Considered in Grand Committee
My Lords, today there are three instruments before the Committee: the draft compensation orders for Bradford & Bingley plc and the UK subsidiaries, Kaupthing Singer & Friedlander—which, with your Lordships’ agreement, I shall refer to henceforth as KSF—and Heritable, of the Icelandic banks Kaupthing and Landsbanki. In moving that the Committee consider the first of these orders, I will speak also to the second two.
I turn first to the Bradford & Bingley plc Compensation Scheme Order. Having already debated the Bradford & Bingley plc transfer order on 13 November, many of the Committee will be aware of the background to the order that we are considering today. I shall briefly summarise events in the run-up to taking Bradford & Bingley into public ownership. Following the turbulence in global financial markets, Bradford & Bingley found itself under increasing pressure as investors and lenders lost confidence in its ability to carry on as an independent institution. On Saturday 27 September, the Financial Services Authority determined that the firm no longer met its threshold conditions for operating as a deposit-taker under the Financial Services and Markets Act 2000 and FSA rules.
Once the extent of those problems became clear, the Government had two options: risk letting the bank go under, or provide support. Letting the bank go under would have risked instability spreading, with serious consequences for the UK’s financial system and wider economy. It was because of that risk to stability, rather than the risk to shareholders, that the Government chose to save the bank.
The Government, on the advice of the FSA and the Bank of England, acted immediately to maintain financial stability and protect depositors while minimising the exposure of taxpayers. Officials worked over the weekend to bring about a part-public, part-private solution that best meets those objectives. I think noble Lords will agree that it was right to explore every option to achieve that outcome. The tripartite authorities had explored a range of private sector solutions before taking action. However, it was concluded that it was not sustainable to run the bank on a stand-alone basis, either as a listed company with public support or as a publicly owned company. A subsidy on the scale required would not, in the Government’s judgment, have provided the best value for the taxpayer.
A transfer order under the Banking (Special Provisions) Act 2008 therefore allowed for an immediate transfer of Bradford & Bingley into public ownership and for the onward transfer of the retail deposit business to Abbey National plc. That was crucial for maintaining financial stability and ensuring that customers retained access to their accounts. These actions taken in relation to Bradford & Bingley demonstrate that the Government stand ready to do whatever is necessary to maintain the stability of the UK’s financial system.
Today’s Committee is considering only the Bradford & Bingley plc, Heritable and KSF compensation scheme orders, which I will come on to now. The draft Bradford & Bingley plc Compensation Scheme Order, which the Treasury has laid before Parliament for affirmation, is made under Section 5 of the Banking (Special Provisions) Act 2008. As noble Lords will be aware, in the event of the Act being used to transfer shares or to extinguish share options, Section 5 requires the Treasury to establish a scheme to determine the amount of any compensation payable to shareholders, or to holders of share options, within three months of the day of the transfer order.
The Heritable and KSF determination of compensation orders are made under Section 7 of the Banking (Special Provisions) Act. As Noble Lords will be aware, in the event of that Act being used to transfer liabilities or rights, Section 7 requires the Treasury to make provision, by order, for determining the amount of any compensation payable by the Treasury to the authorised UK depositor concerned. That means that the three compensation orders we are considering today need parliamentary approval before the end of this year. I regret that the recent turbulence in the financial markets has prevented an earlier decision with respect to compensation in the case of Bradford & Bingley and the Icelandic banks, allowing more time for parliamentary consideration.
This draft Bradford & Bingley plc Compensation Scheme Order reflects the model used in the Northern Rock plc Compensation Scheme Order in most respects, and provides for an independent valuer to assess any compensation payable to the former shareholders of Bradford & Bingley. As in the case of Northern Rock, noble Lords will recognise the need for a fair and proper way to assess the amount of compensation, if any, that should be paid in these circumstances. The Banking (Special Provisions) Act, whose provisions both Houses have debated and agreed, makes it mandatory for any compensation scheme to be based on the assumption that state support has been withdrawn and that no such support will be provided in future.
Crucially, this compensation must be fair, which means that it should be based on a realistic assessment of the shares’ value without public support. It is fair and right that the Government should not be required to compensate shareholders, or others affected, to the extent that taxpayers’ support inflated the value of their shares. Taxpayers should not be expected to pay compensation for value that would not exist without their support. The mandatory assumptions in the Act give effect to that.
However, it is important to note that this order does not impose the same assumptions on the valuer of Bradford & Bingley that were imposed on the valuer for Northern Rock. In the Northern Rock compensation scheme order, as well as assuming that state support had been withdrawn and that no such support would be provided in future, the valuer was required to assume that Northern Rock was not a going concern and that it was in administration. That difference is because the position of Bradford & Bingley was not the same as Northern Rock’s.
When taken into public ownership in February 2008, Northern Rock had been in receipt of substantial institution-specific financial assistance for over five months, in the form of both loans from the Bank of England and the provision of Treasury guarantee arrangements. By contrast, no such guarantee arrangements had been provided to Bradford & Bingley, and the Bank of England had provided no loan facilities to it that were not also open to all qualifying institutions. As a result, it is right to impose no further assumptions beyond the mandatory assumptions under the Banking (Special Provisions) Act 2008. It will be for the valuer to assess the implication of those assumptions.
The order sets out that the amount of any compensation payable will be determined by an independent valuer, appointed by the Treasury. We intend to advertise for expressions of interest in that position in the new year, if the House and the other place agree to this order. After a proper selection process, and after consulting the Institute of Chartered Accountants in England and Wales, the Treasury will make an appointment. We will, of course, be looking for someone independent of all interested parties and with both extensive company valuation skills and the ability to handle a range of relevant stakeholders. Once an independent valuer has been appointed, he or she will decide on the process to be followed. The valuer will then determine the value of Bradford & Bingley shares on the transfer date, on the assumption that public support was withdrawn and no further support was provided, and come to a decision on the amount of any compensation payable.
Once that assessment has been made, anybody affected will be able to ask the valuer to reconsider his or her determination; a revised assessment will then be made. Anyone affected who is dissatisfied with that revised assessment will then be able to refer the matter to the Financial Services and Markets Tribunal. This order is the fairest way forward for both shareholders and the taxpayer. It is fair that the value of any compensation should be determined by an independent valuer, but only on the assumption that public support was no longer available. This order allows for that to happen in a clear way, with opportunities for the valuer’s decision to be challenged at an appropriate time.
I turn to the compensation orders with respect to the UK subsidiaries Heritable and KSF of the two Icelandic banks, Landsbanki and Kaupthing. On 7 and 8 October 2008 respectively, the FSA decided that Heritable and KSF no longer met their threshold conditions and were unlikely to continue to be able to meet their obligations to depositors. Accordingly, the Chancellor announced that by orders made under the Banking (Special Provisions) Act 2008, the retail deposit business of Heritable and KSF were to be taken into public ownership. Heritable and KSF were then placed into administration and their retail deposits subsequently transferred to ING Direct.
The position of Heritable and KSF differs from that of Bradford & Bingley, as the former shareholders still own the shares. The compensation to be assessed relates to the transfer of liabilities: that is, the retail deposit book and associated rights. It is therefore considered that a much simpler compensation mechanism is appropriate in such circumstances. Matching amounts of cash provided by the Treasury and the Financial Services Compensation Scheme backed the subsequent transfers of the retail deposits to ING Direct. Heritable and KSF are required to pay back the total of all costs and liabilities owed to the public sector in transferring the liabilities.
The Government negotiated reductions in the amounts to be paid to ING Direct by the FSCS and the Treasury for transferring the retail deposit books. Those reductions were £1 million for Heritable and £5 million for KSF, and the Government’s claims in the administration of Heritable and KSF will be reduced accordingly. Without the provision by the Treasury and the FSCS to the purchaser of funds equal to the liabilities transferred, the deposit books would have been unsaleable and have represented negative value to any potential purchaser.
Given that the transfers were made up primarily of liabilities to repay retail deposits and associated rights, that they would not have been possible without significant public support, and that Heritable and KSF have obtained the benefit of the £1 million and £5 million negotiated with ING for the deposit books through the reduction in those companies’ repayments to the Government, we consider that no compensation should be payable for the transfers. The compensation orders therefore provide in each case that the compensation payable is to be determined as nil.
I hope that I have explained clearly these orders’ background and purpose. It is right that we should establish a fair way to assess the amount of any compensation payable to people who have lost their shares or had share options extinguished. The three orders we consider today set out fair compensation processes, and I commend them to the Committee.
I thank the Minister for introducing these three orders. My remarks will mostly concern the Bradford & Bingley order, but I will start with a few remarks on the Heritable and KSF orders. As the Minister has explained, those two orders set the compensation at zero; it would be difficult to put together a case for a value of more than zero when transferring liabilities—unless there was significant other value. Now, there may well be a moot point about whether the total of £6 million that the Treasury managed to negotiate as part of that transfer was sufficient recognition of the intangible value attached to the deposit books. Nevertheless, it is clear that no plausible valuation would produce a positive value for those two companies.
I note that Section 7 of the Banking (Special Provisions) Act 2008 says:
“The Treasury must by order make provision … for determining the amount”,
of any consideration. It does not say that the Treasury may determine the consideration, but clearly indicates that some kind of process should be put in place to determine the consideration payable—one which would, presumably, take account of all matters like the appeals processes that the Act contains. So is the position of the Government that they can use the valuation provisions of the 2008 Act to impose the Treasury’s view of value of compensation without any rights of redress other than the wholly inadequate judicial review process? I am not necessarily saying that we disagree with the result in this case, but it is an interpretation of the 2008 Act that is not without controversy. It does not seem to be something contemplated when the then Bill passed into law, so I would value the Minister’s comments on that. The Act has a shelf life of only another couple of months, but we ought to be clear about the matter in the context of the rather different provisions of the Banking Bill, on which we will start work tomorrow.
I have a few questions for the Minister about the Bradford & Bingley order. The first concerns the basis of valuation that the valuer must use. The Minister pointed out that the formulation in the order is the same as that for the Northern Rock order, with one important exception; namely, it does not have the equivalent of Article 6 of the Northern Rock order, which refers to both the “going concern” assumption and the assumption of being in administration. The Minister will be aware that Article 6 of the Northern Rock order is itself controversial and is being challenged by the Northern Rock Shareholder Action Group. The Minister sought to explain the difference by saying that Bradford & Bingley was not the same as Northern Rock and that, because Northern Rock had some institution-specific assistance, that meant it was appropriate for the Government to make the assumptions in Article 6. It is not necessarily for today’s Committee to determine that; it will be determined by the court in due course.
However, it is rather anomalous that Bradford & Bingley, having had its deposit book and branch network transferred to ING, is now in some kind of asset realisation process. Its website confirms that it is not offering new mortgages, so it appears not to be trading as a going concern. On the other hand, Northern Rock has had a rather expensive new board installed and is very much open for business and carrying on trading, albeit on a somewhat modified basis from its pre-nationalisation state. Therefore, we have the paradox that Bradford & Bingley, which clearly is not now a going concern, can be treated as one for valuation purposes but Northern Rock, which clearly is a going concern, is deemed by the Treasury not to be. I find that confusing; no doubt others will as well. Perhaps the Minister might like to explain the Government’s reasoning on the two. I am not sure that simply institution-specific assistance is enough to justify the differences.
The nationalisation of Bradford & Bingley was justified in part because it did not meet the FSA’s threshold for a deposit-taker. Of course, the Government have given no detailed information to back up that position, which means that both Parliament and the financial services world, which needs to understand these things, are in the dark. The issue will become even more relevant in the context of the Banking Bill, where the threshold conditions are referred to as well. I hope that the Minister can say a little more today about the way in which Bradford & Bingley did not meet the threshold conditions, because that is important for people in the financial services world to understand. Not meeting the threshold condition could imply that Bradford & Bingley was not a going concern as a deposit-taker, but it indicates nothing about whether it could continue as a going concern on another basis. Do the Government consider that Bradford & Bingley was a going concern at the time of nationalisation? That would influence the amount of valuation.
I am glad to see my noble friend Lord Eccles in his place today. He prayed against the Bradford & Bingley nationalisation order last month. Unfortunately, I was not able to be present at that debate, but I have read the report of the proceedings of the House. He raised a number of concerns, including the paucity of information about the cost of nationalisation and the lack of a business plan. This order and its accompanying Explanatory Note are no more illuminating than the information available for the original order, so what estimates are the Government making of the run-off of the Bradford & Bingley loan book? Has a business plan been prepared? As my noble friend Lord Eccles pointed out, a plan for the rundown of the business, which clearly appears to be happening, is not complicated. Alternatively, are the Government set to use the Bradford & Bingley vehicle for future mortgage-backed lending? Again, the lack of information there causes considerable concern.
Can the Minister confirm that, once the valuation has been completed by the valuer, and subject to any appeal processes, any amounts due will be paid to shareholders without delay? There has been a suggestion that shareholders may have to wait until all the assets are realised and the creditors, such as the FSCS, have been paid off. Is it possible for the valuer to come up with a valuation on the basis that the shareholders will have to wait until all the cash flows have come through?
The Minister will be aware that, as is typical for a demutualised company, the shareholder basis is characterised by a large number of smallholdings. However, those smallholdings can represent a significant amount of the financial assets for the people concerned and they need to know when they might be paid. The Bradford & Bingley Shareholder Action Group wrote to the Chancellor about this on 10 November but I understand that it has not yet had a reply. Will the Minister say whether the Chancellor intends to reply and, if so, on what terms?
The action group pointed out in its letter that the Government had not communicated with the shareholders at all. It seems that out of common decency the Government should at least do that. They should tell the shareholders what is planned and over what timetable they can expect to receive something. I emphasise that in this instance we are talking very largely about small shareholders; we are not talking about those who are capable of reading about issues in the Financial Times and following matters at a higher level.
It is about time that the Government set out clearly what they expect their nationalisation of Bradford & Bingley to cost. Has the net amount payable in connection with the transfer of the retail deposits and branch network to ING been finalised? Will the Minister say what that is? That would then leave the mortgage book, which is presumably now generating cash as no new mortgages are being entered into. Can the Minister say what the gross amount of the mortgage book was at the time of the nationalisation and what provisions have been made against those gross amounts? What is the total of any other liabilities, about which I assume there is no uncertainty, and is what is then left positive or negative? In other words, what is the ballpark number of the net amount left for shareholders or due to be picked up by the Government?
Will the Minister also state the position of Bradford & Bingley’s securitisation vehicle, which I believe is called Aire Valley? There have been market rumours that Aire Valley will go the same way as Northern Rock’s Granite—that is, one or more triggers will be used to put the vehicle into rundown, which, in turn, will delay cash flows into Bradford & Bingley and raise the issue of the long-term value of the seller’s share, which will be the last to be paid out after all bondholders—
I cannot sing along with that mobile phone, which is a great pity. Perhaps I could if I could get the tune.
Lastly, will the Minister say what estimates have been made of the cost of the valuation process? Perhaps that should have been dealt with in the impact assessment for this order, which the Minister himself signed, but it is silent, so this is the Minister’s opportunity to inform the Committee. At the same time, will he update the Committee on the likely cost of the Northern Rock valuation process? I understand that a fixed fee was agreed with the valuer but that a lot of other costs for staff are included and that various advisers are now working for the valuer. Therefore, the fixed fee that was put into the public domain is by no means the end of the valuation story for Northern Rock. Perhaps the Minister would care to compare that likely cost, which is based on a much more prescriptive valuation base, with what is now expected for Bradford & Bingley.
I thank the Minister for introducing the order in what I think is his first outing in the Moses Room. As he can see, there can be quite a lot of detailed questions, even on what might appear to be a relatively straightforward order.
I start by saying that we on these Benches believe that the Government did the right thing in the end—I stress those words—with regard to both Bradford & Bingley and the Icelandic banks. In contrast to the noble Baroness, Lady Noakes, I propose to spend more time talking about the Icelandic orders and the situation in Iceland, but of course I will start with Bradford & Bingley and Northern Rock.
I listened with interest to the Minister’s carefully chosen words about the compensation process for Bradford & Bingley, but I am bound to say that on Northern Rock, it does not seem that there can be any outcome other than a zero from the process. Indeed, as the noble Baroness said, I would be concerned if the costs escalate beyond the fixed fee since it is bound to be public money that is spent on the process. From what the Government are saying, Bradford & Bingley appears to be a little more complicated. At this point, I should declare my interests both as a pension fund manager for the past 32 years, and, specifically to this case, as an investment manager and a director of a subsidiary of Close Brothers plc. It has a banking licence and we operate to some extent in the same areas as parts of KSF.
As an investment manager and having listened to the noble Lord, I find it hard to believe that there can be value in the shares of Bradford & Bingley in the way described. My general view is that a bank which runs out of cash and credit, which I am afraid basically was the situation at Bradford & Bingley at the moment when it had to be rescued, has no value. Sad though it is—we saw this situation to some extent with Northern Rock—whether the shareholders are large or small, equity shares are equity shares. If the taxpayer is being asked to put his hand in his pocket to recompense shareholders, that is money which is not available elsewhere for vital purposes. I do not prejudge this, but while the outcome for Northern Rock is clear, it is difficult to see how there will be compensation payable as regards Bradford & Bingley. However, I accept that it is a grey area and that it is important that the valuation is done properly and professionally.
Again, I do not agree with the implication of the noble Baroness that Northern Rock is now a going concern. The fact that the shell or hub of the company has been recapitalised at great expense to the taxpayer is relevant to the calculation of whether it was a going concern at the time, but no doubt the noble Lord will give his views on that.
I turn now to the Icelandic orders. By 7 or 8 October, there was no alternative because it was a very grave situation. However, the shocking figures before us show that there is a liability from Heritable Bank plc of £500 million to the FSCS, which basically is all of us as customers of British banks and financial institutions. It is not a separate pot; this is essentially British savers’ money. Some £45 million is owed to the Treasury, while Kaupthing owes £2.5 billion to the FSCS and £550 million to the Treasury. These are shocking sums, and the question that arises and which I want to put to the Minister—he has only recently taken over so I do not expect a full response today, but I will hand him the documents so that he can prepare one—is: why was the situation of the shaky Icelandic banks allowed to drag on for so long? Specifically, what did the Treasury, the Financial Services Authority and the Bank of England know in the spring and what did they know in the summer? I tabled Parliamentary Questions which were answered on 14 and 15 July about the extent to which the British financial authorities were taking steps independently of the Icelandic authorities to satisfy themselves about the stability and solvency of Icelandic banks—particularly Icesave—which, as noble Lords will recall, were at the time advertising vigorously in this country for deposits. Money went on pouring into them right up to the moment that those banks hit the wall on 7 and 8 October. The Answers from the Treasury on 14 and 15 July can only be described as extremely evasive and incomplete.
My honourable friend Vince Cable wrote to the Chancellor on 27 October to ask why those Questions were not properly answered and why, in particular, the Treasury failed to answer the Question about the outstanding compensation scheme. Did not the Treasury know? If not, why did it not find out in July and ask for a full statement about the sequence of events which involved the Treasury and the FSA seeking reassurances from Icelandic and other sources, briefing themselves on the protection scheme and taking any necessary action to strengthen protection?
The noble Baroness said there has been some delay in Bradford & Bingley shareholders hearing from the Treasury; it took six weeks, until 9 December, for the Chancellor to reply to Vince Cable on this very urgent matter involving billions of pounds of council tax payers’ and other people’s money being at risk. The answer ignored the main point of the question and started the sequence of events in August when, by that stage, it was too late to do much.
What happened in the spring? Did the Treasury, the FSA and the Bank of England really have no idea what was going on—that the IMF was seriously concerned, as we now know—and was it really only in August that the Treasury started to get worried? If so, it was negligent and ignorant of the red lights flashing all over Iceland and its banks in the market; if not, why did it not give me a proper answer to my Questions on 14 and 15 July? I will hand the letter and the totally unsatisfactory answer from the Chancellor to the Minister and I hope that he will ensure that we receive a proper answer.
The compensation arrangement negotiated by the Treasury on those days—the £1 million, £5 million and so on—was probably the right thing to do under the circumstances; in a financial panic such as that, people have to do the best they can. I do not criticise that but I ask how on earth, and why, this situation was allowed to drag on for so long. I ask the Minister for proper answers when he has had a chance to check with the Treasury what happened and why.
I declare a non-interest in that my wife is Icelandic. I obviously have family in Iceland but neither I nor my wife has bank accounts in Iceland. I make that absolutely clear because I wish to refer to financial aspects of this issue.
My noble friend will know that I have been tabling Questions to his department asking for information. I wish to read a Question and the Answer I was given and I would like my noble friend and the civil servants in the department to consider it. I asked:
“What conversations took place on what dates between representatives of the government of Iceland and its banking industry and persons representing the interests of United Kingdom depositors in Icelandic banks on impending difficulties in the Icelandic banking sector; and whether they will place transcripts or reports of those conversations in the Library of the House”.
I also asked:
“What discussions have taken place, are taking place, and are planned with representatives of Iceland on financial support that can be given to Iceland to help that country during its period of difficulty in the banking sector”.
My noble friend replied:
“Treasury Ministers and officials have meetings and discussions with a wide variety of organisations in the public and private sectors as part of the process of policy development and delivery. As was the case with previous Administrations, it is not the Government’s practice to provide details of such meetings and discussions”.—[Official Report, 25/11/08; col. WA 281.]
I say gently to my noble friend that that is not a fair answer for the Treasury to give either a Member of the Commons or a Member of this House. We require far more detailed information than the Treasury is giving us at this stage. If these questions had been asked in a Select Committee of this place, the answers would have been far more substantial and, in the event that they could not be answered during proceedings in the Select Committee, the Ministers or civil servants would probably have offered to provide additional information in a written memorandum to that committee. Indeed, in January, I understand, the Treasury Select Committee in the other place will probably carry out an inquiry and I am sure that it would not be satisfied with answers as brief as that one, which was obviously provided to my noble friend by people in his department.
The reason this is relevant is because, in the daily conversations that take place between my wife and myself and the other half of our family in Iceland, we are repeatedly told that people simply do not understand what is going on. I saw this morning five editions of Morgunbladid which had just arrived in the post as I left. My wife was trawling through them for information and it is quite clear that many people in Iceland simply do not grasp the nature of the crisis and they are desperate for more information. I saw it, in part, as my role at least to secure information from within the United Kingdom.
Earlier this year the Icelanders were publishing through their Central Bank press releases as to developments in Iceland prior to the crisis. I received from the Central Bank in Reykjavik a list of all the press releases that were given earlier this year, which will no doubt be of interest to the noble Lord speaking from the Liberal Democrat Benches, on what was being said about meetings on the issue of the stability of the banking system in Iceland.
On 20 May this year, Moody’s downgraded Iceland’s ratings. That information was published in the Icelandic media and there was a press conference in Reykjavik. Why did not that information get through to the United Kingdom? If it did, why was not that information relayed to the local authorities and other institutions that were busy placing money there? On 22 April this year, Fitch Ratings issued a report on Iceland. On 17 April, Iceland sovereign ratings were lowered on external funding risks—outlook negative. This information came from the rating organisations. On 9 April this year, Moody’s issued an annual report on Iceland which was negative. On 1 April this year, Standard & Poor’s ratings services placed its ratings on the sovereign of Iceland on credit watch with negative implications. On 1 April, the same day, Fitch changes Iceland’s outlook to negative. On 5 March this year, Moody’s assigns negative outlook to Iceland’s ratings. In other words, material was available earlier in the year which should have alerted the United Kingdom institutions investing on behalf of public bodies to the fact that there was a problem in the stability of the Icelandic banking system.
I want answers to my questions because I wish to dovetail that information with the information available in Iceland. When people in Iceland read about this, they conclude that people abroad must have known something was wrong, so why did they keep on investing? That is the question they put and there might be a simple answer. I am not a banker—I am a widget maker by origin; a manufacturer—but if this information was available, why did it not get through? Is it not fair for Icelanders to question to what extent they are culpable in view of the information that was being made available within the United Kingdom?
The other question which has arisen during my browsing over the material that came from the Central Bank in Iceland concerns Glacier bonds, which I understand are króna-denominated Eurobonds. It seems that the Icelanders closely researched developments in New Zealand some years ago where, because it was short of internally available money for investment, New Zealand issued Kiwi Bonds, and the Icelanders copied them with Glacier bonds. As a number of these bonds mature in the years to come, I do not know whether they are included in the published figures about the liabilities of Iceland to institutions in the United Kingdom. I have been reading a very interesting article by Thorvardur Tjorvi Olafsson on this issue, which he wrote in 2005, several years before the crisis, in which he sets out the problems that could arise with the sale of these bonds on western markets. As I say, I am not a banker and I do not know the answer. I do not expect my noble friend to give a specific answer today, although he is very knowledgeable on these issues and perhaps he does know a little about it. However, if he does not, I hope that he will write to me with some information on the matter.
Finally, I go back to my original proposition and ask that more information and more detail be published on the background to the meetings that took place. People are entitled to know what has been going on over the past six, seven or eight months with regard to the impending crisis—or what we now know to be the current crisis—in the Icelandic banking sector.
I join other noble Lords in thanking the Minister for his explanations this afternoon. I draw attention to my interest as a director of a financial institution that holds significant policyholder funds invested in financial institutions, including Bradford & Bingley.
I think we all recognise the difficult circumstances that arose when Bradford & Bingley and the other institutions were dealt with and the imperative that drove government action. I think we also all recognise that it is right that shareholders bear the risk before depositors. None the less, I should like the Minister to confirm that his statement this afternoon and the specifics of the individual cases represent government support for the principle that shareholders should, as far as possible, be treated fairly in such situations, if and when they occur in the future.
In deciding what is fair in the particular circumstances of Bradford & Bingley, I draw attention to two characteristics of the situation. First, my understanding is that it was liquidity, and in particular a low ratio of deposits to loans, rather than capital adequacy that drove the decision to take Bradford & Bingley into public ownership. Indeed, I understand that when Bradford & Bingley was taken over, its tier 1 capital ratio was in the region of 10 per cent, which, as I believe the chairman of Bradford & Bingley said when he wrote to the Government at the time, implied that there could be a significant surplus value from the liquidation of the assets. Of course, the capital ratio does not necessarily guarantee that value is left for shareholders—liquidity is also an important responsibility of shareholders—but the fact that the capital ratio was as high as the Government are urging other institutions to achieve is a significant factor in this case.
Secondly, we need to recognise, as I hope will the valuer, that, in addition to the interests of the 850,000 small private shareholders in Bradford & Bingley, major institutions had been encouraged to invest further funds in discussion with the Government in the period before the decision to take Bradford & Bingley into public ownership. As the Minister knows better than most, these institutional funds also represent the interests of millions of individual pensioners and savers. Clearly, it is not a good signal to encourage the further participation of institutions in this kind of structured solution to banking problems if that participation, encouraged by the Government, is not recognised if there is not a successful outcome to the problem.
Therefore, I welcome the fact that this draft instrument has provision for an independent valuation. It clearly is up to an independent valuer to weigh up the circumstances and take them into account. I also welcome the fact that, unlike Northern Rock, the valuer has not been instructed to value on the basis that Bradford & Bingley was not able to continue as a going concern. However, I should welcome an explicit government assurance that this change in wording is significant and deliberate in recognising the potential value for shareholders in this circumstance. I should also like an assurance that the fact that the valuer has to assume that there was no government support does not imply a premise that there is no value in a company as an ongoing business or that the business had no value in rundown. If the Minister cannot go as far as my noble friend Lady Noakes would like in saying whether the Government regard Bradford & Bingley as having been a going concern, will he say whether the Government will present evidence to the valuer on their belief or not in the bank’s potential as a going concern at the time?
Finally, a suggestion was made by the major financial institutions at the time of the takeover to volunteer a non-executive director to be appointed to the board to help oversee an orderly rundown of the book of business if that is what transpires. Would the Minister like to comment on how that proposal has been received?
Noble Lords have debated whether the Government were entitled to take Bradford & Bingley into public ownership by relying on Section 2(2)(a) of the Banking (Special Provisions) Act 2008. If they were not so entitled, we would not be considering this order. The test in the Act is,
“maintaining the stability of the UK financial system in circumstances where the Treasury consider that there would be a serious threat to its stability if the order were not made”.
On 13 November I asked for,
“an explanation of the judgment made by the Treasury that on 29 September, Bradford & Bingley triggered the purpose of the Act”.—[Official Report, 13/11/08; col. 824.]
It did not appear then—nor does it now—that there was in Bradford & Bingley a serious threat to stability on that day. In his response, the Minister frequently referred to “maintaining stability”, but did not explain the Treasury’s reasons for considering the threat to be serious. Similarly, in his letter of 27 November, he did not refer to a “serious threat”. Such additional information as he did give—here I wholly agree with the noble Lord, Lord Campbell-Savours, that we are extremely short of information on all these matters—went to confirm that the problems at Bradford & Bingley, although real and in need of action, did not constitute a serious threat to stability. For example, he detailed the withdrawal of deposits over the four days leading to the Treasury’s action as being to the value of £326 million. That is a significant figure in itself, but not so much within a total of £20 billion-worth of deposits.
Nevertheless, I think we all agree that the market had become a place where Bradford & Bingley, in company with the much larger Royal Bank of Scotland and Halifax Bank of Scotland, was finding it close to impossible to continue. It was this wider market failure which led just 10 days later to the bank recapitalisation scheme. That leaves open the question: why was not Bradford & Bingley included in the recapitalisation scheme, having received financial assistance from the Treasury or possibly the Bank of England to tide it over for 10 days until the announcement of 8 October? That action restored a degree of confidence in some much larger banks that were in trouble. Why was this course of action not an option for Bradford & Bingley? Why was it left out? There may be a good explanation, but we have not been given it.
It is profoundly unsatisfactory that the Government refuse to describe all the options they considered in late September. They constantly mention the private sector but leave out of the account that there might have been an alternative public sector solution to the problem. The Government say that they believe in competition and do not wish to manage banks at all, let alone in run-off, yet by summarily bringing the 160-year Bradford & Bingley history to a close, they have both reduced competition and given themselves a job of administration for which they are unqualified.
It is high time that the Government provided the information to demonstrate that the test in the Act of “serious threat” was met—if it was. There were surely options open that would have better protected long-term stability, depositors and the taxpayer. The solution chosen will cost the taxpayer much more than would have been the case if Bradford & Bingley had been put in a position to continue. In their determination to be seen to be doing something, the Government have failed to see that continuity was greatly to be preferred to compensation. We never needed to be asked to consider this order.
The range of questions asked was considerable. If I fail to answer any, I will carefully examine Hansard and ensure that I provide full answers to Members of the Committee who raised them, with copies to all those who participated in the debate.
I start with the comments from the noble Baroness, Lady Noakes. For obvious reasons, I will not say anything that relates to the forthcoming court action in respect of Northern Rock which is being raised by two hedge funds and another party. The argument that Northern Rock can be continued as a going concern can be only on the basis that it continues to enjoy substantial government support, a point with which I think that the noble Lord, Lord Oakeshott, would agree. I shall say a little more in a moment in response to the observations of the noble Viscount, Lord Eccles, about whether Bradford & Bingley met threshold conditions and the threat that the situation constituted to financial stability.
The noble Baroness, Lady Noakes, asked me to speculate on the gross amount of the assets, net of provisions and liabilities, of Bradford & Bingley. I understand that Bradford & Bingley continues to be under an FSA reporting obligation and that that information will in due course be provided, as indeed will further information about Bradford & Bingley, as required to be declared in a business plan that has to be filed not later than the end of March 2009 in respect of state aid and restructuring requirements. That will also answer the questions that the noble Baroness, Lady Noakes, asks in connection with the securitisation vehicle Aire Valley.
I was also asked about the cost of the valuation process. The appointment of the valuer will be through an open competition. I am assured that that is the method most likely to produce an outcome that represents good value for money. In the case of Northern Rock, where the valuer appointed is from BDO Stoy Hayward, there is a fixed-cost arrangement in respect of the fee for the valuer. There are arrangements for other incidental costs as might be required in the carrying out of the valuer’s duties. I am sure that the valuer recognises the need to exercise caution there, but they must not be fettered in their ability to complete a thorough evaluation.
The noble Lord, Lord Oakeshott, raised a number of questions on the Icelandic banks and has, through the Clerk, passed me a letter that I will ensure receives appropriate attention. I note what the noble Lord says about the replies he received to his Questions of 14 and 15 July. The FSA intensified its supervision of the Icelandic banks from the beginning of 2008. However, as a matter of good practice the FSA does not disclose its confidential negotiations with individual institutions. The Committee will, no doubt, be aware that my right honourable friend the Chancellor of the Exchequer, in the PBR statement, indicated his intention to write to the European Commission about issues arising in consequence of the experience of the Icelandic banks and the implications for the passporting under EEA arrangements; he has now done that.
My noble friend Lord Campbell-Savours, who has asked previously about Icelandic institutions, drew attention to the reports issued during 2008 by the rating organisations Moody’s, Standard & Poor’s and Fitch. Those reports were, of course, available both in Iceland and elsewhere. He says that depositors should have been alerted by the announcements from those rating agencies, and I completely agree. Informed investors should have been taking those rating announcements into consideration in deciding whether they wished to continue placing deposits with Icelandic institutions.
I note what my noble friend says about the paucity of information available on what is happening in Iceland. He also asked specifically about New Zealand bonds; I must confess that I will have to ask for further information on that matter, and will arrange for a reply to be sent to my noble friend.
If I heard my noble friend correctly, he said before that the FSA would not comment on negotiations that were going on during this period—so, from the beginning of the year. That must apply to banks that still trade, but surely if a bank comes to the end of its life there can be a justification for publishing that information. Surely, commercial sensitivity is substantially reduced in those conditions. Also, it is the Glacier bond that I referred to for Iceland.
If I used the word “negotiation”, I apologise; I was referring more to communication and discussions. The FSA’s position—with which I have sympathy—is that, notwithstanding what might happen, it would prejudice its ability to have open and full communications with a regulated entity if that entity were to believe that details of those conversations were subsequently to become a matter of public record.
That is a pretty ridiculous situation. Now that we know, many months on, that disaster has struck, are we seriously to say that we are not allowed to find out when what appears to have been grossly negligent regulator failure has happened? Do we have to ask through the Freedom of Information Act? Surely when something like this happens, which we all agree has been pretty disastrous, neither the FSA nor anyone else can hide behind that position.
I thank the Minister for his assurances that he will look into the matters I have raised. Given what he has just said to the noble Lord, Lord Campbell-Savours, about the fact that informed investors could and should have been aware of these rating downgrades in April and May, was the Treasury aware of those downgrades at that time and, if so, what was it doing about it, particularly given its responsibility for guiding and helping local authorities, many of which went on putting further sums of money into these banks right up until the end?
I am sure the noble Lord, Lord Oakeshott, appreciates that the responsibility for regulatory oversight of the Icelandic banks lies with the home state authorities, and that is where the primary focus of questioning to understand the failure of these institutions must be.
That is a wholly unsatisfactory answer. These banks had operations in the UK and there are bodies in the UK, not least the Treasury, that have measures of responsibility for them. To say that questions have to be asked of the Icelandic authorities is simply unacceptable; we are talking about actions by the UK Government. That is what our questions are about.
My noble friend will know that I have tabled Questions raising that issue about two other banks. The reality is that in Iceland the bank was run by three people—the governor and two others—with a supervisory board, elected by the Members of Parliament, that clearly did not know what was going on in great detail. Are we saying that banks operating within the UK, where billions of pounds are at risk, can be subject to the whims and decisions of three men sitting in an office in Iceland, determining exactly what is going to happen with regard to the management of that bank and all the implications of that? Surely that cannot be right.
I believe that that was precisely what drove the Chancellor of the Exchequer to write to the European Commission asking for a careful and considered review of the implications of the EEA passporting regulations in respect of regulatory oversight and the adequacy of compensation arrangements. I am not in a position to comment upon the management of individual Icelandic banks in Iceland or the action of the regulatory authorities in Iceland.
I turn to the second point raised by the noble Lord, Lord Oakeshott. The Department for Communities and Local Government made it clear in its guidance to local authorities that they should have regard to risk and diversification rather than rate. As my noble friend Lord Campbell-Savours has noted, the deterioration in the health of Icelandic banks, as indicated by the rating agencies, was information that informed investors should have been taking into account. The Treasury, however, does not direct local authorities in respect of their deposit placement activities.
A slightly misleading answer there from the Minister, who is new to his brief. The guidance under which local authorities place deposits is actually joint guidance from the Treasury and the Department for Communities and Local Government. I know that because my honourable friend Vince Cable and I got that guidance from them, which is why on the “Today” programme I was able to challenge the director of the Local Government Association, whom I believe has just been suspended from his job. Since it was involved in the joint guidance, the Treasury should have been aware of the situation and take partial responsibility for it.
I no doubt stand corrected by the noble Lord. I well remember listening to his interview with a member of the local government community on the “Today” programme, an interview in which the noble Lord came out the clear winner.
I turn to the points raised by the noble Lord, Lord Blackwell. He said that he wishes for assurance that it is the Government’s intention that shareholders will be treated fairly. I confirm that that is our intention. I also confirm—and I believe that in so doing I will address the points raised by the noble Viscount, Lord Eccles—that the noble Lord’s understanding is correct: the problem at Bradford & Bingley was not one of capital adequacy but one of liquidity. The bank was experiencing the early stages of a run, as reported by the chairman of Bradford & Bingley, Mr Pym, in his evidence to the Treasury Select Committee.
The noble Lord, Lord Blackwell, welcomed the appointment of an independent valuer and the valuation assumptions that are to be used. He asked for confirmation that the wording of the valuation assumptions was “significant and intentional”. I am pleased to give such confirmation. He also asked that I should make clear that there should be no presumption that there was no value in the shares of Bradford & Bingley, and I am similarly pleased to give such confirmation. I cannot anticipate the evidence that HMT or the other tripartite bodies might give to the valuer in support of the valuer’s process.
The noble Lord, Lord Blackwell, mentioned that institutional shareholders had volunteered a willingness to appoint a non-executive director to the board of Bradford & Bingley. The Committee will be aware that it is intended that the shareholding in Bradford & Bingley should be placed under the supervision of UK Financial Investments, which will have a largely independent non-executive board drawn from people with appropriate experience in the private sector. I believe that that body will perform the function that the institutional investors had in mind.
I believe that I have answered, or have gone as far as I can in answering, the points raised by the noble Viscount, Lord Eccles. The problems facing Bradford & Bingley represented a serious threat to financial stability. This was a large banking institution that was experiencing a run, the details of which have already been provided to the other place. A number of other options were considered by the board of Bradford & Bingley and the Government. The Committee will be aware that Bradford & Bingley explored a number of options with its own shareholders, with a group of institutional shareholders who were willing to increase their shareholding in the company and with a private equity group called TPG. None of those routes provided a satisfactory solution to a situation that was driven, in the end, by liquidity problems rather than problems of capital adequacy.
I reinforce the question I asked. I understand that there were explorations within the private sector to find a solution; indeed, the solution that was found included a fairly large private sector option to transfer the deposits. But was a public sector solution considered? That is the burden of the argument I was putting forward. We were only 10 days from the bank recapitalisation scheme, which must have been known to the Treasury. In order to get through those 10 days, public sector financial assistance would have secured that Bradford & Bingley could enter the recapitalisation scheme and continue, instead of being brought to a halt.
I understand that a wide range of options was considered, but it was the determination of the FSA over that weekend that Bradford & Bingley no longer met its threshold conditions and therefore would not have been allowed to take deposits on the Monday.
As I said in my opening remarks, I am sure there are a number of points that I have failed to cover. If that is the case, I will ensure that the Committee receives full written responses.