Bank's proposed Oversight Committee must be able to examine policy decisions, MPs say

In a short report the Treasury Committee said that the Bank's proposals to set up an internal Oversight Committee as a non-executive subcommittee of the Court of the Bank of England "fall well short" of what is needed. In November, the Treasury Committee recommended that the Court be replaced by an independent Supervisory Board, made up of its own staff, before it could be handed most of the regulatory responsibility for economic stability issues under the forthcoming Financial Services Bill.

The new oversight committee proposed by the Bank in a letter to MPs (18-page / 4.74 MB PDF) last week would have "direct access to the policymaking processes and papers in the bank"; however it would not be able to overturn policy decisions. The Bank said that it was "vital" that the oversight committee did not "seek to second-guess the decisions of policymakers themselves".

Committee chairman Andrew Tyrie said that it was a "huge step forward" that that Bank had recognised its current governance structure needed to be changed to reflect its enhanced powers and responsibilities. However, the internal committee it had proposed to carry out the supervisory role would not have sufficient powers, he said.

"A properly reformed Oversight or Supervisory Board with the duty and authority retrospectively to examine the merits of policy decisions is essential," he said.

"The Bank has still not properly reviewed its own role in the financial crisis. The Court's proposals would not permit the sort of review that the FSA has recently conducted into RBS – the public and Parliament can and must secure the higher level of scrutiny which they demand," he said.

In its report the Treasury Committee said that Parliament's "practical ability to hold the Bank to account" would depend on the extent to which its Court developed into a modern board with "adequate scrutiny and review powers".

"Court lacks much of what is required under present arrangements. The Oversight Committee, as proposed in the Court's memorandum, does not plug that gap... [Its role] would be so heavily circumscribed that it could not be relied upon to provide adequate scrutiny," the report said.

The Committee added that any supervisory body must be made up of a majority of external members "in order to promote debate and creative tension".

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 at the end of this month. The 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.

Last year the Treasury Committee conducted an inquiry into how the Bank of England, particularly the new FPC, could be made more accountable to Parliament and the public. It set out its recommendations in a report, published in November.

In its letter of last week, written as a response to the November report, the Bank of England agreed that a "clear framework for co-ordination" between the Bank and the Treasury, which is responsible for decisions involving public funds, was needed. However, it suggested that the Chancellor should not be granted full financial policy decision-making powers in a crisis unless both the Chancellor and the Governor of the Bank of England were satisfied there was a "serious threat to financial stability".

In the new report, the Treasury Committee reiterated that the Chancellor's decision-making powers should come into force "as soon as the Bank has alerted the Treasury that a material risk to public funds is a possibility". This power should be contained in statute, it said, rather than in a Memorandum of Understanding as proposed by the Bank.

"As the Treasury Committee has repeatedly said, when there is a material risk to public funds the public will expect the Chancellor to be in charge, to be seen to be in charge and to be accountable to Parliament," Tyrie said.