Report (2nd Day)
Clause 75: Power to change law
54: Clause 75, page 39, line 20, leave out subsection (3)
My Lords, I will also speak to Amendment 55. Amendment 54 would omit Clause 75(3). This subsection allows Her Majesty’s Government to amend any law retrospectively. The Minister has pointed out that this clause can be used only within narrow limits and would not be used to amend the safeguards in the Bill. However, subsection (3) refers to subsection (1), which says “amend the law”, so not only banking law but a much broader picture has to be considered. There is nothing narrow about this.
If there is a severe danger of financial collapse and unforeseen circumstances arise, there is nothing to stop Parliament being recalled and the necessary powers being put in place. That is why there is the power to recall Parliament to cope with unforeseen emergencies. There has been talk about the cost and the difficulties of this, but these are small matters compared with the surrender of democracy that is proposed.
I wondered when reading Hansard whether the Minister and I were discussing the same clause. The Minister justified the inclusion of retrospective legislation by citing the precedents of the Safeguarding Vulnerable Groups Act 2006 and Section 148 of the Criminal Justice and Immigration Act 2008. The Government’s arguments that these are precedents for Clause 75 are baffling. The examples contain nothing of a retrospective nature. The Minister compared retrospective legislation with the effect on a contract of employment if there was a change in taxation. That is no comparison, because the employee would pay the revised tax rate from the date of the introduction of the new tax, not on previous earnings. I do not think that the Minister was proposing that a poor worker should have to pay a tax on the earnings of previous years when that tax did not exist or, to take the reverse side of the argument, be able to claim a retrospective tax rebate.
When we debated the clause in Committee, more than one noble and very experienced Lord commented that they had not previously seen such legislation as this clause proposes. The Minister has repeatedly emphasised the need for flexibility to deal with unforeseen circumstances and has not yet justified this massive departure from the democratic processes of this country. The Minister gives assurances about how the legislation will and will not be used. As my noble friend Lord Forsyth pointed out, how can the Minister give assurances when he has no idea what the events will be over which he is giving the assurances? I beg to move.
My Lords, Amendment 55 stands in my name and the names of the noble and learned Lord, Lord Morris of Aberavon, and my noble and learned friend Lord Lyell of Markyate.
Your Lordships’ Select Committee on the Constitution reported to the House on this Bill on 22 January. I wrote to the Minister that day on behalf of the committee. First, we asked for the Government’s view ahead of Report on whether the currently drafted broad and far-reaching wording of Clause 75(3) could be limited in terms of the scope of the envisaged retrospective powers. Secondly, the committee expressed the view that it would be helpful if the Government were to provide the House with illustrations of the circumstances in which they envisage that a retrospective power might be used. I fully understand the difficulties that have prohibited the Minister from providing a substantive reply.
Your Lordships’ Select Committee agreed with the assessment of the Delegated Powers and Regulatory Reform Committee that Clause 75, which empowers the Executive by an order laid before Parliament to,
“disapply or modify the effect of a provision”,
in any Act of Parliament—other than that which will become the Banking Act 2009—delegated legislation or the rule of common law, is an “extremely wide power”.
It was the view of the committee that our constitution does not include an absolute prohibition on Parliament giving the Executive power by order to repeal, disapply or otherwise amend Acts of Parliament, delegated legislation or the common law. However, we believe that constitutional principle requires, first, that any such power should be granted by Parliament only where there is a compelling justification; secondly, that the scope of the power should be limited to the minimum necessary to meet the pressing need of such an exceptional measure; and, thirdly, that any order made should normally be subject to parliamentary control, either by negative or affirmative resolution.
Your Lordships’ committee took the view that there needs to be a compelling reason in the public interest for a departure from the general principle that retrospective legislation is undesirable, that there is a heavy onus on the Government to justify to the House why a retrospective provision of such breadth as that in Clause 75(3) is required in the context of this Bill, and that further consideration should perhaps be given to narrowing the retrospective nature of the Bill. Further, on the basis of the arguments advanced by the Government so far, notably by Ian Pearson, Economic Secretary to the Treasury in another place, we are unpersuaded that this burden has been discharged.
On 20 January, your Lordships’ committee welcomed the Government’s indication that they will re-examine the clause to consider whether a more limited and targeted retrospective power could fulfil the public interest. We look forward to the response of the Minister.
My Lords, as a member of the Constitution Committee, I support the noble Lord, Lord Goodlad. I seek clarification, as does the committee and as he indicated, of the meaning of “desirable”. It seems to me, first, to be as open-ended as a word can be. One is never happy to see words like “desirable” in legislation. Secondly, they are very subjective. Thirdly, many things are desirable. We desire all sorts of things which may not be strictly necessary. One is in a wholly different world when one compares what is desirable and what is necessary.
I echo the words of the noble Lord, Lord Goodlad. Many of us in the committee—and by tradition we lawyers—are nervous of anything that is retrospective. But, of course, this is not a penal clause. Had it been a penal criminal clause, we probably would have much stronger views. I reiterate the words of the noble Lord that the committee was not against retrospection in principle. There may be circumstances where retrospection is necessary. Anyone who has listened to what emanated from Davos will be abundantly clear in his or her own mind that some of the great financial geniuses of the world do not know exactly and confidently where they are going. In those circumstances, there may be a need for a clause to ensure that the Government of the day may be able to bring in powers where they are necessary, because we just do not know what is necessary. But I would need great persuasion to accept the word “desirable” in a statute of this kind.
My Lords, I very much agree with all that my noble and learned friend Lord Morris of Aberavon and the noble Lord, Lord Goodlad, have said. Although retrospective legislation can be acceptable, as my noble and learned friend said, we should not take it lightly. I certainly do not like the idea of it. However, I make it quite clear that I have no love for either the financial geniuses or the bankers who have been running banks in recent months and years, so I would not be opposed to imposing legislation that would help us in relation to what has happened with the banks.
Amendment 55 is much more modest than Amendment 54. I congratulate the noble Lord, Lord Howard of Rising, and his noble friend Lady Noakes on their assiduity on this Bill. They have worked very hard, which is much appreciated. However, the reason why I have not spoken so far in Committee or on Report is that they have gone so far, taking hours and hours, on technical amendments, when there are major issues to consider in relation to what the banks have done. I recognise that this is a large Bill that requires proper consideration, but we have taken all these hours, in Committee and on Report, on detailed legislation, when in practice things have been happening that we should be discussing and debating but have no time to do so.
Let me mention one or two issues. There is the question of whether the banks are revising their lending habits. There is the question of whether quantitative easing—sometimes called printing money—should be carried out; some clever geniuses are suggesting that it should, as noble Lords will have seen in the press recently. There is the question of whether we should increase or reduce government debt, as the Opposition want. What is the Government’s strategy for banks? We are told by the FSA that the banks are repossessing on a vast scale: 1,000 houses a week are being repossessed. These are all major banking issues, which we have no time to debate. We are debating only these technical issues and I regret that we do not have more time to discuss the major issues. Having said that, and not wishing to delay the House any longer, I make it clear that I very much agree with what has been said so far. I look forward to my noble friend’s reply.
My Lords, my name is on the Marshalled List and I strongly support what my noble friend Lord Goodlad and the noble and learned Lord, Lord Morris of Aberavon, said, as well as what my noble friend Lord Howard of Rising said in opening this matter. Clause 75(3) says:
“An order under subsection (2)(c) may make provision which has retrospective effect in so far as the Treasury consider it necessary or desirable”.
I say yes to the “necessary”. However, we have had no explanation of why the words “or desirable” are necessary or what they are intended to add. We have had no examples so far. I am a little surprised at why this retrospective power is thought necessary. I am prepared to go along with the fact that it probably is necessary, so long as it is subject to adequate parliamentary control; that question will be covered in our next group of amendments. To go beyond what is necessary is to go beyond the traditions of either House of Parliament.
A useful work, Craies on Legislation, ninth edition, has recently been updated in a comprehensive and helpful form by one of the parliamentary counsel, Mr Daniel Greenberg. He sets out pretty well all the examples that one can find of retrospection. They are always, quite rightly, tightly confined. In 1999, the noble Baroness, Lady Hollis of Heigham, rightly said for this Government that,
“retrospective legislation should be avoided wherever possible”.—[Official Report, 13/10/99; col. 502.]
The very broad terms of the clause are in danger of setting precedents and quite expressly depart from the doctrine of necessity. I very much look forward to hearing what the Minister says in response. The noble Lord, Lord Myners, is in the Chamber and I can think of few people with a better understanding of this. I do not know whether he is answering this debate—I see him modestly shaking his head—but if he does not understand, I do not know who in the Government does. No doubt the Minister who replies will enlighten us.
My Lords, I wonder with some temerity whether, at this late stage of the legislation, the House and the Government might consider some modest constitutional innovation to deal with the conundrum raised by the amendments. The Government’s case, as I understand it, is that if, late at night in the last knockings of doing some deal, a provision is found in some law that prevents the deal from being done and is not important in its own right, the parties concerned need to be able to get on and do the deal and put it to bed. I understand that. However, if this were corporate governance and it was too difficult to call up Parliament and the whole board, perhaps provision could be made for this by giving power to a sub-committee to take actions on behalf of the board when things need to be done quickly and subsequently ratified.
We have no such provision in the constitution, but it would not be impossible to make provision in the Bill for the exercise of this power to be subject to scrutiny by some cross-party Standing Committee of this House, the other House or both Houses, or by a group of privy counsellors or some other innovation. This would simply ensure that there was a constitutional check on the exercise of this power where it was unrealistic for Parliament to be recalled. It would then be possible for that group to decide whether the power was being properly used and whether Parliament should be recalled to debate it if necessary. I know that it is unusual to make constitutional innovations in the course of a Bill, but I simply wonder whether this situation might require some creative thinking.
My Lords, I am sorry to disappoint the noble and learned Lord, Lord Lyell, as I am replying to this amendment. He will know that I speak with the inherent wisdom of my noble friend Lord Myners. My noble friend has cast his decisive eye over the way in which we handle these issues, so the noble and learned Lord can rest assured that the Government are bending their best efforts to defend our position and that we appreciate the criticisms of the clause and the strength of the amendments that have been tabled.
I am very grateful to the noble Lord, Lord Blackwell, for bringing his innovatory dimension to all this. He will know that I can scarcely respond to it off the cuff at the Dispatch Box. I am not sure that it is feasible to follow the line that he suggests, but I am grateful to him for having advanced further the burden of the remarks made by my noble friend Lord Barnett, who, although critical of the clause, asked us to concentrate on its context and the nature of the problems that we are trying to resolve. I am grateful to the noble Lord, Lord Blackwell, for identifying just how the problems could emerge. I am not sure that his solution is just constitutionally innovatory—it is probably quite impossible—but I will take his point on board and consider it seriously.
On Amendment 54, I congratulate the noble Lord, Lord Howard, on the force of his argument today and last week in Committee. He has been persistent on these issues but he has also been careful about how he has presented his arguments. I am grateful for that. I hope that, in response to this significant challenge from the noble Lord, Lord Howard, the House will, as the debate progresses today and, if necessary, at Third Reading, begin to find that the Government’s position and that of the noble Lord are gradually converging and that there is not a vast gulf between us on these issues. I will, nevertheless, identify why I defend the Government’s position.
I begin with a note of caution. The Government believe that this clause is, as a whole, essential. The Constitution Committee, in its report published last week, stated:
“We accept that there is force in the Government’s general explanation of the need for the Treasury to have a power to change the law by order”.
I will come to the remarks of the noble Lord, Lord Goodlad, in a moment, when I consider his amendment. I must also note that the Constitution Committee raised important questions about the exercise of power in the public interest, to which I will turn when I consider the amendments. Distinguished members of that committee have already made their representations today. The Government are grateful for the committee’s balanced and serious analysis of this clause, because we all recognise its importance.
The Delegated Powers and Regulatory Reform Committee made no specific recommendation in relation to Clause 75, but certainly urged that the House should scrutinise it closely,
“so that it might satisfy itself that the rather unusual context for which Part 1 of this Bill makes provision justifies the extremely wide power taken by the clause”.
The House has certainly scrutinised it carefully. The noble Lord, Lord Goodhart, who takes great responsibility for that committee, will know how intensive our debates on this were in Committee. He will also appreciate the strength of the representations that have been made today. I realise that there are still areas where the Government need to clarify and explain their position, which is what I hope to do during these debates, particularly on this group of amendments and the next. I apologise in advance for the rather lengthy response that I am obliged to make. This being Report, it is my only shot at convincing the House on these important issues. I have a number of important points to make about the amendments.
Three crucial issues have been raised. First, there is parliamentary procedure. Parliament must be allowed to play its essential role in holding the Executive to account. We have introduced an amendment that strengthens this in respect of Clause 75. We shall come to this when we discuss the next group of amendments. I will not go through that argument in full now, but it will be recognised that the Government appreciate the importance of government accountability. Secondly, the potential to use the power with retrospective effect would be removed by Amendment 54. As the Constitution Committee has noted, retrospective powers are not unprecedented, but the Government must make a watertight case for why they are needed in this case. I will come to those points in a moment. Thirdly, there is the question of clarity around how the power will be used. This is a broad power. Noble Lords, including the noble Lord, Lord Howard, have rightly sought assurances that this will not be a power exercised on the whim of a Government. I will provide reassurance about the seriousness with which any Government would use such a power.
We studied the issues carefully. We are aware of the strength of opinion in the House. I hope that it will emerge from our debates today and at Third Reading, should that prove necessary, that the power is more tightly worded and will be fully explained. I must make the position clear. The one thing that the Government cannot do is amend Clause 75 to such an extent that the power becomes unusable; to do so would jeopardise the prospects for a successful bank resolution and thus, in the Government’s view, would be irresponsible. I come again to the point that we must not forget: we are discussing this power in relation to the context in which it would be deployed and the nature of the problem for which it would be used to resolve. As the noble Lord, Lord Newby, noted in his remarks in Committee:
“Having read the Treasury memorandum, it is very difficult to see how the operation of the Bill could take place without such a clause”.
That, of course, is the nub of the Government’s case. The noble Lord went on to say:
“Therefore, although we on these Benches have a general aversion to any retrospective powers, without this power and the whole clause, it would be very difficult, if not impossible, to effect the rest of the powers in the Bill”.—[Official Report, 20/1/09; col. 1595.]
I think that Members on all Benches will agree that they may be necessary. That sums up the position that I sought to deploy at some length in Committee; indeed, it does so more accurately and succinctly than I succeeded in doing. I thanked the noble Lord for his contribution on that occasion, and I do so again today. However, I am going to ruin the effect of that succinct analysis by going on at some length, but that is the nature of the obligation of speaking from this Dispatch Box.
Amendment 54 would remove Clause 75(3), the provision that provides for retrospective effect. The noble Lord, Lord Howard, has spoken with conviction about the need to remove this subsection, while the Constitution Committee noted the power with a great deal of interest. Its report is balanced and recognises the challenges posed by this kind of power. The committee notes that there is no absolute prohibition on retrospective legislation in British constitutional law or practice. It also notes that retrospective powers are unusual but not unprecedented; in presenting the amendment, the noble Lord, Lord Goodlad, also reflected that position.
My last attempt to try to provide the House with examples of legislation with retrospective elements did not produce quite the convinced response that I would have liked, and noble Lords indicated that I ought to do better. This is a difficult area and none of the examples that I am about to give will be directly comparable, because we are dealing with different pieces of legislation and therefore very different contexts. I insist that context is everything with regard to these powers. However, all the examples demonstrate that such powers can and have been justified in terms of their context and all of them have been agreed in Parliament.
A recent example is found in the Criminal Evidence (Witness Anonymity) Act 2008, which overturned the effects of a judgment of the House of Lords on the scope to grant witness anonymity orders in criminal proceedings. The Act was given a qualified form of retrospective effect in that it could, in certain circumstances, apply to witnesses who had given evidence before the Act came into force. This was controversial, but the case was successfully made that the powers were justified in the public interest. There are of course differences between the power under that Act and what will be provided under Clause 75 of the Bill. I do not have the slightest doubt that the noble Lord, Lord Howard, will point that out with some force when he comes to speak, but before he gets the chance to do so I should say that I acknowledge the differences. I am giving an example of legislation that has retrospective effect.
A second example is Sections 3 and 4 of the National Insurance Contributions Act 2006, which contain regulation-making powers enabling retrospective provision to be made. A third example is in Section 431A of the Income and Corporation Taxes Act 1988. The regulation powers in that section enable provisions to have retrospective effect and may amend primary legislation. However, I accept the fact that the noble Lord, Lord Howard, is loath for me to comment on anything to do with taxation in this respect, so the third example is put forward with some diffidence.
My Lords, I am most grateful to the Minister for giving those three examples, but they are all examples where the retrospective power could properly be said to be necessary. They would not need the words “or desirable” in order to have that power. Can the Minister draw that distinction as to why he needs “desirable” as well?
My Lords, I intend to do that. It is an important point and I will not sit down without addressing myself to it. Perhaps the noble and learned Lord will allow me to come to that point in time as it relates rather more to the other amendments and not to Amendment 54 tabled by the noble Lord, Lord Howard.
All of these powers are different in their scope and purpose. As I said, there must be a compelling public interest case for these powers and the House must consider each on its merits. Therefore, the question the House faces today is whether the retrospective power in this Bill is justified in the public interest. We have had the scrutiny which the Constitution Committee suggested was necessary for these issues. In fact, the scrutiny has probably exceeded even the exceptional standards the House normally presents on issues such as this.
I believe that the public interest case, with respect to Clause 75, is clear. The absence of retrospective powers could jeopardise the chances of a successful bank resolution, undermining the special resolution objectives which are at the heart of this part of the Bill, including the protection of financial stability, depositors and public funds. The Bill has been produced against a background of considerable difficulty—indeed crisis—within the financial system, with great effects on the wider economy and deleterious effects on our people. Therefore, we should recognise that we are operating within a context where quite significant action needs to be taken.
If I had not anticipated this when the noble Lord, Lord Goodlad, supported by my noble and learned friend Lord Morris and the noble and learned Lord, Lord Lyell, spoke, I knew that the Constitution Committee would present its position in a critical way with a heavy onus resting on the Government to justify to the House why a retrospective power of such breadth as that which is contained within Clause 75(3) is required. The committee asked the Government to consider whether the scope of the power could be narrowed and to give examples of where the retrospective aspect of the power might be used. I will start by trying to deal with the issue of examples, but I preface my remarks by the obvious point that we are talking about events that will happen rapidly and in relation to which it is not easy for us to give clear identification of what might happen. It is no use quoting from the past. We are trying to anticipate with this legislation the kind of crisis which could occur in the future and to ensure that there are powers in place for the authorities to be able to cope.
The drafting of a transfer order in a fast-burn situation with events moving rapidly may not be perfect. Errors and inaccuracies may creep in. Whether it is appropriate to correct these retrospectively will depend wholly on the facts of the case. If it were the case that the order could not be drafted and action taken rapidly, the very purpose of what the clause seeks to address, in terms of the challenges of a failing bank, could not be achieved.
As I said, it is difficult for me to give instances. However, there may be cases where the parties all intended to achieve a particular effect and have proceeded on the basis of that intention, but looking at the instrument may reveal that the text itself is ambiguous or even wrong. In such cases it may be entirely appropriate to correct the drafting with retrospective effect to ensure that the parties who have signed up to the resolution are indeed in the position that they intended to be in when they gave their agreement. Alternatively, there may be provisions of the law that it would be perfectly proper and sensible to modify, but which are overlooked when the transfer takes place because of the speed at which intervention is required and because of the complexity of the field.
I shall illustrate how difficult that could be with regard to the provisions that relate to the control of undertakings. There are numerous provisions regarding significant changes to the ownership of companies, including provisions that require the prior consent of the regulator to a change in ownership. A share transfer instrument or order is likely to trigger those provisions. The Government would expect to comply with them in full; that would, of course, be their intention. It is not impossible, however, that in a rapid fast-burn resolution of a bank with a novel structure or one that carries on an unusual range of activities, we might inadvertently overlook such a provision. If we did not have the retrospective power, the directors of the bank, or indeed third parties, could be faced with the prospect that action taken to effect the resolution might lead to them facing a regulatory penalty. Indeed, in some circumstances it could even result in criminal penalties. Some of these regimes could result in contracts not being enforceable or the transfer not being recognised. All this could lead to serious uncertainty about the consequences of the resolution for the parties involved. As we have debated previously, any uncertainty in entering into these developments could seriously jeopardise the prospect of the resolution being successful.
I shall give the House another example. There are provisions of regulatory law that apply in different ways depending on the group structure of the regulated entity. Some regulatory law will aggregate the activities of undertakings in the same group. Were the Treasury to take a bank into temporary public ownership as things stand, the bank would find itself in the same “group”—I use that in inverted commas—as Northern Rock, Bradford & Bingley and RBS. We may find that various provisions of regulatory law apply to it in a different way.
We are aware of those issues and aim to comply with them in full or, where appropriate, to seek a waiver from the regulator. However, it is possible that a particular bank might raise different issues that had never been dealt with before and we might miss something. Again, there is a risk of regulatory penalty and unenforceable contracts. Contracts entered into by the bank after temporary public ownership could potentially be laid open to challenge as a result of the breach that had occurred. There is a risk that that could threaten the resolution, and the Treasury’s judgment, based on ongoing contingency planning, is that that risk is a serious one.
I appreciate that retrospective provision was not used in the resolution of Northern Rock, Bradford & Bingley or the Icelandic banks, but experience shows that there is a clear public interest in being able to respond swiftly to fast-moving events to achieve the special resolution objectives, including protecting depositors and maintaining financial stability, two of the significant objectives of the Bill that establish the context in which these powers are being sought. Indeed, the authorities need to intervene at even shorter notice than in previous resolutions. The difficulties relating to Northern Rock were very well known but a bank failure can occur out of the blue—for example, where an unforeseeable event destabilises the bank. That might occur where trading losses have been concealed by deception and we would not have the warning—limited though it was—that the bank was in trouble in the way that we had with regard to Northern Rock.
Of course the Government do not take that power lightly but the public interest argument for effective resolution of banks is compelling. That would be jeopardised without the retrospective power. I hope that the examples clarify for the House how retrospection might work in practice and that I shed some light on some of the possible consequences if the authorities did not have recourse to that power.
The noble Lord, Lord Howard—I am all too conscious of the fact that he has the last word on the amendment—might point out that the examples I provided relate to the needs of the authorities to return to issues that they have not been able to resolve successfully at the first attempt. That may be so, but I would point out that the affairs of a large modern bank can be extraordinarily complex. We have to accept that there is a real chance that the authorities may not be able to resolve the problems immediately and perfectly at the first time of asking. If that means only up to the possibility of making a mistake, the Government are obliged to do so, but I believe that it is better to do that now and prepare for the possibility in the legislation than to proceed on the assumption that the Government on every occasion will get it right first time.
I hope therefore that the noble Lord will accept that the Government are prepared to own up to the possibility of fallibility, particularly when dealing at short notice with the affairs of multimillion-pound large and complex financial institutions. I hope that he will also accept that the prudent course of action is to make provision that will enable the Government to confront that reality and to act to resolve it if it proved in exceptional cases to be necessary.
If the noble Lord can accept the case that I have put in the face of his spirited articulation of the principles of parliamentary scrutiny to which he has subjected the clause, I hope that he can withdraw his amendment and give us the basis for further discussions between us before Third Reading on outstanding points of detail.
I turn to Amendment No. 55, which is in the name of the noble Lord, Lord Goodlad, and which has attracted the support of the other distinguished members of the Committee: the noble and learned Lord, Lord Lyell, and my noble and learned friend Lord Morris. We have considered this proposal to remove the power to make retrospective provision if it is desirable; allowing only that the provision may be made if necessary, which is the burden of the noble Lord’s case. I remind the House that anything done under this power will be in pursuit of the special resolution objectives. In this sense, any use of the power will always be necessary: after all, we are dealing with a crisis situation and crisis provisions operating in a short space of time represented by the special resolution procedure, which is the whole substance of that part of the Bill.
However, if the power were limited to what is necessary, it would suggest that a retrospective provision could be made only where it would be impossible to effect a resolution otherwise than by making retrospective changes. The examples I have given of when the retrospective power might be used illustrate why the need to change the law, including retrospectively, may involve the evaluation of competing public interests. Such an evaluation may show that the case for retrospective provision is justified in the public interest. If such provision could be made only where necessary, that would prevent the better outcome for the public interest being pursued, yet that should be the guiding principle of a Government in action in this context.
It would also give litigants seeking to undermine the resolution a basis to make points on whether something was necessary as opposed to desirable. Parliament is the principal forum for debating the appropriateness of retrospective provision, not the courts in legal action brought by those who have self interest, not the public interest, as their motivation. I hope that the explanation of the wording satisfies the noble Lord, Lord Goodlad, sufficiently for him not to move his amendment.
My Lords, is the Minister not rather overlooking the point that subsection (3) says:
“may make provision which has retrospective effect in so far as the Treasury consider it necessary”.
In the circumstances that he has just outlined, the Treasury would consider it necessary. Somebody else might only think that it was desirable, but if the Treasury considers it necessary and bona fide so considers it, the Minister has his point. I do not see that he needs “desirable” at all.
My Lords, we are concerned about the possibility of litigation that might occur subsequent to the position, jeopardising the public interest, if we do not phrase the clause as we have. I had hoped that I had established just how carefully we must act in the overriding public interest, in circumstances where it would otherwise be possible for a challenge to be mounted if it were not recognised that the rapid drafting of such an order could have a weakness which would have to be dealt with retrospectively.
My Lords, I have given hypothetical examples because we do not have an illustration of how the procedure works. Where a drafting error has been identified, leading to confusion and uncertainty as to whether the intended result has been achieved, it may be difficult to say that it is “necessary” to amend the instrument retrospectively. It may be possible for the parties to muddle through on the basis of the existing wording, in many cases living with the possibility of litigation on the point.
However, that is not desirable; it is far better to put the parties in the position that they thought they were in. The amendment would probably prevent us achieving the security for the parties involved so that no one could challenge their position.
My Lords, I cannot. However, aspects of this legislation and the special resolution powers, and the fact that we are trying to envisage and cover that which for obvious reasons we cannot accurately identify, coupled with the obvious need to act with great speed to achieve the resolution of the problem, give this Bill a unique quality.
The context of the Bill is also unique. I am not in any way, shape or form disparaging the significance of other pieces of legislation for our fellow citizens on which I have commented. However, they scarcely relate to a Bill that is trying to curb the catastrophe which has fallen on the financial system, and through that, on the wider economy and the whole of the country. Therefore, the Bill has particular salience. The powers will be used only to make the stabilisation powers, which are necessary to achieve the special resolution objectives, more effective. We have clearly set down the parameters under which the powers will be used. They are confined to this particular special resolution activity. The power can be used only in support of those objectives. The Bill further establishes that the power will not be used to amend the Bill itself, or the safeguards in secondary legislation made under the Bill.
I, of course, accept that the House is straining to accept a wide-ranging power and that noble Lords seek assurances on how it will be used. The Government are therefore considering what guidance may be put into the code of practice on this issue. As the House has already heard, the authorities will be legally obliged to have regard to the code of practice. For the reasons I have set out, I ask noble Lords to withdraw their amendments. The noble and learned Lord, Lord Lyell, cited Craies on Legislation as giving useful, helpful and limited examples of retrospection. The author of Craies is the draftsman of this Bill.
My Lords, following a most comprehensive reply to all the points that have been raised, may I invite the noble Lord to return to one very crucial matter before he sits down? While I accept that retrospectivity is indeed an evil, I also accept that there are almost unique situations where it might be a necessary evil. Whereas ministerial order legislation can be utterly despotic, there are circumstances which make it exceptional and necessary. However, I return to the point made by the noble and learned Lord, Lord Morris, concerning the adjective “desirable”. The fundamental flaw in relation to that is double. On the one hand, it is extremely wide. That, of course, is why it does not appear in legislation. It is fatally flawed because of its almost illimitable width. Secondly, it is fatally flawed because it is either a subjective test or a test that straddles the line between subjectivity and objectivity. “That which is necessary” is clearly an objective test. If one wanted to change a situation to a limited degree, one could add “that which is reasonably necessary”.
My Lords, I am grateful to the noble Lord for seeking to be constructive but I have illustrated the limited context in which these powers are to be used and why we need to go beyond “necessary” to produce an order which is better for the parties and is in the public interest, but which may not in law be justified solely by the concept of necessity. I do not have a great deal further to add except to make the following obvious point. The Government have indicated that we still have capacity to introduce regulation with regard to the code of practice. We still have Third Reading in which to debate these issues further. Of course, we are clear that strong feelings have been expressed on this matter around the House.
I merely return to the fundamental point. The Government included this clause in this way because it is absolutely central to a specific group of powers in specific circumstances. Therefore, given such limited circumstances, it would not be right to suggest that this legislation opens the door to an abuse of power by the Executive.
My Lords, the Minister referred to the draftsman of the Bill as the current editor of Craies, but the noble Lord will know—and anyone in this House, and there are many, will know—that the parliamentary draftsman acts upon the instructions he receives from the Government.
My Lords, of course I accept that point, but the noble and learned Lord will also accept that it is likely that the parliamentary draftsman brought the full weight of his intellect and knowledge to the position that the Government were identifying.
My Lords, I thank the Minister for his kind remarks and I am glad that we are converging in our views on this Bill. I am very grateful to the Minister that there will be a chance to review this clause before Third Reading. The issues in the clause are too important not to be resolved in a manner that is satisfactory to the whole House and to the many noble Lords who have raised a number of important points, such as the use of “desirable”, which the Minister justified as being in the public interest. I am not sure about that. I look forward to discussing with him the code he mentioned and to hearing how he proposes the narrowing and tightening of the wording in the clause. In the mean time, I beg leave to withdraw the amendment.
Amendment 54 withdrawn.
55: Clause 75, page 39, line 21, leave out “or desirable”
My Lords, I am most grateful to the Minister for his reply on this group. Like the noble and learned Lord, Lord Morris, I thought that the Minister’s explanation for the use—for the first time in British legislation, I think—of the word “desirable” rather than “necessary” was unconvincing. No doubt he will come back to us with any previous use of the word, and no doubt tomorrow your Lordships’ Select Committee on the Constitution will carefully study precisely what he said. Perhaps he will revisit the matter at Third Reading. I will be seeking to withdraw the amendment.
My Lords, has the noble Lord considered whether it would be in order to bring this matter back at Third Reading? As it has been brought back and fully debated on Report, I should have thought that, under the rules of the House, there is a strong argument that it is not open to him to bring it back. If he can get an undertaking from the Government that they will allow it to be brought back, then well and good; otherwise I do not think that he should seek to withdraw it.
My Lords, I took it from the Minister’s comments that, because of the seriousness of the matter, he was prepared for discussions to continue between now and Third Reading, and for the matter to be brought back then if appropriate. I hope he can confirm that that was the basis on which my noble friend has said that he will seek to withdraw the amendment.
My Lords, other noble Lords, including the noble and learned Lord, Lord Woolf, are members of the committee and have a great interest in the matter. On the basis that we will have a further opportunity at Third Reading to revisit it in substance, I am content to beg leave to withdraw the amendment.
Amendment 55 withdrawn.
56: Clause 75, page 39, line 39, leave out subsection (8)
My Lords, this amendment conveniently follows the previous group. It proposes leaving out subsection (8). Alternatively, Amendment 57 proposes leaving out subsection 8(c) and (d).
Subsection (7)(b) provides that an order,
“may not be made unless a draft has been laid before and approved by resolution of each House of Parliament”.
Therefore, Parliament can retain control under subsection (7). It will be an affirmative resolution, and that is a significant measure of control. I propose deleting subsection (8) because it will remove that measure of parliamentary control. When you reach paragraphs (c) and (d), you discover that the lapse of an order under paragraph (b) does not invalidate anything done under or in reliance on the order before the lapse, and at a time when neither House has declined to approve the order. Paragraph (d) says that the Government can make order after order after order. The Government have suggested, in Amendment 107 and the other two government amendments grouped with it, that if they come back and revise the order, it must be in new terms. Let us hope that they are not cynical about that. I support the Liberal Democrats, who I know are very much opposed to that amendment.
It is not right for parliamentary control to be removed. What we have here—subject to agreement on the word “desirable”, there is a good deal of consensus on this in the House—is effectively a strong and very wide Henry VIII clause that allows for retrospection. Now we reach Clause 75(8) and find that we have retrospection without any parliamentary control if the Government so wish. If they lay an order and things are done pursuant to that order, as presumably it is intended that they should be done—banks will be transferred and so on under the special resolution—then they can never be unscrambled.
The Minister has told us nine, 10 or 17 times that we are in an exceptionally difficult financial situation. We would all agree with that. However, that is not a reason for removing parliamentary control. The Government are, by their own admission and to put it politely, in a fog. They are not sure what to do. It is difficult to believe that something that they do as a result of late-night meetings will suddenly resolve the world financial crisis in a way that cannot be achieved with up to 28 days—or possibly, if it is just before the Summer Recess, three or four months—of consideration for Parliament to come back and approve it.
I listened carefully to what the Minister said about how there might suddenly be regulatory penalties or unenforceable contracts that would have to be dealt with. However, those examples, for which we are grateful, do not make the point that parliamentary control should be removed. If a perfectly sensible government proposal is to be implemented but looks as though it might incur regulatory penalties, then a new order could be laid to lift those regulatory penalties retrospectively. Unless the House has lost its marbles—to use rather inappropriate language—and the common sense which normally characterises the dealings of both Houses has gone out the window, the regulatory penalty will be lifted or, alternatively, the unexpected unenforceability of the contract will be rendered enforceable, because that is what people had anticipated and it can be corrected. However, it does not require the exceptional powers of subsection (8)(c), which says that the Government can do it and thereafter it will stand whatever the views of Parliament. I seek to avoid that. I beg to move.
My Lords, I have to point out that if this amendment is agreed to, I cannot call Amendments 57 to 59.
My Lords, subsection (8) is drafted in a slightly odd way. It appears to mean that when the order is made it is in a conditional state, because if it is not ratified by a resolution of both Houses it ceases to have effect. Is that the normal way in which an order is made? If it is not, it is an extraordinary constitutional invention. Would my noble and learned friend care to comment on that?
My Lords, I am not an expert on procedure in your Lordships' House, but my understanding is that the rules governing Report stage are significantly more restrictive than the rules governing Committee stage as regards the extent to which a conversation can take place between Members. If I am wrong, I shall stand corrected; but if I am right, perhaps noble Lords would follow that rule.
In Committee I argued in favour of Amendment 57. I could see the argument for including the clause in the Bill due to the Bradford & Bingley precedent, when the Government had to act near the beginning of a very long recess. It seemed to me that the clause, which deals with the secondary consequences of taking a bank into public ownership or one of the other special resolution regimes, should be able to come into force so that the whole deal was done. You would bring the bank into the special resolution regime and, depending on the extent to which you found it necessary, you would make other changes to the law to allow that to happen by, for example, disallowing provisions of the Companies Act, which in certain circumstances you might need to do. It would be sensible to get a statutory instrument out at the same time and to have it in the public domain so that all those involved would know the Government’s intention and the likely outcome.
The likelihood of a statutory instrument being voted down by Parliament in those circumstances is very rare indeed. When we do attempt to vote down statutory instruments—since I have been here, we have done so probably two or three times—Ministers tell us that we are behaving in a most irresponsible way and it is the end of the constitution as we know it. For that reason, Parliament is very reluctant to vote down statutory instruments. Therefore, by introducing an instrument under this clause, the very strong implication is that that would be the law. In the narrow circumstances of something happening at the start of a recess or when Parliament is not sitting, it would be useful for all involved in bringing a bank into the special resolution regime to have that degree of certainty.
That brings us to paragraphs (c) and (d). I have no doubt that the Minister will confirm this, but I thought on rereading paragraph (c) that we need it because if you have undertaken a whole raft of provisions under the power, you could not turn the clock back just in respect of the secondary provisions, as opposed to the major provision: that of bringing the bank under the special resolution regime. I persuaded myself—I hope correctly—that paragraph (c) was necessary. As for paragraph (d), however, in Committee several noble Lords were appalled at the thought that if Parliament slung it out, the Government could bring it back and back and back. Therefore, I propose that we should just amend paragraph (d) because if Parliament has allowed an order to lapse—which really means that Parliament has voted against it—it is highly unlikely that Parliament would want another order to come forward.
The Government's response has been to produce their amendment to deal with the point that they cannot just bring the same order back and back and back by inserting in paragraph (d) the words “in new terms”. That goes some way to improve the position in that it would mean that the Government could not just bring back the same order. I am unclear about two things, the first of which is what “new terms” means. Does that mean that they could just change the odd word? How substantive is the phrase “new terms”? Secondly, in the highly unlikely event of Parliament voting down an order, why would the Government feel confident enough to bring forward any other order under the clause?
I am pleased that the Government have moved a bit, but I am still rather curious about the consequences of where they have moved.
My Lords, Bradford & Bingley is not a good precedent; I shall try to explain why that is my view. First, on a matter of fact, subsection (8)(a) states that an order may be made. In the case of Bradford & Bingley, the order came in front of Parliament at nine o'clock in the morning and came into effect at eight o'clock in the morning. That was because of the trading, or non-trading, of shares on the market. Clearly, it had to come into effect straight-away. So I think that the answer to the question raised by my noble friend Lord Stewartby is that the order has immediate effect. The lapsing is a different matter. That is where we have previously got into the issue of unscrambling. It is impossible to unscramble what was done in the matter of transfer of shares, suspension of their trading on the market and all the other things that follow from that.
The other reason that I think that Bradford & Bingley is not a very good example is that the action took place 10 days before Parliament reassembled. It was not right at the beginning of the long recess, it was late in the recess. As we know, when we returned there was immediately the recapitalisation announcement. It may or may not be that Bradford & Bingley was such a serious threat to the financial stability of the market that it was necessary to do that on 29 September. Noble Lords will know that I have had doubts ever since the order was laid about whether it would not have been possible to wait until the recapitalisation scheme and to have included Bradford & Bingley in the scheme, as opposed to taking the action that was taken at the time.
I argue strongly to the House that it is not a good idea to proceed on the basis of Bradford & Bingley. Frankly, I am still looking for something that is so unexpected and so difficult that it requires Clause 75(8), although I wholly support the removal of any part of it.
My Lords, I hope I will be briefer in dealing with these amendments than I was with the substantial amendments we discussed in the previous group. We are still dealing with Clause 75. It is a crucial part of the Bill and the Government will not have it amended to the extent that it becomes unusable.
Of course the House has repeated regularly that Parliament must be allowed to play its essential role in holding the Executive to account regarding this proposed legislation. The clause recognises that by making the exercise of the power subject to the draft affirmative procedure. However, as was pointed out by the noble and learned Lord, Lord Lyell, subsection (8) allows orders to be made under the clause subject to the 28-day procedure. That procedure is designed to cope with matters that have to be dealt with urgently, and in this case, the context is the resolution of a particular failing bank. The order will be used only when absolutely necessary. It is by way of a special provision with regard to affirmative orders, recognising that the Executive must act in certain circumstances and seek parliamentary support afterwards.
The challenge that we are facing is to enable parliamentary scrutiny without compromising the authorities’ ability to use the stabilisation options swiftly and effectively. I am aware that noble Lords, like the Government, have sought a number of ways of tackling what we on all sides appreciate is a thorny issue. We have listened very carefully to the representations that have been made during the passage of the Bill. That is why we have brought forward an amendment that we think meets the concerns expressed.
I am not able to accept the amendments before the House today other than those proposed by the Government. One option that was suggested, but not brought forward in an amendment, is that Parliament should be recalled. We rejected that. When we are dealing with a volatile situation, the last thing the country would need is the sense of emergency that is heightened by the recall of Parliament. The debate would be taking place in the middle of complex bank resolution and would be fraught with difficulties about how much the Government could disclose about the transactions that were taking place at the time. It would place enormous pressure on both Houses with regard to how they could effect scrutiny while being in the dark about certain parts of the negotiations. What we need is a process that will allow Parliament to hold the Executive to account effectively, while allowing that the bank resolution procedure can work. Recalling Parliament certainly would not work.
My Lords, there is an extra drama to the recall of Parliament. After all, it means Parliament comes back to discuss that issue, and that issue alone. While Parliament is sitting, the judgment of the Houses might be in the form of a Statement. We do have examples of that with Northern Rock in the past, not under the special resolution procedure, but where the Government had to deal with a difficult situation. Of course, the Government give the information that they can give to the House within that limited framework, the two Houses reach their judgment on whether the Executive should continue to act in the way in which they are acting and they make provision for parliamentary scrutiny. The most obvious provision with regard to Northern Rock was that the legislation would end after one year.
I hear what the noble Viscount is saying; that the collapse of a bank is likely mightily to exercise the Members of Parliament in the other place and noble Lords. However, the Government would be able to rely on the good judgment of both Houses in terms of how much the Government were pressed to reveal when discussions were ongoing. If Parliament was recalled solely for that purpose, a Statement, which would convey a limited amount, followed by short questions and answers with no further discussion, would scarcely be looked on as an intelligent use of Parliament’s time. A full-scale debate while information was limited would not be in anyone’s interests. That is why we are against it.
My Lords, I am sorry to intervene again; I probably did not make myself clear. Even if Parliament was sitting, an order would have had to have been laid, for example, to suspend trading in the shares. That would have happened before Parliament could have any discussion. So even if Parliament was sitting, it would still be faced with action that had been taken that it would be extremely difficult to unscramble under the 28-day procedure.
My Lords, that is certainly so. I hear the noble Lord, Lord Baker, saying from a sedentary position that it is democracy. We are dealing with, effectively, emergency powers being exercised to deal with a complex and difficult financial situation that puts at risk the whole financial position. To suggest that democracy would mean the full participation of both Houses of Parliament in those deliberations would not be a question of democracy but a denial of the proper responsibility of the Executive to sort things out and then to come to Parliament and account for how they had dealt with the matter. That is democracy.
If the Treasury laid an order and had to wait until it had been debated by Parliament, it would immediately become public that the named bank was in trouble. This could seriously jeopardise the resolution of the issue. For example, it could lead to a run on the bank, while the Government stand helplessly by waiting for the subsequent parliamentary approval. I do not think that the depositors in Northern Rock would have welcomed a position where the Government could give no guarantee to depositors until they had parliamentary approval. What happened was that executive action was taken, and then Parliament debated whether the Government, in the round, had exercised powers properly and to good effect. That must be the reason why we seek to defend the clause.
Before I talk about the detail of Amendments 57 and 58, I will speak briefly about the 28-day procedure, the purpose of which is to allow instruments to be made and to come into force with immediate effect. It is a dramatic parliamentary procedure, but it is there because Parliament has always recognised that certain actions are necessary to be taken by the Executive which it needs to evaluate, consider and make judgments on. If the actions are not taken, the remedies cannot be applied in certain circumstances. That is the whole basis of why the 28-day procedure is different from the normal affirmative order. As we are all well aware, 28-day affirmative orders are not very common. As the House will appreciate, such an order provides for an enhanced level of parliamentary scrutiny beyond that used in the negative procedure. The order will lapse unless it is approved subsequently.
In Committee, the noble Lord, Lord Newby, put forward the proposal that the Government might remove paragraphs (c) and (d) of Clause 75(8). We have considered the legal effect of removing these provisions, particularly as some noble Lords suggested that they might bring the matter back on Report. Amendment 57 first seeks to remove paragraph (c). This provision establishes that,
“the lapse of an order … does not”,
in broad terms, invalidate things already,
“done under or in reliance of the order”,
up to that point. This is not unprecedented. Indeed, it is a standard approach.
The Statutory Instruments Act 1946 makes provision in the analogous circumstances of a negative procedure instrument being annulled by resolution of either House. The 28-day procedure allows orders to be made with immediate effect, followed by parliamentary scrutiny. The authorities could not act if there was a chance that their actions could subsequently be legally invalidated. If we removed paragraph (c) of Clause 75(8), we would not be able to use the 28-day procedure at all.
Let me give an example of what it would mean if paragraph (c) were to be removed. The authorities may need to resolve a bank where a statutory impediment has been identified in relation to the transfer and it needs to be addressed by provision under this clause. First, for obvious reasons the authorities could not lay an order in draft and wait for it to be debated. This would announce to the world that they were preparing to place the bank named on the order into the special resolution regime, which would immediately prejudice the chances of making the regime effective.
Secondly, without paragraph (c) the authorities could not make an order under the 28-day procedure. They would be acutely aware that should Parliament later fail to pass resolutions affirming the order, everything that had been done would be unlawful. Faced with this prospect, the authorities would not be prepared to take the risk. Again, that jeopardises the whole concept of the resolution procedure. In short, the authorities would be simply unable to take the necessary action, which in turn would jeopardise the possibility of effecting a resolution if paragraph (c) of Clause 75(8) should be removed.
The Government also looked very carefully at paragraph (d) of Clause 75(8) because that, too, was substantially debated in Committee. Irrespective of the provisions of this power, as the House will be aware, it would be politically and unconstitutionally untenable for Ministers to behave as if they were repeatedly introducing the same order. I would ask the House to appreciate what the response of Members of either House would be if the Government got past the problem of dealing with legislation by a constant repetition of an order whose procedure is drafted against emergency or crisis or dramatic circumstances. Although we recognise the concern, it would not be practical to remove paragraph (d) and under the Statutory Instruments Act 1946, to which I referred earlier, a similar clarification is made in the context of negative procedure instruments. It is not realistic to think that a Government would use this procedure repeatedly.
Government Amendment 59, which is supported by further government amendments, seeks to establish beyond all doubt that the Government will not bypass Parliament by repeatedly laying identical orders. For the sake of consistency, this issue is addressed throughout the Bill, which is why we have put down government Amendments 107 and 117. The Government need to retain the power to make a further order should one lapse, not least to have an opportunity to address the concerns raised by Parliament, which may not relate to every aspect of the order. It is not the purpose of the paragraph to allow identical orders to be repeatedly laid. We do not think it could be construed in that way, nor is it conceivable that the Government would act in such a matter.
However, in view of the concerns expressed in the House on this point, our amendment seeks to make express what is already implicit, namely that the new order will not be the same as the old; it will not be in the same terms. I hope that it will therefore be recognised that the Government have listened to anxieties about a repetition of exactly the same order being made in the same terms. I am indicating that the Government would have to change the terms of the order to comply with this legislation.
Does that mean, as far the question asked by the noble Lord, Lord Newby, is concerned, that all we will have done is change the punctuation or made such a minor change as to be of no significance? We think that the effect of requiring the order to be made in new terms will be that we are not dealing in trivia. The Government believe that this amendment sends a clear signal that, if Parliament declines to approve an order made under this proposal, Ministers will have the opportunity to make a new proposal to Parliament for approval in materially different terms—and those terms would be materially different. We do not think that the Bill should be more prescriptive on this, other than to require in very clear terms that the new order must be “in new terms” in comparison with the old. Accordingly, in due course I will seek to move.
No, my Lords, but the order will be “in new terms”, as I have expressed from the Dispatch Box in response to the point that exercised the noble Lord, Lord Newby. The issue is that we are not laying the same order. Any Government would be obliged to lay a new order “in new terms”. I do not think that it is realistic to ask us to be prescriptive about what that new order could look like, because we are dealing with circumstances that we cannot readily foresee, except in terms of their urgency and seriousness. We do not need to include “material”. The concept of “in new terms” means that the order must be different from the previous one. That is why I am able to disavow the notion that the order would just contain a minor change.
My Lords, on a point of clarification, could the noble Lord confirm what I think I heard him say, which is that any second order would be produced in new terms, with those terms reflecting the views of Parliament on which parts of the previous order were unacceptable and which parts it might wish to see carried forward?
My Lords, the whole point about the restrictive time with regard to the order is to give the opportunity for Parliament to express its views on it. The Government would be concerned that, when they produced a new order in new terms, it would be acceptable to both Houses of Parliament. So the answer is certainly in the affirmative.
My Lords, could the noble Lord explain further how this would work? If the first order is fully implemented at the time of its being turned down by Parliament, paragraph (c) keeps all that has happened in place as lawful. If you come along with a new order, are you undermining or cancelling what has already been done, or is it only valuable to have this power if there is something still to be done under the old order which has not yet been fully completed?
My Lords, the reason for the new order would be unfinished business. If the matter had been concluded, the 28-day provision would allow for parliamentary judgment and the accountability of the Executive to be exercised in the debate on the order. A new order would betoken the fact that there were outstanding issues.
My Lords, I am a little disappointed that the Minister has once again waved his shroud. Every time an objection is made to the structure of the clause, we seem to be told that the whole financial system will collapse into ruins unless we can do without Parliament. Subsection (8) says in effect that the Treasury, if it thinks it necessary, can make any order that it likes and Parliament can do nothing about it. Parliament can disapprove of the order later, but by that time everything would be done and dusted, so why would we be asked back even to consider it? We could simply have a Motion to discuss the financial system of this country; it would have no more or less power than we have under the clause.
The Minister got close to illuminating the position under Clause 75, particularly its retrospective aspects, when he made the point that you might find that you had ignored some detailed provision about regulatory penalties or some detailed provision that rendered some contract or transaction unenforceable. At the end of our previous debate, I suggested to the Minister that, when you have a glitch of this sort and make an amending order, you can confidently expect that Parliament will be thoroughly sensible and will approve it 99 times out of 100, or even 999 times out of 1,000. However, the clause sets up a structure that is much broader. My objective is not that the Government should not have the power to make the special resolution procedures work—we all want them to work and to work efficiently—but that the procedures should be subject at least to basic parliamentary control.
The clause takes a belt-and-braces approach and is completely on the level until the end of subsection (7), which says:
“An order … shall be made by statutory instrument, and … may not be made unless a draft has been laid … and approved”.
That is normally what happens. I imagine that that is how the Government will construct the special resolution procedure and that they will want to make subsequent amendments to iron out little details. So long as they are sensible, they can confidently expect the support of Parliament, but they have given themselves the power to do the whole lot without the approval of Parliament. They do not need that. That is contrary to the whole objective of Parliament. The Minister has not addressed that point and I ask him with great respect to think again before Third Reading and not to cut us off now in our debates. If he comes back with a compelling answer, I am quite certain that anyone who may be mildly persuaded by what I am saying will change their mind. I shall certainly feel a great deal more comforted—I think that the House as a whole might, too—so I ask the Minister to do that.
My Lords, of course we recognise that there are anxieties over Clause 75. I already indicated, with regard to the formal group of amendments, that we were eager to discuss this further, given the strength of representation on the matter. I accept the noble and learned Lord’s point, but we are debating an affirmative order that is related to an emergency provision, so there is not much room for movement. We have explored these issues extensively, but it goes without saying that I will reflect on what has been said in this afternoon’s debate.
I always stand ready to meet noble Lords about these matters. We are not presenting, within this framework, anything particularly exceptionable: 28-day orders are not used frequently, but they have been in existence for well over half a century and they relate to emergency provisions. The Executive must of course be held to account, but it is not possible, in dealing with a bank resolution under these special resolution procedures—we are talking about a highly specific context in which these powers are exercised—for a judgment to be made subsequently that people acted unlawfully and could therefore be found guilty accordingly. The bank resolution procedure could not possibly work like that. That is why we are so firm about the necessity of the clause as it stands. However, I assure the noble and learned Lord that I will meet him at any time, with my officials, to discuss this matter further.
My Lords, the Minister has said that debate on this aspect can continue at Third Reading, on the understanding that there should be a good reason for doing so. I remind him that we are not talking about what has been going on since 1946, which is that prospective orders are made and then things are done. We are dealing with the dangers of retrospection. On the understanding that we can keep discussion alive, I beg leave to withdraw the amendment.
Amendment 56 withdrawn.
Amendment 57 not moved.
58: Clause 75, page 40, line 6, leave out paragraph (d)
My Lords, my reason for moving this amendment was to ensure that the Government could not repeatedly override the rule of Parliament. The Minister has explained that the purpose of his amendment is to enable Ministers to reflect the will of Parliament, should an initial order be overturned. On that basis, I am happy to withdraw my amendment.
Amendment 58 withdrawn.
59: Clause 75, page 40, line 7, at end insert “(in new terms).”
Amendment 59 agreed.
60: After Clause 80, insert the following new Clause—
“Temporary public ownership: report
(1) Where the Treasury make one or more share transfer orders under section 13(2) in respect of a bank, the Treasury must lay before Parliament a report about the activities of the bank.
(2) The first report must be made as soon as is reasonably practicable after the end of one year beginning with the date of the first share transfer order.
(3) A report must be made as soon as is reasonably practicable after the end of each subsequent year.
(4) The obligation to produce reports continues to apply in respect of each year until the first during which no securities issued by the bank are owned by—
(a) a company wholly owned by the Treasury, or(b) a nominee of the Treasury.”
Amendments 61 to 63 (to Amendment 60) not moved.
Amendment 60 agreed.
Clause 81: Temporary public ownership
64: Clause 81, page 42, line 13, at end insert—
“( ) Condition 4 is that the bank represents at least one half of the turnover, balance sheet total or number of employees shown in the group accounts of the holding company at the latest date for which the holding company has prepared group accounts.”
My Lords, Amendment 64 would add an extra condition to the use of the bank holding company nationalisation powers set out in Clause 81. The new condition is that the bank represents at least half of the group’s turnover, balance-sheet total and number of employees, as shown in the latest group accounts. This is a form of words that is used in the Companies Act. I was initially intrigued by the Minister’s description of the rationale for Clause 81 when it was introduced by amendment in Committee. The Minister ended his explanation by saying:
“Finally, a private sector solution may be more likely on a group-wide than a bank-only basis. This is particularly the case if other non-bank parts of the group are attractive to buyers”.—[Official Report, 20/1/09; col. 1578.]
That rang alarm bells. The scenario is that a successful group has a relatively small bank which is failing. The relevant authorities think how easy it would be to get rid of that small bank if they wrapped it up in those other nice businesses, so instead of expropriating a bank with, say, 500 employees, they take hold of a large enterprise with 10,000 employees. My real life example for the Minister is this: would Clause 81 allow the Treasury to grab hold of Tesco, which since a while ago has held 100 per cent ownership in a bank? The same does not apply to Sainsbury’s. This is my Tesco amendment in another sense, too, and, with a nod to its strapline, every little helps to clarify the nature of this legislation. I beg to move.
My Lords, I hope to still the alarm bells and replace them with melodious chimes. The amendment proposed by the noble Baroness, Lady Noakes, follows on from our constructive debate in Committee on holding companies. It would restrict the Government’s power to take a holding company into temporary public ownership to cases where more than half of the holding company’s business, measured by a number of alternative metrics, is in the bank. I can see the purpose behind the amendment. The noble Baroness seeks to make it clear that the Government would not be able to nationalise a holding company that happened to include a small failing bank. However, that is already provided for in the conditions set out in the Bill, as amended in Committee.
Clause 81(3) provides that the Treasury may take action with respect to the holding company only if the specific conditions for temporary public ownership, as set out in Clause 9, are met. Let me help by repeating those specific conditions: first, the exercise of the power is necessary to resolve or reduce a serious threat to the stability of the financial systems of the United Kingdom; or, secondly, the exercise of the power is necessary to protect the public interest where the Treasury has provided financial assistance in respect of the bank for the purpose of resolving or reducing a serious threat to the stability of the financial systems of the United Kingdom. Moreover, Clause 81(3) requires that it be necessary to take action in respect of the holding company; that is, the holding company cannot be taken into temporary public ownership if the conditions for Clause 9 could be satisfied by taking action in respect of the failing bank alone.
I make it quite clear that these conditions would not be at all likely to be met with respect to a holding company containing a very small bank, as might apply at the moment to Tesco, although I suspect that that bank might become very large, and certainly no other financial institutions in the group, however subservient they might be to the holding company.
That last point brings me to one problem with the amendment. It would prevent the Treasury from taking action where a group contained a failing bank representing, for the sake of argument, 40 per cent of its business, a healthy insurance company representing 40 per cent and a healthy investment bank, if that is not an oxymoron, representing the final 20 per cent. One of the reasons why we have had to take these powers is the complex and interrelated business structure of financial groups. The SRR powers, as they stand in relation to banks, will allow the banks in such groups to be resolved. But there is the risk that resolution of the bank would not prevent contagion to other financial institutions in the group, the failure of which could also pose a real threat to financial stability. Nor would the amendment allow for action to be taken with respect to holding companies that contained multiple banks that might each represent less than half of the group’s business.
Fundamentally, the problem with this amendment is that it seeks to set an arbitrary threshold for the Treasury to be able to intervene and to hardwire this into the Bill. I believe that the approach that we have taken, which provides the Treasury with the flexibility to act depending on whether action is in the public interest, is more appropriate and will lead to less uncertainty and confusion. I hope that this has satisfied the noble Baroness that her amendment is not necessary or appropriate.
My Lords, I thank the Minister for setting that out. I am not entirely clear that the Treasury, which is quite capable of interpreting the public interest and financial stability in quite imaginative ways, as I think we have seen in the way in which it have approached some recent issues, might not make a case one day to take over Tesco plc. Perhaps we can leave Tesco to fight that battle for itself. I beg leave to withdraw.
Amendment 64 withdrawn.
65: After Clause 81, insert the following new Clause—
“Holding companies: objectives and code of practice
(1) The relevant authorities shall have regard to the special resolution objectives set out in section 4 in using or considering the use of the power in section 81.
(2) The code of practice issued under section 5 shall include guidance about the use of the power in section 81.”
My Lords, Amendment 65 would add a new clause after Clause 81. This picks up from an issue that we debated in Committee, when I asked about the relationship of the new holding company power to the special resolution regime in the earlier part of the Bill. The Minister told me that the code of practice applied to the new holding company powers. I have now had an opportunity to look at that issue and I am not entirely clear about it. That is why I have tabled this amendment.
Clause 81 says that the Treasury may take a bank holding company into temporary public ownership,
“in accordance with section 13(2)”.
However, Clause 13(2), merely talks about the ability to make share transfers. Clause 13(1), which is not referred to in Clause 81, refers to the third stabilisation option and therefore, presumably, would pull in the other powers. Clause 82(1) refers specifically to Clause 13(3), which deals with the code of practice making provision about management. There is no other reference to the code of practice, which implies that the code does not otherwise apply. That is the reverse of what the Minister was suggesting in Committee and the Minister’s officials have suggested subsequently.
The various piecemeal references in Clause 82 to odd clauses in Part 1 imply that the holding company nationalisation power is not firmly placed within the special resolution regime and therefore, it is not easy to read across Clause 4 with the objectives or Clause 5 with the code, because of the way it appears to draw in small bits from that part. I tabled this amendment again because I am unclear about the relationship between the power in the new Clause 81 and the regime set out in the early part of Part 1. I beg to move.
My Lords, the intention behind this amendment is to ensure that the special resolution objectives, under Clause 4 and the code of practice, under Clause 5, apply to the powers to take a bank holding company into temporary public ownership.
I shall be brief in explaining how this is already the legal effect of the Bill and, therefore, why this amendment is unnecessary. The power to take a bank holding company into temporary public ownership involves the use of the share transfer power. Clause 81(1) of the Bill enables the Treasury to take a bank holding company into temporary public ownership in accordance with Clause 13(2), which provides that temporary public ownership may be effected through the making of share transfer orders. This power to make a share transfer order is, under Clause 1(4), defined as one of the stabilisation powers of the Bill.
The special resolution objectives and the code of practice already clearly apply to the stabilisation powers under the provisions of Clauses 4 and 5. Accordingly, holding company temporary public ownership, which, as I have described, can only be achieved through the stabilisation powers, clearly attracts these provisions. Therefore, the Bill already has the legal effect that the noble Baroness is seeking. The draft code of practice will, in due course, be updated to include provision about the bank holding company temporary public ownership power. On the basis of this explanation and assurance, I ask the noble Baroness to withdraw her amendment
Amendment 65 withdrawn.
Clause 82 : Supplemental
66: Clause 82, page 42, line 21, at end insert—
“( ) section 10(1),”
Amendment 66 agreed.
67: After Clause 168, insert the following new Clause—
After section 213 of the Financial Services and Markets Act 2000 (the compensation scheme) insert—
“213A Compensation payable to depositors
(1) Each depositor will be entitled to receive from the scheme manager in respect of each bank brand a sum which is the lower of—
(a) the deposit protection amount; and(b) their gross balance held by the person.(2) The “deposit protection amount” is £50,000.
(3) The Treasury may by order amend the figure in subsection (2).
(4) The Treasury may by order either in general or specifically determine what constitutes a bank brand.
(5) An order under this section may not be made unless a draft statutory instrument containing such an order has been laid before, and approved by a resolution of, each House of Parliament.””
My Lords, this amendment would introduce a new clause after Clause 168. It is the same amendment that I introduced in Committee regarding the Financial Services Compensation Scheme. I did not feel that the Minister gave entirely satisfactory answers then, so I have returned to it. In particular, I did not think he recognised the political significance of the need to change the way that the scheme is operated.
My new clause, which would amend the Financial Services and Markets Act, would do basically three things: it would use a bank-brand basis for deposit compensation, with the Treasury defining what that was; it would use a gross balance concept for compensation; and it would set the deposit compensation limit at £50,000 with a Treasury power to raise it. At the moment, the FSA has control over those things. I will not rehearse the arguments that we had in Committee but, broadly, we—and, I think, the Liberal Democrats—did not think that the FSA had been seen to be fleet of foot in the past. It took ages to up the compensation limit to £50,000 and it still has not dealt with the branch bank issue or the gross balance issue, notwithstanding the increased focus in the light of the events of the past year. The noble Lord, Lord Newby, demolished the FSA’s “let’s wait for Europe” line in Committee. All these issues are fundamentally political, but the FSA is not, or ought not to be, political. The Government rightly have no power of direction over the FSA, so Parliament is the right place for decisions of this nature to be made.
Given that the FSA does not have a reputation for speedy responses, we believe it is right that the Government, with Parliament, should be in control of these important issues. We recognise that the FSA has a new chairman who is much respected in your Lordships’ House, but he has nearly a decade of attitudes and practices to overturn and make more workable, and this is not necessarily going to be at the top of his priorities. Issues like the levels and nature of compensation have such a resonance that they ought to be handled in an arena such as Parliament. I beg to move.
My Lords, the purpose of Part 4 is to make a number of changes to Part 15 of the Financial Services and Markets Act, which provides the legal framework for the Financial Services Compensation Scheme. As I explained in Committee, that framework already allows the Financial Services Authority to deal in its rules with most features of the compensation scheme, and I am afraid I have to take the same view of the noble Baroness’s amendment now as I took then. However, I shall address some of the points raised in Committee and again today, and I hope I shall be able to convince your Lordships that the matters in the amendment are best dealt with by the FSA in its rules.
First, there is the question of the speed with which the FSA can make its rules. The Financial Services and Markets Act 2000 lays down a process that the Financial Services Authority must follow in making its rules. This process normally involves public consultation so, with the best will in the world, it will take a minimum of three months. In practice, of course, it will take longer if a full and open consultation is to be pursued. One must allow also for internal consideration, informal consultation and discussion papers and consideration of the responses to consultation. I am sure that your Lordships would agree that where Parliament confers wide-ranging powers to make rules on a body such as the FSA, there is real merit in having such processes in place. But the Financial Services and Markets Act also allows the FSA to short-circuit this process if it,
“considers that the delay involved in complying…would be prejudicial to the interests of consumers”.
It is under that provision that the FSA acted to remove the co-insurance element in the deposit protection rules of the Financial Services Compensation Scheme in September 2007 and to raise the deposit compensation limit to £50,000 in October 2008. I struggle to agree, therefore, with the noble Baroness, who says that the FSA has not always evidenced the capacity to be fleet of foot; or indeed with the observation in Committee by the noble Lord, Lord Newby, that the FSA had been,
“dilatory beyond measure in increasing the limit to £50,000”.—[Official Report, 20/1/09; col. 1656.]
An increase to £50,000 had already been widely discussed, including in the authority’s joint consultation documents on financial stability and depositor protection, which preceded the Bill, while the specific FSA proposal to raise the limit to £50,000 had been known since July 2008.
In the circumstances of last autumn, when ongoing market turbulence meant that consumers appeared to be increasingly concerned about the level of coverage available for their savings, the FSA decided that an immediate increase to £50,000, without formal consultation, was in the interests of consumers to reduce any continuing uncertainty. I do not see how the Treasury could have acted more swiftly, particularly if the necessary regulations were subject to the affirmative procedure. Clearly, it would be impossible to move as swiftly with the draft affirmative procedure if Parliament was not sitting.
I accept, of course, that it would make little or no difference in normal circumstances. The Treasury would obviously consult widely before producing a draft regulation. It may even publish draft regulations for consultation before they were laid in Parliament. But normal circumstances are not the problem. I have no doubt that when it comes to unusual circumstances, the FSA is better placed to move quickly and has already demonstrated that it can do so.
On the content of the regulations, the noble Baroness, Lady Noakes, argued in Committee—and I think the noble Lord, Lord Newby, agreed with this—that some decisions about the compensation scheme were too important to be left to the FSA. They were, as she said today, as much political as technical.
I see the point, but I think that there might be a misunderstanding about the nature of what we might call the legislative hierarchy in the Financial Services and Markets Act. Essentially, the Act provides for the framework for the regulation of all financial services in the United Kingdom—not just banking. Some aspects of that framework are set out in the Act itself; other aspects of the framework are provided in secondary legislation made under the Act.
Detail, on the other hand, is left for the Financial Services Authority to deal with in its rules. So the distinction is not between what is political and what is technical but between what is framework and what is detail. I would also say that the political/technical distinction would be an unworkable basis for deciding what should be in primary or secondary legislation and what should be in the FSA’s rules. What may be political to one person may be technical for another. What was political one day might be technical the next—or vice versa. How many people would have described the deposit compensation limit as political two years ago? And if the deposit compensation limit is political today, why is the investor compensation limit not political? If paying compensation on a per-brand basis is political, why are the eligibility criteria for FSCS claimants not political?
As I said in Committee, it would be inappropriate simply to put matters relating to deposit-taking in primary legislation. The FSA is better placed in practice, and more logically placed in the FSMA legislative hierarchy, to consult and make rules on these matters, as it is on the other detailed matters in the compensation scheme, and in financial services regulation more generally. I therefore ask, most pleasantly, that the noble Baroness, Lady Noakes, withdraw Amendment 67.
My Lords, I am touched by the Minister’s faith in the FSA’s ability to deliver. The Minister referred to the FSA’s view being known since July 2008. The issue was around in 2007. We had to wait for a long time until the FSA actually said that it would be £50,000, and we still do not have it. There is deep frustration with the FSA’s inability to act. This is probably just one in a number of examples of how the FSA operates, and it is probably wrong to focus on three aspects of one compensation scheme when the issues with the FSA are so much bigger.
One hopes that if the noble Lord, Lord Turner of Ecchinswell, reads Hansard, for which I do not suppose he has time, he might note that, from what has been said both here and in Committee, the organisation that he now chairs is not held in particularly high regard in a number of respects. I accept that this would not be an appropriate time to make a piecemeal change and, on that basis, I beg leave to withdraw.
Amendment 67 withdrawn.
Clause 190: Directions
68: Clause 190, page 101, line 37, at end insert—
“(3) Before giving a direction the Bank must notify the Treasury.
(4) The Treasury may by order confer immunity from liability in damages in respect of action or inaction in accordance with a direction.
(5) An immunity does not extend to action or inaction—
(a) in bad faith, or(b) in contravention of section 6(1) of the Human Rights Act 1998.(6) An order—
(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, I move this government amendment in the name of my noble friend and will speak also to Amendment 115. I note that the noble Baroness, Lady Noakes, also has an amendment in this group.
We have given careful consideration to the points made by the noble Baroness in Committee regarding exemptions from liability for payment system operators acting under direction from the Bank of England. We know that she has been in touch with the Payments Council, a key representative body of payment system operators. I thank her for bringing the concerns of that body to the attention of the House. It is a valuable representation.
In Committee, the noble Baroness referred to a scenario in which an operator could be instructed by the Bank of England, under its power to give directions, to continue to allow a failing bank to participate in a payment system even where that bank no longer met the criteria for participation. The point was raised as to whether the operator would be provided with an exemption from the Bank in respect of any liability in damages arising from acting in accordance with the Bank’s direction.
The power to give directions is intended to provide a tool for the Bank to use in furtherance of the objectives of this part of the Bill; that is, to ensure that recognised interbank payment systems are operated in a manner that minimises deficiencies and disruptions that could threaten the stability of, or confidence in, the UK financial system, or have serious consequences for businesses or other interests throughout the UK. Therefore, we do not envisage circumstances in which the power would be exercised in the manner suggested by the noble Baroness.
Given her concern, however, we have sought to address the matter further. The government amendments in this group would confer a power on the Treasury to grant an operator exemption from liability in damages for acts or omissions carried out in accordance with a direction, if this is appropriate in the circumstances. Amendment 68 enables the Treasury to,
“confer immunity from liability in damages in respect of action or inaction in accordance with a direction”.
Amendment 115 is consequential, updating the statutory instrument table in Part 8.
We consider that the Bank should notify the Treasury before making a direction so that the Treasury has an opportunity to consider whether it would be appropriate to make an exemption order. As the Bank may need to give a direction urgently in the interests of financial stability, we consider that the order should be subject to the negative resolution procedure. For obvious reasons, it will be important that any exemption is in place at the time the direction is given.
The noble Baroness’s amendment would give a rather more blanket exemption from liability in damages in respect of actions or inactions taken in accordance with any direction of the Bank. We do not think that such an exemption is appropriate. We have accepted that there is a need to have this power but it would not be appropriate to give an exemption from liability in damages in all cases. For example, if the Bank merely directs that an operator should comply with specific minimum standards in respect of business continuity, no such exemption from liability would be necessary. I hope that I have established the case for the government amendment and that the noble Baroness will not move her amendment.
My Lords, as I said at the beginning of Report, we tabled a number of amendments before the Government tabled theirs. However, I fully accept that the Government have responded to the concerns that I raised in Committee and am grateful to them for so doing; so, too, is the Payments Council. I should say for the avoidance of doubt that I advocated this change to legislation in the context of having no interest to declare thereto.
Amendment 68 agreed.
Amendment 69 not moved.
Clause 197: Penalty
70: Clause 197, page 104, line 10, at end insert—
“(3) The Bank must prepare a statement of the principles which it will apply in determining—
(a) whether to impose a penalty, and(b) the amount of a penalty.(4) The Bank must—
(a) publish the statement on its internet website,(b) send a copy to the Treasury,(c) review the statement from time to time and revise it if necessary (and paragraphs (a) and (b) apply to a revision), and(d) in applying the statement to a compliance failure, apply the version in force when the failure occurred.”
My Lords, I shall speak also to government Amendment No. 73. I shall, of course, also comment on other amendments in the group.
In Committee, the Government committed to revisiting before Report the penalty clauses of Parts 5 and 6. Having reflected on the comments raised in Committee and by the Delegated Powers and Regulatory Reform Committee, we have tabled amendments to address the concerns raised.
I note that the noble Baroness has laid similar amendments. I think it is clear from the nature of our amendments that we largely agree on the basis on which to proceed, but I will explain why I believe that the Government’s amendments are necessary. Government Amendment 70 provides that the Bank of England must prepare and publish a statement of the principles which it will apply in determining whether to impose a penalty and the amount of the penalty in respect of a compliance failure under Part 5. It is intended that these principles will preserve the Bank’s discretion in assessing whether to impose a penalty and the quantum of that penalty but will enhance the transparency of the enforcement regime, which was a focal point of a great deal of our deliberations in Committee.
These principles will no doubt reflect the range of factors that will need to be taken into account in the decision process; for example, the scale of the compliance failure and the seriousness of the consequences arising as a result of the failure, the resources of the payment system and the frequency of the offence. However, in the interests of preserving the Bank’s discretion in preparing and issuing the statement, we do not consider it appropriate to specify in the Bill the factors that must be taken into account by the Bank.
The statement of policy must be published on the Bank’s website and a copy must be sent to the Treasury. This publication requirement is adequate to ensure that the policy is brought to the attention of operators of recognised interbank payment systems and the general public. The Bank must review and revise a policy from time to time, as appropriate. In the interests of fairness, naturally any penalty imposed by the Bank must be in accordance with the published policy at the time that the compliance failure was committed. This offers guidance to operators of recognised interbank payment systems, while maintaining the necessary flexibility for the Bank to impose appropriate penalties in all relevant circumstances. I hope it will be recognised that the Government have responded to anxieties about transparency expressed during Committee.
I turn now to Part 6. In Committee, we sought to demonstrate that the banknote regulations will set out the matters about which banknote rules may make provision. The regulations are subject to the draft affirmative procedure, and so I set out the Government’s case that the parliamentary scrutiny to which the regulations would be subject would ensure that there was no inappropriate delegation to the Bank in making banknote rules.
However, we have reflected on the comments made in Committee and, of course, we have noted with great care the comments of the Delegated Powers and Regulatory Reform Committee. This amendment provides that the Treasury must specify in banknote regulations a method for determining the maximum amount of penalty that may be imposed by the Bank for a breach of regulations or rules. I hope that this amendment addresses concerns that the Bank could conceivably have been enabled to set unlimited penalties under the banknote rules.
It is intended that the banknote regulations will set out a formula for calculating the penalty to be imposed for under-backing and will make provision in relation to a statement of policy on penalties to which the Bank must have regard when determining the maximum level of the penalty imposed. I should bring to the attention of the House that provision has already been drafted at paragraph 4 of Schedule 1 to the draft banknote regulations providing that the amount of any penalty must be determined in accordance with a published statement of policy.
Thus, I believe that government Amendment 73, together with existing provisions of the regulations, meet the concerns of the noble Baroness, Lady Noakes, and the noble Lord, Lord Howard, expressed in Committee and in their amendment.
Finally, as regards making express provision in the Bill in respect of the statement of policy on penalties imposed under Part 6, we have conceded that an amendment to this effect is necessary to Part 5 of the Bill, but it is neither appropriate nor necessary in relation to Part 6. I beg to move.
My Lords, I thank the Minister for tabling Amendments 70 and 73, which deal with the matters covered by my amendments in this group. I tabled them before I had sight of the government amendments. My amendments took up many more lines of the Marshalled List, because I had lifted them from the Financial Services and Markets Act 2000, but the Government’s much shorter amendments are quite fit for purpose.
Amendment 70 agreed.
Amendments 71 not moved.
Clause 221: Financial penalty
Amendment 72 not moved.
73: Clause 221, page 113, line 16, at end insert—
“(3) Banknote regulations must establish a method for determining the maximum amount of a penalty.”
Amendment 73 agreed.
Amendment 74 not moved.
Clause 227: Consolidated Fund
75: Clause 227, page 115, line 15, at end insert—
“( ) Subsection (2) shall cease to have effect 2 years after this Act is passed except in respect of expenditure incurred in pursuance of obligations entered into before that date.”
My Lords, Amendment 75 amends Clause 227 by placing a two-year sunset provision on the powers in subsection (2). The power in the clause was already very wide when the Government introduced the Bill to the other place in October, but it was intended for financial stability purposes. That was clear from the debates in another place, and that was the basis on which we accepted the power.
In Committee in your Lordships’ House, the Government radically changed the scope of the powers in the clause by allowing any Secretary of State, not just the Treasury, to give financial assistance on a very wide basis. That basis is set out in subsection (2). The Minister agreed in Committee that the planned use of this power would go way beyond mere financial stability, public confidence in banking systems and depositor protection.
In ordinary times, we would have said that it was inappropriate to include such a power in the Bill; that if Secretaries of State needed legislative cover for their schemes, they should go and get it themselves. However, as I said in Committee, we accepted that these were not ordinary times and we did want to impede the measures that the Government are taking. We did feel, because of the extraordinary nature of the powers, that they should be sunsetted after two years. In Committee, the Minister pointed out that my sunset clause would not have allowed money to be paid out in respect of obligations entered into in the two-year period, and that this would kill off some schemes currently being introduced, which are based largely on guarantees. I had not intended that effect, and my amendment for Report leaves cover for obligations entered into in the two-year period. The idea is that, if there is a continuing need for financial assistance by one of more Secretaries of State at the end of the two-year period, it would be open to that Secretary of State to bring forward his own legislation. Alternatively, in extremis, the Government could bring forward a one-clause Bill to extend the powers in the clause for a further period. Obviously, if circumstances still merited it, I am sure that both Houses would facilitate the passage of such a short Bill.
If we allow the Bill to contain this clause without further restraint, we will be giving the Government a power to spend what they like, when they like, for ever and a day. Any power, including a financial power, that is taken in an emergency is customarily sunsetted. I am disappointed that the Government have not yet recognised that. I beg to move.
My Lords, we tabled an amendment in Committee for a sunset clause for the whole Bill. It did not find favour with the Government, or with the noble Baroness. However, half a loaf is better than no bread, and this is a little sunset clause. Although it does not go as far as we want, at least it is a sunset clause.
My Lords, it is indeed a sunset clause, albeit of a limited kind, which I think is needed in a case like this. There are so many different powers in the Bill that the Government, or various arms of the Government, may wish to pursue, that putting a termination date on this part of it seems necessary. Personally, I would have accepted a period of three years rather than two, given the speed at which things change. However, the Bill is unusually complex and has been put together, at great speed, against a background of changing conditions in the marketplace and in activities that are covered by it. While I would be content with a slightly longer period than two years, some termination and restraint on the timing is necessary. Therefore, I favour the amendment.
My Lords, the purpose of Clause 227 is to provide statutory cover for expenditure incurred under Parts 1 to 3 of the Bill, or in giving financial assistance more generally to benefit financial institutions and their customers, in order to enable the Government’s response to the current difficult economic climate to be taken forward expeditiously. The purpose of subsection (2) is to provide that essentially routine statutory coverage for expenditure for schemes that might be operated by the Treasury or other departments, but which are not directed solely at assisting banks or other financial institutions.
One would normally include this provision in legislation brought in by the appropriate government department. However, these are extraordinary times and the Government have had to move with urgency to bring forward measures, such as the homeowner mortgage support scheme or the working capital scheme, to deal with the situation. That does not mean that the Bill is not about banks and financial institutions. Clause 227 is still primarily about providing statutory cover for the provision of financial assistance in connection with the SRR, or to banks or financial institutions.
Financial assistance provided to banks and financial institutions may also benefit other persons; for example, the customers of banks, a particular industry or part of the economy, or the economy as a whole. Schemes such as the homeowner mortgage support scheme are a good example of this. The scheme provides assistance to banks, but allows them to adopt a more flexible approach to homeowners struggling to make their mortgage repayments. Thus it also assists homeowners. Without subsection (2), there would be doubt about whether mixed schemes of this kind, which facilitate the bank or financial institution in carrying on its business and which also assist third parties, are covered by the provision.
Amendment 75 would limit the scope of such schemes to two years. It would mean that, on the expiry of the subsection, a narrower, technical approach to the provision of financial assistance to banks and financial institutions would have to be taken. Each scheme would have to be closely analysed to determine the “real” beneficiaries of any assistance. I do not see merit in this approach.
I appreciate the concerns behind the amendment. I recognise also that the noble Baroness, Lady Noakes, has sought to address one concern I raised about a similar amendment that she put forward in Committee. I was concerned that a sunset provision in this clause might mean that guarantee schemes might never get off the ground. This new amendment seeks to address that point, and for that I express my gratitude.
However, I still have concerns about how the amendment would operate in practice. As I understand it, the intention is to ensure that obligations entered into before the sunset period expires can be met afterwards, so that schemes initiated before the sunset period expires can continue to run. However, what would happen if, after the expiry of the sunset period, the terms of an existing scheme had to be modified? Would the provision cease to apply? That might depend on the nature and scale of the modifications. A careful analysis would be needed to determine whether this was still the “same” obligation entered into before the sunset period expired, or whether the modifications to the scheme were so substantial that the obligation had become a “new” obligation, not covered by the provision. Such an approach could be difficult to operate, and risk preventing sensible and appropriate modifications to existing schemes.
These are extraordinary times, and the Government must take action, often with unusual haste. I hope, as I am sure does every other Member of the House, that these schemes will not be needed after two years, or will not need to be changed after that time. However, I do not want to promise that at this stage. As I said in Committee, fixing a time limit now would be an unnecessary and unwise hostage to fortune. I hope, therefore, that the noble Baroness, Lady Noakes, will agree to withdraw Amendment 75.
My Lords, before the Minister sits down, will he clarify things that he has said that have left me puzzled? I am interested in particular in the idea that the legislation would govern any decision to provide assistance to people with mortgages who are in difficulties. I did not understand that that was required in this legislation. The Department for Communities and Local Government runs the scheme, but I did not think that it was restricted to customers of banks under the special resolution regime who might benefit.
If I follow the Minister’s logic, he also said that we require this clause to provide to banks anything that then assists their customers above and beyond normal business, into which category shared equity schemes, which the Government have been promoting for some time, would also fall. So I gently suggest to him that I really do not follow that logic and I am not sure that, in terms of these examples, his explanation is entirely consistent with current and previous practice.
My Lords, the Government have demonstrated that they are going to use these extraordinary times as cover for pretty extraordinary legislation. Earlier today, we debated Clause 75 where the Government are taking unprecedented powers and such unprecedented powers are being taken in other areas of the Bill as well. This too is an unprecedented way of getting cover for the kind of schemes which the Minister has in mind. He has turned a financial stability support clause into one which will support any Secretary of State funnelling any amount of money as long as it goes via a bank or other financial institution.
The Minister says that he does not see merit in the amendment. From a constitutional position, there is massive merit in the amendment because it restricts the Government to these exceptional emergency powers for a reasonable time. That is a normal thing for Governments to do. We are constantly being faced with the argument that extraordinary times justify all these actions. At some stage that will not work. The Minister's argument about changing a scheme is so minor as not to be worth responding to. If the authority were to run out, obviously the Government would have to take a new scheme and they would not change a scheme to change existing obligations. These are not substantive points, but I accept that the Minister has threatened the House, using the phrase “hostages to fortune”, and the emotive language which the Government like to deploy when trying to get their own way in taking huge powers. On this occasion I shall withdraw the amendment, but it is the last time I will withdraw an amendment of this nature on this Bill. I beg leave to withdraw the amendment.
Amendment 75 withdrawn.
76: Clause 227, page 115, line 27, leave out from first “paid” to end
My Lords, I shall speak also to Amendment 78. The two amendments amend Clause 227(6) and (7) which were introduced in Committee by the Government. Together with new subsection (5), they cover emergency access to the Consolidated Fund when it is too urgent to seek parliamentary approval. My amendments replace the blanket permission in subsection (6) not to reveal the identity of the financial institution which receives urgent financial assistance with a more specific public interest let out which is already contained in subsection (7). Since tabling the amendment, I have noticed that in Amendment 80 the Government have tabled similar subsections to Clause 228 and my amendments should be mirrored there.
My amendments do not mandate the disclosure of recipients, but they do not allow the emergency procedure to be used as a cover for anonymity when the public interest is not at stake. It seems to me that it is only the public interest that the Government can pray in aid for nondisclosure. I hope that the Minister will see that as reasonable. I beg to move.
My Lords, there is a general principle about which I am unclear. We seem to be in a position where the amount of expenditure will be disclosed but the recipient will not. We have to ask ourselves whether that should always be the case. If a bank in trouble is assisted by the authorities, but in the mean time goes, for example, to find people who can raise capital and it puts the deficit in its capital to rights and repays the assistance, one could take the view that that should never be revealed. The fact that someone borrowed from the bank could be revealed but you would never say which bank it was. Alternatively, should we follow the principle that, as soon as it is possible to say that it would not damage the bank or plunge it back into the problem that it had faced originally, its identity should be disclosed?
I can remember in the early 1990s, when I was at the Treasury, having discussions with the then Governor, the noble Lord, Lord George, and I think the agreement was that when assistance was given by the Bank—they were much smaller banks in those days than we are now talking about—the amount or the identity would not be revealed immediately, but that it would appear in the first annual report of the bank which appeared after six months. However, I cannot remember whether only the amount of the assistance was revealed in the annual report or the name as well. There may be two distinct, subsequent announcements: first, that a scheme has been used and the amount and, secondly—this is what I am seeking guidance on—that a particular bank received help. I suppose the case for doing that would be wanting to judge whether the bank's judgment was correct. The bank may have survived but it may have been rather a foolish thing to have done. Are we entitled to know? Is that as much as Parliament is entitled to know or will we stick to the principle, as we have now in Clause 227, and have added the requirements in the following clauses on the National Loans Fund, that only the amount and the fact of some help is to be revealed?
My Lords, in responding to these amendments, I wonder whether the Minister could clarify the relationship between any report from the Treasury, with or without this amendment, and the disclosure requirements likely to be on the board of the company which receives the assistance. I should have thought that any such assistance would be a market-sensitive fact which would normally have to be disclosed anyway, assuming it is a public listed company. How would any information which the Government put into the public domain relate to the obligations on the directors and the timing difference between those matters?
My Lords, the purpose of Clause 227 is to give statutory cover for public expenditure in support of various schemes which the Government consider necessary in these extraordinary times. Subsections (1) and (2) are fairly routine parts of the Bill. Clause 227(5) is less ordinary. It allows for direct access to the Consolidated Fund in urgent cases.
This subsection is unusual, but it is not unprecedented. First, there are already what are called Consolidated Fund standing services provided for in Acts of Parliament. A Consolidated Fund standing service is a service where the money to finance the service can be taken directly from the Consolidated Fund rather than being voted first in supply estimates. There is also provision in some Acts for direct access to the Consolidated Fund to meet government commitments where estimates provision is not available. A good example is the Export and Investment Guarantees Act 1991. But direct access to the Consolidated Fund for expenditure does not mean that it is not subject to proper control, reporting or accounting. No payment may be made out of the Consolidated Fund without the prior approval of the Comptroller and Auditor-General. The amounts paid out will, suitably aggregated, appear in the annual accounts of the Consolidated Fund. There will be National Audit Office scrutiny and the Treasury will have to answer to the Public Accounts Committee in the normal way.
Turning now to Amendments 76 and 78, subsections (6) and (7) of Clause 227 provide for reporting of expenditure to which the special provisions in subsection (5) apply. Your Lordships were concerned about aspects of these provisions and I specifically promised the noble Lords, Lord Higgins and Lord Turnbull, that I would look at the issue of anonymity again. We have done so, but we have come to the conclusion that the provisions of Clause 227(6) need to be retained.
I fully appreciate, not least as a Treasury Minister, that it is not ideal for anyone concerned with public finances to be told that one cannot be informed about what happened with public money. The plain fact is that some of the schemes or arrangements could not operate or would never be taken up by institutions concerned if there was any chance that their identity might become known. There may be cases where knowledge of public support could precipitate the kind of crisis we were seeking to prevent.
I say to the noble Lord, Lord Turnbull, that I believe that that applies even in cases where, after assistance was received, the amounts were fully repaid. The disclosure of that fact would raise questions about the structure, efficacy, governance, risk controls, and so on, of the recipient institution. There may also be instances where it is essential to keep payments under a guarantee or similar commitment confidential. As well as a need to be able to delay or dispense with a report on grounds of public interest, we must be able to assure participants in some schemes that we can keep confidential their participation and any payments we have made under any guarantees or similar financial commitments entered into for their benefit.
The noble Lord, Lord Turnbull, also asked about disclosure in the Bank’s annual report. To the best of my recollection, the Bank's annual report now discloses that no financial assistance has been provided since a certain date. Obviously, that may well change in the Bank’s next annual report. I am speaking here on the basis of my recollection as a member of the Audit Committee of the Court of the Bank of England, but my experience is somewhat out of date, and I was not sitting in court when the last set of annual reports and accounts were approved, because I had taken leave of absence. If I am incorrect in my explanation, I will write to the noble Lord.
The noble Lord, Lord Blackwell, asked about the obligations that would fall on the directors of a bank if the bank was a public company under listing regimes. I would rather give him a very precise and correct answer, so rather than anticipate the answer, which I am tempted to do, I prefer to take guidance and will write to the noble Lord and copy my reply to others who have spoken to the amendment. I fully accept the point that he makes: if there were an obligation to disclose under the listing requirement, part of the argument in favour of anonymity here would be undermined for public companies.
To close, we have, therefore, to keep the anonymity provisions in Clause 227(6), and I am afraid that the Government cannot accept Amendments 76 and 78 , tabled by the noble Baroness, Lady Noakes. I hope that in the light of that explanation she will feel able to withdraw the amendment.
My Lords, these are difficult issues. Obviously, there is a great desire for transparency and public knowledge but, on the other hand, I recognise that there are necessary issues of confidentiality. There has been some discussion of what was done with the Bank of England's accounts. From my recollection, since the disclosure rules for the Bank of England were changed, there had not, until last year, been an issue of new financial assistance. You have to go back quite a long way to find the last one, although that, too, is from memory, going back even further than the Minister's memory.
These are difficult issues, and I shall not press my amendment. I do not say that I am convinced by the Minister's response, but I concede that there is a case to be made. I beg leave to withdraw the amendment.
Amendment 76 withdrawn.
Amendments 77 to 79 not moved.
Clause 228 : National Loans Fund
80: Clause 228, page 115, line 43, at end insert—
“(6) Where money is paid in reliance on subsection (1) the Treasury shall as soon as is reasonably practicable lay a report before Parliament specifying the amount paid (but not the identity of the institution to or in respect of which it is paid).
(7) If the Treasury think it necessary on public interest grounds, they may delay or dispense with a report under subsection (6).”
My Lords, the amendment concerns transparency in payments from the National Loans Fund. Transparency about some of the powers provided in the clauses has been the subject of a great deal of debate both in Committee and today. We undertook in Committee to look at points made and reflect further. The amendment is our response to those Committee debates.
I shall have a little more to say on the subject of transparency in general when we come to Amendment 81, and why the Government believe it to be unnecessary, but let me concentrate first on the merits of the government amendment.
It is important to understand that the financial provisions in Clauses 227 and 228 fulfil a largely routine function in providing statutory cover for public expenditure. One consequence is that they automatically attract the standard arrangements for control, reporting and accounting of public expenditure.
Clause 227 attracts those mechanisms that apply to expenditure from the Consolidated Fund, whether voted in Estimates or taken directly as a standing service. Clause 228 automatically attracts the normal machinery for the control, reporting and accounting for payments from the National Loans Fund. For example, no expenditure on loans may be paid out of the National Loans Fund without the approval of the Comptroller and Auditor-General under the National Loans Act 1968. All loans from the National Loans Fund are included in the annual accounts of the fund.
The National Loans Fund can only make loans, so Clause 228 could never replace the emergency provisions in Clause 227(5), but it serves a similar purpose in that loans can also be made from Votes—provided, of course, that the necessary Estimates cover has been obtained, or that the resources can be taken from the Contingencies Fund.
So the Government felt, on reflection, that the same kind of reporting arrangements as apply for the urgent payments under Clause 227(5) should be made for individual emergency loans under Clause 228. Amendment 80 does that with the same kind of anonymity and public interest conditions as Clauses 227(6) and (7) provide.
There are already in place well-established arrangements for accounting and reporting which will cope with most of what may happen under Clauses 227 and 228 in the normal way. The additional reporting arrangements that the Government now propose will ensure that emergency payments from the National Loans Fund will have the same reporting arrangements as those that Clause 227 provides for emergency payments direct from the Consolidated Fund.
Accordingly, I beg to move.
Amendment 80 agreed.
81: After Clause 228, insert the following new Clause—
“Transparency: financial assistance
(1) The Treasury shall prepare and lay before each House of Parliament a quarterly report in respect of—
(a) financial assistance paid out under section 227(1);(b) loans made under section 226; (c) guarantees, indemnities or similar arrangements which may result in amounts being paid out under section 227(1).(2) The Treasury shall ensure that the report contains sufficient detail to enable Parliament to understand the actual and potential commitment of public money to financial assistance and the Treasury may summarise the individual items which fall to be disclosed in a report in whatever way they consider appropriate in order to assist Parliament in that regard.
(3) If the Treasury consider that certain information should not be disclosed in a report on public interest grounds, a report may omit that information until such time as the Treasury consider that the public interest is no longer affected.”
My Lords, Amendment 81, in my name and that of my the noble Lord, Lord Turnbull, introduces a new clause after Clause 228 which, put simply, provides for transparency and reporting to Parliament about the uses of both Clauses 227 and 228.
We debated in Committee a longer and more detailed version of the amendment, and the Minister said that he would take the issue away to look at it. All he has produced is a little bit of extra reporting set out in Amendment 80, to which we have just agreed. I declined to group the amendment with Amendment 80, because they operate at quite different levels and I did not want the House to think that they were in some sense the same approach to transparency, because they are not.
We noted in Committee that one thing that is not well reported to Parliament is commitments as well as cash. My amendment seeks to capture commitments as well as cash outflows. The latest schemes introduced by the Government to stave off the recession have typically involved guarantees rather than cash. Where and how can Parliament keep an eye on how much contingent liability is being racked up for the future? The answer is probably the annual resource accounts of the Treasury. As the recent report of the Treasury Select Committee in another place noted, the information that is contained in those accounts is painfully inadequate, and of course is not timely.
My amendment calls for a quarterly report to Parliament, so that Parliament can track the build-up of both cash and commitments under the various financial assistance schemes that now exist under the very wide powers that together Clauses 227 and 228 comprise. In Committee, the Minister queried whether it was appropriate for the Treasury to report on other departments’ financial assistance. That is not a real point. The powers can only be used with the consent of the Treasury, and of course, we are entitled to look to the Treasury to pull together relevant pan-government financial analysis. That is one of the things the Treasury is there for. I should also note that my amendment has the usual let-out on public interest grounds for as long as the public interest may be affected, so there should be no question of having to disclose information that is of a sensitive nature.
In sum, this is a perfectly reasonable amendment that has the needs of parliamentary accountability at its heart. I beg to move.
My Lords, the noble Baroness, Lady Noakes, has justified this amendment, the primary purpose being to ensure proper parliamentary accountability of the way the powers provided in this Bill are exercised. It also provides, as she has said, a pragmatic solution to the issue of whether market intervention should be kept confidential—that is, that information may be withheld, but should be released once there is no danger of exacerbating the problem that the authorities are trying to solve.
In addition to the parliamentary requirement, there is a more general requirement. The Treasury and the Bank are using a wide variety of techniques to counter the current problems. There is a special liquidity scheme, equity stakes in banks, preference shares, guarantees of inter-bank lending, risk sharing for lending into companies, refinancing of mortgages, lending which substitutes for bank lending, insurance of so-called toxic assets and, possibly in the future, purchase of such assets.
Different interventions are being injected at different points in the process. Some may be in money markets, some direct into banks and some towards their credit-starved customers. Some assistance may be provided under the powers of this Bill, some under other powers, some under the Appropriation Act, and as the previous two clauses show, there are different channels through which they can be financed. One’s head spins in the face of all this.
I think there is a strong need for a regular report which would take the provisions of this clause as its kernel, but would actually go beyond it. It would bring together all the different ways in which the Government and the Bank are responding to the financial crisis. It should identify each scheme under a consistent nomenclature; when it was announced; how much has been committed; how much has been drawn; what guarantees have been offered; any losses crystallised to date; the powers used; and the source of the funding.
Above all, it must be clear and simple. Regrettably, the Pre-Budget Report and the Budget documents have become virtually unusable. They are rather like those cumulation songs, such as the “Twelve Days of Christmas”, or “Ten Green Bottles”, when not only are this year’s actions reported, but all the previous years’ actions are repeated until the document becomes ever bigger. The latest version should simply be compared with those produced 10 years ago.
This amendment provides the foundation of such a report, and that is why I, too, am happy to support it.
My Lords, I support the noble Lords who have spoken in favour of this amendment. One of the problems about the situation we are in now, which the Government’s provisions do not solve, is that there is a whole raft of statements, a whole raft of commitments, and it is very difficult to bring them all together and get a sense of what they are at any one time, and also, how they are growing. The great advantage of this amendment is that it produces a series so you can see from one quarter to the next how the situation is changing. In terms of getting a sense of the overall level of government commitment, it is far superior to the provisions that the Government have placed so far in the Bill.
My Lords, I am happy to say that it is not my amendment, so someone else must address it. Just for once, I leave the noble Viscount’s keen scrutiny of the Bill to the tender mercies of the noble Baroness when she gets her chance to reply.
We have already said a lot on the matter of transparency in relation to those parts of the Bill which provide for financial assistance to be made, but I think I need to spell out why the Government are opposed to Amendment 81.
We live in extraordinary times and this Bill is intended to deal with the consequences of extraordinary events. Some of the powers in the Bill are, therefore, themselves rather extraordinary. We have had attention drawn to that during the course of the debate this afternoon. The House is of course concerned about the scope of these powers and about the provision for parliamentary control and oversight of their use. The Government would have expected nothing less and we appreciate the importance of responding to these concerns.
However, not every power or provision in the Bill is extraordinary. Some are quite ordinary—even routine—and that is true of parts of Clauses 227 and 228, as we have discussed at length in the preceding debates. For example, Clause 227(1) is essentially a standard provision included in all Bills that might involve public expenditure. It gives the proper coverage for the use of the annual Supply Estimates to provide the funds for government departments to carry out their programmes. This provision is to be found in countless Acts of Parliament already on the statute book. And Clause 227(1) attracts all the normal apparatus of Parliamentary control, reporting and accountability for the expenditure concerned.
No money, therefore, will be spent on any of the schemes covered by subsection (1)—or for that matter subsection (2)—unless the necessary Estimates have been approved in the normal way by the House of Commons and incorporated in an Appropriation Act or a Consolidated Fund Act, or unless funds have been taken from the Contingencies Fund in line with other long-standing arrangements. Or—and this is where a reference to some non-routine provisions must be made—it has been necessary to use the provisions in subsection (5), which provide the Treasury with direct access to the Consolidated Fund in cases of urgency.
But there is more. No funds can be issued from the Consolidated Fund, even after an Estimate has been passed, without the approval of the Comptroller and Auditor-General under the Exchequer and Audit Departments Act 1866.
Where Estimates are involved, of course, expenditure will always be fully within normal departmental accounting systems. It will be included in departmental resource accounts and subject to National Audit Office scrutiny and audit. The schemes will be discussed in departmental reports, and scrutinised by departmental select committees and the Public Accounts Committee in another place. All of this apparatus will be attracted routinely and automatically by the departmental spending decisions, by the Estimates and by the statutory cover for those Estimates which Clause 227(1) and (2) provide.
As I said a few minutes ago, Clause 228 automatically attracts the normal machinery of parliamentary accountability. The Government do not feel, therefore, that there is any need for additional reporting of the expenditure covered by these clauses which the amendment proposes. Subsection (1)(c) of the proposed new clause opens up the issue of guarantees or any other form of contingent liability, which do not, as I explained in Committee, give rise to any expenditure when they are given. They give rise to expenditure only when they are called. So the normal mechanisms for reporting expenditure, which I have just described, do not bite on guarantees when they are given.
This does not mean that they go unreported. Contingent liabilities that are not entered into in the normal course of business are normally reported to Parliament by means of a departmental minute when the commitment is entered into. Of course, some guarantees have to be kept confidential; the established practice is that these are reported in confidence to the chairmen of the Public Accounts Committee and the departmental Select Committee. Contingent liabilities are also reported in the annual departmental resource accounts. There is, of course, full National Audit Office scrutiny and audit in the normal way.
I can appreciate why the noble Baroness and the noble Lord, Lord Turnbull, see a need for additional regular reporting of guarantees or similar commitments entered into under Clause 227(1), but this would not, in practice, add much to the arrangements that I have just described and which would continue to apply. I am afraid that this would also be impracticable, when at least some of the guarantees might be large and might have to be kept confidential. The problem is, of course, that if some commitments are kept confidential while others are not, there will inevitably be a mismatch between some published total and the sum of the numbers in the column above, which it would be hard to conceal. There is no way round this problem.
I hope that I have persuaded the House that there are already in place well established arrangements for accounting and reporting which will cope with most of what may happen under Clauses 227 and 228 in the normal way, and that the additional reporting arrangements in Clause 227(6) and Clause 227(7), which are now repeated in Clause 228, are suitable for the more unusual things that may happen under these clauses. I noted the strength with which the noble Baroness presented her amendment. I hope that, on reflection, she will accept that the Government have considered these issues and she will feel able to safely withdraw Amendment 81.
My Lords, I thank all noble Lords who have spoken. I agree with the noble Lord, Lord Turnbull, that it is important to try to bring together all the schemes that are being used to provide assistance or support in various ways. The amendment deals with the money that comes from Parliament; it does not necessarily capture absolutely everything that goes through the Bank of England directly, but it covers the majority of it. I further agree with the noble Lord on the content of the PBR and the Budget, but we will have that debate another day.
The noble Lord, Lord Newby, is right that it is important to look at a series of reports to see a build-up over time. I think that I thank my noble friend Lord Eccles for his contribution on the typing error that has been made on the Marshalled List. I am sure that it is not a major impediment.
The Minister tried to portray the provisions of Clauses 227 and 228 as rather routine. I am sure that much is routine in their structure, although not the latter’s subsections. The issue is that the content is not routine. The content endorses both the payment and the commitment of very large sums of money. We learnt in Committee that this clause is being used to frank the £37 billion already committed via bank rescue 1. This clause will provide the backing for anything that comes out of bank rescue 2, including the guarantees to the Bank of England. This clause will provide the cover for the various guarantee schemes that the noble Lord, Lord Mandelson, has been announcing, as well as other schemes. We are talking about major sums of public money.
The Minister explained about estimates and the Comptroller and Auditor-General, none of which is in dispute. The issue is how we pull information together so that Parliament can, over time, track the build-up of not only the money that has been spent but, more important, the money that has been committed. These are exceptional times and it is right that Parliament should have an exceptional degree of scrutiny of what is being done under the authority provided by the Bill. Parliament should not have to wait for the normal production of annual accounts or the laying of Treasury minutes. The information should be pulled together and explained. This is a very important issue. I do not believe that any of the Government’s objections have real substance. I beg leave to test the opinion of the House.
Clause 230 : Definition
82: Clause 230, page 116, line 25, leave out paragraph (a) and insert—
“(a) provide that a specified class of institution, which has a permission under Part 4 of the Financial Services and Markets Act 2000 to carry on a regulated activity, is to be treated as an investment bank for the purpose of this group of sections;(aa) provide that a specified class of institution is not to be treated as an investment bank for the purpose of this group of sections;”
My Lords, as I said yesterday, there are a number of areas in relation to this Bill where further consideration would be helpful before the issues are debated again. One such area is the Government’s provisions for investment bank insolvency. While these provisions have been accepted by the House, there are a number of areas where the Government continue to work to refine the proposals. It has therefore been agreed through the usual channels that the noble Baroness, Lady Noakes, and I will not move Amendments 82, 83 and 84, relating to Clauses 230 and 233, today. We will return to these matters at Third Reading.
My Lords, I shall speak as chairman of the Delegated Powers Committee, which has expressed strong views on this matter. The Government’s proposals for giving themselves almost unlimited powers to rewrite the whole law of insolvency in relation to investment banks reminds me very much of the words of King Lear in his madness:
“I will do such things,—
What they are yet I know not,—but they shall be
The terrors of the earth”.
It certainly seemed to us that Amendment 84 would create a proper balance between the need to act urgently in a crisis and the need for Parliament to give full scrutiny to legislation of serious importance. I am very pleased to know that discussions will continue on this. I hope that they will come to a satisfactory conclusion.
Amendment 82 withdrawn.
Amendment 83 not moved.
Clause 233 : Regulations: procedure
Amendment 84 not moved.
Clause 235: UK financial stability
85: Clause 235, page 119, line 20, after “be” insert “, in co-operation with the Treasury and the FSA,”
My Lords, when the noble Lord, Lord Turnbull, and I reflected on the somewhat unsatisfactory debates on the new financial stability objective and the Financial Stability Committee, we broadly decided that, while we did not much like the Government’s proposals, we would go for a minimalist solution of at least recognising that the Bank’s objective was one that could be delivered only in conjunction with the other tripartite actors. The Government have reached a similar minimalist conclusion and tabled Amendment 86, which is in a similar form. I prefer the formulation that the noble Lord, Lord Turnbull, and I came up with, which uses the words “in co-operation with”, rather than the words,
“shall aim to work with”,
in the Minister’s amendment. However, I shall listen with care to what the Minister has to say about his amendment before deciding what to do with mine.
The amendments in this group, while useful, do not go to the heart of the concerns that we raised about the new arrangements within the Bank of England. I shall not argue them in detail, because many will emerge from the next group of amendments in the name of the noble Lord, Lord Eatwell. To summarise, there are issues about the Financial Stability Committee not having the right internal or external people on it and there are issues about it ignoring the FSA. It is working to an objective about which there may be a lack of clarity. There may be a need to appoint members to court to fill the Financial Stability Committee, thus unbalancing court. The terms of reference of the committee are a ragbag of overlapping functions and there is no transparency about the committee’s working.
I know that the Governor of the Bank of England wants no change to the proposals in the Bill. The Government did not need to put him up to writing formally to the Minister to reinforce that, as it was already well known. I do not believe that the arrangements will work well in practice and I predict that we may well need another bit of legislation to unwind some of this 2009 experiment. However, as the Government have at least accepted the thrust of Amendment 85, we are prepared to listen to their version. I beg to move.
My Lords, I regret that I was unable to attend the latter part of the Committee stage, when what is now Clause 235 was debated. I congratulate those who stayed to the bitter end at gone two o’clock in the morning on their stamina. Had I been present, I would have supported the concerns expressed by the noble Baroness, Lady Noakes, and the noble Lord, Lord Eatwell. The principal shortcoming of the clause was that it almost entirely overlooked the fact that we have a tripartite structure for regulation and crisis management. The clause was entirely introspective, making provision for a change in the structure within the Bank but making no reference to the other players. Hence the amendment, which would insert the words,
“in co-operation with the Treasury and the FSA”.
I am pleased to see that the Government have come up with a similar wording. We can debate whether our wording is better than theirs in due course.
I know that some people—indeed, some people of great eminence—perhaps driven more by nostalgia than by evidence, long to return to a world where the whole system revolved around the Bank. This Bill, in my view correctly, works on the premise that the tripartite structure should be retained but strengthened. For example, earlier clauses sought to define the areas of responsibility in which each player takes the lead. The old system would not work in the modern world, where threats to financial stability come from insurance companies such as AIG, which I believe is still the largest recipient of assistance anywhere in the world to date, from investment banks such as Lehman Brothers and, in the crisis in 1998, from hedge funds such as Long-Term Capital Management.
If the tripartite system is to be retained, it makes sense for the Government to show their commitment to making it work well and to entrench some wording that places a duty on each of the players to collaborate fully. I, too, will wait to hear what the Minister has to say before deciding whether to support the Government’s wording. However, I think that we are both seeking the same outcome.
My Lords, I assure the House that I have taken seriously the concerns expressed last week by several noble Lords about the interaction between the members of the tripartite in the area of financial stability. Before turning to the amendments in this group, I emphasise that the Government believe, as I have previously said, that the tripartite system remains fundamentally sound. The Treasury, the Bank of England and the Financial Services Authority all have roles to play in protecting financial stability, but these roles are different, defined and distinct. The tripartite Memorandum of Understanding shows how each must work with the others as appropriate.
The Government, with this Banking Bill, are taking steps to further support and strengthen the tripartite system, extending the powers and responsibilities of the Treasury, the Bank of England and the FSA. We are responding in this way to the call from the noble Lord, Lord Turnbull, to evidence our commitment to making sure that the tripartite system works. These steps are being taken in line with each institution’s current mandate and responsibilities, to avoid overlap, to ensure that at each point it is clear which institution is in the lead and to enable each body to rely on and build on its existing expertise and experience. This must surely be the right approach to take, rather than creating overlap, duplication or uncertainty over the extent of an institution’s authority.
For example, in establishing the special resolution regime, the Bill sets out resolution processes whereby each of the tripartite authorities has lead responsibility within those areas in which its expertise and authority lie. In addition, where appropriate, where one authority has lead responsibility, the Bill also requires appropriate levels of consultation with the other two authorities.
As I have said in debate on several occasions, I entirely agree that full and effective co-operation between the tripartite authorities is both desirable and necessary. That is why the Memorandum of Understanding establishes mechanisms for the tripartite authorities to communicate and co-ordinate their actions in relation to their joint and individual responsibilities. This is especially important in safeguarding the UK’s financial stability, in which, as I said, each of the tripartite authorities has a distinct role to play. It is also vital that they meet regularly to co-ordinate action within their individual spheres of responsibility to address those issues.
When addressing the financial stability objective in the other place, my honourable friend the Exchequer Secretary referred to the phrase “to contribute to” and said:
“That phrase reflects the fact that the Bank does not have a duty to ensure financial stability on its own, because that would be impossible. That responsibility is shared nationally with the FSA and HM Treasury and internationally with the European Union and other international bodies, which all have a major role to play, alongside market participants themselves”.—[Official Report, Commons, 30/10/08; col. 240.]
It is clear that the phrase “to contribute to” implies that the UK’s financial stability is not the sole responsibility of the Bank of England.
On reflection, however, and having considered the concerns raised by noble Lords on this point in debate last week, we have decided to refer explicitly in the Bill to the fact that the Bank’s financial stability objective will be pursued in collaboration with other relevant bodies, including the other tripartite authorities. That is why Amendment 86, which appears in my name, inserts wording to the effect that the Bank should aim to work with the Treasury, the FSA and other relevant bodies to protect the UK’s financial stability. I recognise that Amendment 85, in the names of the noble Baroness, Lady Noakes, and the noble Lord, Lord Turnbull, has a similar intention, and I hope that they are content that the Government’s amendment has responded to their concerns.
My Lords, I thank the Minister for that explanation and, indeed, for tabling his amendment. I continue to believe that simply asking the Bank to aim to work with the Treasury and the FSA is setting rather a low hurdle, but at this stage of the game one accepts half loaves and does not hold out for the full loaf. I beg leave to withdraw the amendment.
Amendment 85 withdrawn.
86: Clause 235, page 119, line 22, at end insert—
“(1A) In pursuing the Financial Stability Objective the Bank shall aim to work with other relevant bodies (including the Treasury and the Financial Services Authority).”
Amendment 86 agreed.
87: Clause 235, page 119, line 27, after “a” insert “joint”
My Lords, there is a slight oddity in the grouping in that we are going to have the same debate all over again, but with the more sweeping proposals that I tabled first in Committee and have retabled on Report because we did not get satisfactory answers in Committee to the issues that were raised.
At the centre of our concerns are the operations of the tripartite arrangements in securing financial stability. One of the most peculiar aspects of the situation before us is that the tripartite committee has no statutory foundation, yet extraordinarily the Financial Stability Committee will be in primary legislation when it is just a sub-committee of the Court of the Bank of England. It is very strange that we need to have primary legislation for a sub-committee of the court but do not require it to establish the position of the tripartite committee, which the Minister has just argued is so enormously important.
I very much agree with the Minister that the tripartite arrangement is very important for financial stability and the complex interactions of macroeconomic, institutional and microeconomic variables, all of which can feed into problems of financial stability. We know from the evidence that we have that the tripartite arrangements simply did not work at the commencement of the current financial turmoil. Indeed, those involved admitted that they did not work at all well.
Lessons have been learnt, but I am afraid that I am still under the considerable impression that they are still not working effectively. In the past, the Bank of England had the important role during financial crises of co-ordinating the response of banks and other financial institutions to the crises. It was a meeting of the institutional investors, hosted by the Bank of England in the early 1970s, that called the bottom of the stock market crash. Today, such co-ordination is not evident and indeed would be difficult to achieve, since the Bank of England no longer has the relationship with so many of the financial institutions that it used to have. One would therefore expect the Bank of England and the FSA to work together to achieve that sort of co-ordination. However, Mr Peter Sands, the chief executive of Standard Chartered, stated in December:
“The policymakers need to engage with the providers of capital to the banking system, rather than just talking to the banks, because ultimately you need a convergence in expectations”.
In other words, Mr Sands, who is running one of the most important banks in the country, is telling us that there is no co-ordinating activity, which was so important in the past. It is not clear that the difficulties and problems associated with the tripartite system have as yet been effectively overcome.
My amendment in Committee attempted to achieve a statutory basis for the tripartite arrangements. That is why I embodied the FSA and a number of independent persons in the stability committee. I am very disappointed that the Government did not even consider whether there should be independent persons on the committee. The independent members of the Monetary Policy Committee have made an enormously important contribution to the work of that committee, so why cannot we also have independent members on the stability committee?
If the Government are not willing to accept an amendment in this form, I suggest that they abandon the Financial Stability Committee altogether. Over the next several months, we know, because the Chancellor has told us, that there will be significant new legislation on financial regulation and that that legislation is likely to require new institutions to make it effective. Those new institutions will have to be tripartite institutions in some sense and the committee will become an irrelevance. Yet here it is in primary legislation. We really do not need it. It would be much better to wait for the development of regulatory reform and then put into place the institutional structures that will be more appropriate for that reform.
It is clear, for example, that in any system of regulatory reform that is reacting to current financial turmoil there must be some form of liquidity regulation. The banks must have some liquidity management, which means managing their liability side rather than just their assets side, which has been the regulatory structure until now. How will the Bank of England’s Financial Stability Committee do that when all the information about liquidity, especially about the liability structure of the banks and other institutions, is in the FSA? They will have to work closely together, so there will necessarily be some institutional framework in order for them to do so. It would be much better to devise that framework free of the Financial Stability Committee, which is simply a sub-committee of the Court of the Bank of England and cannot have a primary role in dealing with financial stability as it confronts the British economy in the complex financial structures that we have today.
In these circumstances, and in all humility, I advise the Government either to accept my amendment—that is probably not terribly humble—or to abandon the Financial Stability Committee altogether so that, as we move into a new era of regulatory reform, we can design the institutions that are appropriate for the effective management of financial stability in the UK. I beg to move.
My Lords, the other issue that I would have raised on what was Clause 228, now Clause 235, was whether creating a Financial Stability Committee within the Bank, along the lines currently proposed, was the best way forward. I accept that the starting premise of this is correct: the Bank would benefit from what might be called ventilation, or exposure to a greater degree of outside thinking. It is ironic that at a time when this is more necessary than ever, the Bank’s senior leadership will shortly, for the first time since 1997, be made up entirely of insiders, defined as those who have been with the Bank for more than 10 years. While it correctly identifies the problem, I wonder whether the proposed solution is indeed the best available; that is, to take four members of the Court of the Bank of England and put them into a committee chaired by the governor, assisted by the two deputy governors. Oddly, the executive member responsible for markets would not be a full member. I was not convinced by the Minister’s explanation that this was a sufficient gene pool—the phrase that was used—to assemble the experts necessary. Some of them, who would be excellent in the role of experts, would not necessarily want to work, in effect, as the non-executive directors of the Bank, with the much wider range of responsibilities that that carries.
I am also puzzled as to why, if a committee of this kind is needed, it could not have been set up months ago without primary legislation. As the noble Lord, Lord Eatwell, has pointed out, it is inevitable that the whole architecture of regulation will be revisited, not only in the UK but internationally. I, too, wonder whether it makes sense to commit ourselves to legislate on something that will probably have only a short life and whether we could proceed by non-statutory means. I expect that we will probably return to what I would much prefer—a body that acts as a forum to oversee and guide not only the individual players in the system, but the whole tripartite system itself.
This Bill provides for a Banking Liaison Panel to help the Treasury and a Financial Stability Committee to help the Bank, while the FSA already has various practitioner panels. What is missing is something to bring this all together at the tripartite level and sort out the conflicts and trade-offs that the different parties will inevitably bring. For example, the FSA is currently encouraging banks to husband their capital with great care and build it up, while the Treasury wants to encourage banks to commit more of that to increasing their lending. That is precisely the kind of issue that something working at the tripartite level could help to sort out. The Bill currently addresses a particular issue but misses an opportunity to look at something that would have a greater purpose. We will have to wait, but time will probably tell that the noble Lord, Lord Eatwell, and I are right.
My Lords, I support the noble Lord, Lord Eatwell, and his amendments to strengthen the Financial Stability Committee. I take his point about the likely short life of the committee and how it might benefit from the extra membership, particularly as the Minister has stressed the importance of the tripartite regime. To reiterate an old chestnut of mine, I am sorry that the noble Lord, Lord Turner, cannot be here to put in a word for this as well.
My Lords, I supported these amendments and the noble Lord, Lord Eatwell, in Committee and I certainly support the principle behind the amendments. Since the Committee stage, we have received a long explanatory note from the Governor of the Bank of England as to why this committee would be completely impossible. I fear that there are real shades of “Yes Minister” in it. It says that,
“implementation of the FS strategy … has implications for the Bank’s balance sheet and risk and control environment”,
and that it cannot be left,
“to a Committee that is disconnected from the Court of Directors”,
to take decisions in that area. Instead, he suggests that it is all fine, that the Bank works happily within the tripartite framework and that he would be happy to have this stated in the Bill. I assume that this is why we have Amendment 86, which we have just debated. Again, this is a wonderfully drafted amendment. It is the absolute minimum that you could conceivably say while saying anything at all. It covers the fact that the Bank will work with the other relevant bodies, including the Treasury and the FSA, but qualifies it, lest it be thought that the Bank should strive too hard to work with them, by saying that it shall “aim” to work with them. The truth is that the Governor says that they are happily working together anyway, yet the Bill now says that the Bank will try its best to see whether it can work with these bodies. The implication of both the amendment and the document from the Governor is that the Bank is extremely grand, and will work with all the people who want to be involved if it has to, but it is the Bank that really matters.
The entire thrust of what the noble Lord, Lord Eatwell, has been saying, and which I support, is that the FSA and the Bank have equal roles in maintaining financial stability, given that financial stability depends very much, as we have seen recently, not on some general collective financial situation, but the position in individual significant financial institutions where the FSA, by common consent, is in a much better position than the Bank to know exactly what is going on. Given that the Government clearly will not accept these amendments, I follow the logic of the noble Lord, Lord Eatwell. It would be better not to have all this stuff about one sub-committee of the Bank in the Bill because it gives it an inflated importance and creates a misleading impression of how the tripartite system both is intended to work and will work.
My Lords, I add my voice to the sceptical comments from all parts of the House. When I first went through the Bill, this was the part which I found least convincing. We should be grateful to the noble Lord, Lord Eatwell, in particular for setting out so clearly the arguments for replacing the Financial Stability Committee, as defined already, with something that has a better chance of working in practice, and what legislative form that might take. I therefore ask the Government to consider very seriously the points that have been made in this short debate. I do not believe that a group of people with the varied experience of those who have contributed to this debate is likely to go on some blind journey without any sort of conviction that there is a sensible destination. It may be that the solution would be to withdraw these clauses from the Bill and wait for the large regulatory Bill which will come before too long. That would be a sensible way to deal with it, so I support the noble Lord, Lord Eatwell, without necessarily agreeing with all the details that he has put forward.
My Lords, I have argued throughout that the Bill does not reflect the tripartite authorities and how they work together; instead, it identifies little bits of things for them to do at various points and fails to address the whole, which I believe it should. Like my noble friend Lord Stewartby and other noble Lords who have spoken, I do not necessarily sign up to every detail of the proposals of the noble Lord, Lord Eatwell. They are better than what is in the Bill, but I think the solution would be to take out financial stability. We can leave in the financial objective with its weak little override about aiming to work with the others. As has already been pointed out, if it is helpful to the governor to have a financial stability committee made up of whomever he chooses to have advising him, and it does not require primary legislation to do so, that can be arranged. However, if other architectural changes to legislation are needed in due course to meet whatever global consideration there is in response to the current financial crisis, that would be a perfectly appropriate time to do this. Many things do not need to be legislated for, and since we are not even legislating for the tripartite authorities, it is extraordinary that we are legislating for a sub-committee. I support the noble Lord, Lord Eatwell.
My Lords, I am grateful to my noble friend Lord Eatwell for putting before the House a considered set of proposals in which he has clearly invested a great deal of time and thought. His amendments form a coherent package with the purpose of making the Financial Stability Committee into a joint committee of the Bank and the FSA, with further Treasury membership. I respectfully maintain, however, that the model of a joint committee that my noble friend suggests, while being internally coherent, would have an entirely different function from the role which the Government intend the Financial Stability Committee to play. My noble friend has given a strong account of his proposed model. If the House will allow, I will take this opportunity to explain again why the Government are setting up the Financial Stability Committee and why I believe the model set out in the Bill is the correct one.
I should first mention that the Governor of the Bank of England wrote to me towards the end of last week. I can assure noble Lords that the governor is a man of such independence that the idea that he would be directed by a Minister to write a letter is clearly both outrageous and implausible. He has set out his thoughts on our extensive discussions about these issues and I shall refer to some of his comments in due course. The noble Baroness, Lady Noakes, my noble friend Lord Eatwell and the noble Lord, Lord Newby, have received copies of the letter, and I have arranged for a further copy to be placed in the Library of the House.
In Committee, the noble Baroness, Lady Noakes, and the noble Lord, Lord Higgins, asked whether it was necessary to establish the Financial Stability Committee in primary legislation, a question which has again been asked today by my noble friend Lord Eatwell, the noble Lord, Lord Newby, and the noble Baroness, Lady Noakes. The answer, of course, is no. The court already has the power to set up new committees, whether they consist of internal committees such as the already existing Financial Stability Board or sub-committees of the court such as the Transactions Committee.
I take this opportunity to mention that the noble Lord, Lord Higgins, has expressed his regret that he cannot be in his place for this debate on Report. I should like to point out to noble Lords that his absence arises because he is attending a ceremony in The Hague to mark the distinguished services of Lady Higgins, the excellent Judge Rosalyn Higgins, as President of the International Court of Justice, which she has served with enormous distinction. I am sure that all Members of the House will send our best wishes and congratulations.
My Lords, I return to the debate. A question put by the noble Lord, Lord Higgins, goes to the heart of what the Government are aiming to achieve with this clause. It is clear that the Bank does not need a statutory objective in order to ensure financial stability as one of its key objectives. I draw the attention of noble Lords to the Bank of England’s annual report 2008 where on page 1 it states:
“The Bank of England exists to ensure both monetary and financial stability”.
It lists its two core purposes as “monetary stability” and “financial stability”. We can see that, in practice, the Bank of England considers its two main objectives to be equally important, but the current legislation does not reflect this. The 1998 Act gives the Bank a statutory objective for monetary policy, but there is no similar statutory description for its objective for financial stability. Therefore, for the avoidance of doubt, we are placing the Bank of England’s objective in relation to financial stability on a statutory footing. Does that change in any way how the Bank views its responsibilities regarding financial stability? Of course not, but what it does achieve is to ensure that the Bank’s dual responsibilities in relation to monetary policy and financial stability are given a similar level of prominence on the statute book. In the light of the prominence of financial stability in the Bank’s current role, and its role in relation to the stabilisation powers contained in the Bill, it is appropriate that Parliament should endorse the arrangements.
In relation to the stabilisation powers, noble Lords will be aware that the Bill provides the Bank with new powers and levers to protect the financial stability of this country. As lead authority in the special resolution regime, in particular, the Bank will play a crucial role in the resolution of failed banks and will have to take decisions regarding individual institutions, often in extremely fast-moving and pressurised circumstances. To support the Governor and the Bank in discharging these enhanced responsibilities, the Government are establishing the Financial Stability Committee. The Bank of England supports this move, as do the Treasury Select Committee in the other place and other interested stakeholders.
Why are we establishing the committee in statute? The answer is that the Government have placed the FSC on the face of the Bill in order to highlight and set the role that they expect the committee to fulfil; namely, the crucial task of strengthening and underpinning the Bank of England’s activities in relation to financial stability. Placing the arrangements on a statutory footing ensures that there is no doubt about the Bank’s functions in this important area, and this gives Parliament the opportunity to debate, determine and endorse these arrangements. As the Governor explained in his letter,
“the FSC will provide an effective means of focussing and managing the various strands of the Bank’s FS work”.
Last week, several noble Lords asked questions concerning the exact status, composition and role of the Financial Stability Committee. I shall attempt to explain why the Government believe that the model in the Bill is the appropriate one. The first area of debate is when the FSC should be established as a committee of the Bank in a similar way to the MPC: as a sub-committee of the court or in a different structure altogether, for example, as in my noble friend’s suggestion of a joint committee of the Bank and the FSA. The Bank’s financial stability objective is ultimately the responsibility of the court. It is the court that manages the Bank’s affairs, and it is the court that will set the strategy for the Bank to follow in pursuit of its financial stability objective. As the Governor emphasises in his letter,
“implementation of the FS strategy has implications for the Bank’s balance sheet, risk and control environment”.
They are integral to the heart of the operations of the Bank and its governance structure. It is therefore vital that the Financial Stability Committee be integrated into the Bank’s governance structure in such a way that there is a direct and accountable relationship between the Court of Directors and the committee. For these reasons, I believe it is right for the FSC to be a sub-committee of the court and, as I will highlight when I come to the composition and membership of the FSC, its position as a sub-committee of the court will also allow it to utilise the experience and knowledge of the non-executive directors of the court.
I now move on to the question of the role and functions of the committee. As I have mentioned before, the Government’s aim in establishing the FSC is to provide the Governor of the Bank of England with a source of support and expert advice in discharging the enhanced responsibilities and tools that the Bank will have at its disposal. These new responsibilities are, as noble Lords will be aware, lead responsibility in the SRR and statutory oversight of payment systems in addition to those tools and levers that the Bank can and does already use to protect financial stability.
In Committee the noble Baroness described the FSC’s functions as a ragbag, and she used the term again today. I cannot agree with her. New Section 2B(2)(b) to (e) give the FSC functions in relation to the Bank’s role in the SRR and its oversight of inter-bank payment systems. Subsection (2)(f) allows the Court of Directors to delegate further functions to the FSC. As highlighted by the governor in his letter, this will allow the court to give responsibility for some of its existing tools to the FSC. These could include responsibility for decisions relating to the provision of liquidity, decisions which I understand are currently undertaken by another sub-committee of court, namely the transactions committee.
Finally, subsection (2)(a) of new Section 2B gives the Financial Stability Committee a role in influencing the Bank’s financial stability strategy. It seems completely logical to me that a committee that is intended to be the main focus of financial stability expertise within the Bank of England should make recommendations to the court on how the Bank aims to fulfil its responsibilities in relation to financial stability. Therefore, the functions of the FSC, as set out in Clause 235, are a coherent package to allow the committee to advise and monitor the practical implementation of financial stability measures.
Last week, the noble Baroness, Lady Noakes, was of the opinion that the committee cannot advise on and monitor the use of the stabilisation powers at the same time. With respect, I suggest that it would be entirely normal for a committee that includes non-executives to advise an institution or corporation on a specific course of action and later evaluate whether the course of action has been successful. I do not agree that this represents a source of contradiction.
I envisage the working of the FSC involving executive members of the committee and others providing details of the current situation. This could be an institution in the SRR, or a more general concern about a threat to stability. The committee shall discuss possible options in regard to the situation at hand, with the non-executives contributing their experience and knowledge and the executives providing operational and practical input.
The committee shall, as a whole, come to a decision on the course of action that it would advise as the most appropriate in the circumstance. However, the Bank’s executives will ultimately take the decision on what action the Bank will take, and as such they are accountable to the court for their decisions. The Financial Stability Committee will assist the court in this regard with its monitoring role. This will be a dynamic process. The committee's expertise and advisory capacity will be enhanced by its role in monitoring the use of the tools.
I hope this will help illuminate to the House why I believe that it is entirely right for the committee to both advise on and monitor the Bank’s action in respect of financial stability. The noble Baroness also asked who the committee would be advising under subsection (2)(b) and (c). It is clear that on a day-to-day basis the FSC will be advising the Bank’s executives. It is they who will need to make decisions on how to deal with individual institutions, in what may be fast-moving situations.
The governor and his executives derive their authority from the court. Their responsibilities are delegated from it, and they are ultimately accountable to it. However, both the FSC’s work and the executive’s action will need to be consistent with the strategy that the Court of Directors agrees as the best strategy for fulfilling the financial stability objective, and it will be the court that holds executives and the committee to account for supporting it in meeting that objective. Ultimately, though, some decisions in relation to financial stability will be of sufficient importance and magnitude that the Court of Directors considers that the decision should be taken by the entire court. So, in some cases, the sub-committee will be advising the court itself. This is a model with which one is familiar in the private corporate sector.
Moving on to the subject of membership of the committee, I am pleased to note that one thing that my noble friend Lord Eatwell and I agree on is the need to keep the committee relatively small. There has been quite extensive debate, both here and in the other place, on the question of whether the FSC should comprise a fully executive membership, a totally non-executive membership, or some variation between the two extremes. The Government’s aim in creating the FSC is to provide the Bank of England with an internal forum where executives and non-executives can come together to discuss financial stability matters. The core executive presence will be balanced with a strong non-executive membership and, if deemed appropriate, co-opted members—non-voting members—bringing their outside expertise and insight to the committee.
In addition, the Treasury will have a non-voting representative, not only for the reasons that I explained last week, but also, as the Governor points out in his letter, because it is,
“legitimate for the Treasury, as the Bank’s shareholder and as the Ministry responsible for public finances, to be aware of discussions that potentially involve significant amounts of public liabilities”.
But let me be clear: I am certainly not saying that attendance at the FSC’s meetings should be exclusively confined to these core members.
The noble Baroness, Lady Noakes, asked last week why we were excluding the senior executive directors from the committee. My answer to her is that nothing in the Bill would stop the FSC from inviting other Bank executives, as may be appropriate, to attend all or part of meetings. There is no limit to the number of additional non-voting members that can also be co-opted to the committee. As I said in Committee, the most senior executive with responsibility for financial stability, the deputy governor, is a full member of the FSC, and I would expect the committee to invite other executives to attend as appropriate.
Several noble Lords expressed other concerns about the proposed membership, specifically that the FSA is not represented and that there are no fully independent members. The Government agree that the committee should have recourse to whatever external expertise it considers necessary. Again, this is provided for by new Section 2B(4), the power allowing the committee to co-opt other non-voting members. As the Governor says in his letter:
“It can of course invite the FSA to attend, or anyone else who might help its deliberations, and it will want access to the widest range of information and expertise”.
However, the Governor goes on to emphasise that the FSC is, ultimately, part of the Bank. I would like to underline that point. The committee is a sub-committee of the court of the Bank. It is designed to support the Bank in the Bank’s enhanced role in protecting financial stability, which includes the management of new policy responsibilities and, in particular, its lead role in the special resolution regime.
In saying that, I do not mean to suggest that we do not want the tripartite authorities to work together—forfend that be the case, because it is critical that they do work together. I am simply saying that the committee’s functions relate to the Bank’s functions within the tripartite arrangements, and as such it is appropriate for this to be a Bank committee, not a joint committee. I think that the Governor’s distinction between internal co-ordination within the Bank and co-ordination between members of the tripartite is very helpful. I entirely agree with him that both are important and necessary, but that we should be careful not to confuse the two mechanisms.
The letter from the Governor emphasises the numerous formal and informal channels through which the tripartite authorities can already work, including the tripartite standing committee. The Governor is right to conclude that we do not need a second tripartite standing committee. The function of the Financial Stability Committee is to assist co-ordination within the Bank. I am also glad to endorse a further point that the Governor makes: in meeting the financial stability objective, the Bank works within the tripartite framework.
The tripartite arrangements are set out in a memorandum of understanding. This is sufficient, clear and transparent. The Government’s view is that the tripartite working arrangements are better encapsulated in a Memorandum of Understanding than by being codified in statute, as this provides a necessary degree of flexibility to refine and enhance the arrangements from time to time. Indeed, we have committed to reviewing these arrangements once the provisions of the Bill have been put in place. In any event, as I have outlined, the Financial Stability Committee sits within the Bank—we do not intend it to be a tripartite body.
I hope that with this rather lengthy explanation I have adequately laid out the Government’s thinking behind the creation of the Financial Stability Committee. The decision about how much detail to set out in statute in relation to matters such as this is, of course, a matter of judgment. During last week’s debate the noble Lord, Lord Higgins, asked me why we were specifying such minute detail about the FSC in the legislation, while at the same time the noble Baroness, Lady Noakes, asked why the Bill is silent about the workings of the committee. I am afraid that this is one of those occasions where I will be unable to please everyone. I believe that by setting out the role and membership of the FSC in legislation, while leaving the flexibility to delegate additional functions and co-opt additional members, we have hit the right balance.
As I said earlier, we continue to make efforts to ensure that the tripartite authorities continue to work well. Noble Lords pointed out an apparent inconsistency between the FSA urging banks to conserve capital and the Treasury urging them to lend. I do not see an inconsistency; there is common language, and the FSA, the Bank of England and the Treasury have achieved that through the tripartite system. For instance, the variable scalar—the noble Baroness asked me in a previous debate to define and explain this, which I failed to do but will happily do now: it determines capital through cycles rather than at a single point of time—was evidence of the tripartite authorities working effectively. I add that it is also evidence of the Treasury working effectively to conserve stamps because now I do not have to write to the noble Baroness explaining what a variable scalar is, although I have a suspicion that she knew and was just testing me, rather than seeking the information.
I say to the noble Lord, Lord Turnbull, that the ability is there to co-opt members, which should allay concerns about a “gene pool”. I agree with his observation about an organisation where the route to the top appears to be confined to people within it. That is a generalised organisation; I would not limit it to the Bank of England. I would simply say that any organisation is enriched by ventilation, as he described it—by having external people come in. The recreation of a new court with predominantly new members will be an important part of refreshing the Bank.
The Financial Stability Committee and its explanation in statute will address some of the shortcomings of the Financial Stability Board. The chair of the Court of the Bank of England and the executive were never entirely clear about the nexus between the board and the independent members of court. The Financial Stability Committee makes clear that this is a joint committee that brings together the external viewpoint of the independent members of court with the internal executive of the Bank.
The suggestion was made that we should abandon the concept of the Financial Stability Committee as further regulation will be forthcoming in due course. That may well be the case. The situation we have been through means that it is incumbent on us to look at existing regulatory arrangements, and I share with the noble Lord, Lord Northbrook, the hope that we will see the noble Lord, Lord Turner, participating in those discussions in this House. However, it would be unwise for us to delay this necessary and important addition of a new committee at the heart of the Bank in anticipation of legislation that may or may not be produced at some later stage.
Taking my guidance from my noble friend’s suggestion that I should be humble, I humbly invite my noble friend to withdraw his amendment.
My Lords, I am grateful to noble Lords who took part in this—I was going to say “short” debate, but it has become rather a long one. I am also grateful that everyone who spoke, except one, agreed with the force of my argument—that particular one being the Minister.
I was a little surprised to be lobbied by the Governor of the Bank of England, although in these febrile times I probably should not use the word “lobbied”. The governor should have declared his interest.
With regard to what the Minister said, the notion that there should be a financial stability objective is entirely shared. I am sure that the Bank of England has thought that financial stability has been its objective for the past 300 years, and maybe it is a bit surprised that it has to be told again—but never mind; if it is deemed to be neater to ally the financial stability objective with the monetary stability objective, that is fine.
I still do not understand the particular statutory need for the Financial Stability Committee. The core of the governor’s argument was that the committee will be advising the court and the executives are responsible to the court, so the court is the key strategy-making organisation and is responsible for the balance sheet and so on. In my structure the court would have received advice not just from the independents but from the FSA—it would have had a wide range of advice coming into it, on which it could perhaps have made more effective decisions.
One element of my amendment that the Minister did not mention at all is that the amendments would make financial stability an overt objective of the Financial Services Authority. He did not address that issue or indeed the fact that it would be the role of the Financial Stability Committee, as I formulate it, also to advise the board of the Financial Services Authority. The Minister told us forcefully last time that financial stability was the responsibility of the Financial Services Authority; he said it was embodied in the Financial Services and Markets Act. If that is so, why does the authority not also require a committee to advise it? I suggest that the structure I have proposed is the economical way to provide a wide range of advice both to the court and to the board of the Financial Services Authority, and would be an efficient means of securing the integration of financial stability policies across the piece for both the Bank and the authority, which is what the country really needs.
It is clear from both the governor’s intervention and the Minister’s remarks that the Government are not going to accept any change on this. It is also clear, I notice with interest, that the Minister accepts the argument that this may be a temporary arrangement, looking forward to the more coherent structure of regulatory legislation and institutions which is likely to come later this year. If this is indeed a temporary arrangement and the Minister has gone a tiny way towards accepting the validity of the arguments on the need for co-ordinated activity, it would be churlish of me to divide the House in those circumstances. I therefore beg leave to withdraw the amendment.
Amendment 87 withdrawn.
Amendments 88 to 98 not moved.
Consideration on Report adjourned until not before 8.30 pm.