Committee (3rd Day)
Clause 42 : Supplemental instruments
77: Clause 42, page 19, line 34, at end insert—
“(c) provides for property, rights or liabilities specified in the original instrument not to be transferred from the transferor.”
I can be brief on Amendment 77, which adds a new paragraph (c) to Clause 42(3), which deals with supplemental property transfers. Under subsection (3), a supplemental property transfer is one that provides for property being transferred from the transferor under the initial instrument and makes any other provision that an original property instrument could make. That is set out in paragraphs (a) and (b) of subsection (3).
What happens if the original transfer tried to transfer things that cannot in fact be transferred? Problems may not generally arise under UK law, but they possibly could under foreign law—for example, if the property has been confiscated under foreign law or there is some other legal obstacle to the transfer. What provision allows the original transfer instrument to be amended in those circumstances? It is not a reverse transfer under Clause 44, because no initial transfer has in fact taken place; and it does not appear to be within the scope of Clause 42, because of the wording of subsection (3), to which I referred. Perhaps the Minister can explain. I beg to move.
I am grateful to the noble Baroness for the way in which she expressed her amendment. We were somewhat uncertain about its nature, because it looked like a fairly minor drafting amendment. We do not believe that the addition of the word “any” changes the meaning of the clause. The current drafting already provides the law to make specific provision of any sort, so we do not think that any clarification is necessary. I hope the noble Baroness will understand that we think the clause as drafted is quite clear about the issues which she raises.
As I indicated, we were not quite sure about the nature of the noble Baroness’s amendment. The Bank of England makes supplemental property transfer instruments following the transfer of property to a private sector purchaser or bridge bank. These provide particularly valuable flexibility for property transfers. Not only do the powers provide the Bank of England with the means of ensuring that an initial property transfer is effected; they may also produce a better outcome for the resolution. For example, a further transfer of property to a bridge bank may increase the value of the bridge bank and increase the amount that a private sector purchaser is prepared to pay for the business.
We think that there is merit in the clause as it stands. The noble Baroness mentioned the foreign law issue. Clause 35 makes clear that a property transfer instrument may seek to transfer property located outside the United Kingdom and rights and liabilities governed by foreign jurisdiction. The Government understand that such a transfer may not always be effective, and the other place recognised it as a difficulty. As there are limits to what we can guarantee in these terms, we have included Clause 39, which provides that a transferor or transferee are under obligation to take any necessary steps to make the transfer of property effective. This enhances the likelihood of a successful transfer. What happens if the transfer cannot be made under foreign law? You could use a reverse transfer for the purpose of bridging the transfer back into alignment with foreign law. A reverse transfer under domestic law would certainly be possible and we might have recourse to that.
The noble Baroness has identified an area of difficulty which we debated in the previous Committee sitting. None of us doubts that there are difficulties with property transfer when foreign jurisdictions are involved. It is not possible for us to give absolute guarantees in every single case. What the noble Baroness can rightly expect is that the Bill is drafted in such a way that the authorities are concerned to ensure that an effective transfer takes place wherever this is possible. That is what the existing drafting of the legislation is designed to do.
I thank the Minister for that long explanation, in the middle of which I think I heard the answer to my question. I shall read Hansard carefully to ensure that I heard correctly that a reverse transfer could be made if it were necessary to amend the terms of an original property transfer instrument. I beg leave to withdraw the amendment.
Amendment 77 withdrawn.
Clause 42 agreed.
Clauses 43 to 46 agreed.
Clause 47 : Restriction of partial transfers
78: Clause 47, page 22, line 35, at end insert—
“( ) The Treasury shall by order restrict the making of partial property transfers so no partial property transfer can have an effect on contracts or other arrangements which are relevant for regulatory capital purposes.
( ) No order made under this section or under section 48 shall have the effect of altering contracts or any other arrangements which are relevant for regulatory capital purposes.”
We move to rather more complicated territory. Amendment 78 adds two new subsections to Clause 47. This is in the difficult area of partial transfers, which is potentially one of the most significant areas of the Bill for the banking community.
For today’s Committee, these are probing amendments, but the Minister should be in no doubt that the issues underlying them are of huge significance to the banking community. I know that the Government have been working constructively with the banking industry for some time, but there is unfinished business in this area and I hope that the Minister will at least give an update on the Government’s position following the completion of the consultation on the November White Paper on partial transfers. Indeed, I hope that he will be able to return to this issue generally on Report with a finally agreed solution. If the Government are unable or unwilling to do so, I shall feel obliged to return with an amendment at that stage.
My amendment seeks to ensure that the Treasury will not allow partial transfers to alter the effect of arrangements for regulatory capital purposes. The Government made this commitment in paragraph 2.16 of the November consultation paper on the special resolution regime. Industry players have been dismayed that, despite the unequivocal terms of paragraph 2.16, the Government have subsequently made it plain, both in Committee in another place and in the expert liaison group, that they have no intention of enshrining that commitment in primary legislation.
My amendment seeks to do two things. First, the first proposed new subsection would require the Treasury to ensure that partial transfers have no effect on contracts that are relevant for regulatory capital purposes. Secondly, the second proposed new subsection tries to ensure that any secondary legislation made under either Clause 47 or Clause 48 would alter contracts that are relevant for regulatory capital purposes. I do not pretend that the wording of the proposed new subsections is perfect, and I have already indicated that I shall not divide the Committee on them today, but I hope that the Minister will look to their underlying purpose and respond in that light.
Before getting to the meat of the amendment, I understand that the draft secondary legislation, which is being consulted on, will be made under Clause 48. There is a more general power in Clause 47, but I could find no reference to the purpose to which the Government intend to put it. I have drafted my amendment to cover both Clauses 47 and 48 on a belt-and-braces basis, but it would be helpful if the Minister set out the Government’s intentions behind Clause 47.
At the heart of the issues with which the amendment seeks to deal is the Government’s basic approach to partial transfers. The Government wish to include as much as possible in secondary legislation and place as little as possible in the Bill. That, of course, is the customary government position in the name of flexibility. As I understand it, the banking community was initially prepared to go along with the Government’s view on the basis that secondary legislation would cover its concerns, but I now detect a real concern about the likely content of the statutory instrument that is leading to a revived desire to see further changes to the Bill.
My amendment seeks to deal with one important aspect, but while regulatory capital is an important issue, the concerns run wider. If there is any uncertainty about how the secondary legislation will affect contracts, it is that it will affect the overall attractiveness of London as a financial centre. It is likely that it would increase the cost of capital for UK banks, which will do nothing for their international competitiveness, and it will drive business out of London markets in favour of other jurisdictions where there is greater certainty.
If there is any uncertainty about the legal position, it will be impossible to get clean legal opinions on contracts of set-off and similar contracts. That will certainly mean that they will not be effective for regulatory capital purposes both in the UK and in other countries. As I said, it will also make London an extremely unattractive place in which to do financial business, because, if the counterparties cannot get legal certainty, transactions simply will not happen. The lack of watertight set-off and netting arrangements also affects the non-bank counterparties and could disrupt conventional Treasury cash management techniques. It could also have an impact on what goes into the annual accounts not only of banks but of ordinary commercial businesses.
My amendment today is based on regulatory capital on the basis that, if we can solve the issues for regulatory capital, the other problems will also be avoided. However, they may not be. Amendment 80, which is in the name of the noble Lord, Lord Eatwell, and is in this group of amendments, seeks to tackle the problem from a different direction, and I look forward to him speaking to it.
There is a very real problem which will emerge as soon as the Bill receives Royal Assent. I understand that some banks are already involved in contingency plans in case the final version of the Bill leaves any doubts about the effectiveness of instruments for regulatory capital purposes. That contingency planning involves massive rewriting of contracts, and possibly things being taken out of the London market.
What has concerned the industry is the draft statutory instrument, with its very wide carve-outs. It is difficult for the Committee to debate that draft statutory instrument, because it is not before us, but it underlies the concerns about the use to which Clauses 47 and 48 will be put. That is why I think it necessary to raise those issues. As the Minister will be aware, the industry wants to see set-off, netting and similar transactions left alone by partial transfers and completely unaffected by them. The industry is worried by the prospect of the carve-outs being made by the orders under Clauses 47 and 48. For example, the draft statutory instrument provides that foreign property is not to have protected rights. The BBA believes that the only viable way forward may be to exclude foreign property entirely from partial transfers.
There are similar concerns about the carve-outs, such as in respect of deposits, and the issue of securities. All in all, the concerns which have been fed to us about the carve-outs, plus the uncertainty of not seeing the final version of the statutory instrument, have tilted the balance of opinion against carve-outs. People are certainly worried by the prospect of it being left to secondary legislation.
The Government have said that some issues might be dealt with in the code of practice, but that would not be regarded as helpful. If such issues went to the heart of legal certainty, the code of practice would have absolutely no impact. We debated that in the context of Amendment 20, moved by the noble Lord, Lord Eatwell, on our first Committee day. A code of practice is not enforceable by anyone and can contribute nothing to legal opinions. Similarly, the no-credit or worse-off regulations to be issued in Clause 60 will not improve the ability to issue clean legal opinions because they fall far short of a government indemnity.
These are very difficult issues. I hope the Minister will be able to lay out the Government’s current position. I do not expect this to be resolved today. The consultation has, as I said, passed, so I hope that he can give at least a preliminary response on that basis. The industry remains extremely concerned about the way in which the Government are approaching partial transfers and the impact it will have on financial instruments and the financial services industry in the UK. I beg to move.
I want to underline the noble Baroness’s last point—the industry is extremely concerned about these two clauses. For a layman like me it is almost impossible to judge whether these concerns are justified. To what extent in the ongoing discussions with the industry on the principle do the banks and the Government basically agree about what this is trying to achieve? Is the argument a technical one about whether this goes in primary or secondary legislation, or is there still a difference in principle—or at all—about how the legislation should deal with this immensely important but equally arcane issue?
My Amendment 80 is grouped with that moved by the noble Baroness, Lady Noakes. The dilemma we face here is that the Government have two good policies that they are trying to pursue at the same time but which have contradictory effects. One of the good policies is the ability to pursue partial transfers, which may be very important if a bank is in crisis, while the other is the Government’s declared intention to promote netting and set-off arrangements. My amendment is designed to protect such netting and set-off arrangements by using the relatively strong but not decisive expression:
“A partial transfer … shall not undermine any … arrangements”.
I have chosen this form of words because while close attention will need to be paid to the nature of such arrangements, it should not be absolutely prescriptive. The amendment attempts to sustain the arrangements and provide a degree of legal certainty while not being totally prescriptive with respect to the Government’s actions.
I am afraid that the subsections in Clauses 47 and 48 that attempt to provide some degree of legal certainty and to protect netting arrangements are quite unsatisfactory because they are all conditional on whether the Treasury “may” by order do something rather than that it “will” do something. The amendment would provide the degree of legal certainty necessary to protect set-off and netting arrangements without in turn limiting the Government’s ability to pursue partial transfers, which may also be valuable. It may be that I am trying to square a circle and we might end up with two desirable policies that unfortunately conflict with one another, and therefore I am interested to learn how the Minister will deal with the potential conflict between these two dimensions of policy.
This group of amendments relates to clauses which enable safeguards to be put in place in respect of partial transfers. It may aid the debate if I first provide a general introduction to what the Government are seeking to achieve in respect of this issue. I welcome the constructive introduction given by the noble Baroness to these amendments and I share her concern that it is important to get this right. I am sure that the representations that the Government have received from the banking industry and others have also been made to Members of the Committee. We are making good progress and I hope to be able to report on that later when setting out a route to reaching a satisfactory end position.
I turn first to the issue of consultation, and I shall bring noble Lords up to date on the position. The consultation closed on 9 January. We received only 15 replies, but those in the stakeholder communities most interested in the matter have broadly welcomed the approach to the safeguards that we are establishing. Interest remains around the protection of set-off and netting, in particular the proposed carve-out from the safeguards. However, the Government are listening to concerns and a meeting is to be held with the expert liaison group this week to discuss the consultation responses. I would be happy to come back to noble Lords following that meeting, when we reconsider the Bill on Report.
As noble Lords are aware, the Government recognise that partial transfers may be potentially invasive, and they have been working extremely hard to ensure that appropriate safeguards are in place. Responding to interested parties’ concerns, the Government are putting legislative safeguards in place to protect bank creditors and counterparties in a partial transfer.
As my noble friend Lord Eatwell said, there are two noble purposes here: to promote the opportunity for partial transfer and to protect the concepts and efficacy of offset and netting arrangements. It is a delicate balance to ensure that the language of the Bill can respect both those objectives. We certainly recognise the importance that market participants attach to set-off and netting arrangements, and to security interests. For example, legal certainty about a netting agreement is vital for risk management. Therefore, in responding to stakeholders’ concerns, the Government are consulting on the details of three safeguards.
First, Clause 48 provides a safeguard to protect set-off and netting arrangements, on which so many bank counterparties rely. Secondly, to protect security interests, Clause 48 also provides a safeguard so that secured creditors retain recourse to their collateral. Thirdly, Clause 60, to which we will come in due course, provides a safeguard that we will provide compensation for creditors left in the residual bank—and I hope this addresses the point made by the noble Viscount, Lord Eccles—to ensure that they are made no worse off than if the whole bank had entered into insolvency procedure; that is, as if the authorities had not intervened. In addition, the code of practice will set out the types of circumstance in which the authorities would wish to consider a partial transfer.
Building on the work done so far, the Government will continue to work with interested parties to develop these safeguards, as well as the other secondary legislation. To this end, the expert liaison group has been established to prepare the secondary legislation for the special resolution regime. The group has already met on various occasions and provided valuable advice on the detailed nature of the safeguards. Last November, having first sought the group’s advice, the Government published draft statutory instruments for key safeguards. The consultation period for that document recently closed, as I have said, and we will be scrutinising those responses and finalising the secondary legislation.
The amendments in this group relate to Clause 47, so I shall describe its provisions next. It enables restrictions to be placed on the making of partial transfers through the property transfer powers. The range of ways in which the Treasury may restrict partial transfers is deliberately broad. In addition to setting out restrictions, the power provides for secondary legislation to permit conditions to be imposed before a partial transfer can be undertaken, and it can require partial transfers to include particular provisions.
Amendment 78 seeks to require the Treasury to make regulations under Clause 47 to protect contracts and arrangements that are relevant for the purposes of a firm’s regulatory capital. Put simply, the calculation of how much regulatory capital a bank needs to hold is likely to be based, in part, upon the netting and set-off arrangements that it has in place. It is therefore important that those arrangements are protected, as was noted in the November consultation document.
As I have already said, the Government are proceeding to scrutinise responses to the safeguards consultation and finalising the relevant secondary legislation. While it is important not to prejudge that exercise, I can say now that the secondary legislation to be made under Clause 48 will provide for substantial protection for set-off and netting arrangements. Such protection will cover the vast majority of contracts and arrangements relevant to regulatory capital purposes, which is important in order to address market concerns.
However, the issue of regulatory capital is extremely complex. The Government’s position is that rather than offer a general protection for regulatory capital, the secondary legislation should protect the types of contract that are important for regulatory capital. This approach provides greater certainty to counterparties about what is and is not covered. The Government consider that explicitly stating what kinds of contracts are protected is a more appropriate solution. As I have noted previously, it is also the Government’s view that such provision is best suited to secondary legislation. With these reassurances, I hope that the noble Baroness will feel free to withdraw her amendment.
The amendment tabled by my noble friend Lord Eatwell provides that a partial transfer may not undermine any pre-existing and close-out arrangements. Although I hope I have already made this clear, I should reiterate the Government’s position that protecting netting arrangements is extremely important. The noble Baroness, Lady Noakes, is right to emphasise that getting this right is critical to London and the UK remaining an important banking centre.
I fully agree with the underlying purpose of my noble friend’s amendment. However, the Government consider that there are significant benefits in partial transfers. These have been demonstrated by a number of recent resolutions, particularly in relation to Bradford & Bingley plc. This is why the Government have proposed a strong set of protections for set-off and netting, but subject to limited tailored exceptions which will ensure that partial transfers can still take place in appropriate cases. The amendment, which provides that all netting and close-out arrangements must be protected without exception, would potentially prevent any partial transfers. But, as I have said, the Government agree with the general principles expressed by my noble friend that protecting set-off and netting arrangements is extremely important and we are putting in place detailed secondary legislation under Clause 48 to do just that. Draft orders have been published for consultation and the Government are currently scrutinising responses. I hope that this will reassure noble Lords.
The noble Baroness, Lady Noakes, asked what safeguards the Government will introduce under Clause 47. She is right that the main safeguards will be made under the power in Clause 48. In Clause 47, the Government intend to use the power to provide a clear protection for counterparties which have been transferred to a bridge bank or private sector purchaser so that they have certainty that they will not be transferred back to the residual company. Details of this were provided in the consultation documents at paragraph 5.19 onwards. I hope that my noble friend also will not press his amendment.
I thank all noble Lords who have taken part in the debate and the Minister for the spirit in which he approached his reply. We are perhaps not very far apart.
The noble Lord repeated what is contained in other documents and other communications—that the “no creditor worse off” regulations and the code of practice somehow contribute to the certainty required in this area—but the clear opinion of the lawyers dealing with this is that neither the code of practice nor the “no creditor worse off” regulations will contribute one jot to legal certainty and therefore are not part of the framework necessary to create it. We need clean legal opinions for all kinds of reasons, including regulatory capital. Unless we can get clean legal opinions which rest on legal certainty, we will not make progress in this area.
It is most disappointing that the Government are not prepared to back their clear statement in the consultation document that they have no intention of upsetting anything that is necessary for regulatory capital purposes. They are not prepared to reflect that clear commitment in legislation, which is what my amendment seeks to do—although not necessarily in very good words—and I urge them to think again.
I will quote from an organisation with which we have been in touch—I thought that we would be debating this amendment last week and took a briefing in the afternoon. The organisation said:
“As matters stand, there remains significant doubt about whether the Government have appreciated fully the potential consequence of their proposals and as a result, there remains”—
this is in the banking community—
“considerable unease over the possibility that an inability to attract clean legal opinions in support of longstanding setoff and netting arrangements may significantly impact regulatory capital and the underlying economics of completing transactions within the UK. This in itself could significantly impact liquidity and place further constraints on the ability of banks to lend”.
This is something that we will discuss later this afternoon, and is not something that we want to achieve. It is such an important area and it is a pity that we will have no discussions before Report, because the issue is still open on whether the Bill has enough in it to justify the reliance on secondary legislation that the Government want. It will be difficult to decide whether the Bill goes far enough and we can rely on that secondary legislation. If the Minister can communicate before Report with members of the Committee who have an interest in this matter, that will help a more efficient process at Report stage.
If the noble Baroness will give way, I would be delighted to respond positively. The issue of legal certainty is clearly an important test that we strive to pass. The representation that the noble Baroness read was also reflected in at least one response to the consultation document. My officials advise me that we are making good progress. We have found the responses to the consultation helpful, and we think that the gap is narrowing. I am as committed as the noble Baroness is to achieving the right outcome, so we will ensure an appropriate arrangement to inform the noble Baroness and other noble Lords interested in this matter on progress.
I, too, had believed that we would get to this amendment last week. However, the noble Baroness will recognise that these are important amendments and it is critical that we spend time on them, while also recognising that we have a great deal more work to do in Committee. I invite the noble Baroness, and my noble friend, to withdraw their amendments.
I, too, welcome the Minister’s commitment to discussion on these matters prior to Report. By the time that we get to Report, things may have moved on too far. I understand that we are working to a strict timetable, but such discussions would probably facilitate the timetable rather than inhibit it.
In his comments on my amendment, the noble Lord said, somewhat to my surprise, that it would prevent partial transfers. I did not think it was as prescriptive as that. However, I have been searching for a suitable verb to reduce that probability. Maybe “shall not undermine” does not work. However, a suitable verb in the clause would facilitate an improvement in legal certainty. I am grateful to the Minister for his comments and for his consideration of these matters.
Amendment 79 not moved.
79A: Clause 47, page 23, line 5, leave out “to transfers generally or”
Before seeking to achieve certainty and the removal of a degree of flexibility with this amendment, I want to draw attention to the complexity of partial transfers, which is the matter under consideration. Orders as envisaged by Clause 47 are needed only because there is the possibility of partial transfers. Paragraph 1.14 of the special resolution regime is relevant to assessing whether you can make a general order. It says that the property transfer powers provide the authorities with the flexibility to split a bank. This option would most likely be used for the purposes of transferring the good part of a failing bank’s business into a new company, either as private sector purchaser or a bridge bank. In either case a residual bank, a “resco”, would be left behind, containing any untransferred assets and liabilities.
The following paragraph then quotes Bradford & Bingley, but I do not think paragraph 1.14 applies to that company. The case of Bradford & Bingley was much more like a temporary transfer into public ownership, not a transfer into a bridge bank. There was a private sector purchaser that purchased the good assets while the bad assets, or the less good assets, were brought into public ownership, whereas in the case of a bridge bank my understanding is that it would be the other way around—that is to say, the good assets would be put into the bridge bank while the bad assets, or the less good assets, would be left behind. The justification for turning the policy around from the one that was pursued with Bradford & Bingley is in the following paragraph: it would be less expensive for the funders of the resolution, the taxpayer, and, under proposals in the Bill, the FSCS.
In considering orders under this clause, it is important to understand whether the Government are committed to this different policy—indeed, as I see it, this reverse of the Bradford & Bingley policy—of taking the good assets into a bridge bank and leaving the bad assets in the existing, now residual, bank. That leads to a second question, as it leaves the shareholders with the task of dealing with the bad assets as there is no transfer of shares into a bridge bank, while the bridge bank, in the ownership of the Bank of England, has the good assets. In my submission, that brings greater complexity, and it is by no means certain that the costs will be lower; in fact, it is highly likely that the costs might eventually turn out to be higher. If and when you split a bank, although the Minister sought to reassure me earlier, I do not see how you can ever tell whether the shareholders in the residual bank will be better or worse off than they would have been had the bank been left whole. I do not understand how anyone could be sure what the outcome would have been if the bank had not been split, and therefore how you know whether people are worse off as a result.
I would like to be assured that the Bank of England has argued for this approach of taking the good assets into a bridge bank and leaving the less good ones behind. If it has so argued, what arguments has it put forward? I cannot believe that these would have rested on the expression “less expensive”. If it is decided to proceed with partial transfers, is there anything which could be called “general” about the order? I have sought to leave out the words which envisage the possibility of a general instrument. Indeed, the draft instrument, which is in the papers before us, looks quite specific. It will be an additional reassurance in the difficult area of legal certainty if the orders under partial transfer—if indeed they go ahead—are made specific and not left open to the possibility of also being general. I beg to move.
I once saw on television an advertisement for an organisation called confused.com. I am not sure whether I ought to apply to it. I do not wish to delay the Committee, but can the Minister give me a simple explanation of this point? As I understand it, it is the Government who will be making partial property transfer orders. I am not clear on why they feel as though they might also need to make an order restricting the making of partial property orders. No doubt there is a simple explanation.
The Minister said earlier that he thought—indeed, that he was convinced—that the matters dealt with in this complicated part of the Bill were best dealt with by statutory instruments. Of course, the long-standing traditional argument against that is that they are not amendable. Is there any reason, other than urgency, why the Minister thinks that we ought to have this done by statutory instrument, rather than by part of the Bill at a later stage in our proceedings?
I am grateful to both noble Lords who have contributed to this short debate. I will do my best to answer the specific questions involved. The noble Viscount, Lord Eccles, raises some fundamental points with regard to the Government’s intentions for these provisions and explains why he wants his amendment considered sympathetically. Clause 47 provides the authorities with the means to place restrictions on the nature of partial transfers that they may effect through the use of the property transfer powers provided by this part of the Bill. The making of the restrictions has the potential to provide bank stakeholders with greater certainty about how the property transfer powers will be used to effect partial transfers. As was clear from the previous debate, we are all concerned about certainty and clarity in what all who have considered them recognise are complex and difficult issues.
To this end, the Government have recently consulted on what secondary legislation should be made under Clause 47. At this stage we are proposing that the power should be used to place restrictions on reverse property transfers. This restriction is designed to provide certainty to creditors transferred to a bridge bank that they will not be moved back to the residual bank. Consultation on this, and indeed a wide range of matters relating to partial transfer safeguards, is of course ongoing. As my noble friend indicated in the previous debate, we have consultations which are still to be concluded. We will keep the House fully informed of such developments, certainly in the context of our further consideration of the Bill on Report.
The problem that we have with the amendment in the name of the noble Viscount, Lord Eccles, is that it would remove the power for the Treasury to make orders on restrictions which apply to all partial transfers. In essence, the amendment would not allow the Government to make general restrictions on all partial transfers. It would allow us to make restrictions only to individual types of partial transfer.
We believe that the power to make a wider range of different types of restriction is useful and ultimately beneficial to the market. Given the nature of the powers, stakeholder interest and the technical complexity of the issue, the Government consider it appropriate to take a power in the Bill to provide for restrictions to be made as the authorities deem appropriate. In particular, it should be noted that these powers can be used only to restrict—not, I hasten to add, broaden—the nature of the partial transfers which can be made.
I remind the Committee that the special resolution regime is a new legislative proposal. Experience may show that partial transfers should be more or less restricted than initially thought, to respond to continuing market reaction to these powers, or to the authorities’ developing practical expertise in resolving banks in difficulty. At the very least, the nature of the restrictions will need to be updated in line with innovation in the financial markets. Given this position, which I am sure commands the understanding of the Committee, we believe that the clause as drafted is ultimately helpful to stakeholders in allowing different forms of restrictions on the use of partial transfers.
However, the noble Viscount raised one or two issues. He is absolutely right, of course, that the resolution of the Bradford & Bingley problem was different from the situations provided for in the Bill. That resolution was conducted under a different Act which is due to expire in the very near future. That Act does not contain the powers for a bridge bank tool, which is provided for in the Bill and which I am sure commands considerable support. The reference to Bradford & Bingley was included to demonstrate the benefit of a partial transfer approach in general terms. The industry supported the way in which the Bradford & Bingley issue was resolved.
I was asked whether the Bank of England agrees with partial transfers. The answer is yes. All the authorities, especially the Bank of England, support the need for partial transfers. All agree that we need the flexibility best to meet the special resolution regime objectives. The benefits include increasing the chance of a private sector purchase, which is the objective of this part of the special resolution regime, particularly if it wanted to purchase only part of any such property. I was also asked by the noble Viscount whether partial transfers did not mean that costs were necessarily lower. Partial transfers offer the opportunity to leave bad assets behind—I think that he conceded that point—to enable them to be wound up in an orderly manner. This may well be fully in line with the SRR objectives, including, not least, the protection of public funds.
The noble Lord, Lord Higgins, pointed out a difficulty with statutory instruments, which I recognise; namely, that they are not amendable. However, we need the ability to update these safeguards as market practice develops. The Committee will recognise that we have provided for expert advice to be offered to the Government. Inevitably, we are faced—no one can foresee a future different from the past in one respect—with the increased rapidity of change and fluctuations in market activity and market practice. We need a flexibility that primary legislation can never convey. That is why we feel the need in this area to indicate that we will be using secondary legislation.
It is also the case, as my noble friend indicated earlier, that we still have refinements and developments to make on the nature of secondary legislation, on which we are in active consultation. We will make the position as clear as we can as the Bill progresses through the House. I hope that the noble Viscount will feel that I have given him a reply that explains why his amendment would be restrictive; more restrictive than we want the legislation to be. Therefore, I hope that he will feel able to withdraw the amendment.
I am sorry to come back on this, but I still have not understood this rather simple point. As I understand it, the Government would make a property transfer instrument, and presumably they determine the terms of that instrument. Subsequently, apparently, they make an order that restricts the terms of that instrument. Is this simply in case they have second thoughts? Why is it not all done in the initial instrument?
We are seeking to be flexible; I hope that the noble Lord will recognise that we are seeking to be flexible in a direction that ought to command the support of the Committee. After all, we are talking about the nature of restriction. The noble Lord is right. Are we making provision against the eventuality that we might need to effect legislative change quite rapidly, which we could not possibly do through primary legislation and, therefore, which would involve a need to change a statutory instrument? We are seeking legal certainty for the market. The market can look at the legislation and know what cannot be transferred under a partial transfer. It is of the greatest importance that the market should recognise that. The noble Lord, Lord Higgins, will appreciate that where the Government think that they might have to think again it is always against the parameter of moving towards reducing restrictions. I hope that the noble Lord will accept that, in that respect, the Government are seeking to respond to a changing market in a positive way, with the overall objective of trying to give legal certainty in an area that we all recognise is complex, difficult and potentially rapidly changing.
I thank my noble friend Lord Higgins and I thank the Minister for his explanation. I assure the Committee that I am not looking to make trouble, as it were. I am looking to see how there could be more certainty. Market certainty is not just legal certainty; it is broader than that. I remain puzzled as to why, if the subsection read, “An order may apply to transfers of a specified kind, or made or applying in specified circumstances”, that would not in fact be quite adequate for the purpose of restriction under the system of partial transfers.
While thinking not only about my amendment but about the whole discussion of partial transfers, I should like to ask the Minister whether there could possibly be—one would hope that there never could be—a restriction made in an order that said that only good assets were to be transferred in a partial transfer? It seems to me that there will be circumstances in which, first, it will be very difficult to know how to make a split between the good and the less good and, secondly, in which it would be sensible to take a mix of assets and not simply to look for the good ones.
I understand the noble Viscount’s point. I hesitate to be too specific. The Committee will appreciate and he will recognise that we are talking about these issues of restrictions in terms of the constraints on them. We are working with the grain of his argument. Perhaps the noble Viscount will allow me to respond directly in writing to his question. Otherwise I trust that the broad tenor of the Government’s thinking is sufficiently acceptable for him to withdraw his amendment.
Amendment 79A withdrawn.
Amendment 80 not moved.
Clause 47 agreed.
Clause 48 : Power to protect certain interests
81: Clause 48, page 23, line 14, leave out paragaphs (a) to (c) and insert—
“(a) “security interest” means any legal or equitable interest of any right in security (but not a title transfer collateral arrangement) created or otherwise arising by way of security including a charge, mortgage, pledge or lien and including, in relation to Scotland, a heritable security,(b) “set-off or netting arrangement” is an agreement or arrangement between two or more parties under which Obligation 1 can be set off or netted against Obligation 2 to discharge or reduce the amount of Obligation 2 or different claims or obligations can be converted into a single net claim or obligation (incuding under a close-out netting provision or a title transfer collateral arrangement), whether by contract, operation of law or otherwise, whether on a bilateral or multilateral basis and whether through the interposition of a clearing house central counterparty, settlement agent or otherwise,(c) “set off” includes, in relation to Scotland, compensation, retention and/or balancing of accounts, as the case may require,(d) “close-out netting provision” means a term of an arrangement, or any legislative provision under which on the occurrence of a specified event, whether through the operation of netting or set-off or otherwise—(i) the obligations of the parties are accelerated to become immediately due and expressed as an obligation to pay an amount representing the original obligation’s estimated current value or replacement cost, or are terminated and replaced by an obligation to pay such an amount; or(ii) an account is taken of what is due from each party to the other in respect of such obligations and a net sum equal to the balance of the account is payable by the party from whom the larger amount is due to the other party;(e) “title transfer collateral arrangement” means an agreement or arrangement, including a repurchase agreement, evidenced in writing, where—(i) the purpose of the agreement or arrangement is to secure or otherwise cover obligations owed to the collateral-taker;(ii) the collateral-provider transfers legal and beneficial ownership in collateral to a collateral-taker on terms that when the relevant obligations are discharged the collateral-taker must transfer legal and beneficial ownership of the same or equivalent collateral to the collateral-provider.”
Amendments 81 and 95 amend Clause 48 by rewriting the definition paragraphs for security interests, set-off netting and similar arrangements. The amendment was drafted by the City of London Law Society in conjunction with the Scottish Law Society, so I claim absolutely no credit for it. I have a detailed technical note of explanation which the City of London Law Society prepared, but I am aware that it has been available to other noble Lords, it is available publicly, and that the Treasury will have received it. Therefore, in order not to delay the Committee I had not proposed to read it out.
These amendments have the backing of banking representative groups such as the BBA and LIBA, and are supported by several large banks with which we have been in contact. I also understand that the amendment has been discussed with the Treasury and others in the expert liaison group. The Government have tabled their own amendments in this group, which cover some of the same ground and to which the Minister will speak. I should say, in the expectation that he will resist my amendments, that we will accept the government amendments, but it is not the end of the story.
I am sure that the Minister is aware that the banks and lawyers who have been engaged with this issue, while welcoming the moves that the Government have made with their amendments, are not convinced that the government amendments go far enough. The City of London Law Society recently submitted further comments to the Treasury. In particular, I understand that there is a desire to see the wording in Clause 48 made to conform to definitions used in regulation 3 of the Financial Collateral Arrangements (No. 2) Regulations 2003 and regulation 2 of the Financial Markets and Insolvency (Settlement Finality) Regulations 1999.
These are not mere technical issues of drafting preference. An eminent lawyer with whom I was in contact last week said that they are of considerable practical and legal importance in achieving the necessary level of certainty and confidence in the financial markets. Therefore, I anticipate that this is not the end of the story and that we will almost certainly need to return to this issue on Report. In the mean time, I hope that the Government will accept the importance of having legally watertight definitions of these terms in the Bill, because that will drive what is to be covered by the regulations made under the clause. I hope that the Minister will respond by stating the position as the Government now see it.
Will the Minister address specifically the issues relating to Scottish law? There are some specific Scottish words in my amendment, and another issue has arisen since I tabled it on whether there needs to be a reference to trusts used in Scotland as an alternative to contracts, because Scots law does not accommodate equitable transfers. Do the Government accept that something is needed in Clause 48 to reflect the Scots law dimension? I assure him that his answer will be read with interest north of the border. I beg to move.
I should point out that if this amendment is agreed to, I cannot call Amendments 82 to 87.
I wish to speak to Amendment 85, which is based on my great concern, from experience, of the confusion that arises in any offset arrangement at the closing out of a business. The clause completely underestimates the extent of the hazard which is initiated and which causes untold suffering and confusion to all parties in trying to bring about a satisfactory resolution of any transfer of a bank’s ownership in these circumstances. The Insolvency Act 1986 is extremely explicit on the rules governing offset. It has become a matter of custom and practice and is very well policed and overseen by the insolvency practitioner profession, which, to my knowledge, has produced no great dissent during its 23 years of life.
I invite the Minister to consider an actual case in which I was involved. You have to bear in mind that on the day that you close out a huge transaction such as this, a lot of people will rush to complete transactions against the clock. Let us suppose that on the morning of the day when you are going to close the whole deal, you receive a transfer of half a billion pounds’ worth of funds from America, representing a combination of consideration and debt repayment for a subsidiary of a company that banks with the bank with which you are dealing. To whom does that half billion belong in the hours leading up to and through the completion process? There are at least half a dozen applicants for the ownership of that money. If the Government now try to introduce a provision that effectively gives them the right to direct where that half billion goes, they will spend the rest of their natural life in litigation.
The situation is complex. First, the assumption is that the company being sold is owned by a company which banks with a syndicate of banks, because all these loans are syndicated. Some £200 million of the £500 million is due to be the consideration, but when, only two hours away from the company being sold or restructured, the banks get the half billion pounds, they will try to imply that the whole amount belongs to them to divide according to whatever ratio they represent in sharing the overall debt of the company to the banks. That immediately opens up the possibility of a challenge by the shareholding owners of the company that has effectively sold the company in question, and beyond that is the question of who provided the funding to the company. Perhaps it was a subsidiary owned in America—which is what happened in my case—with £300 million of debt to the American subsidiary. What about the American banks? Would they not have a claim? They would have lawyers queuing up to have a go on that one.
The whole situation is so complex that it seems the only safe way for the Government to deal with it is to knock out paragraph (c) in order to allow the Insolvency Act 1986 to continue to rule. It has never let us down yet and it will guide us with accuracy through any challenge that may come. The Government have a hard enough task already; they should not make it go from the difficult to the impossible.
Perhaps I may raise a very small point on Amendment 82 and seek some enlightenment from the Minister. Amendment 82 would amend the clause to read that “security interests” means “arrangements under which one person acquires by way of security an actual or contingent interest in the property of another”. The amendment seeks to introduce into the clause the phrase “by way of security”. Does that mean by way of the exercise of security or does it mean, as I think it probably does, by way of the taking as security for a liability of an interest in the property? I am sure that the noble Lord will have no difficulty in putting me right on that.
We have covered the general purposes clause so I shall start by addressing the questions of the noble Baroness, Lady Noakes, and by presenting the Government’s amendments. I thank her for the constructive way in which she has introduced the amendments in her name, and her indication that she intends not to press them to a vote but rather to seek a better explanation and to help shape and influence our thinking as we approach Report. I am confident that we have interests in common and that all parties are committed to seeking the best possible wording.
As I have noted, Clause 48 provides a broad definition of the interests to be protected. This is intentional and ensures that the secondary legislation to be made under the power is not restricted by the technical definitions in the clause. Further detailed technical provision will be unsuitable for primary legislation. In short, this ensures that a broad range of interests can be included within the scope of the safeguard power and seeks to ensure that the safeguard power remains sufficiently adaptable to accommodate innovation in the financial markets.
The Government have received a number of representations from industry bodies and practitioners in relation to the definitions used in this clause. While I emphasise that Clause 48 is an enabling power, so is not the legislation which provides the actual protection, the Government consider it appropriate to amend the definitions to eliminate any outstanding doubt about the types of interests the clause is designed to protect. In broad terms, the amendments do two things. First, they separate the definition of security interests from title-transfer arrangements. Although the economic effect of the two types of arrangements may be either the same or similar, there are significant legal distinctions between the two. For example, a title-transfer security arrangement involves the outright transfer of ownership of the property in question from one party to another. This is not normally the case with security interests, which typically involve the acquisition by a creditor of a right in property which remains owned by the debtor. As a result, the Government consider it desirable to remove the definition of title-transfer arrangements from the definition of security arrangements and to define it separately. Secondly, the Government’s amendments make clear that the power does not treat set-off and netting as synonymous concepts. Although netting arrangements sometimes use set-off, netting can also be achieved through other methodology legally distinct and separate from set-off.
The Government’s intention in bringing forward Clause 48 is not to change the existing legal concepts of security interests, set-off and netting arrangements and title-transfer security arrangements. Rather, the purpose of Clause 48 is to enable protection to be provided for these interests in the context of partial transfers under the special resolution regime, while allowing scope for the enabling power to address changes to these concepts as industry usage continues to develop and innovate. Some may say we have had a bit too much innovation in banking in recent years, but the industry will continue to innovate to meet the needs of its customers and we must be careful that we do not inhibit the benefits that can arise from innovation.
I believe our intention is made absolutely clear by the provision of Clause 48 which indicates that these definitions only apply for the purpose of this section. It is hoped, however, that the amendments in my name usefully clarify the intentions of the Government in view of the helpful representations that have been made by interested parties. I hope that the government amendments will be accepted.
It is my understanding that opposition Amendments 81 and 95 would have a similar effect to the government amendments tabled in relation to this clause. Indeed, the noble Baroness, Lady Noakes, indicated that that was the case. These amendments would make technical changes to the definitions used in Clause 48. In particular, they relate to the definitions of “security interests”, “set-off”, “netting” and “netting arrangements”.
While the Government agree with the broad purpose of the amendments, they consider that the amendments tabled in my name offer a more appropriate solution. Noble Lords may find it useful if I explain why the government amendments differ slightly from those proposed by the noble Baroness. In broad terms, the difference is one of level of detail.
I start by noting that Clause 48 does not provide the actual safeguard. It is, as I said, an enabling power, providing the Treasury with the power to make appropriate safeguarding secondary legislation. There is a risk that, in seeking greater detail in the clause and in using technical terminology, the opposition amendments may unduly narrow the scope of the enabling power.
Perhaps it would help if I gave an example of this. The opposition amendments would introduce terminology relating to the law of England and Wales, and Scotland, into the definition of security interests. The Government, by contrast, think it preferable to describe security interests in the generic terms alluded to in my introductory remarks. This approach ensures that the potential scope of protection of Clause 48 can include English security interests, but also security interests granted under other legal systems. The use of domestic terminology in the amendment may imply—an unintended consequence, I am sure, but one that illustrates my wider point—an intention to exclude foreign law security interests from the security interests that may be protected under Clause 48.
The noble Baroness, Lady Noakes, asked about Scottish law. There is, of course, considerable interest in this Bill in Scotland, as elsewhere in the United Kingdom. The benefit of using broad and generic terms in the clause is that that enables the broadest range of interests to be protected, including those under Scottish and, indeed, foreign law regimes. Greater precision can, if necessary, be used in the order made under the clause. We are aware of the issue with Scottish trust law and are considering it further, but we are grateful to the noble Baroness for raising it in debate. We will certainly introduce further amendments if that proves necessary to address the particular requirements of Scottish trust law.
In reciprocity to the constructive way in which the noble Baroness has presented these amendments, I would be more than happy to offer a meeting between industry lawyers, including those to whom she referred, Treasury legal advisers and parliamentary counsel to discuss Clause 48, if that were considered helpful. These are highly technical provisions and I think that all noble Lords are agreed that it is important that we get them right. I hope that the noble Baroness accepts this explanation and remains of the view that she need not press Amendments 81 and 95 but can support instead the government amendments brought forward in relation to this clause.
The paragraph that Amendment 85 would omit makes it clear that netting arrangements include what is known commercially as “close-out netting”. This is an important type of netting arrangement. Following a trigger event, a party under a close-out netting arrangement is entitled to close out all outstanding contracts subject to the netting arrangement, calculate a sum—for example, related to profit or loss—in respect of each and then work out a net sum either owed or owing.
One of the principal characteristics of close-out netting is that it permits netting in respect of contracts that have not fully run their course—for example, where both parties have not yet finished performing their obligations under the contract and no actual debt is owed or owing at the time of the trigger event. That is why the definition refers to theoretical debts. That form of netting is important. For example, it is used in the master agreements of the International Swaps and Derivatives Association. The omission of that definition would suggest that Clause 48 was not intended to be capable of being used to protect that form of netting.
The noble Lord, Lord James, asked a series of complicated questions about a theoretical example. I am aware that what I say at the Dispatch Box can be relied on by the courts as indicating the Government's thinking. It would be unwise for me to seek to address at the Dispatch Box the technical questions that he raised. Instead I offer to address them, if I can, in writing, so that he can have the benefit of that explanation and the words that I used immediately prior to my statement to reach a conclusion on whether he wants to table his amendment again on Report. On that basis, I invite him not to move his amendment.
I greatly appreciate that information. When drafting that response, will the noble Lord bear in mind that my great concern is that the Government should not create a two-structure law society where the Government have control of the law in one way through the Bill but the Insolvency Act 1986 dictates a different set of standards for everyone else?
I will certainly ensure that that is taken into account. I respect the fact that the noble Lord is probably the world's greatest living expert on the Insolvency Act 1986, and I shall approach the drafting of my response to his question with considerable care and some trepidation.
Does experience arising from Northern Rock, which has now had a certain run, and with Bradford & Bingley, with a much shorter run, throw some light on the need to make the Bill so much more complicated than the Northern Rock Act, which relied on itself and the existing body of legislation? As the Minister just reminded us, the clause is an enabling clause allowing powers to be used but only when they are needed and by secondary legislation. My question, which relates to the argument made by my noble friend Lord James, is: are we absolutely sure that we need all this additional law in the light of experience to date with failing banks?
I suggest to the noble Viscount, Lord Eccles, whose considerable knowledge relating to mortgage lending and whose interest in the matter I acknowledge, that the circumstances in which a bank may be placed into a special resolution regime are multiple. We must seek to ensure that we have as many options open to us as necessary successfully to address that situation.
The Bill provides a permanent framework to deal with banks in difficulties, building on and refining the temporary tools introduced by the Banking (Special Provisions) Act, to which my noble friend Lord Davies of Oldham referred a few moments ago. In preparing the permanent replacement to that special provisions Act, the Government have sought to refine and develop its provisions. That has followed extensive consultation with interested stakeholders, including the tripartite authorities.
The special resolution regime provides a clear framework for the exercise of these powers, including clearly stated objectives, conditions for entry into the special resolution regime and a code of practice providing further guidance to the authorities in exercising these powers. The SRR includes new tools to deal with failing banks, including the bridge bank, two new insolvency procedures—the bank insolvency procedure for fast pay-out to depositors and the bank administration procedure to make partial transfers effective. We will come to these procedures later. The essence of the Bill is to anticipate the possibilities and to ensure that we have the necessary response mechanisms available to us in order to achieve outcomes consistent with the Bill’s objectives.
I thank all the noble Lords who have taken part. In respect of the intervention made by my noble friend Lord Eccles, we accept that this Bill has a much more sophisticated approach than the 2008 Act. It specifically allows for a bridge bank, which is where we start to get into partial transfers. My party urged that bridge bank facility from the outset, so we support the concept; it is the practical application of it that is causing the difficulty.
I am glad we have a shared interest in getting this right. The issue is going to be whose drafting is better to achieve the purpose that we are settled upon. The Minister kindly invited me to be thrown to the wolves. That could describe a meeting of Treasury lawyers and City lawyers. As far as I am concerned, the most useful way forward is that the Treasury talks to the banking community. If the banking community remains concerned, then I must raise those concerns with the Minister. I do not believe that there is anything that I personally can add to the resolution, but I think it is very important that, as a matter of urgency, those discussions are continued.
The Government are saying they want something as broad as possible and the lawyers in the City are saying they want something that adequately describes the sorts of documents that they deal with every day of the week and uses that language. The Minister did not respond to the point that the City of London Law Society is particularly concerned about, which is conforming the wording to the Financial Collateral Arrangements Regulations and the Financial Markets and Insolvencies (Settlement Finality) Regulations. If there is any ambiguity about whether they are fully covered, that would cause problems. So I hope the Minister will instruct his officials to look at that aspect. He did not mention it when he responded. That is an addition to the issue of whether it involves broad language or narrow language. Whether we can do a positive read-across to European legislation is also very important.
I thought I had answered the query that the noble Lord, Lord Stewartby, raised. From recollection, the noble Lord gave two possibilities and I believe it was the second of the two possibilities, but I apologise if I cannot remember with complete clarity which they were. The noble Lord obviously remembers and I will be delighted to rely on his clear recollection.
Let me also say that I will absolutely make sure that the point made by the noble Baroness about conformity of language receives careful and serious consideration.
Amendment 81 withdrawn.
Amendments 82 to 84
82: Clause 48, page 23, line 15, after “acquires” insert “, by way of security,”
83: Clause 48, page 23, leave out lines 16 and 17 and insert—
“(aa) “title transfer collateral arrangements” are arrangements under which Person 1 transfers assets to Person 2 on terms providing for Person 2 to transfer those or other assets if specified obligations are discharged,”
84: Clause 48, page 23, line 18, leave out “or “netting””
Amendments 82 to 84 agreed.
Amendment 85 not moved.
Amendments 86 and 87
86: Clause 48, page 23, line 20, leave out “includes,” and insert “are arrangements under which a number of claims or obligations can be converted into a net claim or obligation and include,”
87: Clause 48, page 23, line 23, at end insert—
“or to be converted into a net debt, and (d) “protected arrangements” means security interests, title transfer collateral arrangements, set-off arrangements and netting arrangements.”
Amendments 86 and 87 agreed.
88: Clause 48, page 23, line 24, leave out “may” and insert “shall”
I shall also speak to Amendment 92. These are probing amendments to explore the consequences of no statutory instrument being made under Clause 48 or of such an instrument being delayed.
Under Clause 48, it is left to the Treasury’s discretion as to whether the Treasury makes an order that restricts the partial property transfers to deal with the problems of set-off and so on. In another place, the Minister undertook to discuss with his officials whether this formulation should be mandatory, especially in view of the huge importance attached to it in the financial community. I could find no trace of that being discussed further, which is probably not surprising as the Report stage in another place was very truncated: hence I have tabled a conventional “may”-to-“shall” amendment—Amendment 88—to tease this out further.
There is considerable unease among the banks about there being any delay between the Act and the related statutory instrument coming into force. This is on top of the concerns about the content of the instrument, which we have already debated. The concerns relate more to the paragraph 2.16 commitment in the November White Paper to protect contracts relevant for regulatory capital, which we debated in our discussion on an earlier amendment, and to the fact that, if there is no certainty about an acceptable statutory instrument being available immediately after Royal Assent, there will be a period of great uncertainty for banks and their customers. I have already mentioned today that it is understood that some banks are already devoting considerable time and effort to planning the unwinding of positions in case adequate legal certainty is not available. This could involve considerable cost and could, in extremis, push international banks towards relocating their operations outside the UK.
My Amendment 92 is an attempt to deal with this uncertainty. It says:
“Until an order has been made under this section a partial property transfer shall have no effect on security interests, set-off or netting arrangements”.
That is, those arrangements cannot be unpicked by a partial transfer unless a statutory instrument under Clause 48 is already in place, setting out how they are to be dealt with.
I do not pretend that the wording of the amendment is ideal, but we need to find a way of giving certainty to the banking community. The Government will say that they will use the accelerated statutory instrument procedure set out in Clause 249, which we will come to if we ever get to that clause. However, that does not mean that a satisfactory statutory instrument will be produced and it does not guarantee that a period of uncertainty will be avoided. We need to find a solution in the Bill to this problem. I beg to move.
I am grateful to the noble Baroness for introducing her two amendments. As she rightly said, the first amendment was tabled in Committee in the other place, and the Economic Secretary undertook at that stage to consider the point that it raises. There has been considerable consideration of the issue, and the Government were not unaware that the matter might be raised when the Bill came before your Lordships’ House. Once this point had been identified in the other place, we gave considerable thought to it, but we do not think that a change to the drafting is appropriate.
Clause 48(2) provides for a range of things to which the safeguarding order may relate. Indeed, there are four paragraphs to the subsection, and it may turn out that one of them is not used in any order that is made. Clause 46, inevitably, is drawn in broad terms so as not to constrain the degree and nature of protection that may be provided by the secondary legislation that may be made under it. I emphasise the Government’s commitment to making this secondary legislation and to providing the adequate protection that it will contain. I hope that the consultation document makes clear intent with regard to the safeguards that the draft orders need to embrace.
The Government’s continued work with the expert liaison group provides further evidence of our determination to provide accurate secondary legislation under what is recognised in the clause to be an enabling power. We of course agree with the noble Baroness that the secondary legislation is of great import. I hope that she agrees that we are approaching this with the greatest seriousness and the fullest consultation on how we intend to proceed.
Amendment 92 relates to what may happen until an order is made under Clause 48 and is in place. It is the Government’s clear intention to have these safeguards in secondary legislation in place at the same time as the relevant property transfer powers in the Bill come into force. The provisions of the secondary legislation will be coterminous with the activation of the property transfer powers of the Bill.
The consultation period on the document providing draft safeguards has just finished and the Government are working with the expert liaison group to finalise the order. On the procedure for ensuring that the orders are in place in time, I remind the Chamber that the Bill was amended in the other place to ensure that these essential pieces of secondary legislation can, if necessary, be put in place at short notice.
The noble Baroness referred to Clause 249; she looks forward to reaching it as enthusiastically as I do. It provides that these instruments are put in place via the 28-day affirmative procedure instead of the draft affirmative procedure; in other words, they become immediately valid and implementable unless they are withdrawn by resolution of Parliament within the 28-day period. This applies only to the first time that the powers are exercised.
I hope that it is clear that the secondary legislation will be put in place at the time that the provisions to which they relate come into force. The noble Baroness will appreciate that we have thought long and hard about this issue since the point was raised in the other place. I hope she will consider that she has had sufficient reassurance to withdraw her amendments.
I thank the Minister for that reply. I understand the Government’s rationale in respect of “may” or “shall” in my Amendment 88, in the particular in relation to the way in which Clause 48(2) is drafted. I see that that my amendment is not appropriate there.
The Government ought not to object to my Amendment 92. If they are in earnest about getting the statutory instrument out coterminously with Royal Assent, no problem would arise. If for some reason the statutory instrument were delayed—there could be many reasons for that; for example, continuing discussions with the parties about it—my amendment would provide a failsafe mechanism which would otherwise not be necessary. It would apply only to deal with legal certainty in that period. I emphasise that a period of uncertainty because the statutory instrument is not in force could cause banks to unwind a whole series of transactions. That would be most unfortunate.
I regard Amendment 92 as something to be considered further between now and Report. That will depend partly on progress in producing a statutory instrument that is acceptable to all parties. If there is any doubt about that, I may wish to return to the issue. As I have said, legal uncertainty during what might be only a transitional period could be as damaging as legal uncertainty in the whole area. With those comments, I beg leave to withdraw the amendment.
Amendment 88 withdrawn.
Amendments 89 to 91
89: Clause 48, page 23, line 26, leave out “security interests or set-off or netting” and insert “protected”
90: Clause 48, page 23, line 29, leave out “security interests or set-off or netting” and insert “protected”
91: Clause 48, page 23, line 33, leave out “security interests or set-off or netting” and insert “protected”
Amendments 89 to 91 agreed.
Amendment 92 not moved.
Amendments 93 and 94
93: Clause 48, page 23, line 39, after first “to” insert “protected”
94: Clause 48, page 23, line 43, leave out “security interests or set-off or netting” and insert “protected”
Amendments 93 and 94 agreed.
Amendment 95 not moved.
Clause 48, as amended, agreed.
96: After Clause 48, insert the following new Clause—
“Report on partial property transfers
(1) The Treasury must prepare and publish an annual assessment of the efficacy of the safeguards relating to partial property transfers under Part 1 of this Act.
(2) In preparing each assessment the Treasury must consult the Banking Liaison Panel constituted under section 10.
(3) If an assessment indicates that the safeguards are inadequate, the Treasury must make proposals for strengthening them.
(4) Each assessment published under this section must be laid before Parliament.”
This amendment would insert a new clause after Clause 48 requiring a report or annual assessment to be made by the Treasury on partial property transfers. We have spent the past hour or so talking about these transfers and it is clear that important issues arise out of them in connection with set-off, netting and other similar transactions. Even if agreement is reached and harmony breaks out between the Treasury and the banks over the next few weeks over what the terms of the statutory instrument should be, we ought not to be in any doubt that this is difficult territory where people may not have worked out what is exactly the right answer. For example, the British Bankers’ Association is concerned that practical problems and unintended consequences may emerge which need to be dealt with. That is not to challenge the bona fides of the Treasury in conducting and responding to its consultation, but to state a fact of life about this hugely complicated area. The amendment therefore proposes an annual assessment which, although it may appear to be onerous, addresses such an important area that goes to the heart of whether or not transactions work for regulatory capital purposes, possibly actually destroying the market in the UK, that it needs to be set against the damage that could be done to our banking industry.
The amendment requires the Treasury to consult the Banking Liaison Panel, the group being brought together for the purpose of looking at secondary legislation, and, importantly, requires it to make proposals for dealing with any aspects that are regarded as unsatisfactory. We have of course included the requirement to publish the assessment and to lay it before Parliament to allow for an appropriate level of involvement should it so choose.
I hope that the Government will regard this amendment as a practical way forward. If it is accepted, it would take away some of the concerns about getting everything absolutely right either in Clauses 47 and 48 or in the first statutory instrument that will be made thereunder. At least the industry would be satisfied that there is a genuine intention on the part of the Government to keep this under positive review. I beg to move.
I support my noble friend’s amendment because it seems eminently sensible that the Treasury should prepare and publish an annual assessment of how good the safeguards relating to partial property transfers are, emphasising that if an assessment indicates that they are inadequate, it must make proposals to strengthen them.
Viscount Eccles: I cannot resist the thought that if such a provision is not included in the Bill, the Merits of Statutory Instruments Committee would find that this is exactly the sort of thing it would like to look at in its annual report. There is unlikely to be any more controversial secondary legislation than this.
The Government fully accept that it is crucial for the partial transfer safeguards to work effectively. That is the burden of this amendment, which calls for an annual report to assess their efficacy. We recognise that partial transfers might be invasive, and have made it a matter of the utmost priority that effective and appropriate safeguards are indeed in place. I hope that the extensive consultation carried out by the Government demonstrates our commitment to working with the industry to get those safeguards right—a key reason for establishing the expert liaison group. The Committee will know that the group is to be put on a statutory footing; the Government will, therefore, be bound to have regard to its recommendations.
Clause 10, which we considered some time ago, thus provides a mechanism for the Government to receive not annual but regular and expert feedback on what we should consider regarding these issues. Regular feedback is important, but we contend that it will be necessary to update the safeguards over time, with the feedback being crucial in indicating to the Government why they should be changed. That is the basis of the secondary legislation we are bringing forward under the Bill.
The Government consider it desirable to retain flexibility to adjust and refine the safeguards in the light of experience, particularly in the context of set-off and netting, because those arrangements have proved to be highly innovative and a challenging development. In particular, the latter has developed and evolved in a comparatively short time, illustrating that this legislation needs built-in flexibility to cope with a significantly changing environment.
Changes to the safeguard may be necessary to ensure that it continues to protect what it was intended to and that innovations do not undermine the policy aims that the special resolution regime is intended to serve. The expert liaison group will continue to advise the Government on the development of secondary legislation related to the partial transfer safeguards, but the Government consider its remit to be wider than that. Clause 10 makes it clear that the group should advise on the secondary legislation in Parts 1 to 3 of the Bill, although, as I made clear in our earlier debate, use of the stabilisation powers and compensation provisions rightly fall outside the group’s remit. It is appropriate that the Government continue to consult with the industry over the broad range of secondary legislation made under the Bill—not just on the safeguards, important as they undoubtedly are given the focus of this amendment.
On the amendment itself, the formal reporting requirement is neither desirable nor necessary. What form of assessment may be made, or may be possible, might depend on whether any resolutions are carried out; the authorities have already committed to report on those resolutions in the draft code of practice. I agree with the noble Baroness when she emphasises that reviewing the safeguards is important, but the Government consider that to be done best through the mechanisms that we are putting in place, particularly the group. That is for two key reasons.
First, it may be necessary for evaluation and improvement to be undertaken more often than annually. The expert liaison group can meet on a number of occasions during the year, and report to the Government on those matters. Secondly, an assessment by market experts and industry practitioners is important. I note that the noble Baroness shares this view because a requirement for consultation with the expert liaison group forms a crucial part of her amendment.
As far as Parliament is concerned, any amendment to the secondary legislation in relation to safeguards will be subject to the draft affirmative procedure. Therefore Parliament will have an opportunity to scrutinise and debate the provisions of the safeguards. I hope the noble Baroness recognises that, through her amendment, she has pressed the Government on the nature of the reporting on these developments, which will take place much more frequently than annually, and that Parliament will also play its part with regard to the orders. Surely that is the basis on which the Government should act on what we propose in the Bill. I hope that the noble Baroness will feel able to withdraw her amendment.
At the risk of rehashing an earlier debate, it seems that under Clause 10 the panel can advise the Treasury but there is no necessity for the Treasury to take a blind bit of notice of its advice. Would it not be better and more useful for the assessment to be laid before Parliament? This would create more clarity on how the operation of the system is working.
The Treasury would act in a foolish way if it ignored what the expert liaison group offered to it, particularly as the group will be on a statutory basis, with clearly defined rights and powers, and there will be an obligation on the Government to consult with it and listen to it. However, the final position as far as Parliament is concerned is that the provisions of the safeguards will be scrutinised and debated when the affirmative orders are laid. We will have both a flexible and more frequent forum within which experts can express opinions to the Treasury about developments and necessities in the field, and Parliament will act properly in regard to the orders.
I thank my noble friend Lord Northbrook for his participation in the debate. I agree with him that it would be a good thing to have a public report on these issues, and I shall think about that before Report. In particular, I will think about the role that the Banking Liaison Panel can play in that and whether that is an adequate substitute, which I think is the burden of the Minister’s response.
That will take me back to the wording of Clause 10, which we discussed earlier when we talked about the remit of the Banking Liaison Panel. Clause 10 states:
“The Treasury shall make arrangements for a panel to advise the Treasury about the exercise of powers to make statutory instruments”.
Between now and Report, will the Minister consider whether the wording of the remit of the Banking Liaison Panel adequately reflects that the consultation will not only be about the exercise of powers but include the effect of existing statutory instruments after they have been drafted and have been through the normal processes? This will be a retrospective look at how they work and it may not be easy to reconcile that with consulting about the exercise of powers.
We raised earlier the need to reflect the more dynamic role that the Government are saying the Banking Liaison Panel should have but I am not sure that that is accurately reflected in the wording.
Amendment 96 withdrawn.
Clause 49 : Orders
97: Clause 49, page 24, line 26, at end insert—
“(5) The exercise of a third party compensation order will be based on the principle that the Treasury should indemnify counterparties for any loss suffered by them if their netting and close-out arrangements are undermined by the exercise of the stabilisation powers.
(6) After a stabilisation power is exercised with respect to a particular bank, counterparties should be allowed to close-out their own hedged and other positions with respect to that bank in order to determine their losses and to make a claim for compensation from the Treasury.”
The amendment attempts to come at this vexed question of netting and transfers, especially partial transfers, from a different direction; namely, that of compensation arrangements. These provisions would ensure suitable compensation for those who have netting or set-off contracts associated with a bank that is then the subject of a special resolution regime—compensating them for any losses that they may suffer as a result of the implementation of the special resolution regime. The idea is that, instead of dealing with the difficult issue of clean legal opinion, we say, “Okay, we might not be able to proceed in that direction, but we can provide a compensation regime that will provide comfort and cover some of the uncertainty with which we are struggling and that unfortunately we seem to have introduced while pursuing the laudable objective of developing the special resolution regime”. These two provisions deal with the problem through the compensation route. I beg to move.
The contribution of the noble Lord, Lord Eatwell, is interesting. One point raised by lawyers who have looked at this is that, if there was an indemnity, there would not be the need for legal certainty. This would be one way of dealing with the matter. I do not suppose for one moment that the Minister will accept that the Treasury should provide an indemnity for anyone affected by the Bill, but it is a good solution to the problems raised by those who will operate these policies in the City.
I have sympathy with the amendment proposed by the noble Lord, Lord Eatwell, not just for equity reasons, but because, if there is speculation that a bank might be taken into the special resolution regime, it is important that people do not close down positions in advance, thereby precipitating a need to take action. Is the Minister saying that it would be appropriate to compensate counterparties as if the alternative was that nothing had happened and that the bank had continued trading? Presumably in many cases, the Government are intervening only because the alternative would be that the bank goes into insolvency. Clearly, when a bank goes into insolvency, there are procedures by which counterparties can settle their claims legally. One would not want them to get more compensation from the Government than they would in the alternative situation. If one accepts this principle, is there a way of wording this that would require the Government to compensate counterparties only if they could make a case that they were put in a worse position by the Government’s action than they would have been by an insolvency action?
I am grateful to all noble Lords, but on this occasion I am most grateful to the noble Lord, Lord Blackwell, who has pointed out some obvious government reservations about the proposal and our anxiety about the extent of what the noble Baroness called for. I refer to the blanket indemnity that the Treasury would be expected to provide, in circumstances where a whole range of actions, including the speculation referred to by the noble Lord, might take place while these activities were going on.
I am grateful to my noble friend Lord Eatwell for his constructive approach to this issue. He referred to it as a vexed question. I know what he means: as an academic, he means that it is a challenging question for him and a vexed question for the Government. There is no doubt that it is a difficult area, which is why I am grateful for his proposals. We have been working closely with interested parties to ensure the appropriate protection for such arrangements and during those discussions interested parties have told us that the best way of ensuring legal certainty in the market on this matter is to protect set-off and netting requirements through a legislative restriction on disrupting those arrangements, which has been the Government’s approach to the Bill. That is why we are putting in place the secondary legislation that will give effect to the powers conferred by Clause 48, and I am confident that we can use this approach to allow the authorities sufficient flexibility to undertake partial transfers while assuaging market concerns regarding netting and set-off.
The powers that we exercise to provide a safeguard also allow the Treasury to set out the remedy for a breach of the safeguard. The authorities are currently consulting on the appropriate nature of that remedy and we are discussing that both with the expert liaison group and more widely in recognition of the challenges that this issue throws up. The formal consultation ended on 9 January and we are scrutinising the response before finalising policy in this area, which, as the Committee will recognise, is an area of developing policy. We intend that, as far as possible, we will be able to make all these issues clear before the Bill has received its final consideration in the House.
The order that will implement that policy will be subject to a debate in both Houses. As we mentioned on the previous amendment, the first exercise of these powers will be under the 28-day procedure, which will enable the safeguard for set-off and netting to come into force simultaneously with the commencement of provisions relating to the special resolution regime. Any changes made thereafter can be only through the draft affirmative procedure, so we are ensuring full parliamentary scrutiny of these developments.
The Bill already has in place arrangements for the assessment of compensation for third parties who suffer a compensatable interference in their property rights by way of the Third Party Compensation Scheme Order in Clause 59, a matter that I have no doubt will be the subject of considerable debate when we reach that point. Where a person suffers a compensatable interference in his property rights contrary to Article 1 of Protocol 1 of the European Convention on Human Rights, which provides that every person is entitled to the peaceful enjoyment of his possessions, provision for compensation must indeed be made. In accordance with that, the assessment of any compensation due must be conducted in accordance with the principles of fairness. The Government believe that the procedure for the determination of third party compensation—for example, through the appointment of an independent valuer—is compliant with the requirements of Article 1 of Protocol 1 and would provide adequate compensation for the purposes of Article 6. Further than that, the Government are seeking to protect all set-off and netting contracts, with the exception of specific carve-outs on which we are consulting.
We believe that this is the right approach to providing market confidence regarding partial transfers. I am grateful to my noble friend for raising the issue. It gives the Government the opportunity again to assert how important these issues are and how much we are bound with regard to compensation. However, I bear in mind the point made by the noble Lord, Lord Blackwell, that, in circumstances where significant actions can be taken in the market, the Government have to be circumspect about just how blanket their commitment to compensation would be. It is on that basis that the Government, having considered these matters, prefer the proposals in the Bill rather than the amendment that my noble friend has so helpfully proposed. I hope that he will feel able to withdraw it.
I am grateful to noble Lords who have taken part in this short debate. I am especially grateful to the Minister because he has provided me with the verb that I was searching for in Amendment 80. Noble Lords may remember that my problem was the wording “shall not undermine”. The Minister tells me that the Government’s objective is that a partial transfer “should not disrupt”. I will be very happy to move that amendment again on Report, worded in exactly the way that the Minister has so kindly suggested.
Turning to Amendment 97, I take the point made by the noble Lord, Lord Blackwell. He is absolutely right. The compensation should not be greater than that which would be encountered in insolvency. I recognise that this is a significant criticism of the amendments as I have tabled them. What the debate has made clear to me is that perhaps some of this compensation route is an appropriate way of dealing with this difficult problem. We need to look at the compensation route in alliance with the other ways that we are attempting to deal with it. Given that the Minister has said that those considerations will continue, and given, especially, his incredible generosity in correcting Amendment 80, which I will now introduce on Report in the Government’s own language, I beg leave to withdraw the amendment.
Amendment 79 withdrawn.
Clause 49 agreed.
Clauses 50 to 53 agreed.
Clause 54 : Independent valuer
98: Clause 54, page 26, line 2, at end insert—
“( ) An order must provide for the criteria against which a person is to be regarded as independent for the purposes of appointment as an independent valuer.”
Amendment 98 adds a new requirement for the independence of an independent valuer to be defined in an order. I had expected that the term “independent valuer” would be defined in some way in the Bill but could find nothing. Independence is of course a term of art, not science. It varies according to the context. It therefore may be difficult to define on an ex ante basis, but ought not to be difficult to define when coming to an individual order. What do the Government have in mind? Will it always be the case that the valuer is independent of the tripartite authorities; that is, the Bank of England, the Treasury and the FSA? Does the valuer have to be independent of any person who could benefit from a compensation order? In the case of widely held securities, how is that to be interpreted if the valuer is, say, a partnership or a company? Will the interests of the valuer’s partners or fellow directors, their spouses or other family members, be taken into account?
How rigorous will the Government be in establishing independence? Does the valuer have to be independent of the bank concerned, or the property or shares being valued, or does that apply to all commercial relationships that might have been entered into between the valuer and the bank or property at some point in the past? Is there a period over which it is to be calculated? Are there to be any de minimis limits? I hope the Minister will see that there is a case for an order being specific as to independence criteria. That would give some comfort to those who would be affected by an order, most notably the shareholders, but also others who are affected.
If the Minister will not accept my amendment, will he set out for the record how independence is to be established? It may even assist the Committee if the Minister sets out what rules for independence were set for the Northern Rock valuer and what is proposed for the Bradford & Bingley valuer, who I believe will be appointed in the near future. I beg to move.
I support my noble friend on this point. It is obviously very important that anyone acting as a valuer should be independent. It may be difficult to find such a person unless we are clear what the criteria are as some people may already have a history in these matters which those affected by a claim for compensation, or who are making a claim for compensation, might think ought to be taken into account. I am also not the least bit clear what the qualifications of such a valuer will be. Are they to be accountants, bankers, economists or whatever? Indeed, will a single individual be adequate to meet the point?
The other thing that strikes me—it is a simple point—is that the Treasury will appoint someone to appoint the valuer. So the question is not only whether the valuer will be independent but whether the person appointing the valuer will be independent, particularly as he will be appointed by the Treasury. Perhaps the noble Lord could reassure us on that point.
I am grateful to noble Lords who have spoken on the amendment, which raises issues which run through the next two or three clauses; that is, the role of the independent valuer and the provisions relating to that person. I argue that the Bill already clearly spells out provisions to ensure the independence of the valuation process for compensation—which I regard as of the greatest importance—and therefore we do not need further provision on this matter in secondary legislation, as is proposed.
Clause 54 sets out the provisions for appointing and removing an independent valuer. There was extensive discussion in the other place about the need to make appropriate provision for the assessment of compensation. Compensation may, of course, be required in circumstances where there is a compensatable interference in a person’s property rights. Clause 54 provides two safeguards to put the independence and impartiality of the valuer on the strongest footing. First, the appointment of the independent valuer must be made by an independent appointing person. The noble Lord, Lord Higgins, asked who that would be.
I wish to make a small point. The Minister said that the independent valuer would be appointed by an independent person. Unless I am mistaken, that is not what the clause says. Subsection (2) states:
“An order must provide for the independent valuer to be appointed by a person”,
not necessarily an independent person. Therefore, we do not get independence coming in at that level. An entirely partial person could make the appointment.
We shall certainly ensure that the valuer is independent. We seek to distance authorities from the appointment as far as we can. The noble Baroness appears to be saying that a further safeguard needs to be inserted. I shall look at that but I make it absolutely clear that we seek to take the appointment away from government bodies directly to ensure that the procedure will be carried out by someone who is independent of the authorities in order to further guarantee that the person appointed will be considered independent. The appointing person can either make the appointment having regard to any criteria specified in the compensation scheme order, or must select a candidate from a list supplied by the Treasury. This allows for an independent person or panel to appoint a person who has the appropriate skills and expertise to carry out the process of valuation.
Subsection (4) ensures that an independent valuer can be removed only by a person specified by the Treasury and on the grounds of serious misconduct or incapacity, ensuring that the independent valuer has security of tenure and a level of independence as far as any removal from office might be concerned.
Clause 55 provides that the independent valuer may do anything necessary or desirable for the purpose of, or in connection with the performance of, the function of his office in order that he may carry out his role effectively. Clause 55 further provides that the Treasury may confer other functions on the independent valuer. For example, the Treasury may enable the independent valuer to apply to a court or tribunal for an order requesting information from parties, should this be necessary. The Treasury may also enable the independent valuer to publish, disclose or withhold information at his discretion. The clause therefore provides the valuer with the powers to gather and deal with the information that he needs in order to conduct effectively his valuation function.
Finally, Clause 56 sets out the remuneration procedure. Under the provisions of this clause, the Treasury must appoint a monitor to oversee the remuneration and allowances of the independent valuer, which again seeks to bolster the independence of the valuation process.
At every stage, the Government have been at pains to ensure that the Treasury is one stage away from decisions that relate crucially to the appointment, performance and remuneration of the independent valuer. We have set out in the primary legislation factors that ensure the independence of the valuer, in particular the conditions surrounding appointment and removal, the powers that we have given, or could give, to him, and the framework for remuneration.
We believe that these factors will ensure that any valuer is genuinely independent—which is the objective that we seek, in common with the noble Baroness in her amendments—and has sufficient powers to undertake his functions, which in turn ensures the compatibility of the compensation scheme process with Article 6 and provides confidence to the market in the compensation procedures in the Bill.
As these provisions are included in the Bill—I have identified three consecutive clauses in which this is spelt out in considerable detail—I do not believe that further criteria on the independence of any valuer are needed in secondary legislation. The primary legislation is very clear about the nature of the independence of the valuer and how that will be identified and protected in his actions. I reassure the noble Baroness that the independent valuer will be appointed in accordance with the principles of fairness, as prescribed under Article 6 of the European Convention on Human Rights. Accordingly, the independent valuer will be independent from the interested parties, including the authorities and the Bank, and independent of other conflicts of interest, such as those derived from his own shareholdings. This is a requirement in terms of the international position in the European Convention on Human Rights. Of course, we will be fulfilling that requirement in the way in which the independent valuer is appointed.
I entirely appreciate the noble Baroness’s concerns that this role must meet the strictest standards of independence. We are governed by the European convention and, of course, by our concerns that are shared with the noble Baroness that this crucial role should have its independence guaranteed. That is why so much is spelt out in primary legislation and why we, therefore, do not accept that additional legislative provision needs to be made in secondary legislation. I hope that the noble Baroness will feel that I have given her the reassurance she needs to withdraw her amendment.
This matter would seem to have more substance than one might have thought at first. I take it from what the Minister said that he will seek to add a simple amendment to Clause 54(2) on the independence of the person who will make the appointment. He is not a figure of insignificance, given that he is specifically mentioned for remuneration and everything else. Will the Minister consider whether it is appropriate for the appointing person to be appointed by the Treasury, rather than, for example, the Lord Chancellor, or someone of that kind?
We always look with the greatest care at developments in the debates in this House and I will certainly look at that matter. However, the noble Lord, Lord Higgins, will also appreciate that this role will be demanding in the most extensive way and require particular areas of expertise. Therefore, it is not surprising that we regard this rather more as a Treasury matter than one for the Lord Chancellor. However, I take on board the noble Lord’s point. I can see the advantages of the additional independence that he is seeking, but he will appreciate that we need to ensure that our appointments to this highly skilled and important role of independent valuer are effective.
When he looks at subsection (2) following the intervention of my noble friend Lord Higgins, the Minister might also wish to consider whether the Treasury will be happy to appoint “a person”; the noble Lord said that it might appoint a panel. My understanding is that a panel is not necessarily a separate legal entity and, therefore, a person. I am not sure that subsection (2) would allow the Treasury to appoint a panel unless it were constituted as a legal entity, which may or may not be the case.
The Minister spent most of his time talking about independence from the Treasury, which clearly struck a raw nerve, as if that were to be the only thing guaranteed by independence. The main burden of my reasons for tabling the amendment was to ensure that the valuer was independent of the subject matter being valued—the failed bank and the property being transferred—and that the issue was adequately dealt with. The Minister referred me to Article 6 of the European Convention on Human Rights. I need to think about whether simply reading the convention in relation to the Bill is a sufficient set of safeguards, and I shall do that between now and Report. I hope that the Minister will also consider subsection (2) before then.
I will, of course, consider those matters. We are certainly governed by the convention and have to meet clear criteria of fairness with regard to these proposals. However, I reassure the House that in legal terms “a person” can, indeed, include a panel.
Amendment 98 withdrawn.
Clause 54 agreed.
Clause 55: Independent valuer: supplemental
98A: Clause 55, page 26, line 37, leave out subsection (6)
I shall be very brief because we have had an extensive discussion about independence, which will very much flow from the drafting of the secondary legislation, to which we have heard reference. I was struck by the word “reconsideration” in subsection (6) of this clause. Are there precedents for the concept of reconsideration? Who does the reconsidering, and would it not be much simpler to reduce the subsection to a short and conventional appeals procedure? I beg to move.
I hope that I shall not be speaking at cross-purposes with the noble Viscount. We had anticipated that he was concerned about another matter—one of some substance relating to the right of appeal. If I have misinterpreted his amendment, I shall stop.
We think that the word “reconsideration”, and therefore this part of the clause, is an essential part of the Bill, so I shall invest it with slightly greater significance than the noble Viscount may have anticipated. The clause specifies that a compensation scheme order may provide for an independent valuer to assess the compensation due to those who suffer interferences in their property rights that are subject to compensation as a result of an exercise of the powers under this part of the Bill.
We do not consider it necessary to put in place a bespoke appeal mechanism to satisfy the requirements set out in Article 6 of the European Convention on Human Rights. The possibility of recourse to judicial review satisfies the convention rights in that regard. However, for general policy reasons, once an independent valuer has arrived at his determination, we believe it is necessary and important that parties affected by that determination are able to ask the valuer to reconsider his decision and that they may appeal it in a court or tribunal.
It is of course typical in the English legal system to put in place arrangements for the review or appeal of determinations in relation to civil cases. In the case of the arrangements for the assessment of compensation for the former shareholders of Northern Rock, an independent valuer with specialist expertise in commercial valuations has been appointed to undertake the difficult and complex task of valuation. Parties affected by his determination have a right to request the independent valuer to reconsider his determination, which provides an opportunity for the parties to make relevant representations in that regard.
Following any redetermination, an appeal may be made to the Financial Services and Markets Tribunal, which has both commercial and legal expertise, and is therefore ideally suited to adjudicating over any disputes relating to the valuer’s determination.
We believe that this procedure for appeals is far more satisfactory than simply leaving parties to bring a claim for judicial review of the determination. That is why we consider it entirely appropriate that the Treasury must provide for such arrangements in the event that an independent valuer is appointed. I believe that this provision is an important part of the Bill and I wish to retain it. I hope that the noble Viscount, Lord Eccles, will appreciate that we set considerable store by the part of the Bill which he wants to see removed, and I hope that he will accept the Government’s reasons for wishing to retain it.
I apologise. I can see now that my amendment should simply have sought to leave out paragraph (a) of subsection (6). If I understand the Minister correctly, reconsideration of a decision by an independent valuer is to be made, on request, by the independent valuer himself. On that basis, I am completely satisfied and beg leave to withdraw the amendment.
Amendment 98A withdrawn.
Clause 55 agreed.
Clause 56: Independent valuer: money
98B: Clause 56, page 27, line 11, leave out paragraph (d)
I have tabled this probing amendment in an attempt to understand why we need monitors. In the proposed system, there will be an appointing person, an independent valuer, his staff and monitors, and overall, and at every stage subject to the drafting of the secondary legislation, the Treasury. It all sounds very expensive. Are there precedents for monitors of remuneration and/or compensation schemes, and, if so, in what circumstances? Has the requisite work been done to estimate the cost of all this? For example, judging from a previous debate, a tender might be put out in the search for a valuer and, if so, his remuneration will be set out in a contract. What would the monitor’s responsibilities be and who would the monitor be? I suppose that it could be a Treasury official but I guess from previous debates that that is not the intention. Perhaps the monitors are to be chosen, following another tendering procedure, from the private sector. Can we have a fuller explanation of the need for monitors? I beg to move.
I am under constant pressure to show that we are creating a truly independent role for the valuer. The noble Viscount even slipped in that we might have it in mind for the job to be given to someone from Her Majesty’s Treasury. That would be somewhat contradictory to the whole thinking behind this role, and I assure the noble Viscount that my notes say something entirely different. For example, a judge might undertake the role on a non-commercial basis. Here, we are concerned only that the Treasury should provide allowances and be responsible for the resources that make remuneration possible. The monitor’s role is clear. We want to ensure that there is someone to oversee the valuer’s remuneration and allowances, including the pension arrangements, and we want that to be processed as independently as possible. We do not want the Treasury to do this job. Although, as I am sure the Committee will appreciate, it would be more than capable of carrying out such a role with true independence, it might not be recognised among all parties that it was not compromising the concept of independence. That is why the monitor will be required to approve certain actions by the independent valuer—for example, the appointment of staff—and this will be done not by the Treasury but through this additional independent role.
I merely say to the noble Viscount, Lord Eccles, that we are trying to assuage the very anxiety that he let slip when he introduced the amendment. A Treasury role is always open to being criticised when it comes to the provision of resources. Here, there is an additional independent stage of monitoring, which keeps the Treasury at more than arm’s length, and I hope that the noble Viscount will recognise the benign intention behind this concept in the Bill.
Indeed, I can see what the aim is. My problem is only that the Bill becomes more and more complicated and therefore will be more and more expensive to administer and carry out when it becomes an Act. Meanwhile, I withdraw the amendment.
Amendment 986 withdrawn.
Clause 56 agreed.
Clause 57 : Valuation principles
Debate on whether Clause 57 should stand part of the Bill.
I tabled my opposition to Clause 57 standing part of the Bill in order to initiate a short debate about the role of valuation principles in the context of a valuation. My fundamental question is why Clause 57 needs to exist if an independent valuer, who is presumably competent to carry out a valuation, is appointed. I do not object to the content of subsection (3), which ensures that a valuer does not pass on the value of financial assistance provided by the taxpayer to anyone else. That is perfectly correct. I do query, however, why compensation orders might need to be assessed by the principles set out in subsection (2). Those principles could produce a result which was not of value in any ordinary sense. Why, for example, are certain methods of valuation to be ruled out? Why is the valuer being deprived of the use of judgment in the correct methods to use? In what circumstances do the Government expect to use subsection (2)?
The Minister has been at pains to point out how the valuer will be appointed in an independent way, and one can only assume that the Government will ensure that the person will be of some standing, experience and competence. Under subsection (2), however, the Government can tell us exactly what to do.
I am also troubled by subsection (4), which is familiar territory to anyone who has been involved with the Northern Rock valuation order. My problem is that if these principles are insisted upon as opposed to applied as relevant in the judgment of the valuer, it may produce a result which is not fair. Fairness was debated in another place. My honourable friend David Gauke moved an amendment in which he tried to introduce a principle of fairness into the valuation process. Unfortunately the Government did not feel able to accept that helpful amendment.
Let us suppose that a failing bank was hit with the special resolution regime but that the authorities were overhasty in their judgment. The Minister will recognise that this is a concern that has been expressed in relation to the powers under this Bill; that is why we are particularly concerned about the nature of the hurdle in Clause 7, which we debated earlier. Let us suppose that the valuer finds that the bank was capable of operating as a going concern on plausible assumptions. Or let us assume that he finds that administration would not have been an appropriate basis for action. Subsection (4) allows the Treasury to specify a counterfactual. If the authorities had been over hasty, there would be a strong incentive for them to use subsection (4) in order not to let the correct position emerge.
It would be wholly inappropriate to debate the specifics of the Northern Rock case in view of the current legal action. The Minister will be aware, however, that shareholders, and not just the hedge funds, felt strongly that their assets were being expropriated and would not be correctly valued because of the application of the valuation principles which were insisted upon in that valuation order. It is not implausible that this could happen if the powers were used in future. In addition, the existence of the power of the Treasury to specify a valuation assumption, perceived by others to be unreasonable, seems likely to lead to a string of judicial reviews, if nothing else. All in all, it seems fairer and, indeed, more efficient in valuation terms to leave everything to the valuer’s judgment. I look forward to the Minister’s response on why the Treasury needs the powers set out in Clause 57.
Will the Minister assure the Committee that the compensation scheme order referred to in Clause 57 would be in place before the appointing person sought a valuer? One can imagine situations, following on from the exposition of my noble friend Lady Noakes, in which a potential independent valuer declined to bid on the grounds that they would not have true independence. That might well depend on the detail in the order.
Effectively, the valuation principles which the independent valuer will have to use may, as my noble friend has just pointed out, be in conflict with the views of the independent valuer. More particularly, the compensation scheme order, again set out by the Government, will presumably specify what the principles are which the independent valuer has to apply. In short, the Treasury is writing the rule book. The independent valuer is told he has to do this or that, apply average values or values on specific dates, and so on. This seems to be far more restrictive than ought to be the case. The matter ought to be dealt with by the independent valuer; I should have thought that there is a well established body of opinion on how this ought to be done.
Like my noble friend Lady Noakes, I have some doubts with regard to subsection (4). It says:
“Valuation principles may require or permit an independent valuer to make assumptions; such as, for example, that the bank—
(a) has had a permission under Part 4 of the Financial Services and Markets Act … varied or cancelled”.
I would not have thought that this is something one makes an assumption about. I would have thought it is a fact: either such an order has been varied or cancelled or it has not. If not, I do not see that the independent valuer can then be compelled to say otherwise.
Similarly, while I can see that one may need to make assumptions about whether a bank is able to continue as a going concern—that seems reasonable—it seems odd to make an assumption about whether it is in administration. I would have thought it either was or was not in administration. The same applies to being wound up: I should have thought either it is being wound up or it is not. I simply do not understand what subsection (4) has to do in relation to an independent valuation of what needs to be paid to compensate those affected by the action which has been taken.
I understand why this clause has arisen but, like other noble Lords, I have come to the conclusion that the Bill probably does not require it. The issue I have most sympathy with is whether the valuer should be required to make the determination of whether the bank would have been viable in the absence of government action. That is a decision which, under the Bill, we are requiring the FSA, in the first place, to make. The independent valuer is required to rely on the judgments that have been made but, in fact, under Clause 7, the institution will be in this process only if the FSA has determined that it does not pass, or is unlikely to pass, the threshold requirement of continuing as a financial institution. In effect, therefore, the valuer can start with the presumption that it is not a viable ongoing entity without this being spelt out by the valuation principles.
The other aspects of the principles that the Treasury or others might want to put to the valuer are perfectly reasonable parts of the evidence that the valuer would be perfectly entitled to take into account. They do not need to be laid down as principles which are required to be taken into account. The problem is that, in order to satisfy the Treasury that all these principles are going to be considered, the clause leaves open such wide scope for the valuer to be dictated to that the whole notion of an independent valuer begins to be undermined.
If this clause is to remain in the Bill, I should like to understand how the dictation of these valuation principles affects any grounds of appeal. Would an appeal be able to take account of whether the valuation principles that had been dictated were appropriate, or would it have to start from the basis that the valuation principles were outside the appeal process?
I hope that the Minister will have another look at this clause in the light of this debate and the points that have been raised. I think that one matter of language could be improved. When I first read Clause 57(3), I was confused as to what was to be disregarded. The text says that,
“an independent valuer must disregard actual or potential financial assistance provided by the Bank of England or the Treasury (disregarding ordinary market assistance offered by the Bank on its usual terms)”.
I was not sure whether this was a double negative, so I looked at the Explanatory Notes, which say, in paragraph 147 on page 22, that the subsection requires the valuer,
“to disregard actual or potential financial assistance provided by the Bank of England or the Treasury (other than ordinary market assistance offered by the Bank on its usual terms)”.
The language in the Explanatory Notes seems clearer and would be more easily understood than the text in the Bill. It is only a small change of a word or two, but it would remove the ambiguity.
On that last point, if that is what the Explanatory Notes achieve, we will look at them with a view to amendment. I am not sure that I agree with the judgment of the noble Lord, Lord Stewartby, on that point, but I will reserve my position, look at the matter carefully and act accordingly if he proves to be right.
Several of the representations that have been made have been founded on a basis that is contrary to the Government’s thinking on this clause. Although issues were raised on matters of detail, I am not too sure that we are not colliding on a matter of principle. The clause is being attacked because it is thought that it somehow compromises the independence of the valuer, which we were at pains to establish when we were discussing the earlier clause. That view has been translated into the belief that the valuer is bound to have his independence affected because of the role reserved for the Treasury in this clause. I just do not accept that. The independent valuer will be established on the criteria of independence that we discussed at length only a few moments ago, but he will work within a framework established in law, as indeed he should.
Let me get this clear. Are noble Lords who have spoken about this critically suggesting that the independent valuer should approach the issue as if no public resources of any kind were at stake? We are talking about a situation in which a bank or financial institution is in such serious trouble that action has had to be taken. That action may have involved—indeed, it is likely to have involved—considerable resources of public money.
The Government are concerned to ensure that the evaluation criteria take account not of the double negative that the noble Lord, Lord Stewartby, suggested existed; there is no double negative, as it is absolutely clear what has to be taken into account. What the valuer cannot do is identify the value of the institution as if the authorities had not put in any resources to support that institution. That cannot be contended. In the evaluation procedure in this Bill, there were bound to be criteria relating to the safeguarding of public resources. I venture to say that if this Bill had been introduced by an opposition Member, opposition Back-Benchers would not be voicing criticism of this proposal, as they would be four-square with the necessity of having such safeguards.
Of course the Treasury may specify valuation principles to which the independent valuer must have regard when conducting the exercise to assess the amount of compensation, if any, payable in respect of a transfer of powers. That is a cardinal principle behind the concept of the action that the Government are carrying out under special resolution procedures. The valuer must disregard,
“actual or potential financial assistance provided by the Bank of England or the Treasury”,
to the failing bank, as to include that in the framework would make the bank look more valuable and more viable than it could possibly be if it were not for the public interest at stake because of the resources committed. That is the significant point that I want to establish with regard to these issues, although I recognise that noble Lords have made a number of additional points about the scheme.
It may help the noble Lord if I remind him that I specifically did not challenge subsection (3). I am not at all sure that it is necessarily the case in every valuation that significant public resources will have been committed to the organisation; it is quite possible that a bank will not have received any financial assistance before being put into the special resolution regime. I said that I did not challenge subsection (3), although I accept that some of my noble friends have done so. The Minister said that some additional points had been raised. The only points that I raised were other than in relation to subsection (3), so I hope that he will respond to them.
I intend to do so. The noble Baroness will have noticed that I commented on other contributions to the debate but not on hers; I had not addressed myself to her comments and was in no way, shape or form including her within the framework of my remarks.
The Treasury may need to specify assumptions that the independent valuer must take into account in conducting the valuation exercise. These principles set out the parameters that the independent valuer must adhere to in making his determination. This in no way undermines the independence of the valuer. The European Convention on Human Rights recognises that such parameters may be established by the state in circumstances where compensation arrangements are being considered and where the state has been active in terms of public resources.
I emphasise that I am seeking to defend properly, as I was seeking to do in relation to the earlier amendments, the independence of the valuer, while stating that Clause 57 accurately outlines the parameters within which the valuer is bound to work.
Without the clause, the work of the independent valuer would have to take place with no principles or parameters. That would surely be open to the sharpest of criticism. I point out that the detail of the valuation principles, which will be set out in a compensation order made about a bank resolution, would be subject to full parliamentary scrutiny through the affirmative procedure. I reiterate the obvious point that parliamentary scrutiny is necessary for the order. That is an important part of the legislation.
I emphasise that the clause is a crucial part of the legislation. It is consistent with the European Convention on Human Rights. We have considered the provision with the greatest care. We are working within that framework. If we did not have parameters on which the independent valuer—I hope that in our discussion on previous clauses we have established the independence of that valuer—would act, the Bill would be severely deficient. I emphasise again how important that provision is to the Bill. I hope that the noble Baroness accepts that point.
The Minister has not explained why, in his words, the Treasury “may need” to specify assumptions. What need is there? The Minister said that valuations need parameters. Why do they need parameters? If you appoint an independent valuer to value X, why can the independent valuer not go away to evaluate based on the facts and on ordinary valuation principles?
We have to remember here that the Treasury is specifying some powers in granular detail, such as how to use averages or which valuation methods to use. We are not talking about high-level issues; we are talking about some very detailed matters. The Minister has not explained why the Treasury needs to do that, why parameters have to be set and why the Bill would be lacking if it did not contain those subsections.
I do not have a great deal to add, apart from the obvious fact that we are not talking about valuations in an exercise of dispute between two private individuals or personages. We are talking about valuation in the context where the state has acted, and may have acted with a substantial commitment of public funds. Within that framework, it is inevitable that the independent valuer, set up with all the clear protection of his independence that I have identified, will work within parameters to protect public resources.
I will not delay the Committee further, because we have other business this evening. However, the Minister says that significant resources may have been put in by the Government but they may not. I have accepted subsection (3), which includes the financial assistance assumption, which seems perfectly reasonable to protect the interests of the taxpayer, but the Minister has not made a case for any other valuation principles being established. We will clearly need to revisit this again on Report but, in the mean time, I withdraw.
Clause 57 agreed.