David expresses his concern about oversight of the Financial policy Committee in the Joint Committee on the Draft Financial Services Bill.

Witness: Lord Burns, non-Executive Chairman of Santander UK plc and Alliance & Leicester plc, examined.

Q52 Mr Ruffley: Referring to the Financial Policy Committee, the draft Bill tells us that the court of the Bank of England will set the overall financial stability strategy. Do you think the court as it is currently comprised is up to the job given its track record for oversight over the last few years?

Lord Burns: I do not know it closely enough to be able to judge that.

Q53 Mr Ruffley: Then that is a no.

Lord Burns: But, if there is any part of this set of proposals that concerns me, it is probably to do with the governance of the FPC in relation both to its accountability to Parliament through the Treasury and the extent to which it can be defined as 'independent'. We set up the MPC arrangement whereby there was a very clear monetary policy addressed in terms of an inflation target. The Bank of England was then given the remit and operational independence to set that. Incidentally, the court does not have any role to play in that other than in terms of paying rations and ensuring that they are doing the job reasonably well. If this is to work well, this is a topic of a very similar type to the MPC because you are dealing with something to do with business cycles and trying to interpret the way the market is working. Is the economy overheating or underheating? We have a completely different set of proposals. One of the problems is that measuring financial stability is a good deal more complex; even the concept is rather more difficult than that of inflation. Inflation is measurable; financial stability really is not measurable in terms of a single index, so accountability for all of that will be quite difficult. Therefore, it is quite difficult for the Government to set an objective that is terribly precise. I look forward to the exchanges that will take place in years to come on whether or not the remit on financial stability has been met when the FPC reports both to the court and, I guess, the Treasury Committee. There is a collection of issues-I am now crossing the floor-which I think need quite a lot of investigation in this inquiry.

Q54 Mr Ruffley: As you have indicated, defining fiscal stability will be extremely difficult, but whatever definition is arrived at, it still seems to many of us that the disparate expertise of the court, which explicitly in the legislation will be overseeing the FPC-the FPC is a committee of the court, unlike the PRA, which is a full-blown subsidiary of the bank-will not be up to the job given its track record, and I am glad you confirm our concern about this.

Lord Burns: Another big issue is the role of the Treasury and, through the Treasury, Parliament, and what part they play in setting the remit and accountability mechanisms.

Q55 Mr Ruffley: There are confusions. The Bill says that the court will review the overall strategy every three years but the Treasury's remit which sits alongside that will be reviewed annually. It seems a bit of a dog's breakfast. I move on to a second question on governance. Under this Bill, the Governor of the Bank of England will chair both the FPC and the MPC. Is that too big a set of responsibilities for one person? If it is, what mechanisms do you think can be put in place to allow the next Governor of the Bank of England, he or she, to chair both of these huge policy areas at the same time?

Lord Burns: I am not quite so worried about that. If anything, my fear is that these two bodies with separate objectives and governance arrangements are to some extent mirror images of the same thing, so more rather than less co-ordination between them is required. Therefore, having the Governor chair both of them is not something that causes me great anxiety. Indeed, if he was not involved closely in both of them, I would have some anxiety. That is not the bit that concerns me. The bit that concerns me is his accountability mechanism in terms of whether the remit is sufficiently clear, how it will then be held to account, whether the court is the right body, and above all, what happens in a crisis when the Treasury becomes involved as the paymaster of any rescue that may be required. What are the override powers of the Treasury in terms of its interest in the broader economic stability agenda which, in addition to this, covers a number of other things? If I recall, in that legislation there are quite clear circumstances in which there is a Treasury override if the situation allows it. I would not be worried so much about whether the same person can do both, but it seems to me that as far as possible they should be constructed along similar lines rather than the very different lines that seem to be suggested at the moment.

Read the full transcript here:

http://www.parliament.uk/documents/joint-committees/Draft-Financial-Services-Bill/ucJCDFSB08092011ev1.pdf