mark Hoban (Conservative, Fareham)

It is a pleasure to serve under your chairmanship during this evening’s sitting, Mr Leigh.

Before the dinner break, the hon. Member for Nottingham East questioned subsection (7); it does mean that there should be notification in writing. “General indication” is a broad term, but the Bank will need to provide the Treasury with sufficient information to understand the nature of the risk, the type of analysis that might be required and what action might be needed. I do not want to get into the position of micro-managing what should be in the general notification, but it should make sufficient sense to enable the Treasury to respond to it. It should include a broad range of things, such as an explanation of the risk to public funds, an identification of the options that the Bank is considering to mitigate the risk, an assessment of the potential impact of each option and the identification of specific risks to public funds arising from any action.

The hon. Gentleman asked what is meant by “material”, but that term is difficult to define. Clearly, it is not a risk that is remote or negligible but, equally, it is not necessary for risks to be more likely than not for them to be material. The term requires judgment. I have already said clearly that the emphasis is on early notification. There is a low bar for notification, and we would expect the Bank to notify when it thinks that a risk could occur and that, if there were more notification, actions would be taken to get the balance right.

The hon. Gentleman asked about the procedure for scrutiny of the MOU. He has tabled amendment 190 on that subject, so I shall save my firepower until our discussion on that, rather than stealing the excitement of this evening’s proceedings by dealing with it now—[Interruption.] I am sorry to disappoint my hon. Friends.

Chris Leslie (Labour, Nottingham East)

As long as we get to it.

Mark Hoban (Conservative, Fareham)

That is in the hon. Gentleman’s gift more than it is in mine.

I come now to the alignment of the public funds notification with the special resolution regime, which has been raised by the BBA. The public funds notification is designed to create a formal mechanism for the Treasury to be notified early of circumstances that could lead to the use of public funds. It reflects the principle that it is the elected and accountable Government alone who can take decisions to deploy taxpayer money to resolve a threat to stability.

The use of the special resolution regime powers is not an appropriate proxy for public funds. In certain cases, the Bank can manage risks to financial stability using tools at its disposal with no risk to public funds. In other words, there may be cases where the SRR is used, but there is no risk to public funds. Of course, public funds can be put at risk without the SRR being used. For example, RBS and Lloyds were recapitalised with public funds without using the SRR. The use of the SRR is therefore the wrong test. To use the Goldilocks analogy, and to keep the hon. Member for Foyle amused, the test is both too wide and too narrow.

On the FSCS, the Banking Act 2009 already allows it to contribute to the cost of resolution. It is flagged up in clause 54(5), so the Bill reflects the fact that it can be used to contribute to the cost of resolution. It is not clear at this point whether changes will be required as a result of the deposit guarantee scheme or, indeed, the crisis management framework, which the Commission is yet to publish. However, there are routes we can take to amend legislation to take such things into account. I think that that deals with the issues raised by the hon. Member for Nottingham East.

Chris Leslie (Labour, Nottingham East)

The Minister was exceptionally thorough and I am grateful to him for addressing those points so helpfully. I can understand his point about material risk, and it is always difficult to know quite how to define such things. He set the balance out in broad terms, but the devil is always in the detail. That is why we should have more scrutiny of the memorandum of understanding, but we will come to that shortly.

The Minister dealt with the FSCS point. On the possibility that European rule changes might have consequences for these provisions, he indicated that he would be open-minded about amending the Bill to reflect whatever circumstances might arise. In the light of those helpful comments, I can see why clause 54 is framed in the way it is. I have certain questions about it, but I am happy for it to stand part of the Bill.

Clause 55 - Duty of Bank to notify Treasury of changes

Chris Leslie (Labour, Nottingham East)

I, too, welcome you to the Chair this evening, Mr Leigh—it was remiss of me not to say that before.

On clause 54, we talked about the Bank of England notifying the Treasury of a material risk. Under clause 55, the Bank must, in certain circumstances, notify the Treasury of any changes to that notification. The clause is therefore consequential on clause 54, and it also applies where the notification has ceased.

Clause 55(2) states that the Treasury must be notified of a

“substantial change in the matters which gave rise to the notification”,

even if the notification continues to be valid. May I gently ask the Minister whether there is not a danger that, while the Bank does not think a change is material or substantial, the Treasury will be of a different opinion? Would it not be better if the Treasury were notified of any changes in circumstances so that it could judge whether they were substantial? Perhaps the Minister has in mind a concept of what is substantial, and he might be happy to leave us with a vague concept, but I worry that the judgment about whether there has been a change should be in the hands of the Treasury.

Subsections (2) and (3) start with the words

“If the Bank of England is of the opinion”—

and so on. Again, I have to ask the Minister: what does that mean? Is it in reality the Government’s opinion? I am sorry to be constantly pointing out this lacuna in the legislation, but it would be better if the Bill were precise and if it specified, even if in a definitional, consequential clause later on, what is meant by the Bank’s opinion. As a corporate body, the Bank will have lots of opinions, but we have to take it that the opinion is essentially determined by the head of the organisation—the Governor—and if that is the case, the Minister needs to say so. If he will not put it in the Bill, saying it in Committee would be one step towards that.

I want to know what happens if there are disagreements within the Bank about whether risks have changed or ceased, and whether different opinions can be communicated to the Treasury, or whether the only opinion that matters will ultimately be the Governor’s. The Minister has mentioned that the Deputy Governor is a Crown appointment, and perhaps that gives some level of independence, but he will also know that the line management chains mean that the Governor can overrule the Deputy Governor and other deputies, so it is important to test this point. It was heavily discussed on Second Reading, and it is important to get a sense of how such disagreements are to be aired—or not.

Clause 58 allows the Bank and the PRA, following the Government’s amendments, to look at the public funds notification. The Minister is not amending clause 55 to ensure that the FCA is involved, but my view is that the FCA ought also to voice its opinion.

Clause 55(4) says:

“Before giving notification under section (3), the Bank must consult the Treasury.”

What form will that consultation take? Will a phone call to a Treasury official suffice, or will there be a meeting between the Governor and the Chancellor—

Mark Hoban (Conservative, Fareham)

They can tweet it.

Chris Leslie (Labour, Nottingham East)

I am sure that the Minister does not genuinely mean that there might be a tweet between the Chancellor and the Governor. I do not know whether the Governor is a tweeter—if that is indeed the term—but I think it is quite important for us to know what sort of consultation arrangement is envisaged.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

This is a serious point. I wonder whether there is a conflict between subsections (3) and (4). Subsection (3) says:

“If the Bank of England is of the opinion that the risk to which the notification relates has ceased, it must notify the Treasury”,

and subsection (4) cites the need to “consult the Treasury”. We have already discussed how the wording in other parts of the Bill could lead to some confusion.

Chris Leslie (Labour, Nottingham East)

This is the difficulty. We are not the architects of this legislation—the Government are, and they have to iron out this difficulty. Sadly, there is some confusion and lack of clarity about how these procedures will work, and it is incumbent on us to ask what is meant by consultation in this context.

Mark Hoban (Conservative, Fareham)

I am curious about this obsession with what the Bank means. Perhaps the hon. Gentleman or the shadow Chancellor has had a bad experience at some point. This was such a centrepiece of the shadow Chancellor’s speech on Second Reading that I could not work out if he had any other objections to the Bill. He dilated on the topic—as the Speaker would say—for some time, and we never really got to the bottom of why he had this concern.

Let us for the sake of argument replace the Bank of England with the Governor. In that case, if the Governor was ill or away, nothing could happen, because the Governor could not do this. We need to recognise that there is a legal institution called the Bank of England, and it makes these notifications to the Government.

Chris Leslie (Labour, Nottingham East)

Will the Minister give way?

Mark Hoban (Conservative, Fareham)

No, I will not give way on that point. For at least the second time today, we are debating whether the Bank of England means the Governor. We have had that debate, and when the hon. Gentleman tested the will of the Committee, it decided not to accept his amendment.

On the point about substantial change, we need to recognise that the ongoing risk to public funds might change from day to day. It would be disproportionate and bureaucratic to require the Bank to provide formal notification any time the risk changes, so it is important to qualify the risk with the word “substantial”. Otherwise, every minor change will end up being notified, which would get in the way of a proper dialogue between the Treasury and the Bank of England. We, of course, expect the Bank to keep the Treasury up to date on changes in risk.

The form of consultation might, as the hon. Gentleman has suggested, be a phone call or a meeting. The purpose of the provision is to enable the Treasury to make representations to the Bank if it disagrees with the reason for a notification so that the available power of direction still remains. The Treasury has a power to tell the Bank that it disagrees with such a change because it does not accept the Bank’s description of the circumstances. That power will prevent a unilateral withdrawal of the notification, which has to be done in consultation with the Treasury.

Mark Durkan (Social Democratic and Labour Party, Foyle)

The Minister refers to subsection (4), which states:

“Before giving a notification under subsection (3)”—

in other words, about a denotification—

“the Bank must consult the Treasury.”

However, the Bank is not required to consult the Treasury in relation to the notification of a substantial change in the matters giving rise to the risk. The Bank just notifies the Treasury and there is no prior consultation, which surely is odd.

Mark Hoban (Conservative, Fareham)

If there is a change, there will be an opportunity for a discussion, as there is when there is a notification of a risk. The provision relates to when the Bank decides that a risk no longer exists. It gives the Treasury the power to say that the notification should remain in place.

Mark Durkan (Social Democratic and Labour Party, Foyle)

Subsection (2) concerns public funds notifications. Clause 54(2) states that such notifications are covered by clause 54(1) or by clause 55(2). For public funds notifications, there will be no prior consultation with, or indication to, the Treasury. The only room for consultation with the Treasury that is provided for relates to denotifications, not public funds notifications involving a material change.

Mark Hoban (Conservative, Fareham)

We want the Bank to tell the Treasury when there is a material risk—

Mark Durkan (Social Democratic and Labour Party, Foyle)

The Bill does not provide for it.

Mark Hoban (Conservative, Fareham)

If the hon. Gentleman will allow me, we want the Bank to tell us, first, when there is a material risk and, secondly, when there is a change in that material risk, and there will be consultation if the Bank decides to withdraw a notification. The arrangement permits a dialogue in that, once a general indication about the risk has been given, the Treasury and the Bank of England have the opportunity to discuss the nature of that risk. Ultimately, the Chancellor decides how to use public money, so such information has to be provided.

We have to be clear on the point made by the hon. Member for Nottingham East about disagreement within the Bank of England. The MOU sets out that if the Bank is in doubt, it should tend towards making a notification rather than not doing so. The whole emphasis of clause 54 and the MOU is to set the bar low, so the expectation is that a notification will be made rather than not made. That will ensure that there is a flow of information from the Bank to the Treasury. It is important for the Bank to notify the Treasury of a change, but it should be a substantial change rather than any change, because otherwise the Treasury will be deluged with notifications every time there is a slight tweak in the Government’s potential exposure to something. The approach must be proportionate to prevent the measure from being used in a bureaucratic fashion.

Chris Leslie (Labour, Nottingham East)

My hon. Friends the Members for Foyle and for Kilmarnock and Loudoun made important points about the clause’s lax drafting. I am sorry that the Minister is exasperated by our asking what is meant by the opinion of the Bank. There are many players in the Bank. He did, however, ask an interesting question: what if the Governor falls ill? I am still not clear that we know who is second in command at the Bank, given that there are three equal deputy governors. Presumably, the second-in-command functions are divided equally between each of the three players according to their relative portfolios. I presume that the court of the Bank would appoint an acting director in the interim. In a crisis scenario, we cannot dissociate the question of individuals and their opinions, because they really do matter. It is important to test such issues, because in a crisis, there will not be time to figure them out. We might waste half a day trying to work out who will be in charge. It is far better to have clarity in the Bill about how things would flow.

The clause is generally reasonable in relation to notification of changes, but the Treasury must be very trusting of the Bank of England in the measure. Such trust between great institutions of state is good, but the provision puts an awful lot of power in the Bank’s hands and leaves the Treasury blind, and reliant on the Bank to define a substantial change in circumstances. However, we have had sufficient debate.

Clause 56 - Circumstances in which Treasury power of direction exercisable

Chris Leslie (Labour, Nottingham East)

We have discussed matters relating to the meaning of the word “Bank”, so we do not need to run through that discussion—[Hon. Members: “Hear, hear.”] Perhaps we do need to run through it again. If I have not convinced hon. Members, the power of my oratory is obviously as not as strong as it might be at this hour.

I find it strange that the Financial Policy Committee is missing from the list of organisations with particular responsibilities in subsection (5)(b). The clause is a prelude to the main Treasury power of direction, which the Treasury Committee was keen to see in the Bill. It provides a set of preconditions under which Her Majesty’s Treasury may exercise power and direction over the Bank of England. That is fair enough—I suppose it makes sense to try to define such circumstances and, essentially, fetter the Treasury, so that it cannot direct the Bank more frequently.

The Minister has set out in the clause three specific scenarios or circumstances in which the power of direction might be used. I want him to assure us that he genuinely believes that the provision has been drafted with sufficient breadth to capture hypothetical future scenarios. He has cast back and considered the circumstances of the most recent crisis and has imagined when such a power might have been necessary. In terms of the Banking Act and the implications for the FSCS, will the Minister reassure us that there is enough flexibility and breadth to capture future crises, in which the Treasury might need to have a power of direction, not least to safeguard public funds? The power could be in relation to any number of various crises that might occur. Is it wise to be as specific as he has been in the legislation?

I accept that the balance is difficult to find, because one has to ensure that there is some sort of check on the Executive’s ability to interfere with the workings of the Bank of England, but on occasion it may be necessary to interfere. That is my main question to the Minister, and I would be grateful if he could elaborate on that.

Mark Hoban (Conservative, Fareham)

We have, as the hon. Member for Nottingham East would expect, looked at the interventions that have taken place in the recent financial crisis to ensure that subsection (5) is as broad as is appropriate. Provisions such as

“the Treasury or the Secretary of State provide financial assistance to or in respect of a financial institution,”

have been drafted as broadly as possible. They will cover actual financial support, contingent liabilities and guarantees. There is a huge breadth, even in subsection (5)(a).

The reason why the FPC has been excluded from subsection (5)(b) is that we do not expect it to be a micro-prudential regulator; it is a macro-prudential regulator. However, the FCA will be included as a consequence of the amendment that we have already discussed.

Subsection (5)(c) has been drafted in a way that is not exhaustive either. The clause has been drafted as widely as possible to capture any foreseeable set of circumstances.

Clause 57 - Treasury power of direction

Chris Leslie (Labour, Nottingham East)

Clause 57 is more substantial than clause 56, which is essentially a paving set of circumstances, and the Minister feels that this is qualified sufficiently in clause 56. Clause 57 is in essence a countervailing power that was pressed for by the Treasury Committee in response to its concerns. Indeed, much of this part of the Bill has grown up around the power of direction that the Treasury will have over the Bank of England in circumstances where financial assistance might be necessary, where stabilisation powers in the 2009 Act might be relevant, or where an administration regime may be imminent.

The clause will not make powers of direction possible in circumstances of ordinary market assistance, and that is the crux of the clause. The Minister needs to give us a sense of what is meant by “ordinary market assistance”. There is a grey area between crisis scenarios and a scenario that may or may not amplify into a systemic question. It is difficult to know at the time whether a crisis afflicting one particular financial institution is sufficient to cause a domino effect across a range of other organisations, or whether it will be confined to just that particular organisation. Failure might be allowed and administration would be perfectly manageable, and that would be an issue of market failure. The power of direction might therefore not come into play.

I get the sense that there has been some detailed and convoluted negotiation between the Bank and the Treasury on the clause. I also get the sense that following the Treasury Committee’s intervention, there was a desire in those negotiations by the Treasury to ensure that accountability can be maintained and that a thread is present. It is an important thread, because ultimately the buck has to stop with the Chancellor of the Exchequer; that is correct. However, the Bank may have insisted on some of the other restrictions on the power of direction. Will the Minister define and elaborate on that?

Provisions in clauses 58 and 59 relate to the power of direction. It would be useful to get a sense of the definitions. Essentially, the power of direction is to be used only if it is necessary to tackle

“a serious threat to the stability of the…system”,

or if it is in the public interest to do so. A public interest test is applied as well. Those are two broad concepts. Is the provision justiciable? Could it be tested and defined by the courts? It is difficult to imagine a scenario in which the courts got involved to test the definitions. If there were a dispute about why a power of direction was not possible, presumably the Treasury would win out simply because it would be able to make a direction. It would therefore be open to the Bank to challenge it, and it would just be tough on the Bank if it did not want to challenge it in that way. I need to get a sense of the definitions that we are talking about, because they are quite slippery. Will the Minister assist?

Mark Hoban (Conservative, Fareham)

This is quite an important clause. It creates the Treasury’s new power of direction at the Bank. It responds to a recommendation made by the Treasury Committee. Under the provision, the Treasury will have the power, once certain criteria are met, to direct the Bank to use its crisis management levers in relation to one or more firms. The power of direction covers the Bank’s two primary crisis management powers. I will deal with the power that allows the Treasury to direct the Bank to use its stabilisation powers under the SRR. That would allow, for example, the Treasury to direct the Bank to put a particular failed firm into a bridge bank.

On Second Reading, my right hon. Friend the Chancellor of the Exchequer suggested that the power would allow the Treasury to direct the Bank to put a particular firm into resolution. I will clarify what that means in practice. The Treasury can direct the Bank to use a particular resolution option in relation to a firm where the PRA has determined that the Bank meets the test for entry to the special resolution regime. The power of direction does not cover the decision to trigger a firm into the special resolution regime. That, of course, rests with the PRA and not with the Bank, as we discussed earlier.

The second power is one that the hon. Member for Nottingham East focused on, which is the Bank’s provision of liquidity. That covers two things: general support for operations of the system as a whole and emergency liquidity support to individual firms. As part of its day-to-day operations, the Bank of England provides liquidity to banks. That is the purpose of its many market operations. It puts its own balance sheet at risk and makes decisions on normal events. However, there may be situations in which the system requires more liquidity to deal with the crisis of a particular type of liquidity. At that point, it may be the case that the Government provide indemnity for that liquidity, as happened during the financial crisis. We felt it was important that the Treasury had a power to ensure that emergency liquidity assistance was provided.

The challenge was reflected in “Back from the Brink”. My hon. Friend the Member for West Suffolk is not here to plug his own book, but let me plug the former Chancellor’s book. He said,

“My frustration was that I could not in practice order the Bank to do what I wanted. Only the Bank of England can put the necessary funds into the banking system; indeed that is one of the core purposes of a central bank.”

What we are doing here is seeing a crisis situation in which the Chancellor could instruct the Bank to provide liquidity assistance to the market or to a particular institution. We recognise that liquidity is one of the crisis tools. It can be used in a way that puts the Government’s balance sheet at risk, so it is important that the Chancellor, or the Treasury, has the power to offer that liquidity assistance. That is what subsection (2)(a) is intended to achieve.

Chris Leslie (Labour, Nottingham East)

That is partially helpful. Clearly the Treasury Committee had in mind the points made by my right hon. Friend, the former Chancellor, in thinking through the difficulties that would arise in practice, but in circumstances where, it may be imagined, there might have been disagreements about particular strategies.

I suppose that that is the backdrop to the point that we are making—the idea that we cannot simply rely on everyone agreeing naturally. Circumstances may arise in which the Bank of England and the Treasury genuinely disagree. Those disagreements might not be institutional, but might arise from the strongly-held views of individuals. In that case, it is important to make the lines of accountability clear.

It was helpful that the Minister clarified the Treasury’s power to direct a particular course of resolution, but not to trigger the necessity for that resolution in the first place. That is a sensible step. We would not disagree with that provision, because, from our perspective, it is important that that accountability should lie in the hands of the Chancellor, and through the Chancellor to Parliament.

We have discussed issues to do with clause 57, and different aspects of that important provision. We may discuss it further later, but I am happy with the points that the Minister has made about it so far.

Clause 58 - Directions under section 57: supplementary provisions

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 192, in clause 58, page 136, line 22, leave out from ‘Bank’ to ‘give’ and insert ‘must’.

The amendment relates to supplemental provisions, including consultation requirements in relation to the Bank of England. The Bill states:

“On being given a direction, the Bank may, if it considers it appropriate to do so, give the Treasury a report on how it is complying or intends to comply with the direction, and on such other matters relating to the direction as it considers appropriate.”

This is one of those provisions that I always feel is provocative to the Opposition: “Please come and amend this if you happen to spot it.” The Minister will not be surprised that we have tabled an amendment to leave out the ambiguity in the words

“may, if it considers it appropriate to do so”.

We feel that it is not unreasonable to provide that, in a situation where the Treasury has gone so far as to direct the Bank of England, the Bank must give the Treasury a report on how it is complying or intends to comply with the direction. I cannot see arguments for not requiring it.

I suspect that the provision is one that the Bank asked for to give it a little wiggle room in the to-ing and fro-ing in the relevant negotiations between it and the Treasury. However, as to the phrase

“if…appropriate to do so”

I do not understand why the Bill is drafted in such timid and coy terms. It seems as if the Treasury is stepping on egg shells, watching the Bank’s sensitivities and trying to spare its blushes.

It is perfectly possible for the Bank to be required to give a report on its compliance. Surely the Minister agrees about that. It would be a very strange dynamic, would it not, if the Treasury, having gone so far as to make that formal direction, had then to tease out information about whether, when and how the Bank would comply with it. It is a strange provision and it is inappropriate for it to be so vaguely drafted.

Sheila Gilmore (Labour, Edinburgh East)

Would my hon. Friend suggest in what circumstances it would not be appropriate for the Bank to report on whether it was complying? The words

“if it considers it appropriate to do so”

perhaps suggests that there are inappropriate circumstances.

Chris Leslie (Labour, Nottingham East)

That is why we need to wait for the Minister’s rationale. He must tell us why that is the case. I am getting to that moment imminently, but there are another couple of points that he needs to bear in mind on the amendment. There is a problem with parliamentary accountability, in that clause 59 requires any reports from the Bank under clause 58(3) to be laid before Parliament, but if the Bank decides not to publish a report, Parliament will not be able to scrutinise it, so there are downstream consequences for us. It is not only the Treasury that will not see the reports. There should be no grey area.

I hope that the Minister will accept the spirit in which the amendment was tabled. Perhaps he put the provision in the Bill deliberately to see if we spotted it—it would be good if that were the case—and we have spotted it. Can he really say that the clause is framed in the right way?

Mark Hoban (Conservative, Fareham)

It may be immediately obvious that the Bank has done it. If the Treasury’s suggests that Bank X goes into a bridge bank, and the news headlines say, “Bank X has Gone into a Bridge Bank”, we will know that it has done it. There may be some things for which compliance with the direction is so obvious that it is hardly worth the Bank telling us, because we all know that it has happened. One has to be careful not to have an unnecessarily bureaucratic mechanism.

The hon. Gentleman does have a point on what happens if a bank does not comply. We should think about whether the provision can be tightened to ensure a more automatic reporting process, which may be a comply or explain route or using “must”, but let us think about what the appropriate mechanism is to enhance transparency.

Chris Leslie (Labour, Nottingham East)

I like it when the Minister shows such thought and care for the amendments we table. It shows that he is occasionally a reasonable and thoughtful fellow—very rarely.

The Minister is right to say that the provision could be improved. I do not think that he needed to make the argument about things being so obvious, because I would be slightly worried if the Treasury only got its information from what it read in the tabloid newspapers or wherever. [Interruption.] That is true. My hon. Friend the Member for Islwyn said that we know what—

Edward Leigh (Conservative, Gainsborough)

I did not hear that.

Chris Leslie (Labour, Nottingham East)

My hon. Friend said that, such is the lax attention to proper etiquette towards Parliament, we know what is in tomorrow’s Budget from what we read in the newspapers.

Edward Leigh (Conservative, Gainsborough)

What is in tomorrow’s Budget?

Chris Leslie (Labour, Nottingham East)

Mr Leigh, I could hazard a guess that we might see changes to the top rate of tax and any number of changes to pensions tax relief, but such things are shifting around the deckchairs. It is important that we focus on the amendment before us.

Edward Leigh (Conservative, Gainsborough)

Otherwise, I will have to rule myself out of order.

Chris Leslie (Labour, Nottingham East)

It is tempting to speculate on the Budget.

We should not rely on news headlines to be the main conduit of information to the Treasury. Even a short handwritten note from the Governor, saying that we have taken an institution into administration or whatever it happens to be, would suffice. It would be proper to have a formal route.

I accept the Minister’s comments in the spirit in which they are intended. I was going to press amendment 192 to a Division, but I sense that he wants to look again at the issue. I am grateful to him for indicating that, so am happy to withdraw it. Let us hope that we will see something on Report. I beg to ask leave to withdraw the amendment.

Chris Leslie (Labour, Nottingham East)

I have a small point to make to voice our concern over the asymmetric dynamic between the Treasury and the Bank. We talked a little about that on amendment 192, but I want to press the Minister on another issue. Subsection (8) says:

“Each of the following must be in writing…a direction…a report under subsection (3), and…a notice revoking a direction.”

Why is that wording so different from the wording in clauses 54(7) and 55(5), which simply say a notification

“must be given or confirmed in writing”?

The provisions in clause 58 seem stronger. I do not understand why the initial communication in subsection (8) would not be possible orally, with subsequent confirmation in writing. Why are there different standards in different clauses?

Mark Hoban (Conservative, Fareham)

I am not entirely sure I understand the point. Under the clause,

“a direction…a report under subsection (3), and…a notice revoking a direction”

are all required to be done in writing, and the same is true of a notification under clause 55(3)—the same thing is happening.

Chris Leslie (Labour, Nottingham East)

My point was really about the fact that there are high standards in clause 58, but lax standards in previous clauses. I was just trying to get a sense of who on earth is holding the ring for consistency in the drafting of the Bill, but I will not labour the point, because we have said enough about the clause.

Clause 59 - Duty to lay direction etc before Parliament

Chris Leslie (Labour, Nottingham East)

The clause requires the Treasury to lay before Parliament a copy of a direction given under clause 57, which deals with the power of direction, as well as any reports provided by the Bank under clause 58 and any notices of revocation of directions.

We talked a little about some of those issues on amendment 192, but I am concerned that there is only a partial duty to lay documents before Parliament. The amendment was intended to tighten up the conditions on when the Bank should publish documents, but we also need to ensure through the clause that Parliament has access to details of any changes. Subsection (3) says:

“the Treasury…must from time to time review”

decisions, and it must publish documents if it decides that it is no longer in the public interest to withhold them.

It would also be helpful if the Minister could set out who will judge the appropriate frequency for reviews of such arrangements in the Treasury. Does he not think that these internal reviews, which will take place from time to time, should be published alongside the other documents, so that Parliament can see them? That would ensure proper transparency and accountability.

Mark Hoban (Conservative, Fareham)

Ultimately, responsibility for the frequency of the reviews and decisions will be with Ministers, and I think that is appropriate.

Chris Leslie (Labour, Nottingham East)

It is true that they will be the responsibility of Ministers, but I was trying to get a sense of the time scales the Minister was thinking about and what the frequency of the reviews would be, but it does not appear that much thought has gone into that so far. In general, it would be helpful if we tried to keep to the principle of having parliamentary accountability for as many of these things as possible. The Minister knows my feelings about the super-affirmative procedure for affirmative orders more broadly, but we should always err on the side of putting documents before the House of Commons and the House of Lords if possible. However, I have made my point.

Clause 60 - Duty of Treasury, Bank and PRA to co-ordinate discharge of functions

Chris Leslie (Labour, Nottingham East)

Clause 60 is crucial to the Bill. It places a duty on the Treasury on the one hand and the Bank and the PRA on the other, to co-ordinate the discharge of their functions. Again, it is a shame that the Bank of England and the PRA have been lumped together. It does suggest that there is always the overruling power of the Bank of England over the functions and activities of the PRA, so the co-ordination responsibilities have been framed in that way.

Will the Minister explain why there is not also a requirement to co-ordinate with the FCA? That seems the glaring anomaly in the clause. If the FCA is, as is believed, a slightly more independent entity, surely it is more necessary for that body to have a duty to co-ordinate, rather than leaving co-ordination to the Bank and the PRA. The Government amendments agreed earlier suggest that the Government were willing to look at involving the FCA a bit more thoroughly in the process of co-ordination when it came to the memorandum of understanding. However, they have not done so in clause 60. Will the Minister say why it was appropriate in earlier clauses but not this one? It is an important principle and I do not quite see the logic. As a result I am concerned about the clause.

Mark Hoban (Conservative, Fareham)

One assumes that these bodies will automatically co-operate. However, the Joint Committee recommended having a clause in the Bill that required the Bank of England group, which includes the PRA, and the Treasury to co-ordinate during a crisis. If there is a crisis, significant responsibility will rest particularly with the Bank and the Treasury. That is why the clause is drafted as it is.

We talked earlier about the FCA, as a micro-prudential regulator of small deposit takers—not as a matter of course—potentially having powers. That would be only for small institutions, whereas here we are talking about a major crisis. It is unlikely that the FCA would have a role in a major crisis, even if it were to take on some additional micro-prudential responsibilities. This situation is very much related to crisis. The section on crisis management responds specifically to a pre-legislative scrutiny Committee recommendation, which is why we have drafted it in that way.

Chris Leslie (Labour, Nottingham East)

Except that clause 60 does not specifically say that. It refers to the duties of those organisations

“to co-ordinate…as they…affect the public interest."

Of course, there is the overriding paragraph about the stability of the financial system, but the Minister has already accepted the principle that the FCA would be relevant in some circumstances. I do not see the harm in including the FCA in those duties to co-ordinate. What would be the harm in including the FCA?

Mark Hoban (Conservative, Fareham)

The problem is that the hon. Gentleman, as he demonstrated with his earlier amendments, does not get to grips with this issue. He thinks that in a crisis the FCA should be involved regardless, in the same way as he thought the FPC should be involved regardless. There is a clear limitation here. Subsection (2) talks about “public funds notification”. This is a very narrowly defined duty to co-ordinate.

I do not think that it is necessary to include the FCA, where there is an issue about the stability of the UK financial system arising from a widespread financial crisis. We have future-proofed the Bill elsewhere to take account of relatively minor situations where the FCA may have some micro-prudential responsibility for small institutions. It is unlikely that its powers will be relevant when a large bank or insurance company is under threat.

It is fair to respond to the comments of the pre-legislative scrutiny Committee. I have done so in the clause, and I think the right balance has been achieved. The hon. Gentleman would accuse me of being churlish if I did not accept that Committee’s recommendations from time to time. He needs to reflect on the fact that the FCA is not currently tasked with the safety and soundness of deposit takers and insurers. The big difference between us on the matter is that our future proofing takes into account a situation in which the FCA might be a micro-prudential regulator for banks or insurers—it is not—whereas the hon. Gentleman thinks that the FCA should be involved regardless.

Chris Leslie (Labour, Nottingham East)

It is a question of ensuring that the right people are party to the conversations so that they can contribute whatever benefits they might bring to the discussions. What harm would come from allowing the FCA to sit around the table in the co-ordination and discharge of these functions? I accept that it would not necessarily be a primary player in some of those considerations, but the Bill tasks it with responsibility for the efficient and effective functioning of markets, which is a pretty big responsibility that will have an impact on the public interest and might have an indirect impact on the stability of the UK financial system. Why keep the FCA outside in the hallway instead of allowing it in the room to discuss the matter?

The Government’s approach seems stubborn. The Minister has included the duty to co-ordinate in response to a recommendation from the pre-legislative scrutiny Committee, and it is an important concession. The clause could have been improved further, however, and perhaps we should have tabled an amendment to it. I assumed there would be some logical reason for the provisions, but there does not appear to be.

Mark Durkan (Social Democratic and Labour Party, Foyle)

Does my hon. Friend see some inconsistency in clause 60(2), which emphasises

“the importance of co-ordination in circumstances where the Bank has given, or is considering the giving of, a public funds notification”?

That brings us back to clause 54(1) and clause 55(2), where the Minister told us that there should not be prior consultation or co-ordination when he rejected my hon. Friend’s amendment.

Chris Leslie (Labour, Nottingham East)

That is another angle to the reason why we need to pause and look at the clause. Although the duty to co-ordinate is important, it would be wrong to let the clause pass with its current deficiencies. It is a question of the glass being half full or half empty, and unfortunately the glass is a little bit empty because the FCA is left out in the cold.

I do not see that any harm would result from the arrangement that I have suggested. The Minister justifies the rejection of that arrangement by saying that clause 60(2) specifically mentions the importance of co-ordination as a function of “public funds notifications”, but only the Treasury, the Bank and the PRA must have regard to it in such circumstances. The clause does not exclude circumstances where there might be a question of market function. I feel that the clause needs improvement, and I am not happy to see it stand part in its present form.

Clause 61 - Memorandum of understanding: crisis management

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 181, in clause 61, page 137, line 23, after ‘PRA’, insert ‘and the FCA’.

Edward Leigh (Conservative, Gainsborough)

With this it will be convenient to discuss the following:

Amendment 182, in clause 61, page 137, line 31, after ‘PRA’, insert ‘and the FCA’.

Amendment 183, in clause 61, page 137, line 35, after ‘PRA’, insert ‘and the FCA’.

Amendment 184, in clause 61, page 137, line 42, after ‘PRA’, insert ‘and the FCA’.

Amendment 189, in clause 61, page 138, leave out lines 2 and 3.

Amendment 185, in clause 61, page 138, line 4, after ‘PRA’, insert ‘and the FCA’.

Amendment 186, in clause 61, page 138, line 9, leave out paragraph (a).

Amendment 190, in clause 61, page 138, leave out lines 13 to 17 and insert—

‘(7) The memorandum is a measure prescribed by the Treasury by order which shall not be made unless a draft of the order has been laid before and approved by resolution of each House of Parliament.’.

Chris Leslie (Labour, Nottingham East)

I am sorry that the hon. Member for West Suffolk was unable to join us in that Division. He obviously has important business relating to tomorrow’s activities ahead of him. He has been allowed to go off and get on with those important activities, so Government Members have been left holding the fort on his behalf. As we know, he is an important fellow.

In a sense, this group of amendments develops some of the arguments we have made in previous discussions. Amendments 181 to 186 would amend clause 61, which addresses the memorandum of understanding on what would happen in certain circumstances in relation to a particular crisis. The amendments would, for example, insert “and the FCA” at line 23 so that the Financial Conduct Authority would join the Treasury in drafting and preparing a crisis management memorandum for such circumstances. We began to debate that a moment ago during our consideration of clause 60.

The collaboration between the Treasury, the Bank and the regulators is exceptionally important. The Government’s earlier amendments gave me the impression that the Government were beginning to see sense, but as the clause stands, although the Treasury, the Bank and the PRA may include in the memorandum provisions on co-operation between any of them and the FCA, the FCA has been given the power only to agree or not, so the FCA will not be party to the drafting process; that is a strange scenario. Again, I do not know why that situation exists. We believe that the FCA should be an equal party to the PRA in authoring, preparing and maintaining the memorandum of understanding, rather than merely having a veto on it; otherwise, there is a chance that risks to financial stability caused by disruption in financial markets overseen by the FCA could be given insufficient weight.

In the arrangements later in the clause, it is strange that certain bodies are able to say only whether they agree with the draft that the Treasury, the Bank of England and the PRA put before them. The Minister might take the view that a committee should not draft such things and that the memorandum of understanding should be drafted by the fine narrative that only one or two, or in this case three, bodies can provide, but that does not apply in this circumstance. It would be better and wiser to involve the FCA in crisis management preparations because we just do not know what type of crisis might be round the corner.

Again, I sense that the Minister has drafted the Bill always looking backwards to the scenarios that history has taught us. Yes, learning from history is important, but it would be foolish to preclude scenarios in which market failures might prompt certain crisis arrangements. Not to have the FCA in the room helping to author how the cogs in the wheel will operate in such a crisis scenario seems an incredibly strange decision on the Government’s part.

Amendment 189 is a probing amendment that would leave out subsection (4):

“The memorandum need not make provision about the relationship between the Bank and the PRA.”

There is again the sense that the Governor or the Bank of England took exception to the Chancellor’s concession that a memorandum of understanding is necessary in order to try to provide for circumstances in which a crisis might occur. In stamping its authority at this point in the Bill, the Bank appears to have drawn a line, saying, “Don’t you dare tell us how the PRA should interact with the Bank of England. It is a matter for us entirely.” That again suggests that the PRA is a creature of the Bank of England—if any subsection ever said such a thing, this is it.

We suggest leaving out that arrangement. It would be interesting to hear the Minister explain why the Treasury should not be able to detail some of the dialogue and contributions that the PRA might have to make in crisis management scenarios, and why the Treasury should not have powers to at least negotiate some detail on how that relationship would work. It plays to our suspicion that there is somehow an attempt to gag or suppress the PRA’s voice in a crisis, so that it must always be channelled through that of the Governor, as the only voice heard by the Chancellor at such times. It is a dangerous set of circumstances, and it would be better if the PRA’s voice could be heard in those scenarios. As we have only been able to interpret subsection (4) in that way, will the Minister explain his logic for arguing that the Treasury should not be able to make provisions about that relationship? Does it not prove the subservient nature of the PRA, and why we should be careful about muzzling the PRA’s voice in that manner?

Incidentally, it would be useful if the Minister took this opportunity to set out his understanding of the replacement procedures for the PRA’s departing chief executive. I am sure that he will not want to go into too much detail on individuals, but we have read in the papers that Mr Hector Sants is departing the organisation, and it is important to get a sense of when that appointment process will be resolved. Will information be provided at a future stage of the Bill?

Amendment 190 would leave out lines 13 to 17, inserting a replacement subsection (7). So far, all the clause does is insist that the Treasury lays a copy of the MOU before Parliament and

“publish the memorandum as currently in force in such manner as they think fit”.

Having conceded the affirmative resolution procedure for a number of other points—and I welcome the Minister’s change of heart in that regard, particularly on FPC order-making powers and so on—why not give us the opportunity for proper parliamentary scrutiny of that MOU? The Bill already provides insufficient accountability to Parliament in a number of different ways, and our amendment would be far more consistent with the parliamentary control of orders as previously set out in the Bill. The Minister will understand why we feel that such a change should be made, so will he at least consider our point?

Sheila Gilmore (Labour, Edinburgh East)

It will be during a crisis that it is proved whether this financial regulatory architecture is a success. Obviously, we cannot predict everything that might happen, but that does make these particular arrangements important. The Bill sets up a complex variety of organisations, as we have discussed at length, and splits functions that were previously within the FSA by creating different bodies, albeit all largely under the umbrella of the Bank of England. Several different organisations will have a role to play in the event of something going wrong, and getting that right is particularly important. How that is laid out, who takes the decisions and who talks to whom will be extremely important.

On Second Reading, there was debate as to whether we have a quadruple situation with several organisations of relatively equal weight advising the Treasury or whether we have what has been described as a twin peaks arrangement with the Treasury and the Bank of England, which encompasses the other organisations, and how that would work. If we simply have the two organisations—the Bank and the Treasury—there is a risk that the Bank will become much more important in the way that it relates to the Treasury. Would the Treasury have full information from all the different elements of the regulatory framework in order to understand what is happening and, most importantly, make the right decision in the event of a crisis? Much as we hope that there will be no crisis, it is essential that we get the arrangements right. Currently, the Bank of England could have internal disagreements on such matters, with the regulatory arms within it having different views on how to proceed. That will be dealt with internally by the Bank, and it will make a view known to the Treasury, but the Treasury will not necessarily—although it may do informally—have the full view of that internal debate between the different regulatory arms within the Bank.

At times during our debates, we have heard that such discussions are occurring anyway, so it does not matter whether we put them on the face of the Bill, because there will obviously be constant contact and people will know what is happening. At other times, however, such arrangements are specifically laid out. We cannot have it both ways. If it has been deemed necessary to lay down specific indications, such as in the clauses we dealt with earlier this evening, as to when notifications should be made, it is doubly important that the memorandum of understanding dealing with the most important decisions that the structure will make is outlined in full in order to avoid the risk of the Treasury not receiving the fullest possible information. The Bank may have its own internal discussions before coming to the Treasury, so the wrong decision might be made.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

I will be brief. I just want to raise a couple of points, and I hope that the Minister will respond. To put them in context, I want to return to an earlier debate on what would constitute material risk. I recall the Minister saying that that would be difficult to define. However, the explanatory note to clause 61 states that

“the memorandum must address: what the Treasury and the Bank regard as a material risk for the purposes of clause 55(1)”,

so, notwithstanding that it is actually quite difficult to define, the explanatory notes make it clear that that was the intention. There is another point I want clarification on in relation to the memorandum of understanding as outlined in the explanatory notes. It states:

“For example, the memorandum could include provisions about the regulation of a financial institution which might seriously affect diplomatic relations between the United Kingdom and a foreign country.”

Why is that specifically referred to in the explanatory notes and why does it say “could”? Will the Minister give us some examples of where he thinks that might be relevant? It is in the explanatory notes, so someone must have thought about it.

Mark Hoban (Conservative, Fareham)

Let us be clear: we want to move away from a situation where we have unclear and overlapping roles in crisis management. That was inherent in the tripartite system. The Bill sets out a new approach, which involves the Treasury being responsible for public funds and the Bank as a single point of accountability for financial stability. They are to co-ordinate together, rather than in a large committee, which was the method tried by the previous Government and which clearly failed. Our approach ensures clarity and a focus of communication.

It is clear that the FCA has no significant role in crisis management. To the extent that it needs to be involved in assessing a risk or evaluating options to resolve the risk, it can do so under the existing provisions and in the MOU. It is not a requirement for the FCA to be a full participant in the MOU. There is a risk that that would lead to it being involved in discussions and decisions where it lacked a clear role. There is a duty on the FCA and the PRA set out in new section 3P of FSMA, as inserted by clause 5, which emphasises the importance of regulators co-operating with the Bank on the Bank’s duty to notify the Treasury of risks to public funds. That ensures that, in the unlikely event of a potential risk to public funds arising solely from the FCA’s areas of responsibility, the FCA will inform the Bank, which enables the Bank to make a notification if appropriate.

The hon. Member for Nottingham East also talked about the need to have some provisions in the MOU for the co-ordination of the Bank and the PRA. I do not know where he has got this obsession from, talking about people gagging others, dominant force and brooking no dissent. I cannot imagine who he has had experience of in that role. [Laughter.] The purpose of the MOU is not to describe in detail how the Bank and the PRA will co-ordinate. It is for the Bank to determine how its various parts can co-ordinate most effectively. The MOU needs to focus on the relationship between the Treasury on the one hand and the Bank group on the other.

On parliamentary scrutiny, we have ensured that there is provision for the Treasury to lay before Parliament a copy of the MOU and any revisions to the MOU. That is a helpful way to ensure that there is accountability and scrutiny of the MOU. It will be a prerogative of the Treasury Committee, for example, to discuss the MOU and to understand how it works in practice.

The definition of material, which was raised by the hon. Member for Kilmarnock and Loudoun, is, as I have indicated, difficult. There is a requirement in the MOU to define it and that definition should be kept under revision. With that, I hope that the hon. Member for Nottingham East withdraws his amendment.

Edward Leigh (Conservative, Gainsborough)

I hope Mr Leslie will give us an idea of which amendments, if any, he wishes to press to a vote.

Chris Leslie (Labour, Nottingham East)

I will certainly do that, because there are quite a few amendments in this group. It would be churlish to divide the Committee on all six amendments, from 181 to 186, which would insert the proper role of the FCA from the memorandum of understanding on crisis management provisions into the Bill. We will test the Committee’s view on amendment 181, which will suffice as a way of pressing the point.

I disagree with the Minister’s view of the FCA’s role and the harm that would supposedly come if we allowed it to take part in the drafting of a memorandum of understanding. It would be entirely reasonably to allow it to be party to the drafting, rather than just having the memorandum presented to it. Okay, it has the power to veto or change things after the fact, but it is an awkward way to draft and design an MOU. Would it not be far more sensible, easier and more consensual to be party to that process in the first place? This rather convoluted provision of having organisations that get presented with the fait accompli and then have to say yes or no, but with almost no negotiation involved, is a strange way to draft a clause.

The Minister scoffs and asks why we should worry about the subservience of the PRA to the Bank of England. I do think it matters. The sentence

“The memorandum need not make provision about the relationship between the Bank and the PRA”

is an odd one to have put in the clause. Provision can be made, but need not be made. I cannot quite see what subsection (4) brings to the party. It is an entreaty to say, “Don’t intrude too much on to our terrain.” It is a very “get your tanks off our lawn” subsection, given that that lawn is now expanding. We have heard about Threadneedle street and the vast expense of the new offices at Moorgate. One gets the sense that an empire is beginning to be built, and the manifestation of that is in subsection (4).

I disagree with the Minister’s position on use of the affirmative procedure for the MOU. He should have conceded that particular change, which would have done no harm, given the importance of the matter. He knows that there are differences of opinion and, therefore, that the threshold for scrutiny is much higher for that memorandum of understanding. I will, therefore, press amendments 181 and 190 to a vote. Reluctantly, I will not press the other amendments in the group, not because they are insubstantial or insignificant, but for the sake of brevity and to ensure that we have an efficiently run Committee stage.

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 187, in clause 61, page 137, line 36, at end insert

‘and set out draft standing orders of an ad hoc Stability Committee’.

This is another quite important amendment in relation to the memorandum of understanding. The issue came up on Second Reading and relates, in particular, to paragraph 20 of the draft memorandum of understanding on crisis management from the Treasury—a copy of which I am sure members of the Committee will have—which states:

“During a potentially fast-moving crisis, it will become especially important to ensure close and effective co-ordination so as to maintain coherence in the overall crisis management process. At the heart of institutional coordination during a live crisis will be frequent contact between the Chancellor and the Governor. However, the Chancellor and the Governor may agree to establish ad hoc or standing committees at other levels to support this process.”

The memorandum of understanding recognises that some level of formality of a committee or sub-committee structure to work properly through a series of decisions in a crisis management scenario might be necessary. However, there is no detail of those ad hoc or standing committees throughout the rest of the document. Such matters are left opaque and dangling in the air. They are not properly resolved, and presumably will be left on a dusty shelf until such time as we have a crisis and the document has to be brought off the shelf, dusted down and on we go.

The amendment would ensure that the MOU has more particulars of the constitution of the arrangements to resolve a particular crisis. Obviously, we believe that there is a strong case for setting out the draft orders on how the ad hoc meetings would take place and what sort of arrangements would exist. Whether it were called a stability committee, as we have suggested, or however it were termed, it would be important to capture an arrangement so that in preparation for the emergency plan, we would know details of how that co-operation would be thought through before a crisis erupts rather than its being cobbled together in the heat of the situation.

If Ministers started tearing their hair out, saying, “My God, there is a crisis happening. This is dreadful. Let’s set up a series of ad hoc committees quickly,” I am sure that capable and diligent civil servants within the civil service machine would be able to supply answers readily and do so with great success. However, I worry that that might take some time, so it would be preferable if such arrangements were settled as far as possible ahead of time. It is a dusty area of the policy. While emergency planning and preparedness is not something that often hits, after the fact people will always say, “Why didn’t you think about this before the situation arose?” We should take stock now and take the opportunity to deal with such matters, or at least require the participants in the drafting of the MOU to set up more specific stability committee or ad hoc committee arrangements so that the standing orders are clearer. That is the logic of the amendment.

Mark Hoban (Conservative, Fareham)

I do like the idea of a stability committee. It reminds me of the council for financial stability under the Financial Services Bill, prior to the general election. It could be the tripartite committee, the quadripartite committee or the bipartite committee. I wonder whether working out what the standing orders are for a committee is the best use of time. The MOU is there to facilitate how the organisations would work during a crisis. Trying to recreate failed models of the tripartite committee or the council for financial stability will not do it. We have seen how they failed under previous regimes, and we do not want to repeat those mistakes. Yes, there may be times when ad hoc groups need to get together, but let us not try to recreate the failed models of the past.

Chris Leslie (Labour, Nottingham East)

That is a wholly unsubstantial response from the Minister. He has a totally complacent attitude to what ought to be his duty as a Minister: to take preparedness properly into account, though not here in the Committee. We are just saying that in the MOU, he should ensure that the organisations think about how things would work. He infects his argument with a sort of partisan nonsense, saying that we are attempting to resurrect the old tripartite committee arrangements; not at all.

I am quite happy to accept that we have a new architecture and a new set of structures, with the PRA, the FCA and others playing their particular part. All I am saying is, rather than waste time when the proverbial difficulties hit the fan, why not at least commission the players, with all their vast capabilities ahead of time, to think about how such things are done? One could argue that that is part of the scenario planning of how such arrangements might come to pass, and I just think that it is worth doing.

I am sorry that the Minister takes such a dismissive attitude to emergency planning and preparedness; after all, I thought that that was the point of the MOU and the whole section of clauses before us. He gets us right to the brink in paragraph 20 of the MOU, and then falls short and does not detail any aspects of it. I am afraid that it is necessary to press the point. Amendment 187 is necessary.

Chris Leslie (Labour, Nottingham East)

I beg to move amendment 188, in clause 61, page 137, line 40, at end insert ‘and ensure that the Governor and all Bank of England Deputy Governors and the Chief Executive of the FCA may consult with the Treasury directly.’.

Clause 61 will make a number of changes where we believe that the voices of the Governor, the deputy governors and the chief executive of the FCA should be more explicitly and clearly heard by the Chancellor of the Exchequer. We are seeking to amend clause 61(2) to add a further point to the provisions of the memorandum. In particular, it should ensure that the Governor, all the Bank of England deputy governors and the chief executive of the FCA may consult the Treasury.

We have already voiced our concerns about the concentration of power in the hands of the Governor, so it will not surprise the Committee when I say that relying on one person’s opinion is not the best way to proceed when so much rests on it. The amendment would ensure that the deputy governors or the chief executive of the FCA can have their voice heard by the Chancellor if they have concerns. That might be especially relevant if the Governor does not share their view, and it is easy to envisage such a situation.

Such an amendment would benefit the Government of the day and the Chancellor, not Her Majesty’s Opposition. We simply seek to ensure that as many voices as possible can be heard and that there is no doubt that they will be heard clearly, particularly if there is a difference of opinion. As the Bill stands, there is a risk that the Governor might not judge it appropriate to inform the Chancellor that a deputy governor or the chief executive of the FCA, or indeed both, believes there is a material threat to stability or the use of public funds. If the Governor, for whatever reason, makes a personal judgment to dismiss their views in the belief that there is no such danger, the Chancellor will not hear those important voices. It is not beyond the wit of man to imagine such a scenario, and the amendment would address it.

In the current situation, the Chancellor hears from the head of the FSA, Adair Turner. Under the new system and the memorandum of understanding, he will hear from no one other than the Governor. I therefore have to ask again whether the Minister is not in the least concerned that the current drafting of the MOU might not only prevent the Chancellor from hearing such important voices in a crisis, but undermine important relationships and create tension between key post holders in the new regulatory architecture. Would there not be a greater likelihood of leaks if certain people felt they could not voice their concerns to the Government and that leaks were the only way to get information out? We have already seen in the Budget process that leaks often occur on financial policy, and it would be a shame if we ended up instituting a set of circumstances that made that worse.

To help ensure that the right voices are heard at the right time in a crisis, we should enshrine in the Bill a provision to ensure that the deputy governors and the chief executive of the FCA have a right to voice their concerns to the Chancellor of the Exchequer.

Mark Hoban (Conservative, Fareham)

We come back to the hon. Gentleman’s obsession with dominant figures preventing any dissent from emerging from an organisation. Not every institution works like that. It is clear from existing dialogues between the FSA and the Treasury, and between the Bank and the Treasury, that there is quite a lot of interaction at all levels. Whether we are talking about Ministers and the Governor and deputy governors, or Bank of England officials and Treasury officials, that engagement and openness are there, so the amendment is not necessary.

The hon. Gentleman seemed to suggest that the Bank of England means the Governor, but it does not; in the Bill, the Bank of England means the Bank of England. The question whether the use of public funds is appropriate is not a matter for the Governor’s personal opinion; that is completely irrelevant, because it is for the Bank to notify the Treasury of a risk. As clause 54 clearly sets out, it is the Government’s opinion that matters. As soon as the Bank is aware of a risk of circumstances arising in which the Government might reasonably be expected to consider it appropriate to use public funds, the Bank must notify the Treasury immediately. So it is not a matter of the personal opinion of a Governor or deputy governor. It is about whether they believe the Government might be reasonably expected to consider it appropriate to use public funds.

I noticed that the hon. Member for Nottingham East did not talk about this issue much in his winding-up speech on Second Reading, but he has suddenly been gripped by new enthusiasm. Perhaps he feels the need to please his boss at the moment, who I can imagine is a dominating figure who brooks no dissent.

Sheila Gilmore (Labour, Edinburgh East)

I have several times heard the Minister say that the Bank of England is a legal personality in its own right, which is of course the case. However, the Bank cannot be a single voice in that sense, or, if it is to be one, surely that will be in the actual person of the Governor; otherwise it is not clear how that voice will be expressed.

Mark Hoban (Conservative, Fareham)

There is a court, the Governor, and three deputy governors. There is a range of forums in which the Bank’s view can be determined and expressed. It does not require an individual to reach that conclusion. There is an undue obsession with personalities in the debate and a failure to recognise interaction that takes place at a practical level between institutions.

Also, the reality is that the duty to make the notification is imposed on the Bank, not an individual. Hon. Members should not lose sight of that fact.

Chris Leslie (Labour, Nottingham East)

I am sorry that the Minister feels he can fudge the issue in that way, by saying that the Bank means the Bank, and therefore the Bank will do what it is going to do. Signatures are necessary on orders and decisions. Individuals and their posts in the Bank are clearly important. The Minister is the one who is creating a new deputy governor for prudential regulation. Therefore it would seem perfectly reasonable to ask whether that deputy governor will have the right to have their voice heard, even if that is in contradistinction to that of the Governor of the day. It is not clear whether that will be so. One can only hope that we will have a very relaxed Governor, who will delegate decisions and be happy to allow dissent, or differences of opinion. That is not necessarily something that we can always bank on.

Fabian Hamilton (Labour, Leeds North East)

On that point about the Governor and the obsession that the Minister claims the Opposition have with the Governor’s power, does my hon. Friend accept that the Treasury Committee, in its 21st report of the 2010-12 session, “Accountability of the Bank of England”, agrees with Opposition Members? It said that it wanted a stronger supervisory board, because it was concerned about the concentration of power in the hands of the Government without it. Indeed, one of the Members who called for it is a member of this Committee—the hon. Member for Hereford and South Herefordshire.

Chris Leslie (Labour, Nottingham East)

My hon. Friend is right. We tested this discussion in clauses 2, 3 and 4, and elsewhere in the Bill, and we did not manage to get a supervisory board to create that better balance of accountability and power in the Bank of England. Perhaps we shall come back to that later, but I do not think it is unreasonable to clarify the point and allow those voices to be heard. It is important that we do not just assume that the pragmatic realities of dialogue will just follow their natural course, everyone will get on swimmingly, and of course the Governor will allow dissenting voices or differences of opinion to be heard. We know that organisational structures tend sometimes not to work in that way.

I hope that that is how things will work, and the Minister may be very relaxed about the circumstances, but we will probably have a new Governor of the Bank of England by the time the measure is enforced in large part. We do not know who it will be, their character, how they are likely to govern or what sort of management systems they will put in place. We will have to keep our fingers crossed and hope that they are relaxed and collegiate, or we could ensure that that is the case by making provision for it in the Bill. That is the intention of the amendment, which it will be important to press to a Division.

Mark Durkan (Social Democratic and Labour Party, Foyle)

It is a pleasure to serve in Committee under your chairmanship this evening, Mr Leigh.

I fully understand the arguments made by my hon. Friend the Member for Nottingham East about the deficiencies of clause 61, but I am not persuaded that the amendment will resolve them; in fact, it might create more difficulties. If the memorandum of understanding is to deal with crisis management, I am not sure that making a general provision for the Governor, all the deputy governors and the chief executive of the FCA to be able to consult the Treasury directly would necessarily make that crisis management easier. If the MOU makes such a provision, does that mean that the Treasury has to check with all the deputy governors and the head of the FCA each time that it hears from the Governor, or that the deputy governors or the chief executive of the FCA can at any time make speculative inquiries of the Treasury about what the Governor tells it? We have talked about the need for certainty during crisis management, and I am not sure that the amendment would fine-tune the process of crisis management; I think it would add to the uncertainty.

If I support the amendment, I would contradict my position on previous amendments. I backed an amendment which stated that, if there was disagreement between the Monetary Policy Committee and the Financial Policy Committee, the Governor would be charged with reporting such disagreement to the Chancellor; it also related to how that disagreement was resolved. Having supported an amendment to vest such a clear power in the Governor to communicate to the Chancellor on behalf of the Bank, it would be contradictory for me to argue that, in the dire exigencies of crisis management, there could be a free-for-all on communications with the Treasury. I am not sure that the amendment would lead to certainty. It would not help the roles of the people named in it and it would not positively improve the Treasury’s position.

Chris Leslie (Labour, Nottingham East)

Hopefully we can find a way to cool the room down—or perhaps we can keep the door open—because the heat of our debate has given a sauna-esque feel to our proceedings. Fortunately, I like to run warm, and it is heartening to have such a sense of support from so many Committee members.

The clause relates to the crisis management MOU, which is a key concern in the Bill that was discussed at length on Second Reading. During that debate, my right hon. Friend the shadow Chancellor pressed the Chancellor several times on the danger of leaving the matter of communicating a material threat to stability and the use of public funds exclusively to the Governor’s personal judgment. The Government have given some ground through their amendments 98 to 100 by including the FCA in the list of organisations that relate to notification and when the Treasury might reasonably expect to incur expenditure. We remain concerned, however, that the Bill falls short of allowing the deputy governors to be heard, which was why we tabled amendments. These are important matters. The Government are creating new and additional regulators. They must accept that the internal wiring between regulators will be made more complex by additional numbers of such bodies. They must properly address how those bodies will interact in a crisis situation.

Opposition Members are not convinced that the memorandum of understanding, which we have seen in draft form, will be sufficient. Improvements could be made to the MOU, not least through proper scrutiny of the provisions in Parliament. The Bill would have been improved if the Minister had allowed the affirmative procedure to apply to the adoption of the memorandum. He has already dismissed the notion that there might be disagreement between the deputy governors and the Governor. He regards that as a minor point with which we should not concern ourselves, but the memorandum of understanding must deal with that properly.

Paragraph 37 of the draft MOU states:

“Treasury Ministers are responsible for keeping Parliament informed of action taken to manage a financial crisis—including action taken by the Bank without any public funds implications. The Bank will keep the Treasury informed to the degree needed for Ministers to fulfil this function.”

Is not the Minister nervous that the Bank might keep him informed only to the degree that it sees fit? Would it not be more appropriate for him to have full knowledge and facts, rather than only those that the Bank chooses to give him?

I should be grateful if the Minister would explain why the explanatory notes are out of kilter with the clause’s current drafting. There are either typos or mistakes in them; they seem to refer to clause 59 duties when I think that they should refer to clause 60 duties, for example, and they refer to section 55 notifications when I think that they should refer to section 54 notifications. [Interruption.] My hon. Friend the Member for Kilmarnock and Loudoun agrees—she has spotted similar problems. Perhaps I have misread the explanatory notes, but is the Minister willing to accept that a corrected version needs to be issued?

Mark Hoban (Conservative, Fareham)

With respect to clause 61, we need to bear in mind that the Treasury’s engagement is when public funds are at risk. We seek to create clarity. Yes, it is important that the Bank notifies the Treasury as appropriate when it has resolved a situation without recourse to public funds but, clearly, the information required will vary between circumstances. The alternative would be to go into immense detail in the MOU about the amount of information that should be provided, and it is not clear that that is necessary.

The hon. Gentleman says that paragraph 37 of the MOU suggests that the provision of information would be based on the opinion of the Bank, but that is not right. As the Treasury reports to Parliament, the Bank needs to give the Treasury sufficient information for the Government to be accountable to Parliament. It is not about the Bank’s opinion; we need sufficient information from the Bank to enable Parliament to hold us to account so, in terms of disclosure, the obligation is on the Treasury, not the Bank.

We will look again at cross-references in the explanatory notes and, if necessary, revise them in the other place.

Chris Leslie (Labour, Nottingham East)

I am grateful to the Minister for that. The explanatory notes could have been more helpful generally throughout our consideration in Committee. Running into such typographical errors makes them difficult to navigate, but that is a minor point, and we have more general concerns.

The Minister knows that we have worries about the inadequacies of the MOU provision. Although we agree that, of course, an MOU on crisis management is necessary, it is framed in such a lax manner—without proper definition, without clarity on how the ad hoc committee arrangements in paragraph 20 will work, and without an opportunity for Parliament to approve it though a statutory instrument—that it is necessary, given that this is an early stage of the Bill’s passage, to send a message that this is a failure. We therefore cannot support clause 61.

Clause 62 - Memorandum of understanding: international organisations

Chris Leslie (Labour, Nottingham East)

We now get to some difficult and complex aspects of the Bill, and there is one issue that hon. Members will know has significantly exercised me and some organisations. Clause 62 relates to how international organisations should co-ordinate and collaborate with domestic UK regulatory players, and a significant number of City firms and financial services practitioners, along with other observers, have raised major concerns about the new structures proposed in the Bill.

The Committee will recall my general thesis that before the general election, when the Chancellor of the Exchequer was looking at how to apportion blame for the global financial crisis in a way that would pin it on a particular previous Administration, he decided that the way to do so would be to pour opprobrium on the Financial Services Authority. Splitting the FSA into conduct and prudential regulators was his approach. The fact that he designed such arrangements in opposition meant that he neglected, perhaps accidentally, to try to integrate the new structures with the European supervisory arrangements, which are motoring ahead in the way they regulate this country’s financial services institutions. Whether it is Commissioner Barnier and his pipeline of directives and regulations affecting the conduct and regulation of our financial services players, or whether it is the European Banking Authority, the European Insurance and Occupational Pensions Authority or the European Securities and Markets Authority, they all have a locus over our domestic regulatory arrangements. In a number of ways, they can overrule many of the decisions of the domestic structures that we are spending so much time constructing. Several organisations have therefore said that that Bill needs to be amended to reflect that situation and to address the mismatch.

The draft Bill was rightly amended by Ministers to require that the international co-ordination MOU should be established with a committee under Treasury chairmanship and reporting to the Chancellor, and with FCA, PRA, and Bank membership, with the aim of agreeing consistent objectives and effective international engagement. Clause 62 goes some way towards doing that. That proposal was called for by the pre-legislative scrutiny Committee, and it is one of the areas in which the Government have decided to take some action.

The Treasury Committee’s 28th report, which was published on 27 February, also raises concerns. It states:

“A Memorandum of Understanding is unlikely to be the appropriate method to establish the basis of co-ordination between the PRA and FCA in respect of their seats at the EBA, ESMA and EIOPA”—

those letters sound like something from Old MacDonald, but I gather that usual pronunciation of the acronym is such as to avoid the titters that might be caused by spelling it out. The report continues:

“We recommend that the Government consult on the appropriate level of co-ordination and set this out in secondary legislation in order to ensure both adequate scrutiny of the basis on which the two regulatory authorities will co-ordinate, and legal clarity about how they should do this. We further recommend that the Treasury take steps to ensure that the impending change to the FSA does not lead to a fragmentation of UK representation in the EU, and that the UK’s market position in the provision of European financial services be given an appropriate level of consideration within each of the ESAs”

or supervisory authorities. That is a tremendously important recommendation from the Treasury Committee, which I commend for its prescience. I hope that the members of that Committee agree that secondary legislation needs to set out an appropriate level of co-ordination, and that steps need to be taken to ensure the impending changes at the FSA do not lead to a fragmentation of UK representation in the EU.

Specific queries have been raised about the drafting of clause 62. There are concerns about disparities between subsection (1), subsection (6) and section 3E(3) of the consolidated FSMA, in terms of how the memorandum intends to co-ordinate a number of organisations. Some references are to co-ordination with the European supervisory authorities, EU and other international institutions, while others simply mention the European supervisory authorities. Elsewhere, there is specific reference to the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority. For the sake of clarity, will the Minister say which organisations will fall within the ambit of the memorandum of understanding for international organisations, as the Bill is specific in some parts but not others?

The memorandum is relatively thin on detail. The clause states that the memorandum must make provision for

“a committee for the purposes of the co-ordination mentioned in subsection (1)”.

The MOU itself, as set out in “A new approach to financial regulation”, the Command Paper published by the Treasury, states:

“The Committee shall be comprised of officials from the UK authorities and shall be chaired by the representative of Her Majesty’s Treasury. The Committee may invite representatives of other bodies to attend its meetings.”

Will the Minister shed some light on how many authorities are likely to be on that committee and how many officials are likely to be involved? He has already expressed concern about committees becoming unwieldy, large and difficult to co-ordinate. We need clarity: are we talking about five, 10 officials? What scale of committee are we talking about? Surely the Minister would agree that that should be more precisely detailed in the MOU? More importantly, should not all of these adjunct details about membership of the committee also be outlined? For example, how will it be decided which officials should sit on the committee? Who will decide which officials are included and how long they will sit? How will the committee decide which other representatives attend meetings and so on? I do not feel we have a sense of who is in the room for this committee and how it will operate. We need more clarity on how it will work.

Subsection (5)(e) states that the memorandum must make provision

“about how the UK authorities will consult each other about the discharge of their relevant functions relating to international organisations.”

The MOU highlights the principles of openness, co-operation and coherence and lists seven high-level methods, describing what should be done around sharing information, keeping other authorities informed, consulting other authorities and so on. However, there are no concrete terms explaining how that would be done. At least two organisations, TheCityUK and the CBI, in their September briefings on the Bill, suggested that the international co-ordination committee would benefit from a joint secretariat, staffed by members from different regulatory bodies. In evidence submitted to the Treasury Committee, Aviva said:

“We believe that there may be merit in setting up a forum or secretariat in relation to EU and international engagement. A forum or secretariat could help co-ordinate strategy and support activity by the regulatory actors (but should not be a barrier to action).”

In support, Aviva quoted the recommendations by the IMF in its Financial System Stability Assessment of the UK, published on 1 August. It recommended that the UK ought to

“establish a forum for ensuring good governance and coordination among organizations in the new regulatory structure.”

I am sure the Minister will want to agree with the IMF. Even it has spotted that there is a potential problem with co-ordination issues and the mismatch among the European arrangements.

Generally, the Minister will know—we have discussed this on many occasions in European Scrutiny Committee B —the importance of exerting a strong British voice when it comes to European regulations and taking the opportunity to steer and shape where the regulatory agenda goes at a European level. I am honestly growing tired of reacting post hoc to a whole series of regulations as they flow from Europe, with Ministers saying, “We are going to try and fix this particular issue; we will go and negotiate for a concession here or there,” rather than getting in the driving seat and making sure that we are promoting the British model of regulation, which we ought to believe is superior. If the Minister feels that we have the superior system, he needs to show leadership and make sure that the European arrangements follow suit.

I have anxieties, as we have discussed previously, about various circumstances. I have heard that the PRA and FCA players will have to swap seats in certain meetings, in certain circumstances, to voice various views. That can cause great difficulty, so it would be useful for the Minister to address those issues. Does he agree that it would be of immeasurable value if we could also co-ordinate and facilitate a flow of information between the members of the committee, the UK authorities and other interested parties? Can he explain who will undertake the co-ordination function and how co-ordination will happen if we do not have the establishment of a secretariat for international co-ordination in clause 62 or in the MOU? There is a strong set of arguments in favour of a secretariat to undertake that. We need to have a standing set of characters who will co-ordinate that particular function rather than expecting everything to happen voluntarily at committee level. Will the Minister comment on that?

In its March 2012 briefing on clause 62, the ABI made the following comments:

“The Treasury has published a draft of the MoU. We are concerned that this focuses entirely on the interaction between the UK authorities.”

I know that my hon. Friends are also concerned about that.

“We believe that it should also cover consultation with stakeholders. Given the importance of international (particularly EU) rules it is vital that stakeholders are involved as early as possible in discussions”.

People are concerned about that. It is not just about co-ordination between the regulators themselves, but ensuring that there is some insight for the organisations that will be affected by the regulation—the practitioners, consumer organisations and so on. We have very complicated lobbying arrangements for European decisions. Currently we have great costs that are borne by practitioners in the sector and by industry bodies in making representations to the European Parliament or to the European Commission. It would be far better to have a sort of clearing house for those views. We could have our regulators making sure that they are doing the right thing. We would get a little more unity and a bit more co-ordination here in the UK, and we would punch our weight properly in those important forums. Will the Minister comment on that co-ordination?

Fabian Hamilton (Labour, Leeds North East)

I want to add something that is quite important to what my hon. Friend has been saying. The ABI made the point that,

“we have found in the past, for example in the Solvency II negotiations, that the best results are obtained where the UK authorities and stakeholders are able to agree a common UK line”.

Does my hon. Friend agree with that?

Chris Leslie (Labour, Nottingham East)

Yes. Indeed, that is the point that we need to make. It would be useful to involve stakeholders and ensure that those players felt that they knew what was going on. That common UK line is quite an important point to stress. If it were possible to get that more clearly it would be of great value.

The British Banking Association has also voiced its concerns about this issue. It says:

“We believe that it is in the interests of the UK to act in partnership with other Member States through the European Banking Authority and the European Systemic Risk Board”.

Again, that is something that is not necessarily mentioned in other parts of the clause. The ESRB is obviously quite an important layer in this set of very complicated European supervisory structures. The BBA says that is needed

“to make the case for flexibility in specific areas of the rule book—as it is envisaged by the CRR in relation to risk-weightings attached to residential mortgage lending.”

The City of London voices concerns, as do the CBI, Barclays and others. I will not read out all those quotes. Given the changes within the memorandum of understanding and given the concessions that the Government have already made on this, it seems that they are beginning to recognise the deficiencies in the Bill and this particular architectural arrangement. Surely we should have a review and consider the effectiveness of this approach at some point. What does the Minister envisage will be the opportunities to take stock of the effectiveness of this international co-ordination arrangement? Will we be able to have a stocktake of these arrangements? Those are my general thoughts on clause 62 and I look forward to hearing what the Minister has to say.

Mark Hoban (Conservative, Fareham)

This is one of those moments where one rather feels that most of the arguments have been made in earlier debates. Let me therefore restrict myself to some of the things that the hon. Gentleman said that are new.

Edward Leigh (Conservative, Gainsborough)

Yes. I would not want the Minister to indulge in tedious repetition.

Mark Hoban (Conservative, Fareham)

No, and that is not my objective. The hon. Gentleman asked about musical chairs and rotating votes. It is clear from the MOU which of the UK regulators is represented on the European regulatory bodies. We have drawn the hon. Gentleman’s attention to that before. He asked about membership of the Committee, including representatives of the Bank, the PRA, FCA and the Treasury. We cannot set out in advance exactly who will attend various committees and from which organisations. That will depend on the agenda. So we will have the right person in the room at the right time. Which bodies is covered by the MOU. Paragraph 6 sets out the scope and annexe A provides the current list.

The hon. Gentleman asked why ESAs are spelled out in subsection (2) but not in subsection (6). It is quite straightforward. Subsection (2) defines the term “European supervisory authorities” for the purpose of clause 61 as meaning EBA, EIOPA and ESMA. Subsection (6) uses the term “European supervisory authorities”, which is defined in subsection (2). That is all fairly clear. The bodies other than the ESAs are dealt with in subsection (5)(a), which refers to other international organisations of which it is a member or with which it has relations and which are concerned with matters related to its relevant function.

The hon. Gentleman talked about engagement. He was absolutely right: there is a need for engagement with industry. So, for example, I met the executives of insurance companies together and singly to talk about solvency II. We convene industry groups on a dossier-by-dossier basis. So we engage with the industry and we talk through their concerns.

I think that stipulating in an MOU who should be consulted and when is not necessarily appropriate given the diversity of matters raised through European dossiers. The reality is that the European Union has decided to set up three bodies on a sectoral basis. The UK has decided to do it on a conduct-of-business and prudential basis. Other member states have different arrangements. There is no single model across Europe. The key thing is to ensure that we engage, as we do, effectively not just with the ESAs but with the Commission and the European Parliament.

Chris Leslie (Labour, Nottingham East)

I am sorry that the Minister did not address some of my concerns about the nature of the officials taking part and adjunct details about the membership of the relevant organisations. He did not really flesh out where we were with the secretariat recommendation and how that would be taken forward, or state whether he would concede that a review of how that will work is necessary. I had assumed that he would say, “We will keep all those questions under review as best we can,” but he did not. I am concerned about how effective the clause will be.

Mark Hoban (Conservative, Fareham)

I hope that the hon. Gentleman has read the memorandum of understanding. It states that that will be reviewed annually, or more frequently if needed.

Chris Leslie (Labour, Nottingham East)

That is very helpful to have on the record. I apologise, because I must have missed that section—[ Interruption. ] The Government Whip had spotted it; he is obviously on top of the Bill’s detail in a far more effective way than am I—[ Interruption. ] I can tell that that idea has a measure of support from his colleagues, but I doubt that that is actually the case.

I have my misgivings about the clause, and I suspect we will want to return to it at another time. I am not convinced that it fully addresses our concerns, but I will not press the point at this late hour, because we have had a good opportunity to voice some of our concerns.

Clause 63 - Interpretation of Part 4

Chris Leslie (Labour, Nottingham East)

This is a fairly straightforward clause, which simply talks about the interpretation of some of the measures in part 4. As the Committee knows, the Opposition have significant concerns about part 4, because we do not believe that the provisions for collaboration between the Treasury, the Bank, the FCA and the PRA have been framed in the right way. The clause simply defines terms such as “public funds notification” and “financial assistance”, however, so it is difficult to object to it.

Clause 64 - Cases in which Treasury may arrange independent inquiries

Chris Leslie (Labour, Nottingham East)

Part 5 deals with inquiries and investigations, which will be of concern to hon. Members who have been party to debates about failings regarding regulatory matters that have not been dealt adequately with by regulators. I can think of a number of cases—such as Arch Cru, which has been debated in the House recently—and other arrangements where consumers have felt that there was significant failure among the firms involved, and that inquiries should be held into what went wrong in certain corporate arrangements. That is particularly relevant to those of us who have concerns about the impact of the failure of financial firms on consumers, including our own constituents.

Clause 64 details a number of cases in which the Treasury may arrange independent inquiries. We welcome the strengthening of regulatory bodies’ ability to commission inquiries when the interests of consumers and the wider economy have been endangered, so we support the intentions behind clause 64. We would like to place on record some concerns about the clause, however. For a start, it states that the Treasury “may” commission an inquiry if it considers

“that it is in the public interest”.

The wording is interesting. Does the Minister envisage the Treasury applying some form of public interest test? If so, what form does he think that test might take? The question is about what triggers an inquiry or investigation. Will the Treasury set out some sort of decision logic to establish when a public interest test would be applied? The clause appears to suggest there will be a set of circumstances—or will the need for an inquiry simply be left to ministerial discretion on a case-by-case basis?

It would be helpful to have a little more clarity on when public interest might kick in in such circumstances. Does the Minister agree that the use of the word “may” in line 30 of page 140 might lead to an unhappy situation in which the Treasury believes an inquiry to be in the public interest yet fails to commission one? We need to ensure there is clarity on that point.

I would also be grateful if the Minister were to place on record how he imagines the Treasury’s decision-making process for setting up an inquiry will work. What role will the Chancellor play? I am sure the Minister will agree that an inquiry should be a shield against future instability rather than a political weapon, but we need to know what constraints will be on the Chancellor of the Exchequer’s shoulders or, indeed, the Minister’s shoulders, because this is one of the few issues that the Chancellor might delegate to him. Therefore, how will that be framed?

Section 167 of the Financial Services and Markets Act 2000 empowers both the relevant authority and the Secretary of State to commission inquiries. Will the Minister explain why that principle was not followed when drafting clause 64? The clause adopts a slightly different model in which the relevant authority and the Secretary of State do not commission inquiries.

Although we support the clause, I ask the Minister to consider returning with some clarity on those particular points, especially on the public interest test.

Mark Hoban (Conservative, Fareham)

It might help to accelerate the Committee’s progress if I say a little about part 5.

Clauses 64 to 67 are based on the existing powers set out in section 16 of FSMA. In reality, those powers have never been used by either this Government or the previous Government. In these few clauses, we seek to tidy up some of those powers. I am concerned that the fact those powers have never been exercised suggests a problem and that we need to introduce a more automatic process for investigating areas where there might have been a failure to secure appropriate protection—in the context of either the FSA and its objectives or the PRA and similar issues in clause 70, for example. That is why there is a division between clause 64, which allows the Government to do that, and clauses 69 and onwards, which allow the regulator to do it.

In a sense, the powers set out in clauses 64 to 67 are back-stop powers. If the regulator has not investigated, the Government may act where we believe that, rather than having an internal review, which is envisaged in clauses 69 and 70, we need an independent external review—that is the power we are taking in clause 65.

The clauses that address inquiries largely replicate the existing powers. The clauses on investigations introduce new powers to ensure that, as a matter of course, we have more investigations when the regulatory objectives of the PRA and FCA are not met. I hope that that gives some clarity on the purpose of these two sets of clauses in part 5. I hope that that will help accelerate progress.

Chris Leslie (Labour, Nottingham East)

It is telling that the provisions in the Financial Services and Markets Act 2000 have not been triggered in that way. I know that that came up in respect of Arch Cru and we debated that in Westminster Hall. Others have been concerned about why that particular group of powers has not been set up. Presumably there has been reluctance in the Treasury to intervene unless exceptional circumstances occurred. These changes make it more likely that we will be within the realms of inquiries and investigations. By and large, that is why we welcome the changes.

I was trying to test the Minister’s view on what that public interest test would be, because, if he is saying that the thresholds were too high and that we never had the inquiries into those arrangements, presumably the public interest tests will be a little more pragmatic and be more likely to occur. I was trying to get a sense from him of where that trigger or threshold would be set. I do not want to raise the hopes of consumer bodies and others who might want to see, in some future market failure scenario, that they can get a Treasury inquiry in this or that circumstance. I can understand why he would not want to set that out so explicitly. It would have been helpful if he had elaborated on whether he would have wanted some level of inquiry to take place in past situations, such as that with Arch Cru. I accept, however, that the Minister has made his points on clause 64. We generally support it and we will not object to clause 64 standing part of the Bill.

Clause 65 - Power to appoint person to hold an inquiry

Chris Leslie (Labour, Nottingham East)

This clause relates to the power to appoint persons to hold an inquiry. It invests a huge amount of power over inquiries solely into the Treasury’s hands. The Treasury may appoint, direct, suspend and dismiss an inquiry with no obvious oversight provided. That is a slight concern that we have about the powers invested in the Treasury by this clause. Will the Minister explain why there is no reference to some level of outside accountability, particularly parliamentary accountability?

There is serious concern over subsections (3)(c) and (3)(d) of the clause, which allow the Treasury to suspend, postpone or dismiss an inquiry, without establishing any criteria on which to make that judgment. Worse still, the clause makes no requirement on the Treasury to offer an explanation for such a decision to either Parliament or the public. That would create a serious accountability deficit, which could lead to back-room arrangements or sweetheart deals, which run contrary to the public interest. I am sure that the Minister will understand why we have those concerns.

There may be logical reasons why the Minister has gone so far in allowing the creation of these inquiries and investigations and is then pulling back great powers for the Treasury in clause 65, which is a concern. Furthermore, the clause does not set out any meaningful criteria for selecting the person who will lead that inquiry. Indeed, the only criterion is that the Treasury considers them appropriately. That does not seem to be the best means of selecting a person who will be granted significant powers under subsequent clauses.

It is difficult to look at these clauses out of the context of the clauses that surround them. We know that inquiries will be funded by the Treasury out of moneys provided by Parliament. It is therefore strange that Parliament is mentioned in this group of clauses only as a facilitator of the inquiries, and that it is not entitled to any degree of oversight of their operation.

Will the Minister say why he is taking such draconian powers for the Treasury on such arrangements? Would it not be possible to trust slightly more those who are commissioned to conduct inquiries? We have consistently argued that the new bodies established by the Bill must not become creatures of the Treasury, and the same principle also applies to new processes. The clause grants powers to the Treasury that are untempered by oversight or accountability, which is why we have serious misgivings.

Mark Hoban (Conservative, Fareham)

It is important for Ministers to be able to satisfy themselves that the regulatory system as a whole functions correctly and to account for that to Parliament, and the investigations provision will ensure that Ministers can fulfil that role. If Ministers are to receive the comfort that they need about the functioning of the regulatory system, it is right that they should be able to set out the terms of a review. Once a review has commenced, it will report directly back to Ministers before it is laid before Parliament.

The Bill has a range of other mechanisms by which Parliament can hold the PRA and the FCA to account for regulatory failure or other aspects of their activities—for example, for the first time the regulators will be in the remit of the National Audit Office. Powers in clauses 69 and 70 will require the FCA and the PRA to report on regulatory failure, for which the trigger will be set out in legislation, and those reports will also be laid before Parliament. In the first instance, the reports will give Ministers the insight that they need about the functioning of the regulatory system and, as appropriate, they will then be laid before Parliament.

The hon. Gentleman questioned the powers in subsection (3) to suspend or postpone an inquiry. It is perfectly possible to envisage situations in which that would be appropriate. For example, in relation to postponement, the carrying out of an inquiry may be prejudicial to ongoing enforcement action taken by the regulator. We would therefore have to decide whether it is better to have the inquiry or the enforcement, and I suspect that most hon. Members would say that the enforcement should happen first and not be jeopardised by the inquiry. It is also in the interests of consumers to ensure that enforcement action takes place.

In relation to suspension, the Treasury might order an inquiry into the failure of a bank, but if there were subsequent failures, we might wish to suspend the investigation until there is a return to stability, so that the work of the investigator and market concerns about that investigator’s recommendations do not add to the instability. When a failure is followed by a series of others, we might decide to wrap all the investigations into a large inquiry, rather than have several smaller ones.

On the issue of appointments, if it became clear that the Treasury had appointed someone who was not up to the job, we can imagine the opprobrium that would be heaped on it. It is in our interest to ensure that suitably qualified people, with the right and necessary skills and experience, hold the inquiries, and we would be foolish to appoint anyone who does not fit such criteria.

Chris Leslie (Labour, Nottingham East)

I am sure that the Minister can cite hypothetical situations in which such draconian powers are necessary, but I have misgivings about the balance of power. Ultimately, the public must have the confidence that such inquiries, if and when they happen, are genuinely independent. As hon. Members will know, what seem to be small points might in other scenarios become very important questions about the balance of power. I will not labour the point. I am afraid that the balance of power under clause 65 is too far towards clawing back powers for the Treasury, and I do not wish to support clause 65 for those reasons.

Clause 66 - Powers of appointed person and procedure

Chris Leslie (Labour, Nottingham East)

The clause is important. It is about giving teeth to the people appointed to make the inquiry. It is a strong clause and we are happy to support it. The clause will give the person appointed to make an inquiry a wide range of powers, but they will be subject to clause 65(3)(d), which empowers the Treasury to order the person to

“take only such steps as are specified in the direction”.

If there was a question of interpretation, it could become a source of conflict. Will the Minister reassure the Committee that that would not be the case and that the Treasury would not overrule the chair of the inquiry with that arrangement? That is the only question that I have on clause 66.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

In the interests of trying to make progress, I want to ask the Minister a couple of questions about the references in clauses 66 and 68 to the Court of Session in Scotland. Will those references be covered by the legislative consent motion, which has to go through the Scottish Parliament? Also, should any costs fall on courts in Scotland, are they covered by the expenses “reasonably incurred” referred to in clause 67? Would that be transferred from the UK Government to the Scottish Government?

Mark Hoban (Conservative, Fareham)

I will investigate the latter point. I made the point at the start that the provisions were by and large covered by section 14 of FSMA. I do not think there is any point in reopening issues that have been settled some years ago.

Regarding the powers under clause 66, we are making it clear that we are giving significant powers to the appointed person and the procedure. The powers under clause 65(3) are predominantly about the scope of the inquiry, rather than necessarily the sort of people who should be summoned before the inquiry to give witness or evidence or to provide documentation. Clause 66 is therefore not in any way constrained by clause 65(3).

Clause 67 - Conclusion of inquiry

Chris Leslie (Labour, Nottingham East)

I have just a small question. The clause is sensible. Will the Minister say why there is no provision to publish a written report at the conclusion of the inquiry?

The rest of the debate is in Hansard.