Committee (1st Day)
Clause 1 : Overview
1: Clause 1, page 1, line 5, after “banks” insert “and foreign banks”
I shall speak also to the 18 other amendments in the group. As this is the first group of amendments, with the leave of the Committee I shall make a few opening remarks before moving to their substance.
We made it clear at Second Reading that we would bring this Bill political good will for a speedy passage as we recognised that the Government would need powers to fill a gap that would otherwise be left by the expiry of the Banking (Special Provisions) Act next month. Consideration in the other place was rushed because the Bill was not available until October, notwithstanding that the first White Paper was published last January. Even with the unusual procedure that we adopted of starting work on the Banking (No. 2) Bill, we will be hard pressed to finish our consideration before 12 February, which is a full eight days before the Banking (Special Provisions) Act runs out. The other place has decided that it will be in recess from 12 February.
Our good will is tinged with the frustration that we would have preferred a little longer to take the Bill at a more considered pace. Rushed legislation is often defective, which your Lordships’ House abhors. We shall, of course, do our best, and it is in that spirit that we approach the Committee. I say this by way of background to our Committee consideration as a whole and to this group of amendments.
As I said, the Bill is based largely on a White Paper published very nearly a year ago. With the exception of some new clauses, some of which were tabled only yesterday, the Bill shows almost no recognition of what has happened in the past year. It seems to respond to the problems that exhibited themselves in 2007 and not much else. This group of amendments and some others, to which we will come in due course, would fill in some of the legislative gaps revealed in the past year with which the Government appear not to have caught up.
Last autumn when the Icelandic bank, Landsbanki, was in financial trouble and apparently threatening not to honour its international commitments to UK depositors, the UK Government took the unexpected step of using powers contained in the Anti-terrorism, Crime and Security Act 2001 to freeze the UK deposits in that bank to protect UK depositors. The Minister will be aware that the use of these powers, while doubtless available technically, was the cause of some controversy. There is a dispute as to the facts on which the Government rested their decision that these extreme powers should be activated, and there has been a lasting resentment in Iceland that Icelanders have been tagged as terrorists. I do not want to debate the facts and circumstances of Landsbanki—there will be plenty of other opportunities for that—but I want to raise whether this Bill should have a tailor-made version of the asset-freezing powers embedded in it. The Bill must be clear on the full range of the Government’s powers in respect of banks that fail, which in so doing have a potential impact on the UK.
The Minister will be aware that when the Anti-terrorism, Crime and Security Act was passed there was much unhappiness in Parliament about the sweeping nature of its powers, many of which as we know were not confined to counterterrorism activities. That was known at the time and has been demonstrated several times since. The Government undertook to set up a review of the legislation by a group of Privy Counsellors led by my noble friend Lord Newton of Braintree. It is interesting to note that of the nine members of that review, all but two were then, or are now, Members of your Lordships’ House. Indeed, one of the remaining two is married to a Member of your Lordships’ House.
The report, which was unanimous, took the view that when special counterterrorism legislation is required it must,
“contain proper protections for the privacy and liberty of the individual, and in our view, stand apart from other law so that it can be accompanied by its own tailored safeguards, including careful monitoring and review of its use. It is important that it commands public support, otherwise its use risks being mistrusted and therefore less effective”.
In relation to freezing orders, the review said that the powers in the 2001 Act should lapse and be replaced in relation to counterterrorism by primary legislation based on UN Security Council Resolution No. 1373. In other cases, as the report stated at paragraph 150:
“Freezing orders for other emergency circumstances, and the safeguards which should accompany them, should be reconsidered on their own merits in the context of more appropriate legislation”.
The Government have done nothing in response to the review undertaken by the Privy Counsellors, but they have used the powers in relation to non-terrorism circumstances in the case of Landsbanki. My amendment seeks to develop a tailored regime of asset freezing in the case of bank failure.
I shall not deal with the amendments in great detail. They cover more than a dozen pages of the Marshalled List and are significantly based on the legislation contained in the 2002 Act, but have been tailored. Amendments 1 to 3 set up an asset-freezing procedure for foreign banks as one of the elements of the special resolution regime. Foreign banks are defined in Amendment 6. Amendments 9, 15 and 28 bring the asset-freezing procedures into the special resolution objectives in Clause 4, the code of practice in Clause 5 and the general conditions for the special resolution regime in Clause 7.
The meat of the procedure is found in the new clauses and part inserted after Clause 165 by Amendments 146 to 156 and the associated schedule inserted by Amendment 209. These provisions are very similar to those found in the Anti-terrorism, Crime and Security Act 2001, but there is a crucial difference in the formulation of the basic power. Under the 2001 Act, the powers are based on the extremely broad formulation of the Treasury believing that action to the detriment of the UK’s economy had been or was likely to be taken on the basis of action constituting a threat to the life or property of UK nationals or residents. Under Amendment 146, a freezing order would have to satisfy two conditions. Condition 1 is identical to the first two parts of condition A in Clause 8 for the use of private sector purchaser or bridge bank powers. The second condition is a refinement of the third leg of condition A in Clause 8 so that instead of relating to the protection of depositors generally, as in Clause 8, the new asset-freezing power focuses on foreign banks paying up in the case of UK depositors.
I have not attempted to deal with the other main criticism of the asset-freezing power made by the Newton report; namely, the lack of an appeal or independent review process. I have merely attempted to lift the very general power in the 2001 Act and place it in the Bill as a tool that the authorities have used in the past and might need to use in future to deal with banking stability or depositor protection. In addition, I have not sought to repeal the 2001 Act because the Bill does not represent the comprehensive opportunity to alter that Act’s powers in the way that the Newton report suggested. The aim is that the Treasury should look to the tailored powers put forward in these amendments rather than to the ones that were rightly criticised by the Newton report to be used in other contexts.
I am sure that the drafting of some of the detailed amendments is open to criticism, but I hope that the Minister will recognise that for today’s Committee these are probing amendments. They are designed to seek the views of the Government on why the Bill does not provide a comprehensive response to the financial and banking stability issues in the light of recent experience. They are also designed to be a modest contribution to making those powers more comprehensive and making the Bill a proper reference point for all those who seek to identify the Government’s tool box in future financial crises. Importantly, they are designed to recognise the splendid work of my noble friend Lord Newton and the other members of that review, which has been ignored by the Government since it was written in 2003.
We have some sympathy with the amendments. We were not as critical as the noble Baroness about the use of the Anti-terrorism, Crime and Security Act 2001 in respect of Landsbanki; we thought that the circumstances justified it. We have been very struck by the response of the authorities in Iceland, who felt that the fact that the powers had been exercised under an anti-terrorism Act justified a sense of grievance and began a legal action which, I gather, has now been withdrawn, because they felt that the powers had been improperly used.
Everybody agrees that it is appropriate that the powers exist; the only question is the legal context in which they exist. The logical place for the powers, when dealing with banks, is in this Bill, rather than in an anti-terrorism Act. As the noble Baroness said, we could not put the powers in this Bill and simply delete them from the Act, because there are other circumstances that have nothing to do with financial stability in which we may want to use them. However, when dealing with financial and banking stability issues, the logical place for such powers is in the Bill.
I had not intended to intervene in this debate, but in view of the kindly remarks uttered by my noble friend from the Front Bench about the report of the committee that I chaired some five or six years ago—of whose membership at least one other, a very distinguished one, is in the Chamber—it is right that I thank her for raising those points and state that I, as did the entire committee, share the view that where there is what I think we called in the report “mainstream legislation”, the powers should be included as opportunity arises in that mainstream legislation. This is clearly one opportunity and I, too, will listen with great interest to the Minister's response.
I intervene only very briefly to ask the Minister to explain the definition of a UK institution, because under the first and second amendments that we are considering, “bank” is defined at the beginning of Clause 2 as being a deposit-taking UK institution. For that purpose, what is the definition of a UK institution?
I start by noting the political good will to which the noble Baroness, Lady Noakes, referred. I am very grateful to noble Lords on the Benches opposite and to opposition Members from all parties in another place for the constructive spirit in which they have approached the Bill.
The main effect of this group of amendments and additions to the Bill proposed by the noble Baroness, Lady Noakes, concerns the provision of asset-freezing powers in relation to foreign banks. I will endeavour for the benefit of the noble Lord, Lord Stewartby, to define a UK institution by reference to defining what is a foreign institution. Let me therefore start by giving a practicable and workable definition of what a foreign bank is for the purpose of the Bill and the amendments.
I will assume that a foreign bank is one incorporated under the law of another jurisdiction, but which operates in the UK through branches established here. I will argue in a moment that we already have the powers we need to freeze the assets of such banks and that new powers are not needed, but there is a more fundamental practical difficulty that I bring to your Lordships’ attention. Even if I agreed in principle with the noble Baroness that additional powers were needed for the purpose of freezing the assets of foreign banks operating in the UK, there would be serious practical limits to the applicability of such powers. As I said, a foreign bank is a bank that is incorporated under the laws of another jurisdiction but which operates in the UK through branches established here. This means that the UK branch of a foreign bank is not a UK entity. In fact, it is not an entity at all; it is only part of an entity—a foreign entity—and it has none of the legal personality that the entity has. A branch therefore owns no property, and it cannot enter into any contracts in its own name. It is therefore really only a convenient label for the foreign bank’s operations in the UK and for its staff who happen to work here.
There may be significant operations and lots of staff, the bank may operate from large and impressive buildings, the staff may be responsible for controlling and moving huge sums of money, and they may operate accounts that hold billions of pounds of deposits from people in the UK, but none of that means that there are necessarily any assets in the UK that could be frozen. The assets of a foreign company, of which the branch is the physical presence, may be held in the UK, but equally they may be held outside the UK; and, of course, the introduction of these asset freezing powers in the Banking Bill would make it much more likely that assets would not be held in the UK in the future.
The second problem with the amendments is that even if there were substantial assets in the UK, which were controlled by a foreign bank with a branch here and which we wanted to freeze, they might not belong to the foreign bank. It would be very easy to set up a group structure in which the UK assets of the group were not the property of the foreign bank to which the freezing orders could be applied.
This brings me to a third point. The noble Baroness referred to the concern about the use of powers in anti-terrorism legislation to freeze the assets of foreign banks. I see the difficulty, but it is about presentation not substance. Asset freezing powers on the statute book must be justified on their merits, and the statute in which they appear is not the issue. Such powers would be no more or less acceptable in a banking Bill than they would be elsewhere to those who find them unacceptable. The powers that are now proposed are intended to be targeted on and limited to foreign banks. For the reasons that I have just indicated, to make these powers effective one would also need to be able to apply them to the assets that belong to persons, companies or other legal entities connected with a foreign bank.
This brings me to the scope of the power compared with that of the existing power in the Anti-terrorism, Crime and Security Act 2001. That power is available where the Treasury reasonably believes that a person or persons, being the resident or Government of a foreign country, have taken or are likely to take,
“action to the detriment of the United Kingdom’s economy (or part of it)”.
I hear with interest, as I have heard in previous debates, the great credit that has been given to the work done by the noble Lord, Lord Newton, in respect of this legislation, but I beg to suggest to noble Lords that this is not the moment to discuss that issue; this is the Banking Bill.
The amendments tabled by the noble Baroness, Lady Noakes, would introduce conditions based on financial stability, the maintenance of public confidence, the protection of the depositors in the United Kingdom, and the fact that the foreign bank was unable or unwilling to pay its debts in relation to depositors in the United Kingdom. The existing power is in one sense broader, but in another sense it imposes a higher threshold before action is taken. There may be circumstances surrounding a bank failure in which the Treasury needs to consider its existing asset freezing power, and the conditions which noble Lords have identified in their suggested provisions are some of the factors that may be relevant to such a decision. Given that we already have freezing powers under the Anti-terrorism, Crime and Security Act that enable us to address threats to the UK economy, it would be confusing and unhelpful to create a further set of freezing powers.
In a debate in this House on the Counter-Terrorism Bill, the noble Baroness, Lady Neville-Jones, the opposition Front-Bench spokesperson on security issues, said in relation to the asset freezing powers:
“Part of the problem of legislation being brought forward in amendments to successive Bills is that we ultimately get—no doubt unintended—inconsistency, and duplication with minor variations of language. It becomes difficult for those who must obey the law. Consolidation would therefore be good for ease of reference and the avoidance of unintended inconsistency”.—[Official Report, 11/11/08; col. 585.]
I agree with the noble Baroness that it is preferable for anti-freezing legislation to be consolidated where appropriate. These amendments to establish a further set of freezing powers would create just the problem of overlap, uncertainty and potential inconsistency to which the noble Baroness, Lady Neville-Jones, referred.
Finally, we have to recognise that the circumstances in which we would need to use such a power will be wholly exceptional. The recent case of the Icelandic bank, Landsbanki, to which the noble Baroness, Lady Noakes, referred, demonstrates this. Furthermore, while we certainly do not intend to use, or expect to need, the powers in the Banking Bill to deal with UK banks on a regular basis, we have to recognise that UK banks may sometimes get into difficulties. It will be the UK’s responsibility to resolve them. But we would not normally expect to have to resolve foreign banks even if they had branches here. To put a power to freeze their assets in the Bill implies that it may be considered normal, rather than exceptional, for us to intervene when foreign banks are involved. That would seem to send quite the wrong signal. We have a power which we have used in exceptional circumstances. We do not need another one. I would suggest to Members of the Committee that UK banks operating in a foreign jurisdiction that took upon itself the powers to intervene as suggested by this amendment might question whether they wished to conduct business in that jurisdiction. That would not be an unreasonable question for foreign banks which currently and prospectively will continue to operate in the United Kingdom.
The proposed amendments will not strengthen financial stability because we already have powers to apply asset freezes to protect financial stability under the economic aspects of the Anti-terrorism, Crime and Security Act. That was demonstrated in the case of Landsbanki. It is surely important that this Bill is focused on measures that will strengthen financial stability and not overlap with existing powers. The noble Baroness, Lady Noakes, chided that there is little in this Bill to deal with the causes of the current banking crisis. I would suggest that this Bill is less about current crises than about crises which may occur in the future and would have to be dealt with by this Government or by future Governments. It is a Bill about establishing a special regime to deal with the resolution of failed banks, rather than a Bill which attempts to speculate on the causes of the current problems. I therefore hope that the noble Baroness will agree to withdraw the amendments in her name.
In answer to the question posed by the noble Lord, Lord Stewartby, about definition, the Minister improvised a definition and indicated that it was quite difficult to do. Is there any such definition in the Bill? If so, where will we find it? One can see the argument against duplication, but one should not underestimate the fact that in passing terrorism legislation, the House is anxious that it should be used only for what the intention was in saying that it is to deal with terrorism. It is undesirable that we should suddenly find—indeed, it would deter us from going along on such a matter in the future—that terrorism legislation is being used for purposes that no one at the time had particularly noticed. Is there not a case for putting the proposal into a separate Bill if it is intended to use it in the context of banking legislation? The noble Lord says that there are powers already to deal with the point made by my noble friend, but I was not clear whether he was referring solely to the terrorism legislation or whether there are powers elsewhere which he had in mind.
I thank the noble Lord, Lord Higgins, for pointing out the inexactitude of my reply to the question from his noble friend Lord Stewartby. I shall try to be more precise. UK institutions are defined in Clause 2(3) as,
“an institution which is incorporated in, or formed under the law of any part of, the United Kingdom”.
Typically, it will be a UK-registered company.
In respect of the noble Lord’s second point, we may have to agree to differ on a piece of legislation that he refers to as the “terrorism legislation” and which I refer to by its full title, seeking to draw attention to the fact that it is applicable to a broad range of concerns that go beyond terrorism.
My noble friend knows that I am married to an Icelander and that I am in regular contact with my family in Iceland. The Icelandic people were told that the reason for using this legislation on terrorism was that there was no alternative; it was the only legislation available. The presumption that the people in Iceland made was that, when the opportunity arose, we would either amend the existing legislation or new legislation would be introduced. In doing so, we would show the Icelandic people that we were genuine in taking our original action. My noble friend appears to be backing away from that as a proposition and justifying the existence of legislation that the Icelandic people find offensive. I find it difficult to understand why there cannot be a little more flexibility in the Government’s position.
I am not sure how my noble friend came to the conclusion that we gave an indication or undertaking that we would change the legislation. The legislation used in respect of Landsbanki has, I believe, been highly effective in signalling that we will not tolerate discriminatory action by the Icelandic authorities that penalises UK depositors. The legislation has achieved its objective and was appropriate to the circumstances. It remains on the statute book and there is no need to duplicate it or move the provisions from one Act to another.
An important element of my noble friend’s reply to the noble Baroness, Lady Noakes, was that by accepting her amendments, he would discourage the formation of branches of foreign banks here in the UK. Is he aware that an important theme of the discussions of the Basle Committee, and a theme likely to be important at the G20 meeting in April, is precisely to discourage the formation of branches in foreign jurisdictions and replace them with subsidiaries in order to achieve regulatory consistency within any particular jurisdiction? Surely we should discourage branches which are then subject to overseas regulation by foreign regulators in which, outwith the EU, we may have no confidence.
My noble friend speaks with considerable knowledge of this subject. However, there is the counter-view that the position of depositors and creditors is enhanced by being part of a branch with a claim on the ultimate parent company rather than a claim on a subsidiary with limited capital. There are two sides to this argument. Nevertheless, the issue of tensions between the home regulator and the host regulator and some practical issues which have arisen around deposit protection schemes under the directive are ones that my right honourable friend the Chancellor of the Exchequer has raised with the EU Commission and that we will put on the agenda for discussion in preparation for the forthcoming G20 meetings to be hosted in London.
Perhaps I may add a word to reflect a different point of view. I am a trustee of a charitable trust which had some money on deposit with a firm in London that was controlled by Landsbanki. We have succeeded in preventing this money being transferred against the wishes of our charitable purposes, and that was highly unpopular in Iceland. It is unfortunate that we seem to have a state of affairs in law that is capable of being misrepresented in Iceland but which does not reflect the wishes or intentions of the British Government. I hope that in reviewing this situation we will think about the effect of our actions, however justified they are, when they are misinterpreted abroad. That seems to be at the heart of this difficulty. I venture to mention this problem because I do not think that it has been fully brought out yet in this discussion.
The noble Lord may be aware that I have expressed sympathy for the position of the people of Iceland in the difficult situation in which their banks have placed them. In our representations to the Government of Iceland we have made it clear that they should not regard us as accusing them of being terrorists. At the same time, we have made it equally clear to them that we expect them to comply with their obligations in respect of depositor protection and not to act in a discriminatory way against the interest of non-Icelandic depositors, as it appears was their inclination at one stage when they were suggesting that they were going to create “good” banks and “bad” banks, leaving the non-Icelandic depositors as claimants on the “bad” bank. As I said earlier, the action we took, regrettable as it was in the circumstances, has nevertheless proved effective as part of our representation to protect the interest of UK depositors.
The difficulty persists that we were justified in what we were doing but a foreign Government with whom we have normally had very friendly relations were able to misrepresent our actions and look at the legislation from an entirely different point of view. I hope that whatever decision is reached in this Committee will enable us to be more open with such a country and prevent it from distorting our actions, as Iceland did very effectively on this occasion to our considerable disadvantage.
The law is there to express an intention. Suppose the Bill were about shipbuilding, and we knew that one of our ships had suffered tremendous difficulties with its construction. The Minister replied to the noble Baroness, Lady Noakes, that the Bill cannot anticipate future difficulties with the banks, which the Government of the day will have to deal with, and we are simply dealing with the situation as it is now. Would it not be wise, while legislation on banking is going through, to give some thought to the difficulties that have arisen and to which she has drawn attention, instead of simply saying, “We can’t anticipate future dangers because the ship is sailing at the moment, although I know it’s leaking and we can’t get to port yet”? Would it not be wise to go back to the drawing board and find out whether the way the Bill was drafted is right?
I support the sentiment expressed by the noble Lord, Lord Bridges, in respect of Iceland. If there was misrepresentation or misunderstanding, that was regrettable. Through our diplomatic agencies and intergovernmental contact we will continue to work to ensure that our position is well understood and correctly represented.
The most reverend Primate challenges us to ask whether, if the ship is holed, we should be doing something about it. I seek to reassure the Committee that we are doing something about it. The actions we have taken to recapitalise the banks, facilitate funding and expand liquidity provisions are at the core of addressing those problems in this country, problems which, regrettably, are shared with many other countries. I suggest that over the next month or two we will see a serious programme of bank recapitalisations throughout the world, as other countries continue to follow the lead set in the United Kingdom.
However, the purpose of this Bill, particularly where it deals with the special resolution regime, is to say that there is no method of regulation or supervision which will assure us that there is no prospect of failure. There is risk in business, and banking is an inherently more risky business than most. Accordingly, the Bill seeks to ensure that we have a wide repertoire of responses to deal with a failing bank should it, regrettably, be necessary to do so. Some of the powers embodied in the Bill which are contained in the current legislation which expires at the end of February have already been used very effectively to deal with failing banking institutions in this country, including Heritable and Bradford & Bingley.
I thank all noble Lords who have spoken in this important debate, which covered not only the topic covered by the amendments but also the larger issue of whether the Bill covers all the things that need to be in the Government’s repertoire in order for them to handle banking crises. The Minister chided me for saying that the Bill was not about dealing with the causes of the current crisis. Of course not, but it should be about reflecting what we have learnt since the beginning of the financial crisis and the things that we need to do to deal with it. That was the purpose of bringing together the asset freezing provisions in one place—I will come to some others later. In that way the Government, having brought forward this Bill to make provision on banking—although it is largely about failing banking—have a clear expression of what can happen in different circumstances.
The Minister said that if we put these provisions in the Bill, it would be more likely that branches would be set up elsewhere. I take the point of the noble Lord, Lord Eatwell, that we do not want branches anyway, but assuming that we do, we already have the provisions in the 2001 Act. If we rephrase those specifically, we might actually reassure people coming to do business here rather than frightening them away. They should already be frightened away by the 2001 Act.
The Minister gave us a little lesson on what a branch was and seemed to imply that the amendment’s drafting did not take account of that. I tried extremely hard not to draft it in terms of branches but in terms of foreign banks; that was one of the things that I learnt a long time ago. But one is always open to criticism when drafting amendments.
The noble Lord quoted my noble friend Lady Neville-Jones in the context of counterterrorism. I warn him not to quote my noble friends out of context. I can say with considerable confidence that she was speaking only of counterterrorism, not of the use of powers contained in counterterrorism-based legislation in other circumstances. So we can put that to one side.
The Government’s position has not changed since the report from the privy counsellors, led by my noble friend Lord Newton, back in 2003. The Government do not accept the point; they think that under the guise of counterterrorism—or anti-terrorism, as it then was—they can draft very wide powers, give the Bill a Long Title and then use it for everything. Their attitude is, “We originally meant this to apply to organised crime, but if we just call it crime, we can use the powers for anything”. That is one approach to legislation, and it is clearly the Government’s, but we do not think that it is responsible. That is what the Newton report highlighted. We should pull out those very unusual powers—the Minister said that they were to be used only in exceptional circumstances—and put them in their proper context. That is the problem with the 2001 Act; it is there to be interpreted as time goes on. That is why it is unsatisfactory suddenly to lift a power from other legislation and use it in the context of the banking crisis. The Minister said that it was not appropriate to put these provisions in this Bill because it is a banking Bill. Of course it is appropriate, because we are talking about a banking issue. That is what my amendments were specifically designed to do.
However, the Minister said that the Government had not shifted from their position of liking broad legislation which they can pull out whenever they want rather than tailoring it to specific circumstances as was recommended by the Newton report. It is clear that we shall have to reflect further on that position. It weakens the Banking Bill’s ability to reflect the full range of issues that, we know from experience, are likely to come up in relation to banking crises. To that extent, the Government’s attitude weakens the Bill. I shall reflect further on what the Minister said, but, for today, I beg leave to withdraw the amendment.
Amendment 1 withdrawn.
Amendments 2 and 3 not moved.
4: Clause 1, page 2, line 2, at end insert—
“( ) If there is any conflict between the roles of the Bank of England, the Treasury and the FSA, or if there is any disagreement between all or any of them as to their roles or responsibilities, the view of the Treasury shall prevail.”
I shall speak also to Amendment 5. The amendments would add two new subsections to Clause 1. They focus on the tripartite authorities and how they should work in practice.
The Committee will be aware that the tripartite arrangements were invented by the Prime Minister when he was Chancellor of the Exchequer to provide some counterweight to the fragmentation which he caused when he set up the FSA and transferred to it some of the functions of the Bank of England. Many now criticise those arrangements; indeed, the critics are probably more numerous and vociferous than they were at the time.
The plain fact is that the fragmentation was not remedied by the tripartite arrangements, and the three key actors, the Bank, the Treasury and the FSA, failed in their first real test in relation to Northern Rock. As the Northern Rock events unfurled it was very clear that there was no overall leadership in the tripartite authorities and that, within them, they had different views and interests.
The FSA has published its own internal review of its handling of Northern Rock, which was pretty dreadful. We can therefore only speculate on what a truly independent review might have found. There have been no other publicly available reviews of the actions of the other players in the tripartite arrangements and no definitive reviews of whether the tripartite arrangements work, other than those undertaken by the Treasury Select Committee in another place. That committee has made many recommendations for improvement, some of which have inspired the thinking behind these amendments.
The tripartite arrangements do not exist as a matter of law. They were not written into the Bank of England Act 1998 or the Financial Services and Markets Act 2000. They exist only because the Treasury, the Bank and the FSA say that they do in the form of a memorandum of understanding on how they expect to work.
This Bill does, however, take us for the first time into the territory of defining in law who does what within the tripartite authorities in relation to banking and financial stability. They are called “the relevant authorities” in the Bill. It is perhaps a pity that an extra bit of terminology has been added to that of “tripartite authorities”, but we welcome the attempt to clarify individual responsibilities.
In another place, my honourable friend Mr Mark Hoban sought to tease out in Committee the interaction between the FSA’s responsibilities and those of the Bank and the Treasury. The Bill appears to set out a linear process whereby the FSA triggers the use of a stabilisation power by determining whether certain conditions are met under Clause 7. By virtue of Clause 7(6), the FSA ignores the special resolution objectives set out in Clause 4, which we shall debate shortly. Before the FSA sets off the process under Clause 7, it has to consult the Bank and the Treasury, but nothing is said about what happens if there is a disagreement.
Once Clause 7 is activated, the Bank or the Treasury can exercise its stabilisation powers under Clauses 8 and 9. Unlike Clause 7, these will be subject to the special resolution objectives in Clause 4 and, before they are used, the Bank or the Treasury has to consult the other two. Again, nothing is said about what happens if there is a disagreement.
My honourable friend in another place posed the question of what would happen if the Bank or the Treasury disagreed with the FSA over whether the trigger should be pulled under Clause 7. He asked whether there could be a decision tree, showing how the various players operated. The answer seemed to be that, notwithstanding that the Bill appears to set out a linear approach, in practice all parties would consult each other all the time, and the process would be very much non-linear and did not need any process for disagreement.
The Minister in another place said that the FSA would have regard to its own objectives and rule book under the Financial Services and Markets Act, rather than the special resolution objectives, but that would not be a problem because of all the interaction between the parties. He referred to the approach in the Bill as “clear and sophisticated”. It is certainly sophisticated in the sense that it is complicated, but whether it is clear is a matter of opinion. The Bill is, frankly, not clear on the interactive nature of the process. It implies, as I have said, a logical step-by-step approach, which has clearly not happened in the past and will not happen in future. By assigning responsibilities in Clauses 7 to 9, the Bill creates the illusion of simplicity and clarity, which no one will expect to work in practice.
My two amendments in this group address two aspects of these issues. First, Amendment 5 emphasises that, although there is a lot of notification and consultation throughout this Bill, there is a general obligation on the three parties to keep each other informed. As I understand it, that is the Government’s intention, with the Bill merely highlighting some of the formal points of reference. On that basis, I hope that the Minister will accept my amendment.
Amendment 4 is, perhaps, more controversial. It addresses unanswered questions that arose from the handling of Northern Rock. Who was actually in charge? Committees have never been good at running things, which is why in corporate structures and even political ones there is always somewhere the buck stops. This Bill is predicated on there being a unanimity of view among the tripartite authorities, but that does not even accord with historical precedent, let alone the potential in future, when different parties have, under this Bill, to have regard to different criteria.
Amendment 4 says that the view of the Treasury should prevail if there are any disagreements. That should be the intuitive answer because, if something goes wrong, the Treasury alone can pick up any ultimate cost through its ability to pick the pockets of taxpayers. The Treasury is, therefore, the logical holder of the ring. We should not let this Bill go forward on the unrealistic basis that no one is actually in charge but that somehow the trinity of the FSA, the Bank and the Treasury will work to one accord at all times. If we do that, we will legislate for a fairy tale. Nice though that may seem, it is not a responsible approach to legislation—hence my amendments put forward the prospect of the Bill reflecting the real world in which we operate, and not some artificial construct conceived in the Treasury.
As the noble Baroness says, this is a sophisticated not to say complicated Bill which assigns within it distinct roles to the bank, the FSA and the Treasury. As the noble Baroness pointed out, the powers that each is given are qualified by the requirement in the Bill that consultation take place at every point. Followers of the sorry saga of Northern Rock would agree that nobody came out of it desperately well, but I do not think that anybody would argue that the Treasury at every point absolutely had its finger on the pulse and that it, better than the Bank or the FSA, was able to exercise judgment in a way that subsequently seems satisfactory.
What slightly concerns me about the first of the noble Baroness’s amendments is that although at one level what she proposes is blindingly obvious, at the end of the day the Treasury always does call the tune. For example, during the Northern Rock saga, at one stage the Treasury informed the interim management of Northern Rock that it had to give preferred bidder status to Richard Branson at a time when that was not the view of the management, far less of the Bank or anybody else. The Treasury was calling the shots. But in that case, and in many others, the Treasury was proved to have exercised poor judgment. My shorthand way of opposing the amendment is almost to say, “Don’t encourage this”. If the Bill says that whenever the Treasury disagrees with the other actors in a saga it will automatically win, that will encourage Treasury officials to believe that they are in charge of every aspect of the workings of the Bill. I do not believe that that is a good idea. We will therefore not be supporting the amendment.
I rise to say a few words on the amendment of my noble friend Lady Noakes. It is quite clear that the tripartite arrangements have not worked. The FSA’s report into the handling of Northern Rock showed its weakness. Should not the Bank of England have the final view rather than the Treasury, as it is likely to be less biased?
On the comment made by the noble Lord, Lord Newby, about whether it is a good thing to spell out bluntly that the Treasury is in the ultimate key position, this issue arises more generally. After all, we are only dealing here with a Bill that deals with the special resolution regime. We have a whole new tranche of provisions to come in another Bill, in which these things will have to be spelt out one way or another, just as there will need to be some sort of clause along the lines of Amendment 5. The lack of effective consultation between the parties—there may have been a lot of consultation, but we all know from the end result that it was not a very effective process—means that more clarity will have to be given to this. Although it is putting the cart before the horse, the Bill needs to contain some broad principles that will be defined for much wider application in an ensuing thorough Bill on banking regulation and related topics, which I understand is being worked on.
A difficulty with this Bill is that we need to be as specific as possible to avoid any sort of gum-up of the system, as occurred because of Northern Rock and related issues. Legislation has probably to say something about the view of the Treasury prevailing. Otherwise, we go back into a ring-a-ring o’ roses situation and nobody knows exactly who is going to be in the key position.
My noble friend has done us a service in bringing forward Amendments 4 and 5 because, although they apply here only to the special resolution regime, they must be consistent with what is going to be done on a broader canvas when subsequent legislation comes forward.
Before other banks came into being, only the Bank of England was entitled to introduce legal tender. Then we created another currency called credit. Those banks in some ways are doing the same. I think that the Bank of England should ultimately take the decision. The introduction by the present Government of interest rates being governed not by the Treasury but by the Bank of England has created far better stability and better transparency and therefore they are not liable to political manoeuvrings. Even the best civil servants are still liable to political manoeuvrings. I will not welcome the amendment, but perhaps the ultimate decision ought to lie not with the Treasury, although it is answerable to Parliament, but with the Bank of England, which can turn up at the Select Committee, and its chairman can be quizzed on the decision. It is dealing with banking day by day, with an interest in the entire economy as opposed to banks that are just interested in their shareholders. Perhaps, when there are difficulties, the decision ought to lie with the Bank of England, not the Treasury. However, the clarity of the noble Baroness’s argument is irrefutable.
I would have thought it a necessary condition of an effective organisation that the buck should stop somewhere. It is therefore important that somebody—some group or institution—should have responsibility for the ultimate decision. In the Bill, the ultimate decision is with the FSA. Clause 7(1) says:
“A stabilisation power may be exercised in respect of a bank only if the FSA is satisfied that the following conditions are met”.
It does not say, “A stabilisation power may be exercised by the FSA only”. So if the FSA is not satisfied, it does not matter what the Bank of England or the Treasury think. Clause 7(1) seems to mean that its power to make stabilisation orders will not be affected.
As this is my first experience of taking a Bill through Committee, I shall endeavour in my response to these amendments not to fall into the trap of chiding the noble Baroness, Lady Noakes, or teaching the Committee lessons, and certainly never that of quoting any Member of the Committee out of context.
To address the noble Baroness’s points on Amendment 4, the Government believe that there should be a clear role for the FSA, the Bank of England and the Treasury in the special resolution regime. These roles should be in line with their expertise, and are accordingly mandated with, as the Minister said in the other place, a clear and sophisticated model. The FSA should be responsible for assessing whether a firm should enter the SRR, and the ongoing supervision of any firm while it continues to operate in the SRR. In that respect I agree with the noble and learned Lord, Lord Mackay.
The Bank of England should be responsible for the operation of the SRR and the tools within, other than temporary public ownership. The Treasury should be responsible for public finances and the overall public interest. The Treasury will also lead on the decision to take a bank, or bank-holding company, into temporary public ownership. This position has been consulted upon and is widely supported by stakeholders.
Of course, the authorities will continue to work closely together both prior to and during the period for which a bank is subject to the measures of the special resolution regime. This has been demonstrated during the recent resolution of actions on financial stability. As Members of the Committee will know, I have only been a Member of the House of Lords for a relatively short period of time. Before that, I was actively involved in the banking and financial sector. I was an observer from the outside of most aspects of the tripartite process. Over the past three months, I have had an opportunity from the inside to see how the tripartite process works. My judgment is that it works a lot better than many would suggest. It may appear that these separations of responsibility in themselves give rise to scope for conflict, tension or, conceivably, for nobody owning a particular issue; “Who’s in charge?” was the question that Mr McFall put to the Government at the Treasury Select Committee. But the reality is that the tripartite authorities all have a shared responsibility that draws upon their specialist area of expertise and which gives them particular focus on different aspects of how the tripartite arrangement works. Therefore, I respectfully do not agree with the amendment proposed by the noble Baroness, Lady Noakes. The Banking Bill provides for the roles that I have just set out for the authorities, providing in each case a lead authority. For example, Clause 9 provides the Treasury only with the power to take a bank into temporary public ownership. Clause 7 makes it clear that the FSA is the lead authority in deciding that the general conditions for entry into the SRR are met, as the noble and learned Lord, Lord Mackay, drew to the Committee’s attention.
I wish to ask the noble Lord a question on that point. I am sure that he will know the answer immediately and I attempt only to get clarification, but why is it that in Clause 7(6) the special resolution objectives are not relevant to conditions 1 and 2, the threshold conditions and timing and other relevant circumstances respectively? I appreciate that the objectives listed in Clause 4(4) to (8) are rather general but I do not understand why they are excluded. I appreciate that the noble Lord seeks narrow action as opposed to background economic conditions but they seem relevant.
The noble Lord, Lord Lamont, answered his own question in his final comment. As I was saying, the FSA is the lead authority in respect of entry conditions for the SRR. For the exercise of each power the Bill is clear about which authority is the lead one.
I beg the Committee’s indulgence in allowing me to come back to that point in a moment.
I also do not agree with the proposed amendment that would make the Treasury the authority with the final say. In particular, the independent regulator should make any regulatory decision, such as the decision that a bank is failing its threshold conditions—that is part of Clause 7. It is, of course, absolutely right that Ministers lead in matters that affect public funds or the wider public interest. Again, the Bill provides for this. That may well be at the heart of the observation of the noble Lord, Lord Newby, about the relative strength of the Treasury and the particular circumstances in which that strength is of considerable relevance to the operation of the tripartite arrangement. I therefore beg the noble Baroness to agree to withdraw the amendment.
I understand that the purpose of Amendment 5 is to require that each of the authorities keeps each of the others informed of their actions, considerations and decisions. I shall set out why I do not believe that this amendment is necessary. I agree that consultation between the authorities on these matters is essential, as I said. The authorities will, of course, work closely together prior to and during any situation where a bank is failing. This has been demonstrated during recent action taken under the special provisions Act and with regard to other actions to protect financial stability. It is clear to me that the authorities have demonstrated a capacity to work collegiately and effectively in handling challenging situations. I believe, however, that the amendment is unnecessary as where the Bill confers powers on a lead authority it also requires consultation with the other two authorities. For example, I draw the Committee’s attention to Clause 7(5), Clause 8(3) and Clause 9(4). I hope that my explanation has satisfied the noble Baroness that appropriate provision is made for consultation in the Bill. I therefore beg her to withdraw the amendment.
If I may, I shall come back to say a little more in response to the comments made by the noble Lord, Lord Lamont of Lerwick. The FSA is taking regulatory action under the Financial Services and Markets Act; it is not taking action under the SRR. It is deciding whether the SRR should apply. The SRR objectives cover how the stabilisation options will be implemented.
Before I move on to more general points, I want to come back to the Minister on that point. The conditions in Clause 7 on which the FSA must satisfy itself are in the context of the special resolution regime; they do not exist for their own sake. They are there only in the context of the special resolution regime. Therefore, the question has to be asked: why is the FSA making a decision under Clause 7 without reference to the special resolution regime? The FSA could make a decision under Clause 7 that had no implications for the issues raised in Clause 4, yet those issues must be taken into account by the Bank and the FSA in the exercise of the stabilisation powers. We do not believe that that conflict has been adequately explained, and, with respect, we do not think that it was adequately explained by the Minister just now. Perhaps he would like another go.
I am disappointed that I did not pass the test. Where the Bank or the FSA applies to have a bank placed in the bank insolvency procedures, both the general conditions must be satisfied. Additional conditions must be satisfied that relate to the conventional test for entering insolvency procedures—for example, principally if the bank is unable or is likely to become unable to pay its debts. The general conditions do not apply where the Secretary of State applies to have a bank wound up on the basis that this is fair. This reflects the Secretary of State’s historic and rarely exercised jurisdiction to apply to have any firm placed in insolvency procedures on the grounds of the general public interest, which is separate from the SRR.
As we say in Committee, I shall have to read that in Hansard. Perhaps I could respond more generally to the debate that we have had on Amendments 4 and 5.
I thank all noble Lords who have taken part in the debate. The one thing that has emerged is that there is no unanimity on who should be in charge. The Minister rightly said that Mr John McFall in another place asked that question during the Northern Rock crisis and got no answer. Today, we have had two votes for the Bank of England, a couple of votes for the Treasury and a couple of votes for no one. Perhaps there is no unanimity of view in Committee on the way forward. A serious issue remains—that the Bill, by implying that somehow everything will come out harmoniously, misses the point. In a practical sense, when things start to go wrong, leadership has to be exercised, and you cannot expect a committee or a set of three or more organisations to exercise collective leadership, because that simply does not work. If the Minister has any examples from his wide experience in the commercial world, I would be pleased to hear from him, but I have not come across any. I continue to think it important that someone should be in charge.
My other point related to needing to ensure that all parties are kept informed. The Minister referred to the primary clauses powers in Clauses 8 and 9, where there clearly are some cross-reference points, and there are some other clauses with cross-reference points. There are also some other powers that are taken in the Bill that do not have explicit cross-reference points, yet one would imagine that the tripartite authorities would be keeping themselves informed on a much more detailed basis. My point remains that the Bill does not describe the workings of the tripartite authorities in relation to cases of bank failure, and that is a pity.
I shall read the noble Lord’s explanation in Hansard to see if it makes more sense on the printed page than it did when I heard it and I will consider further whether I shall return to this matter on Report. I beg leave to withdraw the amendment.
Amendment 4 withdrawn.
Amendment 5 not moved.
Clause 1 agreed.
Clause 2: Interpretation: “bank”
Debate on whether Clause 2 should stand part of the Bill.
I am rather puzzled that in subsections (6) and (7) there is forward reference to conditions on building societies and credit unions, but there is no forward reference to the conditions which my noble friend plans to introduce with respect to bank holding companies and investment banks. Why are they not there?
Clause 2 agreed.
Amendment 6 not moved.
Clause 3: Interpretation: other expressions
7: Clause 3, page 3, line 4, at end insert “, and
“temporary” means a period which is not expected to exceed 3 years.”
The amendment adds a definition of “temporary”, as in “temporary public ownership”, to the end of Clause 3. The term “temporary public ownership” was first used in recent times in relation to the nationalisation of Northern Rock. I imagine that the use of “temporary” gives the act of nationalisation a more acceptable face. “Temporary” has never been defined in the case of Northern Rock and Ministers resisted saying how long they expected the bank to remain in public ownership when nationalisation was first announced, and they have been no clearer subsequently. Northern Rock remains in existence; it is trading with the benefit of public backing and is immune from the disciplines of the capital markets. Is the Minister yet able to tell noble Lords when Northern Rock will cease to be in temporary public ownership?
Bradford & Bingley is similarly shrouded in mystery. The deposit book and the branch network were transferred with great speed, which is presumably what a bridge bank would be there for, but the rump of the mortgage book seems destined to remain in public ownership for some time. We have not seen the promised business plan which for a run-off organisation cannot be complex to draw up. We have been told virtually nothing, as has been outlined in previous debates in your Lordships’ House. Is Bradford & Bingley in temporary public ownership or is it in indefinite public ownership? We should be told.
The phrase “temporary public ownership” is used throughout the Bill as if it had real meaning. We have to assume that the adjective “temporary” is deliberately placed in the Bill and is intended to add something to “public ownership”. If that is the case, we ought to know what sorts of timescales the Minister has in mind.
My definition refers to a period not expected to last more than three years. That does not mean that public ownership could not last more than three years, but it is intended to show that the power to initiate temporary public ownership in Clause 9, which we shall debate in due course, should, when it is exercised, be an expectation of a relatively short period, because if a longer period were involved it would not be temporary, and the Government should make specific primary legislation—as has been the case with all other nationalisations.
I am not wedded to three years as the definition of “temporary”, but if the Government can see only an indefinite period, as appears to be the case with Northern Rock and, possibly, the rump of Bradford & Bingley, either they should come clean and say that they cannot sign up to the ownership being temporary or they should look at one of the other options in the Bill. This is not just a debate about semantics; it is about honesty. This Bill spins a convenient line that the Government have eschewed old fashioned nationalisation for a new temporary version. If that is the case, the Government ought to be prepared to nail their colours to the mast and to say exactly what they mean by “temporary”. I beg to move.
I agree with the noble Baroness to the extent that I consider the word “temporary” to be unacceptable. Either it means something or it means nothing. In reality, it is pretty meaningless. Contrary to what the noble Baroness said, it is impossible and undesirable to define what “temporary” might mean in the context of the Bill. Let us take the case of Northern Rock. It seems to me that the Government have set a tight timetable for Northern Rock to pay back the money that it has received. That is what has been said. In setting that timetable, I believe that the Government have imposed unacceptable pressures on the management of the bank to pay the money back, and that is why Northern Rock, more than any other bank, is being harsh in relation to repossessions. It is under the cosh from the Government to get the money back as quickly as possible and is not following what many people think are currently responsible policies. Therefore, setting in the legislation a limit of three years or anything other than a very long period could, in certain circumstances, of which Northern Rock is one example, require the management of a nationalised or partially nationalised bank to pursue unsatisfactory policies.
I do not like the use of “temporary”. As the noble Baroness said, it has been included to make an ideological rather than a legislative point. I do not think that she or anyone else believes that the Government have become involved in nationalising Northern Rock or any other institution on ideological grounds. Quite the opposite: the Government tried desperately to avoid nationalising Northern Rock, even when it was the most blatantly obvious thing to do. However, constraining “temporary” in the way that she does is not acceptable to me. I would rather delete it altogether, and perhaps that is what we should do.
I have some sympathy with my noble friend’s amendment but, like the noble Lord, Lord Newby, I wonder whether three years is a slightly arbitrary timescale. It seems to me that the intent behind “temporary” is important. The intent is for this legislation to be used to bring about restructuring, and I wonder whether an alternative way of achieving this objective is to require the Government, at the point that the legislation is used to bring a bank into public ownership, to indicate what timescale they believe is necessary to achieve a restructuring. It may be three years but in some cases, realistically, it may take longer to get a bank back into private ownership. However, if at the time they used the powers the Government were prepared to define the timescale, they could be held to account against that timescale to ensure that temporary did not become permanent.
The noble Lord, Lord Blackwell, is right that the use of “temporary” is a declaration of intent rather than a specification of any length of time. However, I think that he is wrong to go on to say that perhaps we should specify a time longer than three years. The special resolution regime before us derives from that introduced in the United States in the case of Continental Illinois National Bank & Trust Company. In due course, most of the structures of Continental Illinois were returned to the private sector but it took more than a decade for that to happen. Given that one cannot predict economic circumstances, especially financial circumstances, with any accuracy even a year ahead—let alone three years or even more—putting any form of time limit on a movement in temporary public ownership would be a mistake. However, retaining “temporary” as a declaration of intent to which the Government can be held is important.
The point that has just been made is important. I agree that setting a specific time period is not sensible but the intention should be made clear. It should be said that “the arrangement shall be temporary and shall not become permanent”, or some phrase to that effect. It is important to include the intention.
Apart from the intention, it is important to declare how that intention is being pursued, and presumably that will be by way of business plans. I recall asking the noble Lord on a previous occasion what “temporary” meant and he said that the best he could do was to say that it was not permanent. However, that does not seem enough. When you go into something, it is important to have a clear idea of how you might exit again and to report on progress towards that exit.
We are having a semantic debate about “temporary”, but it seems to be based on an assumption that there is an entity which is taken into the public sector, and that there is an entity which is ultimately returned to the private sector. That may not be the case at all. You could take a bank into public ownership, and the bank could be broken up into different pieces, from different assets at different times, and different liabilities could be disposed of. You may end up with a husk of the name of Northern Rock remaining in the bank’s ownership for years, but effectively it would have been disposed of. I do not think that there is an entity to which one can apply the term “temporary”. You take something into public ownership and deal with it, which is not simply limited to the option of selling the entity that you bought in the first place. I am rather with the noble Lord, Lord Newby, that temporary probably has not much relevance as you cannot define the object to which it applies.
At an earlier stage, the Minister distinguished between presentation and substance. Judging from what we have heard so far, this word looks like presentation rather than substance. I should be interested if the noble Lord, Lord Eatwell, could elaborate a little on what he said about the way in which the Government might be held to the arrangement that was said to be temporary. How do you hold the Government to a temporary arrangement when you cannot say with any degree of precision what “temporary” means?
Before I address the amendment, which I hope to do with a clarity that does not require the noble Baroness, Lady Noakes, to have to refer to Hansard to understand my answer—I apologise if I was not clear—I should perhaps start by reminding noble Lords of the rationale for including temporary public ownership as a stabilisation option under the SRR. The private sector purchaser and the bridge bank stabilisation options are the key resolution tools, and the powers to effect them have been conferred on the Bank of England. In some situations, it may be appropriate to take a bank into temporary public ownership. I shall come back to the meaning of “temporary” in a moment, if I may.
For example, temporary public ownership is likely to be the most suitable resolution option in situations where the Treasury has provided a failing bank with a significant amount of public money to stabilise it; or where wholesale and long-term restructuring is required to return the bank to the private sector; or where the bank is subject to a very fast-burn or complex failure, such that there is insufficient time or means to effect a property transfer or share transfer to a private sector purchaser without significant risk. Those three examples are all characterised by considerable uncertainty, which is why it is difficult to be precise on how long a temporary period of public ownership might last. This is the option under the SRR which deals with the most complex and difficult-to-solve situations. The transfer to another bank—the bridge bank—is by contrast relatively simple and straightforward, so that option would be used only in the most serious and complex situations. Not surprisingly, the authority to use this power is reserved to Ministers.
Temporary public ownership provides a stable platform for restructuring a bank’s business. Again, that can take some considerable time, bearing in mind the fact that there may be considerable chaos in the banking system and that the difficulties may not be unique to one particular institution but common to many. My own business experience and that of many others in this Committee suggests that it is not a good idea to have a deadline, which I know is not the purpose of the amendment, because the time that it might take to give effect to such a resolution regime may be much longer.
Under the powers provided by the Banking (Special Provisions) Act 2008, Northern Rock and Bradford & Bingley were taken into temporary public ownership. In answer to the question from the noble Baroness, Lady Noakes, Bradford & Bingley is in temporary public ownership. As noble Lords will know, it is the Government’s intention that Northern Rock and Bradford & Bingley will in due course be managed at arm's length by UK Financial Investments Limited. While details are still to be finalised, and provision will need to be made on a case-by-case basis, it is likely that any other bank taken into temporary public ownership would also be managed at arm's length by that body.
Amendment 7 aims to provide a strong indication that the period for any temporary public ownership will be less than three years. I agree that it is the ultimate aim and priority to return any government-owned bank to the private sector. What do we mean by “temporary”? The noble Viscount, Lord Eccles, reminded me of my earlier comments on that. I define temporary as not indefinite and not permanent. This is a clear expression of intent, and I took some comfort, at least in part, from the noble Lord, Lord Higgins, on that point.
In my earlier observations about the difficulties that one might experience in going through this process, I hope I found some resonance with the noble Lord, Lord Blackwell, in saying that even if one were to put a period in the Bill, it is difficult to know whether it should be two years, three years or five years. It all depends on the circumstances. It is important that this House and the other place will be able to hold the Government to account, and if the Opposition believe that the Government are abusing the temporary nature of this provision, they will, no doubt, be vigilant in challenging that situation.
As the noble Lord, Lord Turnbull, noted, under this option, there can be multiple outcomes, which suggests that putting a finite period on a reporting obligation is tricky. The key issue is that this is a clear declaration of intent. The Government do not wish to acquire banks for some political or social purpose. As the noble Lord, Lord Newby, pointed out in the context of Northern Rock, it was not our preferred outcome but, in the circumstances, it was the right outcome. I do not believe that setting a timing objective in legislation is helpful, even when, as in this amendment, there is flexibility. I appreciate the intention behind the flexibility in the proposal from the noble Baroness, Lady Noakes.
I have previously outlined some of the situations where temporary public ownership may be beneficial; for example, where the Treasury has invested significant amounts of public money in a bank. In such situations, the judgment about when to return such a bank to the private sector should be determined by the public interest of protecting public funds as well as other SRR objectives. I have already reiterated that it is not the purpose of this legislation to do anything other than to hold banks in public ownership for as short a period of time as is consistent with other objectives relating to financial stability and protecting public funds.
I believe the Government have demonstrated their clear intention to run the banks in which they have taken shareholdings or which they have acquired on an arm's-length basis to support an as rapid as possible return of those institutions to the private sector. I therefore request the noble Baroness to withdraw her amendment.
Perhaps I may just clarify one thing with the Minister before I decide what to do with the amendment. He said about the banks taken into so-called temporary public ownership that Parliament would be able to hold the Government to account in that respect. Later amendments in the Marshalled List concern parliamentary accountability, but can he tell the Committee how that parliamentary accountability works and how the Government can be held to account under the framework set out in the Bill for keeping to temporary public ownership objectives?
I beg the indulgence of the Committee; I am still making progress on my learning curve. In my experience of answering Questions at the Dispatch Box on Bradford & Bingley, Northern Rock and other areas where the Treasury and the Government have involved themselves—been obliged to involve themselves—in banks, I have regularly felt that I have been held to account. That is what I had in mind.
The Minister misses the point. When the Government have to bring business before the House, it is right that we are given an opportunity to ask questions about those things, but there can be very long periods—sometimes whole years—when no business has to come before the House and therefore there is no natural opportunity either here or in another place to consider such issues, except through the mechanisms of Select Committees of either House. I was asking the Minister to expand on his comment that Parliament could hold the Government to account.
As I mentioned earlier, we have other amendments on the Marshalled List to deal with accountability, and I shall be asking the Minister to answer in more detail how parliamentary accountability can be achieved for those banks that are taken into public ownership. We will come to that in due course.
The Minister set out why the temporary public ownership was needed. That is why I did not table a Motion to oppose Clause 9 stand part. In the spirit of good will and letting the Bill go through, we have accepted that temporary public ownership is an appropriate power to have, provided that it means temporary—that was the purpose of my amendment. I accept that it is very difficult to define the period and am conscious that when banks run into trouble, the rump can take a very long time to deal with but, importantly, the noble Lord, Lord Eatwell, and my noble friends Lord Blackwell and Lord Higgins teased out that the question of intention is important and that the Bill should not be used as a guise to achieve bank nationalisation, to put not too fine a point on it.
I will reflect on our debate today, which has been interesting. It would not be right to table an amendment that said that temporary was not indefinite and not permanent; I think that we could do better than that in a way that better reflects intention than the current amendment. It is important that we should address to distinguish the Bill from nationalisation, which should be undertaken on a case-by-case, Bill-by-Bill basis. On that basis, I beg leave to withdraw the amendment
Amendment 7 withdrawn.
Clause 3 agreed.
Clause 4 : Special resolution objectives
8: Clause 4, page 3, line 8, after “to” insert “all of”
I will speak also to Amendment 18. Amendment 8 adds the words “all of” to Clause 4(2). This would require the tripartite authorities to have regard to all the special resolution objectives set out in Clause 4. Amendment 18 would require the code of practice issued under Clause 5 to set out how the objectives are to be balanced.
It was clear from the debates on this clause in another place that the Government are very unwilling to prioritise the various objectives listed in Clause 4. Indeed, subsection (9) says that they are,
“to be balanced as appropriate in each case”.
I am not sure what “balanced as appropriate” means in practice, and perhaps the Minister will assist the Committee on that. The evidence to date is that the protection of depositors, which is objective 3, has been the dominant objective in the Government’s mind in their various interventions to date.
Let me give the Minister an example on which to base his reply in due course. Objectives 1 to 3 may well involve some cost to public funds. How are those objectives in practice to be weighed against objective 4, which is to protect public funds? There is no appeal procedure against the use of the special resolution regime, with the possible exception of a judicial review, which is a blunt tool. Thus it is important to financial markets generally, as well as to those who might be targeted by the Bill, to know how its provisions are to be used in practice. How this process of balancing is to take place is one element of that, which is why Amendment 18 calls for the balancing process to be a part of the code of practice.
Amendment 8 is a variant of this, and would make it clear that the relevant authorities must have regard to all the objectives set out in Clause 4. That is important in relation to the need to protect public funds, because objective 4 might be less obvious to those in the FSA and the Bank of England than, say, to those in the Treasury. It is therefore important that those in the Bank of England and the Treasury take that into account when they approach their responsibilities under the Act.
Later amendments seek to add to the list of objectives. Of course, my comments on this amendment apply equally to Clause 4 if it is amended in line with those amendments. I beg to move.
Perhaps the Minister could help the Committee by clarifying the consistency of Clause 4(2) with the point that I raised about the last but one amendment to Clause 7(6). He will recall that I asked why the special resolution objectives were not relevant to condition 1, where a bank was likely to fail, or to condition 2, where a bank did not reach the threshold conditions. He gave a reply which I am sure was very accurate but which was rather difficult to follow at the time. No criticism is implied, but I think that that was the situation for some Members of the Committee.
I took the Minister to be saying that the special resolution objectives were more general background objectives, although I have difficulty seeing how objective 3, to protect depositors, is not relevant to condition 1, where a bank is likely to fail. However, I do not want to go back to the argument about the previous amendment and the previous clause. I am sure that this matter can be clarified, because these things are often much simpler than they appear, but why are the special resolution objectives, which relate to the stabilisation powers, not relevant to conditions 1 and 2, although they relate to a stabilisation power? In Clause 4(2), which cites the stabilisation powers, we are told that the authorities,
“shall have regard to the special resolution objectives”—
namely, objectives 2, 3 and 4. How are the two parts of the legislation consistent?
The Bill states:
“Objective 5 is to avoid interfering with property rights”.
Clause 4(9) states:
“The order in which the objectives are listed … is not significant; they are to be balanced as appropriate in each case”.
In considering this amendment, we need to understand whether the objective,
“to avoid interfering with property rights in contravention of a Convention right”,
is merely something to be balanced against other objectives or whether it has an absolute priority. Are the Government saying that if they believe it appropriate to override the convention right in order to protect funds, objective 5 can be dismissed or put to one side? Is it just another objective to be balanced or does it have an absolute right of primacy?
I do not think that Amendment 8 is required. I believe that the purpose behind the amendment is to ensure that the authorities have regard to all the objectives of the special resolution regime; that is, they cannot ignore one or more of the objectives when undertaking action within the special resolution regime. The Bill lists five objectives to which the authorities must have regard when taking action within the special resolution regime. Those objectives are,
“to protect and enhance the stability of the financial systems of the United Kingdom … to protect and enhance public confidence in the stability of the banking systems of the United Kingdom … to protect depositors … to protect public funds … to avoid interfering with property rights in contravention of a Convention right (within the meaning of the Human Rights Act 1998)”.
In response to the observation from the noble Lord, Lord Blackwell, my interpretation is that it is not intended that that should override our obligations or the obligation to property rights under the Human Rights Act 1998.
I believe that the requirement to have regard to all the objectives is already implicit in the Bill as its drafting does not refer to “one or more” of the objectives but simply to,
“the special resolution objectives”.
That fact is reinforced in the code of practice, the draft of which states that,
“the Authorities must consider the effect of their likely actions (including inaction) and assess them in the light of the objectives”.
For that reason, I do not believe that the noble Lord’s amendment is necessary.
As Members of the Committee may know, further information and explanation of the special resolution regime objectives is set out in the draft code of practice. However, while the Bill is clear that the authorities should have regard to all the objectives, the code also makes it clear that the specific relevance and application of the objectives may change; for example, as the threats to financial stability change over time or depending on whether public funds have been invested in a bank or decisions affect public funds. Furthermore, the Bill and the code state that the objectives have not been ranked. That is important because it recognises that the relative weighting and balancing of objectives will vary according to the circumstances of each bank failure, including circumstances specific to the failing institution and general circumstances relating to the wider financial system. I will consider this point in more detail when I respond to the noble Baroness’s second amendment in this group. However, this point does not change the fact that the authorities need to consider each of the SRR objectives. For those reasons, I would ask the noble Baroness not to press this amendment.
Amendment 18, on balancing the objectives, states that the code of practice under Clause 5 should include provision on,
“how the special resolution regime objectives are to be balanced against each other”.
Perhaps I may set out why such an amendment is unnecessary.
As the noble Baroness and other Members of the Committee will be aware, one of the main purposes of the code of practice is to provide guidance on the SRR objectives as set out in the Bill. Part 1 of the draft code of practice, on which we have recently consulted, includes information on the meaning of the objectives, the authorities’ regard to the objectives, and the balancing of the objectives. It is no accident that the code already includes detailed provision for each of these areas. Clause 5(2)(a) states that the code may provide guidance on,
“how to achieve the special resolution objectives”.
For this reason, I do not believe that the proposed amendment is necessary.
The matter of how the authorities balance the objectives in each case is important. As each resolution will be different, the Bill makes clear in Clause 4(9) that the objectives are to be,
“balanced as appropriate in each case”.
The draft code also indicates that the,
“relative weighting and balancing of objectives will vary according to the particular circumstances of each failure, including … circumstances specific to the failing institution; and … general circumstances relating to the wider financial system”.
Allow me to provide an example of how the weighting of an objective may change. The objective to protect public funds, for example, will become more relevant to the treatment of a bank within the SRR once significant amounts of public funds have been invested in it. Before such an investment, the objective would have been about avoiding contingent risk to public finances. Once an investment is made, however, the objective becomes more important as public funds are now actually committed.
We will reflect, following the consultation on the draft code and the observations made both in this House and in the other place, on whether further information is needed. However, as I set out, I believe that the intention behind the amendment is already covered in the drafting of Clause 5. I therefore urge the noble Baroness not to press the amendment.
The general conditions of Clause 7 demarcate the boundary between when the stabilisation powers of the SRR can and cannot be used. They are preconditions and their satisfaction does not authorise action. The provisions which authorise the use of specific tools are found in Clauses 8 and 9. I hope that that provides further satisfaction for the noble Lord, Lord Lamont of Lerwick.
Perhaps the noble Lord can clarify one point. I am somewhat concerned about the drafting because we appear to start with the objectives and then turn to how the relevant authorities will deal with them, rather than the other way round. Does Clause 4 say that each and all of the relevant authorities shall be able to use the stabilisation powers, the bank insolvency procedures and the bank administration procedures, or is the intention in fact that the Treasury will have one lot of powers, the FSA another lot, and so on? I am unclear about the extent to which the drafting ties this provision down as tightly as it should by using the term “relevant authorities” in the first two subsections of Clause 4. I hope that I have explained the point clearly.
The beginning of Clause 4 refers to the relevant authorities having regard to special resolution objectives when they use the stabilisation powers, the bank insolvency procedure or the bank administration procedure. Is it intended that the Treasury, the FSA and the Bank of England shall each be able to use these powers?
Is it not the case that Clause 8 provides powers for the Bank of England and Clause 9 powers for the Treasury? In both cases, the preliminary conditions of Clause 7 must be held to be satisfied in the view of the Financial Services Authority. Will the noble Lord help me with regard to the relationship between objective 1 and objective 2? Do the financial systems of the United Kingdom include the banking system of the United Kingdom? I would have thought that they do. If some financial systems are not part of the banking system, is not confidence in these also important, because confidence appears to be related only to the banking system? I would be glad of an explanation of the way in which these words have been chosen.
I express my thanks to the noble and learned Lord, Lord Mackay, who I think has helped to provide the right answer to the question posed by the noble Lord, Lord Higgins. The drafting reflects that all parties will be consulted but that specific authorities are vested with specific tools. Objective 1, which the noble and learned Lord also draws attention to, is,
“to protect and enhance the stability of the financial systems of the United Kingdom”,
whereas objective 2 refers to,
“public confidence in the stability of the banking systems of the United Kingdom”.
With regard to our earlier discussions on Landsbanki, misrepresentations and misunderstandings, objective 2 is designed to address situations in which confidence is at risk and to recognise that that is an important issue when promoting financial stability that goes over and beyond the stability of the financial systems of the United Kingdom, or could do in certain circumstances.
I am sorry to be on my feet again, but I wonder whether confidence in the financial systems would also be important. Or is it only confidence in the banking system that is important—that is, that part of the financial system which is the banking system?
Before I decide what to do with my amendment, I have a couple of points to put to the Minister. To help the Committee he gave an example of how the objectives would be balanced. He said the draft code would cover that. He then gave the example of the investment of public funds as being something that would be taken into account. Unfortunately I did not bring my copy of the draft code into the Chamber with me. Is that example in the draft code?
My second question is of a similar nature and related to the question that my noble friend Lord Blackwell asked on property rights. It cannot be the case that property rights can simply be had regard to and disregarded lightly, because they are protected by the convention on human rights. Will the Minister explain again how those rights are balanced against other rights and say how those rights, which are important and protected by European law, are balanced against other matters? Will the code set out in detail how those things might be addressed in particular instances?
I believe that the example I gave is drawn from the code, but the code is a long and complex document; I have a copy with me, but it would delay the Committee if I were to seek to find the quotation. If I do, I will ensure that that is drawn to the noble Baroness’s attention. If it is not in the code, it strikes me as an example that should be—and of course the code is an evolving document.
Noble Lords will appreciate that I do not have a legal background, but I place emphasis on the words “as appropriate” in Clause 4(9). The objectives are not listed in this section in any particular order. That is important, because circumstances will be different and they are to be balanced as appropriate in each case.
There is a very clear message from the noble Baroness, Lady Noakes, with which I am entirely comfortable: that it is difficult to envisage a situation in which it would be appropriate to override convention rights within the Human Rights Act 1998. However, there are circumstances in which it would be appropriate to take them into consideration and others where they would simply not be relevant and therefore not appropriate.
I should like to follow on from the point raised by the noble and learned Lord, Lord Mackay, regarding the objective of the stability of the UK’s financial systems. Why were investment banks or bank holding companies not mentioned in Clause 2? Leaving aside bank holding companies, and looking more carefully at the clause with respect to investment banks, which we will consider later, I can see that this refers purely to an insolvency regime and not the special resolution regime, so I quite understand why they are not mentioned.
Will my noble friend elaborate a little on the objective of financial systems? It is now clear to everybody that the collapse of Lehman Brothers and the willingness of the United States authorities to let it become insolvent was a major factor in enhancing the severity of the financial crisis in which we now find ourselves. Therefore, if we want to enhance the stability of the financial system, would it not be desirable for a special resolution regime to be applicable to an investment bank so that it could be kept going and we would not see the type of disaster that has resulted from the mistake that the American authorities now acknowledge they made?
Will my noble friend confirm that it is not the intention of Her Majesty's Government to develop a special resolution regime for investment banks and that we will have this extended and valuable insolvency procedure which is to be introduced later but not the means of keeping an investment bank in operation?
My noble friend Lord Eatwell raises the question of Lehman Brothers. If one looks back on what has happened over the past 18 months in the global banking system, there have been various phases. I think that the decision of the American authorities to allow Lehman to fail took us into the third and most challenging phase. There was serious further erosion of confidence as a result, and many in the United States of America now recognise that there were consequences which they do not welcome.
We have proposed further amendments to deal with investment banks. We do not believe that an SRR-type regime is appropriate for an investment bank; nor do we believe that conventional insolvency procedures are appropriate. My noble friend referred to this matter on Second Reading, and I will reflect on what he says.
My noble friend asked an earlier question about Clause 2, which provides for an interpretation of the term “bank” for the purposes of Part 1. The reason that no reference is made to investment banks is that the amendments that I laid yesterday with respect to investment banks, which relate to insolvency as I have said, will not be a part of the special resolution regime that is the subject matter of Part 1.
My noble friend Lord Eatwell also asked why no reference is made at that point in the Bill to bank holding companies, which are the subject of another group of amendments which I have laid. The answer is that the application of the term “bank holding company” is dealt with in the new clauses in related amendments that I have laid. I shall therefore reflect on whether further reference in Clause 2 is necessary, but I am not minded at this stage to believe that it is.
I do not wish to raise Lehman Brothers because I recognise that the Minister was not responsible for the appalling mistake that was made in that case, but the question of investment banks is crucial. Clause 2(2)(c) states that “bank” does not include,
“any other class of institution excluded by an order made by the Treasury”.
Does that not leave it wide open to the Treasury to decide on this matter? I do not necessarily have an objection to that, but I would like to know precisely what my noble friend understands to be the interpretation of “bank” under Clause 2(2)(c).
We have had an interesting and wide-ranging debate on the amendments. The Minister said that my Amendment 8, which would insert “all of”, was not necessary in the context of Clause 4. Subject to reflection, I am minded to take that point. I am still a little concerned about the code of practice. Clause 5 states:
“The code may, in particular, provide guidance on … how to achieve the special resolution objectives”.
My Amendment 18 would insert,
“how the special resolution objectives are to be balanced against each other”.
The examples that the Minister helpfully gave were about balancing the objectives against each other. I am not entirely convinced that the Act correctly reflects the intent in relation to the code of practice—the intent being something with which we agree; that is, that the code should reflect the balancing. I would like to take that aspect of it away and think about it further.
My only other reflection on the debate is that I am still not sure that we are all completely wise about the relationship between Clause 4 and Clause 7. I beg leave to withdraw the amendment.
Amendment 8 withdrawn.
Amendment 9 not moved.
10: Clause 4, page 3, line 21, at end insert “which includes ensuring that that they have access to their deposits as rapidly as possible and that depositors and other customers have continuity of banking services”
The amendment expands the definition of objective 3 in Clause 4 so that the protection of depositors is a widely drawn concept and extends beyond depositors accessing their deposits to the need of depositors and other customers to have continuity of banking services. It is a point which has been pressed strongly on us by the British Banking Association. It is supported by consumer groups and bodies representing small businesses. The draft code of practice recognises that one way of delivering depositor protection is to provide continuity of banking services, but the Government have not included continuity of banking services explicitly within the Bill. Indeed, a straightforward reading of Clause 4 would not lead a reader to believe that continuity of service had any part to play in the special resolution regime.
Providing continuity of service is important at two levels. For individual customers affected by a bank failure, it becomes critically important to establish how they will receive their monthly salaries and meet their various direct debit commitments—for example, for rates and utilities. Customers also need to draw cash, as we are not yet in a cashless society. The impact assessment itself gave the statistics on the pervasiveness of banks in everyday life, with 90 per cent of wages and 98 per cent of benefits being paid into a bank or post office account, as well as at least 75 per cent with at least one direct debit.
Objective 3 talks about the protection of depositors, but the deposit element of the banking relationship is often the least important element. The sum in the bank in many cases is not a passive investment but a vital part of the mechanism of household finances. I have referred to individuals, but the same is true for businesses, both large and small. Without access to banking facilities, individuals and businesses simply become non-functioning.
The other point is that the confidence that banks’ customers have in the banking system as a whole is linked to whether they can place their trust in the banking system working for them when they need it—which is almost all the time. When Bradford & Bingley was dismembered in the autumn, the one good thing that the Government achieved was the seamless transfer of banking services available to Bradford & Bingley customers to Abbey Santander. It may be that, when the Bill was drafted, the importance of continuity of service was not well articulated and therefore not reflected in the drafting, which led to its being drafted as if deposits alone were the important aspects. I hope that recent experience will have brought home how important this is and the fact that it needs to be reflected in the Bill.
In addition to the benefits to all bank customers of seeking a solution which includes continuity of service, the Minister will be aware that there is a huge potential impact on the cost of action taken under this Bill if continuity of service is not achieved. The Financial Services Compensation Scheme is a critical component of this. We will not reach the clauses dealing with the FSCS for some time, but the banking industry backed up by an independent study by Ernst and Young estimated that the FSA’s consultation document on faster payout via the FSCS will cost around £1 billion over the first five years, whether or not faster payout was ever required.
Under the FSCS, faster payout would not be important if continuity of banking services were embedded as one of the objectives of the special resolution regime. There is a serous policy issue about whether one of the tripartite authorities—namely, the FSA—should be pursuing a cost-laden approach to the FSCS, which could be largely settled by making continuity of banking services an SRR objective. I know that the Government appreciate the need for the continuity of banking services and the differences between us may not be that great. In that light, I am hopeful that the Minister will be able either to accept this amendment or agree to produce the Government’s own amendment at a later stage.
I support the amendment proposed by my noble friend Lady Noakes. I point out that the impact assessment on the Bill subscribed total costs of only £2.2 million to £4.5 million to the banking reform proposals included in the Bill. That seems a very low figure.
The noble Baroness makes a good point. She gave the example of utility bills being paid. When we think about what has been happening and the problems of the banks effectively in many cases cutting off supplies to business—I think that is a fair way to put it—I think the parallel is apposite. It is as if businesses were having their gas, water or electricity supply cut off without, in many cases, being able to go to an alternative supplier. Continuity of service is a very important point and I strongly support the amendment.
I have been listening to this debate as a non-expert, but as a very concerned member of the depositing public. Continuity of service is a matter of grave concern to many of us. I really do not know what I would do without my bank. Therefore, the whole idea of continuity is basic to the whole idea of security. I hope that my noble friend will consider this amendment with a view to incorporating it or something like it in the Bill.
I add my voice to the growing swell of support for the amendment. In doing so, I declare my interest as the chair of Consumer Focus. The amendment addresses exactly the kind of concerns that the ordinary consumer of banking services is worried about and which affect the viability of many small businesses. I ask my noble friend to look at this and to either accept it or come up with a similar amendment.
I thank noble Lords for their advice. I do not think that there is a great difference in opinion between us. It is really a matter of how the objective is delivered. I am not entirely clear whether the noble Baroness, Lady Noakes, envisaged that continuity of banking services would have as broad a definition as the noble Lord, Lord Oakeshott, appears to be suggesting, where it might be construed that continuity of service extends to a commitment to make credit available. I take the definition as being more relevant to the observation made by my noble friend, and as enlightened by the reference of the noble Baroness, Lady Noakes, to Bradford & Bingley—namely, the continued availability of the function of the banking system in respect of access to deposits and means of transferring money and settling obligations and transactions.
I will take into account the comments on this point that have come from all sides of the Chamber. However, I would like to set out the factors that I also will be weighing in the consideration, ones that will lead to my inviting the noble Baroness, Lady Noakes, to withdraw the amendment.
I do not believe that the amendment is necessary as both the second and third objectives, as set out in the Bill, implicitly include the concepts of access to deposits and ensuring continuity of banking services. If there is any doubt regarding this, the draft code of practice, which was published in November 2008 under the title Special Resolution Regime: Safeguards for Partial Property Transfers, makes this explicitly clear. The term,
“public confidence in the stability of the banking systems”,
refers to the crucial role that public confidence has in maintaining the stable and efficient operation of financial services and markets. The confidence of the general public is of particular significance in maintaining stability in a banking system based on a fractional reserve model, whereby banks’ deposit liabilities exceed the liquid assets they hold at any one time. The Committee knows that confidence is critical to banking. The code goes on to state that public confidence has a number of dimensions. For example, it refers to the expectation that, first, deposits will be repaid in accordance with their terms; secondly, normal banking services will be continuously available; thirdly, problems, or perceived problems—and this takes me back to the point I was making earlier in response to an observation from the noble and learned Lord, Lord Mackay—in one bank or building society will not extend to other banks; and fourthly, if a bank or building society fails, systems exist to protect the interests of depositors.
There is further discussion within the document, in the sections of the code relating to the objective of depositor protection—of the need for continuity of service and rapid access to funds—to which I refer Members of the Committee. Copies are available on the Treasury website or from the Bill team, which is standing by to help Members of the Committee with any inquiries they might have.
Returning to the matter in hand, an explanation of the meaning of terms referred to in the SRR better fits in the code of practice than in the Bill. I therefore invite the noble Baroness to withdraw the amendment but, in so doing, I assure her that I will take it away and give the matter further consideration.
I thank the Minister for that reply, and all other Members of the Committee who have taken part in this relatively short debate. It may have been short, but the importance of the issue has been well set out. I know that all the Minister’s speaking notes are designed to say “I ask the noble Baroness to withdraw her amendment”, and am pleased to see that the Minister has managed to modify that in responding to this one.
The Minister referred to the explanations in the code, to which I referred in my introduction. I was aware that the issues were dealt with in the code, which is why I said that we were not far from the Government on this. However, the code has no legal force. It is nice to have, but does not have the same force as something in the Bill. Some things have to be in the Bill.
There is an issue of what we mean by “banking services”. The Minister referred to them in terms of having access to one’s assets. Of course, a conventional banking relationship might have an overdraft. It is just as important to an individual that an overdraft within an agreed limit is not immediately disturbed, because that is just as disturbing to household finances as the removal of a positive balance. The same is true for small businesses; I do not know where you draw the line before getting up to large businesses with large lines of credit and so on. The issue is not just about individuals and positive balances. The examples that the Minister read out from the code were about positive balances, and we must think about this in a broader sense.
I heard the Minister say that he would take this away and think about it. I genuinely hope that he will, because it is important to have this issue properly reflected in the Bill in words that everybody feels comfortable with. It is also important to get my earlier point, on whether the FSCS might be overengineered in the absence of a continuity of service objective, positively recorded early in the Bill. I have great pleasure in withdrawing the amendment for today, but we will return to this issue one way or another.
Amendment 10 withdrawn.
11: Clause 4, page 3, line 21, at end insert—
“( ) Objective 3A is to protect and safeguard the value of the enterprise.”
The amendment would add a further objective to be taken into account when contemplating using the special resolution regime: to protect and safeguard the value of the enterprise. This would in no way undermine or reduce the significance of the objectives already in the Bill, but it is important that we do not lose sight of those other stakeholders affected when the special resolution regime is brought to bear: the shareholders and the creditors.
We will come to the issue of creditors on Amendment 13 tabled by the noble Baroness, Lady Noakes, but my concern with this amendment is for the banks’ shareholders. Of everybody involved in this saga, it is, in a way, easy to have little sympathy for the shareholders. One is necessarily worried about the overall banking system, the depositors and their ability to continue their ordinary day-to-day activities, as we have just discussed—it is crucial that the banks continue in operation—but the position of the shareholders is also important. In considering this, it is important to think about who the shareholders are. In much popular discussion of shareholders there is a view that they are fat cats who have nothing better to do than speculate left, right and centre. However, as we know, shareholders, not least in banks, and very often pension funds, are individuals who see a low-risk investment in a bank—as they see it—as part of their individual pension pot. Therefore, if you look at in those terms, it is very much in the public interest as well as that of the individuals concerned that the bank’s assets are maintained as far as possible.
It may seem a bit perverse to talk about preserving the value of a bank which by definition is in difficulties and without this special resolution procedure is likely to go bust anyway. That is the only basis on which the special resolution regime is brought into action in the first place. However, the extent to which there is a residual value in the bank at the point when it goes into the special resolution regime can vary dramatically depending on the point at which action is taken by the authorities to put it in the special resolution regime. The obvious example is Northern Rock. If the Bank had facilitated the transfer of Northern Rock to Lloyds TSB in late August, early September 2007, there would have been a residual value for the shareholders. Now there is none. We are not talking about a theoretical issue here; it is a matter of practical significance. Including this amendment in the Bill would put pressure on the authorities to move quickly when they fear that the SRR may be needed in order to protect these assets. At the moment, the authorities want to act before the bank goes bust and before the queues start, but there is no particular pressure on them to move quickly and to have any regard at all to shareholder interests. That is the purpose of the amendment. I hope very much that the Minister will feel able to accept it.
Thinking back to the Northern Rock episode, I believe there was some problem at the time for the Governor of the Bank of England with regard to European legislation. It turned out that he was prevented from doing what he would like to have done by the way in which the implementation of that European legislation was carried through this House rather than the form in which it originated in Europe. That brings me to a point which is worth making and was made by the noble Lord, Lord Newby, a moment ago. To some extent it is related to the whole issue of property rights, which is picked up in objective 5. Clause 4(8) states:
“Objective 5 is to avoid interfering with property rights in contravention of a Convention right (within the meaning of the Human Rights Act 1998)”.
But, surprisingly, Clause 4(9) states:
“The order in which the objectives are listed in this section is not significant; they are to be balanced as appropriate in each case”.
Am I wrong in thinking that it is not possible for the provisions of the Human Rights Act, and in particular the European Convention which it reflects, to be balanced against these other objectives, and that the provisions of the Human Rights Act and the European Convention, which is an international convention, would be bound to prevail in any case?
Before speaking to this amendment I must declare an interest in both Bradford & Bingley and Northern Rock. As an investor my natural instinct is to encourage the protection of enterprise value. I have much sympathy with the amendment and recognise that it is important that the overall value of an enterprise, including the value of shareholders’ equity, expressed so ably by the noble Lord, Lord Newby, is legitimate, should be recognised as such and should not be ignored. I urge caution: that the pursuit of this legitimate objective does not result in taxpayers’ money being used to shore up or create value for equity shareholders which is not deserved. Shareholders take a risk and get the rewards associated with that risk. In the same way, they must take any losses.
Another caveat to enterprise value, if it ends up being included in the Bill, is that without a clear definition of what precisely is meant by the expression, there is always the possibility that lawyers might find different forms of enterprise value for which compensation could be looked for from the taxpayer. If the Minister accepts the amendment, I urge him to include a suitable definition of “enterprise value”.
In summary, these Benches support the amendment. However, I hope that the comments which have been made will be considered when looking at it.
I await with trepidation to receive Hansard to discover how inadequately I answered the question of the noble Lord, Lord Lamont. However, I am much more confident that I can correctly answer the question of the noble Lord, Lord Higgins; namely, that we cannot undermine our legal commitments and obligations under the relevant directive.
I am grateful to the noble Lord, Lord Howard of Rising, for asking about a definition. If I was challenged to define “temporary”, I am certainly even more challenged to define “enterprise value”. As it is customarily used in business and finance, the enterprise value of a company usually comprises a number of elements, including the market capitalisation of the equity of the institution; that is, the market value of the shares in issue, and the market value of debt financing and other liabilities. This concept is much easier to apply to a non-financial institution in which the vast majority of the enterprise value lies in debt instruments rather than equity. It is extraordinarily difficult to interpret this concept of enterprise value as customarily used in business to give effect to the amendment proposed by the noble Lord, Lord Newby. As he took the opportunity to digress a little to talk about the plight of bank shareholders, I hope that I might do likewise. Certainly from my perspective that is sometimes more appealing than reading the notes prepared for me telling me that I should reject the noble Baroness’s amendments, from which I am occasionally willing to deviate.
The noble Lord, Lord Newby, said that he sometimes had difficulty expressing sympathy for shareholders of failed banks. However, he was also absolutely right to point out that those shareholders are in most cases institutional investors and that the funds are used to provide our pensions, protection and insurance and to meet future needs. The media may well have an image of shareholders as fat cats, speculators and hedge funds but that simply is not the case. No doubt we shall discuss Equitable Life later this week. I am reminded that Lord Penrose, who produced a report on it, said that the members of that society were the authors of their own misfortune.
I say to the noble Lord, Lord Newby, that I think there is a parallel to some extent here, in that there is a challenge to the owners of banks as to whether they were appropriately engaged in asking questions about what the banks were doing, why they were increasing their leverage and why they were accepting progressively lower returns on assets. Did they have a good appreciation of the risks associated with the products that they were creating and purchasing? Did they have a good grasp of the overall impact of the remuneration arrangements that they had set in place and the possibility for those remuneration arrangements to have dysfunctional consequences as far as the shareholders were concerned? While I have sympathy for shareholders in respect of what has happened, there are some important questions to be asked about how institutions conduct their own engagement with companies and how they relate to boards of directors.
I do not believe that a core objective of the SRR should be to protect enterprise value in terms of measuring the value of a firm. When a failing bank enters the SRR, the stabilisation options in the Bill are deployed because the authorities believe that they are necessary in the public interest. At this point, the wider public interest of financial stability, depositors’ interests and the protection of funds may well outweigh the commercial interest of the bank. This need to balance the public interest in exercise of the SRR tools against the interest of the bank itself and its creditors is implicit in objective 5—to avoid interfering with property rights in contravention of the convention rights. This objective ensures that any interference with the rights of the company and its creditors must be in the public interest and that the interference must be proportionate.
Therefore, I reassure noble Lords that a number of specific features of the SRR will operate to safeguard and protect the value of the failing bank. The Bill is designed so that the stabilisation options of the SRR can be applied before the insolvency threshold has been reached. This has been specifically designed to allow the authorities, in pursuing a successful resolution of a failing bank, to preserve residual value that may remain in the business.
I draw the attention of noble Lords to Clause 58, to which amendments have been tabled. The clause introduces the bank resolution fund. This fund, which is compulsory for a bridge bank but optional when taking a bank into temporary public ownership, is designed to ensure that the proceeds of any resolution, minus deductions necessary adequately to safeguard public funds, whether actually applied or put at contingent risk, must flow back to the failing bank.
If the Bank of England or the Treasury put in place a bank resolution fund, the resolution fund order may place a duty on the authorities to maximise the proceeds available for distribution subject to meeting the special resolution and bridge bank governance objectives. This mechanism should also help to achieve the result that the noble Lord, Lord Newby, is looking for in the amendments. I ask him to consider withdrawing the amendment.
I shall intervene for a moment, because I am not entirely happy with the noble Lord’s answer. On the front page of the Bill, he states:
“In my view the provisions of the Banking Bill are compatible with the Convention rights”—
that is, the rights under the human rights convention. Accordingly, Clause 4(8) states that one of the objectives is,
“to avoid interfering with property rights in contravention of a Convention right”.
Clause 4(9) states that the objectives “are to be balanced”. I cannot quite see how you would balance something which, in terms of the noble Lord’s provision at the front of the Bill, appears to be absolute.
I am grateful to the noble Lord for giving me such a full reply. This is probably not the time to have a full debate on how shareholders exercise their power, but I think that the noble Lord would agree that the theory of shareholder power is very far apart compared to the practice. Shareholders do not necessarily in reality have the information that they need, or the ability to question management on an ongoing basis, in a way that would allow them to exercise judgment as he would wish. In the case of Northern Rock, for example, it would appear that not just shareholders but the FSA went for months without realising what was going on. To expect an individual shareholder to have such a close knowledge of what is happening to a body in which they have invested, and then to be able to exercise any authority over it, is a pipe dream rather than reality.
As regards the definition of “enterprise value” and the complexities of that, I do not think that matters very much, because you are not seeking to value the enterprise at any point; all that you are seeking to do is to say that delay could cause the value of this enterprise, however it is measured, to decline, and that is simply not in anyone’s interest. There may be issues there, and there may be a different definition that is preferable, but that is not an overriding argument against the proposal. I also heard the comments made by the noble Lord, Lord Howard, and I will read them carefully, along with the Minister’s reply. In the mean time, I beg leave to withdraw the amendment.
Amendment 11 withdrawn.
12: Clause 4, page 3, line 22, at end insert “and to ensure that the expenditure of any public or private money is done in an economcally efficient manner”
Amendment 12 is a straightforward amendment to ensure that expenditure of any public or private money is done economically and efficiently when implementing the special resolution regime.
It is difficult to imagine that there could be any objection to including the amendment. In another place, the Minister, while agreeing with the intention of the amendment, thought that the general mechanisms for monitoring government expenditure, including the work done by the National Audit Office, made it unnecessary to make economy and efficiency an objective of the special resolution regime. It would be helpful if the Minister could explain to the House how the National Audit Office would be effective in this role, as I believe that I am correct in saying that the main audit of the Bank of England is carried out by an independent firm of accountants.
Examining what has happened after the event and saying that it could have been done better is not the same as it being a requirement in law that spending money under the special resolution regime should be done economically and efficiently. If there had been a resignation each time the National Audit Office had made a criticism of the Government, the Government would have run out of Ministers a long time ago. Very wide powers are being sought in the Bill, with a great deal of trust in how the powers are to be used. It could not be unreasonable to ask that there should be a requirement to use the powers in an economically efficient manner. I beg to move.
Amendment 12 proposes that we include in the SRR objectives that expenditure of public and private funds is done in an economically efficient manner. Of course, I absolutely agree with the intention behind the amendment, but again I am not convinced by the argument to place this as an objective of the special resolution regime.
First, I should say, as the noble Lord, Lord Howard of Rising, has anticipated, that there are adequate general mechanisms to monitor and provide oversight of the use of private and public funds by the Government and other public bodies. In addition to the value-for-money and propriety analysis, the Government will, before providing financial assistance, undertake external mechanisms to ensure that assistance is provided in an appropriate manner—for example, through the excellent work of the National Audit Office.
On private funds, if the noble Lord was referring to the funds of the FSCS, we have put in place a number of provisions to ensure that when it is called upon to fund the special resolution regime, under Clause 168, these funds are used in an appropriate manner. I refer in particular to the requirement that any resolution cost to which the FSCS must contribute be independently verified, and the core principle that the FSCS cannot contribute more than it would have had to pay out to insured depositors, if the bank had entered insolvency.
Given that these safeguards are in place I hope that the noble Lord can consider withdrawing the amendment.
I thank the Minister for his remarks, but I must point out that monitoring something is not the same as requiring something to be done, or instructing for it to be done. The request that has been made is perfectly reasonable, and I am rather disappointed that the noble Lord has reacted so negatively. However, I beg leave to withdraw the amendment.
Amendment 12 withdrawn.
13: Clause 4, page 3, line 24, at end insert—
“( ) Objective 6 is to protect the interest of creditors.”
I shall speak also to Amendment 16. The objective of these amendments is to protect the interests of creditors: Amendment 13 adds an objective to ensure that creditors’ interests are protected, and Amendment 16 would include this in the code of practice. That is important because creditors cover a wide range from depositors not covered by the FSCS to trade creditors. There will be a number of competing claims on the assets of an enterprise about which there is doubt. It is only right that if powers under the special resolution regime are used, the Government should recognise that there should be fair treatment for everyone. If a bank is in a position whereby it comes under the special resolution regime, there is a good chance that ordinary trade creditors—some of which might be small enterprises that could be sunk by a bad debt from a supposedly sound organisation—might be owed money. In the powers available under the Bill it is important that the rights of all creditors are clearly stated.
There is provision in Clause 60 to ensure that pre-transfer creditors do not receive less favourable treatment than they would have received had the institution entered insolvency immediately before transfer. However, that is restricted to partial property transfers. If this principle of fairness is accepted, as it has been in Clause 60, I am sure that the Government would agree that that should be extended further to ensure that the interests of all creditors are treated equally and that that requirement for fairness should be included in the code of practice as set out in Amendment 16. I beg to move.
Some of our earlier discussions, in particular the probing by the noble Lord, Lord Higgins, on objective 5, have been helpful in illuminating the issues raised by the noble Lord, Lord Howard. Amendment 13 proposes that protection of creditors should be a separate SRR objective, while Amendment 16 states that the code should provide further information on how the interests of creditors will be taken into account when operating the SRR. Let me set out why these amendments, laudable as they are, are unnecessary.
First, objective 5, already drafted into Clause 4, is important in this respect. The term in objective 5 about the need to
“avoid interfering with property rights in contravention of a Convention right”
refers to the rights of property holders who might be affected by the use of the SRR. That can include the bank or building society itself, its shareholders or creditors or other third parties. Such persons may hold property in the failing bank or building society or have a right of control over such property, or both. The inclusion of this objective acknowledges the importance of acting proportionately when exercising these powers. The primary convention right at issue is Article 1 of Protocol 1 to the convention, the right to property. Other convention rights—including Article 6, the right to fair trial—may also be relevant. Therefore, objective 5 operates to ensure that any interference with the rights of creditors must be in the public interest and proportionate.
Secondly, a number of specific features of the SRR operate to protect non-depositor creditors, such as the protection that we propose for set-off and netting arrangements in the case of a partial transfer—a matter which I suspect we will, quite properly, discuss at length in Committee. I also draw noble Lords’ attention to the compensation provisions that we have provided and, in particular, to the possibility of compensation being payable to creditors under a third-party compensation order. As for partial transfers, there is the additional safeguard, reflected in Clause 60, of ensuring that no creditor remaining in the residual bank is left in a position in which they are worse off than in the event of a whole-bank insolvency.
We certainly agree that the interests of creditors need to be taken into account when determining whether the SRR should be deployed and in exercising the stabilisation powers. I am therefore very comfortable with the sentiments driving the amendment proposed by the noble Lord, Lord Howard. However, we do not think that it is appropriate to provide expressly for the protection of creditors, unlike the protection of depositors, to be made a separate objective.
Creditors—to a much greater extent than retail depositors—can take a number of steps to protect themselves in the event of counterparty failure, including taking security and adopting set-off or netting arrangements. Where creditors stand unsecured, they do so in the knowledge that this is the case and having secured a suitable rate of return on the terms of their liability. None of this is the case with depositors. The Government have been clear that the SRR measures are focused on protecting the depositor class both as an end in itself and because of the important role of depositor protection in maintaining financial stability and confidence in it.
The authorities have therefore developed the SRR tools accordingly. A prime example is the new bank insolvency procedure tool which supports fast payout for depositors. A different regime would need to be designed if the protection of creditors, in and of themselves, was a primary objective for the exercise of the SRR powers. Protecting creditors should therefore not be a reason in itself for pursuing the SRR tools. On that basis, I do not agree that the protection of creditors should be elevated to be an objective of the SRR.
Amendment 16 is intended to ensure that the code of practice includes text on how the interests of creditors will be taken into account during the exercise of the SRR tools. Again, I do not believe that the amendment is necessary for pretty much the same reasons as I have just set out—namely, that the Bill sets out how the interests of creditors are to be treated and protected. The code of practice provides further information on the interests of creditors by providing further information on objective 5 of the SRR, which concerns avoiding interference with property rights. Given that, I do not believe that there is a need for a separate section in the code on this matter, and therefore I ask the noble Lord, Lord Howard of Rising, to withdraw the amendment.
Bondholders, where they exist, will be treated according to their ranking in the liability structure of the company. If a surplus is available at the end of the resolution process, it will be distributed in accordance with the claims, and that will reflect the seniority, or otherwise, of different classes of bondholder. One consequence that I can see arising as a result of the banking crisis is that banks will move to much simpler capital structures and will make much less use of innovative instruments than has been the case in the past. Therefore, should we ever have to face a similar situation in the envisageable future, some of the problems may not be quite so onerous.
Again, I thank the Minister for his comments. It is disappointing that he should so often express sympathy and agreement with the amendments to which I speak but so rarely be prepared to accept anything that is said. Having produced a number of good reasons why there may be protection, I fail to see why the Minister will not accept the amendment and expressly include the provision for creditors.
The Minister made the comment that unsecured creditors take a risk. I accept that but, as the noble Lord, Lord Newby, pointed out earlier, it is not always reasonable to expect everyone to understand complex bank balance sheets. Indeed, in answering a question about bonds just now, the Minister said that he thinks that these balance sheets will become simpler in future. However, generally speaking, it is the extremely complex ones that get into trouble and those are the ones where creditors need to be protected. Having said that, I beg leave to withdraw the amendment.
Amendment 13 withdrawn.
14: Clause 4, page 3, line 24, at end insert—
“( ) Objective 6 is to avoid the distortion of competition.”
Amendment 14 seeks to ensure that when the special resolution regime powers are used, they are not allowed to create an unfair advantage for the institution over which the powers have been taken. Given the powers under the special resolution regime and the huge advantage of government backing, this would be all too easy.
It would obviously be grossly unfair if a bank were to use funds provided by the taxpayer to take competitive advantage over other financial institutions. There will always be a temptation to do this; it is the natural commercial instinct of bankers to make profits. Added to that is the temptation to help the Government by the early repayment of government finance, by creating value to facilitate a sale of government shares or merely by creating value so that the Government appear in a good light and are not seen to have taken an unreasonable action. Therefore, it is only sensible that there should be some built-in restraint. Inevitably, there will be an advantage to an institution owned by the Government in taking deposits as they will become a near relation of sovereign debt. That cannot be got away from but, in so far as possible, distortion of competition should be avoided and it is only right that that should appear in the legislation. I beg to move.
I hope that the Minister will give more support to this amendment from the noble Lord, Lord Howard, than he did to the questions that I put to him a few weeks ago before the Christmas Recess when he made a Statement about the takeover of HBOS by Lloyds TSB. Your Lordships will recall that at that time not only did the Government override the expressed views of the Office of Fair Trading on the matter of competition, with the number of leading banks in this country in effect being reduced from five to four, but they introduced—indeed, they had to introduce in order to deal with the matter—a special statutory instrument to which, in the circumstances of financial instability that the Government were properly drawing to our attention, inevitably we had to agree.
At this point, I should say that I did not disagree with that final decision, but what is being asked in the reasonable amendment now before the Committee is that one of the objectives for the special resolution regime should specifically be the attempt to avoid a distortion, loss or restriction of competition. Therefore, I hope that in the longer term, which is what the Bill is concerned with, the avoidance of distortion of competition will be regarded as one of the objectives. It does not mean that that objective will always prevail but at least it will be taken firmly into account and will be required to be taken into account in the different circumstances in the future, about which we can only guess at the moment.
We, too, have some sympathy with the amendment for the reasons that have been given. As we move forward beyond the Bill, one question to which we will want to return is how greater competition within the banking sector can be introduced. One way would be to develop some aspects of the system that are currently relatively undeveloped, not least in respect of banks at the bottom end—credit unions and community banks—which are being considered in a number of places. In this context, we will be fascinated to see how the noble Lord, Lord Hanningfield, progresses with the Bank of Essex, which is an interesting innovation. Going forward, I think that there is scope for more local banks and regional banks, and those will provide a way of reintroducing a greater degree of competition than we will be left with as a result of the events of the past few months.
In Amendment 14 the noble Lord, Lord Howard of Rising, raises the important topic of competition. As he explained, the intention behind the amendment is to guard against competition distortions when a bridge bank is created or a bank is taken into temporary public ownership. I reassure him that we have put in place measures to meet this concern. I am a strong believer in having a competitive banking system that delivers value to customers. I believe that the points made by the noble Lord, Lord Newby, about the current shape of our banking industry are worthy of debate and discussion. I have previously expressed in this House my support for the concept of mutuality and my disappointment that we have seen so many mutual institutions in the financial sector—building societies and insurance companies—disappear. That is a matter of some regret, although those decisions were correctly and properly taken by the members of those institutions. The banking sector in this country is now much more concentrated, to which my noble friend Lord Borrie drew attention in the context of the creation of the enlarged Lloyds banking group. From where can I take some comfort that this amendment, laudable in its objective, is not necessary?
The code of practice includes measures regarding the running of a bridge bank or a bank in temporary public ownership. It includes guidance on running the bank on a “conservative” basis, to use the word contained in the draft code. Further, both a bridge bank and a bank in temporary public ownership will continue to be regulated by the FSA in the same manner as any other financial service provider. There will be no special privileges or advantages under the regulation. The Office of Fair Trading will continue to keep the relevant markets under review to protect the interests of UK consumers and the British economy. I reassure noble Lords that firms in receipt of financial assistance will still be subject to the provisions of competition law with the competition authorities continuing to have the power to investigate breaches.
As I said, the Office of Fair Trading will continue to keep the relevant markets under review to protect the interests of UK consumers and the British economy. Additional restrictions may also be imposed on those in receipt of financial assistance to comply with the rules on the provision of state aid. I hope that those points address the concerns raised by the noble Lord, Lord Howard of Rising, and I urge him to consider withdrawing his amendment in the light of the assurance that these banks will be exposed to the same rigorous competition laws as we regard appropriate for banks that do not find themselves within the special regulatory regime. Strong competition between banks is necessary regardless of whether the bank is in receipt of some form of support as contemplated by the Bill. I commit to be a fervent fan and promoter of effective competition in the banking system.
I thank the noble Lords, Lord Borrie and Lord Newby, for their support on this amendment. I do not know how easy it is to accept the Minister’s remarks about the competition authorities after recent experience has shown that, if it suits, they can all too easily be completely ignored. Lloyds/HBOS is a prime example. A bank that could not possibly have been put together under normal circumstances will have a market position that enables it, if it so chooses, to completely ignore some of the competition. There is little comfort in that as a protection. However, I am grateful to the Minister for his assurance— although it would be a pleasant surprise if his charming words of support, sympathy and encouragement could sometimes have a practical result. I beg leave to withdraw the amendment.
Amendment 14 withdrawn.
Debate on whether Clause 4 should stand part of the Bill.
This is a crucial clause and I should like to have a quick word with my noble friend on subsection (2)(c) referring to “the bank administration procedure”, which is then referred to in Clause 5(1)(c) dealing with the code of practice.
The code of practice is inevitably a draft as we cannot have the full code until the Bill is enacted, but I remain unclear about the Chancellor’s view, as expressed by my noble friend and others, on an arm’s-length procedure in the management of the banks. There are so many conflicts between the arm’s-length procedure and the way in which the banks are supposed to be run. Even with government guarantees on banks, do they have the commercial right not to use the loan guarantee because they feel that lending to a particular customer or client is not a viable proposition? We are told in the draft code that the Treasury may take a hands-on role in managing the affairs of the bank, which is in direct contradiction to an arm’s-length procedure. You cannot have an arm’s-length procedure in running the bank if it is left to make its own commercial decisions and the Treasury then takes a hands-on role.
I raised this issue with my noble friend on Second Reading and referred to what the Governor of the Bank of England said. This usually very cautious gentleman, Mervyn King, effectively implied that the banks could not be left to carry on as they would wish, which seems to say exactly that the Treasury will take a hands-on role. What do the Government have in mind on the bank administration procedure? They have asked for a response to the draft code to see whether anyone has any ideas about changing it. I would like to know exactly what the Government have in mind. Do they believe that if the banks do not lend, the Treasury will take a hands-on role, or will it be an arm’s-length procedure?
I apologise for not being here for the earlier part of the Committee. Someone conspired to have the Economic Affairs Committee sitting at the same time.
I want to follow up from a slightly different angle the point made by the noble Lord. Clause 4(3) states:
“For the purpose of this section the relevant authorities are—
(a) the Treasury,
(b) the FSA, and
(c) the Bank of England”.
The Explanatory Notes on the background to the Bill state that a tripartite structure for overseeing the UK financial system has been created with distinct roles for the Treasury, the Bank of England and the Financial Services Authority. I do not want to digress into a Second Reading debate but it would be helpful before agreeing the clause if we could have an answer to the question of who is in charge.
It is clear from recent events that no one has been in charge, and while the later clauses make provision for particular activities to be carried out by particular parties, and for consultation, it is not clear what will happen if consultation results in disagreement. Will the Minister give us some comfort? It is not the same point but it echoes the one made by the Minister’s noble friend Lord Barnett. It is all very well saying that the relevant authorities consist of three groups but it would be nice to know who is in charge and who is driving the process.
I plead not guilty to any part of the decision of the Economic Affairs Committee to meet at the same time as this Committee. I welcome the appearance of the noble Lord, Lord Forsyth of Drumlean, and respect his great knowledge of banking matters. We discussed these matters at some length earlier. It may not have been to everybody’s satisfaction, but other noble Lords and I referred to the simple question of who is in charge. The answer is that people are in charge in their spheres of competence and expertise, and the tripartite committee brings together the Treasury’s responsibility for public assets and the taxpayer, the FSA’s responsibility for effective regulation and effective markets and the Bank of England’s responsibility for overall financial stability. With all respect, I am not much inclined to go back into that debate at this stage. We covered it at some length. I suggest that the answer is that a person is in charge for the appropriate situation as contemplated in the Bill and as matched by his competence and expertise.
I shall give way in a moment, but I shall continue while I still have fresh in my mind the question asked by my noble friend Lord Barnett. I was a little worried that he was going to ask technical questions about the code, not least because he has my copy of it, which would have given him a distinct advantage, had he wanted to. He did not go in that direction, and for that, I am grateful.
We have got “arm's length”, “hands on”, “fingers in pies” and other metaphors. Let me try to help my noble friend. “Arm's length” applies to situations in which there is a significant public shareholding—government finance or government-owned shareholding— but we do not own the whole bank. We must have regard to the fact that these are publicly quoted institutions with external shareholders who expect them to be run in the way that a conventional successful business would be. I characterise arm's length in that situation as being an informed and engaged shareholder, an exemplar, reaching for and achieving the standards that the noble Lord, Lord Newby, referred to earlier. By contrast, “hands on” would apply immediately after a bank goes into a resolution regime and in a situation where it is wholly owned by the Government on behalf of the nation, either through a bridge bank arrangement or through temporary public ownership. I do not think those terms are inconsistent; they apply as circumstances determine. For the avoidance of doubt, it is not contemplated in the arm's-length situation that the Government would in any way direct banks to lend.
My noble friend Lord Barnett asked about guarantees. The existing guarantees are largely in respect of liabilities to aid banks in their funding. It is for banks whether they seek guarantees to facilitate a deepening and broadening of their funding, and if they do so, they pay what we judge to be an appropriate rate of return to us for the risk that the Treasury is assuming in guaranteeing bank obligations. There are also certain arrangements in respect of guarantees of loans made by banks, particularly relating to small companies and to ECGD, which was covered in an earlier question. It is for the individual borrower and the bank to make what would be described as an arm's-length commercial decision. The bank will decide whether it regards an application from a small company to borrow under the small business loan guarantee arrangement to be good for its client and itself. If it does, it will enter into it, but it will not be compelled to do so.
Can the Minister help me further on the arm's-length issue? He defined “arm's length” as involving a company being conventionally run in a successful manner. Such a company is usually run by its owners as represented on the board, and one would expect that if an owner held a majority of shares in the company, minority shareholders, who could enter or exit as they wished, would follow the general policy pursued by the majority shareholder. In the case of Royal Bank of Scotland, the Government are the majority shareholder by a substantial proportion. In this situation, why are they pretending that they are a sleeping partner and leaving commercial decisions to the whim of minority shareholders or the management who are not acting in the interests of the taxpayer?
In the case of Royal Bank of Scotland, the Government are acting not as a sleeping shareholder but as a responsible shareholder. We are engaged with the board of that bank in strengthening its membership in the interests of all shareholders. It would be inappropriate for the Government to involve themselves in commercial, day-to-day banking decisions. The Government do not have the appropriate skills to do that. We find the right skills in the private sector, and we act in the interests of all shareholders. As a responsible lead shareholder, the Government ensure that the board is appropriately resourced, that the company’s approach to risk is professional and consistent with protecting and enhancing the value for shareholders and that the company’s control regimes and its approach to remuneration comply with the best standards. It would be abusive of public shareholders for us to act as if we own 100 per cent of the company when we own only 56 per cent and we did not intend or wish to own that much if things had worked out differently. Ideally, we would not have wanted to have been put in this position at all.
The Minister is right to suggest that a majority shareholder may not involve itself in the day-to-day running of a company—that is left to the board and the management—but would he agree that it is entirely appropriate for a majority shareholder to set the strategy for the company?
We could debate this subject for hours. Indeed, lengthy books have been written on it. My limited experience in business is that it is not generally appropriate for shareholders to set the strategy, but it is appropriate for them to be engaged in challenging and approving it. That is what happens with public companies in the perfect world in which all shareholders appropriately engage, challenge and ask questions about business strategy. In that respect, Lloyds Banking Group and Royal Bank of Scotland should be no different from any other quoted company.
I agree with the Minister about the importance of the arm's-length arrangement, but I shall press him, and I apologise if he has already covered this this afternoon. I am not trying to make difficulties for him, but I am genuinely concerned by this clause. It sets out five objectives and then states:
“The order in which the objectives are listed in this section is not significant; they are to be balanced as appropriate in each case”.
However, there are three relevant authorities—the Treasury, the FSA and the Bank of England—that will have different perspectives in a complex situation. Somebody has to be able to take a decision and be in charge. Am I missing something here? Is the answer that it is the Government or the Treasury? If it is the Treasury—
I hesitate to intervene on my noble friend, but we discussed a couple of groups of amendments earlier in Committee. It is a great pity that my noble friend was unable to be with us, but I wonder whether, in the interests of moving on in Committee, we might leave this to later in the Bill, when my noble friend has had a chance to read the extensive discussions that we had on those groups of amendments. If my noble friend wishes to continue, he is perfectly at liberty to, but I am conscious that most Members of the Committee have heard the arguments once this afternoon.
I thought that I had answered the question. The notion of who is in charge applies an altogether too simplistic approach to a complex and sophisticated interaction between three authorities, each of whom has different delegated responsibilities and expertise, but which come together and, as the Bill contemplates, have certain responsibilities which act in sequence in particular circumstances.
I am sorry to revert back to it, but on the question of the difference between an arm's-length and a hands-on role, I did not cite the rest of the draft code, which goes on to state that there must be a business plan setting out how the directors intend to operate the bank and that that plan will include a commercial strategy. Given the arm's-length procedures, who will devise that commercial strategy: the Government, the Treasury, or who? Who is managing the bank?
I am grateful to the noble Baroness, Lady Noakes, for her intervention; we could go on at some length here. The answer, as we previously covered, and as in the ideal model to which the noble Lord, Lord Newby, referred—albeit one which we have both suggested has shortcomings at present—is that the development of the strategy is a matter for the board of directors, who will put it to the shareholders. In the case where we are but one shareholder—albeit the largest shareholder—it will be put to all shareholders. Royal Bank of Scotland’s strategy will not be solely approved by the Government with complete disregard for other shareholders, with no engagement between the bank and other shareholders, as would customarily be the case where the UK Government were not a large shareholder.
In a case such as Northern Rock and Bradford & Bingley, where the bank is currently, temporarily, 100 per cent in public ownership, the process is rather more direct, but there is a very clear difference between those who are charged with developing and executing strategy—the board and the management—and those who are charged with approving strategy, the shareholders.
The Minister kindly prays me in aid in the approach that the Government are adopting to RBS, but he is not totally fair to do so. There is a gap between being a detailed manager and, as a representative of everybody in this country and as the major shareholder, when people generally have a view about how they want their banks to behave, there being a strong moral pressure on the Government to exercise very close control of the bank’s strategy through the directors appointed to its board. The country expects the Government to exercise that degree of control. As several noble Lords have said—although I do not presume to speak for the noble Lord, Lord Eatwell—we are trying to tease out the extent to which the Government accept that the country expects them, as a major shareholder, to exercise their power in that position to ensure that the bank is run to look after its customers and does not behave as it has in the past. If the bank is seen not to behave in that way, whatever the technicalities, the Government will be blamed for it.
We will have to move on fairly soon, but this is a subject of considerable interest to me, so I am probably allowing myself to be drawn into it more willingly than my colleagues might suggest that I should be.
There is a pressing need to strengthen the board of directors of a number of UK financial institutions. In cases where the Government have invested, UKFI, under the chairmanship of Sir Philip Hampton, the chairman of Sainsbury, and the leadership of its chief executive, John Kingman, is actively engaged to work with boards of directors to strengthen them through new appointments. I would not want those new appointments to be described or understood as being government appointments. I believe that the Liberal Democrat party and the Official Opposition support the concept of a unitary board in which the board is responsible to all shareholders. The concept of having directors who sit around the board table to speak for one shareholder to the disregard of others and who potentially take instruction from outside the boardroom or impart information from the boardroom back to one shareholder is alien to our core beliefs about corporate governance and correct practice.
However, stronger boards we need. In the case of the Royal Bank of Scotland in particular, several directors, including the chairman, have indicated their intention to leave the board. Therefore, those boards, their major shareholders and UKFI need to work together to make first-class appointments. Finally, I add that those appointments should not necessarily be wholly and exclusively people with banking experience because, as the noble Lord, Lord Newby, said, and as was covered in an earlier debate in this House on the subject, we need to ensure that other issues such as technology and customer focus are appropriately represented around the board table.
I now suggest that we move on.
Clause 4 agreed.
Clause 5: Code of practice
Amendments 15 and 16 not moved.
17: Clause 5, page 3, line 33, at end insert—
“( ) the meaning of the stability of the financial systems of the United Kingdom,”
We managed to stretch the Clause 4 stand part debate to a considerable degree, but with the next amendment I think that we will stay fairly narrow. Amendment 17 would amend Clause 5, which requires the Treasury to issue a code of practice. My amendment adds the new requirement that the code should contain,
“the meaning of the stability of the financial systems of the United Kingdom”,
which is the wording that we find in the special resolution objectives.
When the meaning of financial stability was debated in another place, largely in connection with Part 7, to which we shall come at some point this year, it was recognised that the term can have several meanings—some narrow and some broad. That emerged from the evidence given to the Public Bill Committee in another place before it commenced its detailed consideration of the Bill. The Government argued in relation to both Part 7 and Clause 5 that a definition of financial stability should not appear in the Bill. In the case of Clause 5, they say that it should be in the code. We do not have a problem with that in principle, because the draft code indeed contains a definition of financial stability; we welcome that. We are concerned that that crucial aspect of the detail underpinning the special resolution objectives as set out in Clause 4 should be a positive requirement of the code.
Clause 5(2) sets out quite a lot of process for what should be in the code but not enough meat. My amendment adds a little flesh to the bones of Clause 5. I suspect that we are not far from the Government on this point, because they have included a definition of financial stability in the draft code. The problem is that the current draft may not last for all time. Indeed, it might not even make it to the final version. There is also the possibility that the code will be revised many times over time, and we want to ensure that whenever that occurs, given the importance of the phrase in the context of the special resolution objectives, the code always contains that definition. We agree with the Government that a definition is more flexible in a code than it is in legislation; but, that being the case, we believe that the code should be in legislation. I beg to move.
I am grateful for the constructive way in which the noble Baroness has presented her amendment. There is not a great deal of difference between the Government’s approach to these issues and the one that she has identified, but we have reservations about the amendment, which would permit the code to include a section on the meaning of the stability of the financial systems of the UK.
Our problem is quite straightforward. The draft code of practice expands on the term,
“stability of the financial systems of the UK”,
by referring to,
“the stable functioning of the systems and institutions (including payment and settlement infrastructure) supporting the efficient operation of financial services and markets for purposes including capital-raising, risk-transfer, and the facilitation of domestic and international commerce in addition to day-to-day banking”.
This is a useful elucidation of the term, and I accept that there could be other competing and useful definitions. However, we do not believe that we have in the draft code an exhaustive definition of financial stability. We do not think that we could have such a definition.
The problem is how to define financial stability in such a way that it would obtain among all commentators and all those interested in the concept, and how to identify what acts might pose a threat to financial stability. After all, instability is the product of challenges to the system, and it is not easy for us to foresee these and to produce an exhaustive definition that pays full regard to that. Whether the financial system of the UK is stable or whether any particular act would threaten financial stability depends a great deal on the circumstances and is likely to vary as the operation of global financial markets change and as the British economy and its relationship to such global financial markets evolve. We have therefore included in the code of practice an elaboration of what financial stability means, and it will be used to guide the authorities in determining whether the specific conditions for the special resolution regime have been met, as set out in Clauses 8 and 9. However, this definition is not intended to be exhaustive and definitive. That is why we shy away from the noble Baroness’s objective, although I recognise the value of what she proposes. We do not think that we should make such a definition mandatory in primary legislation.
We hope that it will be recognised that the code of practice is likely to change over time. That is in the nature of codes of practice and why they have elements of flexibility. We are therefore resistant to an amendment that would require us to be quite definitive about a concept which we could not claim to be definitive about. I hope the noble Baroness will recognise that I am not hostile to her intent but am struggling with the fact that the Government do not think that they can fulfil the objective which she has indicated in her amendment. That is why I hope she will consider withdrawing it.
I support the position which my noble friend on the Front Bench has taken. I argued at Second Reading that one of a series of important characteristics of the financial system is its continuous innovation and change. Indeed, the problems of instability that now affect the financial system have not come purely from the banks but also from failures of other institutions and counterparties in elaborate chains of market relationships that go outwith the banking sector but that impose themselves on it. A precise definition of financial instability would fail to take account of the process of innovation that is characteristic of the system as a whole, so leaving the definition rather more open, as my noble friend has suggested, is the best course in these circumstances.
I agree with the argument, but am I right that if it is a condition of doing something that you can show a serious threat—as set out in Clauses 8 and 9, as the Minister said—you are in fact leaving any discontented party to see whether they can resolve the matter in the courts?
There is always the question of the courts and the proper action of the authorities when it comes to action that may be taken under the Bill when it becomes an Act. At this stage, however, we cannot see how we can produce a definition in the code of practice that aids clarity in these terms. That is why we are not prepared to accept the amendment, although I accept what the noble Viscount, Lord Eccles, says; the basis on which the authorities interpret the law and act on it is always open to challenge. That must inevitably be so. The job of wise legislation is to make the issue as clear as possible so that such mishaps are minimised, if not ruled out, as far as humanly possible—a limitation, inevitably.
The Minister does not really surprise me, because I know that Ministers like to resist all amendments that are proposed in Committee, but he has rather missed the point of the amendment. With respect, the noble Lord, Lord Eatwell, has also missed it. It was not to require a definition in statute that was therefore immutable except by further primary legislation, but to accept that the code of practice was the right place for such a definition in order to guide those who need to understand how the Bill will be interpreted at any point.
The Minister has said that he cannot produce an exhaustive or a definitive meaning. I completely accept that, which is why I used “meaning” rather than “definition”, although perhaps there are wording points here. A code of practice should be there to illuminate certain of the more difficult concepts that appear in the legislation. We have just spent quite a lot of time on Clause 4 and objective 1, which is,
“to protect and enhance the stability of the financial systems of the United Kingdom”.
I am suggesting not that there should be a definition in Clause 4 but that the code in Clause 5 should explain what the Government mean at any point. That would take account of the issue of innovation over time, if indeed innovation will affect the meaning of “financial stability”. The Government have accepted that they should put something in the draft code, in any event, on financial stability, but they resist saying that there should be something on financial stability.
It seems that the Government are in a slightly inconsistent position and are trying to say, “We will tell you what we think about financial stability if we feel like it at the time, but nothing will ever require us to tell the world how we view financial stability at any time”. I believe that the definition in the code is good and workable for today. Whether it is right for all time, I would not like to say. In any event, it would not bind any authority because a code of practice—although this is subject to the amendment proposed by the noble Lord, Lord Eatwell—is not a legally binding document. It is simply a document that gives guidance to market participants.
I deeply regret the stance that the Minister has to take. He almost tempts me today to take the opinion of the House, but I shall go away and think about the wording of my amendment to see whether I can produce a better one that will pass those Treasury officials who like to resist everything. I beg leave to withdraw the amendment.
Amendment 17 withdrawn.
Amendment 18 not moved.
19: Clause 5, page 3, line 37, at end insert—
“( ) how to determine whether Condition 1 in section 7 is met,”
Amendment 19 places a further provision in the code of practice. It requires the code to set out how to determine whether condition 1 of Clause 7 is met. On the previous amendment, I gave the Government credit for including the material in the draft code, but I asked that they make such inclusion mandatory via the requirements of Clause 5. This amendment is different because the Government have not included any relevant material in the draft code other than to say in the most broad terms what the threshold conditions are. With this amendment, I am seeking a change of practice by the Government.
As we alluded to earlier, Clause 7 contains the trigger provisions which activate the stabilisation powers of the Bank or the Treasury. Thus, Clause 7 is a sine qua non for the highly intrusive powers which can be confiscatory in effect. Clarity about the conditions set out in Clause 7 is important. The FSA has to be satisfied that the two conditions in Clause 7 are met. My amendment concerns only condition 1 as set out in Clause 7(2). It states:
“Condition 1 is that the bank is failing, or is likely to fail, to satisfy the threshold conditions (within the meaning of section 41(1) of the Financial Services and Markets Act 2000 (permission to carry on regulated activities))".
We were told that when the Treasury acted in relation to Bradford & Bingley it was because the FSA had determined that it was likely to fail the threshold conditions. Despite several attempts to elicit further information, there has been radio silence in what precise way it was that Bradford & Bingley failed the threshold conditions. The threshold conditions are the minimum conditions that are satisfied for a person to be given permission to carry on regulated activities. The conditions are not set out in the Financial Services and Markets Act but can be found in the FSA handbook. There is a wide variety of threshold conditions, all of which are important to the carrying on of regulated activities but not all of which seem to be sufficiently important to allow the triggering of the stabilisation powers. For example, there are threshold conditions about the adequacy of resources, which clearly would be hugely important in the context of the FSA’s determination under Clause 7. Understanding how the FSA will approach the adequacy of resources for the purposes of Clause 7 is relevant to all banks and those who deal with banks. The threshold conditions also contain issues such as the location of head offices, the appointment of claims officers and matters such as this, which do not appear to be relevant to the issue of the stabilisation powers, however relevant they might be to regulation generally. Without some guidance as to the factors which might, individually or in combination, lead to a judgment under Clause 7 we are all in the dark.
My amendment merely requires that the code of practice sets out how the FSA will reach its determination on condition 1. I can quite see that the FSA would need to keep some flexibility on how the threshold conditions will be interpreted in the context of Clause 7 and my amendment does not seek to tie the FSA down in every circumstance. Using a code of practice will not have that effect, unless of course the amendment tabled by the noble Lord, Lord Eatwell, is accepted by the Government; namely, to give the code of practice statutory effect. But assuming that the code does not tie the hands of the FSA entirely, which I understand to be the Government’s intention of the code of practice, I believe that to give no guidance whatever in the code creates an undesirable uncertainty about the scope of the powers and how they would be used. That uncertainty will overhang the financial services industry and ultimately may deter businesses from operating in the UK. I beg to move.
I support my noble friend Lady Noakes. The draft code of practice says that the FSA will be responsible for taking a decision that a bank or building society is failing or is likely to fail to meet its threshold conditions and that it is not reasonably likely that action will be taken which will enable it to meet those conditions. If we believe, as I think we do, that certainty is extremely valuable in the building of confidence, it surely is not helpful not to know how the FSA has come to a decision and the factors that it has taken into account. Schedule 6 to its Act of Parliament is very general in its language. It is not good to leave it in a situation where no one can understand why the FSA came to its decision, which was the case with Bradford & Bingley. As my noble friend said, we have tried to get an explanation of how the FSA made its decision on threshold conditions in relation to Bradford & Bingley, but we have not had an explanation. The lack of an explanation and accountability will certainly be very bad for the financial services industry in this country.
I shall ask the noble Baroness to withdraw her amendment because we think that this is a case of overegging the pudding. The threshold conditions are regulatory conditions under the Financial Services and Markets Act 2000. The provisions about the determination of whether they are met or not are included in the source material specified under that legislation. The responsible body is the FSA and the requirements are in the FSA handbook. I do not see what the inclusion of this in the code would do except to supplement that which is already abundantly clear and the role of the FSA.
The noble Baroness mentioned that the FSA should preserve flexibility in changing times, which is necessary. Since December, it has been in consultation on updating the handbook, particularly as regards these issues and its role under Clause 7, to which the noble Viscount, Lord Eccles, also referred. We have a clear specification of the role of the FSA. With regard to the conditions, the issue is straightforward. The FSA has to take into account all the conditions. Its final judgment, to which it will give greater significance, will depend inevitably on the circumstances at the time. The noble Viscount, Lord Eccles, will also appreciate how difficult it is to be explicit and public about issues which relate crucially to confidence in the market.
On Bradford & Bingley, the noble Viscount will know that the public interest could be solved only by making sure that depositors were safeguarded and that the bank was able to continue to function, albeit under very different auspices. That is a reflection of the nature of the crisis to which the FSA is responding—we all recognise that the FSA is taking action in circumstances where there has been market failure. Given that, I ask the noble Baroness to accept that if what she has identified is a weakness in the process and the role of the FSA in it—we discussed this earlier and my noble friend Lord Myners was able to be clear and explicit about the roles of the different authorities—here it could not be clearer that the first responsibility and decision rests with the FSA. We have a framework which makes clear the basis on which the FSA would act. Furthermore, it is responsible for its own handbook, which is where the process is identified.
I hope that the noble Baroness will appreciate that her amendment would not add significantly to the necessary arrangements that form part of this Bill, but would produce an extra reference point when surely for the sake of clarity and certainty for all the actors, the more limited the number of reference points to which they should identify who acts and when, the better. For that reason, I hope that she will withdraw the amendment.
I thank my noble friend Lord Eccles for his support. We on these Benches are not entirely sure that we agree that the noble Lord, Lord Myners, gave a clear and explicit description of the roles of the various authorities. Perhaps the Minister will take it from me that all is not clear so far as these Benches are concerned. However, that is not the purpose of these amendments. The Minister accuses me of overegging the pudding, but I have sought explicitly not to do that because, again, I have not asked for a statutorily binding description of how the threshold conditions would be used. If the Minister looks at the threshold conditions, he will find that they are general and extensive, and it is clear that not all of them would be relevant in the context of a decision under Clause 7.
I thought that Amendment 19 was modest because it simply adds to the guidance that is to be issued under the code of practice in Clause 5. Guidance is just what it says: it gives the FSA flexibility to change under given circumstances, but also imposes on the authorities a requirement to make public how they expect to approach the decisions in Clause 7. The problem is that the FSA wants to play its cards close to its chest and not reveal to the outside world how its powers might be used. We do not think that that is good administrative practice; rather, it would be better for the FSA to be more explicit about which aspects of the threshold conditions it was likely to prioritise or what tolerances it would be likely to look at. That is the spirit in which the code of practice has been drafted to date, but for some reason the FSA has managed to convince the Treasury that it should be exempted from disclosing anything about Clause 7.
We ought to remember that, as the Minister said, this is about the FSA taking significant action. This is not a routine decision where the FSA says, “We don’t think we’re going to regulate you until you’ve improved some aspects of the threshold conditions”; rather, it says, “We are going to take everything away from you”. The potential action under this clause is confiscatory in nature, and can trigger action that will run away from the bank’s owners, creditors and managers. That is why it is incumbent on those holding these powers to be more explicit so that the organisations that might be targeted, and indeed the market as a whole, have a clear understanding of how these powers are to be used.
For today, I will withdraw the amendment, but I should say to the Minister that I found his response entirely unsatisfactory.
Amendment 19 withdrawn.
20: Clause 5, page 4, line 4, leave out subsection (4) and insert—
“(4) The code shall be legally binding.”
As I understand it, it is the policy of Her Majesty’s Government, as expressed by the Prime Minister following the G20 meetings in Washington, to encourage greater simplicity and less complexity in financial securities, especially in derivative instruments, and particularly to encourage the practice of netting. The failure of netting arrangements has been a major element in the spread of financial contagion from the collapse of Lehman Brothers.
The regime we are discussing applies not just to a bank that fails but to one that is likely to fail. It therefore applies prior to formal insolvency procedures and the triggering of contractual insolvency conditions, and so we are looking at preconditions. If we are to have netting of obligations, the term “have regard to the code”, as currently expressed in Clause 5(4), is entirely inadequate because it does not provide sufficient legal certainty for lawyers to provide the required so-called legally clean opinion to allow netting to take place. I have tabled this amendment asking for the code to be legally binding in order to investigate how the Government are dealing with this contradiction, because by providing a degree of legal uncertainty at the point at which the SRR might be introduced, they are negating their own objective of encouraging greater netting in financial services.
I would be most grateful if the Minister could address this question in the context of providing legal certainty. Rather than the relevant authorities simply having regard to the code, they should be required to follow its terms. I beg to move.
I shall speak also to Amendment 21. However, Amendment 20, moved by the noble Lord, Lord Eatwell, is certainly the better option, and I should like to express my support for it. His argument for allowing the banks to achieve legal certainty is extremely strong. But if the Government are not minded to accept his amendment to make the code of practice legally binding, I would ask the Minister to consider strengthening the code by making it compulsory for bodies to explain why they have not complied with it. Amendment 21 does not cover the ground as well or comprehensively as Amendment 20 does but it might go some way towards ensuring that the code is properly observed.
As currently set out in the Bill, the Treasury, the Bank of England and the FSA are obliged only to “have regard” to the code. That will not give much comfort to anyone. Amendment 21 requires that a full and prompt explanation be given for why guidance in the code has been ignored. The purpose is to ensure that proper attention is given to the code and that its requirements cannot easily be disregarded, which is as it should be. There is no point in having a code that, for practical purposes, can be ignored. However, I say to the Minister that the amendment of the noble Lord, Lord Eatwell, is superior.
With regard to Amendment 20, I presume that the argument for the code is that it is comparatively flexible and not set out in terms that could make it legally binding. If it were possible to do that then of course we could stick it in the Bill, with suitable amendments if we wanted to alter it. However, that does not seem to me to be the purpose of the code; rather, it is to give the flexibility—or, to some extent, the degree of uncertainty—that would not be possible if it were to be legally binding and therefore enacted in the Bill.
I find considerable attraction in Amendment 21. Simply saying that the authorities should “have regard” to the code, while that may be a well-worn phrase used by draftsmen, is somewhat inadequate in circumstances as important as those that we are discussing. A provision saying that they will comply with the code—or that they will publish the reasons why they decided not to comply with it—would be better than the form of words currently in the Bill. Equally, just having regard to it means that they can consider that they should not do so on a particular occasion and no one will know why that was so. It is better that they should be required to provide an explanation of why they are not complying with the code.
I agree with everyone who has already spoken in this debate that the phrase “have regard to” is just too weak. As for which of the two amendments is preferable, I prefer that of the noble Lord, Lord Eatwell, just because it is the stronger. In response to the noble Lord, Lord Higgins, it is not unusual to have an amendable code that has legal force. In my early days in Customs and Excise we drafted special schemes for retailers, which I seem to remember had legal force although they were not formally part of the body of legislation. A sort of halfway house between a Statutory Instrument and an amendable code that people try to follow, which the noble Lord, Lord Eatwell, has tried to achieve here, has much to recommend it.
I wonder whether the noble Lord, Lord Eatwell, would make more progress if he concentrated on the secondary legislation that will be part of the legally binding system. There is provision in the Bill for the largest number of Statutory Instruments that you could imagine; indeed, there are already two draft Statutory Instruments in the document that includes the code of practice. When you read the code, the only conclusion you can come to is that the author has been very careful to point out that this may happen in these circumstances and that will happen in those other circumstances, and the two things are not compatible—you have to make a choice about whether you do one or the other. Unless there is a major rethink, the code of practice cannot be made legally binding, although of course the words “have regard to” could well be strengthened.
Facing representations on these two amendments from all parts of the Committee, including the Benches behind me, puts me in a somewhat defensive pose. I am therefore going to rely to a certain extent on several of the contributions that help me with my case as well as making additional points, to which I need to respond.
I am grateful to the noble Lord, Lord Higgins, for pointing out that if we had thought to make the code part of the legal framework, we ought to have put its contents into the Bill. There is a good reason why we have not done that. I recognise the additional points that he made, which I will respond to in a moment.
Likewise, I am grateful to the noble Viscount, Lord Eccles, because he is right that my noble friend Lord Eatwell raises the most significant of issues with regard to the effectiveness of the legislation and has identified an area on which we need legal certainty and will need precision. It is a problem that we need to confront; indeed, it would have been remiss of us if we had not addressed it in this legislation. However, the noble Viscount is right that in Clause 48 and later clauses we have provision for secondary legislation that gives legal weight to specific areas that my noble friend has identified. We will come to those issues in due course, but I reassure my noble friend that we take his position seriously and his anxieties need to be addressed. We are addressing them with legal certainty—not the legal certainty of seeking to make the code a legal entity, but the legal certainty of secondary legislation, which surely ought to be preferred if my arguments about the issue of flexibility regarding the code meet the agreement of the Committee.
The provisions of the code are intended to provide guidance. The code may set out provisions that should be taken into account, or it may provide for the approach that the authorities should normally seek to adopt. The expectation will be that the authorities should follow the code and that, if they do not, a public explanation will normally be needed. We are at one with the amendment to which the noble Lord, Lord Howard, spoke, to the extent that the code has those expectations built into it regarding the legislation. That is different, however, from a hard-edged statutory requirement to comply with the code, which would be inappropriate to its function and would be unduly restrictive on the flexibility of the authorities.
The code is something to which the authorities must have regard, but it is not a rigid set of statutory requirements, nor does it have to be exhaustive in nature. That is just as well. I return to the obvious point about this legislation: it is difficult to identify from where a crisis emerges. The authorities have to respond. If we are overprescriptive about how they should act we may not anticipate a particular set of circumstances which all would subsequently agree the authorities had acted properly upon in identifying the problem and taking prompt action, when prompt action is in the very nature of the issues involved when we are discussing confidence in relation to financial structure. We might inhibit that opportunity because we had been prescriptive in primary legislation, and those opportunities do not occur that often.
Primary legislation passed at this point in time is inevitably conditioned by the world we are in at present and by the many issues that the current crisis has identified, but that does not mean that it exhausts all potential threats to the financial system. That is why we not only seek to take on board the points identified by my noble friend Lord Eatwell and the concerns expressed by other contributors to this debate but also require some degree of flexibility, particularly as in other aspects, certainly with regard to making the code fully legally enforceable, it would have been better if we had drafted the Bill to include the code in those terms.
There are good reasons, which I have identified, why we do not want to be saddled with that degree of rigidity. The status of the code means that authorities can provide greater guidance about the steps that can be anticipated to be taken under the special resolution regime than would otherwise be possible. Bank resolutions are likely to be very complex and varied in their nature and, dare I say, may have an element of unpredictability as well. One of the risks of imposing more rigid requirements would be that resolution scenarios would not be sufficiently anticipated and the authorities would not therefore be able to respond in any given situation in a manner best placed to achieve the special resolution objectives. For example, further provision can be made in the code on topics such as the meaning of the SRR objectives, how the authorities will balance the objectives in deciding between stabilisation options and how they will work together.
We are only in the early stages of the Bill’s proceedings but we have had enough evidence already of how much the prospective role of the authorities and how they will act exercise the Committee. I am merely indicating within this framework that there is some understanding in the Committee of the necessity for a degree of flexibility.
Each section in the code can include more descriptive and therefore more helpful language on the intentions behind any specific action or requirement within it. That is why the code should not be in the Bill but can supplement it by providing information that it would not be appropriate to set out on the face of the Bill or in an instrument of similar status. The code will provide a significant amount of detail about the way in which the authorities will implement the SRR and can be updated to reflect experience gained from operating the special resolution regime without imposing hard-edged duties or requirements on the authorities. I recognise that there are other views about this issue in the Committee, but if we conceded the legal status of the code, we would introduce rigidities with regard to the legislation against a background where the main argument, as presented by my noble friend, was covered in subsequent provisions. I hope that my noble friend will therefore feel able, with some confidence, to withdraw his amendment.
While I agree with what the noble Lord has just said about the legal side, he has misrepresented what Amendment 21 does. It would not force the authorities to comply with the code but would say that they must comply or give an explanation. Of course, as he says, decisions may have to be taken in unexpected circumstances, and that would require deviation from the code. But surely that would be a great improvement if the authorities were to say why they had done so in those circumstances. Indeed, in view of recent events, it would certainly have been better if more explanation had been given at the time. Amendment 21 does not do what the Minister says and in the general spirit of good will prevailing in the Committee, I hope that he will at the very least be prepared to take it away and look at it again.
It goes without saying that we always look carefully at these debates. Even if a particular amendment did not re-emerge on Report, a different one might which would incorporate the same concept if our position was regarded as not being satisfactory. So of course I will look carefully at the arguments that have been mobilised, but the amendments are grouped together because they would both introduce into the Bill an element of legal rigidity. We are saying that the code will be followed, obeyed and responded to by the authorities but we are reluctant to see that imposed by statute. That is the basis of the Government’s position, which is why I am hoping that my noble friend will, at least for today, withdraw his amendment.
I am grateful to my noble friend Lord Davies of Oldham for the comprehensive discussion of the amendment. I quite understand his desire for flexibility—indeed, I argued for it on a previous amendment. However, I was attempting to point out that the desire for flexibility actually contradicts another goal of government policy, which is to encourage netting and the use of relatively simple financial instruments to replace the complex instruments which are felt to have been an important element in recent, rather unfortunate, events. Having said that, I feel quite strongly that the words “shall have regard to” are very weak indeed and introduce a degree of legal uncertainty which is likely to be significantly damaging in the operations of financial services.
I have tabled amendments on the clauses to which my noble friend referred, specifically related to netting. I will be interested to see the Government’s response to those amendments in the light of what I see as the need for legal certainty to increase simplicity and financial services. Having said that, I beg leave to withdraw the amendment.
Amendment 20 withdrawn.
Amendment 21 not moved.
Clause 5 agreed.