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Banking Bill

Volume 707: debated on Tuesday 3 February 2009

Report (2nd Day)(Continued)

Clause 235: UK financial stability

Amendment 99

Moved by

99: Clause 235, page 120, line 20, after “interest” insert “(including any reasonably likely future interest)”

My Lords, in Committee, the noble Baroness made several eminently sensible probing observations on the provisions. I promised to take them away and come back with amendments on Report. As promised, Amendments 99 and 100 will modify new Section 2C(2), to be inserted into the Bank of England Act 1998, to broaden the circumstances in which members of the FSC must disclose interests. That will lead to a member being unable to vote unless the committee resolves that there is no conflict of interest.

Under the amendments, the member must now disclose any interests in a business or dealing that falls to be considered by the committee regardless of whether the interest is direct or indirect or a current or likely future interest. That is the appropriate scope of the provision and I am grateful to the noble Baroness for helping the Government to improve the Bill in that way. Last Monday in Committee, the noble Baroness also asked me whether subsection (3) was necessary. On consideration, with the amendments that I have just outlined, it overlaps to a great extent with the mechanisms just discussed concerning disclosure of interests. Subsection (3) goes further, in that it also requires a person to withdraw from debates on matters which touch or concern him or her, but that is simply good committee practice and the committee, as master of its own procedure, can adopt such practice if it wishes. Therefore, Amendment 102 will remove subsection (3). I am very grateful to the noble Baroness for bringing those two issues to our attention and I beg to move.

Amendment 99 agreed.

Moved by

100: Clause 235, page 120, line 21, leave out “with the Bank”

Amendment 100 agreed.

Amendment 101 not moved.

Amendment 102

Moved by

102: Clause 235, page 120, leave out lines 29 to 32

Amendment 102 agreed.

Amendment 103

Moved by

103: After Clause 235, insert the following new Clause—

“Debt: assessment of adequacy of resources

After section 2C of the Bank of England Act 1998 (Financial Stability Committee: supplemental) as inserted by section 228 above insert—

“2D Debt: assessment of adequacy of resources

(1) The Bank of England must write to the FSA twice a year, setting out its assessment of financial stability and the FSA must have regard to that assessment in the exercise of its duties in respect of paragraph 4 of Schedule 6 to the Financial Services and Markets Act 2000 (threshold conditions: adequate resources).

(2) The Bank of England must publish its letter and the FSA must publish its response.

(3) The letters referred to in subsection (2) should not deal with the position of specific financial institutions or other persons.””

My Lords, the amendment adds a new clause after Clause 235. This new clause creates a new mechanism between the Bank of England and the FSA and contributes to a public debate and understanding of the state of banking. In doing so, it responds to calls made by both the Governor and the Deputy Governor of the Bank of England for, to use the governor's words,

“an additional instrument to stabilise the growth of the financial sector balance sheet”.

Of course, the instrument exists at a micro-level in the form of prudential capital ratios agreed by the FSA with individual banks, formally through the threshold conditions provided for by the Financial Services and Markets Act. The governor was referring to a macro-policy instrument, which is what Amendment 103 is intended to deliver.

I do not think there is any doubt that the banks’ balance sheets were over-leveraged. Indeed I have heard the noble Lord, Lord Myners, talk about this. There is also no doubt that the analysis was there to be seen, for those who took the trouble to look at the available data. Therefore, this is not an issue of available data but more a lack of focus of what the data meant in policy terms.

The Bank of England has been issuing a financial stability report twice a year, but I do not believe that it has had much influence. It is a rather academic publication. It does not reflect clear policy positions of the Bank of England and is not designed to be, nor is it in fact, a document which sets out to change policy.

When the Bank of England ran banking supervision, there was an automatic connection between the Bank’s macro analysis and its micro decision-making, because only one institution was involved, culminating in the responsibility of the governor himself. That of course disappeared when the Government chose to transfer banking supervision to the FSA. I should stress that I am not in the camp of those who want to return banking supervision to the Bank. I believe that, in principle, the FSA should be the better body. If it gets its act together, it ought to do the job well. However, I also believe that we need to be more specific about the linkage between the banks’ judgment about the state of banks’ balance sheets, and the levels of debt in the country, and the FSA’s responsibilities to translate that into practical regulatory action.

There should also be greater public awareness of the issues. These issues are too important to be discussed only behind the closed doors of the tripartite arrangements. My amendment, which is a gamma version of the beta test version that I moved in Committee, requires the Bank to write to the FSA twice a year, setting out its assessment of financial stability. The FSA then has to have regard to that when carrying out its bank supervision. The Bank’s letter to the FSA and the FSA’s response would be published.

This amendment avoids a criticism of the version that I moved in Committee in that proposed subsection (3) specifically avoids referring to specific institutions. That was never part of my intention. Rather, the FSA should respond in terms of the general approach to tightening or loosening capital or liquidity requirements.

The Minister said in Committee that this mechanism would make life uncertain for regulated firms. The reverse should be the position, because of the transparency of the process. If all of the analysis and debate were kept secret within the tripartite authorities, which is what the Minister argued for in Committee, that would generate uncertainty for firms. The plain fact is that firms should expect to have their commercial policies changed as a response to the overall analysis of developments in financial stability. The fact that they were not checked at all during the decade or so of balance-sheet expansion was a blot on the history of financial regulation in this country, and that is exactly what we need to address. I beg to move.

My Lords, I support my noble friend’s amendment. We live—is it supposedly?—in a sophisticated democracy, and it is a fault of Governments that they do not explain to the electorate what is happening to them. That is very much in evidence at the present time. The transparency inherent in my noble friend’s amendment is a very important issue and we should support it.

My Lords, this amendment, similar to the one that the noble Baroness moved in Committee, would create a requirement for the Bank of England to write to the FSA on the subject of financial stability. The FSA would be required to respond to any such letter and have regard to it when determining whether the banks are meeting their threshold conditions with respect to the adequacy of their resources. Judging from the title of the proposed new clause, I see that such communication is to have regard to the level of debt.

In Committee, the noble Baroness indicated that the purpose of her amendment was to address what she identified as a “policy instrument gap” between the Bank of England and the FSA. She suggested that the macro-level analysis of the Bank of England was insufficiently integrated with the work of the FSA in regulating individual firms. If noble Lords will allow me, I should like to address this specific concern before turning to the details of the proposals made by the noble Baroness.

It is clear that we are in challenging times. It is also clear that the events of recent months were unanticipated; indeed, they were not in their entirety predicted by any central banker or regulator that I am aware of. With respect, I do not believe that our present difficulties have emerged as a result of the lack of policy instruments of the kind that the noble Baroness suggests. Nor do I believe that any major failure of the UK’s regulatory framework has led directly to the difficulties facing our financial system today. All countries are facing serious economic challenges, regardless of their regulatory frameworks and regardless of whether they have single or twin peak regulation. To lay the blame for the economic problems that we face on the nature of the regulatory framework of any individual country seems to me to be mistaken.

I do not believe that any “policy gap” exists in the lines of communication between the Bank and the FSA, but I recognise the concerns raised by the noble Baroness, and I am grateful to her for raising this issue again. I hope that I can reassure her both on the general point with regard to the effectiveness of the co-operation between the FSA, the Bank of England and the Treasury, and with regard to some of the specific policy issues that she raised in Committee.

When we considered this point in Committee, the noble Baroness drew attention to specific issues that she felt had been insufficiently considered by the tripartite authorities. In this regard, she mentioned the views of the Deputy Governor of the Bank of England on the financial cycle. I pay tribute to the tremendous work done by Sir John Gieve as Deputy Governor of the Bank of England. He will be retiring shortly, but he has served the Bank in an extraordinary capacity in the most challenging times and often in quite hostile circumstances. I commend his contribution to the work of the Bank.

I assure noble Lords that the tripartite authorities are considering very carefully the implications of the current financial crisis, including the observations by Sir John Gieve and the other deputy governor, Charlie Bean. They have both identified excessive debt as a causal factor in the current crisis, but they have not called for amendments along the lines of those suggested by the noble Baroness, Lady Noakes.

With respect, I believe that the noble Baroness is mistaken when she indicates that the current arrangements for the sharing of views within the tripartite, on this or any other issue, are insufficient. As I indicated in Committee, I strongly believe that both the Treasury and the FSA should have full access to the advice and views of the Bank of England when taking decisions in pursuit of their respective functions, but both the FSA and the Treasury already have sufficient access to the wisdom of the Bank. The tripartite authorities meet on a regular basis—monthly, weekly and at times daily—at both the principals’ and the deputies’ level, and there are ample opportunities for the Bank to raise any concerns that it may have about debt or any other matter that it believes is important to financial stability. In short, the Bank of England lacks no opportunity for voice.

I hope that I have satisfied the noble Baroness’s concerns about the need for a new clause such as the one that she proposes. I should like to turn now to the difficulties inherent in the proposed new clause. Fundamentally, it would require the Bank and the FSA to publish letters. This returns to the difficult tension between transparency and the need to avoid undesirable impacts on the market; we will return to that tension later on Report. Some occasions may call for a frank exchange of views between the Bank and the FSA which, from the perspective of market sentiment, it would be imprudent to subject to publication.

Perhaps I may follow up on the concerns I raised about the noble Baroness’s amendment in Committee. Her new clause rightly reflects the fact that published letters should not deal with the position of specific financial institutions or other persons. However, given the Bank’s role as a lender of last resort, the most useful advice that it could offer—and, as I said, already does offer—to the regulator regarding financial stability is highly likely to relate to specific institutions or other persons who are in receipt of liquidity or other financial assistance from the Bank. Clearly, that could not be made public. Therefore, any information in a public letter would have to be based on aggregate-level assessments of debt in the financial system as a whole.

It is hard to know how the FSA could meaningfully respond even to such an aggregate assessment without making reference to specific firms. The FSA conducts its supervision on a risk-based basis, taking into account specific factors that affect each firm individually. It would have to evaluate the Bank’s advice in this same way and would have to consider the impact of the Bank’s aggregate assessment on each institution it supervises. Noble Lords will remember that this was one of the principal objections I raised to this clause in Committee. The regulator’s independence in making judgments about individual firms would be undermined if it had also to have regard to aggregate-level judgments made by the central bank. Putting aside that fundamental objection for the moment, I fail to see how the FSA could publicly respond to the Bank in any terms other than that it had noted the Bank’s advice and would take it into consideration.

While agreeing with the need for the tripartite authorities to work effectively together, and with the principle of information-sharing between them, I cannot agree that this new clause provides a suitable mechanism. However, it may be of some reassurance to note that in Clause 243 we are taking steps to ensure that the Bank of England is empowered to share with other members of the tripartite specific information about individual financial institutions and with regard to financial stability. Tripartite co-operation can only be enhanced as a result. I strongly believe that the provisions of Clause 243 will address any remaining concerns that noble Lords may have.

In addition, I would of course accept that there are lessons to be learnt from the financial crisis. Indeed, regulators the world over are striving to learn them. Here in the UK, the FSA has embarked on an ambitious supervisory enhancement programme in the wake of its report on Northern Rock, and the noble Lord, Lord Turner, is conducting a further review of the way in which the authority carries out its functions. The Bank of England, too, is undergoing change as it steps up to take on the new responsibilities which this Bill confers on it, particularly with regard to the special resolution regime. I can assure the noble Baroness that the tripartite authorities are active, engaged and co-operating closely to address the challenges to financial stability that we currently face. There is no need for new public reporting structures to be introduced to make this process of collaboration function.

In closing, the noble Baroness, Lady Noakes, made reference to the Bank of England’s financial stability report. Although that is a high quality document, it tends towards the academic. It is not necessarily read by the right people and the Bank of England is working hard to ensure that it gets into the hands of independent directors, heads and members of risk and audit committees, rather than into academic libraries. I hope that the Bank might move towards the less Delphic style of communication that the governor himself evidences in oral evidence to the Treasury Select Committee and in his speeches. I hope that the Bank’s financial stability reports might also learn from the examples I cited. I do not believe that a report of the sort envisaged in this amendment would be appropriate. On that basis, I ask the noble Baroness to withdraw her amendment.

My Lords, I am disappointed by the Minister’s response, which I could characterise as the not-invented-here variety. He said that banks’ balance sheets were not to blame for the financial crisis. I did not suggest that what had happened over the past decade or so on banks’ balance sheets was to blame. However, as the regulatory authorities missed a trick in their regulation of banks’ balance sheets during that period, there is a good question to be asked about why that was.

The Minister talked about all these interactions in the tripartite authorities. There is a big issue about how effective those interactions are and the Minister will just have to accept that many of us are deeply sceptical about it. We are not clear whether there is a meeting of minds—whether, if the Bank says something, it is heard, in a deep sense, by the FSA. There is no evidence of that to date. The issue is not so much about what happens behind closed doors but, as I tried to say in my amendment, about getting a greater public debate. I do not believe that the financial stability report is the kind of document that could generate that debate. It is a lost cause, if you like.

The Minister said that the most useful advice would relate to stressed institutions, but I do not believe that that is the case. The issue is to make sure that the macro risks, as perceived by the Bank, are fed into the FSA’s own micro-level risk-assessed approach to the individual institutions. As I said, the Governor of the Bank of England, in a speech only last month, referred to the need for,

“an additional instrument to stabilise the growth of the financial sector balance sheet”.

What was the governor referring to? I do not believe that he was referring to more deep and meaningful conversations in the tripartite authorities. I believe that he was referring to something with an external relevance and publication so that the issues are properly raised. It is clear that the Government will have a closed mind to the useful suggestions of the Conservative Party, unless and until they choose to steal them at a later stage and claim them as their own. I will therefore not pursue my amendment further. But it is a great pity. I beg leave to withdraw the amendment.

Amendment 103 withdrawn.

Clause 242 : Weekly return

Amendment 104

Moved by

104: Clause 242, page 122, line 31, leave out “shall cease to have effect” and insert “is amended as follows—

(a) for “on some day in every week to be fixed” substitute “as prescribed”;(b) for “in the next succeeding London Gazette in which the same may be conveniently inserted” substitute “as soon as is practicable subject to the need to protect the public interest.”

My Lords, Clause 242 completely removes the requirement placed on the Bank of England to publish a weekly return, which has been the position since 1844. We can see that there are drawbacks in the weekly publication, but we should be wary of removing information completely from the public domain. No alternative reporting requirement is placed on the Bank of England by Clause 242, so that is what my amendment would do.

In the place of weekly publication, I have proposed two changes to the 1844 Act with my amendment. The first is to allow the Treasury to prescribe the form and frequency of the return, so that it can move from weekly if that is appropriate. The second is to modernise the publication requirement so that the existing requirement to publish in the next London Gazette is replaced by a broader requirement to publish,

“as soon as is practicable”,

but with an important let-out on the basis of public interest. I hope that the Government will not insist on letting the Bank of England retreat into secrecy. The Bank is a public body and ought to be open and transparent. The Treasury should call the shots on publication, not the Bank. That is what my amendment seeks to achieve. I beg to move.

My Lords, Clause 242 removes a requirement laid out in the Bank Charter Act 1844, which stipulates that the Bank of England should publish a weekly return. The weekly return is a one-page summary of the Bank’s monetary assets and liabilities for the week in question. Under the clause, the Bank is no longer required by law to publish such a weekly statement, although, if it so chose, it could still publish such a return and may continue to do so for a period of time.

When we discussed this issue in Committee, it became apparent that the issues underlying the debate were twofold, with the need for transparency set against the need to protect against untimely disclosures that could have a negative impact on market sentiment. If noble Lords will permit me, I should like to begin by addressing some of the points that emerged in that debate.

In Committee, the noble Baroness, Lady Noakes, suggested that the Government were taking an all-or-nothing approach to the transparency of the Bank of England. I reassure noble Lords that that is not the case. The Bank of England has no plans immediately and comprehensively to cease reporting as a consequence of this provision. Rather, it will be empowered to determine an appropriate level of reporting frequency and I believe that it will propose to consult when determining that reporting detail and reporting frequency.

Noble Lords also expressed concern that this step could have a broader negative impact on the transparency of the Bank of England as a public institution. As I indicated in Committee, the Government have a strong commitment to transparency and believe that the free and effective flow of information is vital to efficiently functioning markets, as well as to the trust that is placed in public institutions. Indeed, matters of public interest with regard to the Bank of England are already published by other means.

I reiterate the point that I made in Committee, which was that the weekly return is not needed to ensure that the Bank operates transparently. Other reporting obligations are placed on it, including the requirements to respect Companies Act reporting standards as laid out in Section 7 of the Bank of England Act. I alluded to this in Committee. Furthermore, as I indicated previously, the retention of a legal requirement to produce a weekly return may force the Bank of England to make disclosures that are harmful to financial stability. For this reason, the Government, with the support of the Bank, consider that it is appropriate to revoke the requirement to publish a weekly return and to allow the Bank, after consultation, to decide how it is to disclose such information as is required to maintain market confidence.

In the light of the difficult tension between transparency and the need to retain market confidence, to which I alluded earlier, I have some sympathy with the amendment laid by the noble Baroness. I appreciate that she has carefully considered how to modify the provision in question, but I reluctantly remain of the view that the Bank of England is best placed to determine how to balance the very real tensions to which I have referred.

Noble Lords have previously highlighted the fact that it is unusual for a public institution to determine the level of transparency to which it is subject, but I remind the House that the Bank of England will be doing so under its statutory duty to contribute to the protection and enhancement of financial stability, and that this level of delegation is appropriate, given that duty. Appropriate transparency on the part of the Bank will contribute to confidence in the financial system and I am sure that the Bank will recognise that.

I turn to the technical aspects of the noble Baroness’s amendment. Under the amendment, the reporting of the Bank of England would cease to be a weekly return and would become a periodic return. An effect of the amendment would be that the period would be prescribed by the commissioners of Her Majesty’s Revenue and Customs, given the stipulations of the Bank Charter Act 1844. I assume that that is not her intention. The technical difficulties aside, my objection to the amendment is that it does not answer the Government’s concern that, whenever a return is published, those speculating about liquidity support could still be avidly reading it to determine whether it gives any indication about a bank, or banks, that face difficulties.

The second part of the amendment tabled by the noble Baroness addresses this concern. The amendment would allow some flexibility in the publication time, requiring the return to be published as soon as is practical, subject to the need to protect the public interest. I have great sympathy with this approach and, again, I appreciate the careful thought that has gone into striking a balance between the need for transparency and the need to retain market confidence. Unfortunately, the amendment still does not quite work. If there is to be a periodic return, which in good times is published as regularly as clockwork, and then—for whatever reason—it is decided to delay publication, a chilling signal would be sent that steps were being taken concerning banks. Whatever the reasons for delaying publication of a particular return, it may well have an adverse effect on the market and it would be very difficult to predict what that effect might be.

The amendment fails in so far as it does not manage to reconcile in a workable way the competing concerns of transparency on the one hand and the need to maintain market confidence on the other. At the broadest level, however, this debate is about whether to do away with the requirement to publish a periodic return of the nature of the weekly return or whether to keep some form of requirement for a return. The objections to this amendment that I have outlined would apply more generally to a wide range of any similar amendments. By imposing a requirement specific enough to be meaningful, an expectation of publication is raised and, as soon as a return is not published, or is published with significant redaction, market speculation is likely to escalate. Removing the obligation is, the Government believe, the appropriate way in which to give sufficient flexibility.

I hope that I have reassured noble Lords about the intentions behind this clause. It is an appropriate and proportionate step to enable the Bank of England to take proper control of the reporting process and to avoid a serious failure of market confidence in periods when liquidity assistance has been offered. Given these concerns and the very real difficulties with the amendment, I ask the noble Baroness to reconsider whether her amendment is necessary or desirable.

My Lords, I should like to make a short intervention. I think that the antithesis between transparency and market confidence is out of date. In a reasonably open society with a free media, in the digital age, you cannot maintain the argument that there is a genuine antithesis between transparency and market confidence. I urge the Minister to go back to the Treasury and ask for that matter to be seriously considered.

My Lords, I thank the Minister for his comprehensive reply and my noble friend Lord Eccles for his contribution. The big issue is not as the Minister articulated it; it should be whether the Treasury or the Bank calls the shots. I may well have drafted in HMRC because I had not translated the wording that was in the 1844 Act; I assumed that the successor was the Treasury, but I had not checked that properly. The Minister tried to make the tension between transparency and public interest the issue. It is extraordinary that the Bank has, since 1844, been publishing a weekly return, yet there have been many periods in that time when the Bank has entered into support operations and this issue has never been raised. This issue is being used as a cover for increasing secrecy.

If I were a Treasury Minister, which I am not, I would not let the Bank get away with it. I would keep Treasury control over what the Bank does. Current Treasury Ministers seem content to let the Bank retreat into its own version of secrecy. We do not think that that is a good idea, partly because of the issue of transparency about where what is in effect public money is going, but also in part because the weekly return gives important information about whether the printing presses have been unleashed. In today’s environment, that is important information for all those who want to know what the Bank is up to in supporting the economy.

I can see that I will not change the Government’s set intent. We shall have to see what happens in practice. I beg leave to withdraw the amendment.

Amendment 104 withdrawn.

Clause 245 : Variation of permission

Amendment 105

Moved by

105: Clause 245, leave out Clause 245

My Lords, my Whip was yelling in my ear and I was momentarily distracted, so I apologise. I should say that I had intended to talk about this clause in Committee in a clause stand part debate when it was Clause 238, but in the early hours of last Tuesday morning the clause managed to stand part without my addressing it. I have now tabled an amendment in order to probe the issue.

This clause allows the FSA to vary permissions to carry on regulated activities on its own initiative inter alia where it is desirable to protect consumers. There is nothing wrong with that, but the new wording added by Clause 245 means that the FSA can vary permission in relation to bank A even though the consumer protection is in respect of the customers of bank B. I struggle to see how that might be appropriate, so my purpose for questioning this clause in Committee and again today is to find out what the clause is designed to do in practice. I beg to move.

My Lords, I am not surprised that the noble Baroness has probed this clause, because it is technical in nature. It clarifies an important provision in the Financial Services and Markets Act 2000, specifically Section 45(1)(c). This section gives the FSA the power to vary or cancel on its own initiative a permission that it has granted to allow an authorised person to carry out regulated activities. It allows the FSA to exercise this power in a number of circumstances, such as when the person with permission is failing or is likely to fail to satisfy the threshold conditions or has failed within the last 12 months to carry out the activity to which the permission relates.

Subsection (1)(c) also allows the FSA to exercise its power where it is desirable to do so in order to protect the interests of consumers or potential consumers. Usually in the FSMA, where there is a reference to consumers, this means consumers generally and not just a particular firm, and this is the appropriate interpretation of Section 45. As recent events have shown, that is entirely appropriate. We need to consider the interests of consumers generally, not just on a firm-by-firm basis. Clause 245 would introduce an amendment to subsection (1)(c) to make it clear beyond any doubt that the reference to consumers includes consumers generally. The amendment makes it clear that, for example, the FSA could exercise its powers in the interests of consumers where firm A is conducting investment activities for firm B and is not adhering to regulatory standards, but where the contractual relationship is between firm B and the consumer. It should be noted that the effect of this amendment would relate to any exercise by the FSA of its powers under Section 45 of the Financial Services and Markets Act.

In addition to providing important clarity in relation to banks, which are the institutions on which we are focusing in this legislation, the Government believe that the effect of the amendment should be general in application. It applies in relation to any financial institution that operates by way of permission from the FSA. This is appropriate because the point is one of clarity of the general interpretation. An amendment that applied only in relation to banks would suggest two different meanings to the interests of consumers rather than one, which would create further confusion and uncertainty. I hope, therefore, that the noble Baroness will accept that I have described why the clause sets out a sensible provision and should remain in the Bill.

My Lords, I am grateful to the Minister for his explanation and I beg leave to withdraw the amendment.

Amendment 105 withdrawn.

Amendment 106 not moved.

Clause 253: Supplemental

Amendment 107

Moved by

107: Clause 253, page 128, line 27, at end insert “(in new terms).”

Amendment 107 agreed.

Amendment 108

Moved by

108: After Clause 253, insert the following new Clause—

“Report on investment banking

The Treasury shall, as soon as practicable after the coming into operation of this Act, produce a report which examines the case for separating investment banking from deposit taking, either entirely or as part of a clearly segmented holding company.”

My Lords, this is a revised version of the amendment that we debated in Committee. It would require the Government to produce, as soon as practicable after the Act comes into force, a report examining the case for separating investment banking from deposit-taking, either entirely or as part of a clearly segmented holding company. When we debated this in Committee, the noble Lord, Lord Eatwell, asked the Minister whether he was familiar with the G30 report which had been produced in the previous week. In reply, the Minister said that he would study it as soon as he had the opportunity. Given that I know he spent the entire weekend reading, I hope that he has indeed had the opportunity. In case he has not—and for those noble Lords who equally might not have waded through this extremely technical document—I should like to draw attention to the relevant conclusion of the report which, in typical bankese, states:

“Large systemically important banking institutions should be restricted in undertaking proprietary activities that present particularly high risks”,

and serious conflicts of interest. The report is referring to exactly the problem that we have had in this country with the large banks, which have started life as deposit-takers, become investment banks and have ended up running a casino which has broken the bank. The importance of the G30 report is not simply in the content of the report, but in the fact of who chairs the committee. The committee which produced it is chaired by Paul Volcker and he will be one of the key advisers to President Obama on all these matters in the months going forward. Therefore, one could assume that this matter will be actively considered by the Administration, and not just the regulators, in the United States.

This issue was raised by the noble Lord, Lord Turner, in the Economist’s Inaugural City Lecture on 21 January. He said:

“A crucial issue for regulators is therefore going to continue to be how we regulate the very large and very complex systemically important banks which are too big to fail and which are involved both in narrow banking and in complex treasury and trading activities”.

The precise ways in which we achieve this end will need to be carefully considered. He then said:

“I am not convinced however that this can or should take the form of any absolute separation between institutions”.

It is absolutely clear that the FSA is going to be considering this along with the range of other issues which it is looking at in terms of how to make banking regulation more effective. The assurance which I seek from the Minister is that this should not be thought of by the Treasury as a technical issue to be left to the FSA. It goes to the heart of whether we are going to have a banking system which is fit for purpose in the future and a banking system which is going to have the confidence of the British public. As both the Treasury and the FSA look at a whole raft of ways in which the regulatory framework is amended in the future, I do hope that the Treasury is going to take this matter extremely seriously and not simply leave it to the FSA to look at.

My Lords, this is an interesting amendment. Bringing up the issue of whether the Glass-Steagall Act should be re-enacted is important. In theory, such a report is a good idea, but I think that the problem with some of these investment banks has really been not necessarily whether the model itself is right but often that their levels of gearing have been far too high. That is what has caused a lot of problems for these investment banks. It is not necessarily a question of whether the investment banking idea itself is wrong. I support the principle of the amendment.

My Lords, the noble Lord, Lord Newby, raises one of the issues that will not go away and has to be examined in the immediate future. My only concern with his amendment is that it examines the case for separating. I would be rather more neutral on that and would wish to examine whether or not there was a case for separating. The noble Lord, Lord Newby, is prejudging the answer in the way that he frames his terms of reference; we would not be so definite in that.

My Lords, I am sorry the noble Baroness feels that a report examining the case “for” prejudges the issue; surely in examining the case for, one looks at the arguments on both sides. One inevitably has to phrase it in that way to look at the arguments for a change from the status quo.

I shall briefly support and amplify the case made by my noble friend. Why on earth does our state-controlled bank, RBS, have seven branches in Kazakhstan? Is that a prudent or proper use of taxpayers’ money? Barclays Capital, particularly its toxic paper machine that generated so many of these strange pieces of paper, was responsible for devising and rolling out Granite, which did so much to let Mr Applegarth and his cronies borrow many more millions than they should have been able to and drive Northern Rock even deeper into the mire. The investment banking operations of banks such as Barclays can create and accentuate serious systemic risk in our basic banking system.

Three of the world’s five largest banks are based in London: Barclays, RBS and HSBC. The noble Baroness, Lady Noakes, has not mentioned it now but I saw in the Financial Times today a rather clever soundbite from Mr Osborne asking whether we want banks that are “too big to bail”. I did not see where that was leading, though; it would be interesting, if this amendment were agreed to or followed up, to see what it meant.

Britain’s banking system is like a car ferry carrying quite a few cars but with three enormous articulated lorries careering around on the upper deck. It is very likely to keel over and stall.

My Lords, in Committee the noble Lord, Lord Newby, eloquently articulated the arguments both for and against the division of commercial and investment banking functions from one another. This is an important and complex issue that is the subject of much current debate. I welcome the opportunity to discuss these issues once again, but I say up front that this is not an issue on which the Government should be required to produce a report.

The utility of the universal banking model, compared with separate and distinct institutions conducting investment and retail banking, is being questioned at present, not just by Governments but by markets themselves. Similarly, a range of international institutions and commentators are addressing these very questions. In last Monday’s debate my noble friend Lord Eatwell referenced the Group of Thirty report that was published on 15 January. I was not familiar with that report then but I understand it suggests that large, systemically important banking institutions should be restricted in undertaking proprietary activities that present particularly high risks. As the noble Lord, Lord Newby, informed the House last week, the OECD has voiced similar support for the general proposition that banking activity—the taking of deposits and the making of loans—should be separated from other types of more speculative financial activity.

Others may not share that view. The noble Lord, Lord Turner, said in his speech at the Economist’s Inaugural City Lecture on 21 January that he was not convinced that there should be an absolute separation of investment banking from retail or narrow banking. The noble Lord, Lord Newby, will remember bringing up some of the counterarguments himself at our debate last Monday, although I do not mean to suggest that he was putting these forward as his own view but rather to show his acknowledgement of the breadth of the argument. I expressed in Committee some sympathy for the concepts of the narrow bank and the broad bank.

This is fertile ground for further debate, which will take place not least of all in the report that we are expecting from the noble Lord, Lord Turner, in his reflections on the role and future of the FSA and in particular how it will flex its regulatory requirements to reflect differences in risk. There is now a broad acceptance that the capital required against trading activities was too low and the capital required against conventional narrow banking assets was too high and therefore there was an incentive to broaden the activity of a bank. There are worthy issues here for debate and discussion. Even if we do not mandate the separation of the activities we can acknowledge that they had fundamentally different risk characteristics that should be recognised in regulation and capital requirements. Incidentally, that is one of the features that the governor had in mind when he talked about further instruments when he spoke recently in Nottingham.

I should like to reassure the House that the Government, together with our international partners, will be considering the merits of this, and many other issues, in attempting—and, I hope, achieving—the restabilisation of faltering global financial systems. I remind noble Lords that, as announced by my right honourable friend the Chancellor of the Exchequer, the noble Lord, Lord Turner, is carrying out a review on his recommendations for reforming the UK and international approaches to regulation. He will be reporting to the Government in March and, I hope, will have the opportunity of reporting to this House at that time.

His review will cover a range of issues of relevance to the concerns of the noble Lords, Lord Newby and Lord Oakeshott, including UK and international policies relating to: capital adequacy; liquidity; valuation and accounting; rating agencies and the originate and distribute model; market infrastructure in over-the-counter derivatives markets; and remuneration and incentive structures and institutional coverage of prudential regulation: whether recent steps to extend the appropriate accounting and regulatory coverage of near-bank and shadow bank institutions have gone far enough or should go further; and finally, cross-border co-operation and co-ordination, including international regulatory co-operation in non-crisis periods, and the scope for better international co-ordination during individual crises.

The Chancellor of the Exchequer has given the noble Lord, Lord Turner, a wonderful opportunity to redraw the landscape of regulation and stimulate debate and discussion around many issues, including those touched on by the amendments of the noble Lord, Lord Newby.

The major firms about which the noble Lord, Lord Newby, is rightly concerned are global, and therefore this issue should be addressed on a global stage. It is appropriate that international bodies such as the OECD and G30 are taking this work forward, engaging with Governments around the world. So the UK Government will, in communication and co-operation with our international partners, as well as through ongoing work by the FSA and the tripartite authorities, carry out their assessments of the pros and cons of this complex issue. Should action in this direction be needed, the next step to be taken would of course be to publish proposals on the matter for consultation and debate with stakeholders in the UK. However, I do not believe that this proposal for a report on the matter needs to be placed in the Bill and therefore I invite the noble Lord to withdraw his amendment.

My Lords, I am grateful to the Minister for that reply. My concern is not simply that the matter be debated, which it will be, but that the responsibility for deciding on changes within banking regulation should not rest only with the noble Lord, Lord Turner. He is producing reports, but the responsibility for what happens should rest in no small measure with government and Parliament.

A major problem that we have faced in recent years is that the FSA has not been seen to perform its functions as Parliament intended in the Financial Services and Markets Act 2000. Although we have great faith in the noble Lord, Lord Turner, we also have memories and will want to scrutinise the changes in the banking regime that the noble Lord will recommend. With that caveat, I beg leave to withdraw the amendment.

Amendment 108 withdrawn.

Amendment 109

Moved by

109: After Clause 253, insert the following new Clause—

“Banking in post offices

The Secretary of State shall establish a national bank which shall operate from both directly managed post offices and sub-post offices throughout the United Kingdom.”

My Lords, I said when we debated it at a late hour in Committee that I would return to this amendment. Although my noble friend Lord Davies is always eloquent and well informed, he generalised on what the position is now rather than being more radical and going for a national or people’s bank. However, I was pleased to see in the press at the weekend, which one must sometimes read to learn what is being thought, that we have the support of my noble friend the Secretary of State for Business, Enterprise and Regulatory Reform. I saw him here a little while ago; I thought he might be coming to hear this debate. However, the press was saying that he was in favour of a people’s bank, so I hope that I am pushing at an open door tonight. I shall listen with great interest to what my noble friend has to say when he replies.

I emphasise again that we are talking about a fully fledged bank that could provide all the financial services. That is a radical step, so I hope that we are going down that route. There is no doubt that many people trust the Post Office who do not trust banks. Indeed, they would not even contemplate going to a bank. This will provide those disadvantaged people with that opportunity. It will also bring banking facilities to rural areas. In many cases, no bank is available to them for miles. It will certainly help the elderly, people with disabilities, mothers with children and, of course, those who do not have a car. It would be a great advantage.

We are talking about providing 12,000 branches. The benefits will not only be in rural areas, but the deprived urban areas where many of the most disadvantaged people in our community live. These are people who do not have the advantages of others such as full banking facilities, going online, paying by direct debit or settling bills in one way or another. It is estimated that the poorest in our society are roughly £1,400 per year worse off because they do not have such facilities.

On deprived city areas, I do not think that my noble friend referred to the Post Office card account, which should be modified. It is currently only about withdrawing money that the Government have deposited. We want to see it extended to give its customers a fundamental basic bank account. That would certainly help them. The other people it would help are the small and medium-sized businesses that use the post office. Such businesses would derive even more benefit if a people’s bank was established. We all know that the Government are talking about getting banks lending again. This would certainly be a positive step in that direction. It would get things on the move in that regard.

I do not think that I need discuss again what form this bank should take except to say that we might consider the merger of the Britannia and the Co-op, which deals in ethical banking. However, there are positive signs in the press in this regard. I look forward to my noble friend’s reply. I beg to move.

My Lords, as usual my noble friend makes a powerful case for something that would bring benefits to ordinary consumers and small businesses. It would further the purposes of government in producing new entities which would lend in situations where ordinary banks, if I may call them that, would have more difficulty in doing so.

In a debate on a recent amendment, the noble Lord, Lord Newby, asked whether we would have a banking system fit for purpose in the future. I can think of nothing more fit for purpose than setting up a national bank to operate through post offices in towns and in the countryside, as my noble friend proposes. I hope that the Government will give that proposal a favourable response, even at this late stage of the Bill.

My Lords, we support this amendment. The noble Lord, Lord Hoyle, made a powerful case, especially as regards trust, which I shall discuss in a minute, and ensuring that banking services are available, particularly in disadvantaged areas.

I am sorry that the noble Lord, Lord Mandelson, is no longer in his place. He looked in a few minutes ago. It would have been good to have him listening to this discussion, although we read with great interest the lead story in the Observer on Sunday on this topic, with which he is probably not totally unassociated. Trust is a great problem for our banking system and for the Post Office in particular. The noble Lord, Lord Hoyle, talked about post office depositors who did not have a car. However, if I may put it this way, they are driving, often with their eyes shut, towards a level crossing with no gates, where the red lights are flashing and the alarm bells are ringing about the Bank of Ireland. British savers have already had one serious shock from Icelandic banks where the FSA and the Government failed to warn or act until it was too late. I am afraid that the message from the markets about Ireland is equally chilling.

The other day, the noble Lord, Lord Myners, was a little out of touch with where gilt markets have been lately. I should explain that long-term 10-year bonds in Germany are yielding 3.26 per cent today. They are yielding 3.7 per cent in the UK and 5.57 per cent in Ireland. That means that the Irish Government are having to pay a 75 per cent higher interest rate than Germany to borrow money, and even 50 per cent more than ourselves.

My Lords, I thank the noble Lord, Lord Oakeshott, for giving way. What I said—and I chose my words very precisely—was that the ratio of sterling to bund interest rates saw sterling within the favourable band of the medium-term trend. I was not talking about absolute rates, but rather medium-term relativities. I am in contact with what the gilt market does.

My Lords, the noble Lord is quite right that he went on to say that. What I objected to was the fact that he said that British bond yields were at a 50-year low, which they were a few weeks ago, but not quite now.

Anyway, the key thing for Ireland is the ratio and the very serious warning message that the markets are sending that Ireland and Greece are yielding far more bonds than any other Eurobond. This is important because, similarly, the credit default swap rates for the Bank of Ireland—the rates to insure it, if you like—suggest that there is a chance of between 30 per cent and 40 per cent that it will default over the next few years. That is almost exactly the figure for Kaupthing and Landsbanki of Iceland a few months before they went down. At the time, I was warning and the Treasury was giving me very complacent answers. I am afraid that we have been here before.

I ask the noble Lord to take this on board and to take it up with the noble Lord, Lord Mandelson, regarding his plans. The British state-owned Post Office should stand for total trust for savers, like National Savings. In these extraordinary times in the banking world, as the noble Lord, Lord Myners, has pointed out several times tonight, can we really afford to run the risk of the Post Office’s deposits being placed with a shaky foreign bank by a shaky foreign Government’s guarantee? The Post Office must now find a strong long-term British banking partner—the noble Lord suggested one name, although there are several perfectly reputable strong names in this country—to replace the Bank of Ireland before thousands of savers are either left in the lurch or the British taxpayer is put in the position of having to ride to the rescue of a foreign Government, as in the case of Iceland.

My Lords, I am grateful to noble Lords who have spoken, and I am particularly pleased that my noble friend Lord Hoyle had support in the debate. I know that two noble Lords who would have spoken had trouble getting here, due to the weather, otherwise my noble friend would have found considerable support from our Back Benches. I appreciate the fact that my noble friend Lord Wedderburn committed himself in support of a sustainable Post Office operation. That is exactly what the Government want.

We have taken a number of actions to support that goal. Over the past few years, we have worked with the major high-street banks to ensure that a wide range of banking facilities is accessible through Post Office branches. The most recent FSA guide indicates that 17 providers’ basic bank accounts can be accessed at the Post Office. In addition, current accounts from a number of building societies and banks are accessible at the Post Office. Furthermore, the Post Office has its own brand of banking services. Again, I hear what the noble Lord, Lord Oakeshott, has said; he made that point last week in Committee and he has made it again. I know it is a serious point, which we will of course take on board. However, he will also appreciate that at present the Post Office is able to offer its own-brand banking services, operated via a joint venture with the Bank of Ireland. That has been a considerably successful activity in those terms.

The noble Lord, Lord Oakeshott, issued a warning which the Government will take seriously, and I assure him that at this stage the Government do not share his profound anxieties about the position regarding the Bank of Ireland, although I take note of the pointers that he indicated. The Post Office continues to deliver a number of government services. For instance, last year the Department for Work and Pensions renewed the contract with the Post Office to deliver benefit payments through an enhanced Post Office card account. My noble friend Lord Hoyle said that that was too limited in its operation. There are ways in which extension could occur and we will certainly look at them.

I will mention also that, in the Pre-Budget Report last year, we announced that the Post Office would provide the savings gateway account programme to encourage saving for people on benefits. As my noble friend rightly said in his opening speech, the Post Office reaches parts that other banks have difficulty in reaching. It is a people’s service for many who otherwise would not conceive of themselves as able to open a bank account. It is all the more meritorious for that. The Post Office also provides a child trust fund, a Christmas club and savings stamps.

The noble Lord, Lord Oakeshott, correctly observed that my noble friend Lord Mandelson was here with us for a short period this evening. I think that he was aware that this issue was coming up. Of course it is the case that he has deliberately indicated the extent to which he wants to look progressively and positively at opportunities for the Post Office.

Often, one looks with a shudder on Report stage, when it falls so quickly after Committee, because one has nothing fresh to say about amendments that have remarkable similarity to those in the debates of the preceding week. However, I am blessed this evening, because whereas I might only have been able to reiterate the potentialities of the Post Office that I identified last week when I had to reply in the debate, I am instead able to give much clearer assertions of the Government’s intention to enhance the role of the Post Office.

The noble Lord said that he wanted to see a stronger role for the Post Office, and this is something that we are working on. My noble friend, who always keeps a close eye on parliamentary procedures, will also know that the Select Committee on the department in the other place has been enjoined with the task of looking at the opportunities that the Post Office could develop.

Those two important developments give a clear earnest of the Government’s intent to respond to the motivation behind this amendment. I am very glad that my noble friend raised the issue this evening. It is a very important debate and there will be other opportunities when undoubtedly it will be taken forward. In the mean time, I hope that I have given a sufficiently positive reply for him to withdraw the amendment.

My Lords, I was very interested in the positive reply given by my noble friend. He was endorsing what I read in the Observer that my noble friend Lord Mandelson had said, namely that we are moving towards a people’s bank. I am very pleased about that. I am glad to accept that he has shown us a green light and am pleased to withdraw my amendment.

Amendment 109 withdrawn.

Amendment 110

Moved by

110: Before Clause 254, insert the following new Clause—

“Review of Act

(1) The Treasury shall appoint an independent person to conduct a review of the operation of this Act no later than 3 years after it comes into effect.

(2) The review is not to be concerned with the general policy to which the Act gives effect.

(3) The person conducting the review must seek the views of all persons who appear to him to have relevant knowledge of the workings or effect of the Act.

(4) On completion of the review, the person conducting it must make a written report to the Treasury—

(a) setting out the result of the review, and(b) making such recommendations (if any) as he considers appropriate.(5) The written report must be received by the Treasury no later than 4 years after the Act comes into effect.

(6) A copy of the report must be—

(a) laid before each House of Parliament, and(b) published in such manner as the Treasury consider appropriate.(7) “Independent” means appearing to the Treasury to be independent of the relevant authorities as defined in section 4(3).”

My Lords, Amendment 110 repeats the amendment that my noble friend Lady Noakes moved in Committee. The Government have moved some way to improve parts of the Bill. They have strengthened the reporting duties around public ownership provisions, and the powers to make loans in Clause 228. They have accepted a few, although not all, of the Delegated Powers and Regulatory Reform Committee’s recommendations about the appropriate level of parliamentary scrutiny.

In Committee, the Minister admitted that he agreed with the general principle of this amendment, namely the need for proper review of the legislation. He even gave assurances that the Government would ensure that,

“all elements of the scheme are appropriately covered by a review”.—[Official Report, 26/01/09; col. 165.]

The Minister also recognised that problems might arise, in particular with partial transfers, and made the point that it might be desirable to evaluate the effects of that part of the legislation more frequently than annually. There is nothing to stop there being as many reviews as the Minister would like. It is important that the review of the Act takes place, that it cannot be avoided and that it does not take place behind closed doors.

Her Majesty's Government have accepted that the provisions of the Bill have the potential to cause legal uncertainty in many areas where certainty is critical for the stability and competitiveness of our financial sector. Meetings to attempt to reduce this uncertainty are ongoing, but with such wide powers given to this Government to change the secondary legislation, it will be impossible to remove the uncertainty entirely. The Bill is intended to preserve the stability and competitiveness of our financial institutions. The amendment would go a long way to reassuring all involved that the Government are serious about taking an objective, non-partisan approach to resolving problems in the banking sector. The non-partisan element is essential, which is why the amendment calls for an independent review, not an internal review. The assessment of the impact of the Bill as a whole is also crucial. In his comments, the Minister made no mention of when a review might be held. If the Government are given too much flexibility in how their commitment to a review is fulfilled, there is a risk that the review may become postponed indefinitely.

This amendment is not unusual and the Government have frequently accepted the force of these arguments on previous occasions. In the recent Pensions Act 2008, the noble Lord, Lord McKenzie, appreciated that there was a very real chance that private sector provision could be seriously disrupted by the establishment of personal accounts. Therefore, he took the sensible and responsible step of accepting that there should be a duty to review the scheme. I hope that the Minister will come to the same conclusion in respect of this complex and unprecedented piece of legislation. I beg to move.

My Lords, I do not come to the same conclusion as the noble Lord but I certainly follow him in terms of his objectives. If the noble Lord wanted an earnest of the Government’s intent, he will see the extent to which we have already provided for important parts of the review process within the legislation. He mentioned the Banking Liaison Panel and he will know that it will have an important role in advising the Treasury in due course as to what changes are needed to legislation under Parts 1 to 3 of the Bill. That is an important dimension, given the fact that the work that is being done on the provisional panel is already appreciated. Within the framework of this legislation we create the permanent role of the Banking Liaison Panel and review is clearly part of its objective. The past terms of remit allow it to give advice about the secondary legislation under Parts 1 to 3 of the Bill. We tabled amendments, which we debated yesterday, to expand the role of the Banking Liaison Panel. Thus the panel will be able to keep under review important aspects of the special resolution review which, of course, has been the nub of very significant debate today and it forms a very important part of the Bill.

I hear what the noble Lord says about the review having to be independent. I do not necessarily wish to undermine the procedures which are already in place for independent scrutiny of the secondary legislation under the special resolution review—the Banking Liaison Panel. In determining the detail of the appropriate review mechanism, we will also need to cater to the fact that much of the information and analysis which will be germane to this issue will be extremely technical and sensitive.

That will be doubly the case if the review is also to consider any exercise of the special resolution powers in relation to a particular institution during the review period. We will need to consider carefully how best to ensure that the review is conducted by a person with appropriate expertise to assess such material. We will also need appropriate mechanisms to protect confidentiality.

The issue is not as simple and straightforward as the noble Lord suggests. We are conscious that reviewing crucial parts of the legislation is important and have already written into the Bill specified provisions. I have no doubt that he will continue to press the concept of the general review, but I hope that he will recognise that the Government are intent on ensuring that the legislation is subject to review. If we need in due course to extend the scope of the review, we will take steps to do so. However, I hope that he will recognise that there is not a great deal of difference between us in his search for a more general review and the rather more specific and carefully thought through provisions that already obtain in the Bill, which of course I commend to the House. On that basis, I hope that he will feel that he can withdraw the amendment.

My Lords, I thank the Minister for his remarks. He picked on specific areas. A general review of the legislation is also important and something that he may like to think about. The Banking Liaison Panel will have a very important role, but it should be mandatory for its review to take place and to be put into the public arena. It is all very well to say that the Government will consult, but if there is no set schedule for consultation, it may well not happen. I am sure that the Minister does not mean that to be the case, but there is always the risk. Information and analysis may well be technical and sensitive, and there may be an argument that the publication of the results of consultation should be delayed, but that is not an excuse for discussions that have taken place not to be made public in future. I hope that the Minister will listen to those comments. In the mean time, I beg leave to withdraw the amendment.

Amendment 110 withdrawn.

Clause 254 : “Financial Assistance”

Amendment 111

Moved by

111: Clause 254, page 128, line 39, leave out paragraph (b) and insert—

“(b) shall not come into effect unless a draft of the order has been laid before, and approved by a resolution of, each House of Parliament.”

My Lords, in view of the lateness of the hour on our final day in Committee, I did not move an amendment to what is now Clause 254, but I raised the issue of whether it is appropriate for an order under the clause to be made using the negative procedure. Clause 254 allows the Treasury to define what is and what is not financial assistance. According to subsection (2), an order can,

“provide that a specified activity or transaction, or class of activity or transaction, is to be or not to be treated as financial assistance”.

That is on top of a very wide definition of financial assistance already in Clause 254(1).

The importance of this is that what counts as financial assistance is critical in determining whether the FSA can invoke Clause 7 and start the ball rolling in stabilisation powers. It also drives Clause 227 in relation to Consolidated Fund cover, which we discussed earlier. Concentrating on how the FSA might use it, I find it difficult to see why the power is needed, given the wide definition in subsection (1). If it is needed, surely it ought to be considered by Parliament before coming into effect.

The Treasury’s memorandum to the Delegated Powers Committee said that the negative procedure was needed because such orders might have to be made quickly while Parliament was not sitting. I do not think that that bears close examination. Since there is already a wide definition, it must be the case that the Treasury would want to use the power only if it wanted to classify something that the man on the Clapham omnibus would not recognise as plausibly equivalent to financial assistance. The Treasury would be using this power to define as financial assistance something that was not obviously financial assistance and thereby could use the revised, possibly artificial, definition to set the special resolution regime in motion, because the FSA has no option but to ignore whatever is defined by the Treasury as financial assistance when triggering the stabilisation powers under Clause 7.

The clause places a potentially very damaging power in the hands of the Treasury, which I suggest ought not to be exercised without Parliament’s approval. Otherwise, we give the Treasury carte blanche to determine when to pull the plug on a bank and all the carefully crafted hurdles and tests in Clauses 7 to 9 become meaningless, because the Treasury will in effect define how it is all to work out in practice. I believe that if the power is to remain, we should have proper parliamentary oversight and not simply rely on the negative procedure, because I cannot see that it would be proper or necessary for the power to be used in an emergency. I beg to move.

My Lords, the purpose of Clause 254 is to provide the Government with the power to specify assistance that should or should not be included in the definition of financial assistance for the various purposes for which it is used in the Bill. The clause is therefore of considerable significance because it provides what is essentially a reserve power to give clarity and certainty about the definition, if that is required. The power may well need to be exercised at short notice, because there may be an urgent need to make provision on whether something should constitute financial assistance for the purposes of the Bill. For example, should a bank need financial assistance on an urgent basis, it may want to know as quickly as possible how that financial assistance will be treated under this Bill. For example, will the financial assistance be disregarded by the FSA in determining whether the general conditions for the special resolution regime are satisfied under Clause 7?

If it is appropriate to make provision under Clause 254 on how financial assistance is to be treated under the Bill, it may well be appropriate, for legal and market certainty, to make that provision quickly. The noble Baroness’s amendment would make the exercise of the power subject to the draft affirmative procedure rather than the negative procedure. I recognise that of course there ought to be parliamentary scrutiny of important changes to the definition of financial assistance, but I am not at all convinced that the affirmative procedure is either necessary or appropriate. The power may need to be used urgently. Of course, there are limitations on the affirmative procedure in those terms.

The Delegated Powers and Regulatory Reform Committee did not think that it ought to recommend the affirmative procedure for this power. The committee made no recommendation about procedure, but had it been anxious about it we all know that it would have agreed with the noble Baroness that the affirmative procedure should be used. The fact that the committee does not agree indicates that, as far as that important body is concerned, the Government may well have got this position right.

I recognise the anxieties of the noble Baroness on this matter, but we do not think that the power is too broad. The clause does not allow the Treasury to alter the basic meaning of the expression “financial assistance”, and the power does not allow the Treasury to make something that is obviously not financial assistance into financial assistance. It merely helps in two broad purposes of assisting with definition. As I indicated, because in certain circumstances there may be the necessity for urgency with regard to this, I do not think that the affirmative resolution is the appropriate procedure. I hope that the noble Baroness will think that the Government’s defence of the arrangements in Clause 254 is sufficient for her to withdraw her amendment.

My Lords, I thank the Minister for setting that out. The crux of the issue is whether this ever needs to be done at short notice. The Minister is right that the Delegated Powers and Regulatory Reform Committee did not make any recommendation but, towards the end of that very big document that the Treasury submitted to the committee, it was asserted that the power had to be exercised at short notice. Whether the committee had the time to challenge the underlying veracity of that assertion is perhaps open to question, but I have challenged it for the purposes of the amendment, because no additional information was given in the memorandum to the committee to explain why the power was urgent.

The Minister has said that the purpose of the power is to give banks certainty that they might get something in a form that did not take them within the Clause 7 formulation, which I think I can just about understand. Doubtless, the Minister will understand my concern that this is not to give the banks certainty but to give the Treasury a power. I am grateful for the explanation that the Minister has given. He has not allayed my concerns but, as with so much of this Bill, we shall have to see what happens in practice. I beg leave to withdraw the amendment.

Amendment 111 withdrawn.

Amendments 112 and 113 not moved.

Clause 256 : Statutory instruments

Amendments 114 and 115

Moved by

114: Clause 256, page 129, line 28, leave out “Negative resolution” and insert “Draft affirmative resolution”

115: Clause 256, page 130, line 36, at end insert—

“190

Bank of England directions: immunity

Negative resolution”

Amendments 114 and 115 agreed.

Amendment 116

Moved by

116: Clause 256, page 131, line 15, leave out subsections (4) and (5)

My Lords, we now reach the final substantive amendment that we have to consider today on Report, for which I am sure we will all give thanks. The amendment is also one that I chose not to move at the end of Committee last week, and it raises slightly different issues.

I propose in the amendment to delete subsections (4) and (5) from Clause 256. I want to probe the rather unusual procedure of having a rather long list of statutory instruments which are to be made for the first time using a procedure for approval after the event. I am aware of the need for speed for at least some of the orders listed in subsection (5) to be up and running as soon as the Bill receives Royal Assent. We have already debated that, in particular in relation to Clauses 47 and 48, which deal with partial transfers, netting and set-off and related transactions. Others are clearly in the same category.

My problem is that the amendments have the potential to be controversial. I am thinking in particular of the partial transfer order expected to be made under Clause 48. The Minister will be aware that there are still considerable concerns about the carve-outs in that order and whether they will prove to be positively harmful to banking practices. I believe that further drafts of the statutory instrument are still awaited, and there is a further meeting involving lawyers tomorrow.

We are only 10 days or so away from Royal Assent, and that means that the order could be made in a form that has not been fully consulted on, which does not necessarily command the support of the banks and could, in extremis, damage their businesses. Part of the purpose of tabling these amendments is to obtain from the Minister a view on the path, from now until Royal Assent, for getting in particular this important statutory instrument under Clause 48, so that it is available immediately Royal Assent is given. As he will be aware, any gap where the detailed rules are not set out in the statutory instrument will be regarded as a major problem by the banking community.

The list of powers in Clause 256 is quite long, and not all of them seem to be in the urgent category. While I can see that some powers have to be implemented very quickly, I am not clear that the Government have good justification for saying that all of these orders need to be made urgently. I am also not aware of whether drafts of all of them are available and being consulted on, which raises the question of whether the appropriate procedure for all of these orders in the first instance is not the one where approval is effectively given in arrears. I beg to move.

My Lords, the noble Baroness has given me the minor task of surveying the Bill and identifying the various instruments that may be necessary, as well as having to give a quick summary of how they will work and how they will bridge the gap between the outgoing legislation and this new Act, and to do all this before midnight.

My Lords, I do not want the Minister to get carried away with this amendment. Subsections (4) and (5) of Clause 256 include a rather limited list. If the Minister reads it, he will see that I am not referring to every power.

My Lords, that is so. But the noble Baroness asked how this fits in in relation to the expiry powers of the 2008 Act, so it is a fairly tall order. But I will summarise the Government’s arguments. Parts 1 to 3 are essentially designed to provide a permanent and refined replacement for the temporary powers created last year by the Banking (Special Provisions) Act, which come to an end in the near future. The Government initially used the powers to take Northern Rock into temporary public ownership. All noble Lords in the Chamber will be well aware of the fact that that Act had a sunset clause attached, which will bring its provisions to an end.

I think that we can all agree on the prudence of keeping the temporary powers in the 2008 Act while the permanent legislation, this Banking Bill, was being prepared. This has been clearly demonstrated by events. Last year, while we were doing all the consultation and preparation work on this Bill, the Government had to act under the provisions of the 2008 Act with regard to Bradford & Bingley, Kaupthing Singer & Friedlander, and Heritable in order to safeguard financial stability and protect depositors and other creditors. The provisions of the Act lapse on 21 February.

As I am sure that all noble Lords will agree, in the current situation of continuing financial and economic uncertainty across the world it would be extremely unwise to create a situation where the necessary powers lapsed. That is why we have sought, gained and are duly appreciative of a consensus on putting in place this permanent legislation. I place on record, as my noble friend has done on a number of occasions, our gratitude to the opposition parties for being constructive about the necessity of putting in place permanent legislation in such an important area of our national life as the financial systems. We cannot take the risk of a gap between the relevant powers of the special provisions Act and the commencement of the powers in this Bill.

However, there are elements of the special resolution regime that require secondary legislation to be in place in order for them to be operable and fully effective. Over the past two days and in Committee we have explored the nature of that necessary secondary legislation. The safeguards that relate to the operation of the resolution regime are contained in secondary legislation and it is vital that it is brought into force at the same time as the power in the Bill to carry out a partial transfer. Similarly, the new insolvency regimes created by Parts 2 and 3 simply will not work unless and until regulations and rules related to the new regime created by the Bill are in place. Again, we could do ourselves the credit of having engaged in very substantial scrutiny and discussion about the Bill on those provisions. To ensure that these essential pieces of secondary legislation can if necessary be in place at short notice, these subsections of Clause 249 will allow these instruments to be put in place by the 28-day affirmative procedure instead of the draft affirmative procedure. We had a substantial debate about that earlier today and further discussion awaits us before, and no doubt during, Third Reading. I sought to assure the House earlier today that the 28-day procedure will guarantee that there will be full debate in Parliament, but I do not think we need to tread over ground we covered so extensively earlier this afternoon.

This House will have the opportunity to debate these instruments in full and, as an additional safeguard, the procedure can only be used the first time these powers are exercised and only if the Treasury is also satisfied that it is necessary to do so. This is a fairly standard method of bringing forward essential secondary legislation.

The Government therefore feel that their approach strikes the right balance between ensuring that these instruments are subject to full parliamentary debate and ensuring that the special resolution regime is fully operable from the date on which the key provisions of the Banking (Special Provisions) Act cease to have effect, which of course is in the very near future indeed. I also add that the Delegated Powers and Regulatory Reform Committee, which has considered the Bill in full, has not made any comment or recommendation on this approach.

The noble Baroness will also know that work is ongoing on developing the safeguards and we believe we are very close to reaching agreement with the legal experts. Royal Assent is expected to be at the end of next week. We will then have until 20 February to commence Parts 1 to 3 and make the essential statutory instruments. We will use as much of that time as is needed to get the safeguard orders right. Of course that is a tight timetable. We always recognised in this House when the sunset clause was passed, given the nature of the anxieties that obtained then, which have been magnified so manyfold over the year with regard to the financial system, that this Bill would be extensive in its reach and would require extensive parliamentary scrutiny in a fairly compressed period. I place on record the Government’s appreciation for the co-operation of the opposition parties on this point. I hope that I can see that co-operation on this final point and that the noble Baroness will think that this is an adequate and proper defence of the broad structure of the Bill with regard to the provision for secondary legislation and that she will feel able to withdraw her last amendment.

My Lords, subsection (5) mentions 15 statutory instruments or potential statutory instruments. How many do the Government intend to introduce under this procedure by 20 February?

My Lords, that work is ongoing and I do not have a figure that I can put in front of the noble Baroness at this stage. However, there will be Third Reading of the Bill in the very near future, and I will certainly ensure that by that point I can answer her question exactly. I do not have a precise answer, and I have said that I do not have one, but I believe the figure to be between five and seven.

My Lords, I thank the Minister for that response. I also thank him for saying that we have been co-operative, which I believe we have tried to be. Indeed, it is in that spirit that I approach these unusual provisions in Clause 256. The Minister said that this was the standard procedure for first orders. Actually, I think that it is the reverse of that procedure, because the procedure for first orders is often more extensive than the procedure for later orders. Almost all orders under social security legislation, for example, are for pensions and benefits. The first orders are the ones that have a special procedure. The later ones often have the negative procedure or a much lower level of procedure, so this procedure is unusual in that orders can be brought in quickly without prior parliamentary scrutiny.

As I say, we were happy with this to the extent that it was necessary to support the original introduction of the Bill, but I am much less than happy that the vast majority will not be brought in, which indicated that the list was an excessive taking of power by the Treasury. I note, however, that the person who exercises the power to make the order must be satisfied that it is necessary to exercise it without laying a draft for approval. I hope that the Minister will reflect with his colleagues that the exercise of that power should be used very judiciously. In the spirit with which we have allowed the Bill to make progress through your Lordships’ House, I beg leave to withdraw the amendment.

Amendment 116 withdrawn.

Amendment 117

Moved by

117: Clause 256, page 132, line 5, at end insert “(in new terms)”

Amendment 117 agreed.

Report received.

House adjourned at 10.17 pm.