Bank of England's accountability proposals do not go far enough, MPs say

Commenting on the Bank's response to last year's Treasury Committee report into accountability at the Bank of England, Andrew Tyrie said that the committee would set out its concerns in a short report before the Chancellor publishes the Financial Services Bill.

In its November report (208-page / 2KB PDF), the Treasury Committee recommended that the Court of the Bank of England be replaced with an independent Supervisory Board with its own staff. However, the Bank has instead proposed to set up an internal Oversight Committee which will report to the Treasury Committee. The Bank said that this new Oversight Committee would have "direct access to the policymaking processes and papers in the bank"; however it would not be able to overturn policy decisions.

"Ultimately, only Parliament can evaluate whether the policy decisions made by the Bank are aligned with the wishes of the electorate; so it is important that the structure of, and processes around, financial stability policymaking allow that. But there are important differences between monetary policy and financial stability policy, and these pose a challenge to designing the appropriate accountability mechanism," the Bank said in its response.

"It is vital that the oversight committee does not seek to second-guess the decisions of policymakers themselves. The passing of such judgements could threaten the relationship of trust that is necessary between policymakers and the Oversight Committee," it said.

The proposed Oversight Committee would be a subcommittee of the Court of the Bank of England, and would not include financial stability policymakers, it said.

The Government is expected to set out its proposals to overhaul the system of financial services regulation in the UK for parliamentary debate in a draft Financial Services Bill shortly. This Bill will dismantle existing regulator the Financial Services Authority (FSA) and hand most of the day-to-day regulation of and supervision of banks, building societies and insurers to a new Prudential Regulation Authority (PRA) within the Bank of England. A new Financial Policy Committee (FPC), also within the Bank, will address wider 'macro-prudential' issues that may threaten economic and financial stability, while a new Financial Conduct Authority (FCA) will handle conduct and compliance issues.

In its report, the Bank of England said that it had "operational responsibility" for managing a financial crisis. However a "clear framework for co-ordination" between the Bank and the Treasury, which is responsible for decisions involving public funds, was needed. The Chancellor should also be able to "direct the use of the Bank's tools of crisis management" when public funds are at risk and there is a serious threat to financial stability, it said.

The Bank of England agreed with the Treasury Committee's recommendation that the Governor be appointed for a single, non-renewable eight year term of office rather than the existing five year renewable term. However, whether the Committee should have a veto over the Governor's appointment or dismissal, as recommended in November, was "a matter for Government and Parliament".

"Whatever framework is put in place it is of fundamental importance that it should continue to safeguard the Bank's independence," the report said.

Giving evidence to the Treasury Committee on its recommendations yesterday, Bank of England Governor Sir Mervyn King disagreed with MPs that the Bank's proposals did not go far enough. "I'm surprised that you suggest that the overseers should be charged with overseeing themselves. We think what we are suggesting is very close to what you want," he said.

However, committee member John Thurso said that the Bank was instead proposing a "committee that would work out if all the wrong decisions had been taken correctly".