Chancellor needs 'general power' to direct Bank of England during financial crises, committee of MPs say

The Financial Services Bill, currently before Parliament, would give the Chancellor power to order that the Bank provide financial assistance to troubled financial institutions or to use "stabilisation" or "bank administration" powers already under its disposal. However, the House of Commons Treasury Committee said limiting the circumstances in which the Chancellor may be able to intervene would be unsuitable.

"When public funds are at risk, the Chancellor of the Exchequer should be given a general power to direct the Bank of England, rather than the circumscribed powers provided in the Financial Services Bill," the Treasury Committee said in its report on the Financial Services Bill. "While the specific powers in the Bill may cover most events currently foreseeable, the legislation will need to stand the test of time."

"A future crisis, many years hence, may require tools not currently considered appropriate, such as those given to the FPC [Financial Policy Committee], nor even yet developed," it said.

The main thrust of the Financial Services Bill is to 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.

The Treasury Committee previously expressed concern with handing new regulatory powers to the Bank without appropriate scrutiny of its governance being in place in a report on the Bill last November.

In December last year a Joint Committee of MPs and peers also said that the Bank of England had to be made more accountable to Parliament before it could be given new powers. Making sure that the Chancellor assumes overall power and responsibility for handling any future threat to public funds would remove the confusion over who is in charge of managing crises, the report had concluded.

The Bank has proposed to set up an internal Oversight Committee which will report to the Treasury Committee in an attempt to address concerns over policy making scrutiny. The Treasury Committee had wanted an independent Supervisory Board to be established to replace the Court of the Bank of England instead. The Bank previously said that the new Oversight Committee would have "direct access to the policymaking processes and papers in the bank" but that it would not be able to overturn policy decisions.

The Government has re-written parts of the Bill following criticisms of its drafting, but the Treasury Committee has again emphasised its concern that governance of the Bank may not be opened sufficiently to external scrutiny.

"We note that the Government believes that in general, the governance of the Bank should primarily be a matter for the Bank itself," the committee said. "We disagree."

"The Government, accountable to Parliament, is the only shareholder of the Bank of England, and many of the Bank of England's responsibilities and functions are defined in legislation. Therefore the Government, accountable to Parliament, is responsible for the structure of the governance of the Bank, the crucial aspects of which should not be delegated," it said.

The Treasury Committee said that it would like to see a statutory duty placed on the Court of the Bank to review the Bank's "performance ... including the merits of policy" included in the Financial Services Bill.

Andrew Tyrie MP, chair of the Treasury Committee, also criticised the Government's approach to amending the Bill and said more time should be taken to ensure it is properly drafted before being enacted. The committee's report had detailed that there had been "insufficient time" for the House of Commons to debate whether the committee should be handed powers to veto the appointment of the Bank of England Governor in future.

"The Bank must not be permitted to carry on with an outdated Court," Tyrie said. "We must ensure that the Court can operate, as far as possible, according to corporate governance best practice."

"Instead of drafting a fresh Bill, the Government has presented Parliament with multiple amendments to the already extremely complex Financial Services and Markets Act. The proposed legislation is therefore much more complicated than it need have been."

"No explanation has been given for the rush to produce the Bill and place it on the Statute Book by the end of the year. Better to take a little more time, and get it right, than rush it. Much remains to be done. I hope our report will be of use to all those with an interest in securing further improvements to the Bill," he said.

The House of Lords is due to scrutinise the Bill shortly.