To ask Her Majesty’s Government what progress has been made in the past 12 months on the proposal to set up an international nuclear fuel bank controlled by the International Atomic Energy Agency.

My Lords, the EU has announced up to €25 million of support towards a nuclear fuel bank under International Atomic Energy Agency (IAEA) control, as proposed by the US-based nuclear threat initiative. In addition, details of the UK-led “nuclear fuel assurance”, formerly known as an enrichment bond, are being finalised.

My Lords, while it is obviously very welcome that the European Union should have recognised the huge priority that needs to be given to this whole process during the nuclear renaissance and to contribute to the non-proliferation of nuclear weapons, can the noble Lord go a little further and tell us which of the several different proposals on the table is now the front runner? Does the UK still prefer what he called the nuclear fuel assurance proposal, formerly the enrichment bond, and, if so, what are its prospects of success?

My Lords, 12 proposals have been put forward. My understanding is that a number of those proposals will fall to be considered by the IAEA over the next few months and certainly, we hope, by the end of the year. I endorse the noble Lord’s comments about the urgency of this matter. As far as I understand, the UK’s proposal is complementary to the NTI proposal. Clearly, other proposals also have to be considered, but we support the NTI proposal as well as continuing to work on the UK’s proposal.

My Lords, does the Minister agree that the priority must be to reduce the number of these proposals, as the objective being pursued by all those who have put forward proposals is pretty well common? We surely must winnow down these proposals. It is now five years since the Secretary-General of the UN put forward this proposal on the basis of a high-level panel, and the 2010 nuclear proliferation review conference is coming down the track. There is not infinite time for it. His noble friend said in this House last week that he was less pessimistic about the 2010 review conference. This is one of the jewels that will have to be in that crown if it is to be a success.

My Lords, I do not disagree with the noble Lord. It is absolutely right that the 12 proposals now on the table should be considered as quickly as possible and that at the end of the day arrangements are in place under which states that wish to develop nuclear power peacefully are enabled to do so but without the proliferation of enrichment facilities. We are at one with noble Lords in our wish to see this progress. I am hopeful that discussions over the next few months will indeed enable that to take place.

My Lords, does the Minister agree that, in the light of the recent decision by the United States in its agreement with the UAE for the importing of uranium for the purposes of civil nuclear power rather than enrichment by the UAE, we may well be on the way to a new and very exciting set of proposals for dealing with nuclear proliferation? To that, I add the recent American indication that the new Administration would support a fissile material cut-off treaty. Does he agree that these two together—the nuclear fuel bank and the fissile material cut-off treaty—could bring us very close to an answer to the horrors of proliferation and nuclear weapons?

My Lords, I agree with the noble Baroness. I take this opportunity to pay tribute to her for her work with the NTI, because clearly the leadership that is being shown will be very important indeed to preventing the proliferation that she referred to.

My Lords, does the Minister recognise that any storage of nuclear-enriched uranium will pose significant security and diplomatic issues? What thoughts have Her Majesty’s Government on where such a store should be located?

My Lords, on the question of storage, seeking to discourage the development of enrichment facilities so that it is possible for countries that wish to develop nuclear power for energy purposes to import and have the assurance that there will be a continuing supply is a very important part of dealing with this problem. As for storage in this country, the noble Lord will know that the Government have been proactive in encouraging development of potential new storage facilities. Expressions of interest in relation to the storage proposals that have been made are being received at the moment. We are confident that we will come to an effective solution.

My Lords, the idea of a nuclear fuel bank is primarily around non-proliferation. The United Kingdom Government have been an important part of the EU3 in its negotiations with Iran. Has Iran responded positively to the idea, and do the Government intend to take it forward within that context?

Yes, my Lords, we are committed to what is described as the EU3+3 dual track strategy. Iran has a very stark choice; increasingly tough sanctions to persuade the country to change its mind, or dialogue to lead to full negotiations if the Iranians suspend their enrichment-related activities.

My Lords, further to the previous question, as Iran is a member of the nuclear non-proliferation treaty, does that mean that Israel, which is not a member, contributes to this sort of bank?

My Lords, the UK has urged Israel to accede to the nuclear non-proliferation treaty as a non-nuclear weapons state and to sign up to a full scope safeguards agreement with the International Atomic Energy Agency.

To ask Her Majesty’s Government what recent representations they have made to the Government of Iran concerning human rights.

My Lords, we made over 40 representations and statements in 2008, bilaterally and through the EU. The most recent representation took place on 31 December, when the French, acting as presidency of the EU, summoned the Iranian ambassador in Paris to convey our serious concern about the recent treatment of Dr Shirin Ebadi. Other recent EU declarations have focused on reports of mass executions, stonings, the persecution of human rights defenders and other key human rights concerns.

My Lords, I thank the Minister for the continuing pressure that the Government are putting on the mullahs over their continuing human rights abuses, and particularly for the work that was done at the United Nations on the report of the Commission on Human Rights at the back end of last year. Is he aware that 1,000 people, including children, have been hanged since August 2005 and 44 in the past month alone? Brutal punishments also include stonings to death, limb amputation without anaesthetics and eye-gouging. Is it not time that the UN added sanctions on these human rights issues to those already in place over other matters?

My Lords, my noble friend catalogues all too grimly and accurately the horrific human rights situation in the country. Iran executes the second highest number of people in the world— 320 last year. It executed kids—minors—and, despite an apparent ban in 2007, stonings appear to have resumed recently. We are aware of the difficulties that we all have in finding a coherent way of dealing with Iran—the previous Question addressed that in some ways—but there is no doubt that human rights must be part of our dialogue.

My Lords, I assure the Minister that there is very great interest in both Houses of Parliament on this matter and very strong support for what the noble Lord, Lord Corbett, said. Will he consider following the example of the French ambassador and call in our representative from Iran to talk to him about the widespread concern on this matter?

My Lords, I will certainly make sure that our envoy is fully aware of the concerns of this House and the other place. On the recent visit here of the Iranian Deputy Foreign Minister, my colleague Bill Rammell raised these very issues. We made sure that Iran is in no doubt about the concerns of all of us.

My Lords, perhaps I may express my dismay at the treatment of Shirin Ebadi and the catalogue of human rights violations that my noble friend Lord Corbett listed. However, does the Minister agree that it is better to ensure that we continue the dialogue? Does he believe that the new incumbent President Obama will make some difference to the dialogue that may take place in the near future?

My Lords, my noble friend touches on a real truth, which is that the dialogue with Iran has been reduced to this vital issue of nuclear weapons and that Iran is quite dismissive of our efforts to raise other issues. We need to arrive at a point where the dialogue covers a broader number of subjects and from which we can engage with Iran effectively on these appalling atrocities.

My Lords, does the Minister agree that, 30 years since the Iranian revolution, we in the West have tried all sorts—demarches, engagement and disengagemen—and have put just about everything on the table? Rather than using megaphone diplomacy, particularly at this time of flux in Iran, which is due to the forthcoming elections, does he agree that sometimes the sotto voce approach would perhaps gain more? I can only endorse the view—does he agree?—that dialogue is the way forward and that we should use other, more subtle means, rather than backing Iranian forces that are based outside that country: those here in the UK and in the US.

My Lords, I thought that the noble Baroness was subtle until the last part of her question. Many human rights defenders in Iran ask us to support them when they get into trouble, but not to pre-emptively speak up for them before that, because that, although it does not literally become a kiss of death, nevertheless means that they become targeted, risk imprisonment and so on.

My Lords, as regards a coherent way of dealing with Iran in the coming phase of international affairs, is it not right to say that although we will probably have to engage with this revolting regime on various crucial strategic matters, we should never for a moment forget the kind of list that the noble Lord, Lord Corbett, reminded us of, which by all standards—even mediaeval standards—is fairly disgusting? We should use every opportunity, while we have to engage and discuss nuclear issues and other things, to remind Iran and the world that these are completely unacceptable standards and that this regime will make itself a pariah of the world, until and unless it improves its human rights record in this area.

My Lords, I think that the noble Lord is correct. That is why engaging the regime on an array of issues that go broader than just the nuclear is not, as some have feared, a strategy of appeasement but a recognition that this regime, in many facets of its behaviour, exhibits at its core that it is an authoritarian regime which brooks no criticism and seeks a military power in order for it to dominate its region. We have to put all these issues on the table and deal with it in a tough and realistic but pragmatic way.

My Lords—

My Lords—

My Lords, it is this side’s turn.

My Lords, historically, Persia/Iran has a proud record in the field of education and tolerance, even from the time of Cyrus, yet we know that the Baha’i community is prevented from attending universities and, now, apparently even from attending schools. That is contrary to the obligations incurred by the Islamic republic under the Universal Declaration of Human Rights and, indeed, under Article 33 of the International Covenant on Economic, Cultural and Social Rights. Whether it be sotto voce or through the United Nations agencies, what are we doing to remind Iran of its international obligations in respect of the Baha’i?

My Lords, I assure my noble friend that we and the EU have raised these matters regarding the Baha’i, as well as others. We are very concerned about the seven Baha’i leaders currently under arrest—a matter that has already been raised in this House. No one in Iran can be left in any doubt about our concern for these individuals and about the persecution of their religion.

To ask Her Majesty’s Government what consideration they have given to whether a decline in the sterling exchange rate is good or bad for economic recovery.

My Lords, the Pre-Budget Report 2008 states:

“Export volumes growth in 2009 is forecast to be 0 to ½ per cent, but as growth in the UK’s export markets recovers and the effects from sterling gradually encourage more companies to pursue export opportunities, growth is forecast to pick up in 2010 and further in 2011”.

The Pre-Budget Report also mentions that,

“the pass-through from sterling’s depreciation will exert upward pressure”,

on prices, but it states that inflation is expected to return to target in 2011 as other factors exert downward pressure.

My Lords, I think that I thank my noble friend; I am not sure that that answers my Question. Does he accept that the depreciation of the currency is positively helpful as a step towards economic recovery in the sense that it will help to get us out of the recession rather quicker than would have been the case without that correction of the currency? Can he assure us that he will leave the currency to find its own level and not seek to manage it in some strange way that I am not sure about?

My Lords, the adjustment that we have seen in the value of sterling should be helpful to British exporters, including, in particular, the very large manufacturing sector, to which my noble friend Lady Whitaker referred last week. It should also mean that opportunities emerge for domestic manufacturers to supply domestic demand which has previously been met by production from overseas. I assure my noble friend that the Government’s monetary policy will continue to pursue the framework that has successfully been in place since 1987—namely, to target inflation and not an exchange rate.

My Lords, I want to ask the Minister again. Underneath that mass of verbiage, was the Answer to the noble Lord’s Question, “Yes, it’s good” or “Yes, it’s bad”? Which was it?

My Lords, within the verbiage to which the noble Lord, Lord Tebbit, refers, I have answered the questions with as much care as I can. I certainly rest assured that, although he accuses me of verbiage, he will not be accusing me of laziness—a description that he has applied to a new member of his Front-Bench team in the other House.

The benefit of a lower exchange rate is enhanced export competitiveness and an ability to provide more demand for domestic production than from overseas sources. That is what I said earlier; I repeat it.

My Lords, the noble Lord said that the Pre-Budget Report assumed that exports would start growing in the second half of the year. What is the Government’s current estimate as to when the economy as a whole will start growing again?

My Lords, the Government are required under the Industry Act to place economic forecasts before Parliament on two occasions in a year and no doubt my friend the Chancellor of the Exchequer will do so at the time of the Budget.

My Lords, would the noble Lord agree that if we were members of the European single currency it would not have been possible for us to cut interest rates in the way which the Government have, and that that would not have been likely to assist economic recovery? As far as the exchange rate is concerned, would he agree that the effect depends on the elasticity of demand for exports and imports? Have the Government made an up-to-date estimate of these?

My Lords, I agree with the observation of the noble Lord, Lord Higgins, that we are free to set our own interest rates. As a member of the single currency, we would be bound to the single-currency interest rates. On his second question, the Government’s forecasts take account of elasticities of demand and supply in terms of their effect on the trade account.

My Lords, is my noble friend aware that in economics we rarely have a laboratory experiment with respect to the exchange rate? The exchange rate plunged in 1992 when we left the ERM. For four years from then our share of world exports rose continuously. Therefore the answer to my noble friend’s Question is very simple and straightforward: it is good and it is not bad. The more interesting question is: what is the likely path of the exchange rate this year? If noble Lords opposite want some free financial advice and fancy a punt, my guess is that the forward purchase of sterling over the coming year will be highly profitable.

My Lords, I am not sure there was a question there. We are all reassured, however, that we can rely upon the Peston family for advice.

My Lords, does the Minister agree that devaluing sterling is short-changing our depositors and that competitive devaluations were a very damaging feature of the 1930s?

My Lords, I do not think the market movement in sterling has an effect on the value of deposits. Many factors do, but that is not one within a domestic economy. Nor do I think that we are engaged in any way in a programme of competitive devaluations. Our exchange rate is set according to a free market.

My Lords, when asked about the Government’s exchange rate policy, the Exchequer Secretary said in another place last year:

“By maintaining sound public finances and low inflation the Government contribute to exchange rate stability. This is consistent with their objective of a stable and competitive pound”.—[Official Report, 21/4/08; col. 1674W.]

We do not have sound public finances and we do not have a stable pound. What is the Government’s policy now?

My Lords, we are in a period of extraordinary economic challenge throughout the world. That is reflected in the likewise extraordinary volatility of exchange rates, stock markets and commodity prices. Our long-term commitment is to a competitive currency, which will be a consequence of our inflation targeting. Given that we have a stable inflation-rate target, that should be reflected over the long term in a stable exchange rate against other currencies. It is, however, a medium to long-term objective and not one that assures valuation on a minute-by-minute or day-by-day basis.

To ask Her Majesty’s Government how they propose to monitor the use of passports of more than one country by British citizens.

My Lords, as the UK Border Agency’s e-borders system is rolled out, it will provide additional capability to reconcile electronically where an individual travels using different documents, so that passengers with dual nationality can be identified. The e-borders system analyses passenger data against watch lists prior to travel. Records of all passenger movements are retained, with a facility to search those data.

My Lords, I thank the Minister for that Answer, but what steps will the Government take to ensure that, as of now, British immigration officials can know when somebody travelling on a UK passport also holds the passport of another country? Has he been made aware, as I have, of the serious concern that the lack of this information at present makes it extremely difficult to track those who are suspected of sympathising with or engaging in terrorism? Is it not astonishing that his noble friend Lord West had to answer my Question of 8 January, when I asked how many British passport holders also hold the passports of other countries, by saying that the “information … is not available”?

My Lords, it is not astonishing at all. It is not part of the nationality Act for us to have knowledge of passports held in different countries. What we have to do is protect our borders, which is precisely what the rolling-out of the e-borders programme is doing. That will be complete when the agency holds 100 per cent of the records available. It is not at that stage yet, but the programme is already successful. There was a four-year successful operational pilot, Project Semaphore, and contracts have been placed. We are now seeing the results: 30 million annualised passenger movements were processed by the end of the project in 2008 and by April this year the figure will be 100 million annualised passenger movements. By the end of 2010, coverage will be 95 per cent and, by 2014, it will be 100 per cent. That is the answer to the noble Lord’s question. However, we are not resting on our laurels—

Too long!

My Lords, it is clear that your Lordships want this information. By the end of 2008, 78,114,231 passengers were screened, 33,000 alerts were made and 2,700 people were arrested. That is the information that I thought your Lordships were looking for.

My Lords, is the Minister aware that, when a nationality is renounced, the passport has to be surrendered and a record is kept? Why is it not possible in this day and age of biometric passports to ensure that records of dual nationality are kept? How can we have adequate immigration statistics if someone uses one passport for entry and a different one for exit?

My Lords, the noble Lord raises an important question, which the whole e-borders project is an attempt—a successful one, I believe—to counter. Getting to the point of having the technology and 100 per cent coverage will take time, but we are moving in that direction. In the mean time, we have watch lists and the security agencies and others keep a close watch on suspected areas of concern, so the situation is not as simple as is suggested. We do not have complete coverage, but we will have in due course.

My Lords, when did these passport changes occur? My experience is as someone who holds only an Australian passport. I never applied for a British passport because the Home Office would automatically notify the Australian Government when someone made an application and the Australian Government would then revoke their Australian citizenship. That law has now changed, but I am too old to be bothered to apply—

No!

My Lords, this country has been very good to me, so I cannot complain. At what stage did the law change? Previously, the Home Office was very aware of people having two passports.

My Lords, I can only say to the noble Baroness that her presence in our country for many years has borne fruit and she certainly does not look old enough not to take advantage of changes to the passport system. The Australians of course require visas for the United Kingdom. The British Government do not have the same requirement that dual passport holders have to renounce one of their passports. The question of how this is being developed is not simply for the UK alone. An increasing number of countries are looking at this situation and are planning to introduce, or already have introduced, systems that capture and analyse passenger data. Those include the United States, as most of us know, Canada, Australia, Japan, Korea, India and Cuba. Your Lordships may guess the odd one out.

My Lords, the Minister gave quite a long Answer to the Question, but I understood from what he said that he was justifying the present situation on the basis of it being compatible with the British Nationality Act 1981. A lot has changed since the early 1980s, especially the need to be vigilant against links with terrorists. Does it remain a matter of unconcern to Her Majesty's Government that we do not have the information for which my noble friend Lord Marlesford asked?

My Lords, my apologies if my previous answers have seemed to be too long; I actually average about eight answers in seven and a half minutes. I was reminded on my first occasion appearing here that I should give short answers. The truth is that there has been more legislation; a Bill is coming forward to this House very shortly. Of course the Government are concerned and we are taking action. It ill behoves those who suggest that we are not.

My Lords, I refer the Minister back to my noble friend Lord Marlesford's original Question. We have soldiers dying in Afghanistan at the moment to protect us against terrorism. One of the bases of terrorism is Pakistan. What action are we taking to ensure that people do not travel from this country as UK citizens on Pakistani passports that we do not know about?

My Lords, I have explained why the system at the moment does not provide for that information to be available wholesale. I am sure that there are those selectively looking at those who may be suspected of going to Pakistan from this country for nefarious purposes. I also explained the timescale by which the system will be complete. In the mean time, I do not doubt that the authorities are looking very closely at the question that the noble Baroness raises.

My Lords, with the leave of the House, we will have two Statements repeated today. To avoid breaking up today's Committee debate on the Banking Bill, my noble friend Lord Myners will repeat the Statement on financial markets at a convenient point at about 6 pm, followed by my noble friend Lord Malloch-Brown repeating the Statement on Gaza.

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.

The Minister says that the clause deals with the case where the original instrument provides for the transfer of property which is not in fact capable of being transferred. Is he saying that Clause 42 allows for that? I could not read that.

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.

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?

I expect that there is an issue of principle—the absolutely basic fact of splitting a bank, to use the words in the Government briefing. The trouble is that in any negotiation to consider such a matter there is no leverage on the side of the banks.

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.

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.

The Minister referred to the responses that were due on 9 January. The questions were specific, and there was a draft Statutory Instrument covering the subject that we have been discussing. When will the responses be published?

I will provide the noble Viscount, Lord Eccles, with a reply in writing, or perhaps later in Committee I will have the opportunity to provide the information that he seeks.

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.

I think we have got as far as we can today. Anything the Minister can provide Members of the Committee with between now and Report would be most useful to our ability to handle this well at that time. I beg leave to withdraw the amendment.

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.

I am grateful to the Minister for that reply. I refer him again to paragraph 1.14 with which I started, which is the basis of the comfort that I seek. Meanwhile, I withdraw the amendment.

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.

Before my noble friend withdraws her amendment, can the Minister respond to the queries I raised?

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.

I am grateful to the noble Lord. I beg leave to withdraw.

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.

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.

I undertake to take that point on board.

I am grateful to the Minister for that. On that basis, I beg leave to withdraw the amendment.

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 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.

That is interesting. I shall consider that further, and I beg leave to withdraw the amendment.

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.

I thought that there was always a right of appeal under common law. I am absolutely not contesting the right to appeal; I am questioning the concept of reconsideration and who would do the reconsidering.

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.

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

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.

My Lords, with the leave of the House, I will now repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer.

“The House will, I hope, understand that it was necessary to issue a market notice this morning, in the usual way.

In the past few months, our priorities have been, first, to prevent the collapse of the banking system; secondly, to support the economy; and, thirdly, to ensure we get lending going again. This is also a problem faced by Governments across the world—and it is therefore necessary to achieve the maximum degree of international co-operation. We are taking steps not just to support the banking sector but, importantly, to safeguard the millions of jobs that could be put at risk by the continuing difficulties in the international financial system.

Restoring the banks’ ability to lend is an essential part of the economic recovery so today I am proposing further measures to meet two objectives: first, to begin to replace the lending capacity lost by the withdrawal of foreign banks and other institutions; and, secondly, to remove the barriers preventing UK banks expanding their own lending.

I want to set out these new measures in the context of the strategy we have put in place to steer the country though the worst global economic crisis for generations. Over recent months, banks have faced increasingly difficult conditions, as we have seen everywhere around the world, with Bank of America rescued last week; Citigroup, one of the world’s largest banks, broken up; Anglo-Irish nationalised; Commerzbank rescued in Germany; and, today, the Royal Bank of Scotland reporting substantial write-offs.

Last October, faced with the potential collapse of the banking system, we recapitalised the banks, strengthening their position. As a result, the Government took temporary stakes in two British banks but, as I said then, we have a clear view that British banks are best managed and owned commercially and not by the Government. That remains our position. As a result of the action we took, no savers in UK banks have lost money.

In the Pre-Budget Report, I announced substantial extra help for people and for businesses—lower income tax, more capital investment now and lower VAT—which, hand in hand with interest rate cuts and lower inflation, will support the economy and jobs. There is a clear international consensus that putting money into the economy now to counter the recession and to help people is the right thing to do. The cost of doing nothing would be substantially greater.

In almost every country, fiscal expansion policies have now been agreed—including in Germany only last week. In the US, President-elect Obama has already signalled the scale of their fiscal expansion. But, as the President-elect said only yesterday,

‘restoring the economy requires that we maintain the flow of credit to families and businesses’.

In the UK, the total amount of lending available still falls short of meeting the needs of the economy. Over the past 10 years, lending by foreign banks and non-bank institutions accounted for more than half of new corporate loans and 45 per cent of new mortgages here. A significant amount of lending capacity—by these foreign-owned banks and specialist lenders for example—has been withdrawn or has returned to their home markets, demonstrating again the need for co-ordinated international action.

On top of that, in the past few weeks, the world economic downturn has intensified everywhere—in the US, in the euro area, and now spreading to Asia, including China—all seeing weaker production, companies in trouble and fewer jobs. As we go into what will be a difficult year, dealing with this global financial crisis will need continuous effort.

There is no single remedy; there is no instant solution. We will need a range of measures designed to support lending, help businesses and protect jobs. Together, my measures today remove uncertainty and accelerate a resumption of lending—a necessary precondition for recovery here and around the world.

There are three measures to address the capacity reduction in the banking sector. First, because of current conditions, companies are finding it harder to get loans. So the Government have today authorised the Bank of England to create, for the first time, a new £50 billion fund, which will help increase the amount of funding available to companies by purchasing corporate assets from the banks, enabling them to invest. This will help large companies and complement the substantial measures announced last week by my right honourable friend the Secretary of State for Business, Enterprise and Regulatory Reform to support small and medium businesses. This fund will buy assets from banks, financial institutions and financial markets, with finance provided by the Treasury. The Treasury is also supporting the fund with an indemnity. It will initially purchase high-quality private sector assets, like corporate bonds, commercial paper and syndicated loans, which companies use to finance their business. The assets purchased by the Bank of England will be good-quality investments which will eventually be sold so that taxpayers’ interests are protected. This will enable larger companies to get the funding they need at a lower cost.

The operating remit of this scheme will be set by the Government but it will be run on an independent basis by the Bank of England. When purchasing these assets, the Bank of England will ensure the total amount of money in the economy does not increase. In future, the Monetary Policy Committee will keep under review whether this facility could be used as an additional way for meeting the inflation target, in line with similar operations at the US Federal Reserve. In such circumstances, I will decide the overall scale of the scheme and I will also keep the House informed.

Secondly, in order to maintain some of the capacity being lost in the mortgage market, I have decided that Northern Rock will no longer pursue a policy of rapidly reducing its mortgage book. In addition, looking at when the housing market recovers, I am considering whether—and, if so, how—Northern Rock or other UK lenders can best support prudent lending to creditworthy customers who will need mortgages but can only afford deposits less than 25 per cent.

Thirdly, in order to ensure that RBS, which owns NatWest and a number of other banks, can continue to support lending, I am taking action to strengthen its position. When the Government purchased their stake in the bank in December, a new management team was put in place. The company has announced further losses today, many of which are associated with its investments in the US following its takeover of a Dutch bank, ABN, in 2007. So I have agreed to its request to convert the Government’s stake of preference shares into ordinary shares. The Government could now own up to 70 per cent of RBS. In return for this, we have agreed with it an extension of lending commitments to large companies and an increase in lending of £6 billion in the next 12 months.

As well as taking action to maintain lending capacity, I want to remove some of the barriers and uncertainty preventing the existing banks lending further. In return for this, we intend to negotiate with each bank a lending agreement. These agreements will be specific, covering both the quantity and type of lending made available to people and businesses across the country, just as we have done with RBS today. These commitments will be binding and externally audited.

In return, banks will get access to support measures. First, under a new scheme the Treasury will insure certain bank assets for a commercial fee against losses on banks’ existing loans. The purpose of the protection is to allow the expansion of lending, so the pricing has to be fair and reflect all our objectives. The banks’ problems stem from uncertainty about the value of their assets. Faced with this uncertainty, individual banks are reluctant to lend to businesses and companies. This will reduce the banks’ exposure to risks and give them the room they need in order to lend more. We will insist on the highest international standards of public disclosure and transparency in the operation of the scheme. Countries all over the world are considering similar proposals. We will work with them to take action together.

The second step towards removing barriers to lending is an expansion of the funding capacity of financial markets. The credit guarantee scheme I announced in October will be extended beyond its current end date of April this year. Instead, it will run until the end of 2009, subject to state aid approval. This scheme guarantees new unsecured borrowing. So far over £100 billion of these guarantees have been taken up. These guarantees have been successful in helping bring down the interbank lending rate from 6 to 2.25 per cent. To complement this, the Bank of England will continue to provide similar types of liquidity support when the special liquidity scheme expires at the end of this month. Until recently, up to half of UK mortgages were funded from the wholesale markets. At the time of the Pre-Budget Report I accepted the recommendations in the Crosby report on mortgage finance markets. I have announced that the Government will provide up to £50 billion of guarantees, initially on new mortgage lending and eventually on other assets. Overall, the liabilities taken on will be backed by financial assets and fees will be charged for guarantees and insurance, safeguarding the taxpayers’ interests.

Thirdly, the Financial Services Authority has today set out its policy on capital requirements. It has set out the level of capital that individual banks need to keep on their books to allow them to withstand the slowdown and maintain lending. It will be a key signal that banks should allow their capital to be used to absorb the losses from investments, while not unnecessarily restricting their lending.

The regulation of capital is fundamentally an international matter and tomorrow I will present our plan to European Finance Ministers in Brussels. I hope we can agree similar proposals there. Because this financial crisis is affecting every country in the world, it is crucial that other countries also take steps to support their banking sectors. We cannot risk a damaging worldwide spiral of weakened confidence and national-only policy decisions. Stronger international collaboration will be strengthened with the arrival of the new US Administration. We must not give way to financial protectionism which could be every bit as damaging now as it was to trade in the 1930s. Instead, we must look at the causes of this international financial crisis. We must strengthen the supervisory and regulatory system here and internationally. I shall publish proposals on the regulatory framework for the banks in the spring together with the FSA’s own review. Internationally, we will be actively pursuing this as part of our presidency of the G20 through 2009. Our objectives in the G20 will be to continue to take action jointly to support the world economy, to act together to restore the flow of credit and to improve the international regulatory regime. This is a continuing effort. Countries all over the world are united in supporting their economies, maintaining lending and protecting jobs. We are ready to do whatever it takes”.

My Lords, that concludes the Statement.

My Lords, I thank the Minister for repeating a Statement made by the Chancellor in another place. I also thank the Government for finally recognising, de facto if not in terms, that their action last October was far from sufficient to save the banks, let alone to save the economy or, to use the Prime Minister’s memorable phrase, “to save the world”. The Government accompanied their October announcements with a lot of fierce words about banks resuming lending. The banks did not do so. The lack of credit in the economy is accelerating the depth and length of the recession in which we find ourselves after a decade of irresponsible and reckless economic management. Of course there is a global banking crisis but the way that it is hurting our economy is a direct result of economic management, or indeed mismanagement, of the last decade. So we start with an economy that is not well prepared for a downturn and this has been exacerbated by a lack of credit to support it. Instead of concentrating on credit, the Government embarked on futile gestures, such as the VAT reduction, which has had absolutely no impact. So we must be grateful that the Government are now focusing on the real issues.

We support much of what has been announced today, though with some provisos. We have argued for a long time that the use of preference shares carrying a coupon of 12 per cent was counterproductive in the original package. It positively worked against increasing lending. At least the RBS will now be freed from that. The Minister said nothing about the similar millstone around the neck of Lloyds TSB/HBOS. Will he do so? Is it that Lloyds TSB does not want any more equity shares to be held by the Government, with which we could have some sympathy? If so, what will that mean for Lloyds TSB’s lending?

What impact will today’s Statement have on government borrowing and debt figures, which are already at record levels? To put it another way, how much more taxpayers’ cash will be paid to the banks? The asset purchase facility appears to involve further borrowing of £50 billion. How much else is involved? Related to that, will the Minister say more about the Bank of England asset purchase facility? We are told that this is to buy high-quality corporate debt, but investment-grade borrowers have access to finance at the moment; the problem is borrowing below investment grade. How will this affect the borrowing for corporates that are below investment grade?

The first £50 billion will be funded by Treasury bills, but this morning’s announcement opens the way for the MPC to use asset purchases for monetary policy purposes. Will the Minister confirm that this means that the Government are opening the way for quantitative easing, or, in ordinary parlance, for printing money? We can see that, in extremis, quantitative easing may be necessary, but it will be the most damning indictment of the Government’s handling of the economy if it comes to that.

Secondly, how is the MPC involved in this? The committee has no control over the Bank’s printing presses. Do the Government intend to change the monetary policy remit of the Bank of England? If so, how, and when will they do so? What mechanisms will be involved, and, more importantly, what involvement will there be for Parliament?

On the contingent liabilities that will come with the Statement that the Minister has repeated, will he say how much is at stake for the taxpayers in a worst-case scenario? There are virtually no figures in the Statement. The Chancellor denied on the radio this morning that this was a blank cheque, but how do we know, because the Government will not give the figures? Is there any limit on the amount that will be exposed in the economy as a result of this Statement?

We have concerns about the open nature of the plans that have been announced today. I have some detailed questions for the Minister on the asset protection scheme. The press release that was referred to this morning talked about information on the assets being made available to the Treasury, but no mention was made of such information being made available to Parliament, and since this is an open-ended commitment, it is important that proper information is set up. We have called for a full and independent audit of what the taxpayer is now being asked to ensure. What is being done to value assets before their risk passes to the taxpayer?

The vehicle for the asset protection scheme may well be an entity that is established or designated by the Treasury. We have seen with UK Financial Investments how the use of a special vehicle that is set up by the Treasury lacks a specific statutory accountability framework, which means that what happens within that organisation can be very difficult for Parliament and others to track. Will the Minister commit to ensuring that full accountability of that body to Parliament is established? The Statement this morning was not stuffed full of detail; nor was the Minister’s repetition of it. It is clear that much still remains to be decided. When will full details of this scheme be made available?

The test of this package will be whether credit is restored to the economy, but it is important that lending is realistic and not of the reckless variety that helped the banks to get into the mess that they are in. Most commentators believe that the valuation of the housing market has not yet reached its trough. To what extent is it not reckless to encourage individuals to start borrowing again when values are still going down? The Statement referred to Northern Rock starting to lend again. I am not at all sure that using a state-owned bank that was not known for prudent lending practices is a particularly good vehicle for that, but will the Minister say what instructions the Government are giving to Northern Rock on its lending criteria and how much they will allow it to lend?

More generally, allowing mortgage-backed borrowing by the banks, as recommended by Sir James Crosby, will be acceptable only if it means meeting the standards of transparency and quality that the Government set out today. The Minister said that £50 billion will be available. How does that compare with former volumes of mortgage-backed securities? What impact will this have on the market? We would be concerned if this scheme were so large that it led to a return to the price inflation and lending criteria that got the banks into this mess in the first place.

Lastly, the Statement referred to the FSA’s separate statement on capital ratios. Will the Minister explain the reference in that statement to amending the variable scalar method of converting internal credit risk models? Will this allow the banks to reduce their risk-weighted asset requirements, as commentators have suggested, and hence to reduce the amount of capital that they are required to hold? Does that not leave the way open for our banks to become even riskier than they are already?

My Lords, I am grateful to the Minister for taking time out from the Banking Bill to repeat the Statement. It is, however, a very depressing Statement, because it makes it clear that the banking system is in even greater crisis than was apparent in the autumn, that it is creating a real economic crisis of alarming and growing proportions, and that the first bail-out was completely inadequate. We obviously hope very much that this bail-out is more successful. The Statement, however, gives rise to as many questions as have been answered, and I hope that the Minister will not mind if I ask him a few questions now.

The Minister points out quite correctly that there has been a dramatic fall in the capacity of the banking system because the foreign banks have largely withdrawn their lending. Have the Government assessed the quantum of lending that has disappeared from the UK financial sector, and has that figure informed the amounts by which they are now asking the banks to increase their lending?

Secondly, will the Minister confirm that the £50 billion of net assets that are being available will be funded by an increase in government borrowing? As the noble Baroness, Lady Noakes, said, this is another £50 billion to add to the ledger. When he says that the Monetary Policy Committee will keep under review whether this facility could be used as an additional way of meeting the inflation target, can he explain what on earth that means? Again, as the noble Baroness asked, can he explain whether we will need an amendment to the Bank of England Act to change the MPC’s formal remit to do that?

We welcome the fact that Northern Rock will no longer pursue a policy of rapidly reducing its mortgage book. Does that mean that it will carry on reducing its mortgage book, or will it seek to increase it, given that the Government will encourage it and other lenders, in a manner about which we are yet unclear, to make mortgages available to those who can afford deposits of less than 25 per cent?

The Government now own 70 per cent of the RBS. Does that not mean in effect that it is a nationalised bank, and would it not be more straightforward to turn it into a state bank so that the borrowing and lending policies that it pursues can explicitly follow public objectives? The RBS is in a slightly bizarre situation in that the Government are directing it to make specific policy changes to its lending while professing more generally, and certainly in the context of the Banking Bill, that when they take shares in banks—and particularly when they take over a bank—they will do so at arm’s length. They profess this; yet we have a detailed proposal from them on how the RBS will extend its lending activities in the future.

On the other banks covered in the Statement, the Government have undertaken to negotiate a lending agreement with each bank. Will all the banks agree to such a lending agreement? What will the sanction be if they do not? There is a problem in reaching these agreements and putting in place the new scheme to insure, as the Government coyly put it, “certain bank assets”. How do you value these bad assets? Values in, for example, commercial property are still plummeting. When the Government say that countries all over the world are considering similar proposals around bad assets and that we will work with them to take action together, are they seeking to find a common basis for valuation? Or are they just going to have a chat with all the countries doing similar things?

On capital adequacy, it seems that the FSA and the Government have accepted that the current capital adequacy rules are inadequate. Are they in effect tearing up the bar rules unilaterally, or is the Chancellor going to Brussels tomorrow to ask that they be revoked, set aside temporarily or replaced? It is not clear from the Statement.

Finally, what in broad terms does it mean when the Government say they will publish proposals on the regulatory framework for the banks in the spring? Might they, for example, be contemplating a Glass-Steagall approach, or is this just a raft of technical issues?

My Lords, I gave up counting the number of questions asked in 13 minutes and doubt whether I will be able to answer them all in the customary seven minutes that remain. I will do my best. This is an important announcement, following the announcements made in October that were highly effective in reassuring customers and depositors of British banks of the strength of those banks and their ability to honour their commitments.

Contrary to the comments of the noble Baroness, Lady Noakes, banks have continued to increase their lending in a number of important areas. In the various meetings I had over the weekend with most of the chairmen or chief executives of our British banks, a number expressed considerable confidence about the outlook for lending in the United Kingdom. This is in the light of action taken by the Government—in both the Pre-Budget Report, as a consequence of lower interest rates and, importantly, because of the measures we announced this morning.

The noble Baroness questioned whether we were in a strong enough position economically to cope with these extraordinary changes. I remind noble Lords that these are global challenges. As I and the Chancellor of the Exchequer have said, there is no economy in the developed world, or indeed in the major developing economies, which is not now experiencing significant contraction in output and demand. Yet in six of the past seven years the United Kingdom was either the strongest growing or second strongest growing economy in the G7. Over the past 10 years, we achieved the highest growth in GDP per capita in the G7. We approach these challenges from a position of considerable strength after the achievements of the past decade.

The noble Baroness asked about the Lloyds Bank Group and the “millstone” of preference capital. The preference capital was agreed with the board of Lloyds. It may well reflect on changed circumstance and wish to talk to the Treasury and the UKFI. If it does, those representations will be received.

On the impact of today’s Statement and in particular the amount of cash that is going to the banks, the strong feature of this announcement made by my right honourable friend the Chancellor of the Exchequer is that it involves little cash. The exchange of preference shares for ordinary shares is a non-cash item. The attachment of guarantees in accordance with Crosby is a non-cash item. The extension of the discount window facility at the Bank of England is a non-cash item. The extension of asset protection through an insurance scheme is a non-cash item at first. It may be a cash item in due course; that would depend on the experience of the insurance policy and would have to be offset against the premium received.

The noble Baroness asked whether we are giving a blank cheque to the banks. That is not the case. On the contrary, establishing the asset protection scheme will take six to eight weeks. It will involve a huge amount of data analysis. I envisage well over a billion items of individual data reviewed for each bank that approached us in that connection. We will be drawing on the support of external advisers—accountants, actuaries and lawyers. We will determine appropriate attachment points based on value-at-risk calculations and ensure that the premium reflects the risk, taking into account the lending commitments we would receive from the bank as a consequence.

The Bank of England asset purchase facility will involve investment-grade bonds. The noble Baroness lives in a different world from me in her assertion that investment-grade corporations have no difficulty obtaining loans. That is simply not the case from the contact I regularly have with the finance directors and chief executives of major companies. The appetite for banks to lend to major corporations has deteriorated substantially. The measures we have taken will address that.

This is not a prelude to quantitative easing, but it creates the architecture that would be needed for that. If the Bank of England and Monetary Policy Committee conclude that that is the right thing to do, an appropriate framework will be set in place. That would include an exchange of letters between the Chancellor of the Exchequer and the Monetary Policy Committee. The noble Baroness does not reject the concept in certain circumstances—presumably at a point where interest rate reductions no longer have the effect they otherwise previously did at higher levels. There will not be a need to change the Bank of England Act.

There were observations about the lamentable record of Northern Rock management, disregarding the fact that the management of Northern Rock has changed. The current instruction to the board of Northern Rock is that it should no longer regard its asset book as in run-off.

The noble Lord, Lord Newby, asked for data on the extent to which foreign banks’ withdrawal is impacting on the availability of credit. It is quite significant in particular sectors of the market. The withdrawal of the Icelandic and Irish banks, the ending of securitisation and a general retreat to home which tends to happen in these circumstances have meant a serious reduction in credit availability. This programme is designed to address that.

The noble Lord also asked whether the Royal Bank of Scotland is now a nationalised bank. No discussions with the Royal Bank of Scotland have ever discussed nationalisation. The Chancellor was clear in his Statement to the other place that he regards our banks as best owned in the private sector. However, with the board of the Royal Bank of Scotland and other shareholders, we have commenced a programme to improve the quality of management and leadership there. Noble Lords will no doubt have seen the appointment of Sir Philip Hampton to join Mr Stephen Hester as respectively chairman and chief executive of that bank.

Questions were asked about the Crosby review and the guarantees. Again I remind noble Lords that the attachment of guarantees to residential mortgage securitisations does not involve a cash payment. It enhances the quality of the credit and is a non-cash cost. Crosby was very clear that he did not believe that this programme would create any costs for the Exchequer, but rather would be a source of income. We have also committed, as a part of this programme, to ensuring that London becomes a centre for a new form of securitisation that departs from the weaknesses and failures of the last, which did not have appropriate disclosure or risk sharing.

I hope that I have managed to respond to most of the questions put by the noble Baroness and the noble Lord.

My Lords, the accusation has been oft repeated that there was indeed a failure three months ago on the part of the Government to make the bail-out of a proportion sufficient to be effective. Is the Minister satisfied that those banks that have received massive subventions from public funds have, since the beginning of October last year, been entirely candid with the Treasury and the Bank of England with regard to their contingent liabilities? I shall put it another way. Is this latest crisis due in any way to the deliberate failure to make a full disclosure of those liabilities, or is it due to unforeseen and unforeseeable events?

My Lords, the action taken in October was not a bail-out; it was designed to put beyond reasonable doubt questions about the capitalisation of British banks. Issues around asset valuation are primarily for boards of directors and external auditors to address. Nearly all our major banks have a December year-end, and they will now be going through the process of completing their accounts. The Royal Bank of Scotland made it clear that its announcement this morning of quite frightful losses was a consequence of that work. It is absolutely incumbent on boards of directors, particularly chairs of audit committees and external auditors, to be clear on the need to be honest about the state of the assets they own.

My Lords, we are in danger of forgetting that this stems from the incompetence or even worse of bankers who, to some extent, the Government are now depending on to run the banks. The losses are so huge that frankly we do not know what they are, and indeed I am not sure that anyone knows. Certainly I am not sure that the directors of these banks, their auditors, Ministers, or anybody else can answer questions about values because we know what has happened in the past. Clean certificates were issued by auditors but, days or perhaps weeks later, billions were written off. The situation is so incredible that it is hard to believe. If we do not know the figures, is not there a real danger that guaranteeing the banks could be self-defeating in the sense that once the bad and slow payers know about it, they will become even slower so that situation is even worse, and we will see real bad debts, not possible bad debts?

The Government now have 100 per cent control of some banks and at least 70 per cent of others. We assume that that is the end of it, although one begins to doubt if it will be. I appreciate their desire to leave the running of these banks to at least some bankers, although again, I am not sure which ones. Can the Minister tell us whether any of those bankers who decided to buy ABN AMRO and now have to write off God knows what—£10 billion or £20 billion—are still going to be allowed to run their banks at arm’s length? Is it really the case that the running of banks in which the taxpayer has more than a 70 per cent interest as well as interests in the form of guarantees and insurance is going to be left to those self-same bankers? Is that really the Government’s decision?

My Lords, many of my noble friend’s questions focus on the Royal Bank of Scotland. I remind noble Lords that very significant changes have been made to the leadership of that bank. A new chairman is to be appointed and a new chief executive is in place. Two or possibly three of the executive directors have left, and there is a general agreement that the board needs to be further refreshed. Certainly, very serious questions need to be asked not only by the board of directors and the senior management of some of these businesses, but also by institutional investors who, from my recollection, voted—inasmuch as they voted either for or against the acquisition of ABN AMRO—by a margin of over 90 per cent in favour. Noble Lords will no doubt recall that a competition was held for the ownership of ABN AMRO. Barclays failed, and perhaps now regards itself as truly fortunate. In putting the performance of banks into context, it is only fair to note that, on Friday evening, Barclays announced profits well above market expectations. It would be wrong to castigate all bankers.

The value of assets, as I said earlier, is a matter for directors, who must know what the assets are worth. Valuation is not a precise exercise, as we discussed very recently in the context of the Banking Bill, but there is no excuse for failing to address valuation. When it comes to providing insurance, we will form our own views on valuation; that is, we will take a bank’s data and form our own views on how much of the risk we will take.

My noble friend’s penultimate observation was on the danger that these policies will encourage people to be even slower in making payments. We will structure them so that we take what insurers refer to as the tail risk. The first or primary risk will rest with the banks, which will also take a proportion of the tail risk. They will continue to have an equity interest in ensuring that the existence of the insurance does not in itself lead to any moral turpitude.

My Lords, I thank the Minister for the Statement and I hope that it will remove some of the uncertainty that prevents banks lending to each other. I want to ask the Minister about the insurance scheme for bad past investments made by banks. On the radio the Chancellor said that the objection to the bad bank solution has been rightly rejected because it requires evaluation of these bad debts, which would take too long. Yet here we are with a solution that is going to take time and requires the valuation of those bad assets.

Secondly, while the insurance scheme is a lot cheaper than the horrifying costs of the bad bank solution, it is not quite a non-cash item as the Minister suggested. The costs will build up over time and could be very significant. If the Minister cannot respond to my noble friend Lady Noakes about giving a cost now, will a cap and a cost be given at the point when the insurance scheme is put in place?

Thirdly, how long might an insurance scheme last? I know that the “bad bank” solution has disadvantages, but one advantage would have been that it created certainty and got the assets off the balance sheet. The insurance scheme cannot last forever, so is it not the case that it has very considerable uncertainties attached and that, because we need full declaration and certainty, it may not do the trick?

My Lords, the noble Lord, Lord Lamont, asks well informed questions. I did not hear the Chancellor of the Exchequer on the wireless, so I will not comment on what he said. The problem with the terminology “good bank, bad bank” is that it oversimplifies. The principal challenge in separating assets out into a new institution is that it would need separate funding, and there would need to be absolute agreement on the value of assets. If the Government paid too much for these assets it would be gifting value to the banks; if it paid too little, it would further diminish the capitalisation of the banks.

The attraction of an insurance proposal, as opposed to the sale-and-purchase model of “good bank, bad bank” is that there is continued equity as far as the bank is concerned. To the extent that it does not need to call on the insurance and that the value of those assets improves, and they perform better than current expectation, it will continue to retain all the interest in those assets, less the premium it has paid for the insurance. I believe that I said clearly that the insurance was a non-cash item at first. It could be a cash item later, but might not be; that would depend on the efficacy of the insurance policy.

I entirely agree with the noble Lord’s best informed comment. The duration of the policy will be important, because we need a policy that will take financial markets through this economic downturn and beyond the next cycle, so we are probably talking about a policy duration of no fewer than five years and probably no longer than eight or nine years. In terms of the ultimate structure of the policy and the scale and value of assets covered, I imagine that matter will be disclosed publicly, not least by the banks, which will, in some cases, need shareholder approval to enter into the contracts. I commit that the Government will make available details of the broad nature, scale and coverage of those policies when they are entered into, should such policies be written.

My Lords, may I return to the Royal Bank of Scotland? It may not be nationalised, but it is under national control if the Government own 70 per cent of the ordinary shares. Do the Government now guarantee the liabilities of that bank to the same extent as other government securities?

My Lords, the Royal Bank of Scotland is not under national control. It is under the control of all its shareholders and its board of directors, and no discrimination or advantage accruing to depositors of the Royal Bank of Scotland is denied to depositors with other banks in terms of the Government standing behind those deposit liabilities.

My Lords, led by my noble friend Lord Newby, I want to carry on asking for clarification about the Royal Bank of Scotland. I am specifically concerned that, to quote the Statement,

“we have agreed with them an extension of lending commitments to large companies”.

I am somewhat puzzled by that, because there is widely felt concern about small businesses and the Royal Bank of Scotland has particularly portrayed itself as their supporter. Can the Minister clarify exactly what is meant by,

“an extension … to large companies”?

Is that at a cost to the small business sector?

My Lords, in October the Royal Bank of Scotland, along with Lloyds TSB and HBOS, entered into commitments related to the availability and marketing of competitively priced credit to small businesses and private borrowers. That commitment remains in place, but this effectively extends it to include large companies. I believe that although there is considerable concern about the availability of credit to smaller companies, the initiatives announced at the time of the pre-Budget review, which my noble friend the Secretary of State for Business, Enterprise and Regulatory Reform expanded upon, have considerably eased anxiety among smaller companies about the availability of credit.

As I said to the noble Baroness, Lady Noakes, there is concern about larger companies as well. That is why the Royal Bank of Scotland willingly volunteered this extension in our discussions on Sunday. I repeat my earlier comment: over the weekend a number of banks expressed a step change in their confidence toward the availability of credit and profitable lending opportunities, as a result of the steps that have been taken, here and globally.

My Lords, in asking this question I must first declare a marginal interest. Is the Minister aware that I invested my modest savings in the national Bank of Ireland? There was then a series of takeovers, and I ended up with the Royal Bank of Scotland, which I had no desire to have any connection with whatsoever. In desperation, I then left the Royal Bank of Scotland and went to Coutts, which I thought was a safe haven. The next minute, I found that Coutts was taken over by the National Westminster which, after a short time, was taken over by the Royal Bank of Scotland, so I was back where I started.

The gravamen of my question is: what will happen to those banks which, like Coutts, have hitherto had a proud record of independence? They have also had the great privilege of not only my membership but that of Her Majesty, whose interest is probably marginally larger than mine. What will happen now that Coutts bank is a wholly owned subsidiary of the Royal Bank of Scotland? What will the Minister do to safeguard the interests of the innocent who put their trust in financiers?

My Lords, I was a director of Coutts bank. I am not sure whether many of my noble friends on these Benches were directors there, but it shows what an open party Labour is when casting its net into the areas from which it captures its supporters. Coutts is one of a number of subsidiary banks of the Royal Bank of Scotland, Ulster Bank in Ireland being another, for example. I can reassure the noble Lord that Coutts is, in my experience, a fine bank to bank with. It enjoys the same protections that apply to any other bank in the United Kingdom. Regardless of whether it is a subsidiary of the Royal Bank of Scotland, it has a good board of directors—chaired by a Member of this House—and has, I believe, always exhibited cautious and conservative lending policies. No doubt that was one of the things that attracted the noble Lord, Lord St John of Fawsley, to it.

My Lords, I am obliged to the noble Lord. I shall sleep better tonight.

My Lords, in assessing whether these measures are now adequate to the task, do the Government have a target for the level of credit they believe is necessary to support the economy in the next year to replace the previous aspiration of banks continuing to lend at 2007 levels? It is clear from the Statement that bank credit is contracting in the economy, both because, as the Minister said, foreign banks have disappeared from the economy and because UK banks are having to de-gear their balance sheets for both capital and liquidity reasons. Some of that decrease in lending may simply reflect the fall in the value of previously overvalued assets but we are all concerned about whether there is enough credit in the economy to support the genuine needs of business. As we look at these various packets of £50 million, £100 million, £200 million and add them up, is there behind that a government view of what level of credit they are trying to achieve to support the economy and whether these measures will achieve that?

My Lords, we have given serious consideration to the quantum of support being provided through the asset purchase scheme, the asset protection scheme, the discount window and the support to securitize assets based on the Crosby model as extended and refined. We believe it will make a significant contribution. I wish I could give the noble Lord, Lord Blackwell, a more precise answer but there are a number of variables. Just as my doctor keeps telling me that there are two types of cholesterol—one of which it is all right to have and another which is not—there are two types of users of credit. There are many users of credit, for instance, in the world of hedge funds and speculation where, quite frankly, a de-leveraging of that kind of credit does no economic damage; it is the credit availability to the real economy that matters. We also need to take into consideration the global factors and the extent to which the process of banks retreating into their home markets continues to be a significant factor. The extent of credit that would need to be supported by government programmes is, to some extent, a response to certain factors that we have to take into account. We believe that a serious, comprehensive, integrated proposal is right to support the British economy in this global challenge and to make credit available to hard working British families and to British business.

My Lords, with permission, I shall repeat a Statement on Gaza made by my right honourable friend the Foreign Secretary.

“With your permission, Mr Speaker, I would like to make a further Statement to the House on Gaza.

From the outset of the conflict, the UK has called and worked for an immediate ceasefire. I know from questions last week that the whole House will have felt enormous relief when on Saturday night Israel halted its military operations in Gaza, and on Sunday when Hamas stopped its rockets. Our relief at the ceasefire is matched by our distress that it has taken so long to be achieved. The respite has come too late for too many.

A ceasefire, as Security Council Resolution 1860 made clear, was always going to be the essential first step. We urge Israel to complete the withdrawal of its troops from Gaza with all due speed. Hamas must put a definitive end to rocket fire at Israel. That is why the Prime Minister travelled to Sharm el-Sheikh and Israel yesterday to join other world leaders in starting to embed that ceasefire and ensure it becomes the durable and fully respected ceasefire that we—and the Security Council—have called for.

In the 22 days of the Israeli offensive over 1,200 have died and we are yet to know the full extent of the destruction. But horrific accounts and images already fill our news bulletins and we can be sure that life for Gazans, already grim, has become desperate. Systems for power, sewerage and food distribution are broken or under acute strain.

Meanwhile, rockets have reached further than ever from Gaza into Israel. Israel has lost nine soldiers.

The Gaza crisis has reverberated around the world. There have been large demonstrations in the Middle East but also in the West. The conflict has also been used to whip up hatred, including in this country, and I am sure the whole House will want to send a very clear and cross-party message that we all denounce the anti-Semitic attacks that have taken place and vow to work for their elimination.

We are faced with two immediate challenges: stopping the flow of arms and starting the flow of aid into Gaza. In respect of trafficking in arms, as the Prime Minister announced yesterday, we are ready to play our part. The immediate security responsibility lies with Egypt but the origin of these arms stretches way beyond the Egypt-Gaza border. This is where international help aimed at interdiction, using intelligence and a range of military assets, is important.

But it is not just arms that are smuggled. The closure of the crossings has also created a thriving illegal trade in necessities, which has filled Hamas’s coffers without providing Gazans with the basics they require. Hand in hand with closing of illegal traffic must go a vast increase in legal traffic. The immediate priority is to meet the desperate humanitarian needs. That means not simply food and medicine but, for example, sanitation equipment. Then there are all the supplies which are required to repair Gaza’s ruined infrastructure and return power and water. The Government have pledged a further £20 million on top of the £6.8 million we pledged earlier in the conflict. British charities have raised millions more.

The Prime Minister made clear in Egypt and in Israel that reopening the crossings will be vital. The 2005 movement and access agreement between Israel and the Palestinian Authority should provide the framework. We are ready to help, including by reinstating and, if necessary, extending the EU Border Assistance Mission at the Rafah crossing.

Smuggling and the crossings will be at the heart of the discussions this Wednesday evening when all 27 EU Foreign Ministers meet with Foreign Minister Livni, and on Sunday evening when we meet our Palestinian, Egyptian, Jordanian and Turkish counterparts.

However, the critical actors in securing progress, never mind peace, are the Palestinians themselves. Full humanitarian reconstruction will be impossible unless accompanied by political reconstruction. Unity in Palestinian politics is vital to so many things: to rebuilding Gaza, to holding elections, to delivering peace. It is for President Abbas to lead this process. The Arab League and Egyptian commitments of November last year point the way forward.

At a time of enormous loss for Palestinians, one thing should not be forgotten: Palestinians on the West Bank did not respond to Hamas’s call for a third intifada. In fact, the Government of Prime Minister Fayyad in the West Bank showed clearly in their management—political, economic, security—that, given half a chance, the Palestinian Government can be hugely effective and provide a real partner for peace.

At the UN and last week in this House, I said the Gaza crisis was a symptom of political failure. To avoid its repetition we need a political process. The Arab League showed in its letter to President-elect Obama in December that it was serious about its ground-breaking offer of peace embodied in the Arab Peace Initiative: the creation of a Palestinian state in return for Arab normalisation of relations with Israel—a genuine 23-state solution.

The challenge is to ensure that this Gaza crisis does not simply provide another grim milestone in an endless conflict. As we help Gazans rebuild their lives, we must find a way to ensure that this is the last time they will have to do so. That means showing serious progress towards a Palestinian state alongside improved Israeli security. It means a peace process where closed door negotiations are buttressed by Israel and the Arab world taking steps to support rather than undermine the peace process.

But anyone who doubts that peace in the Middle East requires the full, intense engagement of the international community only needs to look at the streets of Gaza today. International engagement that is full and intense includes the immediate engagement of the new American president and Administration. President-elect Obama and his Secretary of State designate, Hillary Clinton, have made clear that they understand the urgency and are committed to act. It will certainly be the first topic when I speak to the new Secretary of State this week.

Palestinians and Israelis will be asking themselves whether they are fated to permanent conflict. I know that I will have the support of the whole House in doing everything possible to avert this future”.

My Lords, that concludes the Statement.

I thank the Minister for repeating the Statement made by the Foreign Secretary in the other place. We welcome the ceasefire announced by the Israeli Government on Saturday, and the reciprocal ceasefire announced by Hamas. We also welcome reports of the continued gradual withdrawal of the Israeli defence forces.

We all want to see the Middle East as the top priority for the incoming United States president and Administration. In the mean time, it is vital that we do what we can to help bolster what, at the moment, is a fragile ceasefire. Clearly, this must involve mechanisms to prevent weapons-smuggling into Gaza. Will the Minister be more specific about how weapons-smuggling through tunnels will be prevented? As part of the ceasefire arrangements, the Prime Minister has apparently offered Royal Navy support. The nature of this support is unclear. Will the Minister be more specific about this? What impact will it have on the many competing priorities of the Royal Navy, which now has so few frigates and destroyers? The Falklands guard ship has just been taken away to east Africa, so there is only one frigate covering west Africa, the West Indies and the Falklands. How can a single ship shuttle between these places and have any effect? Much as the Royal Navy would like to take on this commitment, it is hard to see how the Prime Minister is in a position to offer it, certainly for any length of time.

Will the Minister also confirm that the Prime Minister has offered to help remove unexploded bombs in Gaza? Is the Minister satisfied that we have sufficient service personnel to do this, in addition to what they are doing in Afghanistan and Iraq, and their enduring commitments in this country? I declare an interest as honorary colonel of the Royal Engineer Territorial Army Bomb Disposal Regiment.

It is vital that we help to ensure that there is a quick and effective aid supply to the people of Gaza. The Statement rightly points out that life for Gazans, already grim, has become desperate. We welcome the announcement that Britain will make available an additional £20 million in humanitarian aid. What steps will be taken to ensure that the severe constraints on the ability of humanitarian workers and supplies to reach the population are quickly addressed? In particular, what technical assistance will be needed to restore the basic infrastructure and prevent the spread of disease?

Given the obvious need to open the crossings if aid and assistance is to enter Gaza on the scale needed, have the Israeli Government indicated when the crossings will be opened? Did the meeting at Sharm el-Sheikh agree a timetable for the opening of the crossings? Who will monitor the crossings? What role will the Palestinian Authority play, and what will happen to the Hamas representatives who are there on the ground? Are there any plans for a broader international monitoring mission?

Finally, we on these Benches support the Statement’s clear message denouncing the anti-Semitic attacks that have taken place in this country. We will do all we can to work for their elimination.

We welcome this Statement, but it is not enough. We welcome the ceasefire, but it is not enough. This conflict has been about not just rockets fired from Gaza but future relations between Israel and the Palestinians, and whether they are to be based on repeated assertions of military superiority, or on a return to negotiations and the achievement of a negotiated settlement.

The Statement’s aim of,

“a durable and fully respected ceasefire”

is far too limited. We have to get back to a much more active peace process that addresses not just Gaza, but the future of the whole of historic Palestine, or historic Israel, and which involves all interested parties, inside and outside the region, and therefore has to find some way of bringing in Hamas.

Will the Minister comment on the quotation in Haaretz today from King Abdullah of Saudi Arabia, saying that the Arab peace proposals would not necessarily be on the table for ever? Does he feel that this reflects the degree of urgency we face in saving some sort of wider peace negotiation?

For Israel, this has been a tactical victory and a strategic defeat. We all recognise that Israel has lost the sympathy of public opinion across much of the western world, and has further undermined its claim to moral authority. I spent some time last week talking to a number of Israelis about what their preferred end game was for the Gaza conflict, and was frustrated to discover that nobody could tell me what the Israeli strategy was. Mr Netanyahu said that the aim had to be to destroy Hamas. However, if one does destroy Hamas, who runs Gaza? Does the Minister know how we can reconstitute Gaza without the engagement of the political wing of Hamas?

Some Israelis would prefer to bring in Fatah again, under the approval of Israel—disastrous for the future reputation of Fatah on the West Bank, and of Hamas, it seems to me. Others in Israel say, “Gaza should be nothing to do with us in future. Open the Rafah crossing and push Gaza onto Egypt”. The Mubarak regime is clear that that would threaten to destroy the Egyptian regime, with potentially disastrous results for Israel. Others accept that perhaps no one would end up running Gaza, and out of the chaos, an even more radical terrorist wing would emerge.

We on these Benches find the approach of Her Majesty’s Government deeply frustrating. They have been too close to the Bush Administration in their dying days, and too biased towards Israel after its disproportionate and self-defeating use of force. Having watched our Prime Minister at his press conference in Israel—an image that undoubtedly has gone to Al-Jazeera and the whole of the Arab world—one worries about the hatred issue. There is, as the noble Lord, Lord Astor, said, real concern about encouraging anti-Semitism in this country. However, encouraging hatred of the West across the Arab world must be deeply against Britain’s long-term interests, and we have to be concerned about that, as well.

Will the Minister tell us about the Sharm el-Sheikh summit? Under whose auspices was it held? What was the framework? Was it an EU summit or was it an ad hoc collection of heads of Government? Did it have any relationship with the quartet, or is the quartet no longer viable?

On the policy of excluding Hamas and talking only to Fatah, one of my Israeli interlocutors told me that, in effect, Israel is already talking to Hamas through the Egyptians. There is a great deal of hypocrisy about how we keep Hamas out of the loop.

The Statement refers to “unity in Palestinian politics”. However, we and others have been promoting disunity in Palestinian politics ever since the 2006 election and the Israeli imprisonment of a number of elected Hamas MPs. The Statement talks about the,

“creation of a Palestinian state”.

“A Palestinian state”? We need the Palestinian state foreseen in the road map, within secure boundaries, which I suspect have to be close to the 1967 boundaries.

It is the same situation with talk about stopping the flow of arms to one side. Those of us who remember the Bosnian conflict recall that an arms embargo disadvantaged one side in a deep and bitter conflict. If we talk about the flow of arms, we must talk about the flow of British components to Israeli arms manufacturers.

When the Statement talks about opening the crossings, will the Minister reassure me that it means opening all the crossings and not just the Rafah crossing? It talks about the contribution that we and others will make to rebuilding Gaza again. Who else will be asked to pay? Will the Israeli Government, as well as Arab Governments, be asked this time to contribute to the rebuilding of Gaza, which must be part of rebuilding a viable economy in the Palestinian land, one of the necessary bases for the negotiated settlement for which we all desperately wish but from which we are now further than we were three weeks ago?

My Lords, both the noble Lords, Lord Astor of Hever and Lord Wallace, have essentially said, “So far so good in terms of the ceasefire, but we need to go a lot further to build an enduring peace”. We on these Benches agree completely with that view—this is a start, but no more than that. We must move quickly to bolster what is obviously a fragile ceasefire.

I shall take the points in order. The issue of the tunnels and the boats is a critical early step to get right because it is a confidence-building step for at least one side. I do not pretend that we yet have all the answers. Egypt has always maintained that as the sovereign power at one end of the tunnels it should be responsible for security in that regard and has never expressed much enthusiasm for an international force in that function. With regard to the boats—there is a big debate about how many of the arms come in by land and how many come in by sea—that is an area where the international community can make more of a contribution, hence the Prime Minister’s offer. It is certainly his expectation that it would not just be the UK but that a group of countries would provide boats if that were useful. Again, though, a whole series of questions need to be thought through about the right of interdiction at sea, the legal basis on which the boats would be operating, and many other issues. These are spontaneous initial responses to the situation and offers made in great seriousness to try to move this thing forward, but an effective regime of controlling arms smuggling, either underground or by sea, must be urgently developed. We will play whatever useful role we can in that, within the limitations of our military and naval capacities, as was pointed to by the noble Lord, Lord Astor.

Both speakers said that we cannot stop there. Equally important in this first phase is ensuring that the crossings are opened. Here there may well ultimately be a role for an international monitoring force, under either the UN or some other international flag—there is some experience of that already. It must involve all crossings in order to ensure that adequate humanitarian access is achieved and that the economy of Gaza can be restarted. The level of destruction, as we have started to see today in the footage from journalists who have been able to regain access to Gaza, is truly horrendous and goes well beyond easily moved supplies such as food, medicines and water to fundamental infrastructure materials, a large volume of which needs to be brought in over a considerable period of time.

The noble Lord, Lord Wallace, expressed concern that the Arab peace initiative will not be there for ever. It seems like a long time ago, but before this dreadful conflict in Gaza started the Foreign Secretary toured the region, trying to build support for the Arab peace initiative. That was the main thrust of David Miliband’s Middle East visit, now six or seven weeks ago. He and the Government believe that it remains as important now as then, but it is right to say that it will not remain on the table for ever. A cost of this conflict is a polarisation and radicalisation of opinion in the Arab world as well as other places, which means that moderates have difficulty in holding on to their ground. If we are to move forward with the initiative, we must do so quickly.

That takes us to the question of who runs Gaza and the role of Hamas in the political process. It is primarily, as the Statement said, for Palestinians to determine who runs Gaza; there must be a political process that will resolve the differences between the two Palestinian groups, Fatah and Hamas. There remain several ways that the Palestinians could choose to move that forward. One is to reunite again under the banner of the Palestinian Authority, which recognises the state of Israel and has sought a peaceful means to resolve these conflicts. If the authority became a unifying Government for the two halves of the Palestinian community, that would be a way forward. There is speculation among Palestinians that it may be easier to move to elections and elect fresh leadership. Ultimately, though, the Palestinians must resolve how to come together in a united way and negotiate not just with Israel but with the international community as well.

If I may, I shall defend the Government and our Prime Minister and Foreign Secretary. Perhaps I am looking at this from the other end of the measuring stick, in a sense, but it seems that the Government have tried to show even-handedness in this conflict and we have not fallen into the trap of blind support for one side. The negotiation of the UN Security Council resolution, in which we played such a leading role, reflects that, and Israel’s anger at that resolution demonstrates that if offending both sides is the measure of neutrality—or if not neutrality, at least some balance—then it was a much better performance than that of several years ago, when the charge that there was not balance quickly enough in British policy in 2006 perhaps had more truth to it.

On the arms issue, we want to stop a conflict that began because the Israelis were reacting to rocket attacks on their cities. We therefore want to prevent a revival of those rocket attacks, so preventing the resupply of those rockets is vital to building peace. There is inequality in arms supply; there is no way around it. Israel has a large domestic arms industry of its own. As I have assured the House before, we have sought, in the limited arms exports that we allow to Israel, not to export material that we think can be used to kill civilians or indeed can be used for repressive means. We will continue to review that policy, which has subsequently been reviewed in a judicial process that confirmed that it was living within the objectives set for it. However, I do not mean to detract from the argument that these issues of military supply and balance are key.

I turn to the final point that was raised, the reconstruction and who will pay for it. I was pleased to hear today that the Saudi Government are contributing $1 billion to reconstruction, and I hope the Gulf countries will play a leading role in that. However, as I have said before in this House, and I think this is a widely shared sentiment, how many more times do we have to rebuild Gaza? There is an obligation on the parties to this conflict to bring this to an end and stop the shameless cycle of reconstruction and destruction.

My Lords, I am sure that we are all grateful for much of what was said in the Statement and for some of the Minister’s replies to questions. I have three brief points. First, will the Government make it clear that the taxpayers of the world cannot be expected to repair and replace the wanton damage caused by Israel to civilian and United Nations premises? Israel, surely, should initiate a worldwide Marshall plan for both Gaza and the West Bank. Secondly, given that the present ceasefire is not necessarily permanent, and that there is still no agreement about crossing points, will the Government insist on access by sea to Gaza for relief and emergency supplies? Ships carrying such supplies should, if necessary, be escorted by NATO and other allied navies. Finally, will the Government ensure that tankers carrying pure drinking water by sea to Gaza, to prevent widespread kidney disease and other diseases caused by polluted supplies, can get there?

My Lords, I sympathise deeply with the observation of the noble Lord, Lord Hylton, that it is not fair to turn to the international community time after time for this kind of reconstruction. Israel, too, has a responsibility in this. That is absolutely correct. However, equally, we cannot make the reconstruction a political football when people are in need and their lives are at risk today. We have to start this and, once more, it will be those with a reputation for generosity in such humanitarian activities who, I fear, will get a large portion of the bill. It is worth it; lives that have been so deeply jeopardised by recent events will be saved.

As to access from the sea for humanitarian supplies, the UN Secretary-General has sent a humanitarian assessment mission to the region and a DfID Minister, Mike Foster, is also there looking at the humanitarian issues. We will need to wait and see what is the best way to achieve the supply that we all want to see on an urgent basis.