House of Commons Treasury Committee Accountability of the Bank of England Twenty-first Report of Session 2010–12 Volume I: Report, together with formal minutes, oral and written evidence Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/treascom Ordered by the House of Commons to be printed 19 October 2011 HC 874 Published on 8 November 2011 by authority of the House of Commons London: The Stationery Office Limited £22.00 The Treasury Committee The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of HM Treasury, HM Revenue and Customs and associated public bodies. Current membership Mr Andrew Tyrie MP (Conservative, Chichester) (Chairman) Tom Blenkinsop MP (Labour, Middlesbrough South and East Cleveland) John Cryer MP (Labour, Leyton and Wanstead) Michael Fallon MP (Conservative, Sevenoaks) Mark Garnier MP (Conservative, Wyre Forest) Stewart Hosie MP (Scottish National Party, Dundee East) Andrea Leadsom MP (Conservative, South Northamptonshire) Mr Andy Love MP (Labour, Edmonton) John Mann MP (Labour, Bassetlaw) Mr George Mudie MP (Labour, Leeds East) Jesse Norman MP (Conservative, Hereford and South Herefordshire) David Ruffley MP, (Conservative, Bury St Edmunds) John Thurso MP (Liberal Democrat, Caithness, Sutherland, and Easter Ross) Mr Chuka Umunna MP (Labour, Streatham) was also a member of the Committee during the inquiry. Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk. Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/treascom. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in printed volume(s). Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Chris Stanton (Clerk), Lydia Menzies (Second Clerk), Jay Sheth, Peter Stam, Antonia Brown and Renée Friedman (Committee Specialists), Phil Jones (Senior Committee Assistant), Steven Price and Baris Tufekci (Committee Assistants) and Nick Davies (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Treasury Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5768; the Committee’s email address is [email protected] Accountability of the Bank of England 1 Contents Report Page Summary 3 1 Introduction 5 The accountability of the Bank of England 5 2 Historical context 8 Before 1997 8 The tripartite system 10 3 The Court of the Bank of England 14 The origins and role of the Court 14 Make-up of the new Supervisory Board 17 The Chairman of the new Supervisory Board 19 Size of the new Supervisory Board 20 Appointment and review of members of the new Supervisory Board 20 Staff available to the Court 24 Ex-post review of policy performance 25 The availability of information to the new Supervisory Board 28 Provision of information by the new Supervisory Board 28 4 Committees of the Bank of England 30 Membership and appointments 30 The risk of groupthink 31 The financial stability objective 34 Macro-prudential measures 38 Duty of the Bank to explain its decisions 38 Handling conflicts between policy areas 39 The Financial Operations Committee 43 The monetary policy objective of the Bank 44 5 The office of Governor of the Bank of England 45 Appointment and dismissal 45 Term length and reappointment 45 Parliamentary involvement in appointment and dismissal 46 6 Crisis management and the role of the Chancellor 49 Responsibility in a financial crisis 49 The Chancellor and crisis management 52 A wider role for the Chancellor? 55 Conclusions and recommendations 58 Formal Minutes 65 2 Accountability of the Bank of England Witnesses 66 List of printed written evidence 67 List of additional written evidence 67 List of Reports from the Committee during the current Parliament 68 Accountability of the Bank of England 3 Summary The Bank of England is being given new powers which affect everyone in the country. It will be responsible for preventing another financial crisis. The inquiry has thrown into relief several issues that may require further examination. However, this report is focussed solely on the accountability of the Bank of England. Wider issues in the proposals contained in the Government’s Draft Financial Services Bill may be examined in the first instance by the Joint Committee1. We may also return to aspects of the Draft Bill in future inquiries. The evidence that we have received suggests that the governance of the Bank needs strengthening and that it needs to be more open about its work. The Bank must be held more clearly to account than it has been in the past. In particular we recommend that the role of the Court of the Bank of England should be substantially enhanced. It should be transformed into a leaner and more expert Supervisory Board, with the power to conduct retrospective reviews of Bank policies and conduct. These reviews are not a substitute for oversight by us, the Treasury Committee, but will allow the Supervisory Board of the Bank to ensure that the Bank learns from its own experience, and to provide this Committee with appropriate evidence on the Bank’s performance in order to enhance scrutiny of the Bank’s actions. The Board would be made responsible for meeting reasonable requests for information by Parliament. The Bank should publish indicators of financial stability by which its performance to meet the financial stability objectives may be assessed. The lines of responsibility and accountability between the Chancellor of the Exchequer, HM Treasury, and the Bank of England at times of financial difficulty must be clarified. In a crisis, where public money is at risk, the Chancellor should be given statutory responsibility for the conduct of affairs, including a limited special power to direct the Bank. The Bank must be suitably staffed to perform the enlarged role proposed for it. It must ensure that it does not deter suitable candidates from joining its Committees by over-rigid rules on conflicts of interest. The Financial Policy Committee and the Monetary Policy Committee should have a majority of external members. The Governor of the Bank should be appointed for a single non-renewable term of eight years. 1 Further information about the Joint Select Committee inquiry may be found at: http://www.parliament.uk/business/committees/committees-a-z/joint-select/draft-financial-services-bill/ Accountability of the Bank of England 5 1 Introduction The accountability of the Bank of England 1. The financial sector plays a crucial part in the UK economy in terms of employment, exports and its contribution to GDP. However, the financial crisis of 2007–08 exposed flaws in both the management of financial institutions and in regulators’ ability to identify and act on the risks that were emerging from the system. There is a need for an approach to holding regulators to account which can also improve their performance. Hence this inquiry. 2. In February 2011, HM Treasury opened a public consultation on its proposals for “A new approach to financial regulation”.2 The proposals were for a reform of UK financial regulation to replace the old ‘tripartite’ system comprising the Bank of England, HM Treasury and the Financial Services Authority (FSA). In June 2011, the Treasury published the results of its public consultation alongside a draft Bill with more detailed proposed amendments of the Financial Services and Markets Act 2000 (FSMA).3 The Treasury proposes that the tripartite system of financial regulation be replaced by the establishment of: • A macro-prudential regulator within the Bank of England, the Financial Policy Committee (FPC). This Committee will monitor and respond to systemic risks; • A micro-prudential regulator, the Prudential Regulation Authority (PRA), created as a subsidiary of the Bank of England, and • An independent conduct of business regulator, the Financial Conduct Authority (FCA), which will ensure that business is conducted in such a way that advances the interests of all users and participants of the UK financial sector. 3. Figure 1 summarises the proposed changes. It is intended that the Bank of England will be given significantly more power and responsibility over monitoring the financial system and preventing any future crisis. The Treasury stated in its consultation document that: These changes to give the Bank control of macro-prudential regulation and oversight of micro-prudential regulation will mean a much greater and more operational role for the Bank in the financial system. This will have significant implications for the Bank in terms of its staff, resources, governance and transparency.4 2 HM Treasury, A new approach to financial regulation: building a stronger system, Cm 8012, February 2011 3 HM Treasury, A new approach to financial regulation: the blueprint for reform, Cm 8083, June 2011 4 Ibid., p 8 6 Accountability of the Bank of England Figure 1: Summary of proposed new system of UK financial regulation system.5 Parliament Parliament sets the legislative framework and holds the Government to account (for the regulatory