Committee (2nd Day)
Clause 10: Banking Liaison Panel
31: Clause 10, page 6, line 3, after “arrangements” insert “about—
I shall move Amendment 31 and speak to Amendment 32. Before I do so, we heard a few moments ago in the Statement repeated by the noble Lord, Lord Mandelson, that there would be an amendment to the Banking Bill. We were given no prior notification of that, which is the normal practice. Indeed, I have amendments in the Marshalled List that relate to loan guarantees. Will the Minister ensure that Members of the Committee are informed of the nature of the Government's intentions in relation to the Bill?
My amendments seek to extend the role of the banking liaison group. They seek two new functions or roles for the banking liaison group as set out in Clause 10(1). The first of these is to monitor the special resolution regime and its impact on markets. I have talked about unintended consequences already and some form of feedback mechanism ought to be written into the Bill. The second is to recommend changes to the statutory instruments referred to in the current function of the group.
As I have already said in Committee, the introduction of this clause in Committee in another place was welcomed by the banking community, as was the setting up of the forerunner, the expert liaison group. Without wishing to look a gift horse in the mouth, it has been suggested that the terms of reference should be extended. If the initial statutory instruments will be made shortly after Royal Assent, which I believe is the intention, it is difficult to see what function the banking liaison group will have until the Treasury decides that it needs to revise some statutory instruments, which could be some time away.
I hope that the Treasury has found that the expert liaison group has been useful and has allowed the Treasury to access practical knowledge that can be useful to it. I am well aware that Treasury officials are extremely able, but they do not necessarily know everything about everything in the outside world. It would be beneficial for the Treasury if the Banking Liaison Panel were to have a more proactive role than simply responding to statutory instruments that the Treasury chooses to put before it.
That is basically what my amendment seeks to set out. I do not expect that the panel would be in constant session or would even need to meet frequently, but it would provide a standing mechanism for the tripartite authorities to tap into the views and experiences of those actually operating in the bank marketplace. I beg to move.
As the noble Baroness has indicated, the panel has in a sense already been created; it is currently known as the expert liaison group and it will eventually become the Banking Liaison Panel. It is an important addition to policy development in this area and, as the Committee will know, it has already been very successful in informing the work taken forward on partial transfers as safeguards. In fact, Clause 10 was added following a request from stakeholders to provide a statutory basis for this group. Clause 10 therefore represents the Government’s continuing commitment to engagement with stakeholders on the development of the special resolution regime.
Clause 10 refers to the most pressing and important area of the special resolution regime and the primary focus of the expert liaison group’s work at present; that is the development of the secondary legislation under Parts 1 to 3 of the Bill, which underpins the special resolution regime. In particular, the current remit of the expert liaison group includes the secondary legislation that relates to safeguards for partial transfers.
The purpose of the second half of the amendment is to allow the panel to advise the Treasury on what changes should be made to secondary legislation made under Parts 1 to 3. As it will already have been appreciated by the Committee, I agree with the intention behind this part of the amendment. It is indeed right that the panel be involved not only in the preparation of the first set of standing legislation to be made under Parts 1 to 3, but in advising the Treasury in due course as to what changes may be needed to that legislation.
We do not see the role of the panel coming to an end when the Treasury makes the first set of standing secondary legislation that underpins the special resolution regime. The panel will have a continuing and ongoing role to provide advice to the Treasury as to the appropriateness of that legislation. However, the clause is clear that this is the case and is the Government’s intention and will, subject to the passage of the Bill, become law. Therefore, this part of the amendment is not strictly necessary.
On the other parts of the amendments, the primary function of the Banking Liaison Panel should be the secondary legislation that underpins the special resolution regime. The amendment would expand this remit to the operation of the special resolution regime, including the drafting of the transfer orders, and to advise on other legislation that may be relevant to the SRR. I do not see this panel as the appropriate mechanism to advise on the operation of the special resolution regime. It is chaired by the Treasury and its purpose is to inform the development of, or to review, standing policy. It would of course be impossible to consult the panel before drafting the transfer orders, due to the likely need to act quickly and the need for confidentiality, which I am sure the House respects.
For similar reasons, we do not believe that the panel should have a role in reviewing the drafting of a particular transfer order, even after it has been laid. It would be extremely difficult for the Government to engage in an active discussion on the effect of a transfer order for a particular organisation, as there is likely to be an active and ongoing compensation process and there may be additional litigation proceedings.
I do not think that the panel should have a statutory remit under the Bill to consider other legislation, as the amendments imply. Other groups have been set up to consider and review other legislation and I would not wish for this group to focus on such matters.
Having set out the reasons for the specific limitations of the group, and, therefore, why I shall ask the noble Baroness to withdraw her amendment, I would like to explain how the Government see the panel’s role on matters that go beyond its remit, as drafted in the Bill. When we announced the formation of the expert liaison group, we stated that it should have an ongoing remit to keep SRR powers and regulations under review, as practices in the financial markets develop over time. The panel, when it formally replaces the expert liaison group, should have that role.
It is right that we use the expertise of the panel to monitor the implications of the SRR powers on the financial markets and advise the Treasury on whether there should be any changes or developments in the special resolution regime. Such advice may, in the months and years to come, also touch on related matters in other legislation. While Clause 10 does not specify that exact purpose, there is nothing in the Bill to prevent it. The panel can be given tasks on other matters on a non-statutory basis. However, that is a mark of how important the Government see stakeholder input on the development of the standing secondary legislation under Parts 1 to 3, and the statutory remit of the panel should be focused in that way.
I am glad that the creation of this expert group has been widely welcomed—noble Lords have paid compliments to its work during our deliberations. The group demonstrates our ongoing commitment to stakeholder consultation, and has already made important contributions to policy on the special resolution regime. I hope that I have demonstrated why I have difficulties with the amendments. I also hope that I have provided some reassurance to the House on how we intend to use the Banking Liaison Panel in the months and years to come. On that basis, I ask the noble Baroness to withdraw the amendment.
I thank the Minister for that helpful reply to my amendments, and I am glad to hear him say that the expert liaison group has been helpful in policy development, which was the intended focus of my amendment. The Minister went to great lengths to say that it would not be proper or practical to involve the Banking Liaison Panel in transfer orders; I completely accept that—it was not the intention of my amendment, nor did I introduce that issue in those terms.
However, it was my intention to reflect on what the Minister has said can proceed on a non-statutory basis. My question is: why would the Government not want to enshrine in statute what they have admitted is a valuable process to date, and what they say will be the process to take forward? The banking community suggested this amendment to us to reflect what the Government had said in relation to the expert liaison group, and I am mystified as to why the Minister is sticking to his “resist” brief.
I need to think about this matter again before Report, and I also have an outstanding amendment which I moved on the previous Committee day relating to the role of the Banking Liaison Panel and the code of practice. We are building up a picture of a rather restricted role being written in for the Banking Liaison Panel, which in practice might be extremely restricted if there are no statutory instruments when the Government are saying something else. I do not think that Bills should be drawn up on that basis. As I said, I shall reflect on that between now and Report, and I beg leave to withdraw the amendment.
Amendment 31 withdrawn.
Amendment 32 not moved.
Clause 10 agreed.
Clause 11: Private sector purchaser
33: Clause 11, page 6, line 22, leave out “commercial” and insert “private sector”
Amendment 33 replaces “commercial” in Clause 11(1) with “private sector”. I hope that it is a straightforward amendment which the Minister can accept.
The Bill uses “private sector purchaser” in the early clauses in describing the stabilisation option. When we get to Clause 11, which is the first place where it is spelt out in detail, the clause is headed “Private sector purchaser” but subsection (1) says:
“The first stabilisation option is to sell all or part of the business of the bank to a commercial purchaser”.
The term “private sector” is very clear and has a clear reference point. So far as I can see, “commercial” is not given a particular meaning in the Bill, so we must try to see what it might be in ordinary interpretation. It is pretty clear that “commercial” is not synonymous with “private sector”. We may not have the full range of nationalised industries that existed before my party embarked on privatisation in the 1980s but there are still many examples of bodies that operate from within the public sector on wholly or partly commercial lines. Of course, the Government have added to their number recently by acquiring Northern Rock and Bradford & Bingley’s residual business and, more recently, by taking control of the Royal Bank of Scotland, which I believe has been classified to the public sector.
We agree with the Government that the first stabilisation option should be a transfer to a private sector purchaser but we do not think that this option is appropriate in order, say, to transfer a failing bank to one of the other banks that is now in public ownership, which would be commercial but not private sector. However, that is what Clause 11 would allow if the wording remained. If the Government want to increase the number of failing banks in public ownership, they should be prepared to use the powers in Clause 9 and meet the slightly tougher conditions set out there or, indeed, introduce separate legislation.
I expressed the hope that the Minister could accept the amendment and I hope that I am not mistaken. I beg to move.
I shall not be able to able to accept the amendment but I hope that my explanation will be a little more benign than the noble Baroness suggested it might be if I were in conflict with her on this. Of course, I understand her point that there is a discrepancy between the clause’s title and its wording. The title is a signpost; it indicates the area that is covered. Legislative primacy obviously relates to what is specified in the clause, where we are concerned with—
The noble Baroness seeks to pre-empt me, but I am not going down that path. I was merely giving background to the fact that it looks as if there is a discrepancy so I will indicate the nature of the difference between the two positions. I was establishing that we needed precision in the clause, which is the issue that takes legislative primacy. That will be the law of the land, not the clause heading.
The heading is there for signpost purposes. The phrasing is drawn widely to ensure that a range of transfers is possible, subject to the need to meet the public interest. For example, a healthy deposit taker in which the Government are a shareholder may be in a position to take on the business of a failing bank, or the commercial operation of a foreign state may be prepared to do the same. We would not want Clause 11 to prohibit that, so it refers to a “commercial purchaser” to take account of situations in which the transferee may not be totally private-owned. I hope that the Committee will recognise that the clause uses the heading “Private sector purchaser” rather than “commercial purchaser” for that sole reason. It is an issue not of discrepancy but of identifying what the clause is about and then being precise in the way in which it is meant to reach its objectives. Its objectives must be wider than might be suggested if we talked only in terms of a commercial purchaser.
I think that I am right in saying that the title of a clause has no legal significance, but none the less I am not clear whether the Government’s objective is to have a clause that is about a commercial purchaser but whose heading is “Private sector purchaser”, which is not the same. There seems to be some confusion in the drafting. If their objective is to extend the possible range of purchasers beyond those in the private sector to what may be governmental purchasers, the heading—if it has legal significance—is inconsistent. The Minister’s argument would suggest that the heading was inappropriate.
I hoped that it was not. In its details, the clause has to hit the objectives that we have for it, which cover more accurately the issue of the commercial purchaser because of the potential range. We are dealing with circumstances which none of us can foresee with great accuracy, but the role of the legislation is to make the public interest realisable against all foreseeable circumstances as best we can, and we certainly should not limit the legislation by drafting it too narrowly. The importance of the clause is in the phrase that it uses—“commercial purchaser”—in its crucial aspects. I shall not go to the stake over the question of the heading of a clause, but we regarded it as indicating broadly what the clause was about, and that is why it stands. If there is considerable anxiety about the wording and it is thought that it will cause great confusion, of course I will take away those representations and think about them before Report, but we should compare this with the issues that confront us in the Bill. I think that I have presented why the clause reads as it does and I therefore have great difficulty in going much further.
I certainly agree that this is a very small matter by comparison with the other issues involved in the Bill. Nevertheless, it is right to get it right. If the clause states “commercial” as its essence, why not put that in the clause title to avoid any possible confusion?
The Minister said that he will take the matter away to look at it. I therefore do not want to delay the Committee more than one more moment, but if he has in mind that the purchaser might include, for example, sovereign wealth funds, it would seem that the heading as it stands is not right.
The Minister has not set my mind at rest on how the Government might seek to use the concept of private sector purchaser. He has agreed to take the matter away, so we must let him consider it before Report but I do not think that it is simply a question, as my noble friend and my noble and learned friend may have suggested, of changing the heading to Clause 11. The issue starts in Clause 1(3), which states:
“The three ‘stabilisation options’ are—
(a) transfer to a private sector purchaser”.
The Bill may be spinning a line that that is about selling on to a private sector purchaser. We have had discussions on other parts of the Bill about whether it is using language that is open and honest. We may well have come across another example of that. When the Minister goes back to discuss it, I hope that he will not just discuss changing the heading to Clause 11, but discuss being honest about language throughout. Then we may have a more honest debate on the content but, for today, we have probably done it justice and I beg leave to withdraw the amendment.
Amendment 33 withdrawn.
Clause 11 agreed.
Clause 12 : Bridge bank
Debate on whether Clause 12 should stand part of the Bill.
Clause 12 is very important. It sets out the scheme for the second stabilisation option, that of a bridge bank. To date, at Second Reading and so far in Committee, we have not had much discussion of exactly what a bridge bank would be and how it would operate. “Bridge bank” is a new term of art. There is no such institution today, so we may rightly expect a full explanation of how a bridge bank will operate.
First, we must hope that bridge banks will be few and far between; indeed, it would be best if the Bank of England were never subjected to the challenge of owning and managing a failing bank across a bridge to re-enter the private sector, whether in part, in parts, or in whole. However, from experience to date, it would not be right just to think in terms of Northern Rock or Bradford & Bingley, both of which might have been bridge bank candidates. Their business model turned out to be unworkable in current market conditions, but their businesses were not in themselves complicated. Things could be very different if, for example, no private sector solution, enabled with funds from the recapitalisation scheme, were successfully put together for a bank such as Halifax Bank of Scotland.
Under the Act, a bridge bank, 100 per cent publicly owned by the Bank of England, would come into existence if option 1, triggered by the FSA, had not produced a rapid solution. I will not dwell on the threshold trigger, except to say that despite yesterday’s reassurances from the noble Lord, Lord Davies, the FSA handbook to which he referred is difficult to navigate and subjective in its approach to threshold conditions. The 2000 Act is faulty because it has given the FSA mixed and uncertain objectives. Nevertheless, when the trigger has been pulled, then, as the October regulatory impact assessment of the Bill says, the Bank of England can take,
“the opportunity to stabilise the bank, preserve franchise value and ensure consumers have continued access to banking services”.
This continuity of service to the public is the best available justification for what would otherwise be seen as over-hasty public ownership.
The regulatory impact assessment goes on to say that depositors would have access to their money and that the Bank of England would gain time to achieve a transfer or transfers to the private sector. However, there is a draconian price to be paid. The Bank of England effects its ownership by laying instruments under the Act, subject to no parliamentary procedure. The Delegated Powers and Regulatory Reform Committee has drawn attention to the Bank of England’s wide-ranging powers, and a government reply is awaited.
From here on, matters become more complicated. As Clause 12(3)(a) says, the Bank of England will need objectives—not too many, one hopes—as it facilitates sales to one or more private sector purchasers. In theory, especially if the failing bank were large, there could be a considerable number of purchasers, and over what period might they be expected to purchase? Paragraph 72 of the code says:
“It is envisaged that a bridge bank will typically exist for less than one year: it is intended to be a short-term operation”.
However, the code has already said, in paragraph 60:
“However, in situations where there is expected to be a lengthy period of time prior to a sale, the Bank shall”—
do certain things. Just as we have had a discussion of “temporary”, we could now discuss “lengthy”.
Clause 12(3)(d) reads:
“different arrangements for management and control at different stages”—
this implies that they will be required—and the code comments on this in paragraph 51:
“the Bank shall take steps to manage its relationship with the bridge bank at arm’s length. However, an arm’s length arrangement may not be appropriate if a bridge bank is only in existence for a short period of time (as is intended and envisaged)”.
In Clause 12(3)(e) there is “eventual disposal”, which does not sound like a quick and successful sale. Paragraph 81 of the code goes to and fro again on this, as do many of the paragraphs in the code. It says:
“In some circumstances it may be appropriate to transfer some or all of a bridge bank’s business to a public-sector transferee, either a company wholly owned by the Treasury or an onward bridge bank … However, this would only occur if it best met the bridge bank objectives”.
All this is set against the plea of the Government that flexibility is needed. These paragraphs show considerable flexibility. The problem is that flexibility is deeply at odds with certainty, and the market needs certainty. More thought than has been given so far is needed about the procedures that the bank will have to follow and how it would know that it had been successful. The language of the code is perhaps best summed-up by saying, “Now you see it, now you don’t”.
This is all subject to Clause 79, which states:
“The Bank of England may not take action in respect of the bridge bank without the Treasury’s consent if the action would be likely to have implications for public funds”.
That seems to be a contradiction in terms. You cannot have a bridge bank without it having implications for public funds. So, throughout whatever is done, the Bank of England has to give its agreement.
Finally, under Clause 12(4), transfers from one Bank of England company to another will create an “onward bridge bank”. Why the Bank of England would want to complicate its life further with both bridge banks and onward bridge banks I do not know. We need a full explanation of these matters. Meanwhile, given the drafting of the Bill, particularly the drafting of the code, we live in the hope rather than the expectation that there will never be a bridge bank.
It is something of a relief to get away from discussing individual amendments in order to have a clause stand part debate. One should be grateful to the noble Viscount for giving notice of his intention to oppose the Question that Clause 12 stand part of the Bill. Clearly, the second option is very important. The noble Viscount raised a number of questions which I hope the Minister can clarify. In particular, I am not quite clear what will happen if part of a business, rather than the whole of it, is transferred to a bridge bank. Would the bank concerned effectively be split into two parts, one of which remains in the private sector and one of which would become a company owned by the bank? We are told that the code of practice will set out a number of things, including the content of the articles of association, which will obviously be very important, and the objectives. Perhaps the Minister should give us an idea of what the objectives will be. Will it not simply operate as a normal, commercial bank? If it is to have objectives beyond that, will it seek to facilitate, for example, the extension of lending when we know that considerable controversy has arisen because the Government have given large sums of money to banks which have failed to lend it on? Will there be objectives of that kind?
Like my noble friend who has just spoken, I am somewhat mystified by the concept of an “onward bridge bank”. It is not at all clear why, if it has been set up as a “bridge bank”, it will need to be transferred to a different company. What will be the difference between the initial bridge bank and an onward bridge bank? In that context, the code of practice is said to be important in setting up the objectives, the articles of association and so on for a bridge bank, but does not, apparently, fulfil the same function in relation to the onward bridge bank? It would be helpful to have clarification of that, which, as my noble friend has said, is apparently a completely new innovation and a concept we have not had on any previous occasion.
I am grateful to both noble Lords, in particular the noble Viscount, Lord Eccles, for asking me to spell out what Clause 12 represents. It is a tall order, as I am sure he will recognise. One feels more comfortable when one has specific amendments to which one can address responses. Covering the whole clause would delay the House for an inordinate amount of time. However, I will give as full an explanation as I can, consistent with respect for parliamentary procedure.
I begin by responding to the noble Lord, Lord Higgins. The noble Viscount, Lord Eccles, asked the same question, which is important to this clause: “What is an ‘onward bridge bank’”? I will tackle that first. The concept of the onward bridge bank, which is as new as that of the bridge bank itself, is that the Government are seeking a high degree of flexibility to allow the Bank of England to carry out any necessary restructuring. After the initial transfer to the bridge bank, it is possible that the Bank of England may wish to transfer some or all of the bridge bank’s business to another company that it owns. It might wish to do this, for example, if it wishes to split up the business prior to selling it. Under subsection (4), if property, rights or liabilities are transferred in this way, the new company is called an “onward bridge bank”. That is the concept behind that particular term.
I hope that noble Lords will recognise that we are talking about difficult circumstances for the Bank of England. I will deal later with the time constraints under which we are working, and how open the procedure is. The House will appreciate how the Bank of England, when it takes over a failing enterprise, must then create circumstances where it can meet the criteria of the rubric that the Opposition constantly enjoin upon us, and which the Government also accept—that there is no intention to take banks into public ownership, except when they are in such serious difficulties that that is the only possibility. Therefore, when the Bank of England takes responsibility for a bank, it must be able to make arrangements for disposing of it in due course, and returning to the private sector that part of the operation that may be viable and for which people will bid.
The concept of the bridge bank is fundamental to Clause 12.
I have gone as far as I can in explaining the onward bridge bank. It is where the Bank of England has a potentially disposable asset that it wants to transform into one that in fact does meet the requirements of the market. We must give the Bank greater flexibility to effect this. The onward bridge bank is only an addition to the provision of the bridge bank, preparatory to the Bank making arrangements for the return to the private sector of some of the assets—if it cannot effect what would be most desirable, which is the return of the totality. That is what the concept is.
I hope that the noble Lord will interpret that answer as broad agreement with what he is asking.
On the more general issue, the clause embraces the second of the stabilisation options—the bridge bank. The option gives the Bank of England the ability to take control of part or all of a failing bank’s business. Once the Bank of England has control of this bank’s business, it may stabilise it, restructure it as necessary, and sell the bridge bank. If it is successful in doing so, the concept of the onward bridge bank does not come into play.
The bridge bank option will give the Bank of England the opportunity to stabilise the bank, preserve franchise value and ensure that customers have continued access to banking services. It will provide the Bank with time to pursue a private-sector solution where this could not have been immediately arranged, for example by allowing potential acquirers the time needed to carry out essential due diligence on the business.
The bridge bank option is very important, which is why the noble Viscount, Lord Eccles, has focused on it. It enhances the possibility that the authorities will be able to facilitate onward sale of the bank to a private sector purchaser, which, I repeat, is the Government’s favoured option for the resolution of banking difficulties.
Bridge banks are intended as short-term operations, and the aim is for a swift onward sale to a private sector purchaser. Under Clause 80, the Bank of England must report to Parliament about the activities of a bridge bank after one year.
As with the previous clause and the private sector purchaser tool, Clause 12 establishes that where the general special resolution regime conditions and the specific conditions for the bridge bank stabilisation option are met, the Bank of England may transfer all or part of the business of a bank to a bridge bank. Transfer to a bridge bank may be effected through a transfer of the bank’s property, rights and liabilities, and is executed by one or more property instruments made by the Bank of England. The Bank of England has the power to choose which parts of a failing bank’s business to transfer. Hence, as with the private sector purchaser option, partial transfers are possible. I shall provide a detailed treatment of partial transfers when we debate the property transfer clauses.
Unlike the private sector purchaser tool, the bridge bank can be effected only through the use of the property transfer power, and not by share transfer. This is because a bridge bank is a new entity, especially established to carry on the banking business transferred to it. Property transfer powers offer a number of advantages, in particular the fact that they permit a partial transfer, which may be the best solution in some circumstances.
It is important that bridge banks are managed in the right way; the noble Viscount made that quite clear when he introduced the debate. The Government consider it appropriate to set out how this will work in practice in greater detail. To this end, the code of practice, to which the noble Viscount made copious references, which is provided for under Clause 5, will cover matters relating to the governance and management of bridge banks. The published draft code makes draft illustrative provision on these matters.
The Bank of England will not profit from operating a bridge bank. The Bill’s provisions for compensation provide that a “bank resolution fund” must be established when a bridge bank is created. The fund provides the failing bank with a contingent economic interest in the resolution. The bank resolution fund is a scheme under which the failing bank becomes entitled to the proceeds from the sale of some or all of a bridge bank’s business, less any deductions necessary to reflect the use of any public funds in the resolution, including the placing of public funds at contingent risk, or any other costs of the resolution. On the winding-up of the failing bank, the net proceeds of the resolution will flow to the creditors—and shareholders, should creditor claims be satisfied in full—of the failing bank.
The bridge bank stabilisation option will help the authorities to resolve the issues surrounding a failing bank, enhancing the chance of a successful sale of the bank to a private-sector purchaser. That is the concept behind the bridge bank. I hope that I have explained the additional dimension of the points on which the noble Lord, Lord Higgins, in particular challenged me. I hope that the noble Viscount, Lord Eccles, will think that the combination of the proposals in the clause and the code to which he has made reference is explicit about how the Bank of England will manage this part of the resolution procedures, which are very important.
If the option exercise involved the Bank of England establishing a bridge bank, the Bank would take into account the nature of the institution that it was taking over. The straightforward answer to the noble Lord is that it might take over any bank in any circumstances which fulfilled the criteria. The answer to his question is therefore yes.
That is not really what I was looking for. It is clear that a number of banks are having problems and nobody knows how many toxic assets they hold. That is one of the fundamental issues. One solution might be if banks could get rid of their toxic assets and make it clear what their proper balance sheets were. Would it be possible for the Government to use this process to take hold of those toxic assets for a period and move them on in better times?
The answer is yes, but I think that the noble Lord will recognise that, in terms of the public position, the Bank of England would exercise real judgment in using the option in such circumstances. That is why we are in very difficult waters and need more than one vessel to navigate them, of which the bridge bank is one.
Let us be clear. When the Minister said that a bridge bank could take on toxic assets, am I right in thinking that it could do so only in the context of Clause 8—namely, that the bank from which it was taking the toxic assets was in such difficulty that either the stability of, or maintenance of public confidence in, the financial system was at risk or protection of depositors was required—and that it could not take on the toxic assets of a bank that was doing reasonably well? Could it take on toxic assets only in cases where the conditions for the stability regime to come into play were met?
Of course, that is right. That is why we have great difficulty anticipating all circumstances for which the Bill is intended to allow the authorities to act effectively. I am grateful to the noble Lord, Lord Newby. Just as the Box raced a note back to me saying, “Quote Clauses 7 and 8”, which are the conditions under which the authorities act, the noble Lord expressed them with great accuracy and clarity.
If I have understood this situation correctly—and I would like the Minister to say if I am right—an onward bridge bank is just a bridge bank. The relationship between that bridge bank and the first bridge bank really gives rise to the definition of “onward”. The onward bridge bank could be a bridge bank already in existence to take on the assets of another failing bank. It might be thought a good idea to amalgamate some part of the assets of one failing bank with the assets of the second, and put them into a bridge bank which would be an onward bridge bank in relation to the first and just a bridge bank in relation to the second. Then the whole thing could be sold off to the private sector as a bridge bank if that was feasible. Is that correct?
Sometimes I feel that ministerial replies ought to consist of one sentence, so that everyone can then put their gloss on it. We learn more from the contributions around the Committee than we sometimes do from the notes on which I base my replies.
The noble and learned Lord is of course right. The onward bridge bank is for circumstances where, in preparing for a purchaser, it is clear that there is not the potential for the sale of the entity for which the Bank of England became responsible, but that it may have parts that can effectively be made ready for the market. First, there may be several different such circumstances and, secondly, it is quite difficult for us to envisage just how such circumstances can be defined. However, the concept is exactly as the noble and learned Lord suggests.
My noble friend Lord Wade mentioned the taking-on of toxic assets. It is worth clarifying that the Bill in no way creates a facility to take toxic assets out of banks that are not otherwise in trouble. The Bill therefore does not provide a mechanism for that, should the Government choose at any point to go down that route. The Minister might like to confirm that the Government do not intend to take legal powers to do that.
I am extremely grateful to the noble Baroness. The noble Lord, Lord Wade, introduced the concept of toxic assets. I was seeking to establish that the Bank of England may take on a bank, parts of which can readily be described as “toxic”. That is why we have the concept that it is perhaps able to sell on only a part of itself when it has analysed its position. The noble Baroness is absolutely right. The Bill is not about dealing with toxic assets, but with banks that fall into the clearly defined areas of Clauses 7 and 8, where they present dangers to the financial system and, therefore, to the public interest.
On that last point, is the Minister saying that the Bill, when enacted, would not allow another Bradford & Bingley? In that situation, the viable parts of the business were immediately subject to a successful private-sector sale. The non-viable, or much more doubtful, parts of the business were taken into public ownership. There was an absolutely clear decision to cherry pick: dispose of the good thing immediately and take the less good thing into public ownership. As I have read the Bill, I see nothing to prevent the Bank of England, once it has the right approvals and the FSA has pulled the trigger, doing a Bradford & Bingley: immediately selling the deposit-taking part of the business and taking on the not-so-good book.
Is it not the case under this clause that the Bank of England could take over a particular bank and make it into a bridge bank but, under the provisions for onward bridge banks, it could indeed pass on the viable part of it—the Minister seemed to imply that that would happen—but get left with the rump, including the toxic assets? To that extent, the Government would be taking over a degree of toxic assets and retaining them, even though the best part had been sold on. It is the same point as that which my noble friend Lord Eccles is making.
We all have to recognise that the Bank of England will not be involved in these circumstances any more than the Financial Services Authority or the Treasury. None of them will get involved in these circumstances unless a bank is in such trouble that it is presenting a threat to the financial system and to the public interest. When the authorities act, it is not the case that they are dealing with the world in perfect viability; far from it, they are dealing with crisis and institutions in crisis. There is bound to be an unfortunate dimension—even a toxic one—as far as such institutions are concerned. The issue we are trying to resolve in Clause 12 is whether this structure is a valid and valuable option for a solution to such difficult circumstances. That is why the clause should stand part of the Bill.
The Minister has not dealt with one point made by the noble Viscount, Lord Eccles, that a bridge bank is by definition in the Bill wholly owned by the Bank of England; the Bank of England is wholly owned by the Treasury; therefore, a transfer to a bridge bank under this clause is, in effect, a transfer into public ownership. Should the instruments that effect that not be subject to some kind of parliamentary procedure as the Delegated Powers and Regulatory Reform Committee asked?
I shall try to settle into the position that concerns me. I understand the need for flexibility and, in times of crisis, nobody would wish that there were no flexibility. On the other hand, it is at odds with certainty. If you are looking at assets that you wish to sell, it is much better that the market has a degree of certainty about what you are doing and the way that you are doing it. The Minister said that this was being done by asset transfer. That is more convenient than share transfer because share transfer brings all the liabilities while assets come as they are and you have a chance to value them. With share capital, you do not know; there may be 16 pieces of litigation in the United States about which you know nothing when you acquire the shares. That is a benefit and makes the Bank of England’s task somewhat simpler.
In my career, I have been involved with many businesses that were in trouble, mostly in the third world, and not banks, with one or two marginal exceptions. It is important that when you enter a rescue you know how you will exit and the rules about what you are expected to do in order to create an exit. When people used to ask me about this, I said, “Please read Hamlet. The exits are much more exciting than the entrances”. Polonius had a rather unhappy exit, but the exits are many and various. They can involve writing things off and throwing them away, as in house clearances. The good assets are easy to deal with—the children want them—but who is going to clear out the bad assets?
We are looking at a situation of that kind. The code of practice is hopelessly woolly, and the Government’s thinking about what they are going to ask the Bank of England to achieve is also not sufficiently worked out. I am convinced that the author of the code of practice had a pretty desperate time deciding how to qualify some of the paragraphs that I have read out, and I sympathise with them in that matter. I urge that between now and Report some careful thought is given to this. I could, and possibly would, table some interesting amendments. I did not think that was the right thing to do in Committee because we simply did not know what we were talking about, and it is difficult to amend something when you do not know what it really means.
There were interesting points in the Minister’s reply. He told us about reports. That is right, the code says that the arrangements are not expected to last for more than a year, and you only have to make a report if they last for more than a year. That is one of the contradictions here.
I would like to believe that by Report we shall know a great deal more about bridge banks and onward bridge banks. An onward bridge bank is clearly intended at the moment for bad assets, not good ones. The possibility is then envisaged that the Bank of England will be able to persuade the Treasury to take this lot of bad assets off its hands into full public ownership—it says that in the code of practice.
There are many things about the position of the Bank of England and its duties and obligations under the Bill that should be clarified before Report. Meanwhile, I withdraw the suggestion that Clause 12 should not stand part.
Clause 12 agreed to.
Clause 13: Temporary public ownership
34: Clause 13, page 7, line 24, after “management” insert “, including board membership,”
I hope that with this amendment we are moving into somewhat less opaque territory. It would amend Clause 13(3), which deals with the provision in the code relating to the management of banks taken into temporary public ownership. We spent a considerable time yesterday talking about how banks in public ownership might operate, and I do not want to repeat those arguments today. I will merely paraphrase the noble Lord, Lord Sawyer, whom I am pleased to see in his place, when he spoke on this issue in the debate on the Queen’s Speech. Talking about mutuals, he said:
“When customers are owners, they are given a very different model of customer engagement”.—[Official Report, 8/12/08; col. 218.]
My view is that when citizens are owners, there needs to be a different model of engagement. That is why we spent some time yesterday trying to tease out from the Government what management of a publicly owned bank under these provisions might mean.
The amendment is relatively specific; it says that the code should include within its provisions the question of board membership. The reason for wanting that provision there is that in our view the board members who are appointed by the Government will play a significant part in the way in which the bank operates, particularly in circumstances where the Government are by far the single largest shareholder. It is important who those members are and that they should not all be the same kind of person. They certainly should not all be from a banking background. They need to represent the other stakeholders in the bank, of whom customers, not least business customers, are one and the taxpayer is another. Therefore, we want to ensure that the composition of the board, in respect of those members placed on it by the Government, is diverse and reflects the diversity of interests that the Government’s stake itself reflects.
If my noble friend Lord Smith of Clifton were here, I am sure that he would make again the argument, as eloquently as he has done in the past, for having a proportion of women among the Government’s nominees. I remind the Minister and the Committee of his example of the Norwegian requirement that 40 per cent of board members should be women. It would be extremely welcome if the Minister could say that 40 per cent of government appointees to the board of the bank would be women. If he cannot do that, I hope that he will at least give some assurances that the Government, in making those appointments, will try to ensure that they reflect the diversity of stakeholders with a genuine interest in the bank and that the bank, as reflected by its directors, might be slightly different from a bank not principally in public ownership.
I very much support this amendment. The issue of diversity is central to what we are trying to do in this set of circumstances. There is general public disappointment about the performance of directors of banks. Certainly, Northern Rock is a good example: it had a star-studded board of directors yet, at the same time, its business model failed. We must ensure that we have people on the boards of our banks—or banks with some public ownership—who can take a wide and diverse opinion and bring different skills sets, ideas and backgrounds to the bank’s governance.
Part of the problem is with FSA regulation. Obviously, anybody who is appointed as a director of a bank must be approved by the FSA. Of course, it is commonsense and very important to have people on the boards of banks who understand banking—but there are far too many bankers among directors of banks. Other people in the community, with skills from the economic and marketing sectors and from all walks of life, would make a valid and relevant contribution to the governance of the bank.
Customer representation—or, in this case, taxpayer representation—is very important. On the boards of banks, it is the shareholders who need primarily to be satisfied, but there is also the customer input. When the Government take up an issue such as this, it is important that the position of the customer of the bank is reflected in the diversity of the board. I hope that the Government will be able to give some reassurances that they are prepared in these circumstances to do some new thinking and, perhaps, to do some things that have never been done before. Perhaps they could challenge some of the old ways of thinking about the appropriateness of different types of directors and widen the pool of people who are able to take up these appointments.
Can the Minister clarify the nature of board membership in this situation? It is important that we understand whether the directors appointed through the public sector to represent the public sector interest will be classed as independent directors, or whether they will be connected persons who are representing directly a particular shareholder interest—that is, the Government. In a normal corporate situation, when directors are appointed by a significant shareholder, whether a minority or a majority shareholder, the presumption is that those people have an interest that is specific to that shareholder and that, when matters arise before the board in which a minority shareholder has an interest that diverges from those of other shareholders, those directors would exclude themselves from that decision, so that the independent directors can properly represent the views of the shareholders at large.
I am not clear, and it would be very helpful if the Minister could clarify, whether the intention is that shareholders appointed by the Treasury or by the holding company from the Government are there to represent the Government. If that is the case, will the Government accept all the implications of that: not only exclusion from certain decisions but the confidentiality of information passed to those directors and the implications for those whom they pass it to in terms of their use of it in decision-making? Again, there are quite strict rules on that.
Alternatively, is the intention that the directors are truly independent? If that is the case, there should be an important set of provisions making clear that they are not there to represent the Government’s interests but those of shareholders at large, even where they diverge from the Government’s interests. Again, there are very strict rules about not passing information back to the shareholder executive.
I have not been clear what category these directors must fall into. Before they are appointed, the terms on which they are appointed and the way in which they use their position and information must be very clear.
I have absolutely no problem with requiring the code of practice to include sensible provision about the situation of directors. In particular, on the point just raised by my noble friend Lord Blackwell, some clarification would be very helpful. In fact, it would be necessary before anybody took up the role as a director of one of these companies.
I should like to raise a point parallel to that raised by the noble Lord, Lord Newby, about what the code of practice should contain in this regard. There is a discrepancy between the wording of Clause 13(3) and that of Clause 12(3). Clause 12(3) states:
“The code … must include provision about the management and control of bridge banks”,
whereas Clause 13(3) refers just to the “management of banks”. I was brought up when looking at draft legislation always to ask questions if there were discrepancies in the wording between apparently similar situations. It is not clear to me why it is necessary for the code to cover control of bridge banks but for it to be omitted from Clause 13(3). There are many common features between temporary public ownership and control by a bridge bank. I should be grateful for clarification on that.
The noble Lord, Lord Stewartby, has made a most important point following on from points made by others in this short debate. It would be helpful if the Government could explain the justification for the difference between Clauses 12 and 13 that the noble Lord has drawn attention to. I imagine that, if the current amendment to Clause 13 were carried, “management, including board membership”, would indeed cover both management and control, and would helpfully align Clause 12 with Clause 13.
The noble Lord, Lord Blackwell, asked an important question with regard to the directors of a bank in temporary public ownership; namely, will they be independent or will they be government representatives? The answer to that should be that they will be independent. Today and yesterday the Government have frequently emphasised the need for an arm’s-length relationship for good or ill. Therefore, it is surely evident that the directors should be independent and act in the public interest and in the best interests of customers and the company as a whole. They should certainly not be appointed at the behest of the Government to fulfil government requirements.
Noble Lords raised the important point of diversity. My noble friend Lord Sawyer emphasised the need for a wider range of background experience among bank board members than has been customary. It is almost inevitable, and justifiable after the disasters—that is not too strong a word—that have occurred in British banking in the past year, that noble Lords and others should favour a much broader brush approach as regards selecting suitable independent directors. I would not dream of suggesting that there should be positive discrimination in favour of women, as some have proposed. I agree with the suggestion of the noble Lord, Lord Newby, that there should be more diversity than there has been. However, it would be most unwise to go down the route that has been suggested by his noble friend Lord Smith of Clifton of having a certain percentage of women on the board, as is the case in Norway. Above all, merit and value must be the key factors to be taken into account when appointing directors.
In some ways I support the amendment to Clause 13 tabled by the noble Lord, Lord Newby. Indeed, it could usefully be included in Clause 12 to clarify the code of practice with regard to what the Bank of England or the Treasury intend to do about the board membership of the organisations that they take into public ownership. I hope that the Minister will respond to the very important point that my noble friend Lord Stewartby raised about the different wording of those two clauses. However, I should not like my support for clarification about board membership to be included in the code, which would be helpful, to be taken as indicating my party’s support for social experimentation such as gender balancing with regard to that membership. Like the noble Lord, Lord Borrie, I believe that diversity has a role to play but that appointing the best man for the job—if I can use a politically incorrect phrase—is the right approach to board membership for the reasons that he outlined. I had understood from the noble Lord, Lord Myners—I think he said this yesterday but I am losing track of time—that that was the Government’s approach to board membership. It would be helpful to put that in the code of practice to make it clear beyond peradventure that the Government will not appoint placemen to the board, or use it for social experimentation. However, as I say, the amendment of the noble Lord, Lord Newby, makes a useful point.
I am grateful to all noble Lords who contributed to a rather lengthier debate than I had anticipated. I am also grateful to the noble Baroness for emphasising that these issues need to be looked at in terms of the code of practice, which is where a great many of them are properly located. I listened carefully to the debate. I assure the Committee that we intend to revisit the draft code of practice and that we expect changes to be effected. Debates of this kind help us in terms of the redefinition that may be necessary in the code of practice. Therefore, I am grateful for all the contributions, which indicate that more thought needs to be effected in these areas. In particular, we will look further at the point made by the noble Lord, Lord Stewartby, and we will come back on it. It is an important point, and I do not have a ready answer at this stage.
I emphasise that we understand the concerns that both my noble friends emphasised; that one should be concerned about the nature of management and who is effective in management. I assure the noble Lord, Lord Blackwell, that the Government’s view is that the directors of a company will be independent. They have a company law duty to the company; they are not appointed to represent particular interests but to develop and effect the strategic plans of the company to its good. The Government stand by our constant reiteration that that is how we define the role of directors. That is part and parcel of the point that my noble friend Lord Myners emphasised earlier this week, when we talked about the arm’s-length relationship in these terms. I offer reassurance on that point.
On the more general point of whether those who are appointed to the board should be more diverse in their backgrounds, interests and factors of that kind which were brought up in the debate, of course those are matters that ought to be considered. They are appropriate for the code of practice and, as I indicated, we are still in the process of developing that code after the initial consultation exercise and the initial draft. I say to the noble Lord, Lord Newby, that we do not think that the Bill needs to be changed. His concept under his amendment is somehow to indicate that there is some difference between directors and management. Our point is clear; the board of directors is part of the concept of the management of the bank or the company.
I hope that he will therefore recognise that the Government are not at all excluding any of the considerations that we are enjoined to take into account through the representations this afternoon by staying with the clause’s wording and not accepting his amendment. That is not because we are against his intent or his concerns about greater diversity of representation on the boards, but it is simply because the Bill enables that to take place if, after consultation, the code of practice in any way reflects these necessities. It is not necessary to have it in legislation in circumstances where the Bill already includes the concept of directors when it refers in this clause to management.
Therefore, I hope that the noble Lord will recognise that he has had a most fruitful debate as a result of moving his amendment, but that his amendment would not in any way strengthen Clause 13. Therefore, I seek to protect the clause as it stands, and I hope that the noble Lord will withdraw his amendment.
I am grateful to noble Lords who have spoken in the debate. The Minister has yet again produced a definition that cut across my view of what the word meant. Yesterday, we were arguing about the definition of other words. I thought that the Government were at great pains yesterday to make a distinction between management and the board of directors. If management in this context does not mean management in the normal sense, but in a broader sense regarding every way in which the bank is managed, that is one thing; but the Government have been at great pains to point out, as the Minister has today, that the directors appointed by the Government will be distinct from management and independent. Therefore, the wording that I propose in the amendment clarifies matters and should remain.
Regarding appointing people on merit, while I agree with the noble Lord, Lord Borrie, that everyone appointed to the board needs to be able to do the job well, and I am not a great fan of quotas, in every circumstance that I have seen when there has been pressure for greater diversity, the status quo has been defended on the basis that appointments had to be made on merit. However, many people who do not fit the status quo, but who would do a very good job on the board of a bank or in many other positions of authority, would not be appointed if you simply looked at their conventional history. This issue is causing problems across the public sector, because head hunters who produce appointments for directors and other senior people look for their definition of merit and appoint people who are exactly the same as the people who are already doing the job. I am very keen to avoid that in this case.
This has been an interesting debate. I shall take away the Minister’s remarks and consider whether I wish to return to the issue on Report. In the mean time, I beg leave to withdraw the amendment.
Amendment 34 withdrawn.
35: Clause 13, page 7, line 25, at end insert—
“( ) The Treasury shall report to Parliament on an annual basis on the activities of each bank which is taken into temporary public ownership for as long as the bank remains in public ownership.”
The amendment adds a new subsection to Clause 13. This is a probing amendment for the Committee. The parliamentary accountability of banks that are in some kind of limbo within the special resolution regime troubles me, and, on reflection, the amendment itself is not sufficient to allay my concerns. I shall, therefore, take the opportunity to raise issues that have not been dealt with in the Bill that are relevant to dealing with the accountability of failed banks more generally.
Under Clause 80, the Bank of England has to report to the Chancellor each year on the activities of a bridge bank, and that report must be laid before Parliament. However, in the Bill there is no equivalent provision for reporting to Parliament in respect of banks taken into public ownership. My amendment is intended to be a mirror of the Clause 80 provisions and repeats the annual report formulation in Clause 80, but I should like the Minister to explain why it is appropriate for Parliament to be kept informed about the affairs of a bridge bank only on an annual basis. Parliament should be kept informed about bridge banks and those in temporary public ownership on a more regular basis than annually. In each case, the status is not intended to be permanent, and Parliament should receive information at a frequency that is appropriate to the temporary or transient status.
I can quite see that organisations that become a permanent part of the public sector—which is not, I believe, what is intended—might report annually, because that is what most public sector bodies do, but not these temporary creatures. My noble friend Lord Eccles, when he opposed the Question that Clause 12 stand part of the Bill, said that if a bridge bank was not held for a whole year, there would be no report at all to Parliament. That could equally be a criticism of my amendment, which is another reason why it is a probing amendment for today.
I looked at the code of practice for further help, but received very little. Paragraph 98 refers to the reporting arrangements for bridge banks, and paragraph 99 states:
“As and when appropriate, the Chancellor of the Exchequer shall report to Parliament about the activities of the bank”.
I am not entirely clear whether paragraph 99 is intended to refer to a bridge bank or a temporary public ownership bank. Either way, leaving it to the Chancellor’s discretion is at the very least a discourtesy to Parliament, and I believe that we need to see much clearer rules, preferably set out in this statute.
When the Minister replies, I invite him also to cover the position of the banks that have been acquired under the Banking (Special Provisions) Act 2008. I believe that that Act contains no reporting requirements and, to that extent, it is deficient. That Act is about to expire and it seems to me that this Bill should therefore cover the parliamentary accountability of the banks in public ownership when this legislation takes over from the previous Act.
More recently, we have also had a case of a controlling interest in the Royal Bank of Scotland, and I should be interested to know how information about that bank will flow to Parliament. In addition, the Government have set up UK Financial Investments as a holding vehicle for their growing banking conglomerate business. Although that seems sensible, it raises questions about that body’s accountability to Parliament. I am sure that the Government did not need a statute to set up UK Financial Investments but that does not excuse them from regularising the accountability of such a body at the first natural opportunity, and it seems to me that the first natural opportunity that presents itself is this Bill.
I accept that all these banks need to be run on commercial lines and that they should not be subjected to minute inquiry or interference—something that applies as much to government as it does to Parliament. However, very large sums of public money have been invested in these bodies, directly and indirectly, and more stands contingently behind them. Indeed, if the powers of the Bill were used, more public money would be involved. These bodies are not simply the playthings of the Executive; Parliament has a right to information and a duty to keep these bodies under review in terms of information flows to Parliament. Therefore, it is right and proper that there is a defined regime of information flows so that Parliament can be clear about what it is entitled to receive. It seems to me that the Bill is a good place to start, although it is deficient because not only does it not deal with the situations created by the Bill but it does not deal with the situations created by last year’s Act either. I beg to move.
I support Amendment 35 moved by my noble friend Lady Noakes as a mirror image for bridge bank reporting in Clause 80. This seems an eminently sensible measure, as taxpayers’ interests need to be safeguarded. This method seems to be the most practical way of doing so and of reinforcing the code of practice clause.
I am grateful to the noble Baroness and the noble Lord. The answer to the noble Lord, Lord Northbrook, is that the arrangements in Clause 80 are for a bridge bank controlled by the Bank of England, which of course is not directly answerable to Parliament. That is why those arrangements are spelt out in the way that they are. However, this amendment concerns the Treasury. The Treasury is answerable to Parliament, and Parliament can ask Treasury Ministers to report on the activities of a bank in temporary public ownership whenever it wants—on an annual basis, if it wishes. Therefore, the question is: do we need this amendment to the Bill to provide what obviously already exists as an opportunity for the Treasury to be answerable for any bank in temporary public ownership? The Treasury is already answerable for that and Parliament will take its opportunities.
By way of an indication of good faith on this matter, I should say that when Northern Rock was taken into public ownership, it was contended that it should be obliged to provide a business plan, which it did. It did not do so quite as quickly as noble Lords and some Members of the other place might have wished, but I make it absolutely clear that that happened not a year but a matter of months after Northern Rock had been taken into public ownership. The Government were constantly urged to make it a requirement for Northern Rock to provide a business plan and it was duly provided.
The noble Baroness raised the matter of UK Financial Investments. We are reviewing the arrangements for how it will operate and how it will be answerable. We do not foresee there being a legislative requirement in that regard; we think that it will come within the framework of the code of practice. However, I emphasise that we recognise that the authority should be directly responsible to Parliament, just as authorities such as the Treasury are obliged to be answerable at any time. There is a different structure for the Bank of England in relation to the bridge-bank concept because the Bank is not directly answerable to Parliament.
I am not in any way gainsaying or seeking to disavow the importance of public answerability for the institutions for which public authorities have responsibility. We made it quite clear how we intend to deal with that so far as concerns the Bank of England, and there are further discussions to be had in that regard before our deliberations on the Bill are concluded. However, so far as concerns the noble Baroness’s amendment, the Treasury is of course answerable and can be made answerable at any time. Therefore, the amendment is unnecessary and I hope that the noble Baroness will be convinced that that is so.
I thank my noble friend Lord Northbrook for his contribution and I thank the Minister for his reply. It will not surprise the Minister to hear that I found his response disappointing. It seems to me that it is not sufficient simply to say that the Treasury can be asked for information by Parliament at any time—although the mechanisms for that are quite difficult to tease out—and that nothing needs to be provided in statute. If the Bill were setting up a body, there would be no question but that we would draft into it quite extensive accountability arrangements, including an annual report, annual accounts and the ability of the Secretary of State to direct the organisation to provide whatever information he or the Treasury desired. In my experience, the Treasury insists that those provisions are put into Bills produced by other departments because they are an important element of the financial accountability of those bodies. However, when we get to the Bill that the Treasury writes for itself, it tears all that up. The Treasury will just provide whatever Parliament chooses to get out of it if it can find a mechanism for doing so, or Parliament will get the Chancellor to report “as and when appropriate”, to use the words in the code of practice. That does not seem appropriate for bodies which are not just in public ownership for a few months. Let us not kid ourselves—we had a debate on temporary public ownership on our first day in Committee—we are talking about significant periods of time and significant organisations with large amounts of public money invested in or standing behind them. This Bill, almost uniquely among statutes, creates no accountability arrangements, except the very barest that are found in Clause 80 in relation to bridge banks. I cannot begin to say how pretty unacceptable the Minister’s answer was.
I said that it was a probing amendment because on its own it is nothing like good enough to deal with the accountability requirements that come out of this Bill and the hangover from the actions taken under the Banking (Special Provisions) Act 2008. I believe that all those need to be dealt with. As it is a probing amendment I will not divide the House, but I will look at it again and will probably bring back a more comprehensive amendment reflecting a proper approach to parliamentary accountability that the Treasury might expect of other departments in a similar circumstance. With that, I beg leave to withdraw the amendment.
Amendment 35 withdrawn.
Clause 13 agreed.
Clauses 14 to 16 agreed.
Clause 17: Effect
36: Clause 17, page 8, line 29, leave out subsection (3)
I shall also speak to Amendment 61. These are probing amendments to Clause 17, which deals with the effect of share transfer orders or instruments, and to Clause 34, which deals with the effect of property transfer instruments.
We have no fundamental problem with the clauses but seek clarity on their extent. In each case the amendments would delete subsections (3) of the relevant clauses, which state:
“A transfer takes effect despite any restriction arising by virtue of contract or legislation or in any other way”.
The subsections were debated in another place but I am not clear that there was an unambiguous meeting of minds during those exchanges, so I will have another go. The debate in the other place centred on the meaning of “in any other way” and the interaction between the subsections and European law and the ECHR. My honourable friend David Gauke argued that “in any other way” must mean common law because there was nothing else beyond contract and legislation. The Minister said that the Government did not want to get into any arguments about what subsection (3) might mean but gave no illustration of what “in any other way” might mean if it was not common law. Can the Minister today go any further than that, or does the extent of “in any other way” relate to common law?
Will the Minister say whether the subsections override European law and the ECHR, or will any transfer remain subject to challenge if it is asserted that a transfer is in contravention of EU law or the convention? I think that in Committee in another place the Minister said that the Bill was compliant with both because it was proportionate and so on, but that has no bearing on whether the actions taken under the Bill will be immune from challenge under EU law or the convention. Will the Minister confirm that notwithstanding the wording of the subsections the Bill does not override EU law and convention rights?
Some confusion has arisen because the Government have chosen to make an explicit reference to EU law in Clause 35, but have chosen not to do so in Clauses 17 and 34. I hark back to what my noble friend Lord Stewartby, who is no longer in his place, said earlier—that you always look for differences between different parts of a Bill and try to tease out whether the differences are intended to be substantial and convey meaning. It has been put to us by one of the major law firms that the refusal by the Government to universalise Clause 35—by referring to EU law—to the rest of the Bill is a recipe for legal doubt and uncertainty. I hope that the Minister will clarify that.
Will the Minister also respond in terms of competition law? Do the Government intend that these subsections could override domestic competition law? We know that they have had to take special powers to allow the takeover of HBOS by Lloyds TSB, notwithstanding the objections of the Competition Commission. Do these subsections allow a sale to a private sector purchaser in defiance of competition law? Do they avoid the need for the Government to do what they had to do in the case of Lloyds TSB, which was effectively to rewrite competition law in those instances? The Minister will appreciate that the full meaning of these clauses may be important if transfers under this Bill are made in due course so it is important to have clarity of meaning. I hope that the Minister can enlighten the Committee. I beg to move.
Before addressing Amendment 36 I shall touch on a couple of other points. The noble Baroness told the Committee about her loss at the odds of 25:1 in a horserace yesterday. As things are quite quiet at the Treasury I had the chance to look at the runners in yesterday’s races, in which a number of horses lost at 25:1. I concluded that the horse she probably backed was called Present Orientated, which fell at Folkestone in the Westenhanger handicap chase.
I am not sure that I can use that horse’s name to lever into my next point so I shall stick with Present Orientated; I do not have the smoothness and skill of my noble friend Lord Mandelson, of Foy and Hartlepool. The noble Baroness asked a question in the light of my noble friend’s Statement earlier in which he mentioned the Bill and its amendments. I believe that he was referring to a group of amendments that I tabled on Monday starting with that numbered 174A in the Marshalled List, which will modify Clause 225 to enable the scheme that he announced.
I shall return to the matter in hand. Clauses 17 and 34 make provision in relation to the effect of a share or property transfer instrument or order. The purpose of the clauses is to ensure that a transfer of property is effective in law and takes place in spite of any restrictions that might otherwise exist. The subsections of each of these clauses which the amendments would remove are drafted in deliberately broad terms. As the noble Baroness said, that drew some discussion when the clauses were reviewed in another place.
Once the authorities have decided to intervene in the public interest to resolve a failing bank and the necessary general and specific conditions have been met, the Government consider it appropriate that a transfer should take effect despite any restriction. That is to maximise the chances of a successful resolution, in so far as is appropriate and feasible. For example, a counterparty’s contract with a bank may stipulate that the counterparty needs to provide consent for the contract to be transferred from the failing bank to any other person. In normal commercial conditions this is a sound provision. However, bearing in mind the conditions in which the authorities may need to exercise the transfer powers, it would be impossible for all the necessary consents to be gained before the transfer. As such, it may not be possible to transfer the contract on which the transferee may need to rely, which would undermine the authorities’ ability to resolve a failing bank in the public interest.
Similarly, without the provisions, private sector transferees may be deterred from seeking to acquire a failing deposit taker, as they may perceive there to be a significant execution risk attached to the transfer. Indeed, a transfer to a private sector purchaser will not be possible unless commercial counterparties are certain that they will obtain complete control over the property, rights and liabilities transferred to it. Thus it is vital that provision can be made to make clear that a transfer takes effect notwithstanding any restrictions in contract or legislation, or in any other way, and that the transfer may, if specified in the instrument or order, take effect free from any trust, liability or other encumbrance. I believe that that answers the questions posed by the noble Baroness.
I remind the Committee that the Government are putting in place a suite of safeguards to protect counterparties, and these of course still stand. In particular, Clause 48, which we will debate in detail in due course, provides for protections for set-off, netting and security interests. For those reasons I hope that I have demonstrated the importance of the provisions, and that the noble Baroness will feel able to withdraw the amendment.
I hate to disappoint the Minister, whom I thank for his attempt at a reply, but he did not answer a single question, so I do not know how he could possibly think that he answered my questions. He set out the purpose of the clause which, as I said in my opening remarks, I support and understand, but I raised some specific points about subsection (3), which he did not address.
The three points that I raised were, first, whether the words “in any other way” in subsection (3) had meaning beyond common law. Secondly, I raised the issue of EU law and the European Convention on Human Rights and pointed out in particular that Clause 35, but not Clauses 17 and 34, referred to European law. I referred to the view of a leading law firm in the City of London that that is a recipe for doubt and uncertainty and asked specifically for a statement on the interaction with EU law and the convention rights. Thirdly, I asked about the impact on competition law. I am sorry to say that the Minister did not answer a single one of those points. He simply read out a speaking note that assumed that I was going to say something else.
Then let me endeavour to be more specific and granular. The purpose of the phrase “in any other way” is primarily to include common law, but there are other examples—for instance, the terms of a trustee arrangement. On EU law, I confirm that the Bill cannot override Community law and a transfer in breach of the convention rights could be declared unlawful on judicial review. Thirdly, on the issue of competition law, the clause could not of itself be used to override competition law, but that may be necessary in certain situations, and we will return to those issues in the debate on Clause 75, on which noble Lords have already said that they intend to focus later in Committee.
I am very grateful to the Minister for responding to my specific queries. Perhaps he could also respond on why Clause 35 makes specific reference to European law, but neither Clauses 17 nor 34 do? That is the particular point that has been put to us by a City firm of lawyers: that the non-reference in Clauses 17 and 34 is a recipe for confusion, so why not universalise the reference?
I would like to give the noble Baroness a clear and detailed answer. With her agreement, I will do that in writing and therefore ask that she withdraw the amendment on the basis that when she comes to consider the matter ahead of Report, she will be informed by my response to the point that she raised, having had it drawn to her attention by a leading City legal firm.
I am most grateful for the Minister's reply and of course accept that assurance. I think that this is the first time that we have had an exchange when he has said that he will write to a noble Lord to explain a point. Perhaps I may be clear that we are on a very tight timetable between Committee and Report, so it requires the Minister to be tough with his officials in getting answers out quickly.
Amendment 36 withdrawn.
Clause 17 agreed.
Clauses 18 and 19 agreed.
Clause 20: Directors
37: Clause 20, page 9, line 33, at end insert—
“( ) No action by the Bank of England or the Treasury under subsection (1) or (2) shall have the effect of removing or modifying existing contractual rights of directors.”
Amendment 37 adds a new subsection to Clause 20, which deals with directors. I can completely see why Clause 20 is thought to be necessary. It will save a lot of fuss and bother if directors of a bank which is dealt with by the Bank of England by way of a transfer to a private sector purchaser or a bridge bank, or by the Treasury taking it into temporary public ownership, can be got rid of or their terms altered by one simple instrument. My amendment is designed to limit the impact of such changes. It states that an action by the Bank or the Treasury under the clause does not remove or modify existing rights.
It may be easiest if I pose some questions to the Minister to see whether my amendment is necessary. What happens if the Bank of England or the Treasury decides to remove some bank directors using Clause 20? Are those directors entitled to make claims against the bank for breach of contract, including any early termination provisions included in those contracts? What happens if the Bank of England or the Treasury decides to change the conditions of a bank director, so that he is paid less or loses an entitlement to a bonus? Would the director still be entitled to pursue a constructive dismissal case in appropriate instances and, if he proved his case, could he be awarded damages? Could bonuses that have been earned in accordance with existing contracts be removed before payment without any right of action against the bank?
I am aware of the public anger directed towards banks as a result of the credit crunch. Much of that anger is justifiable, but public anger should not be allowed to affect legal rights. In many instances, agreements will have been reached with directors—we have seen instances of that in recent times—but that will not always be the case, especially if one or more directors is aggrieved by what they perceive to be premature or unnecessary action by the tripartite authorities.
In addition, if the clause could overrule existing contractual rights, there is the little matter of European law and the Human Rights Act, which does not allow rights to be taken away just like that. In that context, I note that the noble Lord, Lord Myners, has signed the customary human rights declaration for the Bill.
I have put some specific questions to the Minister to try to discover how Clause 20 interacts with pre-existing rights. On that basis, I beg to move.
Without wishing to cast myself in the role of the representative of public anger, I very much hope that the clause indeed allows directors who, for example, had very significant bonuses attached to their contracts of employment not to receive them if they have driven the bank for which they were directors into the ground and it has been forced into public ownership.
On the basis that I was rather slow in getting to the point on the previous amendment, perhaps I may try to make amends by saying that I think that the noble Lord, Lord Newby, will be pleased with my answer when I get to it.
Clause 20 provides that a share transfer instrument or order may enable the Bank of England or the Treasury to appoint or remove directors. It also provides that the instrument or order may confer on the Bank or the Treasury the powers to vary or terminate the service contracts of directors. Such provision gives the authorities the necessary power to put appropriate management into place once control of the failing bank has been transferred. It is, of course, critical that the deposit taker has a board of directors with the appropriate expertise to manage the business. However, in the period immediately preceding the transfer, members of the board may have resigned, the existing board may not have the necessary expertise, or it may no longer be appropriate or suitable to run the bank. The conditions that have occurred prior to the clause becoming relevant surely give rise to questions about competence, appropriate skill and the worth of these people to the bank.
The noble Baroness’s amendment seeks to specify that a share transfer instrument or order may not make provision in relation to the terms of existing contracts relating to directors. However, the Government consider that this is an important power to have. Let us suppose that the Treasury takes a failing bank into temporary public ownership. It may be appropriate to amend the provisions of a director’s contract—for example, by changing the length of his tenure or remuneration arrangements—or, to provide another example, to amend the notice period for a director’s dismissal. Such measures may be necessary to put appropriate management arrangements in place.
The breadth of the powers under the clause was noted in the other place. While I acknowledge that this is a broad power, I repeat the reassurances offered by the Economic Secretary. As he noted in the other place in Committee when this clause was debated, the terms under which former directors were employed are a matter for the previous board. He also stated that those terms would be governed by normal contract law. This is the case because they would have been determined before the bank needed to be resolved: hence there would be no property transfer instrument. He went on to say that any amendment to a director’s service contract would be governed by contract law. This is also the case.
While the clause provides a power for the Bank or the Treasury to alter a director’s service contract as part of the resolution of a failing bank, any modification made using the powers would be treated as part of the contractual arrangements between the director and the bank and would be governed by normal contract law. Moreover, of course, any power under the clause could be used only once the general and specific conditions were met, and would have to be exercised in a way that is compatible with the European Convention on Human Rights and with Article 1 to the first protocol in particular.
In answer to the noble Baroness’s question, the intention of the clause is to allow the authorities to have the ability, should they believe it to be appropriate, to terminate a contract without compensation, to modify a contract without compensation and to remove any entitlement to bonuses that have not been paid. Those are right and proper powers to have in place in the circumstances which this Bill contemplates. Therefore, I ask the noble Baroness to withdraw her amendment.
To clarify, the Minister says that the Government want the power to terminate without notice. Does that mean that the director concerned would be denied access to the employment tribunal to argue his case, or indeed to the courts generally—access which he has under existing rights? I understand how the Government might want to do this as a technical act, but does that mean that they can in effect write out rights that already exist? That is the important distinction that I am trying to tease out. I have not objected to the clause per se; I seek to see whether the clause in effect denies individuals rights of recourse to law that would otherwise exist. In another failing organisation where a chief executive is taken out at no notice, it is up to him whether he tries to pursue a case for wrongful dismissal or for payment of contractual rights. Are we taking ourselves out of the normal situation and creating wholly new sorts of rights or denying rights to people?
The clause as worded does not mean that directors could not take legal action in pursuit of their contractual rights, but the authorities would rely on the clause to say that, in the particular circumstances of directors of banks, the clause overrode any contractual rights and entitlements that they had. We want to be absolutely clear that we are talking about people who are responsible for failed banks. The failure of a bank is associated with the need to put a bank into a special resolution regime, which should not be taken lightly. That said, a claim to the European Court of Human Rights for compensation may exist if a European Court of Human Rights right has been interfered with, but, other than that, the clause specifies quite clearly that the authorities have the power seriously to amend and revise contracts.
I find this rather depressing, because although I have no problem with the action being taken, it appears that the Treasury’s judgment is now being imposed—the only right of recourse being to the European courts, which is a rather difficult right for individuals to take. I had feared that this is what the Government intended by the clause. The Treasury might well judge that an individual was responsible for failure, as happens in other business situations, but it is not right then to say that the Treasury’s judgment means that it can completely wipe out virtually all rights of recourse to the normal avenues available in this country. That gives the Treasury, or indeed the Bank of England, a power that is disproportionate to the situation, because it is a question of the Bank’s or the Treasury’s judgment of that individual and not of the court establishing the correct position. However, the Minister is clear that that is the intention. I see that he is being passed another note. Does he want to add anything?
The note that I have been handed was not relevant to what I was going to say. Nor will it lead me to deviate from what I was going to say.
Anyone who assumes the position of a director of a bank should do so with due and careful consideration of their public responsibilities. The nature of banks, their critical importance to the economy and the fact that a failed bank can place burdens on society should require particular focus and application by a director to rise to the very highest standards. Abject failure by bank directors is not a circumstance in which compensation is necessarily appropriate.
The noble Baroness uses the term “disproportionate”, and I envisage that the authorities, when looking to these clauses, will have regard to proportionality, as indeed we have in some of our discussions with banks in circumstances where we have intervened. A number of directors have left those banks, and in one or two cases the directors volunteered to surrender certain rights that they had under their contract, for which I commend them. In the circumstances, that was an honourable and good thing for them to have done. Proportionality is important.
The note that I have received advises me that it is possible to litigate the convention rights in UK courts under the Human Rights Act. They do not have to be taken to a court outside the boundaries of this country. On that basis, I invite the noble Baroness to withdraw her amendment.
I accept the clarification that on European rights we can use the Act to litigate in the UK, but I am not sure what effect that would have. The Minister refers to abject failure, but not all cases will be abject failure and not all individuals will abjectly fail. The point is that they are being denied the normal route of asserting their rights or of having them not accepted, with the Treasury or the Bank of England just saying their opinion. That causes me huge concern. I was minded to divide the Committee on this issue, but I shall reflect further on the availability of remedies under the Human Rights Act. I accept that ultimately it is an issue of whether the Treasury and the Bank of England act reasonably or proportionately.
I am deeply concerned that it is found necessary to have this little warfare against directors of banks. In most ordinary circumstances the law would allow them to achieve effectively what they want in the bad cases and by agreement as may have been reached. This seems to be a bit of public posturing against directors. I am not here to defend all bank directors because many of them have not behaved responsibly or honourably in all cases. But I believe that, given these very wide powers which would allow on the basis of Clause 7 the triggering of the special resolution regime on not necessarily serious grounds and certainly not transparent grounds, we might be into using Clause 20 in circumstances that the ordinary law would not approve or support, but which the Treasury could use for its own purposes. I shall think about this again before Report and I beg leave to withdraw the amendment.
Amendment 37 withdrawn.
38: Clause 20, page 9, line 37, at end insert—
“(5) An appointment under subsection (1)(d) or (2)(d) may be made in connection with an appointment under section 164A (Remuneration committee).”
First, I should like to pass on the apologies of my noble friend Lord Wedderburn to the Committee. Unfortunately, he is ill and cannot be here, although he was looking forward to our debate on this issue. Amendment 38 is a paving amendment for Amendment 145, to which I shall also speak. The aim of new Clause 164A, which is proposed under Amendment 145, is to enable the Treasury, with the agreement of the FSA and the Bank, to have a limited power in order to intervene and prevent irresponsible remuneration being paid to the executive directors of a bank. The order would normally be made where public funds have been provided for a bank. The huge remuneration paid even to a failing bank’s top executives has been much criticised in the past.
The proposed new clause adopts a mechanism to which responsible bankers can hardly object; that is, a voice on the remuneration committee which sets the levels of such rewards. The Companies Act 2006 requires a report to the shareholders’ meeting on directors’ remuneration only in the case of quoted companies. That shareholders’ vote is only advisory. The clause would enable parallel provisions to apply also to all banks, quoted or unquoted. The mechanism adopted is to enable the Treasury to appoint a member to the remuneration committee or any parallel body with suitable immunity under the Bill, but subject to the ordinary general fiduciary duties of a director—for example, to act in good faith in the interests of the bank and the community—so that the voice of the public interest can be heard in its deliberations. It may be doubted whether a responsible bank would defy that voice by paying enormous and irresponsible remuneration where that was contrary to the public interest and the interests of shareholders. The established City principle “comply or explain” would clearly be applicable.
The new clause would enable the Treasury, with the FSA and the Bank, to act generally in this manner, but it would be expected to make clear its intention to adopt this mechanism in cases where public funds had been provided to a bank as part of the deal. The provisions of Part 1 and Part 3 are relevant to such cases.
If banks are to be supported by taxpayers’ money, it is important in the current climate that there should be some sort of accountability with regard to the salaries and bonuses paid to senior executives. It is common knowledge that very large sums have been paid, even in situations when the decisions for which such executives have been responsible have resulted in catastrophe. Many ordinary employees who have been completely innocent of the decisions at senior level are now facing redundancy, often in areas where alternative work is not readily available. One can understand what resentment will arise should the senior executives who share a substantial part of the responsibility for the present crisis walk away with large sums.
I am sure the Minister is aware that many completely innocent people will suffer in the crisis we face—not only are former employees facing unemployment and impoverishment, interest rates are the lowest ever and are likely to go down still further, perhaps to zero. Effectively, prudent people will have to pay for the imprudent. This is a transfer of money from savers to borrowers. Many elderly people will see their income diminished at an age when they have no chance to make good their loss. That also is bound to cause resentment if at the same time the people deemed to bear a major responsibility for the crisis are still able to secure large sums of money for themselves. The principle involved in these two amendments is simple: public money involves public accountability. I hope that that is accepted. I beg to move.
My noble friend Lady Turner of Camden has spoken with some eloquence on this matter. It is of considerable interest to the Committee that she has raised the whole subject. In the course of the debate on the previous amendment, the Minister spoke with some eloquence too on the responsibility of those who are directors of banks. I hope that I have not misunderstood him when I say that the impression he gave me was that in his view the responsibility of the directors of banks is of a somewhat higher grade than the responsibility of company directors generally. It seems to me that my noble friend Lady Turner of Camden has made a very strong point in talking about the value of having a public interest voice in the discussion of the remuneration of executive directors.
We all have experience, whether with banks or other companies, of the way in which remuneration is dealt with whereby even the independent, non-executive directors who are supposed to keep a special eye on the remuneration of executive directors are themselves executive directors of other companies and therefore are somewhat disinclined to vote down the proposed executive directors’ remuneration in those companies where they are merely non-executives.
This detail of this amendment would ensure that, in circumstances that the Treasury thought appropriate, and having consulted the Financial Services Authority and so on, an appointment could be made of a non-executive director who would have the special role of keeping an eye on the remuneration of executive directors and of trying to ensure that remuneration packages were not as excessive as some have been in the past. Because of being involved in the debates on this Bill today and yesterday, it strikes me that the Government’s ground for opposing this amendment may be that, even when they have part ownership of a bank, they wish to keep at arm’s length and not get involved with detail, certainly not the detail of the remuneration of executive directors. That may be the basis for an objection to the amendment.
There is tremendous public interest in remuneration. There has been much public sentiment on this issue in the past six to 12 months when the directors and boards of so many banks have failed in the kind of responsibilities that the Minister was talking about in the debate on the previous amendment. There is a much clearer view now among the general public that the public interest should be maintained at a high level. When other Ministers were in charge, not so very long ago but before the crisis in banking, I recall Questions being asked in this House of the noble Lord, Lord Jones of Birmingham, whom we were delighted to see earlier this afternoon. His present role seems much more suited to him than being a Minister in Her Majesty’s Government. When he was a Minister, he stated that any questioning of unduly high remuneration in banks or other companies was quite wrong, that this was a matter for the companies alone and that any suggestion that it should be otherwise was a bad idea. I hope that that view is not so commonly held in government circles today.
I also hope that the Minister will support this modest amendment, which allows the Treasury so much flexibility in addressing the particular circumstances of any bank. The amendment proposes a remuneration committee in exceptional circumstances. I hope that Ministers will realise that it is a valuable change to the Bill.
I congratulate the noble Baroness on introducing a debate on this subject. It is a matter of significant public concern that directors have paid themselves excessively in the past, and that this payment has not been linked to the success of the enterprise and in many cases has gone on at excessive levels when the enterprise has underperformed. We are not talking just about banks: this is a general problem. One reason for it, given by the noble Lord, Lord Borrie, is that you have a charmed circle of executive and non-executive directors, all of whom are setting each other’s pay. Thus very often the incentive for downward pressure towards realistic levels of pay is missing.
The question raised by the noble Baroness is one aspect of the more general debate we have had on the Government’s role as regards their stake in largely or wholly owned public banks. The answer that the Minister has given is that it will be an arm’s length relationship. We talked earlier about the role of directors, who will be independent. If you go down that route which the Government clearly are going down the outcome that the noble Baroness seeks is achieved by ensuring that the independent directors, as I argued earlier, are a diverse lot and do not come with a vested interest in keeping salaries and bonuses high. If some of the directors do not come from a traditional bank—bank directors, as it were—that will be a good way to keep the pressure on.
This is an important issue, but no more important an aspect of the management of the bank than other things that we have discussed in this and other debates, such as the way in which the bank lends to small businesses and the attitude that it takes towards repossessions if it is conducting mortgage business. Therefore, while this is important, it does not warrant separate legislative provision. We will have to rely on directors appointed by the Government to exercise their judgment and wisdom in reflecting a wide range of views about how banks should be governed, and that must include executive pay.
I associate myself with many sentiments that the noble Baroness, Lady Turner, has articulated through this amendment. However, I cannot support it, for a couple of reasons. I draw attention to my interests in the Register: I work in a bank and sit on remuneration committees. The way that the noble Lord, Lord Newby, characterised remuneration committees is not one that I recognise. On both the remuneration committees on which I sit, there are no serving executive directors from other companies, for precisely the reason that he stated. The people are all entirely independent and there is no charmed or magic circle. I suspect that most professionally run companies these days take the same view.
The principal reason that I resist this amendment is because I think that to interpose a separate individual on a remuneration committee, outwith the normal governance that we would expect through the Companies Act, would be quite wrong. An individual on a remuneration committee who is not a member of the audit committee or of the company’s board, and who somehow has a completely separate set of objectives, would be in an invidious and difficult position, and it would be simply wrong. For all the reasons articulated yesterday by the Minister, we cannot put government-appointed directors on boards and expect them somehow to operate independently of their responsibility to the shareholders of a bank. If that argument is right for the board as a whole, it is doubly right in the case of remuneration committees. It must be right that members of remuneration committees are also independently appointed members of the whole board and take part in all the governance of a bank, and not just part of it.
I do not believe that the amendment, as drafted, would achieve the ends that the noble Baroness wishes, laudable though they are. Although I have sympathy with them, we must rely on the independent members appointed to the boards to discharge all of their governance functions, including remuneration, rather than distinctly as members of a remuneration committee.
I associate myself with almost everything that the noble Baroness, Lady Ford, said. She articulated very clearly the right approach to remuneration. My only doubt is whether all remuneration committees have complete independence from other remuneration committees. There may be some travelling still to be done by some remuneration committees. There are problems in the working of remuneration committees, in particular the ramping up that comes from pay consultants who are good at keeping the machine going. In my experience of remuneration committees, independent directors take their responsibilities very seriously and find it a hugely difficult task. That is not to say that it has worked well, and not to say that it has worked well in banks. However, the approach that the noble Baroness espouses is the right one.
I wish the noble Lord, Lord Wedderburn, a swift recovery to full health. I too lend my support to the sentiments expressed by my noble friend Lady Ford, as endorsed by the noble Baroness, Lady Noakes, subject to one or two qualifications that I will mention in a moment.
The amendments are not clear about whether the Treasury’s power should be available with respect to any bank, or only with respect to a bank once the stabilising options that are the subject of Part 1 of the Bill have been exercised. I shall take it that they are to apply only once stabilisation has taken place; I invite my noble friend Lady Turner to correct me if I am wrong.
I shall start by summarising the stabilisation and the degree of governance which the authorities will be able to exercise in each. The temporary public ownership stabilisation option gives the Treasury the power to take control and ownership of a failing bank through transfer of shares to a nominee of the Treasury or a company wholly owned by it.
As set out in the published draft code of practice, the articles of association for a bank in temporary public ownership will provide for the relationship between the Treasury, in its capacity as shareholder, and the directors of the company. The Treasury, through its nominee or wholly owned company, will be able to exercise normal shareholder rights. Immediately following the transfer of securities, the Treasury may need to take a hands-on role in managing the affairs of the bank in order to address the immediate problems causing the bank to be at risk of failure. However, once the bank has been stabilised, the Treasury will seek to introduce corporate governance arrangements in line with best practice as soon as is reasonably practicable.
In practice, of course, a bank may be in public ownership for only a very short period. In such a case, it is clearly unnecessary to appoint a new board or make other changes to corporate governance arrangements. However, if a bank is likely to remain in temporary public ownership for a longer period, the draft code of practice makes it clear that the Treasury will set out the directors’ objectives for how the bank should be operated. I argue, therefore, that the Treasury already has sufficient powers in relation to a bank in temporary public ownership; it is not necessary to have an explicit provision in the Bill empowering the Treasury to appoint members to a remuneration or analogous committee.
To draw a comparison with Northern Rock, which was taken into temporary public ownership under the Banking (Special Provisions) Act 2008, the shareholder relationship framework sets out the structure of how the day-to-day governance and shareholder relationship between Northern Rock and the Government will work in practice. Under that arrangement, the Treasury has appointed a chairman of the board and two independent non-executive directors, in consultation with the chairman, who must also give consent for the appointment of any other board members. Directors’ remuneration is determined by the remuneration committee of the board of the company, but under the shareholder relationship framework document, the Government have a right to approve the terms.
Where the bridge bank stabilisation option has been exercised, the owner of the bridge bank will be the Bank of England. The Bank of England will therefore have the powers of the sole shareholder of the bridge bank and be able to put in place an appropriate governance structure, including relating to matters of remuneration. This is set out in more detail in the published draft code of practice. Again, I argue that it is clearly not necessary to have an explicit power to appoint members of a remuneration committee by order, given these circumstances.
Finally, the private sector purchaser option gives the Bank of England the power to transfer a failing bank’s property or shares to a private sector purchaser. Although such a transfer will take place outside the normal commercial transactional mechanisms appropriate for a sale, one private entity will be purchasing the shares or property of another. I believe that it would clearly be inappropriate for the Government to intervene in such circumstances in matters of remuneration, including through the making of appointments to a remuneration committee.
I have so far discussed remuneration as it relates to the stabilisation options. I hope that I have persuaded noble Lords that the amendments proposed by my noble friends Lord Wedderburn and Lady Turner are not needed.
Let me turn briefly to the question of remuneration more widely. Generally speaking, pay for directors and employees must be a matter for the banks in question, as it is with any company. I appreciate, however, that there is the specific question of whether executive pay regimes in the banking sector have led to a risk-taking culture that has contributed to the financial crisis. That is why the FSA is looking at remuneration structures in the institutions that it regulates.
The FSA has said it will take remuneration structures into account in risk assessments of financial institutions “with increased intensity”. Its chief executive, Mr Hector Sants, has noted the need to consider the implication of remuneration structures to a greater extent when judging the overall risk of individual institutions.
I agree with my noble friend Lady Turner regarding the attention she has drawn to the social consequences within banks and elsewhere in the economy as a result of bank failures here—social consequences which are being felt elsewhere in the world where banks are experiencing similar difficulties.
My noble friend Lord Borrie suggested that I was conveying the sense that being a director of a bank was of a higher order than it was for other companies. I do not want to diminish the seriousness and responsibilities of a director of any company, but I think that directionally he is correct in conveying my sentiment. Nobody should contemplate lightly the challenges and responsibilities of being a director. With regard to our earlier discussion, it might be wise for banks to incorporate in their director appointment letters and employment contracts reference to Clause 20 to make it absolutely clear to directors of banks that certain rights exist and are vested with the authorities. That seems a wise and sensible thing to do in the interests of shareholders and, quite frankly, as a way of showing some recognition of social consequences.
I am grateful to my noble friend Lord Borrie for reminding me that the noble Lord, Lord Jones of Birmingham, was a member of this Government. From my limited time in this Chamber, I have to say that it is not always obvious that he was. My own views are rather different from his, and they go wider than just the banks. I share the view expressed by the noble Baroness, Lady Noakes, that the power and influence of the external comparator—the benchmark, the remuneration consultancy—has become too dominant. Boards of directors should look at not only external but internal comparability. They should look at the structure of remuneration in their company and not limit themselves to those of the directors. They should have a clearer understanding of the intention of the company’s overall remuneration policy, the cultures and values they seek to encourage and the behaviours that they seek to discourage. I find remuneration reports of many public companies seriously deficient in conveying a sense of what the company is trying to do. They are long on language and detail—the language is often opaque—and they fail in many cases to convey those simple and straightforward messages which are so important.
With reference to some of the points made by my noble friend Lady Ford, while the primary responsibility in a remuneration committee rests with independent directors, I do not excuse executive directors from responsibility. Executive directors should be setting the example of behaviours that they wish to see reflected throughout the organisation. It may be rather old-fashioned, but tone from the top and restraint are appropriate in many cases.
I am grateful to my noble friend for her comment. I certainly was not suggesting that that was her view. However, it is often argued in the media that the responsibility for remuneration is an issue for the independent or non-executive director. I do not think that this is an issue where the executive directors are excused responsibility, because they tend to set the broad framework for remuneration throughout the company.
I would hazard to suggest that in a number of our banks there may be 20, 30 or 40 people who are paid more than the highest paid director. There are issues here which go beyond remuneration of the directors. I have gone on for rather longer than I should, for which I apologise, but they are matters which are of some concern to me, as I think noble Lords might see. I urge the noble Baroness, Lady Turner, to withdraw the amendment, but not to do so believing that the sentiments that she expressed are not shared by some on the Front Bench.
I thank the Minister. I am of course disappointed by the Government’s reaction to the amendment, because, as my noble friend Lord Borrie said, it was modest and not particularly radical. Before it became operational, there would have to be an order, which would have to be approved. The Treasury would be responsible for making the remuneration order or recommendation; it would have to agree it with the FSA and the Bank of England; and then a draft would eventually have to be laid before, and approved by resolution of, each House of Parliament. So quite a procedure would have to be followed before it could be put into operation anyway, which would be only where there were problems which meant that the situation would have to be dealt with in that way.
I say to Members who have opposed what I have suggested that we are no longer in the situation that has prevailed in past years; we are unfortunately in an economic crisis, about which many people are very concerned. It has social effects, which I tried to indicate when I moved the amendment. I was glad to hear the Minister say that the amendment was not needed, which I presume means that something is being done about the matter, because the FSA has the responsibility, I gather, to look at remuneration. I suppose that that is at least something.
In the mean time, I shall examine carefully what has been said by our Front Bench, because public as well as social problems are involved. The large sums that have been paid to senior executives have resulted in a fair amount of unfavourable publicity. It is clear that a lot of people have become worked up about it, particularly employees who suddenly find themselves facing redundancy. They are not responsible for the decisions that have landed us in these problems—those have been taken higher up. Ordinary employees now face redundancy, sometimes in areas where other employment is not readily available. There will be enormous resentment if people are allowed to take large sums of money when they are felt to be responsible for some of the difficulties in which others find themselves. In the mean time, I beg leave to withdraw the amendment.
Amendment 38 withdrawn.
Clause 20 agreed.
Clause 21 agreed.
Clause 22: Termination rights, &c.
39: Clause 22, page 10, line 15, after “means” insert “a Type 1 or Type 2 default event provision as defined in subsections (1A) and (1B).
(1A) A Type 1 default event provision is”
I shall also speak to the other amendments in this group. My contribution will be rather lengthier than is normal with government amendments as they are on the whole regarded as technical. These amendments have their technical qualities, but, as we all appreciate—the noble Baroness, Lady Noakes, has tabled amendments to this clause as well—some interesting issues arise, to which my remarks are addressed. I shall consider the opposition amendments when they are moved fairly shortly.
Clauses 22 and 38 set out certain provisions in relation to events of default. An event of default clause in a contract gives a specified right to a counterparty if a specified event occurs. For example, a contract could stipulate that a counterparty has the right to terminate the contract if a bank’s credit rating changes or if there is a change of control of the bank. These clauses are important since most modern contracts make heavy use of them.
The exercise of property or share transfer powers under the special resolution regime may in future be characterised as an event of default, which would give counterparties the right to terminate or modify contractual arrangements in the event that the authorities exercise the transfer powers. It is clear that any termination of key contracts could significantly reduce the likelihood of the deposit-taker being able to continue as a going concern. It could necessitate renegotiating contracts, potentially with new counterparties, with no guarantee that similar terms could be arranged. In extreme circumstances, for example, if the majority of a bank’s counterparties sought to rely on termination rights, the bank would be unable to continue its operations. In addition, the very act of counterparties terminating their contractual arrangements with the deposit-taker would send a strong signal to the market that other counterparties should not do business with the bank. Thus, a number of counterparties closing out their contracts could lead to a wider counterparty flight from the deposit-taker, which could have severe consequences for the success of the resolution.
Clauses 22 and 38 therefore make provision to address events of default which could impede resolutions under the special resolution regime. The most obvious example would be the authorities making provision for a share or property transfer instrument or order to be disregarded when determining whether a default event provision applied; in other words, such default event rights may be disapplied in relation to a transfer of control by way of a share transfer order or instrument.
Having established the significant context of Clauses 22 and 28, I shall speak to the government amendments. We have tabled a series of amendments to alter the definition of a “default event provision” for the purposes of Clauses 22 and 38. The amendments do two things: first, they extend the scope of the definitions used in the clauses; secondly, they provide for the fine-tuning of which default event provisions are modified in a particular resolution.
I shall now describe in greater detail the purpose of the amendments. The changes give further effect to the principle underlying the default event provisions by seeking to limit the extent to which banks and their counterparties can seek to “draft out” of the special resolution regime. The amendments seek to extend the scope of the provisions in a technical way to address drafting devices which would have a similar practical effect to the situations already covered by the Bill. As I have already explained, it is crucial that the authorities can take appropriate action with respect to events of default and termination rights. The risks of a significant number of a bank’s counterparties exercising such rights could be severely detrimental to the resolution and therefore certainly not in the public interest.
Since the Bill was introduced, it has come to our attention that the definitions in Clauses 22 and 38 may not be broad enough to deal with a device known as a “condition precedent”, which is already in commercial use and which could easily be substituted for a termination right. For example, a contract may provide for B to perform an obligation in favour of A, but only where one of a number of specified events has not occurred. These events will typically be similar to events which would entitle a party to terminate a contractual arrangement; for example, non-performance by A of his obligations to B or matters relating to A’s creditworthiness. The crucial point about a condition precedent is that the performance obligation will arise only at such time as the condition precedent is satisfied.
It is the Government’s view that there is some ambiguity about whether these events would be captured in the existing definitions of default events in these clauses. Given the risks involved, the Government consider there to be a strong case for amending the clauses.
The failure to cover adequately events of default could allow counterparties to restructure transactions in a way which would enable them to evade the application of the powers of the special resolution regime. This would subvert the objectives of the regime, including maintaining financial stability and protecting depositors. Any ambiguity is likely to be relied upon by commercial drafters seeking to subvert the intention behind these provisions. In particular, the effectiveness of these clauses is likely to be tested in litigation arising in relation to transfers. As a result, any ambiguity in the governing primary legislation of course needs to be removed. This is particularly important in the case of a transfer of banking business to a private sector purchaser, which is likely to be the authorities’ preferred resolution option, as we have discussed earlier in Committee. As such parties tend to have a low level of risk appetite in respect of transactions, uncertainty about the effectiveness of transfers under the special resolution regime would have the capacity to undermine the potential to achieve such a resolution.
The amendments seek to prevent formalistic drafting devices from being used to evade the regime more generally. For example, a person might try to use drafting devices to characterise an event of default as something other than that. The amendments, particularly proposed new subsection (1C) in Amendment 43, make it clear that it is the substance of a provision that matters, rather than its form. This is a common approach adopted where legislation creates distinctions between different types of contractual arrangements.
The second matter addressed by the amendments is that they make technical changes to enable these provisions to be fine-tuned to particular resolutions. For example, they can apply differently for different purposes or different circumstances.
I apologise for the length of this introduction to government amendments, which in previous Bills I have always enjoyed as relatively limited. However, this is a complex area. The Government are making these changes due to representations made to them. Accordingly, I beg to move.
We have received no representations about these amendments, but the Minister will appreciate that they have not been on the Marshalled List for long, as they were tabled relatively recently. I hope that we will not need to return to this matter on Report, but I certainly have nothing to raise in connection with them at the moment. I leave the issue open to return to on Report if one of the lawyers with whom we are in contact produces something that we wish to debate at a later stage.
I greatly appreciate that response. I apologise to the noble Baroness for the limited time she has had, but the Bill is operating against a limited schedule. The Government have tabled these amendments in good faith to make effective these crucial clauses. Of course, the noble Baroness may well raise issues on these matters at a subsequent stage, and we will make our responses accordingly.
Amendment 39 agreed.
House resumed. Committee to begin again not before 8.25 pm.