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Banking Bill

Volume 707: debated on Monday 2 February 2009

Report (1st Day)

Relevant Document: 3rd Report from the Constitution Committee

Clause: Overview

Amendment 1

Moved by

1: Clause 1, page 1, line 13, leave out “private sector” and insert “commercial”

My Lords, in moving Amendment 1, I launch what I hope will be an enjoyable couple of days on Report. With the leave of the House, I will address some overall issues before turning to my amendment. I am aware that the Minister’s officials have been working extremely hard on the Bill, and they have produced letters following our Committee sittings in record time. We much appreciated that. However, we were disappointed that the Government did not table a single amendment until late last Thursday. We had agreed, obviously, to waive the usual interval of two weeks between Committee and Report for a Bill of this length and complexity. This gave less than six days—in fact only three sitting days—between the two stages. The Government guidelines indicate that amendments should be tabled one clear week before Report. But as I have said, the Government tabled none before late on Thursday, not even those that arose out of the first four days of Committee. I hope that that was not a tactic to restrict the preparation time of the Opposition. If so, I can assure the Minister that we are fully prepared for battles ahead. I hope that he is well prepared with a file full of speaking notes that do not say “resist”, but rather, “accept”. We shall see.

More seriously, this has meant that we have had little time to prepare for Report and, in particular, consult outside bodies which have a real interest in the Bill. Accordingly, since we have accommodated variations to normal practice to facilitate the passage of the Bill, I hope that the Government will agree to relax the normal constraint on the carrying-over of points to Third Reading. This is particularly the case in relation to Clauses 22, 34, 38 and 48.

I am very grateful to the Treasury for arranging a meeting between parliamentary counsel and lawyers who specialise in financial services and for allowing me to attend. These areas continue to raise difficult and technical issues which we will need to consider further, including the possibility of tabling amendments for Third Reading. I believe that the Minister has agreed that and, subject to his confirmation, I will not be moving my amendments to those clauses today.

We may also need to refer to some other issues, and I hope that I can rely on the Minister and the usual channels for a reasonable response if we need to make a case. I should stress I am not asking for a wholesale suspension of the rules.

I should also say that we were obliged for practical reasons to table our amendments without sight of the Government’s, so there is some duplication between the government amendments and our own. That is unfortunate, but I hope it will not impede the work of the House on Report.

Amendment 1 concerns the first of the three stabilisation options. It is the one that the Government say that they favour, and it is certainly our favoured solution to bank failure. It involves transfer to what is described in the Bill as the private sector. In Committee, I moved an amendment to Clause 11, because that clause was headed “Private sector purchaser”, but in fact it talks about selling all or part of the business of the bank to a commercial purchaser. I naively thought that this might be a mistake, because the two—commercial and private sector—are clearly not synonymous. The Minister surprised me in Committee by saying that the Government wanted to be able to sell to what he described as a,

“healthy deposit taker in which the Government are a shareholder”.—[Official Report, 14/1/09; col. 1241.]

That begs a rather big question. If the Government really believe in temporary public ownership, as opposed to old-fashioned nationalisation, a healthy deposit-taker would already have been transferred back to the private sector and would not exist as a potential public sector purchaser of a failed bank. The Minister also said that they might want to sell to the commercial arm of a foreign state. My party is not attracted to either of those options, but for the purposes of the Bill we have accepted them. My Amendment 1 therefore seeks to make the Bill consistent and to refer to a commercial purchaser. The amendment conforms the language of Clause 1 with that of Clause 11. If this is accepted, the heading to Clause 11 should be aligned as well, but that can doubtless be achieved separately. I beg to move.

My Lords, I welcome the constructive opening comments made by the noble Baroness, Lady Noakes, and I will do my best to ensure that we comply with the spirit that she evidences and that she says she expects from us. I agree with her that it may be necessary to return to some of the issues of substance at Third Reading, including, where that would be helpful, through the tabling of further opposition amendments. Of course, this will need to have been agreed through the usual channels. In particular, we have agreed through the usual channels that it would be helpful to further consider issues around Clauses 22, 34, 38 and 48, including with external stakeholders. I would like to inform your Lordships’ House that the noble Baroness and I will not move the following amendments today: 21 to 23, 27 to 30 and 34 to 38. We will instead return to address these amendments at Third Reading.

Amendment 1 would change Clause 1 so that the private sector purchaser stabilisation option is referred to instead as commercial purchaser. This is similar to an amendment that the noble Baroness tabled in Committee. Following that debate and her comments now, I believe I understand her main concern on this. It is not, as I had previously thought, a concern about discrepancy, but rather that, in presenting this stabilisation option, both in the title to Clause 11 and in Clause 1, as one involving a private sector purchaser, the Government are not accurately representing what may be allowed under these powers. I do not agree with the noble Baroness on this point and I believe the Government have been open on this matter. Clause 11, which describes the effect of the powers, clearly states that a transfer of a bank or its business may be made to a “commercial purchaser”. As I stated in Committee, it may be the case that a healthy deposit-taker in which the Government are a shareholder may be in a position to take on the business of a failing bank. The wording of Clause 11 clearly permits this.

This is not something about which the Government are trying to keep quiet. I wish to be very clear that we must use these powers in whatever way meets the special resolution objectives. Thus, the text of Clause 11 refers to a commercial purchaser to take account of situations in which the transferee may not be entirely privately owned. Given this, one may argue that the heading of that clause and the title “The stabilisation options” for these clauses should change to reflect this. The Bill has, however, been drafted with a number of main headings which use terms to reflect the main purpose behind the powers. The stabilisation options have been labelled “private sector purchaser”, “bridge bank” and “temporary public ownership”. None of those terms has precise meaning unless given so under the clauses that provide for them. In each case the clauses are clear. Furthermore, we have been clear in our presentation of the clauses how the powers can be used.

The principal purpose of the stabilisation option in question is to achieve a transfer of the shares or property of a failing bank to a private sector purchaser, which is why the option is labelled, and why Clause 11 is titled, thus. For that reason, I invite the noble Baroness to withdraw her amendment.

My Lords, I thank the Minister for that response. It seems that the Government want the ability to say that “black is white” and “white is black” if they choose so to do. We said in Committee that the Government were spinning through this Bill. This is not the only place where they are spinning, but it is perhaps the most egregious example. The Minister has disappointed me in not wishing to stick with proper drafting procedures by using words that have precise meaning. Instead, he has used words that convey something to some people but that are not intended to be used in that way in the detail. That is very regrettable, but I shall not pursue the case further. I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

Amendment 2

Moved by

2: Clause 1, page 2, line 5, at end insert—

“( ) If there is any conflict between the roles of the Bank of England, the Treasury and the FSA, or if there is any disagreement between all or any of them as to their roles or responsibilities, the view of the Treasury shall prevail.”

My Lords, this amendment deals with the question of who is in charge, which has hovered over the tripartite authorities since late summer 2007. My party has been asking that question since the Northern Rock affair and it was also picked up by the chairman of the Treasury Select Committee in another place. The question has never been answered.

We debated this in Committee in conjunction with a further amendment which also sought to require the ongoing co-operative tripartite working that we have been told is the underlying modus operandi of the tripartite arrangements. Many of us have concerns about the tripartite arrangements because the stresses and strains within them were evident for all to see in summer 2007. In Committee on 13 January, the Minister told us that from his experience,

“it works a lot better than many would suggest”.—[Official Report, 13/1/09; col. 1132.]

That is not quite as ringing an endorsement of the tripartite authorities as we, or indeed they, might have hoped for. Indeed, there is evidence in the Bill—notably in the way that the Bank of England expects to work via its new Financial Stability Committee—that joint working will not be the norm. Instead, we have a picture of the tripartite authorities working in silos with occasional interaction between them rather than the reverse. At the end of the day, the tripartite arrangements will be judged by their outcomes. If they do not work well and the Government pass up opportunities in the Bill to make them work better, the Government will take the blame.

Amendment 2 is not an optional extra, because it goes to the heart of accountability. As my noble and learned friend Lord Mackay of Clashfern said in Committee:

“I would have thought it a necessary condition of an effective organisation that the buck should stop somewhere. It is therefore important that somebody—some group or institution—should have responsibility for the ultimate decision”.—[Official Report, 13/1/09; col. 1131.]

My noble and learned friend then referred to the FSA's decision under Clause 7. It is clearly the FSA's decision, but it cannot be reached without consulting the Treasury and the Bank of England, and the question must arise: what happens if there is a dispute between the parties? If we faced another Northern Rock case, where there clearly were differences of opinion within the tripartite authorities, we would need to be clear where ultimate responsibility and accountability lie. It is not enough to say that each party will be accountable for its own decisions, because not every decision will have been documented in the Bill or allocated to one party. Nor is it enough to say that there is collective accountability, because that is simply another way of saying that accountability is diluted and weak.

I concede that there was a difference of opinion in Committee about who should have the final say. Some favoured the Bank of England. The noble Lord, Lord Newby, conceded that, as a matter of practicality, the Treasury calls the tune, as he put it. However, he most definitely did not want to name the Treasury in case it got above itself.

My brief spell in the Treasury many years ago did not leave me with quite that kind of antipathy towards it, although I am not uncritical of it. At the end of the day, we are talking more about the responsibility and accountability of Ministers, not the hardworking and able civil servants in the Treasury. The Treasury Minister, the Chancellor and the First Lord got away scot free in respect of ultimate responsibility for their role in Northern Rock. That is why we must not let that happen again and why I have tabled my amendment again for Report. I beg to move.

My Lords, I add a brief word in support of what my noble friend has just said. There was a long period of public discussion about where the responsibility and authority lay in the case of Northern Rock. It was almost a classic case of what can happen when these matters are not thoroughly clarified. If this complicated legislation is to work effectively, it must be publicly understood where the ultimate responsibility lies. The point has been very well made, and I do not need to make it again, but if what is said in Amendment 2 is correct, there is no reason why what it says should not be in the Bill. If it is not correct, we have further questions to ask.

My Lords, I, too, support my noble friend’s amendment. Two uncertainties run through the whole Bill. One is how detailed a definition we may have of financial stability and thus of financial instability. The other is the question of the threshold conditions—what constitutes going over the border of the threshold conditions in Schedule 6 to the Act of 2000? We have pursued both, and will pursue further on Report, the meaning of financial stability and the trigger for the threshold conditions not being met. In these circumstances, the Treasury, by which I might easily mean in current circumstances the Prime Minister and certainly the Chancellor of the Exchequer, will in fact decide. It is quite unreasonable that this should not be recognised and, as my noble friend Lord Stewartby just said, quite unreasonable that it should not be in the Bill.

My Lords, the amendment, and the issues to which it draws attention, was debated in Committee. I regret that I could not sufficiently comfort the noble Baroness, and other noble Lords who supported her at that stage, that her amendment is not necessary or desirable.

Let me remind noble Lords of the arguments that I put forward. The Bill sets out resolution processes whereby each of the tripartite authorities has lead responsibilities in the areas in which its expertise and authority lie. Thus the FSA—the independent regulator—will be responsible for taking the regulatory decisions about whether a bank should enter the SRR and for the ongoing supervision of any bank while it continues to operate in the SRR. The Bank of England will be responsible for the operation of the SRR and the tools in it, other than temporary public ownership, as well as for its traditional functions as a central bank, such as providing liquidity assistance. Finally, the Treasury will either take, or have the final say in, those decisions that would have a significant impact on public finances or on matters relating to the broader public interest; for example, in matters relating to the UK’s international obligations.

This position has been consulted on and is supported by stakeholders. As the noble Lord, Lord Newby, pointed out in Committee while explaining why he could not support the noble Baroness’s amendment, requirements are imposed on the authorities throughout the Bill to consult one another before discharging their various responsibilities. These requirements are explicitly provided for in the Bill to underline the importance of tripartite co-operation and consultation. Of course, proper mechanisms—I am thinking, in particular, of the standing committee—already exist by which the authorities are able to consult one another closely in dealing with any potential threat to financial stability, the banking system or depositors. The noble Baroness chides me with evidencing a less-than-ringing endorsement. I hope that I will always exhibit moderation in this Chamber and decline hyperbole but, for the avoidance of doubt, I have observed the tripartite system in operation from close quarters as a director of a regulated entity, through my membership of the Court of the Bank of England and, more recently, through my involvement in Her Majesty’s Treasury, and I think that it works well.

I do not think that it is necessary for the Bill to go further than this and to specify that one authority would always have the final say. It would be counterproductive and damaging; for example, it would mean that our system of independent financial regulation would be compromised. If the Treasury were to disagree with the FSA’s judgment that a bank remained in compliance with its regulatory threshold conditions, under the noble Baroness’s amendment the Treasury would be able to override the FSA’s decision. On what basis could the Treasury take such a decision? On what grounds could it claim to have better regulatory and supervisory understanding of the bank than the regulator? At the very least, the Treasury would have to develop a significant shadow supervisory function to analyse regulatory information. It would have to gather such information itself, which would create duplication, confusion and dilution of responsibility.

It would also send a strong signal that the SRR could be triggered for reasons of political expedience rather than because there was a genuine risk that a bank might fail and damage financial stability. This charge was laid against the Government—wholly irresponsibly and without the least foundation, I might add—in respect of their actions in nationalising Northern Rock. The Government believe that the permanent regime for dealing with bank failures should not allow even a scintilla of doubt over whether political motivations will override judgments taken by the independent regulator or the central bank within their respective spheres of authority and competence.

I could labour the point further, but it is straightforward. I believe that I have said enough and that my answer has addressed the point raised by the noble Lord, Lord Stewartby. It would be wrong to opt for an overly simplistic approach of determining who is in charge. We should recognise that these three bodies work together and that each has an area of specific responsibly. It would be wrong for the Bill to give primus inter pares status to the Treasury. Therefore, I invite the noble Baroness to withdraw her amendment.

My Lords, I thank my noble friends Lord Stewartby and Lord Eccles for their support of this amendment. I thank the Minister for improving just a little on the endorsement of the tripartite authorities that he gave in Committee. If we keep going on the Bill, he might get to a positive statement about them at some stage. But let us put that on one side.

There seem to be two universes. One has the Banking Bill, where the relevant authorities do their own things, which is what my amendment is about, and in the other there are the tripartite authorities, which are supposed to work well together but, as the evidence from Northern Rock showed, did not. We have not had another test; we only ever had one public test, which they failed. My point was about the broader issue of the tripartite authorities and the inability to hold to account anybody other than this collection of bodies. Speaking as a parliamentarian, I am frustrated by that. However, one cannot let one’s frustrations get in the way of letting the Bill go forward. I see the Minister’s point about not compromising the judgments of certain players, but I continue to believe that the co-ordinating aspects of the tripartite authorities are not well reflected in the Bill. I have raised that matter at other points in our deliberations on the Bill, but I will pursue it no further. I beg leave to withdraw the amendment.

Amendment 2 withdrawn.

Clause 4 : Special resolution objectives

Amendment 3

Moved by

3: Clause 4, page 3, line 22, at end insert “which includes ensuring that that they have access to their deposits as rapidly as possible and that depositors and other customers have continuity of banking services”

My Lords, this amendment would add additional words to objective 3 of the special resolution objectives as set out in Clause 4(6). Currently, objective 3 is to protect depositors, which we agree is a very important objective. We know that in practice the protection of depositors is one of the most important considerations that have driven government actions to date. Indeed, some of us have struggled to see that some of their interventions have genuinely been about systemic risk at all and that the protection of depositors has driven policy. However, this focus on protecting depositors concentrates on those who have financial assets in the system and ignores the wider dimension of banking services. Of course, many people have deposit accounts in which they store their savings or spare resources. However, many more do not have savings but have a crucial reliance on their bank for everyday transactions. Those bank accounts might not even be in credit at the date when a bank fails, yet the continuity of service is just as vital to those people as to those who are owed money by the bank.

In Committee, I cited the statistics in the Government’s regulatory impact assessment, but they bear repetition. Ninety per cent of wages and 98 per cent of benefits are paid into a bank account or a Post Office account and 75 per cent have at least one direct debit. I doubt whether there is a business in the land that survives without a bank account. I go so far as to say that ensuring the continuity of banking services is at least as important as protecting depositors. It is one thing to have to wait for one’s deposit money to be returned; it is quite another if one has no ability to manage household finances or draw cash from a hole in the wall. The one thing that would destroy confidence in the banking system is if banking services were disrupted. Therefore, continuity of banking services is essential for the achievement of objective 2, which is about that confidence, as the Minister pointed out in Committee.

The Government have included words about continuity of banking services in the code of practice, but omission of such words from the objectives means that the continuity of banking services is no more than an optional extra as far as the objectives are concerned. The Minister will be aware from our exchanges in Committee that the banking industry has a particular concern that, if continuity of banking services is not hard-wired into the special resolution regime, the Financial Services Compensation Scheme could end up being overengineered at a cost of around £1 billion. That is what the FSA’s current consultation could involve. While this is a cost that the banks would have to pay in the first instance, we should be in no doubt that consumers would end up having to pay for it.

If we ask the man in the street what they want from the Bill, I am sure that they would tell us that they want their bank accounts to remain functional and that they do not want to pay any more for that. That is what my amendment is designed to achieve. In Committee, the Minister said that the code of practice was a better place for explaining the meaning of terms. I accept that up to a point, but not when it drives at the heart of what the objectives are. Clause 4 has only the protection of depositors as an objective. It is perfectly possible to protect depositors without protecting banking services at all; the two are not synonymous. For example, I do not regard my internet savings account with a bank that is not my main bank as part of the banking services that I need. It is simply a financial asset, which I need to have repaid if the bank goes belly up. However, I most assuredly need the banking services to deal with everyday life from my main bank. That is why we need to ensure that continuity of banking services is clearly specified as an objective in the special resolution regime. I beg to move.

My Lords, we supported the amendment in Committee. As the noble Baroness has just said, the Minister stated that we should all be relieved that the relevant provision is referred to in the code. The problem is that the code is an obscure and amendable document. The Bill is neither obscure nor amendable in the same way. The amendment covers an extremely important point of great concern outside these walls. This is the kind of amendment, of which there are a number that we shall debate today, that could be incorporated in the Bill without impeding the Government’s ability to do what they want with the Bill in any way. However, it would reassure people about how the Bill will operate. The Government should be thinking about a package of amendments, of which this is the first, that they could put into the Bill to reassure people. I hope that the Minister will show his spirit of generosity, starting by accepting the amendment.

My Lords, I do not think that the Government have sufficiently taken on board the enormous importance of continuity. They accept that it should happen but, by resisting the sort of amendment that would specifically spell it out, they make one feel that it is rather a subsidiary objective. The clause contains several objectives, such as protecting public funds, enhancing,

“public confidence in the stability of the banking systems of the United Kingdom”,

and others. These are all important and necessary objectives to spell out. However, for most people and businesses involved with banks, the most important thing is uninterrupted service and continuity of their banking arrangements. I hope that the Government appreciate how strong the feelings about this are.

My Lords, I add that the Government’s view on this seems in sharp contrast to the amount of space in the Bill devoted to the importance of resco continuing to give service to newco.

My Lords, the noble Baroness pointed out in Committee that the British Bankers’ Association feels strongly about the amendment. I am not surprised to hear it; the Treasury has also had communications from the BBA. For example, I have read the BBA’s briefing paper for Second Reading in another place, which referred to the need for,

“the balance between delivering compensation payments through the FSCS and seeking to maintain access to funds through alternative solutions”.

The question that we must ask ourselves in relation to this subject, or any amendment, is whether the amendment is necessary to the Bill, rather then whether the British Bankers’ Association wants it. As I pointed out in Committee, the concepts of continuity of access to banking services and rapid access to deposits are already present and correct within the special resolution regime objectives. I am not sure that I would be drawn as far as the noble Baroness in suggesting that this was almost as important, or as important, as protection of depositors. However, I have no doubt that it is important, for the reasons that the noble Baroness and the noble Lord, Lord Newby, explained with such eloquence.

Continuity of access to banking services is implicit within the objective to protect and enhance public confidence in the stability of the banking systems of the United Kingdom and within the objective to protect depositors. As I said, this is clearly explained in the code of practice, a draft of which was made available in November.

Let me go a step further. Avoiding a failure in which a bank closes its doors and the Financial Services Compensation Scheme pays out depositors is the fundamental raison d’être of the SRR and the guiding principle behind the whole of Part 1. The stability of the financial system, the interests of depositors, and the public finances will be better served if effective intervention can ensure the resolution of a troubled bank before, rather than after, it fails.

By its very definition, therefore, the SRR is about ensuring continuity of service to customers. The examples of bank resolution that we have seen in the past year have consistently demonstrated that point. Wherever possible, the powers in the Banking (Special Provisions) Act have been used to ensure that depositors had continuous access to their accounts, to their funds and to banking services. In the case of Northern Rock, this was achieved by public ownership; in the case of Bradford & Bingley, it was achieved via a deposit transfer to Abbey Santander; and, in the case of Kaupthing Singer & Friedlander and Heritable, it was achieved by the transfer of depositors to ING Direct. That will clearly continue to be the case under the Banking Bill. After all, what is the point in inventing a special resolution regime if you do not intend to use it to the benefit of bank depositors, the financial system as a whole and the taxpayer?

The British Bankers’ Association appears to be concerned that, without the amendment, the authorities would be minded to close down failing banks and leave the FSCS to pick up the pieces. I am very happy to assure your Lordships that this is not the case and I hope that I have made it clear why.

I must point out one area where I differ from the BBA and where I hope that the noble Baroness agrees with me. I do not agree that the existence of the SRR means that we should not be doing all that we can to ensure that the Financial Services Compensation Scheme could, if required, pay out quickly in the event of bank failure. I agree that this will not, in most cases, be the best outcome, but we must prepare for it nevertheless.

That is why, for example, Part 2 provides for the creation of a new bank insolvency procedure and Part 4 makes some minor improvements to the legal framework in the Financial Services and Markets Act to facilitate fast payout. It is also why the FSA is consulting on the systems changes that the banking industry will need to implement if fast payout under the FSCS is to be practically possible in those cases where it is necessary.

I can appreciate that this “single customer view” is causing the BBA some concern. If adopted, the FSA’s proposals will certainly require some of the BBA’s members to invest in new systems, but it seems to me entirely appropriate that banks should be able to tell the authorities, at short notice if necessary, who their customers are and how much money they have deposited with, or been lent by, the bank. I would also have thought that a single customer view was something that a bank’s marketing and development departments would find useful.

We live in an age where banks are expected and, indeed, required to know their customers. To suggest that banks need not invest in technology that would enable them to do this better—technology that would surely improve the service that the banks can provide for their customers—because the authorities will always be around to step in and prevent any bank from failing in any circumstances seems to me to be moving in the direction of irresponsibility.

Of course, the authorities will do all that they can to prevent the operational failure of a bank by using the tools in the SRR, but they will be hampered in their ability to do so if consumers do not have absolute confidence that they would be repaid rapidly in such circumstances, including those cases when the only realistic option is to close down the bank. Depositors will have more confidence in the authorities’ efforts to resolve a failing bank if they know that they will be protected come what may. In other words, not preparing for the contingency of the FSCS payout would have the paradoxical effect of making it more likely that it would have to be used.

The noble Lord, Lord Newby, queried whether the code was an obscure document which did not provide reassurance concerning continuity. The authorities are legally obliged to have regard to the code. It has been subject to scrutiny in Parliament and, with today’s amendments, will have the input of the Banking Liaison Panel. Assurances given in the code should, therefore, provide comfort to noble Lords.

I am, however, mindful of the comments made by the noble Baroness and others and I will, in the spirit of generosity that I have been urged to show, go away and reflect further on this matter and on whether we could introduce an amendment at a later stage. I shall not give an assurance that we will introduce an amendment, but I certainly give an assurance that we will give that very careful consideration.

My Lords, I thought that the Minister would disappoint me completely in his extensive reply, in which he raised a number of points. The noble Lord, Lord Newby, is right about the code of practice. There is not a legal requirement; there is a requirement only to have regard to the code. We know that the Government use that formulation to give themselves flexibility and that it creates not much more than an indication of what might be followed. If the code were legally binding, that might be a different issue, but it is not. In addition, as the noble Lord, Lord Newby, pointed out, the Bill allows the code to be changed at will. The Government cannot have it one way, for flexibility and all the other reasons, but then try to use that as an excuse for not having something in the Bill.

The Minister made much of the issues concerning the BBA. I would not have raised this issue had I not thought it reasonable to do so, because while there is a potential cost on the banking industry and, therefore, consumers, regarding the way the FSA is taking the Financial Services Compensation Scheme, the issues that I have raised go beyond that, because they are genuinely about signalling what is important. While I completely agree that getting your money back is important, one must strive to achieve continuity of banking services in any special resolution regime. That may not always be possible in every case, but those should be the objectives.

I am grateful to the Minister for agreeing to take this away. I hope that he will table something for Third Reading, because if he does not, I shall bring back my amendment. On that basis, I beg leave to withdraw.

Amendment 3 withdrawn.

Amendment 4

Moved by

4: Clause 4, page 3, line 25, at end insert—

“( ) Objective 6 is to avoid the distortion of competition.”

My Lords, the amendment is to ensure that in the event of the powers of the special resolution regime being used, a bank which comes under the regime will not take unfair advantage over the competition. When this matter was debated in Committee, we did not have the benefit of the arguments in favour of ensuring continued competition in the banking sector which were put so ably by the noble Lord, Lord Whitty, in support of his amendment. Although Members of the Committee were not so sure about remedies suggested by the noble Lord, there was strong agreement with the thrust of his argument that competition is essential to ensure that there is no disadvantage to consumers from creating overpowerful institutions.

If Her Majesty’s Government are forced to use the proposed legislation, there is clearly a danger that the number of banks will be reduced and that another superpowerful bank may be created. Together these could have a severe effect on competition, so it is only right that there should be a requirement to avoid distorting competition.

The Minister pointed out that not only was he a supporter of strong competition between banks, but that the Office of Fair Trading had responsibilities under Parts 4 and 6 of the Enterprise Act 2002. However, as the noble Lord, Lord Borrie, pointed out, in the case of HBOS and Lloyds Bank the Government overrode the express view of the Office of Fair Trading, so there must be some doubt about the effectiveness of that organisation in these circumstances. Another reason is that Clause 75 allows laws to be amended by order, except for those in this Bill, so the Enterprise Act could easily be overridden.

If the Minister really is keen on maintaining a competitive, if oligopolistic—a splendid word used by the noble Lord, Lord Whitty—banking sector, I am sure he will accept this amendment and include in the Bill a requirement to avoid the distortion of competition. I beg to move.

My Lords, this is another area where I think that there is very little difference between the Opposition and the Government in terms of the goal that we seek to achieve, but there is a difference of opinion as to whether there is a need for that to be formally incorporated in the Bill. I shall seek to persuade the noble Lord, Lord Howard of Rising, to withdraw his amendment.

In Committee, I provided a number of reassurances on how the Government treat competition, referring to the important role of the Competition Commission, the Office of Fair Trading and the FSA. I also drew attention to the SRR code of practice, which includes guidance on the management of publicly owned banks, requiring them to be run in a conservative manner.

In addition, during the debate on the amendment of my noble friend Lord Whitty, I described how the OFT and Competition Commission have an active role in monitoring and investigating movements that have implications for competition within a specified market. This includes the OFT’s ability actively to investigate markets that do not appear to meet the needs of consumers.

Therefore, to reiterate what I said in Committee, we should be satisfied that the competition authorities will continue to keep relevant markets under review in order to protect the interests of UK consumers and the British economy.

Finally, I again draw attention to the fact that a banking business transferred to a private sector purchaser, a bridge bank or a bank in temporary public ownership will continue to be regulated by the FSA in the same manner as other financial services providers.

Rather than repeat those arguments further, I should like to reflect on a matter raised during the Committee debate by the noble Lord, Lord Howard of Rising, in connection with the merger of Lloyds and HBOS, a subject to which he referred again this afternoon. With the greatest respect, I do not agree with the noble Lord’s assessment of this matter. My noble friend the Secretary of State for Business, Enterprise and Regulatory Reform considered the matter and gave regulatory clearance on the basis of the public interest. In coming to this decision, my noble friend, as well as considering representations from the authorities, also considered representations from the parties to the proposed merger and interested third parties.

The fact that the merger went ahead does not mean that competition was ignored. Rather, proper process was followed and competition issues were considered. I repeat, therefore, that there are structures and systems in place in other legislation—in particular, the Competition Act and Enterprise Act—to ensure that distortion of competition is avoided.

In Committee, the noble Lord, Lord Howard, requested that my assurances on the points that he raised should occasionally “have a practical result” in the Bill. I am afraid that in this instance they should not. I do not agree that the protection of competition within the financial and other markets that already exists in other legislation needs to be duplicated in this Bill. The special resolution objectives set out the broad purpose of the SRR and therefore the matters to which the authorities must have regard when undertaking action under the SRR.

There is, as noble Lords will have noticed, one exception to this: objective 5, relating to the avoidance of interference with property rights. This is not of course a core purpose of the SRR, as, for example, is the protection of depositors. However, this was included in recognition that many of the SRR powers directly interfere with property rights. Given this, it seemed appropriate to place an explicit objective to avoid any interference that is in contravention of a convention right under the European Convention on Human Rights.

As the noble Lord has pointed out, a number of consequences of action under the SRR may result in an effect on competition. I do not believe that this is of the same magnitude as the direct effect of the Bill’s powers on property rights. Further, and at the risk of repeating myself, a significant body of English and EU law already works to protect competition matters. This is an important matter, which is why I have endeavoured to be reassuring. But for the reasons I have set out, I urge the noble Lord to withdraw his amendment.

My Lords, I thank the Minister for his remarks. However, his endeavours have not been very successful as I am not reassured. He mentioned the FSA, but the FSA is not responsible for competition; as far as I know, that is the Office of Fair Trading. If competition issues were considered equally, they were overwritten in the case of Lloyds and HBOS. That overriding and the potential of a very large bank to ride roughshod over other people are addressed by this amendment. With the best will in the world, the Minister, despite his strong effort, has not been convincing. I accept that we shall not go further with this today, so I beg leave to withdraw the amendment.

Amendment 4 withdrawn.

Amendment 5

Moved by

5: Clause 4, page 3, line 27, at end insert—

“( ) In addition to the objectives set out in this section, the relevant authorities shall also have regard so far as it is practicable to the interests of creditors and shareholders.”

My Lords, Amendment 5 gives recognition to the interests of creditors and shareholders. This is a more modest amendment than those discussed in Committee. At that time, the Minister pointed out that objective 5 set out in Clause 4(8), referring to the Human Rights Act, gave adequate protection so an amendment to include the protection of creditors was not necessary. Up to a point, as the Minister said, the special resolution regime is designed for the protection of depositors, and the protection of creditors is not a primary objective. That being the case, there is a danger that creditors, especially small creditors, may end up being accidental casualties, as the authorities pursue the primary objective of this legislation. Similarly, shareholders may also suffer disadvantages, in particular, with the power included in the legislation for the Government to acquire holdings and/or other group companies of a bank. In this case, the line between what is a failing bank and other interests of that corporation or group may not be clearly defined.

I do not agree with the Minister’s arguments in favour of this power, but if it is included in the Bill, there is a danger that, as with creditors, as was pointed out earlier, the interests of shareholders could become overlooked or trampled on in pursuing the primary objective of protecting depositors. If the powers included in the Bill become law, it would be only reasonable that there should be recognition that creditors and shareholders also have rights. Those rights will not disappear just because a bank is in trouble, even if creditors and shareholders have to take their turn behind depositors. As commented on earlier, this amendment is modest and would in no way impede the protection of depositors and the banking system. However, it would help to draw attention to the fact that there are other interests as well as those of depositors. I beg to move.

My Lords, this amendment in essence incorporates an amendment that stood in my name in Committee, so I should like to associate myself with it. No one doubts that the position of the depositors in situations where a bank might be failing is the first priority. But, as I argued in Committee, the dilatoriness with which the Government obtained a solution to the Northern Rock situation and moved towards nationalisation harmed the interests of creditors and shareholders significantly. There was no evidence at any point that the Government took their interests into account. Therefore, while not wishing to detract from the importance of the position of depositors, this amendment, modest as it is, has much to commend it.

My Lords, this amendment would require the authorities to have regard to the interest of creditors and shareholders as far as is practicable. I believe that this amendment is unnecessary and confuses the approach we have taken to specifying the objectives to which the authorities must have regard in acting under the provisions of this part of the Bill.

I fully appreciate what motivates the noble Lord’s concern that the authorities should have regard to the interests of creditors and shareholders. But the Bill already requires this to the appropriate extent. First, under the European Convention on Human Rights, the Government must demonstrate that any interference with anyone’s property rights, including shareholders and creditors, is justified. This is a fundamental legal requirement, with which the Government would have to comply, regardless of the provisions of this Bill. But we have done what is necessary to demonstrate compliance with the requirements of the convention in primary legislation. This is clearly signalled by objective 5 in Clause 4.

In concrete terms, under Clause 7, the Bill limits the circumstances in which intervention can take place and, under Clauses 8 and 9, creates a strong public interest justification before stabilisation powers can be exercised. Under Clauses 49 to 59, further provision is made by putting in place compensation mechanisms to assess compensation for any compensatable interferences with property rights. In addition, and acutely aware as we are of the concerns of creditors in particular, as the noble Lord knows, we have created additional safeguards for partial transfers and we have made explicit the objective to avoid interfering with property rights.

I am not sure what the amendment would add to this. As I have explained, the European Convention on Human Rights requires that we take into account creditors’ and shareholders’ interests in the design of the powers and the actions taken under them. For this reason I urge the noble Lord to withdraw his amendment.

My Lords, I thank the noble Lord, Lord Newby, for his support for the amendment. I do not see how the amendment could be construed as confusing. The Minister repeated the same arguments and I am afraid that they are no more convincing this time around than they were the last time. Compensation will never be quite the same as giving someone or something proper consideration in the first place. Compensation is a remedy for something that has been done that should not have been done. It would be much better for provision to be in place for the action not to happen in the first place. That may sound rather convoluted. If consideration had been given in the first place, there would be no need to claim compensation. For that reason, it would be desirable to include that in the Bill. I beg leave to withdraw the amendment.

Amendment 5 withdrawn.

Amendment 6

Moved by

6: After Clause 4, insert the following new Clause—

“Transparency: general

(1) Whenever the special resolution regime is used, the relevant authorities will ensure that they make public full and transparent information on a timely basis about their actions and the consequences or likely consequences of their actions.

(2) If the relevant authorities think it necessary on public interest grounds, they may delay making information public under subsection (1).”

My Lords, this amendment takes up the theme of transparency which I shall pursue at various points in the Report stage. It deals with transparency about the use of the special resolution regime and seeks to insert a new clause after Clause 4 requiring the authorities to be transparent. In Committee, my noble friend Lord Howard of Rising moved a more specific amendment which focused on the Treasury presenting a report to Parliament about the way in which the relevant authorities had used their powers under this part. The Minister made his usual defence that lots of information is available to allow Parliament to call the Government and the other relevant authorities to account, and he offered a critique of the precise terms of that amendment. On reflection, it focused too closely on Parliament and allowed the Minister to divert into the mechanisms of parliamentary accountability, most of which, I should point out, look good on paper but are relatively weak in practice. The issue is transparency.

Parliament has an interest in what the Executive and public bodies do under the terms of the legislation passed by it, but there is also a big audience in those who are affected by the use of the powers. This clearly covers the financial services industry, but importantly also extends to groups representing consumers and other users of financial services. Here my amendment for Report is less narrow in many ways than the amendment moved in Committee. It is not focused on to whom information should be given and the precise details of that information; rather it sets up a duty on the relevant authorities to,

“make public full and transparent information on a timely basis about their actions and the consequences or likely consequences of their actions”.

We cannot define in Parliament exactly what it would be appropriate to reveal in any particular instance of the use of the special resolution regime, but I hope that we can agree on some criteria—transparency, making public, and timeliness. That, I hope, is what the amendment conveys.

The Minister may refer, as he did in Committee, to the provision in the code of practice relating to the announcement of actions and an explanation for why the conditions for exercise of the powers were met. There are three points here. First, the code requirement is just that. There is no legal obligation on the authorities to follow it and it can be changed at will by the Government, as we mentioned in an earlier group. Secondly, the code is a backward-looking requirement, while my amendment asks the relevant authorities to address the consequences of their actions and to keep information in the public domain. Thirdly, my amendment does not cease once a decision has been made. It is intended to go beyond the initial action, which is all that the code addresses, and to require ongoing transparency, an aspect on which we would probably not score the existing bank nationalisations highly.

I hope that the Minister will be able to embrace transparency and accept my amendment. I beg to move.

My Lords, I have a lot of sympathy with the motive behind this amendment because it is in everyone’s interest that the country as a whole gains a full understanding of why action has been taken under the special resolution regime. I am slightly concerned, however, that the amendment may well not achieve what the noble Baroness wishes because it gives too much scope for the relevant authorities themselves to define what constitutes full and transparent information. The Bank may think that what we or the noble Baroness would consider full and transparent information is more detail than would fit its definition. I am also concerned that it could use the second part of the proposed clause to delay making available a lot of information almost indefinitely. As I say, while I have sympathy with what lies behind the amendment, I am sceptical about whether it would achieve what the noble Baroness seeks.

My Lords, the draft code goes a long way to support the points just made by the noble Lord, Lord Newby, because in paragraph 17 it states that,

“the Authorities must make public statements explaining how they have acted in regard to the special resolution objectives; and … how they have balanced the objectives”.

But paragraph 18 states:

“It should be noted that it will not be possible to divulge certain information, for example information the release of which would threaten financial stability or confidence in the banking system”.

Paragraph 18 could be used to nullify paragraph 17 without any difficulty.

I draw attention to a different point in relation to transparency, which of course is one of the original criteria that led to the Financial Services and Markets Act 2000 and the setting up of the FSA, which has a duty to be transparent. In the Bill and in our discussions, we constantly come across the issue of confidence in the banking system. Indeed, in Davos on Saturday, the Prime Minister repeated the need for the re-creation of confidence in the banking system. But that is putting the cart before the horse because the problem is to re-create confidence within the banking system. Because of the £50,000 deposit guarantee, the public are probably willing to await the outcome of the mountain-of-debt crisis, but the bankers do not know how to deal with it and have almost entirely lost their confidence.

My Lords, I am grateful to all noble Lords who have spoken, particularly as their speeches were united with the noble Baroness in her intent. I, too, share that intent. The Government follow the position which she is seeking to ensure through her amendment, that the authorities should provide relevant information about their actions following the use of a special resolution tool. This is similar to a provision we have already included in the draft code. I know the noble Baroness does not put as much store by that as I would wish, but we have stated before that the use of the Government’s powers under the Banking (Special Provisions) Act certainly followed the concept of being as open as possible.

The Bill already requires the Treasury to lay a transfer order before Parliament. The Bank of England is to publish its transfer instrument in the public domain and, following an amendment brought forward in response to the debate we had in Committee, such transfer instruments are now to be laid before Parliament. Given this and the requirement in the code of practice, I cannot conceive of a situation where the authorities would not publicly disclose information about their activities. I would go so far as to argue that they would not be credible—the noble Viscount, Lord Eccles, touched upon this point—unless there was a public interest consideration related to confidence in the market. There must on occasion be a possibility that full disclosure of how the authorities are acting cannot be followed because of the nature of the case, and we have to make provision in the legislation for that possibility; but we have clearly indicated that we share the intention behind the amendment and the authorities will be obliged to be open in their activities.

The amendment is unnecessary. I do not disagree with the intention behind it, and we are trying to be as constructive as we can be within the framework that I have just identified. The fact that transfer instruments made by the Bank of England must now be laid before Parliament is an earnest of that intent.

The problem with the amendment is that it would require the authorities to disclose information about the consequences or likely consequences of their actions. The authorities can be expected to do that in the short and, potentially, medium terms with regard to the bank in question. They would be able to give an account of how the action met the special resolution objectives, which is the intention behind the noble Baroness’s amendment. It would, however, be difficult to require the authorities to give a full account of all the likely consequences of their actions. That is surely too open-ended a requirement to place on the authorities while they deal with a situation in which the extent to which they are able to foresee developments will inevitably be limited and they have a relatively short period in which to act.

In general the Government support the principles that the amendment seeks to advance, but I have a specific concern about the drafting and about how realistic it is to place this obligation on the authorities. I hear what the noble Baroness says—the indication in the code is not sufficient, in her terms—but that, coupled with the other statutory obligations in the Bill, means that the amendment is not necessary or even entirely appropriate. I hope she will feel that she has pressed us far and that we have responded constructively, and that she will feel able to withdraw the amendment.

My Lords, I thank the Minister for that response, and I thank the noble Lord, Lord Newby, and my noble friend Lord Eccles for their contributions to this short debate.

The noble Lord, Lord Newby, said that the amendment gave too much latitude. I always feel that one is damned if one tables a tightly drawn amendment and damned if one tables a principles-based amendment—there is no satisfying some people. I would say that it is better than nothing to require transparency.

The Minister has predictably referred, as did my noble friend Lord Eccles, to the content of the code of practice, but that is a rather narrow requirement. It has the opt-out in paragraph 18 for, in effect, public interest, which I have repeated in my own clause because I recognise that some things should not be put into the public domain, at least initially. The requirement in paragraph 17, however, is very static: it is about how they have regarded, and how the authorities have “acted with regard to”, and “how they have balanced.” It is not about what they think will happen in the future. I assume that the authorities will think about the future and the consequences of the actions they take, which is why I have asked for that to be given.

The Minister said that the Bank is now going to lay its orders before Parliament but there is no parliamentary process for that, so we will have no opportunity to examine the Bank or even the Government on any further detail about the actions. The Minister says that he agrees with the intention but cannot quite bring himself to agree with it. I would like to test the opinion of the House.

Clause 5 : Code of practice

Amendment 7

Moved by

7: Clause 5, page 3, line 32, at end insert—

“( ) The code shall provide guidance on the Treasury’s interpretation of Objective 1 of the special resolution objectives set out in section 4.”

My Lords, the amendment would add a subsection to Clause 5 requiring the code to provide guidance on the Treasury’s interpretation of objective 1 within the special resolution objectives. This is the financial stability objective.

We had quite a lot of discussion about definitions of financial stability in relation both to Clause 5 and to the Bank of England’s new financial stability objective in Clause 235. We were concerned that there could be ambiguity around that definition, especially in view of the rather narrow definition that a representative from the Bank of England had given to the committee in another place. We felt that it was important that there was an official definition. We recognised that, as the noble Lord, Lord Eatwell, pointed out, the financial system is characterised by continuous innovation and change and that the definition may well vary over time. That is why the code, rather than the Bill, is the right place for a definition.

I felt strongly about the Treasury having an obligation to give guidance about what it means by financial stability. That is why I have tabled this amendment, which is a gamma version to replace the beta version that I tested in Committee. Since then, the Government have tabled their Amendment 8, which is in this group. I shall leave the Minister to speak to his amendments. I am not sure exactly in what terms he will do so and I shall listen carefully. If what he says is satisfactory, I shall in due course be happy to withdraw my amendment in favour of his. For the time being, I beg to move.

My Lords, I am grateful to the noble Baroness for the way in which she moved her amendment. I appreciate that she wants to see the colour of the Government’s money in terms of their amendments before she makes a judgment about her own. Therefore, I shall first address government Amendments 8, 9 and 10, which add to the list of matters that the code of practice may address.

In Committee, there were a number of areas where Members requested further clarification, or expressed a desire that the code of practice include further information. While Clause 5, in particular subsection (1), already sets a broad remit for the code of practice, the Government agree that further information should be added to the code and that it is appropriate to signal this through Clause 5.

Amendment 8 seeks to provide reassurances to the noble Baroness on two issues that she raised in Committee. She proposed an amendment to the effect that the code should include information on the meaning of,

“the stability of financial systems in the United Kingdom”—

that is, the phrase used in the first of the SRR objectives. We agreed that an exhaustive definition could not be provided but that the code could elaborate on this and how it is to be understood.

The first part of the government amendment provides for that and indeed goes further by signalling that the code can provide similar information about all the SRR objectives rather than just focusing on the first. I believe that that is the right approach and I hope that the House will accept this as a useful addition to Clause 5. For that reason, I hope that I am able to persuade the noble Baroness to withdraw her amendment.

The second part of the amendment expressly states that the code can provide further guidance on the choice between the stabilisation options. Questions were raised in Committee as to the factors that will determine the choice of one tool over another. Given that such a decision will be made on a case-by-case basis, the code is indeed the right place to provide significant additional information on this matter. The draft code already lists factors to be taken into account when deciding between different options, and it could include more information on this matter. I hope that this can be seen as a response to the noble Baroness’s request for a requirement that temporary public ownership be seen as an option of last resort. We have continually stated that that is the case. The amendment draws out expressly that the code of practice can provide further guidance on this important point.

The next two government amendments in this group add further to the list of areas about which the code can give guidance. They are a response to two parts of the debate in Committee. First, further information was requested on the working of the continuity obligations under Clauses 63 and 66. Given that they are new obligations, I agree that there should be a vehicle for providing additional information within the Bill on how those obligations will be used. In case noble Lords are concerned that there is no reference to the special continuity obligations in Clauses 64 and 67, let me explain that the code can also make provision about those. Special continuity obligations are exercised by share and property transfer instruments and orders. As a result, they are an aspect of the use of stabilisation powers about which the code may already clearly provide guidance under Clause 5(1)(a).

The second addition is to signal that the code can include information on compensation arrangements. I make it clear that there will, of course, be certain parts of compensation arrangements that it would not be appropriate to provide information on in the code. For example, it would not be appropriate to provide guidance on the precise activities that an independent valuer should undertake, as this could compromise his independence.

During the debate, questions were raised about the new concept of a bank resolution fund, with its associated management duty, the role of the monitor and the criteria for independence of a valuer. We will come back to these questions in later debates, but we believe that the code of practice can include useful information on some of these areas, so my noble friend has tabled government Amendment 10.

Before concluding, I confirm that information on the Bill’s powers with regard to bank holding companies will be included in the code of practice. The powers in Clause 81 are stabilisation powers and therefore the code of practice must make provision about them, as is made clear in Clause 5(1). I make this point now, in advance of our later debate on the noble Baroness’s amendment intended to have this effect.

In summary, the code provides a useful addition to the architecture of the new special resolution regime. The Government have listened carefully to the points made in Committee and have sought, through our amendments, to provide the necessary reassurances that further information can and should be provided on a number of important elements of the special resolution regime. Accordingly, I hope that the noble Baroness will feel that the Government have responded positively and with sufficient thoroughness that she can withdraw her amendment.

My Lords, before my noble friend replies, let me just say that Amendment 8 refers to,

“how the special resolution objectives are to be understood and achieved”.

In relation to objective 1, paragraph 5 of the draft code of practice states:

“The intention of the first objective is to (a) recognise the wider systemic risks posed by the potential or actual failure of any institution, or group of institutions; and (b) to require the Authorities to have regard to the likely systemic impact of their actions (including a decision not to act) when implementing a SRR tool”.

That pushes us hard in the direction that the code of practice must consider possible effects on competition. If the number of major institutions in the banking sector is reduced from the current four, clearly the effect on competition of any one of those, God forfend, getting into a position where the regime is implemented would be far-reaching. That was debated in Committee and I hope that we shall have some assurance that the possible effects on competition will be spelt out in some way and not left unstated.

My Lords, I have said my piece for Report, but the noble Viscount presses me. He caught me just before I sat down, so I shall respond to his points. I take on board his point; this is not the first time that he has addressed himself to the issue. We take the matter seriously and we are concerned, as we said on a previous amendment, to ensure that, as far as possible, the authorities will be open in their actions. He will recognise how far the Government have gone with these amendments to meet the main debate that we had in Committee, which related to the issues that the noble Baroness raised with her amendment. I hope that the noble Viscount will think that the Government have listened carefully and made a constructive response.

My Lords, I thank the Minister for his reply and for dealing with the important point raised by my noble friend Lord Eccles. I am pleased that the Minister explained that Amendment 8 is intended to address the issues raised by my Amendment 7. Provided that the code of practice does that, we will be content. I will come to temporary public ownership later. I queried with the Opposition Whips’ Office whether the Government had asked for that amendment to be grouped and was told that they definitely had not, so I shall speak to it in its place on the list. In addition, I heard the Minister’s comments about Amendment 81, which I shall also deal with in the appropriate place; I think that that will be more convenient. I thank the Minister for Amendment 8 and beg leave to withdraw my amendment.

Amendment 7 withdrawn.

Amendments 8 to 10

Moved by

8: Clause 5, page 3, line 34, leave out paragraph (a) and insert—

“(a) how the special resolution objectives are to be understood and achieved,(aa) the choice between different options,”

9: Clause 5, page 4, line 2, leave out “and”

10: Clause 5, page 4, line 3, leave out paragraph (f) and insert—

“(f) sections 63 and 66, and(g) compensation.”

Amendments 8 to 10 agreed.

Amendment 11

Moved by

11: Clause 5, page 4, line 6, at end insert “and if the authorities do not follow the code in any particular instance they must publish as soon as practicable an explanation of why they have not done so”

My Lords, this amendment is simple. It states that if the code is not followed, there should be an explanation of why it has not been followed. Her Majesty's Government strongly argued that the code should not be legally binding. While I do not agree with that argument, it is just understandable that the Government should seek to keep all their options open in exceptional circumstances. However, if they believe that they must be able to ignore the code in order to achieve the flexibility they deem necessary to cope with the banking crisis, the least they should do is give a full and prompt explanation of why they have ignored the code. If they do not have to do even that, it is difficult to see the point of the code.

In Committee, the Minister said:

“We are at one with the amendment”.—[Official Report, 13/1/09; col. 1177.]

However, he went on to say that the Government do not wish to be bound by legal rigidity. This amendment does not impose a legal obligation to follow the code, but asks for an explanation for deviating from the code. Given the Government’s keenness on transparency, I am sure the Minister will wish to accept the amendment. Indeed, I will go one further and say that it would be suspicious if he did not wish to give reasons for ignoring the code.

My Lords, I do not think there is a great distance between us and the Opposition on these issues. That is why, if the noble Lord will forgive me, I have a battery of notes that will demolish his amendment in technical terms. That may readily be done, and I do not have the slightest doubt that it would be done with the greatest accuracy. However, I do not think that that would address his argument.

I am not in conflict with the noble Lord’s objective. As explained in Committee, the Government have considerable sympathy with the spirit behind the amendment, which is about transparency and accountability to Parliament and the public at large. However, the expectation that the authorities will comply or explain is clearly built into all the crucial parts of the code. The default expectation must be that the authorities will follow the code. After all, it is established by primary legislation. It is explicitly stated in the Bill that the authorities are legally obliged to have regard to the code. If the authorities took any action that deviated significantly from the code, it goes without saying that a public explanation would normally be needed; indeed, it would without doubt be demanded by this House and the other place.

I do not think that it is necessary to remind Parliament of its obligation to hold the Government to account in primary legislation. That is why all who serve in Parliament do so, unless they are serving in Government. The expectation is that the code will make the authorities accountable. If they should in any way, shape or form resile from that obligation, they will be challenged in Parliament. That expectation is bound to be automatic. I therefore hope that the noble Lord will accept that his amendment has provoked an interesting debate, as it did in Committee, but that he can safely withdraw it.

My Lords, I wish that I had a pound note for every time the Minister has told me that he agrees with me but does nothing about it. I thank him for his explanation. Expectations may be in the code, but that does not mean that they will not be disappointed, rather like the disappointments that the Minister dishes out to me on such a regular basis.

The amendment is about transparency, not accountability. It is about people’s ability to see why the Government are taking the steps that they are when they go outside a code that they themselves have written. It does not seem unreasonable that people should be told why the Government are deviating from their self-appointed agenda. Perhaps the Minister will comment.

Amendment 11 withdrawn.

Amendment 12

Moved by

12: Clause 5, page 4, line 18, leave out subsection (2) and insert—

“(2) The code shall not come into force unless an order containing the code has been laid before Parliament.

(2A) An order under subsection (2)—

(a) shall be made by statutory instrument, and(b) shall be subject to annulment in pursuance of a resolution of either House of Parliament.”

My Lords, the amendment replaces Clause 6(2) with two new subsections. Subsection (2) requires the Treasury to lay before Parliament a copy of the code of practice required by Clause 5. My two new subsections replace this with a requirement that the code be contained in a statutory instrument subject to the negative resolution procedure.

In Committee, I argued for this code of practice to be approved by Parliament using the affirmative resolution procedure. The Minister resisted that argument. His arguments were largely based on the fact that a draft code of practice is currently in circulation, and that the Government were to be congratulated on that. I know that the availability of the draft has been welcomed by market players and representative bodies, but we must not be blinded by the open process on this first draft code. The draft released in November was only a draft. All agree that a number of changes must be made to the draft before it is finalised. New topics, such as holding companies, have been added to the Bill. Other comments have been made both by those affected by the code and by parliamentarians of both Houses. The code must clearly be revised before it is issued in its final form, yet there is little time to finalise it if, as I understand is the intention, it is to be issued as soon as the Bill comes into effect. Hence, even for this first code of practice, we have run out of time for a proper iterative process through consultation. It is therefore natural and right that Parliament should approve even this first draft in order to provide some assurance that the Executive have achieved the right balance in the code, in accordance with discussions in both Houses.

Furthermore—this is my main point—however open the process around the first code to be issued, it is clearly likely that there will be further codes to be issued as practice develops. Indeed, something would be wrong if there were not further versions. However, there is no requirement in Clause 6 for external consultation on any revision. There needs to be some check and balance on inappropriate use of the powers contained in the Bill.

The authorities are required to have regard to the code, and Parliament should have some say in what they are to have regard to. I believe it is arrogant of the Treasury to seek to bypass Parliament in this respect.

As I said, in Committee I argued for the affirmative procedure. This, of course, is not much of a procedure, as an order would be unamendable. Indeed, the Minister, who normally praises the affirmative procedure when it suits him, implied that it was not effective and clogged up Parliament.

I do not think that there would ever be an argument for a code of practice to be issued so quickly that the affirmative procedure was an impediment, and the Minister did not make that argument in Committee. I have, however, reduced my sights to a negative procedure, so that if major concerns were expressed about the content of an order, the Government could at least be forced to come to either House, or both Houses, to explain themselves. I hope that the Minister will not continue to resist some minimal, but symbolically important, parliamentary involvement in this code. I beg to move.

My Lords, I support the amendment. The more one looks at the code, the more one realises how substantive it is. Take, for example, the objectives of a bridge bank. If you read the Bill, you would not have the faintest clue why you needed a bridge bank in addition to the full nationalisation option. However, the code makes it absolutely clear: it says that it is intended to be a short-term operation and that its primary objective is to facilitate the sale of the bank. It seems to me that either of those things could equally well have been put in the Bill from the start. As the noble Baroness said, the fact that they are in the code now does not necessarily guarantee that they will be in the code for ever, because it can be changed at any point.

The Minister said earlier that the code has been scrutinised in Parliament. We have scrutinised it in Parliament to a certain extent but equally, as the noble Baroness said, new sections of the code are as yet unwritten. Even when the full first version has been completed, there will be every opportunity for the code to be amended in future.

The negative resolution procedure is a very limited form of parliamentary scrutiny but it is better than nothing. On that basis, I support the amendment.

My Lords, I am grateful to noble Lords who have spoken on this issue, which occasioned some debate in Committee. The noble Baroness has slightly shifted her position in response to the Committee stage debate, but so have the Government. She will recognise the extent to which the Government have listened to arguments about the code and will know that they have shifted their position considerably. The noble Baroness indicated that there would be no requirement for external consultation on the code. It is our exact intention that Clause 10 should be amended so that the Banking Liaison Panel will be consulted on the code and on future changes to it. That was subject to considerable debate in Committee, and again I give a clear indication of the way in which the Government have responded to the points made at that stage.

I will be asking the noble Baroness to withdraw her amendment but I hope that she will appreciate that, in approaching these issues, we have listened carefully to the debates in this House and the other place. I hope she will also appreciate that we have provided opportunities for the draft code to be scrutinised.

A moment ago, the noble Lord, Lord Howard, said that, if he had a pound for every practice that I indulged in when responding to amendments, he would be rich. I would also be very rich if I had a pound every time I was asked for a draft code or draft statutory instrument to be provided before concluding legislation. How often have noble Lords said, “You’re asking us to provide for later codes or subordinate legislation but we have not seen sight of them yet”? Here we provide a draft code, which has been significantly debated in both Houses. We are also responding to the changes suggested in Committee, but yet again it is suggested that we are not moving far enough because we are not making the draft code subject to a statutory instrument.

I had hoped that it would have been recognised how far the Government have moved on this concept of the code. In the previous amendment, we debated and accepted provisions that the code must set down how the special resolution objectives are to be understood and achieved, how the choice is to be made between different options, and a number of other matters at the heart of the significance of the code.

We have come a very long way with Clause 5. The Government chose to put into primary legislation some of the things that may be covered by the code. We also laid the code before the House and had extensive debate on it. The code has been subject to more parliamentary scrutiny than I would dare to suggest many other codes have been. So we are not seeking to avoid scrutiny. We have gone to great lengths to ensure that we have had a proper framework for parliamentary consideration of what the code should contain. The principal reason why it should not be laid before Parliament is that it is not a statutory instrument. This is a code of practice. There are countless codes and guidelines that are not subject to parliamentary approval. A very large percentage of them were not considered when the primary legislation that established them was debated. This code is in a very different position.

Let me give an illustration. The Memorandum of Understanding between Her Majesty’s Treasury, the Bank of England and the Financial Services Authority, which establishes the framework for co-operation in the field of financial stability, does not require a statutory instrument for it to come into force, yet I am sure that noble Lords will recognise the significance of that key document. Many here and in the other place take great interest in that document, but it is not appropriate for every key document to be subject to direct parliamentary approval in the way that the noble Baroness suggests that this code might be.

There is another example in banking: the rules made by the Financial Services Authority. The noble Baroness said of the rules in a previous debate that this Bill confers powers that go way beyond anything in the Financial Services and Markets Act. The powers conferred by that Act are significant. To take an obvious example, it confers on the Financial Services Authority power to withdraw regulatory approval from a bank. This is a serious power but, in the case of both the Financial Services and Markets Act and the Banking Bill, the powers are conferred by primary legislation, not by rules or codes. It is therefore the primary legislation that is subject to the fullest debate, not the code or rules, which provide guidance on how the powers are to be used. Of course, it is the primary legislation that we are considering today.

When the code is released, the Treasury will be under a statutory duty to lay it before Parliament. If this House seeks a debate on the code, then that will take place. Indeed, when the Government issue a new code shortly, I have no doubt that the noble Baroness will prompt such a debate, given the great significance that she has attached to the code, for which I do not criticise her. However, as I said when we considered this in Committee, the Government have shown their willingness to involve Parliament and interested parties in the formulation of the code. While we have a very clear idea of what the code will contain, we are involved in redrafting it, because we have to take on board the amendments that the Government have proposed in response to the Committee debate.

This amendment would require the unusual step of seeking parliamentary approval for a technical guidance document. We do not normally ask Parliament to do that and we should not on this occasion. We have given the debate on the code a very good hearing. The Government have responded to some important points and have indicated necessary changes that will be effected to the draft code. I hope, therefore, that the noble Baroness will think that she has pressed the Government effectively in this area—I recognise the effectiveness of that pressure—and that we have responded. I hope that she will withdraw her amendment. I see that the noble Viscount, Lord Eccles, wants a word before I sit down.

My Lords, I am sure that the Minister will accept that many times when statutory instruments come before the Merits Committee, the code of practice that is referred to is attached and is part of the committee’s remit. It is not the case that codes of practice do not get scrutinised in that way.

No indeed, my Lords. I was not seeking to detract from that at all. I was merely indicating that this requires a statutory instrument for the code to become effective. The noble Lord has succeeded in provoking a further point in my argument. The Delegated Powers Committee, whose representations the noble Baroness and other Members of this House quite rightly urged the Government to take seriously, especially where it clearly identifies that further thought and consideration by the Government is necessary, did not make a recommendation for this procedure on this code. That should weigh with some substance and I hope that the noble Baroness will feel comfortable in withdrawing her amendment.

My Lords, I thank my noble friend Lord Eccles for his contribution and I am grateful for the support from the noble Lord, Lord Newby, who I thought gave some good examples of the importance of this code. That point gives the lie to the Minister’s calling the code a technical guidance document. It is not a technical guidance document. It goes to the heart of how the extensive powers in the Bill will be used. You cannot use this Bill without the guidance document because, deliberately, a large amount of the substance has been left over for the code. We do not object to that as a matter of principle, because we recognise that that detail may need to change over time. It is that issue of changing over time that is probably more important.

The Government keep wanting congratulations on the open process of this first code, but the fact is that a lot needs to change in that first draft before it is finalised and there is no way that Parliament is going to have another sight of the document, certainly not before this Bill has completed its stages. The Minister said that the Memorandum of Understanding is not required to be done by Parliament. No, it is not, because it exists only extra-statutorily. If it were set up as part of a statutory framework, there is no doubt in my mind that Parliament would want to have a say on it. The Minister said that lots of codes of conduct are not subject to parliamentary approval. However, lots are; it is not an unusual or unprecedented procedure. Let us make this code one more such. I beg to test the opinion of the House.

My Lords, there being an equality of votes, in accordance with Standing Order 57, which provides that, no proposal to amend a Bill in the form in which it is before the House shall be agreed to unless there is a majority in favour of such amendment, I declare the amendment disagreed to.

Amendment 12 disagreed.

Clause 7: General conditions

Amendment 13

Moved by

13: Clause 7, page 4, line 30, leave out “not reasonably likely” and insert “highly unlikely”

My Lords, we now come to Clause 7, which is crucial in the context of the special resolution regime because the FSA is required to pull the trigger under this clause before one of the stabilisation options can be pursued. Two conditions have to be met before the FSA can do that and my amendment concerns the second, which is contained in subsection (3) which reads:

“Condition 2 is that having regard to timing and other relevant circumstances it is not reasonably likely that (ignoring the stabilisation powers) action will be taken by or in respect of the bank that will enable the bank to satisfy the threshold conditions”.

My amendment replaces the words “not reasonably likely” in this formulation with “highly unlikely”. We had an interesting debate in Committee at the end of which the Minister undertook to take the issue away to see whether an alternative form of words could be found. He has not done that, so I have retabled my amendment for further debate.

This is not mere semantics. Our debate in Committee indicated that the Government were unwilling to give a definitive explanation of the meaning of “not reasonably likely” at the Dispatch Box, but indicated that it would be along the lines of a balance of probabilities. It was not, as the noble Lord, Lord Newby, extracted from the Minister, a test of what a reasonable man would think, but was rather in the direction of “more likely than not”. That is not a very high hurdle and that is why bodies such as the BBA have expressed such concerns about it.

We have to remember that this clause will trigger expropriation. In a civilised society, such powers should be exercised only when it is clear that it is necessary to use them. In many situations, it will be clear that a bank is incapable of a wholly private sector solution and that the FSA will have no difficulty in satisfying itself that the conditions are met. But our concerns are clearly around the borderline cases.

Let us take the example of a bank which has got itself into a mess. It has perhaps made one bad judgment rather than has been through an era of reckless management. It might be easier to think about these things, not in the context of today’s unacceptable conditions in banking, but in looking forward to, we hope, more settled times. Let us suppose that this bank, which has had one bad event occur to it, does not today satisfy the threshold conditions, and that it needs its balance sheet strengthened and its cost base rationalised in order to survive. If it has a business plan, but has not yet executed it, and has the possibility of further capital, which has been negotiated but is not settled, what does the FSA do?

The test of “not reasonably likely” would allow the FSA to assert that without all the outstanding issues being resolved it was not reasonably likely that the bank would meet the threshold test. The FSA would not have to positively reject the plans. It could say that, on balance, it did not think that they would work. Using my test, it would have to go further and reach a positive judgment that the plans would probably not work, that they were “highly unlikely” to work, and there is a crucial difference.

In Committee, the Minister said that the test was designed to ensure that the special resolution regime powers could be used before a bank entered into insolvency, so that the Government could act early to preserve value. In the first instance, the shareholders should have the ability to act to preserve value and not face expropriation by the state unless it is very clear that that is the only way to go. The test for condition 2 fails to meet that expectation.

The FSA’s consultation document on this issue, which was published in December, provides some crumbs of comfort, in that the FSA intends to look at reasonableness in relation to the time horizon, but it is still not clear whether it intends to operate the “more likely than not” balance-of-probabilities overall approach. That is disappointing when set alongside the Minister’s own interpretation of the words that we debated in Committee. I beg to move.

My Lords, in Committee the Government committed to reflecting on the most suitable form of words to respond to the concerns of the House on this matter. I can report that thought has gone into this. Alas, however, having reflected on the debate, the Government believe that the wording in the Bill as drafted is the most suitable form of words.

I shall set out again why the term “not reasonably likely” in respect of whether a bank will meet its threshold conditions is the most appropriate form of words to use in this context. The clause is about identifying the point at which the authorities decide that voluntary and regulatory action cannot turn a bank around. It has the consequence that, should there be a sufficient public interest justification under Clause 8 or 9, stabilisation options may be exercisable in relation to the failing bank.

I appreciate that there are obvious and serious risks to a bank being put into the SRR too early. The market must therefore have confidence that these actions will be taken only once it is clear that a bank is failing. That is why the independent regulator is leading on this decision, and why the general conditions under Clause 7 include not only an assessment against the threshold conditions but a decision on the likelihood of turnaround. However, there are also risks with putting this decision at too late a stage. Indeed, I believe that the noble Baroness’s party’s official position on the SRR trigger has long been that it should be given to the Bank of England as there is a risk that the regulator might be unwilling to pull it too early for fear of admitting a failure of regulation.

The stabilisation options are designed so that the authorities can intervene before insolvency is reached and, as was noted in Committee, while there is still some residual value remaining in the bank—a point that has some relevance to our earlier discussion about the interests of creditors and shareholders. Acting at this stage increases the chances of a successful resolution and, I would argue, is particularly important for achieving a private sector solution, which will normally be the authorities’ preferred approach. Acting at this stage is also necessary to achieve the objective, much supported by the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, as well as by the banking sector, of ensuring continuity of service, a matter that we addressed earlier when I agreed to go away and reflect further.

I believe that noble Lords will agree that a balance needs to be struck. The “not reasonably likely” formulation currently included in the clause appropriately strikes that delicate balance. In reflecting on this matter we have considered the points made in Committee. The noble Baroness and others questioned what the phrase “not reasonably likely” meant in terms of probability. The general conditions—correctly, we believe—contain both quantitative and qualitative considerations in the assessment of threshold conditions. The question of the reasonable likelihood of the provision regarding turnaround is necessarily a matter for expert evaluation, based on a series of complicated and interrelated considerations. It is a multitextured assessment of future events that cannot be predicted with complete certainty.

The noble Lord, Lord Newby, made the point that language matters in legislation. I entirely agree with him. He also said that as the phrase “not reasonably likely” was effectively the same as “highly unlikely” in layman’s language we should adopt the latter construction and be done with it. Here, I am afraid that I cannot agree. With respect, we are debating primary legislation, not the everyday language of laymen, to use the noble Lord’s word. Nor, to use the example given by the noble Baroness, Lady Noakes, in an earlier debate, are we talking about pricing a horse race. I have eschewed the temptation to offer a tip to the noble Baroness today as race meetings are so limited by the adverse weather, but perhaps tomorrow will provide me with a further opportunity. It is important that the language we use has the precise legal effect that is intended.

“Reasonable likelihood” is a term which is used in legislation. For example, before a court grants an administration order, it must be satisfied that the order is reasonably likely to achieve the purposes of administration as set out in paragraph 11 of Schedule B1 to the Insolvency Act 1986. Given this explanation of the term, I would argue that it encapsulates exactly the threshold that this decision should be set at, and indeed the level of consideration from the FSA that noble Lords were seeking in their questions and comments in previous debates.

Let me give an explanation of why the imposition of the higher test of “highly unlikely” would be undesirable and could even cause dangers to the public policy objectives represented by the special resolution objective, in particular of protecting financial stability and depositors. First, this test may force the authorities to wait until it is too late to intervene in a way that preserves franchise value in the bank. That may be the case where the authorities have to wait until the bank is on the very edge of the precipice of failure, at which point it would be likely to be next to worthless. That may not protect public funds and may ultimately be deleterious to bank creditors. For example, in resolution through a bridge bank, the net proceeds of resolution flow back to the bank through the bank resolution fund. Where the authorities have waited too long before intervening, those net proceeds will be much less than if the intervention had taken place while franchise value remained in the bank.

Secondly, distressed banks do not necessarily decline gradually towards failure in a predictable way. As resolution experience shows, bank failures can involve “fast burn” scenarios. For example, a depositor run can potentially imperil any bank at very short notice, as it is in the nature of banking that banks do not hold sufficient liquidity to repay all their depositors within a short period of time. Thirdly, it may simply not be possible to say that turnaround is highly unlikely in circumstances where there is nevertheless the most compelling and powerful public interest in intervention. Perhaps I may illustrate this with an example.

Let us say that a bank is failing its threshold conditions, but a private sector purchaser is potentially interested in acquiring ownership of the bank. In this example, the failure of the bank would have catastrophic implications for financial stability and for depositors. Because a private sector purchaser is potentially interested in acquiring ownership of the bank, it may be difficult to say that it is highly unlikely that action cannot be taken by or in respect of the bank to enable it to satisfy its threshold conditions. Indeed, the possibility that the bank could be acquired through a share sale means there is at least a possibility that the bank could be enabled to meet its threshold conditions without resort to the special resolution regime. However, the private sector purchaser may be too risk averse to seek to acquire the bank through ordinary commercial means, which may involve delay and an unacceptable level of execution risk.

In such circumstances, even though it is not highly unlikely that the bank will be turned around, the Government believe that there is a clear case for intervention under the special resolution regime, ideally to effect a transfer under Clause 11 to the private sector purchaser concerned. Otherwise, the authorities would have to run the risk of a failure occurring, with all the adverse implications this may have for financial stability and the protection of depositors, not to say public funds.

On this basis I would strongly urge the noble Baroness to withdraw her amendment, and if she is unable to do so, I urge the House not to support it.

My Lords, I thank the Minister for setting out extensively the Government’s case against the amendment. There are two reasons why I am troubled by what the Minister said. First, he introduced the issue of moral hazard and said that the authorities will want to act while there is still franchise value. That is getting very close to saying that creditors do not have to worry about their relationship with a bank because the Government are keeping an eye on it for them. The Government are running a real risk. At present, depositors in banks have been protected beyond the Financial Services Compensation Scheme level and I assume that the Government wish to exit from that commitment at some stage. But the way in which the Minister has articulated the authorities’ relationship towards banks that may fail might encourage depositors to gain comfort that the Government, the Bank and the FSA are looking after the interests of creditors. That is undesirable.

The second problem is that the Minister referred to a private sector purchaser not wanting to acquire through normal commercial means. I am concerned that the Government will become an actor in a transaction where a private sector purchaser is waiting in the wings ready for the Government to facilitate a sale on non-arm’s-length terms which could not have been obtained in the market.

Those two matters leave me genuinely concerned about the consequences of what the Government are saying. I shall not pursue this issue further; we have debated it and, ultimately, we will find out whether or not this is an issue from the next round of bank failures only if, God forbid, we go into one in the future. I have more than simply semantic concerns that the way in which the Government articulate their approach to the special resolution regime may well come home to haunt either the current Government or some future Government. I beg leave to withdraw the amendment.

Amendment 13 withdrawn.

Clause 9: Specific conditions: temporary public ownership

Amendment 14

Moved by

14: Clause 9, page 5, line 36, after “that” insert—

“(a) neither of the other stabilisation options is appropriate or practical, and(b) ”

My Lords, Amendment 14 seeks to add some crucial words to Clause 9, which empowers the Treasury to take a bank into so-called temporary public ownership.

Ever since their White Paper in January last year, the Government have sought to present nationalisation as an option of last resort, an issue we debated in Committee. We have always believed that it should be a last resort and the Minister in another place was commendably clear about it. He said:

“The temporary public ownership tool should be seen very much as one of last resort”.—[Official Report, Commons, Banking Bill Committee, 6/11/08; col. 355.]

But that is not what the Bill states.

The Minister sought to argue that because there was a higher test for the use of public ownership in Clause 9 compared with the test for Bank of England action in Clause 8, that automatically made it an option of last resort. But that is simply not the case because it is perfectly possible for a bank to satisfy the FSA’s Clause 7 trigger conditions and then to fall both within the Bank of England’s powers within Clause 8 and the temporary public ownership power in Clause 9. The Bill does not differentiate between them. As I have said, we believe that the Bank’s powers should come into play first and temporary public ownership should come in later.

In Committee, the Minister said the code of practice would deal with the issue but the draft code does not contain the words or even the substance of the meaning of “last resort”. Temporary public ownership is presented as just another option. The only real place where it is dealt with is in paragraph 41 where it is noted that before using the option, consideration would be required of whether,

“alternative resolutions would be more appropriate”.

But the emphasis is the wrong way round.

In Committee, the Minister agreed to take this away and I understand that the Government’s response is in terms of Amendment 8, which we passed earlier, which says that the code of practice must now deal with,

“the choice between different options”.

However, it is not a question of choice between options: there should be a hierarchy of options. You do not choose temporary public ownership as opposed to Bank of England moderated procedures. You can get to public ownership only if you cannot do the other things.

We fully support the use of the Bank of England's powers. We also accept that there may be no alternative to nationalisation, but it should not be a choice to get to nationalisation: it should be an issue of prioritisation. That is not dealt with in the code, nor is it implicit in Amendment 8, which was moved earlier. I beg to move.

My Lords, we return to the matter of temporary public ownership and the extent to which it is necessary to signal in the Bill that this is a tool of last resort.

During the Committee stage debate, the Government pointed out that the conditions for taking a bank into temporary public ownership are higher than those for other stabilisation options, which in itself signals that the tool is a last resort. As I promised during Committee, I have reflected on this matter and I should like to set out the Government’s position with respect to it.

Clause 9 states that a bank can be taken into temporary public ownership only if the Treasury believes it is necessary to resolve or reduce a serious threat to the stability of the financial systems of the UK, or where financial assistance has been provided to prevent or reduce such a threat. As I said, the test is higher than that in Clause 8, referring as it does to a threat to financial stability. But there are a couple of further elements of this clause, to which I should like to draw the attention of the House.

First, under Clause 9(4), the Treasury must consult the FSA and the Bank of England. Therefore, given that the Bank is the lead authority on exercising the other tools, it would have a say on whether they were more appropriate than temporary public ownership. Furthermore, Clause 9 sets out a test of necessity. That is to say, it provides that, notwithstanding the availability of the other stabilisation tools, taking a bank into temporary public ownership is necessary to meet the conditions.

The combination of the higher test, the consultation requirement and the test of necessity more than signals that temporary public ownership is a tool only to be considered following consideration of the other tools. Let me be clear, however, that it is absolutely right that there should be a range of stabilisation tools under the special resolution regime and, in certain circumstances, taking a bank into temporary public ownership will be the right thing to do. For example, a transfer of shares to the Treasury provides for a swift resolution which may be optimal if immediate stabilisation of the whole of a complex bank is required. Temporary public ownership may also be appropriate if a significant amount of public money has been made available to a failing bank.

During the Committee stage debate, I pointed to the code of practice as an area where we have and can provide more comfort by including more information on this matter. I know that the noble Baroness, Lady Noakes, questioned the legal force of the code, but we had that debate earlier and I hope that my points have persuaded her of this point, at least in part. Therefore, to signal that the code will include drafting on this precise issue, we have amended Clause 5 to include a reference to the code including information on the choice between the stabilisation options. The code is a far better way of meeting the noble Baroness’s concern on this matter, as it can set out in detail the factors that may make something more appropriate or practicable.

I hope that this will be seen as a constructive response, and I invite the noble Baroness to withdraw her amendment.

My Lords, I thank the Minister for setting out the Government’s position, although I am disappointed with his response. He tries to make the case that the Clause 9 test is automatically a test of last resort, but it is not; it is just a stabilisation option, no matter how it is dressed up.

The Minister referred to the test of necessity in Clause 9 as though it were peculiar to that clause. However, there is a test of necessity in Clause 8 as well, so there is no difference between Clause 9 and Clause 8; it is simply the way in which draftsmen have expressed the hurdle in either case. The position is still that the Bank might say that it could make a go of it by using the bridge bank provisions but the Treasury says that it wants temporary public ownership. I am not sure how that is resolved, especially as the Minister did not accept my amendment earlier, which said that the Treasury could make the call. If he had accepted it, he would have a clear answer to both the Bank and the Treasury wanting to take over a failing bank; the Treasury would win every time. However, he did not accept my amendment. I fail to be convinced.

The Minister referred to the possibility of further material going into the code of practice. I suppose that we have to hope that the code will reflect more of what has been said both in Committee and here than it currently reflects. My only concern is that the Treasury has a taste for bank nationalisation and, having got the taste, it might carry on doing it. We shall see what happens. I beg leave to withdraw the amendment.

Amendment 14 withdrawn.

Clause 10 : Banking Liaison Panel

Amendment 15

Moved by

15: Clause 10, page 6, line 4, at end insert “the effect of the special resolution regime on—

(a) banks,(b) persons with whom banks do business, and(c) the financial markets.(1A) In particular, the panel may advise the Treasury about—

(a) ”

My Lords, in moving government Amendment 15, I will also speak to government Amendments 17 and 66. In Committee, the noble Baroness, Lady Noakes, proposed an amendment to widen the remit of the Banking Liaison Panel. I think that we agreed that we were not too far from each other on this. I explained, and I think the noble Baroness agreed, that it would not be appropriate for the Banking Liaison Panel to provide advice to the Treasury on the operation of the SRR powers, such as drafting and placing a transfer or associated instrument.

We both agreed that the panel’s remit should include the effectiveness of the policy and the powers in general of the SRR. One of the noble Baroness’s main concerns was to ensure that the panel has a role in monitoring the market for unintended consequences of these new powers. Government Amendment 15 provides the panel with a broadly defined purpose to advise the Treasury on the effect of the special resolution regime both on the banks that could be subject to it and on the wider financial services market.

In addition to this broad purpose, government Amendment 17 provides the panel with a statutory remit to advise the Treasury on the code of practice. This meets another of the noble Baroness’s requests in Committee. Although we have tackled this from a slightly different direction from the one that she proposed, I believe that it meets her concerns. The amendment also provides that the Banking Liaison Panel should advise the Treasury on the exercise of the power to change laws under Clause 75, with the exception of cases in which the exercise is carried out in connection with a particular use of a stabilisation power.

Government Amendment 66 is consequential to government Amendments 15 and 17. The Banking Liaison Panel’s remit will extend to building societies because the special resolution regime generally applies to building societies, as provided for by Clause 83. However, a consequential amendment to Clause 82 has been made to ensure that the panel can also advise the Treasury on the effect of the powers on bank holding companies and their counterparties.

As I have stated before, the creation of the expert liaison group has been welcomed by interested parties and already provides invaluable advice to the Government on the development of policy and the impact of their powers on the market. I hope that, when it is reconstituted as the Banking Liaison Panel, it will continue with this good work. The government amendments proposed today ensure that this work is given a firm and broad statutory basis. Given the breadth of the Government’s response to the concerns that she raised in Committee, I respectfully invite the noble Baroness not to move Amendment 16.

My Lords, I wholeheartedly endorse the Government’s amendment. They have produced an amendment that goes beyond my amendment, which is something one does not often get to say. It responds to the debates that we had in Committee. This is an excellent group of amendments and I commend the Minister.

My Lords, I hope that it is recognised that the Government’s amendment and the stabilisation regime will have an effect before the regime is ever used on the banks. The certainty with which the banks understand the possibility of the regime being enforced will have a great effect on the way in which they behave and on their confidence. I make no apologies for reiterating that one of the great issues facing us is restoring the banks’ confidence in themselves.

Amendment 15 agreed.

Amendment 16 not moved.

Amendment 17

Moved by

17: Clause 10, page 6, line 7, leave out “and third party compensation orders” and insert “, third party compensation orders and orders under section 75(2)(c)),

“(b) the code of practice under section 5, and(c) anything else referred to the panel by the Treasury.”

Amendment 17 agreed.

Clause 13 : Temporary public ownership

Amendment 18

Moved by

18: Clause 13, page 7, line 22, at end insert—

“( ) A share transfer order made under subsection (2) shall state the period of time that the Treasury estimate that temporary public ownership will last.”

My Lords, this amendment would insert a new subsection into Clause 13, which deals with the Treasury’s so-called temporary public ownership power. In Committee, when we debated an amendment that sought to define the likely duration of “temporary” as three years, we established that, at best, “temporary” was a statement of intent rather than a matter limiting the use of the option. As the House will know, nationalisation in all its guises is not the preference of my party, but we can just about live with it if it is genuinely meant to be temporary. That is why I decided to pursue the definition.

I was convinced by our debate in Committee that to specify any time limit, even in the form of my Committee amendment, which was framed in terms of expectation, would convey the wrong sense. However, at the end of the debate, I remained concerned that there was no mechanism for holding the Government to account on the non-permanence of the option, if that is what it turned out to be. Our debate crystallised the issue for me as being not exact timing but the Government sticking to their word that the power would be used for temporary ownership.

There are currently two banks in temporary ownership following the use of the powers in the 2008 Act. In neither case is it clear what timescales are involved. There was no clarity at the time of nationalisation and there is no more clarity now. In the case of Northern Rock, there was a business plan that involved a rapid return of government debt, though no clear plan for the return of the bank to the private sector. More recently, the debt rundown strategy has been superseded by Northern Rock returning to mortgage lending, although it is not clear whether that is a commercial strategy or a policy of soft mortgage lending to support the housing market. In the case of Bradford & Bingley, we know nothing whatsoever, as no business plan has yet emerged for the rump of the mortgage business. There is no exit plan, at least in the public domain, for either of them.

Amendment 18 would merely require the Treasury to state in the order taking a bank into public ownership its estimate—no higher than that—of the duration of public ownership. That estimate would naturally form the basis of the Treasury’s subsequent accountability to Parliament. If there are many such orders—we hope that there will not be—we may build up a pattern over time about how clever the Treasury is at seeing the exit point from public ownership. In individual cases, we could see whether the Treasury knew enough about what it was taking on in these banks and about how quickly it could turn a bank around.

The next group of amendments deals with the accountability of banks while they are in the temporary public ownership category. This amendment deals with the rather different issue of the accountability of the Treasury for that ownership in fact being temporary. I beg to move.

As the noble Baroness has faithfully reflected, we debated “temporary” in Committee, when the Government were somewhat unfairly accused of spinning that word. The noble Baroness nods at “spinning”. I see that she still believes that and that I have not got very far in convincing her of the straightforwardness of the Government in this respect. We are being straightforward. Even if it does not have a specific time limit attached to it, “temporary” clearly demonstrates our intentions with respect to the option of public ownership—namely, that it should be time limited. “Temporary” illustrates that it is not the Government’s intention to take a bank into public ownership because they believe that they can run banks more successfully than their managers; rather, that action will be taken only when it is necessary for the purposes set out in Clause 9. I think that we were reasonably explicit about that in Committee. I should love to think that we were convincing. I hope that I am convincing about it today.

Moreover, however imprecise and open to interpretation “temporary” may be, it signals that the Government’s intention is not to keep banks in public ownership permanently. In Committee, we also debated the benefit of setting an arbitrary date or time limit on how long a bank could remain in public ownership. This amendment would allow the Treasury to set a time limit for each transfer on a case-by-case basis. But even if this were determined flexibly on a case-by-case basis, any time limit would be arbitrary in the absence of a clairvoyant ability to anticipate accurately how long a successful resolution procedure to take a bank back into the private sector might take.

As I said, factors other than the meeting of an arbitrary set deadline should determine when a bank is returned to the private sector. Temporary public ownership should come to an end when the objectives of the special resolution have been achieved. It should not end before they have been achieved. The noble Baroness may ask what harm the amendment could do, as it calls only for the Treasury to estimate the relevant period. However, if it seeks only an estimate from the Treasury, what on earth is its benefit? It would be an exercise in arbitrary assessment.

Having reflected on this question, I believe that the benefit of the Government’s position is twofold. First, it signals an expectation of debate in Parliament. Parliamentary scrutiny is a great benefit. The amendment that we have brought forward for an annual reporting on banks in public ownership will allow that debate to take place. Further, as the transfer order will be made through the negative procedure in Parliament, Parliament may call for a debate in respect of the order. This would provide the opportunity for Parliament to question the expected time limit. For the reasons that I set out, the authorities will, first and foremost, seek to pursue a strategy to return banks to the private sector and will do so in a way that best meets the special resolution objectives. They will not pay too much regard to inevitably arbitrary deadlines.

Although transparency is undoubtedly important, as the noble Baroness emphasised repeatedly, it may ultimately be less than helpful to force the Government to signal an intention that they may be obliged to change. I realise that this argument may lead to anxiety that the Government will act to take a bank into public ownership before an exit strategy has been planned in detail. That may be the case, but the authorities may have to act very quickly to stabilise a failing bank whose failure would threaten financial stability. In such cases, detailed planning of an exit strategy may be impossible.

It is certain, however, that the period of public ownership will end; that is why the word “temporary” is used in the legislation. That is the fundamental principle, which the market and public will legitimately expect to be achieved and in respect of which Parliament can call the Government to account. That is the basis of the Government’s position. I hope that the noble Baroness is sufficiently convinced of our genuine intentions with regard to “temporary” to be able to withdraw her amendment.

My Lords, I thank the Minister for setting out the Government’s objections to my modest amendment, which was designed to get the Treasury to say what it thought “temporary” meant in any individual case. The Minister said that, if the Treasury did that, it would signal an intention that it might be forced to change. Well, exactly. There is nothing wrong with it changing, but the Treasury should then be accountable to Parliament and others for that change of tack. At the moment, such information is kept out of public view unless it is dragged out of the Treasury, probably before the Treasury Select Committee in another place. There is no other forum for examining the Treasury’s actions and intentions because there is nothing on the public record against which the Treasury can be judged. At the end of the day, I suppose that we will find out whether temporary public ownership will certainly end, as the Minister put it.

My Lords, is the noble Baroness seriously contending that Parliament would not find a way of holding the Government to account if the operation of Northern Rock was such as to cause enormous public anxiety and a feeling that it would be kept in public ownership in perpetuity, or that the bank was being directed in anything other than the arm’s-length way that the Government had indicated?

My Lords, I am sure that Parliament would find a way, but it would have to search for it. Northern Rock is a very interesting example, because there has been a change of tack and a diversion into additional mortgage lending for reasons that may not be related to the preparation for its exit strategy into the private sector. I shall not press the amendment further, because who determines whether temporary public ownership is temporary will almost certainly not be the current Government; it will be overseen by another Government. On that, I rest many hopes. For that reason, I can with some comfort withdraw the amendment. I beg leave to withdraw it.

Amendment 18 withdrawn.

Amendment 19

Moved by

19: After Clause 13, insert the following new Clause—

“Transparency: temporary public ownership

(1) The Treasury shall ensure that regular financial and other information is made available about—

(a) banks which have been taken into temporary public ownership under section 13,(b) banks which are in public ownership as a result of the exercise of the powers in the Banking (Special Provisions) Act 2008 (c. 2),(c) any company within paragraph (b) of section 13(2) of this Act.(2) The information referred to in subsection (1) shall enable an understanding of—

(a) the financial position, prospects and plans of each of the banks referred to in subsection (1),(b) the amount of any guarantees or similar arrangements in respect of those banks which may result in a call on public funds, and(c) such other information as the Treasury considers relevant.(3) Information made available under this section shall be laid before each House of Parliament and shall be published in such manner as the Treasury shall determine.”

I thought that I was going to have a rest. The amendment calls for regular financial and other information to be made available to Parliament in respect of nationalised banks. I was rather taken aback when in Committee the Minister said that this was not a problem, because the Treasury was always accountable to Parliament on everything. If only. I shall not, however, pursue that issue further, because the Government have tabled Amendment 60, which, although not as extensive as my amendment, goes some way to dealing with the basic issue of accountability to Parliament.

I intend to give way to the government amendment at the appropriate time; however, I wish to raise some detailed points. My amendment asks for a broader range of information than the activities mentioned in the government amendment and, in particular, asks for any details of guarantees. The need for better information about this latter aspect is dealt with in the recent report of the Treasury Select Committee in another place and, to some extent, crosses over with information that I seek in an amendment to Clause 227. I shall leave that issue until then.

However, there are some other important gaps in the information required to be sent to Parliament. First, there are banks already in public ownership by virtue of the 2008 Act. I noted in Committee that the lack of accountability information was a weakness of that Act. Secondly, there is no information about UK Financial Investments—a rather shady body which is being kept from public view—getting control of billions of pounds of taxpayers’ money. These bodies are dealt with in my Amendment 19, but not in the Government’s Amendment 60, which is why I have tabled Amendments 61, 62 and 63 to that government amendment. I look forward to the Minister’s explanation of his amendment and his reasons for the exclusion of the important bodies to which I have referred. I beg to move.

My Lords, I welcome my noble friend’s Amendment 19. I am very pleased to see that government Amendment 60 has been tabled, but I reiterate the advantages of Amendment 19, which includes,

“banks which are in public ownership as a result of the exercise of the powers in the Banking (Special Provisions) Act 2008”,

and the inclusion by my noble friend of,

“the amount of any guarantees or similar arrangements in respect of those banks which may result in a call on public funds”.

I reiterate her comments on UKFI, which I agree is a rather shadowy organisation that we do not seem to know enough about.

My Lords, government Amendment 60 requires the Treasury to lay before Parliament every year a report on the activities of any bank in temporary public ownership. This is a direct response to concerns expressed by the noble Baroness, Lady Noakes, that insufficient reporting requirements are placed on banks taken into temporary public ownership.

As I have stated previously, there are numerous ways in which the Government are accountable to Parliament on their role with regard to banks in temporary public ownership. Parliament can already request Treasury Ministers to report on the activities of a bank in temporary public ownership whenever it wishes, including, should it so desire, on a more-than-annual basis. Furthermore, as I made clear in an earlier debate, all the usual accounting and reporting requirements under the Companies Act 2006 will apply to banks in temporary public ownership.

However, having reflected on the matter, the Government are persuaded that it would be helpful to have an express requirement to produce a report on the activities of a bank in temporary public ownership. Therefore, I have brought forward Amendment 60, which I believe has the same effect as that brought forward by the Opposition in Committee. I should note that this reporting requirement includes banks taken into public ownership under a company wholly owned by the Treasury or a nominee of the Treasury.

The noble Baroness, however, seeks to amend the Government’s amendment by extending it to banks taken into temporary public ownership under the Banking (Special Provisions) Act 2008. Of course it is hard to disagree with the principle behind the noble Baroness’ amendment, but I believe that such an addition in this Bill is neither necessary nor desirable. It is right that the Banking Bill requires reporting on activities taken under the powers within it, but I do not believe that the requirement should extend back to powers exercised under the Banking (Special Provisions) Act. For that reason, the amendment is not appropriate. However, I said that I agreed with the intention behind it. The Treasury has demonstrated its commitment to sharing information on the important matter of the activities of banks in temporary public ownership; for example, the publication of the business plan for Northern Rock and the publication of its accounts. For that reason, the noble Baroness’s amendment is unnecessary.

On the “shadowy” UKFI, we will publish a framework document for UKFI in due course, which will set out much more information on that body. However, we have already explained why it is being established, particularly its role and objectives.

On the issue of there being no requirement in the Banking (Special Provisions) Act 2008 for reporting on Northern Rock, as I have said, Northern Rock has already demonstrated its openness through publishing its annual report and accounts in April 2008, six monthly trading statements and its half-yearly results in October 2008.

On the noble Baroness’s question about guarantees, contingent liabilities have to be declared in departmental accounts, in line with general public accounting principles. In cases where confidentiality is required in the public interest, the report is made to the chair of the Public Accounts Committee and relevant Select Committee. On that basis, the noble Baroness’s amendment is unnecessary, and I invite her withdraw it.

My Lords, I have two questions for the Minister. He referred to the information made available by Northern Rock. It was notable in his description that he did not refer to Bradford & Bingley; I do not think that even he could claim that there has been a lot of information in the public domain about that. Does this commitment to information apply to Bradford & Bingley? Some of us might think that that was not the case.

Secondly, on UKFI, the Minister referred to the framework document. Can he say, first, when we might expect it? UKFI has been meddling in nationalised banks for quite a long time, with no framework document as yet. Secondly, will that framework document deal with the accountability issues of the information flow in the department? That is rather important.

My Lords, I shall endeavour to help the House by giving noble Lords straight answers to their questions. However, I do so from my memory of a huge volume of papers that I read over the weekend. I assure the noble Baroness that, if she finds herself content with certain amendments on the basis that there will be a change of Government, there is a new world dawning in which one loses personal time, ceases to have any contact with one’s family or personal interests and waits until midnight for the bell to ring to tell you that another box of papers has been delivered in order to submerge you in yet more information.

Nevertheless, on the basis that the occasional fact sticks, I believe that we will be reporting on Bradford & Bingley no later than the end of March. I believe that the framework document for UKFI will include a section explaining how it will report and account to Parliament. If, however, I am wrong on either of those points, I will of course immediately write to the noble Baroness.

My Lords, Amendment 60 is welcome but is written at a time when it is pretty clear that the banks did not know how to report on their activities. Just to say that there will be a report about the activities of any bank is a pretty bold statement if it encompasses that we should all understand when we read the report exactly what that bank’s situation is. Knowing that if the special regime is brought into play the Treasury will pick up all the complexities of whichever bank it is shows that there must be a case for thinking carefully about how bank reports are made. I am sure that that is under consideration.

We are not looking for a transfer order, but if there were one, I would hope to find that the Treasury would establish best practice.

My Lords, I ask my noble friend to take on board the point about UKFI. I absolutely support the sentiments expressed by the noble Baroness, Lady Noakes. UKFI is active in those banks owned or part-owned by the Government. The basis on which it is operating is not entirely clear. It has not been helped by the transfer of personnel. I make absolutely no criticism of Sir Philip Hampton, but to be in charge of UKFI one day and become chairman of RBS the next confuses people who are not as close to the situation as banking professionals—I should declare an interest: I work for a Canadian bank—or politicians. It is incumbent on the Government to be much clearer about the regime under which UKFI is operating. I urge my noble friend to attend to that with all speed.

My Lords, I first congratulate my noble friend on working for a Canadian bank, a jurisdiction in which the experience of banks has been commendable by comparison with so many other jurisdictions. We were very fortunate that Sir Philip Hampton agreed to stand down as chairman of UKFI and accept the invitation from the board of the Royal Bank of Scotland to become its chairman. We will make every effort to ensure that there is good understanding about the role of UKFI. We have been very clear as to the objectives of UKFI. For my part, I am very keen that UKFI should be an exemplar as an investor. The noble Lord, Lord Northbrook, and I share a background in fund management. We have probably both seen examples of good investor behaviour engagement and too many examples of inadequate ones. I hope that UKFI will set new standards.

That also speaks to the point made by the noble Viscount, Lord Eccles. There is global recognition that bank accounting and reporting had certain shortcomings. That is being addressed by regulators and accounting standards bodies throughout the world. We will encourage improvement in that respect. I would expect the Treasury to match very best practice in its own reporting. If the accounting and regulatory professions and bodies take us to a further phase of new, fuller and more comprehensive reporting, I would very much hope that the Treasury would act in alignment with those new standards.

My Lords, this has been an interesting debate and I look forward to the Minister writing to me if he has anything to add. He may also choose to add when the framework document for UKFI will appear; that would be helpful information. Beyond that, I shall express no sympathy whatever for the Minister having boxes delivered at all hours of the day and night; that is what he chose. I beg leave to withdraw the amendment.

Amendment 19 withdrawn.

Amendment 20

Moved by

20: After Clause 21, insert the following new Clause—

“Remuneration committee

(1) The Treasury may by order make provision concerning a remuneration committee in consequence of and furtherance of this Part and of Part 3 of this Act.

(2) An order (“a remuneration order”) under this section—

(a) shall be made by statutory instrument, and(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.(3) Before making a remuneration order, the Treasury shall consult—

(a) the FSA; and(b) the Bank of England.(4) The order may amend or modify the effect of an enactment passed before the commencement of this Act.

(5) The order shall enable the Treasury to appoint a person (with his consent) (“the appointee”) to sit as a full member of the remuneration committee of a bank, notwithstanding any provision in its constitution or any other agreement or arrangement.

(6) The person appointed under this section shall enjoy the immunity of an agent under section 234(2)(a) of this Act, save for the general duties of a director under Chapters 2 and 3 and Part 10 of the Companies Act 2006.

(7) A remuneration order may provide that entitlement to payment of any remuneration recommended by a remuneration committee shall arise only, notwithstanding section 439(5) of the Companies Act 2006, if it was approved—

(a) by the appointee, or(b) in the absence of his approval, by the FSA.(8) In this section “remuneration committee” means—

(a) in the case of a quoted company, any committee or body which prepares or drafts a remuneration report under sections 420 and 421 of the Companies Act 2006 (duty to prepare, and contents of, directors remuneration report) intended to be presented to the shareholders meeting as the directors’ remuneration report under section 439 of that Act (quoted companies: members’ approval of directors’ remuneration report); or(b) in the case of an unquoted bank, any committee or other body which prepares such similar information and material regarding remuneration as shall be specified by the order; or(c) in the absence of any such committee or body, the board of directors itself.”

My Lords, the amendment raises the question raised in Committee when my noble friend Lady Turner of Camden and I tabled an amendment concerning the operation of remuneration committees, which in all companies and most banks recommend the rewards and remuneration for directors. In my unavoidable absence the first time that the new clause that the amendment would insert was relevant, my noble friend Lady Turner spoke on 14 January concerning what had happened with regard to that remuneration over the years and the resentment that it had caused over a wide scan of British society. Indeed, this afternoon your Lordships have heard of remarkable events: the unusual taking to the streets by British workers in an almost Gallic fashion. This has in part been fuelled by that powder keg of resentment and the inequalities which helped to ramp up British society.

The amendment is different from the one in Committee, as indeed it must be. It raises the question of remuneration committees in the weak form that the amendment in Committee sought to insert—namely that the Treasury should have power to appoint a person to a remuneration committee—and it goes on from there. I have two questions for my noble friend. First, has he rethought his objections to the weaker amendment brought forward in Committee? Secondly, does he have any similar objections to the stronger one which takes account of what was said by some speakers at that stage?

All speakers in the debate in Committee, including the Minister to some extent, expressed strong sympathy with the concerns that lay behind the amendment. This is hardly surprising. When I first wrote and spoke on these questions in your Lordships’ House in 2003, for example, it was difficult to get people to believe that directors had had their remuneration raised in the previous 10 years by 288 per cent instead of the 45 per cent which overcame most salaries and remunerations in society. The top bankers, whose irresponsible practices have been part of the reason for the crisis into which we have fallen, must not be allowed to profit from any of the provisions in the Bill. It should be made explicitly clear, not merely implicitly clear, as the Minister and others have sometimes argued, that measures can be taken to prevent that happening.

Indeed, President Obama, in his recent broadcast to the American people, said that the measures in America need,

“transparency, rigorous oversight and clear accountability so taxpayers know how their money is being spent”.

With the billions of pounds of taxpayers’ money being offered to the banks in our jurisdiction, that formula would be adequate only if one adds what my right honourable friend the Prime Minister always adds in his descriptions of what is being done: that there must also be fairness, in a social sense across the board, in the results of what is being done.

All speakers in Committee suggested that the weak form of the amendment that was then moved had a particular defect. The noble Lord, Lord Higgins, for example, said, at col. 1652, that it was very modest and that it was still open to colleagues on the remuneration committee to ignore the appointee’s voice, which is meant to be the voice of public opinion and reasonableness, because they could not follow his objection to the remuneration that was being proposed.

As my noble friend Lord Borrie pointed out, the non-executive directors, who are supposed to keep a special eye, as he put it, on the remuneration of executive directors, are somewhat disinclined to vote down the proposed remuneration in companies in which they are merely non-executives. In Committee, I quoted from one of the many books that make a general point about the defect of the remuneration committee regime that we exercise in our law. We must not pass a Bill that says nothing about this question.

There is widespread public resentment and concern, to which I have already referred, that when a bank falls within Part 1 or Part 3 of the Bill—I am entirely responsible for the defect in my amendment on the Marshalled List, in which Part 1 is printed without the “1”; it is a typographical error, for which I am responsible and for which I apologise to your Lordships—the top bankers whose irresponsible practice has helped to create the crisis should in no way profit from the measures that we are taking, and the measures that we are taking should make that absolutely clear.

My noble friend and I therefore tabled Amendment 20 to cure the defect which a number of your Lordships pointed out in Committee: namely, that the appointee of the Treasury might be put on a remuneration committee and be ignored. That is a justifiable objection if the rest of the proposals are accepted. We cannot rely either on institutional shareholders to take the point on remuneration committees or on directors who have shown that they cannot be trusted not to restart the same old spiral into huge excesses that are quite unjustified in any social sense, and at the same watch working men and women risk and lose their jobs and their futures in a society in which they have so much influence.

My noble friend and I sought to cure this defect—as I said, the noble Lord, Lord Higgins, among others, pointed out that the voice of the Treasury appointee had no sanction behind it and could be ignored without consequence by other members of the remuneration committee as he did not have a decisive voice—in subsection (7)(a) and (b) of our proposed new clause, which seeks to provide for the necessity of approval by the Treasury appointee, or alternatively by the FSA, which will have been consulted by the Treasury before any such order will have been made, as your Lordships will see from the Marshalled List.

If it is objected that this takes the matter out of the hands of the normal machinery of banks and companies, shareholders and the other normal instruments of the law, the answer is that it is time for something to be done. Billions of pounds of public money have been put into these institutions and especially into the lack of activity by institutional shareholders, who should pay special attention to the issue. Should this be so—and it is—and they have failed in the past to deal with the issue, and directors have felt free to abuse the institutional gap that this has created, then there is a need for new institutions. On 4 January, the president of the CBI said that these problems need a new institutional base. Today, with £37 billion of taxpayers’ money engaged, it is not surprising if that argument gains further force every day. Your Lordships overlook it at the peril of us all.

If it is said that the time is not yet ripe to deal with this matter in regard to banks, when the Companies Act 2006 failed to adopt an institutional regime by regulation of companies as a whole, my reply is that those who resort to the feeble excuse of the principle of unripe time should remember Professor Cornford’s argument. Time is like the medlar: it has a habit of going rotten before it is ripe. This is not a Bill in which your Lordships should exercise that kind of option.

It is time that regulation in the public interest extended its beneficial range beyond the frontiers that have so far protected directors’ remuneration from abuse. The old protectionist notion that company institutions are enough to protect society against the scandals of the past two decades has now been shown to be wrong. If people say that other executives are paid even more than directors, as has been said in previous debates, the remedy lies in the hands of the skilled draftsmen to whom I hope the Government will place our rather rudely drafted new clause. It may well be that other persons than directors should be controlled by the Financial Services Authority, as would be the last recourse in our amendment. It is my fervent hope that the Minister will take the opportunity to accept the spirit of our amendment and bring it back to the House with whatever drafting adjustments it requires. On the passage of this Bill, he will be placing his name on what will be a momentous stride forward in the law. I beg to move.

My Lords, this amendment addresses an issue of concern with regard to the levels of remuneration paid to directors by some of our largest financial firms. I share my noble friend Lord Wedderburn’s concerns about the impact of excessive remuneration, which can cause undesirable behavioural distortions, particularly where it is inadequately linked to performance and produces outcomes that are manifestly unfair. But I must also point out that we debated these matters in Committee not once, but twice, with my noble friend showing a formidable knowledge of the procedural avenues available to those determined to press their case in your Lordships’ House. I can only reiterate what I said twice in Committee: the issue of pay and incentives for the directors and employees of a private firm—it is important to emphasise that it is also about employees, because if we have concerns about remuneration they should not be limited to the remuneration of directors—is a matter for that firm, not the Government. There is surely little place for government in determining wages and incomes, a policy approach that has not been attempted for many decades.

I am not as persuaded, however, that there is not a public interest concern regarding the process followed in framing remuneration decisions and regarding the role of shareholders, particularly institutional shareholders, in the determination of those frameworks and outcomes. There is a real issue which the FSA is actively addressing around the impact of incentives in remuneration. The chief executive of the FSA wrote to the chief executives of the major banks in October to clarify the expectations of the authority with regard to remuneration. This letter sets out some high-level criteria for good and bad remuneration policies and urges firms to review their remuneration policies against those criteria. The FSA has followed it up through active engagement with firms on their remuneration policies and has reiterated the importance it places on appropriate and balanced remuneration.

I can assure noble Lords that the issue of excessive remuneration regimes is one that the Government take seriously, particularly to the extent that they may give rise to reckless behaviour, threatening the stability of financial firms and the financial system. But to the extent that this is an issue related to the prudential oversight of the banking sector, it is fundamentally a matter for the FSA. I can assure noble Lords that the FSA is tackling the matter with vigour.

I turn once more to the specific proposals put forward by my noble friend. I should reiterate that I find myself in some agreement with the comments made in Committee by my noble friend Lady Ford and the noble Baroness, Lady Noakes. The proposal to insert a government appointee into the governance structure of independently managed firms would undermine that very independence and weaken the governance links that bind together the employees, directors and shareholders of a firm. I should note that where firms in which the Government have a shareholding continue to be run on an independent basis and the Government are not seeking to interpose themselves into their governance structures, this also applies to their remuneration policies. Having given my noble friend this assurance, I wonder if I might prevail upon him to withdraw his amendment.

My Lords, I am very grateful to the Minister for his answer. My mind naturally returns to the many occasions on which the late Lord Dormand tried again and again, almost weekly, to put before your Lordships the scandal of remuneration being extorted from companies and banks by directors and other highly paid executives. If my noble friend is not happy that the amendment is aimed only at directors and he has other people in mind, I have already said that he has the draftsmen at his elbow to put forward a new clause in an amendment to cover those aspects which he has hinted at and to which he spoke in Committee. Then, he said that he knew that there were people earning 20, 30 or 40 times what directors sometimes earn in banks. If he wants those people to come within the scope of the clause, I shall be the first to vote for it, as I hope will the rest of your Lordships.

As for the question of independence, it was that which made me think of Lord Dormand, who got such poor answers from Government after Government, including this one, when he put the matter to this House in Question after Question. He was told that it would interfere with the independence of companies and banks. At the time, he mainly asked about companies and was told that fixing the remuneration of directors would prevent them being independent. In Committee, my noble friend Lady Ford made a similar point in different words, which I carefully studied before helping to draft this amendment.

It is an argument of despair to say that we can do nothing. I understand the Front-Bench position put to us by my noble friend to be, “Yes, of course it is a scandal but we cannot do anything about it by regulation because that would interfere with the independence of the whole operation”. Either this is a Government, an institution, who are here to put the public interest into legislation or they are an institution in thrall to the institutions that they fear to control. Regulation does not have frontiers set by natural law; it has frontiers set by men and women who are bankers or legislators and who choose where the frontier of regulation will stop. If in this instance this Government choose the frontier of regulation to stop at the walls of the Bank, then on their head be it when the resentment to which I have referred grows stronger and stronger among working people, who see the results of such choices in their very livelihoods.

I promise the Minister that I shall not come back to this matter; I have no opportunity to do so. However, I will leave it only on condition that he thinks again about the consequences to which I have referred. He plays a major and vital part in financial affairs for this Government. That is why he sits where he sits, and that is what he must think about as a consequence of the Government’s next electoral liabilities. I beg leave to withdraw the amendment.

Amendment 20 withdrawn.

Clause 22: Termination rights, &c.

Amendments 21 to 23 not moved.

Clause 24: Procedure: instruments

Amendment 24

Moved by

24: Clause 24, page 11, line 31, at end insert—

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

My Lords, I shall move Amendment 24 and speak to the other amendments in my name in this group. I say at the outset that I anticipate a harmonious outcome for this group of amendments. Amendments 24 and 32 amend Clauses 24 and 41 respectively so that where the Bank of England makes a share transfer instrument or a property transfer instrument and sends it, in accordance with those sections, to the Treasury, the Treasury must in turn lay it before Parliament.

In Committee, we debated the Delegated Powers and Regulatory Reform Committee’s recommendation that the House consider a parliamentary approval process for these instruments because they have the same effect as temporary public ownership. In Committee, I was persuaded—just—that that procedure was unnecessary, although whether that proves to be the correct judgment will be tested only when the Bank exercises those powers if, indeed, it does so. If there is any doubt about the appropriateness of the Bank's action, that could well call into question whether it should be allowed to have confiscatory powers without direct parliamentary oversight. However, as I say, I have accepted that point.

My fallback position was that there ought to be at least a formal notification to Parliament. The Government agreed to take the issue away and they have tabled Amendments 25 and 31. They deal with the same points as my Amendments 24 and 32 and therefore, if asked nicely, I shall withdraw them.

For the convenience of the House, I shall speak briefly to Amendments 32 and 33, which are in this group, although I do not intend to move them. In Committee, we debated the parliamentary procedures attached to the various supplemental and other types of procedure in Clauses 26, 30, 31, 42, 43 and 44, and the Minister and I were completely at cross purposes. The Minister subsequently wrote to explain how that procedure fits into the rest of the Bill so that my points were unnecessary. I overlooked the Minister’s letter in my rush to put my amendments down for Report, so I apologise to the House for cluttering up the Marshalled List, and I apologise to the Minister for not paying more attention to his letters.

Government Amendments 25 and 31 are a direct response to the amendments tabled in Committee by the noble Baroness, Lady Noakes. They propose that when a share transfer instrument or property transfer instrument is made by the Bank of England, the Treasury should lay it before Parliament. I note that the noble Baroness has brought these amendments forward again on Report. During the Committee stage debate, I signalled the Government’s intention to reflect on this matter, and the proposed additions to Clauses 24 and 41 are the result of that reflection. Should the Bank of England make a share or property transfer instrument, these amendments require the Treasury to lay a copy of such instruments before Parliament, thereby allowing Parliament to have direct access to the instruments. I hope they achieve what the noble Baroness was seeking to achieve with her amendments. I believe they reflect a constructive response to the Delegated Powers Committee’s recommendation that the House reflect on the matter of parliamentary accountability for these instruments. Accordingly, I ask, ever so nicely, that the noble Baroness withdraw her amendment.

Amendment 24 withdrawn.

Amendment 25

Moved by

25: Clause 24, page 11, line 37, at end insert—

“(3) Where the Treasury receive a copy of a share transfer instrument under subsection (1) they shall lay a copy before Parliament.”

Amendment 25 agreed.

Amendment 26 not moved.

Clause 34: Effect

Amendment 27 not moved.

Clause 38: Termination rights, &c.

Amendments 28 to 30 not moved.

Clause 41: Procedure

Amendment 31

Moved by

31: Clause 41, page 20, line 6, at end insert—

“(3) Where the Treasury receive a copy of a property transfer instrument under subsection (1) they shall lay a copy before Parliament.”

Amendment 31 agreed.

Amendments 32 and 33 not moved.

Clause 48: Power to protect certain interests

Amendments 34 to 38 not moved.

Clause 54: Independent valuer

Amendment 39

Moved by

39: Clause 54, page 26, line 35, leave out “a” and insert “an independent”

My Lords, the amendment inserts the word “independent” into Clause 54(2). This clause deals with the use of an independent valuer for a compensation scheme order. An independent valuer is to be appointed by a person appointed by the Treasury.

In Committee, I sought further details on the exact independence that would be sought for these independent valuers and tabled an amendment to make the relevant order spell that out. The Minister's response was that the valuer would be appointed by an independent person, or an independent panel. That would clearly go some way to ensuring that a genuinely independent valuer was appointed, but the Bill does not say that. So I am returning to the issue on Report with a simple amendment to make the independent valuer appointed by an independent person so that independence can be seen to be achieved. I beg to move.

My Lords, as the noble Baroness said, we debated the issue of the independence of the valuer in Committee and that debate encouraged us to bring forward government amendments to the code of practice to signal that the code can include information on certain compensation matters. This amendment states that the person appointing the independent valuer should be independent. I agree that the appointing person should act independently in his function. Therefore, the debate is about whether that needs to be achieved by requiring that the appointed person or panel be independent.

The starting point is that Article 6 of the European Convention on Human Rights requires a person who determines compensation to be independent and impartial. A person is not precluded from being independent and impartial because the Government appoint him. However, this is an area where we thought it desirable to signal that the independent valuer would not simply be appointed directly by the Government without external participation in the process. The Government believed that including provision for an appointing person had two main benefits: first, that a person with sufficient expertise, or indeed a panel of experts, could be used to select an independent valuer, which seemed more helpful to the process than a direct appointment by civil servants; and, secondly, that showing that the Treasury is not directly involved in the process would help to put the independence of the valuer on the strongest footing.

To be clear, we do not believe that this provision is required on fairness grounds under the European Convention on Human Rights, but we believe it is a helpful signal on this matter that the Treasury would not have a direct role in appointing the independent valuer. Even without requiring the appointing person to be independent themselves, I believe that the fact that they have a purpose and role distinct from the roles of the interested parties ensures that they can act with independence.

In short, we have taken the belt of an independent valuer, which is mandatory under the European convention, and added to it the braces of an appointing person or panel. I do not believe we need the additional security provided by any further contraptions for keeping our metaphorical trousers in place. For this reason and speaking with some authority, I do not believe the noble Baroness’s amendment is necessary and I urge her to withdraw it.

My Lords, I speak as a person unfamiliar with belts and braces for keeping trousers up. The Minister said that civil servants could not be appointed, but the clause simply refers to a person appointed by the Treasury. Since I think that civil servants are persons—although I sometimes have a little trouble with that concept—and therefore could be appointed, can the Minister assure the House that a civil servant would never be appointed?

My Lords, I shall have to take the Minister at his word on this subject. I beg leave to withdraw the amendment.

Amendment 39 withdrawn.

Clause 57: Valuation principles

Amendment 40

Moved by

40: Clause 57, page 28, line 27, leave out “to be applied” and insert “to which the valuer must have regard”

My Lords, I shall speak also to Amendments 41 and 42. These are amendments to Clause 57, which deals with valuation principles. We find this approach to valuation odd. The Treasury is at pains to appoint an independent valuer, or so it tells us—the Minister has repeated that again. But, having appointed him, it then wants to use Clause 57 to tell him exactly how he should carry out his valuation.

Clause 57 allows the Treasury to set out various things that it could tell the valuer to do. We have no problem with subsection (3), which mandates the disregard of financial assistance provided by the Treasury or the Bank of England; that is entirely proper in order to protect public money. But subsection (2) allows the Treasury to mandate all sorts of valuation methods, thus begging the question about why an independent valuer has been appointed in the first place if he has to be told in detail how to ply his trade. Subsection (4) allows the Treasury to tell the valuer to make assumptions which might not in fact be true.

The Minister gave no specific rationale for this other than the need to protect the public purse. We have to remember that the special resolution regime can be triggered without any actual public money having been committed. It is not a prerequisite of the regime that such a condition is fulfilled. In any event, we believe that it is bad government for the public purse to be protected by the use of valuation principles that are counterfactual or not in accordance with the judgment of an independent valuer.

The Minister said that the clause was ECHR-compliant. The Government always say that about their Bills, of course, and sign a declaration to that effect. But he cannot mean that any application of the sweeping powers in this clause would be ECHR-proof. It is highly doubtful that, say, the specification of a counterfactual under subsection (4) would survive a legal challenge.

My amendment seeks to change Clause 57 so that the valuer has to have regard to the principles that could be set out in a compensation scheme order but does not necessarily have to apply them and can still have recourse to his own judgment. In subsections (2) and (4), instead of the valuer having to follow the principles, the amendment requires him to consider whether it is desirable to follow them. I believe that this is a more realistic and, indeed, reasonable approach. I beg to move.

My Lords, we debated this issue fairly extensively in Committee when the noble Baroness expressed her anxieties about the existing provision. We believe that we have got it right, and I shall ask the noble Baroness to withdraw her amendment.

The valuation principles that we are putting forward would operate in two ways: first, by specifying certain methods or matters to be taken into account and, secondly, by requiring certain assumptions to be made as to the status of the bank had it not entered the special resolution regime.

It is appropriate for compensation orders to specify principles to be applied in determining the compensation payable. Failing banks are complex institutions, and valuation can be approached in different ways. Principles such as those in the Bill provide a framework within which to approach this complex situation.

Of course, it is essential that compensation is assessed in a manner compatible with the European Convention on Human Rights. However, the case law of the European Court of Human Rights makes it clear that contracting states enjoy a broad margin of appreciation in setting up arrangements for compensation. Accordingly, it is entirely appropriate for contracting states to set parameters for such valuation.

The accusation may be made that the only reason for the Government to have this power is in some way to rig the exercise. The justification for this power is not that at all. The Government have a legitimate role in setting parameters for a number of reasons. The first is to safeguard considerations of the public interest—for example, by requiring public financial assistance to be discounted so that compensation claims are not artificially inflated by public money. This is also achieved by setting out, where appropriate, the situation that would have held had the authorities not intervened under the special resolution regime.

The second is to give the independent valuer parameters to work within, so that his process does not become beset with collateral litigation seeking to undermine the decisions that he has taken as to how to approach the valuation exercise. The independent valuer is meant to be an expert with experience of company valuation. Valuation principles allow the Government to set parameters for valuation based on wider considerations of the public interest.

However, it would be wrong to suggest that because such matters are outside the independent valuer’s remit, the Government will be the final arbiter of such matters. Any party who is affected is free to challenge the legitimacy of the valuation principles that have been included in the order. The higher courts will then consider whether the valuation principles are proportionate and strike a fair balance between the wider interests of society and the individuals affected by the exercise of stabilisation powers. The appropriateness of including the discretionary valuation assumptions and the nature of the assumption would of course need to be considered on a case-by-case basis and, as I have noted, they are open to challenge.

I do not accept that this is an unfettered power. Rather, it is an appropriate discretion to allow the Government in setting up compensation measures. I hope that the noble Baroness will accept that the Government’s case is sound enough for her to feel able to withdraw her amendment.

My Lords, I thank the Minister for setting out the Government’s response. It is difficult to accept their rationale for Clause 57. The Minister effectively says that there is a legal remedy. I think that he must mean judicial review, because there is no other obvious legal remedy available. That process, while available, is costly, cumbersome and not very well directed at a lot of issues. I am sure that anybody who has worked in government will know that you can avoid judicial review by going through a lot of processes that make it look as though you have considered everything, even if you have not.

There are some real issues here as to whether the Treasury should have the power to specify things that are unreasonable, which the Bill allows it to do. The longstop is perhaps that no decent valuer would accept appointment if the Treasury had set unacceptable parameters in the compensation order. Of course, the Treasury might not want a decent valuer when the time comes, so we must see what happens. I will not press my amendments, but I am disappointed. However, I would be even more disappointed if the Treasury ever used this power in a way that seemed designed to tilt the result of the valuation. That would be unacceptable. With that, I beg leave to withdraw the amendment.

Amendment 40 withdrawn.

Amendments 41 and 42 not moved.

Clause 58: Resolution fund

Amendment 43

Moved by

43: Clause 58, page 29, line 28, leave out “may” and insert “shall”

My Lords, I shall speak also to Amendments 44 and 46. The amendments seek to amend subsection (6) of Clause 58, which deals with resolution funds that may be set up to pay any balance of funds after a bridge bank operation or temporary public ownership. I have tabled my amendments to subsection (6) but in haste omitted to table mirror amendments to subsection (7), but the issues are relevant to both subsections.

The amendments would introduce the concept of maximisation of proceeds, but the resolution fund order is permissive. It is not necessary that the Bank of England or the Treasury must maximise the proceeds, which means that they may not be required to have the residual interests of the shareholders in mind at all, except by reference to human rights issues. Amendments 43 and 44 would make this requirement to maximise proceeds mandatory.

It should be noted that the operation of paragraph (a) of the subsection means that the special resolution objectives and the code of practice will always trump proceeds maximisation, and so there can be no argument that the need, say, to protect depositors cannot come before proceeds maximisation, which will always come later in the order of consideration. In that light, I challenged the Minister in Committee to say in what other circumstances a resolution fund might not have the requirement to maximise proceeds, but the Minister did not give me an answer.

Amendment 46 would delete paragraph (b) of subsection (6). This is an oddity, because it requires an order to specify the extent of maximisation of proceeds. I do not understand how one can partially maximise anything as a matter of logic. I did not get an answer to that in Committee, either.

The Minister said that he would reflect on this prior to Report but his amendments in this group do not appear to deal with the points raised by my amendments. Instead, they deal with other amendments to which I spoke in Committee and get rid of the ridiculous word “subserviate”. The Minister’s officials asked to group his amendments with mine, to which I agreed, but I have no idea why, as they appear to address a completely different issue. I hope that when the Minister speaks to his amendments he will also manage to address mine. I beg to move.

My Lords, the amendment concerns putting in place a resolution fund as a means of compensation and whether, once a fund is in place, there should always be a requirement on the Bank of England to manage the bridge bank in a manner that maximises the proceeds available in the resolution fund. I understand the intention and, indeed, the logic behind the amendment, but I shall set out for the House, as I did in Committee, why there may be circumstances why such a requirement would not be appropriate.

The authorities and stakeholders alike have been cognisant of the benefit of a bridge bank as a stabilisation option that can be used for a very short period to facilitate a commercial purchase onwards from it. The transfer of Bradford & Bingley into temporary public ownership and the immediate onward sale of its deposit book to Abbey Santander is an example of how the bridge bank might be expected to work. I note that this was achieved under distinct and different legislation, which does not explicitly contain reference to bridge banks. This was the effect of the resolution, both intended and achieved. In such a situation, I do not believe that the bridge bank is in existence for long enough for any reasonable management duty to be applied. For this reason, I do not believe that it should always be a requirement.

The noble Baroness may be concerned about the Government’s discretion over this matter. For example, the Government have discretion over the cut-off point after which a management duty should be put in place. However, this decision will of course be subject to full parliamentary scrutiny through the affirmative procedure and is challengeable through the courts. Therefore, there are enough safeguards to prevent this discretion from being misused in any way.

During the debate in Committee, there were a number of questions over elements of the bank resolution fund as set out in Clause 58. While the Government tried to answer them during the debate, those questions prompted us to reflect that this new concept should be described in more detail through the code of practice. This, therefore, is one of the reasons why we have added compensation arrangements as something that can be included in the code of practice through the amendments to Clause 5. I believe that this is a helpful and constructive development. Given that, I urge the noble Baroness to withdraw her amendment in due course.

Amendment 46 would remove, or perhaps it probes, Clause 58(6)(b). It may be helpful if I set out the purpose of the provision. It is important to set out the nature of any duty owed by the authorities. As noble Lords will be aware, a number of different duties can exist in civil law. For example, in certain cases, a strict liability duty will arise. No matter how much care is taken, if the duty is not discharged, the person owing it will be liable for its breach. No one would suggest that that was appropriate in this context. But other standards exist—for example, of negligence and gross negligence. This provision enables an appropriate standard to be imposed by which the breach of the duty should be assessed. Without such provision, the clause would not work properly, as the nature of the duty would not be clear. The Government of course will need to justify their choice of extent to Parliament and, again, that can be challenged by interested parties through the courts. For that reason, this subsection is essential and workmanlike and I beg the noble Baroness not to press her amendment.

In Committee, the noble Baroness, Lady Noakes, expressed misgivings about the term “subserviate”. While admitting that it is defined in the Oxford English Dictionary and was used several times in the speeches of Sir Winston Churchill, the noble Baroness was concerned that the term is not used in legislation. Since the introduction of this Bill, the term “subserviate” has had quite an airing. Indeed, an internet search would reveal quite a few references in Hansard. Therefore, one is tempted to keep the term to try to raise its popularity and profile, or possibly create a Facebook page for it. But it was a serious concern and I must provide a serious response, or risk another chiding from the noble Baroness.

In drafting statutes, we do not seek to be hidebound or to adhere always to precedents. Rather, we seek to use the best words to encapsulate the concept in question. I do not think that the meaning of “subserviate” is opaque or confusing. However, concern was also expressed in the other place, where the standards of learning are perhaps not as exceptional as in this House, and it is for the Government to respond in a constructive manner. Therefore, I bring forward this amendment to replace the term “subserviate” with a new subsection to Clause 58.

The amendment states in plain language our intention that the management duty to manage a bridge bank or bank in temporary public ownership in a manner that maximises the proceeds available in a bank resolution fund will apply only so far as the duty is compatible with the special resolution objectives and the code of practice. I hope that this amendment satisfies both Houses’ concerns on this point and demonstrates our willingness to respond helpfully on these matters. I beg to move.

My Lords, the Minister may get an opportunity to move his amendment in a moment, but not yet.

I thank the Minister for his comments in relation to my amendments. As usual, we heard the old line about judicial review providing the answer to anything that goes wrong, which we have never thought to be a good answer. Nevertheless, the Minister made some substantive points in his response, which will deal with the issues sufficiently for my purpose. On that basis, I am happy to withdraw the amendment.

Amendment 43 withdrawn.

Amendment 44 not moved.

Amendment 45

Moved by

45: Clause 58, page 29, line 31, leave out paragraph (a)

Amendment 45 agreed.

Amendment 46 not moved.

Amendment 47

Moved by

47: Clause 58, page 29, line 39, leave out paragraph (a)

Amendment 47 agreed.

Amendment 48

Moved by

48: Clause 58, page 29, line 42, at end insert—

“(8) A requirement under subsection (6) or (7) is to be complied with only in so far as is compatible with—

(a) pursuit of the special resolution objectives, and(b) compliance with the code of practice under section 5.”

Amendment 48 agreed.

Clause 71: Pensions

Amendment 49

Moved by

49: Clause 71, page 37, line 13, at end insert—

“( ) An order or instrument may not modify the accrued pension rights of any member of a pension scheme.”

My Lords, the amendment adds a new subsection to Clause 71, which deals with pensions. The powers in the clause are very widely drawn and in Committee I sought to find out just how wide the powers are. I posed a number of questions to the Minister, such as whether the clause would allow the Treasury to turn a defined benefits scheme into a defined contributions scheme, and whether any changes could be made to accrued rights.

The Minister said that the power was there to allow a pension scheme to be transferred or split up to facilitate a transfer on sale. He said that,

“this provision would not amend accrued rights. It does not do that and does not create the possibility of doing it, nor have we any intention of doing it”.

That seemed pretty clear. But the Minister continued:

“It applies both to the group position and to individuals”.—[Official Report, 20/1/09; col. 1574.]

It is the position of individuals and their accrued rights which are specifically protected by my Amendment 49.

Clause 71(3) states that an order or instrument may,

“modify any rights and liabilities”;

and subsection (4) states that:

“Provision by virtue of this section may (but need not) alter the terms of a pension scheme”.

Members’ rights in a pension scheme are contained in the terms of the scheme. Members’ rights are the liabilities of a pension scheme. I do not know how the Government could have drafted a power to interfere in those rights more clearly if they had wanted to. The Minister has said that they did not, but this flies in the face of any ordinary interpretation of the Bill.

I have tabled my amendment to seek further clarification on this. I completely support the clause to the extent that it allows the Treasury to negotiate around the complexities of pension schemes where there are changes of ownership and structure. I can just about cope with the power being used to alter the rights in relation to future accrual, but I am completely opposed to a power to alter the accrued rights of individuals, which is what my amendment would protect and what the clause seems to be aimed at being capable of doing. I beg to move.

My Lords, we debated this issue substantially in Committee and I appreciate the noble Baroness’s concern. This is an important issue. I had hoped that I had allayed that concern with the government response on that occasion, but obviously that is not the case. I made it clear, and the noble Baroness reflected that fairly, that it was not the intention of the authorities to make provision in a transfer instrument or order which had the effect of interfering with—and by this, I mean diminishing—a person’s accrued pension entitlements. At that time the noble Baroness asked why, if this was the intention of the authorities, provision to that effect was not made in the Bill. I understand that she has returned to the issue because I resisted then.

Clause 71 is important. It may be necessary to make provision in a transfer instrument or order in respect of a pension scheme for the purposes of effecting the transfer. For example, if a failing bank is part of a group of companies, then all group employees may participate in the group’s pension scheme. In this situation, if a deposit-taker is transferred from the group, it is likely to be necessary for the employees of the bank to be transferred to a separate pension scheme. The relevant authority may make provision to transfer the employees from the group pension scheme and establish a new scheme, or transfer the employees into the transferee’s pension scheme for all future service benefits.

Provision may be made, therefore, in the transfer instrument or order to enable the transfer of the scheme, or, for example, it may enable the creation of a new scheme. This would be the case in normal commercial transactions, such as takeovers or de-mergers. Following this, consequential changes to pension schemes may be necessary. This may include consequential provisions relating to accrued rights. For example, we may need to specify who will continue to fund the scheme following the transfer. Where a partial transfer has been affected, we may need to specify apportionment of the contribution rates to the scheme between the transferor and transferee. We may also need to specify other matters of succession from one principal employer to another. That should not be controversial. Indeed, it is difficult to see how the power would work at all if it could not make such consequential provisions. The noble Baroness’s amendment could prevent those consequential provisions being made, which is why we cannot accept it.

I suspect that the noble Baroness does not intend to wreck all the schemes but that is the Government’s view of the effect of the amendment and it is why we cling so strongly to the clause. It is not intended that Clause 71 will be exercised to reduce accrued rights. I made that very clear in Committee and I am happy to reassert it. There is absolutely no question of using this clause to carry out a raid on people’s pension schemes. That would be counter to the special resolution objectives, and it would infringe convention rights and would therefore be prohibited by this Bill and European legislation.

I shall explain this point further. The authorities must act proportionately in exercising the powers under Part 1 of the Bill. They must balance broader public policy interests with those of private individuals, including individuals’ convention rights. For example, Article 1 of Protocol 1 of the European convention specifies that a person is entitled to the peaceful enjoyment of his possessions, and this includes economic interests such as an entitlement to a pension. This is a qualified right—that is, the authorities may interfere in that right if that interference is lawful and justified in the public interest. However, the authorities will, as in the case of any other exercise of powers under Part 1, only take steps necessary for the purposes of the resolution.

Of course, the authorities will also have regard to the special resolution objectives. Objective 5 provides that the authorities must avoid interfering with property rights in contravention of a convention right. We will have regard to that in considering making provision in respect of a pension scheme.

As such, we do not think that the amendment is necessary or appropriate, but Clause 71 certainly is. The clause gives us the scope to make the consequential amendments to pension schemes that may be necessary. It is also suitably limited by the special resolution objectives and the European convention so that action cannot reasonably be taken to diminish accrued rights. That is why I was so emphatic on this point in Committee.

I hope that the noble Baroness will appreciate that we have examined this matter with the greatest thoroughness. She has raised a very important issue concerning the special resolution procedure, but the Government believe that Clause 71 meets all objectives, including those of ensuring that individuals’ pension rights cannot be diminished. With that assurance, I hope that she will feel able to withdraw her amendment.

My Lords, I have listened carefully to the Minister’s discussion about the need for consequential provisions for accrued rights to be accounted for, but could there not be some wording to the effect that the accrued rights themselves will not be affected? That would cover the contingency that might be needed.

My Lords, I hear the noble Lord’s further point on that, but he will appreciate how closely we have looked at accrued rights in order to ensure that Clause 71 does what we intend it to do for the special resolution procedure. However, I shall take his point away and look at it further. I recognise the justified anxieties and concerns of all Members of this House, which were particularly expressed by the noble Baroness and other noble Lords in Committee and by the noble Lord, Lord Northbrook, in his comment a few moments ago. I will look at this further, but I hope the noble Lord will appreciate how tested the objectives and guarantees in Clause 71 are.

My Lords, I thank the Minister for setting out the Government’s view of Clause 71 in such detail. I also thank him for agreeing, following the intervention of my noble friend Lord Northbrook, to take the point away and look at it again. I am sure that the Minister is aware that I had no intention of wrecking the clause with the amendment I moved. It was designed to reflect unease that we had not reflected the difference between what we need to do to effect a normal commercial transaction—I completely support the need to do that, as I said in Committee—and giving an ability to change the rights of employees. I am sure there is that possibility in the Bill. Against that, there is the Government’s clear statement of intent, repeated again today. It is important, although such a statement would not have any bearing on the interpretation of the clause if the clause were clear, which it is.

While it is helpful to have the Minister’s statement of intent, I am not sure it affects the legal construction, which is why it would be helpful if the Minister would look to see whether any reassurance to employees with accrued rights or pensioners could be placed in the Bill so that we are not simply having to rely on the interpretation of convention rights. While the convention is an overarching set of rules that apply to everything, it is also helpful to reflect the important issues that arise from convention rights in the legislation we pass in this House, so that we are clear in the way that we approach it. I look to the Minister to see if he can do anything by Third Reading. I beg leave to withdraw the amendment.

Amendment 49 withdrawn.

Clause 74: Tax

Amendment 50

Moved by

50: Clause 74, page 39, line 6, after “section” insert—

“(a) ”

My Lords, the Government’s amendments to Clause 74 respond to the concerns expressed in Committee about the parliamentary scrutiny of secondary legislation. The purpose of Clause 74 is to ensure that the Government can deal with the tax consequences of a transfer made under the special resolution regime in Part 1. The intention is to ensure, broadly, that tax advantages or disadvantages that are created because of a transfer can be neutralised and that continuity can be preserved where appropriate.

The regulations to do this would be made under the draft affirmative procedure, but the clause also contains a power to make orders to amend the list of taxes in relation to which regulations could be made. The Government considered that it was appropriate for the order-making power to be subject to the negative procedure, as there would be an opportunity for full debate, under the affirmative procedure, on the substantive provisions when the regulations were made. However, the Delegated Powers and Regulatory Reform Committee has indicated that, had it been a matter that concerned both Houses, it would have recommended that the affirmative procedure should be used for the order-making power.

The Government take the views of the committee very seriously and, while this is really a matter for another place to consider, we have also reflected further on this matter in the light of the debate in Committee in this House. As a result, we have decided to switch the order-making power to the affirmative procedure. I therefore hope that the noble Baroness, Lady Noakes, will not move Amendment 52.

My Lords, I am delighted that the Minister has adopted my Amendment 53 and has produced his own version of my Amendment 52, which I am pleased to say I shall not press. Rather, I shall support the Government’s amendments. We are pleased that they have implemented the recommendations of the Delegated Powers Committee.

Amendment 50 agreed.

Amendment 51

Moved by

51: Clause 74, page 39, line 8, leave out “Regulations under this section” and insert—

“, and (b) ”

Amendment 51 agreed.

Amendment 52 not moved.

Amendment 53

Moved by

53: Clause 74, page 39, line 10, leave out subsection (10)

Amendment 53 agreed

Consideration on Report adjourned.

House adjourned at 8.10 pm.