rose to move, That the order laid before the House on 8 October be approved.
The noble Lord said: My Lords, before I turn to the two instruments that we are considering this evening, I should like to say a few words of a personal nature.
It is a very great honour for me to stand before your Lordships for the first time in this House. I want to begin by thanking the whole House for the warm welcome that I have received from all sides since my introduction last week and to extend my grateful thanks to the staff of the House, who have been similarly welcoming and supportive. We are truly fortunate to be so well served.
I have always—until right now, at a safe distance—held the House in the highest respect both for the quality of its debates and for the depth and breadth of its expertise, which allow it to frame national debate and hold the Government to account so rigorously. I come from a business background, so it will take me time to familiarise myself with being “the Government”. I beg your Lordships’ indulgence while I find my feet.
I think I am right in saying that I am only the second life Peer to be a Treasury Minister, but I tread with caution in the company in which I now find myself. The House has, at the last count, four former Chancellors of the Exchequer, two former Governors of the Bank of England and three former permanent secretaries in the Treasury. There is also a host of other noble Lords with strong backgrounds in banking, accounting, finance and economics. I hope to benefit from all your Lordships’ wisdom in the exchanges ahead.
I have taken the title Baron Myners, of Truro in the County of Cornwall. I was fostered, and then adopted, by a Cornish family. I think it would be described as blue-collar. I had the benefit of a fine education, courtesy of Cornwall County Council. I was, to plagiarise the words of Senator Biden, the first in my family for a thousand years to go to university. Cornwall is a very special place to me, and to this day represents one of my two great passions in life; the other is contemporary art. My father was a fisherman and a small shopkeeper, and it was at his side that I learnt the basics of small business.
It took me some time before I realised that business was to be my metier. First, I embarked on a career as a schoolteacher in inner London. Then I was a financial journalist: ironically, 30 years ago, writing about the secondary banking crisis for the Daily Telegraph. After that, I entered the world of business and finance. I am fortunate that this career has led me to sitting on the boards of a number of major companies and financial institutions, including being a member of the Court of the Bank of England and a director of a major sovereign wealth fund. I have also, in recent years, developed an increasing interest in wider public policy and institutional matters, and my work in this respect has included chairing the Low Pay Commission and the Personal Accounts Delivery Authority and acting as a trustee of Tate.
It is clear that a competitive business environment has a vital role to play in delivering economic efficiency, but that it is also required to act with integrity and responsibility. In my business career, I have actively promoted the benefits of good governance and effective regulation, and I will continue to do so in my ministerial post. My business career has taught me the importance of a strong banking system that inspires confidence and plays a critical role in supporting a strong economy, to the benefit of all.
In recent months, the Icelandic economy has experienced increasing difficulties. In July, the IMF’s mission to Iceland concluded that the Icelandic banking sector faced significant risks. On 29 September, the Icelandic Government acquired a 75 per cent stake in Glitnir, nationalising Iceland’s third largest bank. This was immediately followed by further rating agency downgrades for all Icelandic banks and their subsidiaries. On 7 October, the Icelandic Government passed emergency legislation in an attempt to stabilise the financial system in Iceland.
The new powers are wide-ranging and had immediate effect. The Icelandic authorities were able to take various steps, including appointing receivers to take control of the bank Landsbanki Islands and to deal with its assets. Despite repeated efforts to seek reassurances at official and ministerial level, the UK Government could not gain satisfactory clarification from Iceland of the position of UK creditors in the administration of Landsbanki. This was of serious concern, as certain statements made by the Icelandic Prime Minister indicated that while Icelandic depositors would be protected, the rights of other creditors, including those in the UK, could be prejudiced—a breach of the EEA treaty. It was also unclear whether the Icelandic Government were prepared to honour the obligations to depositors in Landsbanki’s UK branch—a requirement under the EU deposit guarantee scheme directive. Under the terms of the directive, Iceland’s share of compensation to Icesave depositors was in the region of £2.2 billion.
I turn to what brings us here today: the Landsbanki Freezing Order 2008 and the Landsbanki Freezing (Amendment) Order 2008. The first order was made on 8 October 2008, because the Icelandic Government, their authorities and Landsbanki appeared to be on the brink of action that would be to the detriment of the UK economy, including the detrimental treatment of UK depositors and consequential burdens on the banking sector. At a time when saver confidence was fragile, it was necessary to take action to help to safeguard the position of UK customers and depositors and to prevent economic damage to the UK. It was also necessary to take such action to stem the risk of any contagion in the UK financial sector as a result of Landsbanki’s financial difficulties. The order has ensured that assets that belong to Landsbanki and are controlled through its London branch remain in the UK until the freeze is lifted.
The second order simply makes a few minor, technical changes to clarify the order. It does not change its substance. The order freezes only funds relating to Landsbanki. Furthermore, as envisaged by the 2001 Act, the order gives the Treasury the power to license exceptions to the freeze. Granting licences is an integral part of the Treasury’s ongoing role in relation to the freezing order, particularly in minimising potential harmful consequences while providing the necessary safeguards. The Treasury’s approach has been to publish general licences and guidance to deal with industry concerns. It granted a general licence the day after the order was made. This dealt with the concern to allow the London branch to continue its commercial finance operations, on which a number of UK businesses depended for their cash flow. This licence also confirmed a broad range of transactions that were permitted, including allowing third parties to set off and net out arrangements where Landsbanki was the counterparty. A further licence was granted on 13 October to reassure a wide range of market participants who might otherwise deal with frozen funds. The Treasury has also published extensive guidance to assist people who may be affected by the order or licences, and it will continue to grant licences and offer guidance as appropriate.
The principles behind the licence granted by the Treasury are that the London branch is not to repatriate funds back to its head office in Iceland or elsewhere in its banking group, but the core commercial financing business is allowed to continue. Business customers can continue to deal with the funds in their accounts, and other financial institutions and third parties are given protection under the licence for a wide variety of dealings with frozen funds.
Since the order was made, the Government have continued to negotiate with the Icelandic authorities to agree a mechanism whereby the Icelandic Government can honour their obligations to UK depositors and ensure the fair treatment of UK creditors. In particular, the Bank of England has provided a short-term facility of up to £100 million for the London branch of Landsbanki. This was made available on 13 October to help to ensure an orderly wind-down for Landsbanki that will maximise the return to UK creditors.
The freezing order was made under a power in the Anti-terrorism, Crime and Security Act 2001. This Act includes a broad range of provisions and is not only about countering terrorism. The power enables the Treasury to make a freezing order where the Treasury reasonably believes that action to the detriment of the UK economy, or part of it, has been or is likely to be taken by a foreign Government or a resident of a foreign country or territory. I emphasise that the UK’s action was not taken on the basis of anti-terrorism provisions in the Act. The action was deemed necessary because the Icelandic Government could not clarify the position of UK creditors in the administration process and there was therefore a threat to UK economic interests. Their actions also appeared to be in breach of Iceland’s obligations under the EEA treaty, so we also alerted the European Commission to our concerns and our decisions.
On 9 October 2008, the administrators of Landsbanki transferred its domestic assets to a new entity, New Landsbanki. The London branch of Landsbanki Islands was left in old Landsbanki. This action appeared to support previous concerns about Iceland intending to favour its own creditors.
The Government believe the order to be a necessary and proportionate measure to protect the assets of UK customers of Landsbanki and to safeguard vital UK economic interests. The Treasury considers that the freezing order should remain in place until the Government have successfully agreed with the Icelandic authorities a mechanism whereby the Icelandic Government can honour their obligations to UK depositors and ensure the fair treatment of UK creditors. As such, I commend the order to the House. I beg to move.
Moved, That the order laid before the House on 8 October be approved. 28th report from the Joint Committee on Statutory Instruments, 29th report from the Merits Committee.—(Lord Myners.)
My Lords, it is my privilege to follow the maiden speech of the noble Lord, Lord Myners. A maiden speech is an important rite of passage in your Lordships’ House. The noble Lord has nicely demonstrated the qualities that he will bring to our deliberations. As he told us, he started out as a teacher and a journalist. I am sure he will find that the dual skills of dealing with an unruly class and a way with words will stand him in good stead.
The noble Lord is principally known for his outstanding career in the City, including being chief executive of the fund manager Gartmore and, more recently, as a mainstay of many FTSE boards. He is perhaps best known to Members of your Lordships’ House as the author of reports for the Treasury on equity investment and, more recently, as chairman of the Personal Accounts Delivery Authority, which the noble Lord will find is still the subject of the Pensions Bill, which is keeping us busy even this week. He and I share a common history in membership of the Court of the Bank of England. I look forward to putting that shared knowledge to good purpose with him when the Banking Bill is scrutinised here in the next Session.
As well as welcoming the noble Lord to this House for the qualities that he will bring as an individual, we welcome him as a Treasury Minister. It is an important role, and it has been nearly 20 years since we had a full-time Treasury Minister in your Lordships’ House. I know that the whole House will join me in welcoming the noble Lord in both his personal and his ministerial capacities.
Maiden speeches are not times for controversy, but when a Minister makes a maiden speech on government business it is difficult to avoid that entirely. So I must now turn to the orders, which the Minister has introduced so comprehensively. I am afraid that we are now on to business as usual. Let me say at the outset that we support the Government in taking action to protect the interests of UK depositors in Landsbanki. If both the initial order and the amending order, which was tabled last week, are what are needed to achieve protection, they have our complete support.
Questions have been raised about whether the Government were over-hasty. On 8 October, on the radio, the Chancellor of the Exchequer said that the Icelandic Government had “no intention of honouring” their UK obligations. But the Icelandic Government have released the text of the telephone conversation between the Chancellor and the Icelandic Finance Minister which shows that this did not appear to be quite the truth. Will the Minister clarify on what basis the Chancellor made his statement? If the Icelandic Government were still seeking a way to honour their obligations, was the initial order appropriate?
Last Saturday, it was reported in the Times that a potential IMF rescue package will go ahead without any special provisions being made for UK claims. Only a few days earlier, the Treasury was briefing that the IMF deal was dependent on sorting out UK claims. There was also talk of the Government possibly lending the Icelandic Government up to £3 billion in order to help them to repay UK savers. Has that now gone away? What is the current status of the IMF negotiations? Will the Minister say whether and to what extent the UK’s position is being protected in those negotiations?
What are the financial implications for UK taxpayers? The freezing order will, I assume, have to be lifted at some stage, which will mean that the assets will pass to the administrator or liquidator of Landsbanki. What will happen then? The Government will have bankrolled the repayment of deposits to UK retail depositors, not all of whom are the liability of the Financial Services Compensation Scheme. If Landsbanki’s assets are insufficient to pay all its creditors, we will not get all our money back. How much taxpayer money is thought to be at risk? What sequence of events is now expected to bring this to a conclusion? How long will it take to sort out?
The Minister will be aware that the Icelandic Government and the citizens of Iceland are deeply offended by the use of anti-terrorism legislation to freeze their assets, as well as some of the Government’s language that has been used around this. Iceland has repeatedly said that it should not be tarred with a terrorism brush. When the Anti-Terrorism, Crime and Security Act 2001, one of the many pieces of rushed legislation to which we have become accustomed in the past 10 years, was considered in your Lordships’ House, we sought to confine those powers to terrorism. But that was rejected by the Government. Eventually the Government conceded a review of the legislation, which was led by my noble friend Lord Newton of Braintree. He recommended that the non-terrorism powers clearly in the anti-terrorism Act should be in mainstream legislation so that anti-terrorism powers could be clearly marked as such. The Government refused to do that.
The result is that, in order to achieve the protection of UK depositors, the Government have used legislation which carried the stigma of terrorism. On reflection, do the Government not think that it would be better if a more neutral legislative home for these powers was sought? Earlier this year, the Government took sweeping powers to deal with failing banks in the Banking (Special Provisions) Act, but clearly those powers did not equip them to handle the activities of all foreign banks operating in the UK.
As I mentioned, we will shortly have the pleasure of scrutinising the Banking Bill which is currently in Committee in another place. Will the provisions of that legislation be adequate to deal with situations such as Landsbanki in future? Or do the Government intend to continue to rely on the provisions of anti-terrorism legislation? I hope that the Government will not bypass this legislative opportunity to secure direct powers to deal with all potential threats to our financial system.
I think that the best that can be said of the freezing order procedure is that it has been an inelegant one. Others have passed harsher judgments. Early on the morning of 8 October, the Government issued one order, but the detailed text was not available until much later in the day, which was not helpful. The following morning they issued a general licence which corrected some of the defects of the original order. Four days later, on 13 October, they issued a second general licence which revoked the first licence but reinstated much of its contents. It has been put to us that the second licence is,
“in such incomprehensible language that it remains unclear to the market generally what activities are permitted”.
That was followed by a “clarification” issued on 17 October which purported to deal with what is and is not “frozen funds”, but I am told that these assertions are difficult to reconcile with the wording of the order itself.
Lastly, on 20 October, the Treasury issued another order which, according to the Explanatory Memorandum, makes,
“minor changes to assist clarity”.
If that description of “minor” is correct, I fail to see why the Treasury felt that it should disapply the usual 21-day rule for laying such instruments.
The impression which this has left in the financial community is of a poorly thought out sequence of events and lack of preparation. More importantly, the first order brought the markets in repos, swaps and derivatives involving Landsbanki to a halt, and this has challenged the credibility of the use of English law as the governing law in these global transactions. That in turn may well have long-term implications for the UK’s pre-eminence in the global financial services industry.
Can the Minister say whether the Government now believe that, two orders, two general licences and one clarification later, all the angles have been covered? Is the Treasury planning to review the effectiveness of its actions so that it learns lessons in case we are unlucky enough to find ourselves in this position again? Will the Minister reflect on the accountability of the Executive to Parliament and whether it is adequate? Before either House of Parliament had considered the first order, a second order varying it was laid, and in the mean time it had been considerably varied by two general licences for which there is no parliamentary scrutiny. There has also been a document of clarification which, according to some, clarifies nothing and certainly has no parliamentary scrutiny. The Treasury website sets out all this information, but the Minister can see that the sequence of events poses challenges to parliamentary accountability.
I am sorry to burden the Minister with so many questions on his first outing at the Dispatch Box, but these are important issues and I look forward very much to hearing his response.
My Lords, I join the noble Baroness in welcoming the Minister both to this House and to his new job. We are particularly pleased to have a proper Treasury Minister in our midst—not that the noble Lord, Lord Davies, was in any sense improper, but at times I felt that he was dealing with our questions with one hand tied behind his back because he was not of the Treasury, as it were. We are glad that the noble Lord, Lord Myners, will be able to take our concerns back to the Treasury with even greater speed than was possible with the noble Lord, Lord Davies.
I will not repeat the long list of achievements of the noble Lord in the City, but just two or three stood out for me. I note that he makes much of his Cornish upbringing. I can only assume that he has imbibed some of the liberal principles with which we associate that county and brings them to all his work in Parliament. He also mentioned contemporary art, and I see that he was chair of the trustees of the Tate Gallery. It says he that he “is” a trustee of Glyndebourne. I do not know whether he has been allowed to keep that on or has had to give it up as well, but I hope that the noble Baroness and I are not so assiduous that we keep him from both those enjoyments of life.
I turn to the legislation. As the noble Baroness has said, a number of questions have been raised, not least by my colleagues last week in debates on the Counter-Terrorism Bill about whether it was appropriate for this action to be taken using a piece of legislation called the Anti-Terrorism, Crime and Security Act. To most people, that sounds as though it relates to anti-terrorism, crime and security, but this action does not. I accept entirely that there are powers in the Act that can justify it, but at the very least it has given the impression that the Government have pushed the boundaries of what the legislation was intended to cover. Whether or not that is the case, it has obviously created difficulties in our relations with Iceland and caused confusion more generally. I have not heard it put in quite the way the noble Baroness did; her proposal was that the section of the Act used to justify these orders would be better placed outside the anti-terrorism Act and put into a separate piece of legislation. Indeed, the provisions look as though they were parachuted into the Act from somewhere else, or added using scissors and paste. The Act does not flow, as it were, and Section 4, which was used to justify these orders, looks completely out of place.
I have a more general question about the legislative route taken. At the same time as the Government were instituting these orders, they were taking powers under the Banking (Special Provisions) Act for Kaupthing. In that case, they arranged for the retail deposits of Kaupthing to be shifted across to ING Direct while putting the bank into administration. Can the Minister explain why that route was chosen with Kaupthing and its retail depositors, but a similar procedure was not adopted for Landsbanki and the Icesave depositors? The great advantage for retail depositors with the Kaupthing route is that they have had access to their accounts all the way through. Equally, why was the remainder of the Kaupthing bank put into administration under the Banking (Special Provisions) Act rather than its assets being frozen? I am not suggesting that there is anything to hide here, but they are completely different routes and it would be useful to be given an explanation for it because I have not seen any so far.
The Minister spoke at some length about the licensing provision and the noble Baroness voiced perfectly understandable criticisms about the way that was brought about. I have just one question on that: have representations been made by any sector of Landsbanki account holders saying that they should have been beneficiaries of a licensing provision, but have still found their assets frozen when they feel that they should legitimately have access to them at this stage?
The noble Lord said a little about the timetable and the process going forward. I accept that we are at a point where things are progressing quickly and it is difficult to be totally precise. However, can he confirm that the Government have made a commitment that individual retail depositors will get all their money back and not just £50,000? I have read a number of suggestions to that effect. On the other bodies with deposits in Landsbanki—the local authorities, charities and businesses about whom there has been much discussion—can the Minister give us any sense of the likelihood of them getting a significant proportion or the majority of their deposits back? I realise that it may be impossible at this stage, but if he were able to say something, it would reassure many people.
We are not discussing the Kaupthing situation because the legislation under which the orders were made meant that they were passed using the negative resolution procedure, but as the Minister will be aware, the situation in respect of Kaupthing depositors, particularly in the Isle of Man, is causing considerable concern, not least because many of those involved were ignorant about the fact that their deposits were actually Isle of Man deposits. I shall come back to that point in a second.
Other problems have also been brought to my attention. Some people transferred their money out of the Isle of Man into Kaupthing in the UK several days before the order took effect and their money—their entire life savings—has, in effect, disappeared into a black hole. I would be grateful if the Minister could signpost them and other people who are worried about their deposits in the Isle of Man to whichever body he thinks is best able to give advice at this stage. As he will be aware, there is very considerable concern about this.
We shall have to return on another occasion to the whole sorry story about the collapse of the Icelandic banks because it raises broader issues. First, the relationships between the UK and Icelandic Governments were far from satisfactory; there are huge disputes about who said what to who and a childish spat has developed between the Chancellor and his opposite number in Iceland over what they were talking about. The whole thing looks an amateurish mess.
It raises big issues about how depositors in banks other than domestic banks get their information and how they decide on risk when the deposits are outside the UK. Many people—not least, local authorities—have found that their money is in jeopardy yet, as the noble Lord mentioned, the IMF was issuing clear warnings about the state of the Icelandic banks before the summer. In the Times on 5 July, Patrick Hosking, in his article “How safe is cash in a bank beyond UK regulation?”, described the depositor protection scheme in Iceland as being,
“a bit like relying on a pocket handkerchief as a safety net for an elephant”.
How right he was. Yet sophisticated treasurers and relatively sophisticated investors either do not read the Times or choose to ignore this kind of advice and then, when something goes wrong, they look to the Government to sort out all their problems. This is an unsatisfactory situation. Although protecting people from their folly is something the Government will never completely achieve, we need to look at this in the context of the Icelandic banking collapse and banking collapses elsewhere and the advice and advisory structures available to enable people to be more aware of what is happening.
This applies not only to the local authorities, who clearly should know better, but, as we have seen from our postbags, there is a major problem with people who took out accounts in Kaupthing, particularly in the Isle of Man, who were completely ignorant of the differences in the regulatory frameworks of the Isle of Man and the UK. No doubt people in Guernsey and Jersey who find that they have no depositor protection are learning for the first time what some of the differences between the jurisdictions are.
The simplistic part of me thinks that sending a gunboat to these places and sorting out their financial arrangements to bring them into line with the UK might have a lot to recommend it. I suspect, however, that that approach will not commend itself to the Government. The large number of distraught people who, to a greater or lesser extent, either were misled or allowed themselves to suspend disbelief is a problem with which we need to grapple in the months ahead.
However, the Government have acted decisively in a way that they believed protected people. It has protected people and we therefore support the orders.
My Lords, I, too, tender my warmest congratulations to the Minister and wish him every fulfilment and success in his new role.
I take up the point raised by the noble Baroness, Lady Noakes, which was to some extent echoed by the noble Lord, Lord Newby, with regard to the powers under which these orders are tendered. There is no reference to terrorism in Part 2 of the 2001 Act. Therefore, there can be no question as to, first, the efficacy and, secondly, the essential validity of an order made under Sections 4 and 14 of the 2001 Act. Even had there been a reference to terrorism, the golden rule of statutory interpretation would have applied, which is that, where the grammatical language of a provision is clear enough, even though Parliament may have had some different intention at the time, the ordinary grammatical words of the provision should apply. That applies to documents, including wills, and is of many centuries’ standing. Therefore, there does not seem to be any real question about using these powers in the way that they are used now.
My Lords, if the noble Lord studies what I said in Hansard, he will find that I did not suggest for one moment that the laws were not capable of being used. The burden of my argument was that they were perceived as being related to anti-terrorism; indeed, I also referred to the review carried out under the auspices of my noble friend Lord Newton, which recommended that the non-terrorism aspects of the Act should be removed to mainstream legislation.
My Lords, I take the noble Baroness’s point, but it would be a luxury to redraft the Act in order to give Parliament powers that it clearly already has and is entitled to use.
It is not only entirely lawful for these powers to be used in this way but entirely just. The Icelandic Government—so far as I understand, this is still their position—have totally guaranteed the deposits made in Icelandic branches but have not extended that guarantee to any deposits made outside Iceland. That must breach the European Union rule in this regard, in that it unlawfully discriminates against those who are outside that country’s shores.
Many questions remain to be answered. The Statement made by the Chancellor of the Exchequer on 8 October was to the effect that these freezing orders would be made for the purpose of safeguarding the position in Britain of funds belonging to Landsbanki until such time as the position with regard to United Kingdom creditors was made clearer—I think that those were the exact words. What happens then? If the Icelandic Government say, “The guarantee that we have given to our own people will be extended to everyone”, then fair enough; there will be no problem. If they do not give that guarantee, what then happens to these funds? Will they be sequestered? If so, will they be there for division among United Kingdom charities and local authorities? I am conscious that my own county, Cardiganshire, has £5.5 million deposited in this way. What sort of dividend can be expected?
On 13 October, the Chancellor of the Exchequer announced that £100 million would be made available to Landsbanki in order to assist it in its difficulties. Were any counterundertakings given by Landsbanki in that regard and, if so, what were they? There must be something in the nature of a contract here.
Local authorities, such as my own county council in Cardiganshire, were exhorted time and again by the Treasury to try to gain the highest possible interest from their deposits; indeed, from time to time there was some element of threat. The Treasury may or may not be liable for negligent statements in that connection, although the fact of a crash would not make it negligent. Who could have foreseen a year ago exactly what was going to happen? Beyond that, the Treasury does not seem to have given a clear picture of any fine-toothed-comb examination of the condition of Icelandic banks, balancing assets against liabilities and all sorts of eventual possibilities.
The question remains: is there any possibility of a legal responsibility—or, if not that, a moral responsibility—regarding the Treasury’s relationship with charities and local authorities? It is clear that, some months before the crash occurred, there were signals. Did the Treasury then communicate with those on whom it had lent earlier to say, “Look, the situation has now changed. You are now sailing into danger”? I would welcome a reply to those questions.
My Lords, I congratulate my noble friend Lord Myners on his appointment to the Government’s Front Bench and on his informed contribution to our debate. His reputation comes before him and he arrives at a time when the Government need his considerable financial sector experience in the House. We all look forward to his many contributions to our debates in the future.
I want to say a few words about the impact on Iceland of what is happening. Before doing so, I declare an interest: my wife is an Icelander. She retains her Icelandic nationality, although she is a citizen of the United Kingdom, and we do not have any deposits in any Icelandic banks. I have visited Iceland many times over the years, and there is constant, almost daily, contact between my family, my wife and her family in Iceland.
Our family in Iceland tells us that everyone is profoundly affected by the current crisis. People in Iceland believe that there is a real risk to their savings, despite government assurances to the contrary. They believe, in particular, that there is a risk to the savings of the elderly, who were advised to invest in products that are believed to be at risk. There is already public debate over a proposed reduction in pensions, which is frightening generations of people. Some Icelanders have foreign currency mortgages and are particularly vulnerable to the loss of their homes. There is fear of massive inflation if the currency is to be refloated. Prices are already beginning to rise, some by 50 per cent. Many people are worried about a possible exodus of parts of the working population unless an early solution is found.
There is worry over students abroad being called home. The banks in Iceland are seeking to be flexible on necessary expenditure, although that obviously does not deal with the effects of currency devaluation. For many Icelanders, the opportunity to travel abroad may well now be frozen. As my sister-in-law has said to me on the phone, “I am a prisoner in my own country”.
There is a strong feeling that action taken in the case of Kaupthing was premature. There is concern that discussions with the Russians over financial support should have been interpreted as an invitation for Russian domination, a suggestion made in the British press. The proposition is regarded in Iceland as ludicrous. There is also concern that the actions of a few Icelandic oligarchs, as I would almost describe them, should be blamed on the whole population of Iceland. The population of Iceland is not to blame for what has happened. Finally, there is deep-seated resentment over the use of counterterrorism legislation.
My view is that there is a complete failure of Icelanders to understand that alleged statements by David Oddsson on central bank deposits, which triggered a sovereign debt downgrade, placed the UK Government in an impossible position. That statement, with reported suggestions that attempts might be made to move Icelandic assets out of the United Kingdom, meant that, if the Government had not acted, they would have been accused of dithering. That was not going to happen.
Our mistake has been not to separate out the issue of economic well-being and damage into self-standing legislation. I understand that there were some calls for that in recent years—the noble Baroness, Lady Noakes, referred to this—but that we simply did not have the legislative peg and opportunity to do so. We really need to get this message over to the Icelandic people, because they do not understand the pressures that the British Government were under.
The transcripts of conversations between the two Governments, and statements by the ministerial team in Iceland and by David Oddsson, should be made available in their entirety. The fullest possible explanation of all Icelandic and British actions and discussions should be made available, otherwise the issue will fester like an open wound. I cannot exaggerate the impact of the Government’s action on the attitude of the people of Iceland towards the people of Britain and the resentment that it has generated. Far more information needs to be placed in the public domain so that we fully understand the position in which we have been placed.
I am concerned also about the artificial pegging of the krona by the Icelandic authorities at a rate of just over 200 krona to the pound, which cannot be sustained long term. The narrow spread between buy and sell in conditions where Icelanders are finding it almost impossible to buy sterling for foreign visits—they can buy, but only in very special circumstances—and for expenses incurred abroad will leave British visitors to Iceland feeling short-changed, yet Iceland has no alternative if it is to protect its economy and avoid massive, immediate inflation and an explosion in wages.
I am concerned also about the failure of the rating agencies within the United Kingdom to recognise the potential for difficulties. There have been references to reports in the British media, but why did alarm bells not ring when, earlier in the year and prior to the period of currency uncertainty in recent weeks, the currency fell 20 per cent against sterling, which itself was in difficulty, and when the Icelandic banks were paying 16 per cent on deposits?
What is the solution? Iceland must no longer be allowed to climb out of its only-too-frequent economic crises by way of devaluation, as has happened over the years. The banks need stability. Iceland needs to rebuild its financial system on currency stability and it needs the euro. Politicians in Iceland must grasp the nettle. People on the streets of Iceland say that they need the stability of the euro, yet many politicians there are locked into an anti-euro position, perhaps in part because of their concerns about having to make concessions in fisheries policy. The voice on the street in Iceland says: “Join the euro and stop the nonsense”. I hope that Iceland does so and that the British Government will play every part possible in trying to help Iceland through its current difficulties.
We have to understand the difficulties for the Icelandic population. If Iceland decides to proceed down the euro route, we must give it every possible support, because we will have its people on our side. If Iceland ultimately joins the euro, I hope that it will do so without having to concede anything on the fisheries front. Western European nations may demand greater access to Icelandic fisheries, but many of us would firmly oppose that. There is no alternative to the euro. I hope that my noble friend is able to take that position this evening.
My Lords, I, too, welcome the noble Lord, Lord Myners, to his new responsibilities. We are fortunate to have in the House the benefit of his tremendous commercial and financial experience. I trust that this debate will have given him some taste of the breadth of the area over which your Lordships’ House roves. On a single order, we have had discussions about the euro, cod fishing, security and banking regulation. The Minister’s task is formidable.
I wish to make only one point. I support the remarks of my noble friend Lady Noakes about the inadvisability of mixing anti-terrorism legislation with banking or financial regulation legislation. When legislation is introduced under the overriding banner threat of terrorism, it is not appropriate for it to be used for general financial regulation, any more than it is appropriate for it to be used for ejecting octogenarians from Labour Party conferences or for householders to be placed under surveillance for not recycling their waste properly. The House gives tremendous authority to the Government when they bring in such wide-ranging anti-terrorism powers, which should be as narrowly drawn and as narrowly used as possible. The consequence if that does not happen is that assurances given by Ministers are later called into question and it becomes more difficult for the Government to win support for future national security legislation.
I quite understand that Section 4 in Part 2 of the 2001 Act makes specific provision to allow this type of order to be made. I do not think that the House takes issue with that. The question is whether that legislative settlement is really appropriate. One has only to look at the questions and concerns that were raised at the time of the making of the order, including in Iceland. I have much sympathy with the points made by the noble Lord, Lord Campbell-Savours. For another friendly Government to be brought under the auspices of this legislation and for action to be taken against them under an Act that deals with anti-terrorism, crime and security cannot be right, when what we are dealing with here is the regulation of banking institutions.
I strongly support my noble friend’s common-sense argument that these powers need to sit in a dedicated banking Act and not within an anti-terrorism Act. If that happened, the noble Lord would no longer have to come to the House and defend this complex and inappropriate legislative settlement.
My Lords, I, too, welcome the noble Lord, Lord Myners, to the House. As it is his first day, all he has to do is agree with me.
In the 90 years since Iceland achieved political independence, this is the third time that the United Kingdom and Iceland have been in difficulties. The first time was, obviously, the military occupation in 1940; the second time was the cod wars; and now this. All are different issues, but I can well understand why the Icelanders feel unhappy about the way in which their neighbour, the United Kingdom, has treated them during the past 90 years.
I want to talk about the comparison made by the Prime Minister and the Chancellor between Iceland and Scotland. I understand the need for the unionist jig to be danced, generally for the people of Scotland and particularly for the people of Glenrothes, but I hope that the Minister will agree with me that Scotland and Iceland are not good comparisons, whereas, if it comes to it, Iceland, Jersey, Guernsey or the Isle of Man would be quite good comparisons. That is all I have to say. I am just concerned about the use of the crisis in which Iceland has found itself being used against the people of Scotland.
My Lords, I, too, congratulate my noble friend on his excellent maiden speech. I make just two points. First, the Act that we are concerned about is not just an anti-terrorism Act; it is the Anti-terrorism, Crime and Security Act. I agree that it is unfortunate that all those things were combined, but the title of the Act certainly entitles the Government to do what they have had to do.
I also think that the Government were right to take quick and effective action because, in any receivership, as we all know, the money goes to those with the loudest voices and the heaviest hands. The action of the Government has at least ensured that this matter will be cleared up in an orderly way.
My Lords, I join in the welcome to the noble Lord, Lord Myners. I speak as a member of the Merits Committee. We considered the first order on 15 October, reported on it and then considered the second order immediately after it was laid. We reported:
“By means of this Order, the UK Government are taking action to ensure that Landsbanki assets are not transferred from the UK until the position of UK creditors becomes more clear”.
At the same time, a Statement was made in the House by the Chancellor of the Exchequer, which stated:
“I am taking steps today to freeze assets of Landsbanki in the UK until the position becomes clearer”—[Official Report, Commons, 8/10/08, col. 279.]
When we reported to the House, we felt that we were not in a position to give any detailed advice. I had personally hoped that by today—three weeks after the first order was laid—the position would have become somewhat clearer. Although I welcome the opening explanation of why the orders were laid, whatever we may think of the rights and wrongs of that, I regret that so far we have not been brought adequately up to date with what has happened.
I do not want to repeat a lot of the things that other noble Lords have said, but the gearing between the United Kingdom and Iceland should not be forgotten. There are 60 million people in the United Kingdom and 300,000 in Iceland. Her Majesty's Government, in dealing with this matter, should remember that. As it happens, Iceland has the highest rate of literacy probably in the developed world—higher than we have here. Also, up until now, it has had a per capita income about the same as the United Kingdom.
However, the resentment notably referred to by the noble Lord, Lord Campbell-Savours, has amounted to a diplomatic problem that should be solved. I wish to interpolate here that I do not have any issue about the use of the Anti-terrorism, Crime and Security Act 2001. It was looked at and it is entirely correct that that Act can be used. However, 10 per cent of the population of Iceland presented a signed petition to the Icelandic Government, which stated:
“Gordon Brown unjustifiably used the Anti-terrorism, Crime and Security Act of 2001 against the people of Iceland for his own short-term political gain. This has turned a grave situation into a national disaster ... Hour by hour ... the actions of the British government are indiscriminately obliterating Icelandic interests”.
That should be set against the background of what was said in the beginning by the Chancellor of the Exchequer and in the explanation of the statutory instrument—that our Government would seek to solve this problem as quickly and positively as they could, because it was a grave problem.
Finally, the Minister referred to the International Monetary Fund’s report of 4 July this year. I want to read out its conclusions, but before I do that I want to say that the International Monetary Fund looked at Iceland's situation every year. In 2007, it issued what, if you read it carefully, was a Gypsy's warning that things could not go on in Iceland the way they were then going.
In July of this year, it said:
“Outlook … Economic activity is expected to slow significantly from unsustainably high levels”,
“Looking forward, policies will have the difficult task to facilitate an orderly rebalancing process, while mitigating risks by shoring up confidence. Close coordination between monetary and fiscal policies, along with actions to address financial sector vulnerabilities, will be key in this respect”.
This bureaucratic language, means that Iceland was facing a serious economic and banking crisis.
The Treasury must have known that—that has already been referred to in this debate. What was Her Majesty’s Treasury advising British depositors with Icelandic banks from 2007, contemporaneously with the Northern Rock issue, through to July of this year—90 days before the instrument freezing the assets was laid? I emphasise that we have some responsibility for helping to resolve this issue. As members of the IMF, I hope that we are welcoming the $2.1 billion standby facility which has already been approved by the staff of the IMF, from which $833 million can be drawn immediately, given board approval.
My Lords, I strongly and warmly welcome the action of Her Majesty’s Government in this event. If we were to re-run it slightly differently, and we were standing here and the Government had not used the legislative peg available to them, the accusations rightly levelled at them would quite rightly be bitter and intense. The Government found themselves in a difficult position and used the option available to them; that was correct. It may not have been the most elegant way of dealing with the situation, but it was a necessary and effective one in dealing with circumstances that had developed quickly.
In passing, I refer to the somewhat idiosyncratic contribution of the noble Earl, Lord Mar and Kellie. Let us make it absolutely clear that nobody is using what has happened in Iceland to attack the interests of the people of Scotland. It is also worth observing that the First Minister of Scotland, in pursuit of a narrow, nationalist agenda, has repeatedly used Iceland as a model that Scotland should follow. We ought to think and reflect upon that.
My Lords, I thank noble Lords for the warmth of their welcome. I was particularly touched to be welcomed by the noble Baroness, Lady Noakes, whose reputation and standing as an accountant and public servant are renowned. I have followed with great interest her contribution on matters relating to the Personal Accounts Delivery Authority, where she has been vigilant, energetic and at times terrier-like in her pursuit of her interests. I look forward to engaging with her on the Banking Bill; I shall be sure to be well prepared.
I was grateful to the noble Baroness for saying that she supported the action the Government have taken to protect the interests of UK depositors. Were we overhasty in making the decision? My noble friend Lord Haskel reminded us of the importance of acting swiftly in situations such as this. Money moves rapidly and in a situation where we believed the interests of UK depositors were likely to be prejudiced and treated in a discriminatory fashion, it was entirely proper that we took swift action. But we did not take that action before we had engaged in extensive discussions at ministerial and official level with the representatives of the Icelandic Government and of their deposit protection financial services agency. We were unable to obtain the assurances that we thought were necessary that Iceland would honour its obligations to treat all depositors equally and not to discriminate against those who were not from Iceland. For that reason we felt we had to act swiftly when it was clear that a very serious situation was about to occur. That does not mean that negotiations do not continue. Indeed, we are in regular dialogue with the Icelandic authorities to help secure an effective resolution of this unfortunate situation.
Was the amendment order brought into force too swiftly? To some extent I think that I have answered the point made on that by the noble Baroness, Lady Noakes. The amendment order is an affirmative order which must be made, but will lapse if it is not debated by both Houses of Parliament. We took the necessary action and have now brought it to the House for affirmation, that having occurred in another place yesterday.
The noble Baroness asked about the IMF loan, as did other noble Lords. The US Government support the extension of an IMF facility to Iceland. The IMF issued a press notice on 24 October announcing that the initial sum had been agreed with Iceland at $2.1 billion. This is a two-year loan to support economic recovery. Following a review by IMF’s management, the agreement will be presented to the IMF board for approval in early November. A condition of the loan should be to ensure that all creditors are treated fairly and equitably. That is a key objective of the Government’s action in placing the freezing order on Landsbanki. We wish to see all creditors treated equitably and fairly and not discriminated against by virtue of nationality alone.
The noble Baroness asked about taxpayer exposure. The Chancellor has guaranteed the retail deposits in full for Landsbanki’s branches, for Heritable, which was a subsidiary of Landsbanki, and for Kaupthing Singer & Friedlander. The top-up above the Financial Services Compensation Scheme threshold for Landsbanki is likely to be of the order of £800 million. So after the first tranche of protection to retail depositors is provided by the Icelandic compensation scheme, the second tranche by the Financial Services Compensation Scheme, the final top-up from the Government will be £800 million. To put that in context, the Icelandic share will be £2.2 billion and the Financial Services Compensation Scheme contribution will be £1.4 billion. In the case of Heritable and Kaupthing Singer & Friedlander, which were UK-registered, FSA-regulated entities, the Treasury top-up is likely to be of the order of £600 million.
The noble Lord, Lord Newby, asked why the retail deposits of Kaupthing Singer & Friedlander were transferred to ING but this did not occur in the case of Landsbanki. We did transfer the retail deposits of KSF and Heritable, but they were UK-regulated and UK-incorporated entities, as I said earlier. Landsbanki, through its Icesave account facility, was operating as a branch of Landsbanki in Iceland and, as such, we did not have powers to transfer the retail deposits of a branch to another banking institution under the Banking (Special Provisions) Act 2008—although it is clearly fortunate that those provisions were available to us to take action to protect retail depositors in Heritable and Kaupthing Singer & Friedlander. Instead, insolvency arrangements in the case of Landsbanki are the responsibility of the home state of the parent—in this case, Iceland. We cannot put Landsbanki into the insolvency process; that can be done by the authorities and parties in Iceland.
Several noble Lords asked why terrorism powers were used. I am grateful to my noble friend Lord Haskel for reminding us of the full title of the legislation. It is fortunate that we have such legislation in place to protect the interests of British depositors in these circumstances. I am pleased that a number of Members of this House expressed support for that view. Whether it is contained in one Act or another, let us not lose sight of the fact that retail depositors in the United Kingdom are in a stronger position as a result of the actions that we have been able to take to protect Landsbanki assets held in the United Kingdom.
We would not wish to see the stigma of terrorism associated with Iceland. It was with sorrow that we felt we had to take the action we took. We made every effort to secure appropriate commitments from Icelandic Ministers and authorities that they would not discriminate against UK depositors. Those assurances were not forthcoming. Here I rely not upon a partial disclosure of the transcript of a single conversation but, rather, on the depth and breadth of many conversations involving Ministers and officials. We tried very hard to secure the commitment that UK depositors would not be subject to adverse discrimination. Only when it was clear that those assurances would not be forwarded to us on a basis that was acceptable to us did we, with deep regret, take this action to protect the interests of the UK economy.
We have a warm and close relationship with Iceland. It is a country which we admire; we admire its people, its culture and achievements. As the noble Viscount, Lord Eccles, said, it has—or did have—the fifth or sixth highest GDP per capita in the world. It is a matter of great sadness that, as a result of the failures of Iceland’s banks, the country, as my noble friend Lord Campbell-Savours said, is now having brought upon it significant, serious economic consequences. That is why we, through our membership of the IMF, are doing what we can to support the people of Iceland. I want to make it very clear that we would not wish our friends in Iceland, the Government, their ambassador or anyone else to believe for one moment that we regarded Iceland in any way to be a terrorist nation.
The noble Baroness, Lady Noakes, asked whether these powers should be in the Banking Bill. Of course, I was not a Member of this House when the Newton committee reviewed these matters in 2003 but I have acquainted myself with the arguments used at the time and the reasons why the committee’s proposals were not accepted. The provisions of Part 2 of the 2001 Act are emergency powers, which could be used in the context of terrorism but are not limited to that context. I think that we stand here today seeing the efficacy of this legislation and the foresight of the Government in putting in place action which could be used to protect the interests of the British economy in circumstances such as this. As such, I—albeit as a relative youth when it comes to these matters in this House—would need to be persuaded that it was necessary for us to move this legislative provision to another piece of law. It has acted as we anticipated that it would in such circumstances.
The noble Lord, Lord Newby, also asked about issues relating to Kaupthing Singer & Friedlander in the Isle of Man. Kaupthing Singer & Friedlander (Isle of Man) is a subsidiary of the Icelandic parent company and not a subsidiary of the UK company Kaupthing Singer & Friedlander. The Isle of Man authorities are responsible for the supervision of KSF (Isle of Man), and arrangements for depositors are therefore a matter for them. A provisional liquidator, PricewaterhouseCoopers, has been appointed over KSF (Isle of Man), and queries relating to lost funds should be directed to PWC. The Isle of Man has a deposit guarantee scheme and the Isle of Man authorities have indicated that they will ensure that depositors are compensated up to the £50,000 threshold. They are not going as far as the UK in respect of retail depositors; nevertheless, they have given assurances regarding that threshold.
To clarify matters for the noble Lord, Lord Newby, I point out that the Chancellor has put in place arrangements to ensure that all retail depositors of the UK branch of Landsbanki, including those with deposits in its Icesave products, will receive their money in full. I repeat: all retail depositors will receive their money in full.
The noble Lord, Lord Elystan-Morgan, raised a number of questions, some relating to investments by local authorities, including his own. The relevant government department issued new guidelines in 2004 in which it advised local authorities that in the placement of deposits they should have primary regard to security and liquidity and only then should they consider rate. The law treats local authorities and larger charities and companies as informed investors who have the benefit of judgment and resource and the capacity to diversify. That is why retail depositors who do not necessarily have access to those skills are treated differently. The Government stand ready to provide advice and support through a rapid response unit in the Department for Communities and Local Government to any local authority which is experiencing difficulties. However, I believe that at the moment there is no suggestion that acute difficulties are being experienced, because, as we in this House would expect, local authorities have exercised wisdom and care in the placement of deposits and there has been no excessive concentration of such deposits.
The noble Lord, Lord Elystan-Morgan, also asked about the £100 million working capital provision for Landsbanki. This loan is secured over a significant amount of Landsbanki’s assets. It is at a commercial rate of interest and it is expected that the loan will be recovered in full from these assets within a reasonably short period. It is designed to facilitate the creditors receiving the highest possible sum under the administration process.
My noble friend Lord Campbell-Savours has already told us about the impact on the Icelandic economy, to which I have already referred. He also asked questions about the IMF and I am pleased to see that good progress is being made. He said that the view had been expressed by some in Iceland that action in respect of Kaupthing Singer & Friedlander was premature. KSF in this country is regulated by the FSA, which concluded that that company no longer met its threshold conditions. It did so after due and proper inquiry and very close engagement with the company. In those circumstances I stand ready and content to accept the advice of the Financial Services Authority. It should also be stressed that this move did not have any bearing on the status of the parent company. The decision to place that company into receivership was taken in Iceland.
I welcome the contribution of the noble Viscount, Lord Goschen, on terrorism. I hope that my comments about Iceland have given some comfort. I also note his concern that this measure would be better placed elsewhere, but I have already spoken to that point. The most important issue is efficacy. This may have been inelegant or a slightly uncomfortable process in which to engage, but it was highly effective in protecting the interests of British depositors and the British economy.
I thank the noble Viscount, Lord Eccles, for reminding us in some detail of what the IMF said. It was prescient in its observations, and it is a matter of regret that earlier action was not taken. He also mentioned the rating agencies, which will be dealt with in another place, but it is important to remember that they are one source of information only. There are other sources. A rating agency is not a substitute for good judgment. If charities, companies or local authorities relied solely on rating agencies, they were not using the full range of skills and judgment of a prudent person that the law and those who put them in their position expected them to do.
I was grateful for the observations about Scotland. I am very new to your Lordships’ House, but it would be wise for me to steer clear of any matter relating to the politics of Scotland. I commend the orders to the House.
On Question, Motion agreed to.