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Banking Bill

Volume 706: debated on Wednesday 14 January 2009

Committee (2nd Day) (Continued)

Amendment 40

Moved by

40: Clause 22, page 10, line 16, after “agreement” insert “to which the bank is a party”

I shall also speak to the other three amendments in this group. There are two pairs of identical amendments here; Amendments 40 and 44 amend Clause 22, which deals with termination rights in relation to share transfers, and Amendments 65 and 69 are in a similar form and amend Clause 38, which deals with termination rights in relation to property transfers. The amendments have been suggested to us by one of the leading City law firms and have been supported by the representative banking bodies. I am sure that the Treasury is aware of them.

Clauses 22 and 38 do not restrict contractual overrides to default event provisions in contracts to which the failing bank is a party. As drafted, they appear to apply to contracts that reference the failing bank, even where the failing bank is not a party. This can arise in a number of derivative products, for example, credit default swaps, equity derivatives, bonds options and forward contracts. The failing bank may be the “reference entity” or the “underlying share” in respect of a contract between two other parties not connected to the failing bank.

Credit default swaps are an important means for a counterparty to limit its exposure to a particular entity, and if the proper functioning of such products is called into question by the Bill, quite serious damage could be done to the market for such products. Against that background, Amendments 40 and 65 limit the application of the termination rights clauses to agreements to which the bank is a party; so if bank A is referenced in a contract between parties B and C, the default event provision will be unaffected by Clauses 22 or 38.

Amendments 44 and 69 are a little more complex. Clause 22(2) allows the share transfer order or instrument to be either completely or partially disregarded in determining whether a default event provision applies. The words added by Amendment 44 mean that the default event provision is to be left unaffected by the share transfer when it is involved in set-off, netting or security interests as defined in Clause 48—a clause which we will have the pleasure of debating in due course. Amendment 69 makes identical changes to Clause 38. This is to ensure that the more complex contracts that exist in the world of set-off and netting are equally unaffected by Clauses 22 or 38.

When the Minister responds, I hope that he will also comment on the relationship between Clauses 22 and 38 and the EC financial collateral directive. It has been suggested to us that these clauses are not compatible with Article 4(l) of the directive, which requires that on the occurrence of an enforcement event, the collateral-taker should be able to realise the financial collateral as provided for in the article. I beg to move.

I am grateful to the noble Baroness for the way that she explained the objectives behind her amendments, and I will certainly do my best to respond to the particular issue she raised. The amendments seek to amend the definition of a “default event provision” so that it only includes events of default in agreements to which the bank in question is a party. This definition would exclude any contract between two third parties that, for example, had a link to the bank. It will be recognised that the earlier government amendments took into account the necessity of covering that position.

Normally, the bank will be a party to contracts which contain events of default linked to SRR powers, or steps preparatory to this, but I sought to bring to the attention of the Committee in the previous group of amendments the fact that the Government consider that the flexibility to amend default event provisions that are part of a contract between parties other than the bank may indeed be necessary.

Suppose that party A provides an essential service to a bank, such as an IT facility. Suppose that party B in turn provides a service to party A which is necessary for party A to provide the service to the bank. The contract between B and A, setting out the service agreement between the two parties, will be likely to contain events of default. If an event of default is included which, for example, is triggered if stabilisation powers are exercised in respect of the bank, this could bring the business relationship between A and B to an untimely end. This could have serious adverse consequences for the bank, even though it was not a party to the contract, as the IT facility upon which it depended could be disrupted.

I put it to the Committee that there is a public interest issue concerned with these measures of resolution. In some circumstances it will be necessary to amend default event provisions in contracts where the bank is not a direct party. It should be remembered that in each case the termination event would have to relate to the bank in some way in order to satisfy the test set out in Clauses 22(5) and 38(5). The clauses could not be used to override a termination event simply because, for example, one of the third parties defaulted on its obligation to pay for a service that was provided to it by another party, which in turn it used to provide the service to the bank.

Without flexibility there may be potential for parties to redraft their contracts and their events of default in a way which evaded the provisions of the special resolution regime. I am sure that the noble Baroness will appreciate our anxieties. For example, the provision of a service could be subcontracted in such a way that a contract between two third parties, to which the bank was not a party, was an essential link in the chain of provision of a service to the bank.

I understand that there have been considerable representations on this issue. The example provided in those representations relates to the bank being a reference entity in a derivatives contract between two third parties. Of course the Government will listen carefully to concerns about this and related matters, but we do not consider that a blanket limitation of the nature proposed by the amendment is appropriate. We continue to think that various constraints on the powers of Clauses 22 and 38 should provide reasonable assurances. I have already noted that the event of default must in some way relate to action taken in respect of the bank, rather than a default by one of the third parties. As is the case for all their actions in a resolution, the authorities will be obliged to act proportionately and have regard to the special resolution objectives.

Those guiding principles underpin the whole of these operations. I also point out that this is an area where, in the light of further analysis and consultation, we have felt obliged to adopt a more restricted form of the powers than those taken in the Banking (Special Provisions) Act last year, which, for example, extended to allow changes to be made to the agreements of any person with a specified connection to a deposit taker or any of its group undertakings. We have learnt from experience, and we are seeking to make these clauses as effective and accurate as we can and to have limits upon them in terms of the impact on third parties, but we need to safeguard the special resolutions procedure. I hope that the noble Baroness will feel able to withdraw her amendment on the basis of the Government’s proper anxieties.

The second pair of amendments, Amendments 44 and 69, seek to carve out any default event provision that relates to a set-off or netting arrangement from the scope of the powers. I reiterate the Government’s commitment to putting in place appropriate safeguards to ensure that the market can have legal certainty in its dealings with banks. That is why we have put in place the safeguarding provisions of Clause 48—the power to protect certain interests—and why we have consulted on draft orders designed to protect set-off and netting agreements. It has been said before, but I reiterate that we are working closely with the expert liaison group to make sure that the outcome of this work achieves the right balance between certainty for the market and the necessary flexibility for the authorities to act quickly to resolve threats to financial stability and depositors. The consultation period on the recently published safeguards document has just ended and we will closely scrutinise the responses in advance of preparing the final regulations.

The Government accept that the scope of the termination clauses may cause concern with regard to how they may affect the integrity of a netting agreement—a concern to which the noble Baroness gave voice. However, we consider that an outright carve-out of any default event provision which relates to a set-off or netting arrangement would not be appropriate. Take the example of a counterparty whose contracts are transferred to a bridge bank. We would wish to avoid a situation where such a counterparty was entitled to close out as against the bridge bank, thus accelerating its rights and claiming payment from the bridge bank. The risk in such circumstances is that the counterparty would have acquired a better right than it had in the first place—namely, the right to close out not against a failing institution but against the somewhat more creditworthy bridge bank. That is not the same as the right to close out for which the counterparty had contracted.

I stress that we are concerned only with default events that relate in some way to the exercise of the powers of the special resolution regime which may lead—and in fact are intended to lead—to an improved position for the institution concerned. If, theoretically, a bridge bank committed an event of default following the transfer—for example, through failing to meet a payment obligation—the counterparty’s right to close out in those circumstances would be unaffected by these provisions. On the other hand, if a counterparty’s contracts were not transferred in a partial transfer and remained in the residual company, then the Government accept that there would be a case for allowing the party to close out.

I am all too well aware that this is a complex area. If the noble Baroness frowns at me, I know that she knows that I am having difficulty with a complex technical area that is no doubt entirely lucid as far as she is concerned, and therefore I say with less than my usual generosity how pleased I am to reply to her amendment. However, we intend to reflect on the points that she made in introducing the amendments and in the light of responses to the consultation document. If we think that we do not have it right, we will bring forward amendments on Report if necessary. However, I hope that from this discussion the noble Baroness will at least have derived some insight into the strength of the Government’s argument—or perhaps its less than convincing strength in one minor instance that I may have overlooked—before she considers how to respond.

The noble Baroness asked me, in particular, about the financial collateral arrangements directive. The power may not be used to override financial collateral agreements, which are protected by the directive and broadly must be allowed to take effect in accordance with their terms. I hope that the noble Baroness thinks that we have advanced the debate somewhat and that she will feel able to withdraw her amendment.

I have gained some insights into the arguments on the government side but I cannot say that I am in any sense convinced by them. I think that the Minister said that these clauses cannot override the financial collateral arrangements directive, but there are those who would wish to see that more explicitly reflected. I shall reflect on it, as I hope the Government will if that is indeed the position.

My first pair of amendments relates to contracts to which the bank is not a party. There is a balancing act here. The Minister is saying that we want a lot of flexibility because we do not know what kind of contracts might be in a chain related to the bank. I understand that point but I am not convinced that these are likely to be the usual contracts. On the other hand, I am told that using a reference entity or an underlying share is perfectly normal in driving the derivatives and similar markets. Therefore, on the one hand there is the possibility of putting major uncertainty into those markets and, on the other, the possibility that the Government might, in some slightly ill-defined circumstances—if they had a failing bank and some of these complex contractual terms down the line—want to unwind them. At the end of the day the Government will have to decide where the balance lies. If the Government leave major uncertainty in relation to the legal effect of contracts such as derivatives, which are an essential part of the financial services industry, they could be destroying the UK as a location for such contracts and English law as the law governing them, which may take a whole raft of business out of UK markets. That is the main danger.

We then went on to the issue of set-off and netting which, with respect, I do not think the Minister dealt with any better. He referred to the consultation that has just ended, which I acknowledge, but that is in relation to partial transfers only. The powers in Clauses 47 and 48 to protect set-off and netting relate only to partial transfers and not to the provisions that I have been talking about, which are not related to partial transfers. I have some difficulty in seeing how the Minister expects to provide a form of legal certainty around those contracts. I think the Minister is saying, “We will be reasonable when we come to them, so we won’t upset contracts”, but that is not good enough for contracts that are traded in marketplaces. I am sure that we will discuss that later when we get to Clauses 47 and 48.

The Minister could see from the look on my face that I was far from convinced by his response. These are important issues, and the Government need to reflect on whether their theoretical imaginings of things that might go wrong when dealing with a failing bank are more important to them than the impact they will have on some financial markets. That is a really serious issue for the Government to reflect on between now and Report. The Minister has said that he will reflect on it. The Treasury knows the people who have been analysing this, and it should have further analysis available. I would not like to leave the Government in any doubt that we thought this a serious issue that needed to be resolved. I beg leave to withdraw the amendment.

Amendment 40 withdrawn.

Amendments 41 and 42

Moved by

41: Clause 22, page 10, line 16, after “that” insert “has the effect that”

42: Clause 22, page 10, line 16, at end insert “or situation arises”

Amendments 41 and 42 agreed.

Amendment 43

Moved by

43: Clause 22, page 10, line 27, at end insert—

“(1B) A Type 2 default event provision is a provision of a contract or other agreement that has the effect that a provision of the contract or agreement—

(a) takes effect only if a specified event occurs or does not occur,(b) takes effect only if a specified situation arises or does not arise,(c) has effect only for so long as a specified event does not occur,(d) has effect only while a specified situation lasts,(e) applies differently if a specified event occurs,(f) applies differently if a specified situation arises, or(g) applies differently while a specified situation lasts.(1C) For the purposes of subsections (1A) and (1B) it is the effect of a provision that matters, not how it is described (nor, for example, whether it is presented in a positive or a negative form).”

I apologise to the Committee for being so dim but I cannot understand Amendment 43. Proposed new subsection (1B)(a) says that a provision,

“takes effect only if a specified event occurs or does not occur”—

in other words, whether it occurs or not. I do not understand that. It is bound to either occur or not occur, just as my dinner tonight was bound to occur or not occur. I think I have said enough.

I am not here to dispute whether the noble Lord’s dinner did or did not occur. We were discussing some technical government amendments on the special resolution procedure. As we recognised from the debate that we have just had, these are complex issues. The noble Lord has asked such a specific point that I shall have to write to him. The government amendments were considered with the greatest care. They are the products of significant representations and the noble Lord will give the Government the credit of knowing when a dinner has taken place or not. We are talking about events that are somewhat different from a dinner. This relates to the technical aspect of the description in the clause, but I will write to the noble Lord.

Perhaps I can help the noble Lord, Lord Stewartby. Surely the provision is about contracts that define a referenced event that occurs, or contracts that define a referenced event that does not occur. In other words, the sentence covers two distinct events, not a single event which may occur or may not occur.

I am grateful to my noble friend. I was hopeful that the noble Lord, Lord Stewartby, would recognise that my noble friend could not have been more explicit or accurate and has abrogated the need for me to write to him. I will write and say the same thing that my noble friend has just said.

With relation to the noble Lord, Lord Stewartby, and his dinner, the reference could be to either his dinner or his breakfast, but not simultaneously to his dinner.

Amendment 43 agreed.

Amendment 44 not moved.

Amendments 45 to 47

Moved by

45: Clause 22, page 10, line 38, after “that” insert “is done by the instrument or order or”

46: Clause 22, page 10, line 43, after “(4)” insert—

“(a) ”

47: Clause 22, page 10, line 44, at end insert “, cases or circumstances;

(b) differently for different purposes, cases or circumstances.”

Amendments 45 to 47 agreed.

Clause 22, as amended, agreed.

Clause 23: Incidental provision

Amendments 48 and 49

Moved by

48: Clause 23, page 11, line 5, after “purposes,” insert “cases or circumstances,”

49: Clause 23, page 11, line 6, at end insert “, cases or circumstances.”

Amendments 48 and 49 agreed.

Clause 23, as amended, agreed.

Clause 24: Procedure: instruments

Amendment 50

Moved by

50: Clause 24, page 11, line 13, at end insert—

“( ) As soon as is reasonably practicable, the Treasury shall lay a copy of the copy share transfer instrument sent to it under subsection (1) before each House of Parliament.”

I shall speak also to the other three amendments in the group. Two of them, Amendments 51 and 76, derive from the first report of the Delegated Powers and Regulatory Reform Committee in 2008-09, which is a signal to the Minister that we expect its recommendation to be taken seriously, and I shall start with those two amendments.

Where the Treasury makes a share transfer order, it must make it by statutory instrument subject to the negative procedure. There is therefore accountability to Parliament of a sort. The Committee will doubtless recall that the equivalent provisions in the Banking (Special Provisions) Act 2008 were the subject of a recommendation from the Delegated Powers and Regulatory Reform Committee that the affirmative procedure be used. The Government rejected that recommendation then and continue to apply only the negative procedure. I say that by way of background. The Minister will be pleased to see that that I have not tabled an amendment that would return to that issue.

The Bill takes new powers for the Bank of England to make share transfer instruments and property transfer instruments to give effect to its private sector purchaser and bridge bank powers. Those instruments are subject to no parliamentary scrutiny whatever. The Delegated Powers and Regulatory Reform Committee pointed out that a transfer by the Bank of England may be considered by some to be similar to temporary public ownership, the implication being that the parliamentary procedure should be the same. The noble Lord, Lord Armstrong, who is unfortunately no longer in his place, raised that point earlier this afternoon.

In any event, the committee stated in paragraph 4 of its report that,

“the House will wish to seek a justification from the Government for the proposed absence of any Parliamentary procedure for instruments relating to transfer to a private purchaser, and in particular for instruments relating to transfer to a bridge bank. In the absence of such a justification, the House may wish to consider applying a measure of Parliamentary control over such instruments”.

Amendments 51 and 76 do just that. They give the same degree of parliamentary control over share and property transfer instruments as over share transfer orders.

I had already drafted Amendment 50 before the Delegated Powers and Regulatory Reform Committee’s report was available. I have left it on the Marshalled List as a possible alternative way forward. It requires the Treasury to lay a share transfer instrument before Parliament, but has no other parliamentary procedure attached to it. I should have tabled a twin of that amendment for Clause 41, but failed to do so.

Amendment 52 relates to share transfer orders, which are subject to parliamentary procedure, and raises a slightly different point. The clause places an obligation on the Treasury to act as soon as reasonably practicable in telling the Bank and the world in general, but there is no sense of urgency about telling Parliament. Amendment 52 rectifies that and ensures that Parliament is at least informed at the same time as everyone else.

It should be noted that subsections (2) of both Clauses 24 and 41 require the Bank to put the share transfer on its website and publish it in two newspapers. The focus appears to be on informing those who may have had dealings with the failed bank. There is nothing wrong with that, but it is certainly not the appropriate way for Parliament to be informed, which is why my amendment refers to the customary method of informing Parliament by way of laying a copy before each House.

I look forward to hearing the Minister's justification for bypassing Parliament when the Bank of England exercises the substantial powers conferred by the Bill, and I beg to move.

I am grateful to the noble Baroness for the clear way in which she has explained her amendments. She will recognise that the Government have a common thread running through their response to all of them which is why we hope that she will feel after reflection that she is safe to withdraw them.

As the Committee will be aware, the Bank of England exercises its transfer powers by making a formal instrument rather than an order. Clause 24 sets out the procedure to be followed following the making of a share transfer instrument by the Bank of England. In particular, it sets out requirements for the Bank to provide a copy to the failing bank, to the Treasury and to the Financial Services Authority and to publish the instrument in two newspapers and on the internet.

The noble Baroness’s amendment states that the Treasury, as soon as reasonably practicable following receipt of the instrument, should lay a copy of it before each House of Parliament. We do not think that that is an appropriate procedure. The Bank of England is not directly accountable to Parliament. In general, it is highly unusual for powers to make statutory instruments that are subject to parliamentary scrutiny to be conferred on a person who is not a Minister and who cannot speak to a matter on the Floor of the House. Were the matter to be subject to parliamentary debate, a Minister would have to speak to an instrument which he was not responsible for making and for which he was not directly accountable. I am sure that parliamentary scrutiny on this basis would be regarded as being of limited utility.

There are existing mechanisms for calling the Bank of England to account in Parliament. In fact, I have no doubt that the Governor of the Bank of England would testify to the extent to which he is held to account in Parliament, not least by appearing before sittings of the Treasury Select Committee of the other place. He and his officials are frequently called before that committee, which can report to Parliament on those deliberations. The Bank of England does not make instruments for which it can be directly accountable to Parliament. There is no locus in these terms for any member of the Bank to be accountable in Parliament directly. A Minister would fulfil that role, because the instrument may have been created by the Bank but no one from the Bank could be called directly before Parliament in any parliamentary debate. The noble Baroness will recognise that we cannot accept Amendment 50.

Amendment 52 proposes a similar provision in relation to share transfer orders. These orders are, of course, statutory instruments made by the Treasury. In this case, they are subject to the negative procedure. This means that the orders will be laid before each House as soon as possible following the making of the order. The Kaupthing Singer & Friedlander transfer order, for example, was made at 12.05 pm on 8 October 2008, came into force at 12.15 pm and was laid before Parliament at 4 pm that day. I therefore hope that the noble Baroness will recognise that her anxiety is not well placed when one thinks about past action and sees the extent to which in these crises—that order was obviously made at the time to protect the public interest, which of course was the depositors—the appropriate authorities were able to act with great rapidity and be directly answerable to Parliament.

Amendments 51 and 76 propose that share and property transfer instruments should be subject to the negative resolution procedure. Any instrument made by the Bank to effect the private sector purchaser and bridge bank stabilisation options would be subject to annulment by Parliament under this amendment. But it is already the case, under the provisions of the Bill, for share transfer orders made by the Treasury to effect the temporary public ownership stabilisation option. As I have noted, the Bank of England is an independent institution that is not directly accountable to Parliament. The Bank does not sit in either House. It may not participate directly in debates and of course it has no means of voting on any issue raised. So the Minister would undertake the debate on behalf of the Bank for an instrument which he has had no responsibility for preparing.

I have great difficulty in accepting that this is a meaningful degree of parliamentary accountability. But, as the noble Baroness enjoined the Government to do, we have taken note of the report of the Delegated Powers and Regulatory Reform Committee. I am aware that the committee recommends that the House should seek a justification, as the noble Baroness accurately reflected in her opening remarks, for the proposed absence of any parliamentary procedure for instruments relating to transfer to a private purchaser and to a bridge bank.

I hope it will be appreciated that we do not consider that it would be appropriate for instruments made by the Bank to be subject to parliamentary procedure in the same way as normal statutory instruments. I hope that I can also provide adequate justification to the House on why it is important for the Bank to have the power to make such instruments, even in the absence of parliamentary scrutiny. The Bank has substantial responsibilities for important aspects of financial stability and the Bill provides for the Bank’s responsibilities to be formalised—for example, through the addition of a statutory financial stability objective under Clause 228. Given these responsibilities, it is right that the Bank should have the tools available to protect financial stability, which is enjoined on it by the Bill.

As the Committee knows, the Bank has special expertise in the financial markets and matters of financial stability and is therefore extremely well placed to assess risks to financial stability and to assess the most appropriate course of action to resolve a failing bank. The noble Baroness has not been the only representative of Her Majesty’s Official Opposition to stress the extent to which the Bank should be greatly involved in these operations. As such, it is clear that the Government are making the Bank of England the UK’s lead resolution authority, conferring on it powers to effect the key stabilisation options. These options are the private sector purchaser tool and the bridge bank tool. In exercising these stabilisation options, the Bank must consult the other tripartite authorities, which will be engaged at all stages. The Bank’s role in this regard has been widely supported, if not directly by the Opposition, certainly by its representations on an enhanced role for the Bank. It has been widely supported by stakeholders in the industry. It is also consistent with the recommendations of many noble Lords across all parts of the House.

However, Ministers still retain a role and the Bill provides a clear framework for how this will work. First, it will work through providing backstop mechanisms to ensure ministerial involvement in decisions concerning compliance with the UK’s international obligations under Clause 76 and the protection of public funds under Clause 78. The Bank of England may not exercise a stabilisation power in respect of a bank without the Treasury’s consent if the exercise would be likely to have implications for public funds. Secondly, reserving the exercise of a number of significant powers to ministerial procedure through the House means that neither the power to change primary or secondary legislation or take a bank into temporary public ownership is conferred on the Bank of England, because these are proper ministerial responsibilities. We have also ensured that ministerial consent is required where the Bank of England’s powers may extend beyond its financial stability remit and raise broader questions of public policy. This consent role relates to powers concerning continuity obligations between group companies and the failing bank, and powers in relation to pension schemes.

The Bank of England’s exercise of these powers will be subject also to new internal governance arrangements that will be put in place by the Bill. The Bill will formalise the Bank’s responsibility for financial stability by providing it with a statutory objective for financial stability, and by establishing a financial stability committee as a subcommittee of the court of directors, with responsibility for making recommendations to the court regarding the nature and implementation of the Bank’s financial stability strategy. One function of the new financial stability committee will be to advise on and monitor the Bank’s use of the key stabilisation options.

In summary, there are strong policy reasons for conferring the key resolution tools on the Bank of England, and alternative arrangements have been made to ensure transparency and accountability in respect of the exercise of those tools. In exercising its role as the lead resolution authority, the Bank can, and undoubtedly will, be called to account in Parliament by the Treasury Select Committee, which the Government consider an appropriate and adequate means of scrutinising its conduct, as it has been for many years.

For these reasons, I hope that the Committee is persuaded that the existing procedure for instruments is appropriate. The Government have recognised the representations from the Committee and we take the Committee’s role very seriously. However, it must be recognised that the broad structure of the resolution regime has a crucial role for the Bank, which should not be made responsible for instruments that it could not defend in Parliament.

I accept the principle of the noble Baroness’s Amendment 50. I know that she is motivated by a determination that these powers should be exercised with the greatest possible openness. We have considerable sympathy with Amendment 50, which she would probably regard as the least significant in her group of amendments, as far as it concerns laying a copy of the share transfer before both Houses. However, on the other amendments, we have thought very seriously about the issues, particularly in the light of the Delegated Powers Committee’s representations, and the Government’s judgment is as I have outlined.

Before I decide what to do with my amendments, I should like to have clarified what “considerable sympathy” means in relation to Amendment 50.

As the noble Baroness has reserved her position on many things in Committee, she will allow me this little latitude to reserve my position, while at the same time indicating that her amendment has considerable merit. We will reflect on that and I hope that when we have, she will be beaming at me rather than regarding me with suspicion, as she is at this moment.

I thank the Minister for an extraordinarily comprehensive reply to my modest set of amendments. I do not accept that, just because the Bank is not directly accountable to Parliament, Parliament has no right to know how the extraordinarily extensive powers being set up by the Bill are exercised in practice. That is what lies behind my amendments.

On Amendments 51 and 76, I accept that the inability of the bank to argue its case makes the negative resolution procedure on share transfer orders potentially not quite right. However, there are examples where Ministers produce statutory instruments to obtain approval for documents which they have not themselves prepared. One example that comes to mind—it is not on all fours with this case, but it is an example—is the Audit Commission’s code of practice, which has to be put to Parliament under the affirmative resolution procedure. Although the Secretary of State does not prepare that document, he has to put it before Parliament. So we are not in unprecedented territory, although we do not need to argue that point. I take the Government’s assurance that they will always inform Parliament as rapidly as possible and that Amendment 52, while nice, is not necessary.

That leaves Amendment 50, on informing Parliament. The Minister has offered the parliamentary accountability of the Bank of England through the Treasury Select Committee in another place. That is the only way in which the Bank has any effective accountability to Parliament. It depends on the Bank fitting in with the Treasury Select Committee’s timetable and the topics that it wishes to examine. It is not about Parliament generally, and certainly not about your Lordships' House.

The Minister expressed sympathy and said that he would consider between now and Report whether, as I believe, there is a case to be made for Parliament being informed. That is the mechanism for Parliament to decide what it wishes to do. The Treasury Select Committee in another place might wish to examine the issue, or your Lordships' House or another place might wish to initiate some other kind of debate on the subject. It is important not to eliminate Parliament from formal knowledge of the use of the very extensive powers in this Bill.

I am a little encouraged by what the Minister has said. I think that we should return to this on Report, and I would prefer it if he produced an amendment. With that, I beg leave to withdraw the amendment.

Amendment 50 withdrawn.

Amendment 51 not moved.

Clause 24 agreed.

Clause 25: Procedure: orders

Amendment 52 not moved.

Clause 25 agreed.

Clause 26 : Supplemental instruments

Amendment 53

Moved by

53: Clause 26, page 12, line 9, leave out subsection (4)

I shall speak to the other five amendments in the group as well. They all address the same issue as it arises in Clauses 26 to 31. Those clauses deal with supplemental share transfer instruments, supplemental share transfer orders, onward transfers, reverse share transfers, bridge bank share transfers and bridge bank reverse share transfers. I am sure that these are all essential powers to deal with how to put right things that are not right in the first attempt. I could have drafted similar amendments to Clauses 42 to 46, which deal with the equivalent powers for property transfers, but it was tiring enough going through the various permutations for share transfers.

My amendments focus on the provision in Clauses 26 to 31 that Clause 7 and either Clause 8 or 9, as appropriate, do not apply to those clauses. Clause 7 requires the FSA to be satisfied about the threshold conditions; Clause 8 requires the Bank to be satisfied about various things such as financial stability or the protection of depositors; and Clause 9 requires the Treasury to be satisfied to a slightly higher level. These conditions are necessary to trigger the stabilisation powers under Clause 7 and then for the Bank to exercise its private sector purchaser and bridge bank powers under Clause 8, or for the Treasury to exercise its temporary public ownership powers under Clause 9.

Various conditions have therefore to be satisfied for the stabilisation powers to be initiated and for the initial share transfers or property transfers to be made, but that is not the case when it comes to all the variants set out in the clauses to which I have referred. I have proposed the deletion of the subsections on a probing basis. The Minister in another place explained in Committee that, if the initial action had stabilised the bank, the conditions could not be met at a later stage. That may well be the case, but the new powers are therefore set to apply in a void. As the Bill is drafted, the Bank or the Treasury can use the powers as and when they choose without context or constraint—there is no purpose driving those clauses as there is for the clauses on share and property transfers.

Does the Minister think it satisfactory that these powers are not constrained by words, for example, that link back to the initial exercise of the stabilisation powers? The Bill disapplies the strong constraints applied to the initial powers, but with absolutely no replacement other than general principles of administrative law.

I have not sought replacement wording at this stage—as I have said, my amendments are probing for today—but I urge the Minister to look again at whether the removal of the framework that exists for the initial transactions is correct or whether it should be supplemented by some other framework to guide the exercise of the powers that come up in the later clauses. I beg to move.

Once the Bank of England or Treasury has made an initial share transfer, they have a number of types of share transfer instrument available to them. These amendments relate to supplemental, reverse and onward share transfer instruments and orders. It may aid the debate if I briefly describe each of the transfers.

The first type is supplemental transfers. Once an initial transfer has taken place, the authorities may undertake supplemental transfers, which provide for further things to be transferred; for example, a supplemental property transfer may follow an initial property transfer, providing for further property to be transferred from the failing bank.

The second type is reverse transfers. Once an initial transfer has taken place, the authorities may also undertake reverse transfers. In a reverse property transfer, for example, property may be transferred back to the failing bank.

The final type is onward transfers, which are designed to effect a swift onward transfer from a publicly owned bank. The Bank may make an onward transfer of property or securities from a bridge bank. The Treasury may do the same from a bank in temporary public ownership.

I turn to the specific amendments in the group. Amendments 53 to 59 would remove provisions that perform two main functions. First, they exclude the general and specific conditions of the SRR from applying to supplemental, onward or reverse transfers. Secondly, they provide that all the attributes which apply to initial transfers apply to supplemental, onward or reverse transfers, including the procedural requirements governing the making of the instruments and orders to effect them. However, I note that Amendment 60, which we are due to debate shortly, and also laid by the noble Baroness, Lady Noakes, reintroduces the requirement for the exercising authority to send a copy of instruments and orders to various persons.

In order for the authorities to effect a share transfer of a failing bank, the general and specific conditions set out in Clauses 7 and, as appropriate, Clauses 8 and 9 apply. The general conditions are that a bank is failing or likely to fail to meet its threshold conditions and that, having regard to timing and other relevant circumstances, it is not reasonably likely that—ignoring the stabilisation powers—action will be taken by or in respect of the bank that will enable it to satisfy the threshold conditions.

Before the Bank of England can exercise the powers to transfer a bank to a private-sector purchaser or a bridge bank, it needs to be satisfied that the exercise of the powers is necessary, having regard to the public interest in the stability of the financial systems of the UK, the maintenance of public confidence in the stability of the banking systems of the UK or the protection of depositors. A higher test is used for full public ownership of a bank. The Treasury can only take a bank into temporary public ownership when it is satisfied that it is necessary to resolve or reduce a serious threat to financial stability, or to protect the public interest where the Treasury has provided financial assistance in respect of the bank for the purpose of resolving or reducing a serious threat to financial stability.

These are high hurdles. The fact that the conditions will have been met for the initial intervention gives the authorities warrant to take the necessary steps to resolve the bank. It is neither necessary nor desirable, nor efficient, for each stage of the bank’s resolution to have to meet these various sets of conditions again. For example, following the transfer of a failing bank into temporary public ownership, the Treasury would act to stabilise the bank. In due course, should the Treasury consider that the time is right to transfer the shares in the bank to a private-sector purchaser by way of an onward transfer order, it would be inappropriate for the general conditions to apply, as the bank would have been stabilised.

A supplemental, reverse or onward transfer is one stage of the authorities’ intervention to protect the public interest in resolving a failing bank. Given this, it is not appropriate for the making of relevant instruments and orders to be subject to repeat testing against these conditions. Of course, the authorities still must have regard to the special resolution objectives and the provisions of the code of practice. Any order which interferes with property rights will need to be proportionate to the public interest pursued, in order to ensure the compatibility of the action with the European Convention on Human Rights.

The noble Baroness asked whether the powers could be used without constraint. I believe that this is not the case. The exercise of these powers does not take place in a void. There are many constraints: first, the special resolution objectives of Clause 4; secondly, the code of practice of Clause 5; thirdly, the legislative safeguards provided, for example, in Clause 48; fourthly, the European convention rights; and, fifthly and finally, the need of the authorities under the convention to act reasonably and proportionately. Under those circumstances, I suggest to the noble Baroness and Members of the Committee that, while well articulated, the reasons for this set of amendments do not sustain close examination. I encourage the noble Baroness to withdraw her amendment.

I thank the Minister for that comprehensive response. I tabled the amendments in this group to ask what constraints there might be. The Minister said that these onward supplementary transfers would be subject to the special resolution objectives. As a matter of interpretation, are the powers in Clause 26 onwards within the term “stabilisation powers” as used in Clause 4(2)?

With the greatest respect, belief is not quite good enough. Is it the Government’s view that that is the case? If that is the case, I can see the point. If it is not clearly and unambiguously the case, I cannot see that it is necessary.

I am encouraged by my colleagues to believe that I was correct in believing that the noble Baroness was correct. I therefore give a clear and affirmative answer: yes.

I am grateful. If that is the case, it at least roots those provisions, which appear to be rootless, in something relatively well defined. I will consider what the Minister has said about the various other ways in which the powers work and may be subject to outside constraints. For the time being, however, I beg leave to withdraw the amendment.

Amendment 53 withdrawn.

Clause 26 agreed.

Clause 27: Supplemental orders

Amendment 54 not moved.

Clause 27 agreed.

Clause 28: Onward transfer

Amendment 55 not moved.

Clause 28 agreed.

Clause 29: Reverse share transfer

Amendment 56 not moved.

Clause 29 agreed.

Clause 30: Bridge bank: share transfers

Amendments 57 and 58 not moved.

Clause 30 agreed.

Clause 31: Bridge bank: reverse share transfer

Amendment 59 not moved.

Clause 31 agreed.

Amendment 60

Moved by

60: After Clause 31, insert the following new Clause—

“Additional procedures: supplemental instruments, &c.

(1) As soon as is reasonably practicable after making a supplemental transfer under section 26, a bridge band share transfer instrument under section 30 or a bridge bank reverse share transfer instrument under section 31, the Bank of England shall send a copy to—

(a) the bank,(b) the Treasury,(c) the FSA,(d) any other person specified in the code of practice under section 5.(2) As soon as is reasonably practicable after making a supplemental share transfer order under section 27, an onward share transfer order under section 28 or a reverse share transfer order under section 28, the Treasury shall send a copy to—

(a) the bank,(b) the Bank of Englnd,(c) the FSA, and(d) any other person specified in the code of practice under section 5.”

I was hoping for a little rest. Amendment 60 proposes a new clause after Clause 31. Like the previous group of amendments, it relates to the exhausting group of clauses—Clauses 26 to 31—that alter, reverse, onward and so on in relation to the original share transfers. I could have proposed a similar new clause for the equally exhausting supplementary property transfer clauses—Clauses 42 to 46—but I hope that the Minister will take this amendment as representing both groups of clauses for the purposes of debate.

Under Clauses 24 and 25 there are well defined procedures to ensure proper notification of an initial share transfer order or instrument. When we get to Clauses 26 to 31 there is absolutely no information procedure. My probing amendment asks why. I have drafted Amendment 60 to mirror the requirements for information set out in subsections (1) of Clauses 24 and 25. It requires information to be passed between the relevant authorities and anyone else specified in the code of practice. I should have gone further and mirrored subsections (2) of the clauses so that the facts would be made public by way of websites and newspapers.

These supplementary clauses give wide powers, and it is possible for transactions to be carried out under them that are at least as significant as the initial transfers. There is no restriction of these clauses to small or de minimis transactions, and I am sure that would be resisted. For that reason, information and publicity is as important for the subsequent transactions as it is for the initial transactions. I am sure that the Minister will see the logic of this.

The noble Baroness said that she was hoping for a break while my noble friend Lord Eatwell moved Amendment 57. I am also disappointed that he did not move it because I had rather a good answer. When we had an open meeting before we went into formal session and I met Peers to talk about the Bill and how we proposed to assist the House, the noble Baroness warned me that I should expect a high degree of energy and enthusiasm from her and long sessions if necessary. She is certainly evidencing everything she led me to believe and doing it admirably.

Amendment 60 proposes a new clause to provide for the procedure for supplemental, reverse and onward share transfer instruments and orders. When we debated other amendments to these clauses, I noted that the effect of the noble Baroness’s amendments was to remove the existing procedural provisions. This amendment reinstates some aspects. As I made clear previously, the Government’s position is that the original wording of the clause is preferable. As a consequence, I hope that the noble Baroness and the noble Lord will feel able not to press Amendment 60.

The procedural requirements of, for example, Clause 24 apply to supplemental, onward and reverse transfers, in each case by the provisions exemplified by Clause 27(4). With that, I hope that I have gone some way towards answering the noble Baroness’s question and that she will either say more to explain her perplexed expression or be inclined to withdraw the amendment.

I am completely perplexed. My previous amendments were not about the procedure of information flows, which Amendment 60 is about, but were probing why the framework of objectives in Clauses 7, 8 and 9 were not referenced into these various supplemental, onward and reverse transfers. That procedure is not of the same ilk as the information flow procedure; it is addressed by Amendment 60.

I am completely perplexed by the Minister’s response, as I was when he referred to this on the previous group of amendments. Amendment 60 would try to get information about these transactions that are undertaken, supplemental and so on, and nothing to do with the framework of conditions that apply to them. It is not on all fours. Leaving subsection (4) in there does nothing at all about creating an information flow. I do not understand what the Minister is saying and why there should not be an information flow. Help may be at hand for the Minister if he looks to his left.

I am much clearer about the noble Baroness’s intention, having listened carefully to her second contribution. I shall take that away and consider it. She makes a good case, but I would like to consult colleagues and reflect on that as we prepare for Report. In those circumstances I hope she will be kind enough to consider withdrawing her amendment.

Amendment 60 withdrawn.

Clauses 32 and 33 agreed.

Clause 34: Effect

Amendment 61 not moved.

Clause 34 agreed.

Clause 35 agreed.

Clause 36: Continuity

Amendment 62

Moved by

62: Clause 36, page 16, line 39, leave out subsection (4)

I shall speak also to Amendment 63. These are both probing amendments that would delete subsections of Clause 36 that deal with continuity provisions with regard to property transfer instruments, in order to ascertain the meaning and extent. These subsections do not exist in Clause 18, which applies to share transfers, so I seek to understand what the differences might be.

Subsection (4) is deleted by Amendment 62. It says that a property transfer instrument that transfers or enables the transfer of a contract of employment may include provision about continuity of employment. Why is this provision necessary? The Transfer of Undertakings (Protection of Employment) Regulations already provide for continuity of employment when employees are transferred with an undertaking. That term has been tested many times in the courts and in tribunals, and it has been established that an undertaking applies at a fairly granular level within a business. Are the Government saying that they need this clause to provide for rights which exceed those in TUPE? If that is the case, why are they doing it for bank property transfers and not more widely?

In addition, subsection (4) is permissive and does not require the instrument to contain continuity provisions. Do the Government expect continuity provisions to be made in every case or do they expect the general law to operate in most cases—the general law being TUPE and any other provisions?

Subsection (7), which is deleted by Amendment 63, provides that a transfer instrument may apportion liability to tax between transferor and transferee. Will the Minister explain at what this subsection is aimed? Are particular taxes expected to cause a problem? Will the Minister say what limitations there are, if any, on the term “liability to tax”? Does there have to be a liability in existence at the date of the transfer or can it extend to liabilities which may arise in future? Is it intended to cover only taxes which arise as a consequence of the transfer, or can it cover other tax liabilities? Can the Minister say how this subsection is to be read alongside tax law? There are many pages of tax law on how taxes are to be paid and by whom as well as on the consequences of non-payment. Does this subsection bind HMRC, or is it intended to operate only as between the transferor and transferee?

These amendments were prompted by the disparity between Clauses 36 and 18, but the Minister will see that I also have some substantive probing questions to ask in relation to their operation.

This group of amendments relates to Clause 36, which makes provision for continuity in a property transfer.

Clause 36 makes provision to preserve the continuity of a failing bank’s arrangements, and hence is essential to ensure that a business can continue operating after the transfer. This is particularly important in the case of property transfers, when banking business is transferred from one company to another. An example of why this sort of provision is needed can be given. A transfer of banking business from bank X to bank Y may involve the transfer of mortgages. The mortgage documentation will refer to bank X, and not to bank Y. This power can be exercised to ensure continuity. For example, in the example I have given, under subsection (1) of the clause, bank Y can be treated as the same person in law as bank X or, under subsection (5), references to bank X can be modified so as to refer to bank Y. In particular, it may be important under a property transfer to ensure the transfer of employees to the transferee.

Amendment 62 seeks to remove subsection (4) of the clause, which provides that a property transfer instrument may make provision about the continuity of employment. The purpose of this subsection is to ensure that the authorities can make relevant provision in order to provide, by instrument or order, that employees can be transferred with the business so that it can continue to operate effectively. The expertise and corporate knowledge of the employees may be of great importance to the continued operation of the business. This provision would allow, for example, employment service at the transferor failing bank to be treated as an employment service at the transferee, to preserve employment rights which arise after a stipulated period of service. But let me be clear: this is not the same power, or even a similar power, to that which we debated earlier in the context of the directors of failing banks. In particular, the power does not allow general variations to be made to the contracts of employees; for example, to change their salary or to alter such entitlements as they may have in the event of redundancy. So noble Lords need have no concern that these powers will be used adversely to affect the interests of employees in a failing bank. Provision in relation to employment is likely to be important to the effectiveness of any property transfer. Therefore, I hope the noble Baroness will feel able to withdraw her amendment.

The noble Baroness asked a specific question on why employer requirements were not applied to share transfers. The provisions on continuity of employment are not relevant to share transfers. The employer, the legal person who is the bank, remains the same on the share transfer.

I shall now turn to Amendment 63. The noble Baroness explained when introducing these amendments that they were probing, but she was withering in her analysis of this clause and the questions she raised about it. So much so that I have been reconsidering the case for keeping subsection (7), particularly in view of Clause 74, which provides that the Treasury may make provision in regulations,

“about the fiscal consequences of the exercise of a stabilisation power”.

I very much appreciate the points she made. I have also reached the conclusion that subsection (7) is no longer needed and that provision for tax should be made through the detailed powers in Clause 74. Accordingly, I am delighted to accept the amendment.

I am, of course, very grateful to the Opposition Front Bench and the Liberal Democrat leadership in their constructive approach to the work of the Committee. I hope that this small gesture might be taken as recognition of their sterling service in making their case.

The Minister makes it sound like a long service award, which perhaps it is. On Amendment 62, I think I heard the Minister say that this was in order to transfer contracts of employment over, whereas I was coming at it from a different direction in asking why this is needed in order to protect employment rights. The noble Lord said that he wanted to transfer the benefit of the contracts of employment. I understand that point. I am grateful to the Minister for accepting my Amendment 63, to which we will come in a moment. We shall return to probing those issues later on the general clause on tax, on which I have some points to raise. In the mean time, I beg leave to withdraw Amendment 62.

Amendment 62 withdrawn.

Amendment 63

Moved by

63: Clause 36, page 17, line 5, leave out subsection (7)

Amendment 63 agreed.

Clause 36, as amended, agreed.

Clause 37 agreed.

Clause 38: Termination rights, &c.

Amendment 64

Moved by

64: Clause 38, page 17, line 29, 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”

Amendment 64 agreed.

Amendment 65 not moved.

Amendments 66 to 68

Moved by

66: Clause 38, page 17, line 30, after “that” insert “has the effect that”

67: Clause 38, page 17, line 30, at end insert “or situation arises”

68: Clause 38, page 17, line 41, at end insert—

“(1B) A Type 2 default event provision is a provision of a contract or other agreement that has the effect that a provision of the contract or agreement—

(a) takes effect only if a specified event occurs or does not occur,(b) takes effect only if a specified situation arises or does not arise,(c) has effect only for so long as a specified event does not occur,(d) has effect only while a specified situation lasts,(e) applies differently if a specified event occurs,(f) applies differently if a specified situation arises, or(g) applies differently while a specified situation lasts.(1C) For the purposes of subsections (1A) and (1B) it is the effect of a provision that matters, not how it is described (nor, for example, whether it is presented in a positive or a negative form).”

Amendments 66 to 68 agreed.

Amendment 69 not moved.

Amendments 70 to 72

Moved by

70: Clause 38, page 18, line 9, leave out “to be, or that” and insert “done by the instrument or is to be, or”

71: Clause 38, page 18, line 14, after “(4)” insert—

“(a) ”

72: Clause 38, page 18, line 15, at end insert “, cases or circumstances;

(b) differently for different purposes, cases or circumstances.”

Amendments 70 to 72 agreed.

Clause 38, as amended, agreed.

Clause 39 : Foreign property

Amendment 73

Moved by

73: Clause 39, page 18, line 31, at end insert—

“( ) If it proves impossible or impractical to make the transfer effective as a matter of foreign law, other than by reason of the actions or omissions of the transferee, the Bank of England shall ensure that the transferee suffers no disadvantage thereby.”

Amendment 73 adds a new subsection to Clause 39, dealing with foreign property, which is the subject of a property transfer instrument. In practice, I am sure that foreign property transfers will throw up many practical problems, and I recognise that Clause 39 tries to deal with them comprehensively. In particular, both the transferor and the transferee are required to do whatever is necessary to complete the transfers by virtue of subsection (2). The costs of completing transfers are for the transferee’s account under subsection (5). But the question posed by my amendment concerns what will happen if, despite the best efforts of all the parties, particularly the transferee, it is not possible to transfer the foreign property. Perhaps the property has been confiscated or transferred under draconian powers existing in a foreign country similar to the powers contained in the Bill. In any event, if the property cannot be transferred to the intended transferee, what will happen then?

My amendment says that the transferee should suffer no disadvantage and that the Bank of England should ensure this. The disadvantage could involve incurring legal and other costs in trying to achieve the transfer, or challenging whatever obstacles have been placed in the way of the transfer in the foreign country. The inability to transfer some property might also involve more extensive problems. For example, the non-transfer of intellectual property might render a foreign business non-viable and it would not then be right for staff or any related assets or rights to be transferred to the transferee.

I know that the Minister will not like the suggestion that the Bank should shoulder the responsibility to see the transferee right. I have suggested this because the transferor may be long gone, completely dismembered by the Bank under the bridge bank provisions, and the residue dealt with by insolvency law. There will be no one to turn to unless the Bank had held back some of the proceeds of the transfer against future problems. In a commercial transaction where there is doubt about the ability to give legal effect to some aspects, it would be normal to take a range of warranties and indemnities, often backed by money held in escrow or by other forms of security or guarantee. If the Bank will not stand behind this—my amendment suggests that it should stand behind such measures—I invite the Minister to say how the Government see transfers which involve uncertainty working out in practice. Will the property transfer instruments contain provisions that match warranties and indemnities in commercial deals or will this be dealt with in some other way and, if so, what other way? It seems to me that it cannot be right that the risk of non-completion of a transfer is left wholly on the transferee. I beg to move.

I am grateful to the noble Baroness for moving the amendment but I assure her that normal service on this side of the Committee is being resumed and therefore I cannot accept it. However, there is a congruence of view between us that this is a very difficult area and we need to think about the issues very carefully. In domestic law, the transfer of foreign property will be recognised as effective as it is a transfer authorised by primary legislation. But, as we discussed in the debate on extending the special resolution regime to foreign banks, the critical question is whether the transfer of foreign property will be recognised as valid under foreign legal regimes. If foreign courts will not recognise the transfer, it may not be practically effective as, for example, an overseas service provider could cease to provide services and the transferee would have no means to compel their provision because no claim would be found to exist under the foreign legal system in question.

Clause 39 makes provision to ensure that transfers of foreign property are recognised as effective to the greatest possible extent, where this is not the case simply by virtue of the property transfer instrument. I understand the nature of the amendment and the concerns that the noble Baroness expressed in arguing for it. However, it provides that the Bank of England must ensure that a transferee is not adversely affected if a transfer of foreign property is not effective. I, of course, agree with her that steps must be taken to ensure that the transfer of foreign property is effective in all cases where we can achieve that. However, she was absolutely right to indicate that I might have reservations to exposing the Bank of England to the liability of ensuring that no transferee suffers any disadvantage in such circumstances. The liability that this would impose is likely to be uncertain and may be unquantifiable in any given case. Such uncertainty would give rise to complex and costly litigation.

Of course, the Bank will take all practicable steps to ensure that a transfer of foreign property is effective. Clause 39 goes a long way to ensuring that. It provides that an obligation may be imposed on the transferor to take steps to ensure the effectiveness of the transfer under a foreign legal regime.

These obligations are enforceable as if created by contract between the transferor and the transferee. Because the obligation is enforceable as a contract, any person who is unwilling to comply with it must consider whether the transferee would be able to bring a claim for substantial damages should non-compliance prejudice the resolution and give rise to economic loss. Other contractual remedies would also be potentially available to compel compliance with the obligation, such as an interim injunction and an order for specific performance. These incentives enhance the likelihood of a successful operation.

It is the Government’s view that Clause 39 strikes the right balance, so I hope the noble Baroness feels able to withdraw her amendment. I recognise that some of her amendments have been probing. She has indicated that this is a very difficult area, and we have certainly given substantial consideration to the clause and why it is drafted as it is. She will appreciate that the Government cannot accept an amendment that would put the Bank into a very difficult position of potentially unquantifiable liabilities, which might involve very substantial costs.

Given that uncertainty, I ask the noble Baroness to realise that the Government have not been at all blasé about this issue—very far from it. We recognise how difficult this is with regard to foreign property, and we have worked hard regarding this clause; but we could not have the provision diluted to the extent that her amendment would undoubtedly achieve, with deleterious effects on the operation. That is why I ask her to consider withdrawing her amendment.

The Minister does not surprise me with his response. Can I probe what he is saying? Is he saying that if a transferee is stupid enough to get involved in a property transfer instrument in relation to foreign property, he knows that he will do so entirely at his own risk and that there would be no effective remedy that he could pursue?

That is part of the position. I have no doubt that the noble Baroness could give an example of where the party concerned was in difficulty, having entered an agreement without fully understanding the potential circumstances. After all, we are talking about situations in which there has been a substantial institutional failure and the authorities have been obliged to act. A range of individuals involved with that institution could have relationships with regard to foreign property that they entered in good faith, and they wonder why they should bear the loss.

Of course I understand the anxiety on that score. That is why Clause 39 is a significant attempt to ensure the most effective representation on the matter that the authorities can manage. However, we are not prepared to accept that the Bank of England would be the final resort on which liability could rest. That would be putting the Bank in an extremely invidious position, particularly in circumstances whereby, as the noble Baroness suggested, someone had entered into an agreement without thinking things through and had acted stupidly. What is certain is that someone who had got themselves into that position had taken a commercial risk. I am afraid that the Government’s position is that if there is an element of risk in the position, there is also a possibility of liability attendant upon that position. It is not for the Bank of England to meet that liability in such circumstances. That is why I am unable to accept the amendment.

Perhaps I may pursue this a little further. The Bank of England is effectively acting as a vendor in selling things on. The fact that they have come from a failed bank does not mean that what is being transferred on is a bad asset or collection of assets. If this were a commercial transaction, there would be various provisions in the contract that could include warranties and indemnities, money held back or guarantees. There would be some way of protecting the transferee against recognised uncertainty. If what the Minister is saying is correct, no transferee would want to get involved in any transaction where there was a scintilla of doubt about the ability to complete the transaction, possibly because of the impact of local foreign requirements.

I am struggling to understand why the Government are being so dogmatic, or are they effectively saying that they will be unable to get rid of any foreign assets which could, in fact, represent value when taking over a failed institution with an overseas business? Are the Government saying that absolutely nothing could be done and that foreign property is completely at risk? If that is the case, people will be advised by their lawyers not to take part in such a transaction.

That would be a misinterpretation of the Government’s position. If I have misled the noble Baroness, I must correct myself as rapidly as possible. The whole point about Clause 38, and Clause 35 which permits the transfer of foreign property, is that of course we recognise that we must create the strongest possible position for the effective transfer of foreign assets. We would expect that a very substantial number of foreign regimes would recognise such legal rights and that the issue would be the realisation of the value of those rights for the individual and the Bank acting in this capacity. However, when all those instruments were in place and those efforts were made, it may remain the case that loss was involved. It may be impossible to enforce the right with regard to foreign property, because the legal entity may not be prepared to recognise that obligation and the matter could not be pursued in those terms.

The Government’s position is not one of neglect—it is the opposite. The position is to pursue every strategy as far as the Bank is concerned to ensure that it realises assets. However, when it is unsuccessful in those circumstances—and we have to expect that it may not be successful in every case—the risk must be borne not by the bank but by the transferee.

I have a very extensive note on this matter. If, on the arguments that I have set out thus far, the noble Baroness feels that she is not able to withdraw her amendment, my extended note would refine the issue somewhat but I am not sure that it would move us very far with regard to the substance. However, if she is still dissatisfied with my answer, I will prolong the discussion and do my very best to persuade her. Having said that, I hope that she is content with the points that I have made and I ask her to withdraw her amendment.

The Minister said that Clause 39 sets out everything that could possibly be done, but it does not replicate what happens in ordinary commercial transactions. I am content to withdraw the amendment but the Minister has to understand that effectively the Government will be left on the record as saying that risks in transfers involving foreign property will lie completely with transferees without any possibility of recourse. Clause 39 is just about making lots of efforts—that is all it does. Once the efforts have been made and they do not work, it is down to the transferee. If the Government want that left on the record for all to see, I am entirely happy with that, but I just say to them that, where foreign property is involved, those using these powers will be in for a very hard time with any lawyer on the other end.

I concluded my last remark by suggesting that the noble Baroness might find the position acceptable. However, what I do not find acceptable is her interpretation of where we are at this stage in relation to foreign property, and therefore I shall have to clarify the issue further.

The provisions of the Bill seek to ensure that transfers of foreign property are recognised wherever possible. We also hope that foreign legal regimes will recognise the actions taken under the special resolution procedures and in view of the public interest pursued by the tripartite authorities. The precise position will be governed by international law. The Bill’s powers work in conjunction with each other as follows.

First, as I set out earlier, Clause 35 permits the transfer of foreign property. As such, transfers will be authorised by Act of Parliament. The transfer will be valid and effective as a matter of domestic law, and the only exception will be if the transfer is prohibited by Community law. Clause 39 then seeks to ensure that transfers of foreign property are recognised as effective under foreign law, even where that is not the case by virtue of the property transfer instrument. This is important because, if the transfer is valid under domestic law but not recognised under the foreign law regime which provides the relevant governing law, the transfer may be practically unenforceable. That is bound to be the logical position. In particular, Clause 39 imposes a duty on the transferor and transferee to take the necessary steps to ensure that the transfer is effective. That may include, for example, effecting a registration in the foreign legal jurisdiction where that is necessary to pass ownership in the jurisdiction and seeking to arrange a contract to change a reference to the transferor to a reference to the transferee. The precise position will then depend on what actions are taken in pursuance of this duty. We recognise that there may be some cases when it is simply not possible to make a transfer of foreign property practically effective, but I put it to the noble Baroness that that merely reflects reality. Of course, any transfer involving foreign jurisdictions will involve close co-ordination between the domestic and overseas authorities. Actions will not be limited to just what the Bill provides for.

Clauses 35 and 39 face up to the reality that it is not in every case guaranteed that foreign property transfer activity will be effective. When it is ineffective we maintain that that ultimate risk must lie with the transferee, not with the Bank of England, which would put public resources at risk in a contract to which the Bank has not been a party. I understand the noble Baroness’s anxieties; we all have anxieties when the limits of our powers are reached, but we have to make provision for the fact that that may be the case. That is the situation that the Government think should obtain and why we have drafted Clause 39 as it stands, and why I ask the noble Baroness to withdraw her amendment.

The Minister has very clearly repeated what he said earlier. The record will show that the Government are putting the transferee entirely at risk in the case of foreign property. If that is the Government’s position, that is fine, but any lawyer reading the clauses—and certainly Hansard and the way in which the Minister articulates them—will see that a transferee will be taking a risk that no commercial person would normally take. If that is the position that the Government want to achieve in the Bill it is their problem. On that basis, I beg leave to withdraw the amendment.

Amendment 73 withdrawn.

Clause 39 agreed.

Clause 40: Incidental provision

Amendments 74 and 75

Moved by

74: Clause 40, page 19, line 5, after “purposes,” insert “cases or circumstances,”

75: Clause 40, page 19, line 6, at end insert “, cases or circumstances.”

Amendments 74 and 75 agreed.

Clause 40, as amended, agreed.

Clause 41: Procedure

Amendment 76 not moved.

Clause 41 agreed.

House resumed.

House adjourned at 10.08 pm.