Strengthening Governance & Accountability at the Bank of England
Sarah Jane Leake | Bloomberg Law
Accountability of the Bank of England – House of Commons Treasury Select Committee Twenty-first Report of Session 2010-12 Volume 1: Report, together with formal minutes, oral and written evidence, 19 October 2011
Over the next few years, the existing tripartite system of financial regulation, comprising the Bank of England (BoE), HM Treasury, and the Financial Services Authority will be replaced by a twin peaks model of regulation, giving the BoE, and its new subsidiaries, the Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA), responsibility for monitoring and maintaining financial stability. The Government’s proposed changes to the UK’s financial regulatory architecture are set out in the draft Financial Services Bill,1 currently undergoing pre-legislative Parliamentary scrutiny.
Given the impending expansion of the BoE’s powers and responsibilities, the range of policy decisions for which it will be held accountable will similarly increase. In the current climate, the substantial reforms to the country’s financial regulatory architecture provide a rare opportunity to readdress the balance of relations between the BoE, the Government and Parliament, which have developed on a piecemeal basis over the past 20 years. To this end, the House of Commons Treasury Select Committee (Committee) earlier this year launched an inquiry into the accountability of the BoE.2
On 8 November, the Committee made its much anticipated report (Report) publicly available. The Committee argues that certain aspects of the BoE’s governance remain antiquated and unnecessarily entrenched in tradition. In its view, the bank’s governance must be strengthened, and its accountability increased, to reflect its wider powers under the new regulatory regime, and to meet the needs of a 21st century democracy. The Committee makes a number of recommendations for improvement in this regard, the most important of which are outlined below.
The Court of the Bank of England
The Court of the BoE, established in 1694, is, despite its namesake, not a court but the board of the Bank. In the Committee’s view, the title “Court” is outdated, does not give a clear picture of its role and responsibilities, and should be changed to “Supervisory Board of the Bank of England.”
The Committee reports that the Court “does not have the expertise nor the resources . . . to be able to vet the Bank for good housekeeping.”3 While, traditionally, the Court’s members are drawn predominantly from managerial backgrounds, the BOE’s new responsibilities will demand an enhanced mixture of skills. Given that the Bank will be responsible for macro- and micro-prudential regulation, the Committee recommends that, in addition to managerial experience, members of the Court, in particular the chairman, should have expertise in prudential policy. Members of the new Court would regularly be invited before the Committee for questioning, so as to ensure that they remain committed to discharging their functions effectively.
Under the Committee’s proposals, the Court would be transformed into a smaller, more expert supervisory board, with “eminent and professionally experienced individuals.”4 In its view, the Court is still too large and should be reduced from 12 to eight members, comprising the governor, the two deputy governors, an external chairman, and four other external members.
Surprisingly, the Court has no dedicated support team. By international standards, this is poor. To help the Court meet its management function more effectively, the Committee proposes establishing a dedicated Court support unit, comprising high quality staff drawn from the BoE.
During the inquiry, Professor Garret commented that he is “amazed,” and regulators overseas are “just astonished” that the BoE never conducted a proper investigation as to what went wrong in 2008/2009.5 From a corporate governance point of view, the Court should be involved in holding decisions made by the bank’s committees to account. To this end, the Committee proposes giving the BoE the power to conduct and publish a retrospective review of the Bank’s policies and conduct, together with statutory responsibility to respond to reasonable requests for information from Parliament. This will, opines the Committee, “enable lessons for the future to be learnt.”6
The Chancellor of the Exchequer
MPs argued that the Chancellor of Exchequer should be both responsible and accountable during times of financial turbulence where public money is at risk. In these circumstances, the Chancellor, they argue, should be given temporary and limited power to direct the BoE. The Committee proposes a means by which this may be achieved without resorting to the Bank of England Act 1946, often referred to as “the nuclear weapon,” which would, ultimately, undermine the BoE’s independence across the board. The power would be discretionary; should the Chancellor choose not to direct the Bank, operational decision-making would lie instead with the governor of the BoE, although the Chancellor would retain ultimate responsibility for any decisions made.
The Governor of the Bank of England
Currently, governors of the BoE may serve two five-year terms, to match the practice at the European Central Bank.7 This system has, however, been criticised over the years for potentially causing instability and giving the perception of political interference in the BoE. The Committee therefore argues that the governor of the BoE should be permitted to serve only a single, non-renewable term of eight years. To further safeguard independence, the governor’s dismissal should be subject to statutory veto by the Committee.
In secondary legislation, yet to be drafted, HM Treasury will confer upon the FPC wide-ranging macro-prudential powers. In the Committee’s view, there needs to be thorough Parliamentary scrutiny of these powers before they are granted. To this end, it proposes that it be provided with the draft legislation at least two months before the legislation is laid before Parliament so that it can produce a comprehensive report on its merits. Moreover, the Report suggests that the issues raised in the draft legislation be debated on the floor of the House of Commons, and that the traditional 90 minute restriction for these debates be waived.
The Committee further recommends that HM Treasury gives guidance to the BoE to adopt indicators to gauging financial stability. In its view, the range of indicators must be flexible and under constant review by Government, the BoE, and also others such as financial industry practitioners, the media, academia, and the public. For the sake of transparency, these indicators should be published. This will also, anticipates the Committee, enable performance in maintaining financial stability to be monitored.
Many before the Committee argued that the Court is responsible for policing “group think,” monitoring conflicts of interest, and mediating any conflicts of interest. To fulfil this role effectively, the Committee argues that the chairman of the Court should sit as a silent observer on all of the Bank’s committees (delegation to other members of the Court, however, would be permissible).
Finally, the Committee recommends that the BoE change its policy on appointment, so that suitable committee candidates are not deterred from applying. In the Committee’s view, the BoE’ current conflicts of interest policy is too rigorous and should be relaxed in order to attract the widest pool of talent.
The draft Financial Services Bill is currently being considered by senior legislators, and a final Bill will soon be published, with a view to getting it into the statute book by the end of next year. While the Chancellor of the Exchequer, George Osborne MP, has promised to take all recommendations into serious consideration, he has not to date indicated that he will adopt any of the proposals. The Report has, though, been welcomed in the City of London, by bankers, lawyers and insurers alike, agreeing generally that more safeguards are necessary when the Bank takes on more responsibility for financial stability and regulation.
While this particular inquiry has focused on the accountability of the BoE, wider issues arising out of the Bill may be examined by the Joint Select Committee in the near future.
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