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Banking Bill

Volume 707: debated on Monday 9 February 2009

Third Reading

Clause 4: Special resolution objectives

Amendment 1

Moved by

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

My Lords, on Report, the Government agreed to take a number of issues away for Third Reading. This was in part a consequence of the very limited time between the completion of Committee and Report, which did not allow the issues outstanding at the completion of Committee fully to be resolved. We were grateful for the Government agreeing to take issues away and to the usual channels for allowing these issues to be debated again today.

Report concluded on the evening of Tuesday last week, and we had to table our amendments for the outstanding issues ahead of final discussions with the Government and before sight of their own amendments. This means some inevitable duplication between our own amendments and the Government’s, but I hope that it does not inconvenience the House.

Amendment 1 is one such amendment. The Government have tabled Amendment 2 in this group. An issue that I have raised throughout our consideration of this Bill is that the need to achieve continuity of banking services is absent from the objectives of the special resolution regime. This concern has been expressed largely by the British Bankers’ Association, but it is supported by consumer groups. Modern life is dependent on continuity of banking services; it is as simple as that.

My Amendment 1 is to objective 3 of the special resolution regime, which is set out in Clause 4(6). Objective 3 is about the protection of depositors, which clearly overlaps with the issue of banking services. There is a link here to the separate proposals being pursued by the Financial Services Authority, which are aimed at speeding up payments to depositors via the Financial Services Compensation Scheme in the event of bank failure. However, the BBA believes that unnecessary costs may be imposed by the FSA if insufficient attention is paid to the alternative, and more satisfactory, outcome of continuity of banking services.

To this extent, therefore, I am pleased that the Government have, with their Amendment 2, accepted the principle of placing the continuity of banking services in the Bill. I will, of course, let the Minister speak to his own amendment in a moment. While we understand the link between the Government’s amendment and objective 1, namely the stability of financial systems, we remain concerned that the FSA will take insufficient account of the continuity of banking services when it pursues changes to the FSCS aimed at depositors alone. I hope that the Minister will be able to reassure the House that the FSA will be mindful of the banking continuity requirement, which, as a result of the Government’s amendment, will now be an explicit part of the special resolution regime. I look forward to hearing the Minister’s comments. In the mean time, I beg to move.

My Lords, I thank the noble Baroness, Lady Noakes, for her amendment. Noble Lords will be aware that the Government have tabled an amendment of their own on this subject and that there is now little, if any, difference between us. I am grateful to the noble Baroness for the strength with which she has urged the case for continuity, and I am pleased that we have been able to accept the validity of her arguments and incorporate them into our amendment.

As the noble Baroness said, the issue here relates to continuity of banking services. I spoke at length on this matter both in Committee and on Report. Noble Lords will be relieved to hear that I do not wish to return to these arguments in full, but I will summarise the Government’s opinion on these points. The Bill already includes, at its heart, provisions aimed at ensuring continuity of services. The very purpose of the stabilisation tools of the special resolution regime is to ensure that banks do not fail completely, thereby maintaining full continuity of banking services. This is reflected both in the objectives set out in Clause 4 and the draft code of practice, which explains them.

That said, the Government are, as always, prepared to listen to the views of the House and to respond as constructively as possible. We have therefore tabled an amendment that meets the concerns expressed on Report. This amendment makes it expressly clear that the special resolution objective includes the concept of continuity of banking services. Noble Lords will note that this is included as part of objective 1, to protect and enhance the stability of the financial systems in the UK. As I have said, the continuity of banking systems is implied in different ways in each of the first three objectives. Therefore, in making explicit provision for the continuity of banking services, we have done so under the broadest of them. To be absolutely clear, this drafting is entirely consistent with the fact that this concept also relates to the objectives of protecting and enhancing confidence in the banking systems, and of protecting depositors.

I also make it clear that continuity of banking services is not the only element to be considered under objective 1. The amendment does not, therefore, limit the scope of that objective in any way. However, the amendment now makes it explicit in the Bill that this concept is at least one of the elements that needs to be considered. I hope this demonstrates, once again, the Government’s commitment to listening to the views of the House and responding constructively. I will therefore, most respectfully and—to take the names of two horses in the 5 o’clock at Kempton this afternoon—in a way that is both Faintly Hopeful and with a Straight Face, ask the noble Baroness to withdraw her amendment. If she will do so, I will move the government amendment which I have just described.

The noble Baroness asked me one question relating to the FSA. The authorities must have regard to all the objectives. This includes objective 1, which now references continuity of service, and objective 3 on protection of depositors. I believe that the introduction of the continuity of service is something that the FSA will need to take into careful consideration in framing all its policy responses to the Bill. Therefore, I hope that my answer provides the comfort that the noble Baroness sought in her question.

My Lords, as the Minister has been very sympathetic to the views expressed in the House throughout the passage of the Bill, could I just clarify one point? There is a clear difference between Amendment 1 and Amendment 2. Does the Minister regard the ability of depositors to get their deposits back as part of banking services? I should have thought that that was something rather different. It is not a service, as such. The Minister’s amendment does not seem to refer to the position of depositors getting their money back.

My Lords, I am pleased to see the noble Lord, Lord Higgins, back with us again in debate on this Bill. We shared our pleasure at the acknowledgement of the noble Lord’s wife’s contribution to the International Court of Justice in a previous debate. As far as I am concerned, provision of banking services includes the return of balances, and I am happy for that to be read into Hansard as being part of the meaning of that term for the purpose of the clause.

My Lords, what the Minister said is entirely satisfactory. I am grateful for his response on this. I am not quite so sure about his horserace tipping ability, but he is doing extremely well in bringing amendments back at Third Reading. I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

Amendment 2

Moved by

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

“(8A) In subsection (4), the reference to the stability of the financial systems of the United Kingdom includes, in particular, a reference to the continuity of banking services.”

Amendment 2 agreed.

Clause 10: Banking Liaison Panel

Amendment 3

Moved by

3: Clause 10, page 6, line 17, leave out “75(2)(c)” and insert “75(2)(b) and (c)”

My Lords, the amendment standing in the name of my noble friend relates to Clause 10, which provides for the Banking Liaison Panel and has proven to be one of the more appreciated clauses in this Bill. With this amendment, we return to matters relating to Clause 75, which it is fair to say has occasioned some degree of controversy and which has been rather less well received by the House thus far.

We have come a long way with this debate. I believe that the Government have made the case for the power to change the law and for the particular aspect of the retrospective dimension contained in the clause, which I know causes anxiety in the House. I appreciate that concerns remain, but I hope and believe that we are reaching a point of consensus on this important clause.

I do not intend at this point to delve into the substance of Clause 75. I think that arises from the important amendments in the name of the noble Lord, Lord Goodlad, and the other noble Lords who support him. The reason why I am speaking first in this important debate, which largely revolves around the amendments in the noble Lord’s name, is simply because we have a technical government amendment at the start of the group.

I shall reserve my arguments on the substantive issues until the noble Lord, Lord Goodlad, and those who support him have had the chance to deploy their case and their anxieties about the Government’s position, which I shall of course respond to and hope to allay, while moving a technical amendment which is likely to occasion very little controversy. I hope, in due course, that the House will see fit to support the amendment. Meanwhile, the major debate will take place on the amendment to which the noble Lord, Lord Goodlad, will speak.

My Lords, I speak to Amendments 20 and 21 standing in my name and those of the noble and learned Lord, Lord Morris of Aberavon, my noble friend Lord Norton and the noble Lord, Lord Pannick. During our consideration of Clause 75 on Report, the Minister undertook to conduct discussions on issues arising from the clause. I am most grateful to him for his characteristic courtesy in arranging those discussions on a timely and inclusive basis.

Retrospectivity and the role of the Executive in exercising statutory powers go to the heart of constitutional government. The use of the word “desirable” in addition to “necessary”, while not unknown in law, is not easy, if indeed possible, to find in legislation with retrospective effect. I shall not reiterate at length the arguments that were rehearsed on Report. Your Lordships’ Select Committee on the Constitution reported to the House on the matter, and I wrote to the Minister and asked for the Government’s view on whether the broad wording of Clause 75(3) could be limited in terms of retrospective powers, and whether they could give illustrations of circumstances in which the powers might be exercised.

Noble Lords will await the Minister's substantive further explanation of why the Government should take powers to repeal, disapply or otherwise amend Acts of Parliament, delegated legislation or the common law, and how such action, if exercised, should be subject to parliamentary control, and the circumstances in which such potential actions are envisaged by the Government.

My Lords, I, too, am most grateful to my noble friend for giving of his time last Thursday to discuss our concerns. We appreciate his patience, and—I repeat what the noble Lord, Lord Goodlad, said—his characteristic courtesy.

Retrospective legislation is undoubtedly needed in this context. To envisage the extent and nature of all the facts that it might be necessary to cater for in a fast-moving situation demands retrospective legislation, much as I object to it generally. We have to prepare ourselves for such cases and be able to deal with that fast-moving situation.

The Minister may think it is extraneous, but there is a great deal of public concern about what is happening in the banking field. It crosses my mind whether this particular retrospective power might be used for the situation that is causing that concern; namely, the payment of huge bonuses for which the Government seem to say that because there are existing contractual obligations, then nothing can be done about it. I hope that I have misinterpreted what they are saying, but it would appeal to the public if retrospective legislation may have to be used. The Minister may be able to help me on that.

I return briefly to the arguments put by the noble Lord, Lord Goodlad, which we adumbrated on Report. We all understand the word “necessary”. There is a compelling reason for such a matter. “Desirable” is a wholly different matter. It may be necessary for me to do something in the course of a working day when it is desirable. Whether I desire it or whether somebody else desires it is another matter. That is the difference between ourselves and the cross-party committee, which has considered this matter in great detail and is concerned about whether the Government have gone a step too far.

The Minister was asked, in col. 567 of Hansard of 3 February, to help the House by describing the type of situation that might not be covered by the word “necessary”. The example he gave—I emphasise that it was the only example that he could give on that day—was where there was a drafting error and, because of confusion or uncertainty, it would be difficult to rely on the word “necessary” alone. With respect to my noble friend, I found that explanation singularly unpersuasive. It is curious if that is the only example that the Government can give. They have had time now to think about the matter and I hope that they will do better. However, I would have thought that the example of a drafting error presented the strongest possible case for the use of the word “necessary”, because nothing else is required. In our experience of legislation, we have seen drafting errors made, and they have had to be corrected. In my experience, those are usually matters that Parliament is prepared to deal with on the nod, because it is obvious when a word like “not” or “where” has been left out, and easy to understand that there is no intention to legislate in that form. If that is the best example that can be given, it is the weakest that I have come across.

Secondly, I ask the Government to give one example—I know we pressed the Minister very hard and he was extremely patient—of where any Government have thought it necessary to use the belt-and-braces approach of using both words, “necessary” and “desirable”. The Minister had had no warning of this and could not give such an example. He has cohorts of advisers and brought a large number with him to our meeting. There was hardly space in the room to house what seemed like the whole British labour force—certainly there were British jobs for a large number of people on that Thursday afternoon. They have had the weekend to reflect—the great minds of the Treasury, their huge legal resources, parliamentary counsel—and I hope that they have come forward with not one but a whole host of examples of situations where they have had to use “necessary” and “desirable”. That would be a valuable precedent for us to consider in this instance.

I believe—unless I am advised to the contrary, and I am prepared to listen—that the Government are breaking new ground. I will emphasise one point. In this difficult, contentious field of relying on retrospective legislation, and introducing legislation to cover retrospection, the Government need very forceful arguments that the word “desirable” is necessary. We suggested that, in order to avoid the open-ended nature of “desirable”—which in my view is a blank cheque—that some other words might be suggested. The words put forward in Amendment 21 are,

“if there are compelling reasons to do so”.

They appear to limit the open-ended nature of “desirable”. They certainly put the onus on the Executive when they seek to rely on this. It is very close to, if not almost the same as, “necessary”.

The Government have listened. I hope that they will come forward with some proposals that meet our concerns about the fact that the word “desirable”, without some qualification, is not one that I am prepared to accept easily.

My Lords, I, too, thank the Minister for his courtesy to us last Thursday. Like the noble Lord, Lord Goodlad, and the noble and learned Lord, Lord Morris of Aberavon, I see the force of the Government’s argument that the Treasury needs to be able to introduce provisions with retrospective effect, because such is the speed with which complex action may be required that later retrospective orders may be necessary in order to address problems which then arise. None of that is in dispute.

However, your Lordships’ Constitution Committee was not persuaded that a retrospective power of the breadth contained in the Bill is appropriate—in particular, that Ministers should have the power to make orders with retrospective effect, not merely where this is thought by the Treasury to be necessary, but even if it is thought by the Treasury to be desirable. I emphasise that the power to act is where the Treasury considers it to be necessary; there is no question of the Treasury having to persuade a court.

The leading textbook, Craies on Legislation, states at page 433 that it is,

“a principle accepted by successive governments that retrospectivity should be avoided except where necessary”.

As the noble and learned Lord, Lord Morris of Aberavon, said, Ministers have hitherto been unable to identify any previous occasion when Ministers have been given power to make orders with retrospective effect when they did not think it necessary to do so.

I still have considerable difficulty envisaging in what circumstances it could be appropriate to exercise the exceptional powers of the sort conferred by Clause 75(3) if the Treasury did not think it “necessary” to do so—in other words, if there were to be a reasonable alternative. I note that Clause 75(8) is drafted in terms of necessity. I do not understand why Clause 75(3), by contrast, confers a broader power.

This is an important matter. I ask the Minister to consider again the constitutional implications of the quite unprecedented powers which he is asking the House to confer.

My Lords, I follow, reluctantly, the noble Lord, Lord Pannick, and my noble and learned friend Lord Morris of Aberavon, who is so expert on these issues. I spent five years in the Treasury, and I am sure that it will come up with a response that might just be suitable. I have a Question on the Order Paper tomorrow about banks, and I might be saved a lot of time on at least one aspect if I get a fuller reply now from my noble friend Lord Davies.

No one who has who had anything to do with retrospective legislation likes it at all. I certainly do not like it. The Treasury has tried to come up with a reply, and to some extent it has managed to tell us something and to give some concession in the area. However, my noble and learned friend Lord Morris thought that it might just be that the Treasury had in mind retrospection regarding bonuses. That might be popular with the general public if the powers were even retrospective, but is that the only issue that the Treasury had in mind? Perhaps if my noble friend Lord Davies can give us some idea of where the Treasury, or some Treasury officials who are ingenious on these matters, could come up with some alternative areas of retrospection that they might wish to use, it would be helpful in reducing the length of my supplementary question tomorrow on banks. That might please my noble friend Lord Myners.

So many questions arise on what banks are doing and what the Government are doing in relation to them; I could be asking such questions tomorrow although, if at all possible, I would like to limit my supplementary question. I hope that my noble friend could give us some idea of other areas that the Government had in mind and whether they might be thinking of using retrospective action. Amendment 22, the Government’s proposed amendment to deal with it, simply says,

“but in relying on this subsection, the Treasury shall have regard to the fact that it is in the public interest to avoid retrospective legislation”.

But that is the Treasury having it in mind. What the Treasury has or does not have in mind is not necessarily what the rest of us might have in mind. I would be very interested to hear from the Minister, as my noble and learned friend Lord Morris pointed out, the Treasury’s interpretation of “necessary” and “desirable”. That would be of great interest to your Lordships’ House. The Constitution Committee, which is now becoming much more active under the noble Lord, Lord Goodlad, on important public interest issues, is clearly concerned—rightly—about retrospective legislation as it is important. As I say, I am interested to hear from my noble friend what the Treasury might have in mind.

My Lords, there has obviously been extensive discussion on this clause and subsection (3) in particular. I am sorry not to have been able to join in on those discussions. I therefore hesitate to intervene for more than a moment or two.

Many years ago, as a Treasury Minister, I introduced something that I described as a technical amendment into a Finance Bill. It turned out that that amendment would have made a considerable number of people retrospectively criminal. I therefore stress that we should be absolutely clear that this clause should not be used to make any amendment to, for example, tax law, which would effectively make people criminals when they were not in the first instance, before retrospective action is taken?

My Lords, I am grateful to noble Lords for their contributions to the debate. I am particularly grateful to those who kindly met with my noble friend Lord Myners, officials and me on Thursday to look at these issues in some detail. That examination has been reflected in today’s contributions. I am a bit less grateful to my noble friend Lord Barnett. He may think that I am so short in the tooth that if he dangles before me the prospect of reducing the level of his Question tomorrow, I will give him a decent answer today—but there is not a hope of it having that effect. I will not be able to give him the response that he wanted, save in so far as to say that any variation of a director’s contractual entitlements would be affected under provisions such as Clause 20, in respect of banks subject to special resolution, and not under this clause. Clause 75 will not be needed here, nor could it be used. I am prepared to wager that that will shorten my noble friend Lord Barnett’s Question tomorrow, and make the task of my noble friend who replies to it that much the easier.

I looked very carefully at the point raised by the noble Lord, Lord Higgins, and can give him an assurance on it. I hope to spell out exactly what Clause 75(3) will do and to put it into context so that he can see why we should safeguard against the anxiety that he expressed—the proper anxiety that someone might become an unintended victim of powers which we never intended to use in those terms.

Throughout the debates in Committee and on Report, as well as in our meeting last Thursday, noble Lords rightly sought to ascertain exactly what the retrospective power under Clause 75 will be used for. On Report, this debate coalesced around subsection (3), which provides that the Treasury may use the power if it considers it either,

“necessary or desirable for giving effect to a particular exercise of power”,

under Part 1. The Constitution Committee under the chairmanship of the noble Lord, Lord Goodlad, had already made it clear—the noble Lord reinforced the point in the Chamber both today and on Report—that only by considering examples of how the Treasury intends to use the power could the House come to a reasoned view on whether the power was justified. I gave a number of examples on Report, although I am not sure that they impressed any members of the committee; my noble and learned friend Lord Morris indicated today that they certainly did not impress him.

I said on Report that the Government could not amend the power to the extent that it would become unusable. That remains the Government’s position, from which we cannot move. However, in response to the concerns that have been expressed on the several occasions when these issues have been considered, we have brought forward amendments today in order to delineate this power more carefully. In the process, it is necessary to correct some drafting problems with this clause. When I have finished dealing with the substantive arguments that have been deployed today, to which I am under an obligation to respond, I will talk about the amendments that my noble friend Lord Myners has tabled to help to solve these drafting problems. However, those are within the framework of the main case that I am about to deploy.

Let me remind the House of the existing public law limits on the use of Clause 75(3). I will then look in detail at the amendments that have been put forward and finally I will come to the government amendments. In our debates so far, I have focused on justifying the existence of Clause 75 per se and, in particular, the presence of subsection (3), which confers the retrospective power and which has been the focus of anxieties. We have had wide-ranging debates, but I do not believe that we have yet addressed in full the existing constraints on this retrospective power or how we can enhance the safeguards around the use of the power. That is what I hope to do today.

The constraint on the use of the power provided for in the Bill—the “necessary or desirable” test, on which this debate is focused—is not, of course, the only limit on the use of the retrospective power. There is a significant risk that the use of a retrospective power can give rise to unfairness and it must not be undertaken lightly. I want to reassure noble Lords that Ministers and the Treasury, in preparing this Bill, have been all too well aware of the anxieties of this House. I almost said, “of this House in particular”, but that would be grossly unfair to our colleagues in the other place. However, there was no doubt that this House would express anxieties about retrospective legislation, and so it has proven.

We should recognise that the retrospective power in the Bill does not exist in a vacuum; it exists within a highly developed constitutional framework. It is important to recognise the range of constraints on the use of the power. Not all these appear in the Bill, nor would noble Lords expect them to.

First, there are the convention rights. Article 7 is an absolute bar on the retrospective imposition of criminal offences or the increase in penalties. The use of this particular retrospective power may also engage Article 1 of the first protocol: the right to the peaceful enjoyment of property. Retrospective interference with property rights needs particularly careful justification, where the action must be proportionate to the public interest pursued. The range of cases where it will be compatible with the convention rights to interfere retrospectively with the property rights protected by Article 1 of the first protocol is very limited.

Secondly, the Government have a duty to act reasonably. What “reasonably” means in practice will, of course, depend on the context. The more unusual or potentially unfair the proposed course of action, the more it will be necessary to justify, by way of reason, any government action. I speak as a layman. Several noble Lords who spoke in the debate are distinguished lawyers, but I have no claim at all to expertise in the law. But in layman’s terms: if the Government are proposing to legislate with retrospective effect they need to be especially reasonable when they do so.

I should like to elaborate a little on how this second point relates to the amendments in front of us today. Since Report stage the Government have been involved in intensive discussions on how to put further limitations on Clause 75 in order to allay concerns expressed by noble Lords both on Report and in the work of the Constitution Committee. As part of that we have looked very seriously indeed at the form of words that the noble Lord, Lord Goodlad, proposes in Amendment 21, which seeks to introduce a “compelling reasons” test to the retrospective power. We have gone back to our parliamentary draftsman on this point.

In light of the intensive discussions that we have had, we consider that there are difficulties with this form of wording in the amendment. The requirement to have “compelling reasons” for legislating with retrospective effect in effect mirrors the effect of existing administrative law. Put differently, even as the text stands, the Treasury could enact retrospective legislation only if it had compelling reasons to do so. So adding these words to the text would not add anything of substance. In a sense, the Government’s reasons have got to be compelling. A reason that is not compelling is simply no reason at all for a power of this kind, constrained in the ways that I have sought to make explicit.

A further difficulty with the amendment is that spelling out the “compelling reasons” test in this legislation would in fact lead to doubt about many other cases where the rules of administrative law require—as we would anticipate—strong reasons for acting but where no express reference to compelling reason is found elsewhere. It would therefore be undesirable for us to introduce it into this clause.

The third constraint on the exercise of retrospective powers is the Government’s respect for the rule of law and legal certainty. Despite the rather critical—I would not go so far as to say cynical—comments that may sometimes be made in response to such statements, the Government always take very seriously their duty to act fairly and appropriately. We fully recognise the values of fairness and legal certainty, values which are the bedrock of the common law system of justice in this country.

Therefore, in considering whether retrospective legislation is appropriate, we will reflect not just on whether legislative proposals are compatible with convention rights or are intra vires of enabling powers but also on whether the proposed exercise of the power satisfies standards of fairness and propriety. I cannot emphasise strongly enough that we do not take retrospective legislation lightly.

As I said on Report, there are also measures in the Bill that should provide reassurance on how Clause 75 will be used. Subsection (1) of the clause requires the Treasury in exercising Clause 75 in any case, including cases where the power is exercised retrospectively, to have regard to the special resolution objectives. These are defined clearly and precisely under Clause 4, and they are another great limiting factor on the context within which this retrospective legislation might be deployed.

Of course, the Government recognise that these public law constraints may not be enough to provide sufficient certainty. We also accept that the House has not been reassured by the restrictions implicit in the special resolution objectives to which I have alluded. We recognise that we need to go further. The Government have looked seriously at the noble Lord’s Amendment 21 because we agree with the thrust of the argument that there must be “compelling reasons” for the use of the retrospective power. However, as I said, we cannot agree to the amendment because it simply reiterates existing public law requirements on necessity with the undesirable side-effect that it may call these requirements into question in other contexts where they have not been explicitly set out in powers enabling administrative action.

We want to add something material to the range of existing constraints, which I have just described, and to avoid the potential for casting doubt on the existing safeguards provided by public law. We believe that Amendment 22 does just that, by positively affirming the public interest in avoiding retrospection.

Before I come on to the detail of the government amendment, I should like to comment a little further on Amendment 20. I think that it would help if I gave an account of the original drafting of the text. I am reluctant to detain the House for as long as I was obliged to do on Report, when I sought to give examples of where the Treasury might consider it necessary to use the retrospective power. However, I should like to expand briefly on why we need to retain the word “desirable”, given that the Treasury considers those examples “necessary”.

One example that I gave on Report is the possibility that the resolution of a bank might raise issues that had never been dealt with before and that, in the process of making the order, we might miss something, running the risk that the directors of the bank or other third party could be subject to a regulatory penalty or even a criminal sanction. The prospect of a person being exposed to a penalty in such cases is obviously unpalatable. The penalty may have occurred as a direct result of the transfer, rather than any action by the person subject to the penalty. He may have had no knowledge of the sanction and may not have been in a position to avoid it. I argue that under this circumstance it would be common sense and reasonable to use the retrospective power, but would it really be necessary in the strictest sense of the word? The person may be perfectly able to satisfy the penalty or be easily able to pay the fine, for example. Either way, the trouble with the word “necessary” in that sense is that there could be legal uncertainty, and we are anxious about any dubiety regarding how the Bill will operate when it becomes an Act. In other examples—I give way to the noble Lord.

My Lords, I feel for the Minister having to reply since he is not legally qualified, as he said, but I have difficulty with what he is now saying because the European Court of Human Rights has made it clear that the test as he has outlined it under Strasbourg Convention law is a test of objective necessity, of whether there is a pressing social need or a fair balance struck in terms of proportionality. That is taken care of in the Bill as it stands by the reference to necessity. When one gets to “or desirable” not only does that breach legal certainty, but it flies in the face of the Strasbourg case law where the court has made it clear in cases such as the Sunday Times thalidomide case that the test is not one of reasonableness but of pressing social need and necessity. I wonder whether this could be thought of again because, quite apart from the other proposed amendments, it seems to me that the words “or desirable” are not compatible with what the convention requires. They create legal uncertainty and the example given by the Minister ought to be able to be taken care of by the test of necessity. For my part, I am very troubled by that part of the Minister’s answer. I do not, of course, expect him to be able to come back right away with an answer to that.

I should like the Minister to think about another point. The Joint Committee on Human Rights has repeatedly said that the safeguards need to be written in legislation and not left to be read in on the basis on what is in the Human Rights Act. Again, because of legal certainty, there must be adequate safeguards against abuse in the Bill and not elsewhere. It does not seem to me that what is now proposed by the Government would meet that test either. I hope I have not thrown too large a spoke in the wheel by that intervention.

My Lords, I am grateful to the noble Lord, who is particularly well qualified in this area, for recognising my potential deficiency. I hope he will hear me out with the general argument. I have taken on board the point he made, and we have looked at this with the greatest care. I indicated that this legislation has to be seen within the framework of the law that he quoted. We are trying to identify a specific area with regard to the law and how it will act. That is why the constraint identified by the noble Lord, which I recognise, accept in full and put into this context, is not sufficient and would not have been sufficient, had I expressed it in these terms, for the other anxieties that were voiced on Report and in our discussions. That is why I hope he will allow me to bring into play a rather broader argument. I hope that, at the end of it, I will have reassured him on the points that he has raised.

My Lords, I apologise for not being able to be in my place when the Minister began his remarks. The more that I have heard, the more concerned I am about Amendment 22, which seems not to achieve the purpose that the Minister agrees should be achieved. If it is a matter of necessary or desirable, that is replacing “necessary” by “desirable” because if it were necessary it would be bound to be desirable. As this power would clearly not be used where it is undesirable, it means that the Minister is not merely achieving nothing but is watering down the purpose that he declares lies behind this amendment.

My Lords, with his usual accuracy, the noble Lord has raised an issue just as I was coming to confront it. He will also recognise that in the earlier part of my contribution I indicated that I would have to address this issue. I hope I will satisfy him on that point. I have not the slightest doubt that if I do not I will probably get an indication that I have not done so.

As I said on Report, the retrospective power might be used to correct a drafting error that had cast into doubt the legal position of parties to an agreement over a transfer. In that example, the retrospective power would be used simply to put all parties to the agreement in the position that they had thought they were in. That would obviously benefit third parties; it would restore legal certainty; it would meet every test of how the Government should act, but it would introduce an element of retrospection. It is arguable that such action taken in order to provide legal certainty to counterparties is desirable, but not absolutely necessary.

When making law, we try to establish the greatest legal certainty. In both the illustrations that I have just given, there is absolutely no doubt that “necessary or desirable” provides the parameters for the Government to act. The Government could act with certainty, and third parties could safely rely on the government action. If the word “desirable” were removed, some of that certainty would be removed with it.

Those risks have not gone away, even with the compromise form of wording that the Government propose in Amendment 22, but we have now a form of wording that satisfies the greatest concerns of noble Lords. We meet the concern that the retrospective power should not just be deployed on a whim. Rightly, noble Lords were concerned that not having spelled out the context in which the power would be exercised, the danger was that the Government would attribute to themselves greater power than they ought.

My Lords, I am very grateful to the Minister for giving way. Although his Amendment 22 is a considerable improvement, the difficulty with it is that it is drafted by reference to what Ministers must have regard to, but it allows Ministers also to have regard to many other matters. Does he agree that it would achieve the Government's objectives and meet many of the concerns that he has heard expressed today if Amendment 22 were drafted in terms that allowed the Treasury to act if it considered that it was in the public interest to introduce retrospective legislation, rather than simply requiring it to have regard to such a matter?

My Lords, I am grateful to the noble Lord and, of course, respect his expertise and contribution in this area. I was grateful for the points that he expressed in our meeting on these matters. I must report to the House that we took those issues into consideration. As I said, we think that we are meeting the main issues of anxiety about how the power will be exercised. Amendment 22 puts beyond doubt the nature of the Government's capacity to act. The noble Lord, Lord Pannick, will remember earlier discussions about the Bill when we discussed the significance of the legislation. Clause 75 relates to actions that are as close to emergency actions as we can envisage, when they are the subject of desperately urgent negotiations in which a deal needs to be struck, all parties need to be sure that the deal will be adhered to and the Government need legal certainty that they can give effect to the deal that is struck. That is the nature of our difficulties. I hope that the noble Lord, Lord Pannick, will give the Government credit for listening to the anxieties. Nevertheless, we are determined that we have put beyond doubt the issues that have been raised in the past and I hope that he will accept our position.

I emphasise that, while retaining the words “or desirable”, the flexibility inherent in the desirability test is not a licence to act lightly or irresponsibly but is a recognition that it is in the public interest to avoid retrospective legislation wherever possible. It will be deployed only when the problem that we have to overcome leaves us no option but to exercise the retrospective power in the public interest.

My Lords, the Minister emphasised earlier the repercussions on other legislation if our amendments were accepted. I asked him whether he could give one example of past legislation which had in it the words “necessary or desirable”. I hope he will reply.

My Lords, I shall come onto that point in a moment. The argument that the noble Lord, Lord Pannick, has properly raised is central to Amendment 22. That is why, after long deliberations on the anxieties connected with retrospective powers, I shall press the House to accept the amendment.

My Lords, I really am puzzled now. When, under Section 19 of the Human Rights Act, the Minister writes on the face of a Bill that he considers it to be compatible with the convention rights, that is what Parliament requires him to do and that is what he has done in this case. In other words, to use the phrase of the noble Lord, Lord Pannick, the Minister has written on the face of the Bill, under Section 19, that he considers it to be compatible. I do not understand what possible objection there can be to using the rather conspicuously moderate approach of the noble Lord, Lord Pannick. He is not saying that the test of necessity is to be written in as the only test—which I think is the correct approach—but that it is enough, from his point of view, if the Bill states, “If the Minister considers that it is in the public interest”.

In those words, “considers” has the same meaning as the requirement under the Human Rights Act. So I do not understand why the Government should choose the rather watery and weak words, which are basically unenforceable, that,

“the Treasury shall have regard to the fact”,

among other things, because they seem to be contrary both to what Parliament stipulated in Section 19 and to the convention. The wording is far too vague and loose and does not meet the test of legal certainty. I am talking only from a common-sense point of view and not legalistically. I should be grateful if the Minister could address those points.

My Lords, before my noble friend responds to that point and before he sits down—I am sure he is going to sit down fairly soon—does he recognise that we are at Third Reading and therefore that long speeches in the course of ministerial statements are simply out of order? There is no point in arguing at Third Reading for different wording. The only way that different wording can be achieved on any of these amendments is by the noble Lord, Lord Goodlad, asking the House to approve his amendment, or any other amendment, and that going down to another place where the Government would have to produce an amendment in lieu.

My Lords, I do not have the slightest doubt that the noble Lord, Lord Goodlad, was aware of that point. So am I, of course; that is why I am battling as best I can to persuade him to withdraw his amendment.

On the points that the noble Lord, Lord Lester, raises about the Strasbourg position, I am hesitant to enter into a debate with him at the Dispatch Box on those issues, for all the reasons we discussed earlier, but the tests laid down by the Strasbourg court are relevant only to the use of powers that interfere with convention rights. The Government cannot make secondary legislation that is incompatible with such rights; such legislation would of course be unlawful. However, my example related to relieving a regulatory penalty triggered by a transfer. The question of ECHR compatibility would not arise in lifting a penalty, but we would need the capacity for a retrospective decision on that in circumstances where, as I indicated earlier, the third party might be subject to a penalty when he could not have anticipated the nature of the offence. Even more important, with regard to the noble Lord, Lord Pannick, we are seeking to envisage that which we cannot predict with great accuracy and give illustrations, and seeking to predict that the deal may hang on the legal certainty of what has been agreed. If there were failures with regard to that legal certainty because of a drafting error, a mistake, we would need to keep that deal in place by correcting the position.

That is why the Government are committed to Amendment 22, which is not conjured out of thin air but is a response to the real concerns that were put forward initially by the Constitution Committee, although they were voiced early on with regard to the Bill. They were certainly voiced at Second Reading, we had intensive discussions in Committee and we had even more intensive discussions on Report, when I made a speech that was so lengthy that I was ashamed of it. I am in great danger of being in that position today so I want to encourage noble Lords by saying that I am nearly at the end. However, my noble and learned friend Lord Morris pressed me to give an example so I am going to have a shot at that as well.

One example that we have exists in tax law. In particular, a retrospective power can be used when it is expedient to make changes in respect of national insurance contributions under sections of the 2006 Act. I mentioned that on Report. I recognise that this is a very different context. The House must decide whether this use of this power is justified, which is what I am seeking to do in the particular circumstances of the Bill. We all recognise that the Bill is trying to deal with highly particular circumstances in a very important part of our banking and financial system and indeed of the welfare of the nation. We are making it clear with our amendment that we are not establishing a precedent for retrospection—we are setting out that it is in the public interest to avoid it—but that there are clearly limited circumstances where we consider it to be necessary.

I emphasise that this formulation has been arrived at after very serious consideration of the concerns of noble Lords. All noble Lords in the Chamber will appreciate that, when we had provided enough chairs for our meeting on Thursday in the room to which the noble Lord, Lord Goodlad, referred, we had the benefit not only of his representation but also, with great accuracy, those of the noble Lord, Lord Pannick, and the noble and learned Lord, Lord Morris. So it is not as though we were not fully aware of their concerns and anxieties. This is the best that we can do in meeting those anxieties. I have no more to add.

I do not know whether it is possible that there could be another formulation. However, I hope that noble Lords will appreciate that the Government have done their very best to meet the carefully articulated and very real concerns of noble Lords. That is why I shall press the noble Lord, Lord Goodlad, to withdraw his amendment and, in due course, I shall move government Amendment 22.

The House may rest assured that government Amendments 23 and 24 are technical. In our debates, I have repeatedly referred to using Clause 75 to correct mistakes made in transfer orders. I said that the Government, at times, make errors and when that happens we need to fix them. These technical amendments relate to a drafting error in this clause. As currently drafted, it does not allow provision to be made in relation to transfer orders and that is remedied by new government Amendments 23 and 24. I hope that the House will accept that mistake by the Government and our attempts to remedy it.

I genuinely wish to put on record my thanks to the Constitution Committee, to its chair, to the noble Lord, Lord Goodlad, and to the noble Lords who supported that work. The Government have had to think about these issues with the greatest care, which I can assure the House they have done. I hope that the noble Lord, Lord Goodlad, will not move his amendments.

Amendment 3 agreed.

Clause 22: Termination rights, &c.

Amendment 4

Moved by

4: Clause 22, page 10, line 33, at end insert “to which the bank is a party”

My Lords, this is something of an anti-climax. I shall speak also to the other five amendments in my name in this group. They amend the termination rights provisions in Clauses 22 and 38. They do that in a common way for both share transfers and property transfers. We have now reached one of the technical areas of the Bill about which practitioners in the City are concerned. I thank the Treasury for including me in a meeting with, first, parliamentary counsel and, secondly, various lawyers last week involved on all sides. That was indeed most useful.

The Government have three amendments in this group to which I hope the Minister will speak in due course. They deal with slightly different issues from my amendments. My amendments deal with two separate but related issues. Amendments 4, 5, 10 and 11 amend Clauses 22 and 38 so that a default event provision is not defined to include a contract or other agreement to which the bank is a party. The purposes of this set of amendments is to ensure that contracts, such as certain credit default swaps and other derivatives which are written with the failed bank as a reference entity or an underlying share but which do not directly involve the bank, are not caught. We completely understand that the Government want Clauses 22 and 38 in order to protect against contracts in a subcontracting chain being capable of being broken, if they relate to services which are essential to the bank. But the definition also takes in financial services and therefore takes us into the highly technical area of the contracts which I have just described.

The second set of amendments, Amendments 6 and 12, seek to make it clear that set-off, netting and similar arrangements will be outside the scope of an order under Clauses 22 and 38. That is part of the wider debate on set-off and netting, which we shall come to, but it has a very specific importance in the context of termination rights. If these clauses interfered in the operation of set-off and so on, legal certainty in those markets might well disappear.

As I understand the position, the Government’s intention is that secondary legislation under Clauses 47 and 48 will be used to ensure that set-off and netting arrangements are not affected by the termination rights clauses and that this will be predicated on an assumption that Clauses 22 and 38 will raise a problem only if a partial transfer is involved. I further understand them to believe that the issue of the bank not being a party to the contracts will, in practice, arise only in connection with set-off and netting arrangements. I hope that the Minister can explain all of this for the record. On the basis that he does so, I am sure that I will be able to withdraw my amendments in due course, but I thought it was important to table them again so that the explanation of how these issues are to be dealt with was clear for all concerned. I beg to move.

My Lords, I am grateful to the noble Baroness, Lady Noakes, for the way in which she introduced her amendments, explaining that she is providing the Government with an opportunity to explain their thinking and that, if that explanation is satisfactory, she will not press the amendments she has tabled. As the noble Baroness said, this group of amendments relates to events of default, also known as termination rights, and refers to Clauses 22, 34 and 38. I will speak to government amendments to Clauses 22 and 38. For the benefit of the House in debating these matters, I will speak briefly to the purpose of these clauses as I believe it sets a useful context.

Clauses 22 and 38 set out certain provisions in relation to clauses in contracts which give a specified right to a counterparty if a specified event—an event of default—occurs. In particular, such a clause may specify that a counterparty has a right to terminate the contract should the event of default occur. Most modern contracts make heavy use of such provisions. The exercise of property or share transfer powers under the special resolution regime may, in future, be characterised as an event of default. This would give counterparties the right to terminate or modify contractual arrangements in the event that the authorities exercise the transfer powers.

As I explained in Committee, this could lead to a wide counterparty flight from the deposit-taker, with severe consequences for the success of the resolution. Therefore, Clauses 22 and 38 make provision to address events of default which could impede resolutions under the special resolution regime. I should make it clear that the financial collateral arrangements directive, under which the Government must allow financial collateral arrangements to take effect in accordance with their terms, including by respecting terms which permit the counterparty to close out, is a dominant feature here. In debating these provisions, we are talking about the minority of financial contracts that are not protected under that directive.

Government Amendments 7 and 13 seek to respond to concerns which have been raised by interested parties, including at a meeting arranged between Treasury officials, parliamentary counsel and the City of London Law Society, which was attended by the noble Baroness, Lady Noakes. A further meeting has since taken place between tripartite officials and the City of London Law Society. We have always been clear that the purpose of these clauses is not to prevent termination rights from being exercised where the transferee defaults in the obligations it has assumed. Let me illustrate this with an example which I hope will help. A services contract to supply IT is transferred from bank X to a bridge bank by the property transfer powers. The services contract contains two events of default. One says the contract terminates if the contract is transferred from bank X to any other company. Another provides that the contract may be terminated if there is default in payment on three consecutive occasions.

Clause 38 is intended to address the first event of default, which would be turned off by this provision. But it is not intended to allow the bridge bank to default in paying its obligations under the services contract on three or more occasions. If it did, the service provider would be able to exercise its right to terminate.

Interested parties have questioned the reference in subsection (8)(b) to things done,

“under or by virtue of”,

a transfer instrument. It has been suggested that the entire contractual relationship following a transfer flows from the fountain-head of the transfer instrument, so the clause would catch even a second event of default mentioned in my example. The Government do not believe this to be the correct construction of this provision. “By virtue of” is an expression used in statutory drafting to refer, for example, to things that are not done directly under the order.

However, the Government recognise the need clearly to indicate that the purpose of these clauses is not perpetually to immunise a transferee from ordinary commercial obligations. Accordingly, we have brought forward government Amendments 7 and 13 to dispel such concerns.

The noble Baroness has spoken to her Amendments 4 to 6 and 10 to 12, for which I thank her. I realise that these amendments flow from concerns that the default event provisions that I have described could have the effect of interfering with financial arrangements, such as set-off and netting, with negative consequences for risk management and regulatory capital. Noble Lords will recall that the Bill already provides protection for such arrangements in the context of partial transfers, and so, as I made clear in Committee, it is appropriate that similar protections be provided for in the context of default events.

The Government also recognise that such protection should be extended to third parties where they have entered into financial contracts with a counterparty of the bank, which are relevant for set-off and netting arrangements. But we do not think that protection for third parties should be extended to non-financial or service contracts, which, if terminated, could, for example, prevent the failing bank being able to offer continuous banking services to its customers. Nor do we think that the protections are needed in the context of “whole bank” transfers, as the market’s concerns have been expressed in the context of partial transfers.

However, the Government believe that protection for financial contracts, such as those relevant for set-off and netting, including third-party contracts, should and can be provided under the existing structures of the Bill. Therefore, providing appropriate protection does not need any changes to the provisions of Clauses 22 and 38.

To provide protection for the types of contracts I have described above, we intend to use the enabling power under Clause 47, which allows the Government to place certain restrictions on partial transfers. Therefore, under Clause 47, we will put in place a standing order which will protect, in the event of partial transfer, the termination rights of bank counterparties and third parties in relation, broadly speaking, to financial contracts with set-off and netting arrangements. To be clear, this will protect those who contract with the residual bank, with third parties not directly related to the failing bank, and those who would be transferred to the new company following a partial transfer. I believe that this will satisfy market concerns.

However, for reasons that I listed in my introduction, the authorities believe that it is critical to provide the new company, be it a bridge bank or a private-sector purchaser, with certainty over what contracts are, or are not, being transferred. Otherwise, it will be difficult to ensure an effective resolution. In order to achieve this, we intend to have the flexibility to make conditional transfers. I will consider the details of these proposals when I speak to government Amendment 8. However, using conditional transfers will enable us to obtain a greater degree of certainty for the transferee, while fully respecting the safeguard that I have just set out. In short, the transferee will know what property has been transferred to it, without resort to close-out, within a period set out in the transfer order. The Government believe that this targeted protection balances the need for certainty in the financial markets with the authorities’ ability to effect a successful resolution. The early indication from consultation with stakeholders is that this approach will be supported.

I turn now to government Amendment 8, which provides for the conditional transfers to which I have just alluded. Its aim is to prevent counterparties closing out against the transferee simply as a result of the transfer, while preserving their transfer rights against the residual bank. I emphasise that it does not prevent the counterparty closing out, should the transferee breach the obligations that it has assumed, as I made clear earlier. An unfettered right to close out against the transferee—or new company—carries potential risks for the resolution. The new company could immediately be required to pay crystallised liabilities, creating liquidity stress. Moreover, and importantly, should a counterparty close out on such a basis, it would have acquired a better right than it had in the first place, namely the right to close out not against a failing institution, but against the more credit-worthy bridge bank or private-sector purchaser. This is not the same as the termination right for which the counterparty had contracted. The Government believe that the amendment to Clause 34 provides a way to overcome this concern, and we are encouraged by a positive response from stakeholders.

This amendment enables the authorities to transfer property, rights or liabilities conditionally. It could be exercised in two broad ways. First, it could provide that the transfer only ever happens if a specified condition is satisfied. Secondly, it could provide that a transfer is automatically reversed if a specified condition is satisfied. In either case, the condition could be defined as an event occurring or an event not occurring. Where a counterparty has protected financial contracts, the authorities could adopt either of the following approaches. They could provide that the transfer of financial contracts will only take place if a counterparty agrees to waive any rights to close out that might otherwise arise; or they could provide that a counterparty will be transferred but will be automatically returned to the residual bank should it attempt to close out. It is because the transfer can be made conditional on the waiving of termination rights that the time limit that I mentioned earlier can be contemplated. A time limit does not purport to interfere with termination rights. It merely creates a defined window in which the counterparty can elect to affirm the transfer to the new company.

The protection that I have described, which will be put in place under Clause 47, remains fully effective. However, should the counterparty wish to close out, as a result of this amendment, the authorities can ensure that the counterparty will not be able to close out against the transferee. It will, instead, close out against the residual company with which it had originally contracted. This allows for a targeted approach. I hope noble Lords will see that it is entirely appropriate that the counterparty should not be able to acquire new and superior rights to those for which it contracted. I commend this amendment to your Lordships’ House as a way of achieving this result.

Financial markets legal experts have indicated that they are satisfied that this approach meets their concerns. Therefore, the Government are proposing a package of measures that delivers protection for financial contracts with set-off and netting arrangements following a partial transfer. In addition to the broad protection already provided to financial contracts by the financial collateral directive, we believe that this will provide the legal and therefore market certainty. I can confirm that the Government intend to insert these protections in the safeguards orders that we will be laying on partial transfers at Royal Assent.

Further, these provisions target only the precise concerns put to us by the market. Therefore, the Government can still exercise their rights to prevent default events for other contracts such as service contracts or financial contracts following a full transfer. The authorities believe that this will provide sufficient flexibility to effect a resolution and certainty for any new private sector purchaser over what property it will be receiving.

Key stakeholders discussed the package last week at a meeting attended by the noble Baroness, Lady Noakes. During the meeting, we provided parties with initial drafting, which set out the protections that I have just explained. While, of course, the detail of these orders has yet to be agreed, I can report that the stakeholders appeared to believe that this broad package met their concerns.

Balancing market certainty and confidence with appropriate powers for the authorities to effect a successful resolution has been at the core of a number of our debates. I believe that these proposals find that balance and are preferable to the alternative amendments. However, I would like to thank the noble Baroness for taking so much time to ensure that the House debates the matter and for attending sometimes lengthy and complex meetings dealing with stakeholder concerns on these important matters. I am sure all those who have concerns about this complex area will be indebted to the noble Baroness for her diligence in addressing these matters and helping us improve the legislation. I respectfully ask her to withdraw her amendment, so that I might press the government amendments to which I have just spoken.

My Lords, I am extremely grateful to the Minister for setting out the position at length and for his kind words. He said that the initial view from the market participants was that this was a good way forward. I can confirm that people have said that to me and that they do support the approach, which is a constructive way forward. The Minister will also be aware that there are a number of concerns about the detail, the market participants having seen the draft of the statutory instrument only last week; and time is short. I hope that the constructive working continues to get the right solution so that these instruments are introduced at Royal Assent. My purpose in tabling the amendments was to get that statement placed on the record. I am more than grateful to the Minister for so doing. I beg leave to withdraw the amendment.

Amendment 4, withdrawn.

Amendments 5 and 6 not moved.

Amendment 7

Moved by

7: Clause 22, page 11, line 33, at end insert—

“(10) A thing is not done by virtue of an instrument or order for the purposes of subsection (8)(b) merely by virtue of being done under a contract or other agreement rights or obligations under which have been transferred by the instrument or order.”

Amendment 7 agreed.

Clause 34 : Effect

Amendment 8

Moved by

8: Clause 34, page 17, line 5, at end insert—

“( ) A property transfer instrument may provide for a transfer to be conditional upon a specified event or situation—

(a) occurring or arising, or(b) not occurring or arising.( ) A property transfer instrument may include provision dealing with the consequences of breach of a condition imposed under subsection (5); and the consequences may include—

(a) automatic vesting in the original transferor;(b) an obligation to effect a transfer back to the original transferor, with specified consequences for failure to comply (which may include provision conferring a discretion on a court or tribunal);(c) provision making a transfer or anything done in connection with a transfer void or voidable.”

Amendment 8 agreed.

Amendment 9

Moved by

9: Clause 34, page 17, line 5, at end insert—

“( ) Where a property transfer instrument makes provision in respect of property held on trust (however arising) it may also make provision about—

(a) the terms on which the property is to be held after the instrument takes effect (which provision may remove or alter the terms of the trust), and(b) how any powers, provisions and liabilities in respect of the property are to be exercisable or have effect after the instrument takes effect.”

My Lords, this group of amendments responds to concerns raised by interested parties around the definitions used in Clause 48. I want to put on record the fact that the noble Baroness made a substantial contribution in Committee on these issues and has participated in subsequent meetings with parliamentary counsel, Treasury officials and the City of London Law Society, which have all helped to resolve the matter in a way that meets the interests of all sides.

It is important to use broad and flexible provisions in this power, as we noted in Committee. It is an enabling power, designed to ensure that adequate safeguards can be put in place. Breadth to put in place protective provisions is, indeed, a virtue. Flexibility is necessary so that orders made under the power can keep pace with developments in the law governing security interests and set-off and netting arrangements, which has proved to be innovative. We understand that the need for this flexibility in primary legislation is now appreciated by the City of London Law Society and other legal experts. I can confirm that we are considering changes to the secondary legislation to reflect some of the concerns regarding commercial definitions. A redrafted order, including revised definitions, has been sent to the expert liaison group, on which the relevant legal bodies are all represented.

However, there are a number of issues on which the Government accept that clarification in the Bill is desirable. Amendment 14 amends the definition of “title transfer collateral arrangements”. These involve one party transferring to another full ownership of assets. In broad terms, such arrangements are entered into to secure the performance of obligations owed by one party to the other. Such agreements may typically provide for the return of equivalent collateral when such obligations are performed. The reference is to “equivalent collateral” because the assets originally transferred may no longer exist and may have been replaced with new assets. Although we thought that the original definition, in referring to new assets, reflected this, we are aware of the anxiety over this description. As a result, the amendment in the name of my noble friend Lord Myners removes this troublesome phrase, but leaves the scope of the enabling power sufficiently broad to achieve its purpose.

Amendment 15 makes a change to the definition of set-off arrangements. It describes the breadth of different set-off arrangements that might exist. We consider that the broader formulation is more appropriate. Amendment 16 makes it clear that close-out netting arrangements can involve actual as well as theoretical debts. Although this provision was an inclusive further elaboration of the broader concept of netting arrangements, we are pleased to offer this additional clarification if it provides reassurance.

Amendment 18 adds further provisions to the definition of arrangements, which is used as a building block for the definitions of security interests, title transfer collateral arrangements and set-off and netting arrangements. It provides broad language that makes it clear, for example, that such arrangements may operate on a bilateral or multilateral level, or involve the interposition of third parties such as clearing houses. We do not believe that the clause would have been construed to exclude these arrangements from the ambit of the power as originally drafted, but we offer reassurance through this amendment.

We have one further reassurance that we need to give, which arises out of issues brought to our attention by legal experts, including the Law Society of Scotland. Amendment 9 signals that arrangements to be protected under Clause 48 can include trusts. Stakeholders have asked us to make it clear that interests protected under Clause 48 may be created through, or comprise in part, trusts. The Government are not convinced that the change is necessary, as the terms would be construed in their commercial context. If commercial practice does make use of trusts in this context, then trusts would fall within the definitions as they stand. However, we are told that Amendment 9 offers reassurance, and we are glad to offer this where we can.

Amendment 17 relates to the treatment of trusts under the property transfer powers. Stakeholders have questioned whether property that a bank holds on trust for beneficiaries would fall within the definition of property, rights and liabilities under Clause 33. We believe that property held in trust would be included under the broad definition, but we are told that in Scotland there is some doubt as to whether a reference to “property” will be interpreted to include property that a person holds in trust. The amendment will allow us to stipulate how property held by the bank in trust is to be held after the transfer. This allows the effects of the resolution, as it relates to trust property, to be made clear in the property transfer instrument, enhancing legal certainty and allowing a more refined and proportionate approach.

These amendments are a direct response to the concerns of stakeholders on how trusts are treated and, I believe, allow the authorities to act proportionately on a case-by-case basis by being specific on how each resolution can affect trusts. In seeking to meet the concerns of financial markets participants, I should also say a few words about the noble Baroness’s amendment, but it is appropriate that she should have a chance to speak to it, and I shall respond briefly after she has spoken. I beg to move.

My Lords, as the Minister has said, I have Amendment 19 in this group, but I should like first to speak on the government amendments, which are the product of the Treasury’s willingness to listen to the concerns of those who will be operating in financial markets and dealing with the implications of the Bill. Again, I record my thanks for being allowed to participate in the meetings, including with parliamentary counsel.

The Minister explained the way in which these modifications work and how the statutory instruments will be developed. I do not need to remind him that a lot is riding on the final version of the statutory instrument and it being made immediately after Royal Assent in order not to destroy legal certainty at that point.

Some substantive issues raised by the market participants remain. I am sure that the Minister will be aware of a joint letter from the British Bankers’ Association and the London Investment Banking Association last week setting out their concerns. I hope that when speaking again to the amendment, the Minister will update the House on plans for laying the statutory instruments and, more importantly, between now and when they are laid, say what the Government plan to do to work with stakeholders to allay the remaining concerns, which are not small. Some important issues that people want dealt with remain. It would be a shame if the excellent co-operation that has characterised the way in which the Bill has been developed and the draft statutory instruments discussed were spoiled at a late stage by rushing the measure through. I say that to encourage the Government to engage in constructive dialogue.

My Amendment 19 asks for an annual report on partial transfers. I tabled it in response to very big concerns about whether this Bill would completely disrupt market practice and the attractiveness of London for the financial services industry. To some extent those concerns have been allayed by the constructive way in which the Government have sought to ensure that the statutory instruments will do what is necessary to ensure that there are no unintended market or regulatory capital impacts from the types of transaction that have been referred to. To that extent, I shall not move my amendment. In reaching that judgment, I have been particularly encouraged by the way that the Government widened the terms of reference of the Banking Liaison Panel in Clause 10, which allows the panel a wider say in the workings of the Bill beyond the narrow definition in the earlier draft of the Bill. Wedded as I am to transparency, I can see that in this instance the Banking Liaison Panel is probably the right place to keep this matter under review, and I hope that it will.

My Lords, I moved a number of amendments in Committee dealing with the issues addressed by the Government’s amendments to Clause 48. They have responded to the difficulties regarding the impact of partial transfers on netting arrangements. Like the noble Baroness, Lady Noakes, I look forward to learning how the statutory instruments ensuring that those netting arrangements, which are enormously important in improving transparency in markets in the future and reducing complexity, are to be brought forward. I support the government amendments, which have addressed important concerns.

My Lords, I am grateful to the noble Baroness for her response to the government amendments and also to my noble friend. Both made interesting contributions in Committee which enabled us to get this additional work under way. As I have indicated, we were not totally convinced in the early stages that these additional clarifications were necessary but we recognise the force with which they have been put—not least by my noble friend—and I am glad that he thinks that the amendments meet the points that he made. I am also grateful to the noble Baroness for the full part that she has played in these matters. As for her points about the necessity for additional co-operation, we will certainly publish the draft statutory instruments on Royal Assent.

One of the great advantages of the substantial consultation that was carried out throughout the drafting of this legislation and its development over the past year is that we are in a position to make commitments of promptitude on secondary legislation. We will continue to work with the Expert Liaison Group on the detail of these draft orders before they are finished and made on commencement of Part 1 on 20 February. I give the noble Baroness our assurance on that and agree with her that for the Expert Liaison Group to become the Banking Liaison Group is a proper forum for that.

My honourable friend the Economic Secretary indicated that the process should be as open as possible. He said that he was committed to seeking the Expert Liaison Group’s views on whether its minutes should be published. He did not meet with a totally positive response. The group did agree that high level summaries of the discussion and the conclusions could be usefully made public, so there will be openness in that respect. I hope that that is sufficient to assure the noble Baroness that we intend to proceed on the basis of openness. We intend to check with the group whether it thinks that any specific advice that it gives to the Government should be made public. If it does, we will commit the Treasury to publishing it and providing a copy to Parliament.

Amendment 9 agreed.

Clause 38: Termination rights, &c.

Amendments 10 to 12 not moved.

Amendment 13

Moved by

13: Clause 38, page 19, line 21, at end insert—

“(10) A thing is not done by virtue of an instrument for the purposes of subsection (8)(b) merely by virtue of being done under a contract or other agreement rights or obligations under which have been transferred by the instrument.”

Amendment 13 agreed.

Clause 48: Power to protect certain interests

Amendments 14 to 18

Moved by

14: Clause 48, page 24, line 31, leave out “those or other”

15: Clause 48, page 24, line 32, leave out from “which” to end of line 33 and insert “two or more debts, claims or obligations can be set off against each other,”

16: Clause 48, page 24, line 36, at end insert “actual or”

17: Clause 48, page 25, line 21, at end insert “or trusts;”

18: Clause 48, page 25, line 24, at end insert—

“(d) involve any number of parties;(e) operate partly by reference to other arrangements between other parties.”

Amendments 14 to 18 agreed.

Amendment 19 not moved.

Clause 75: Power to change law

Amendment 20

Tabled by

20: Clause 75, page 39, line 42, leave out “or desirable”

My Lords, I am advised that, procedurally, it is expected that I should say very few words about this extremely significant debate. The Minister made a detailed and eloquent speech explaining the Government’s decision. He received no support from anyone in the Chamber and opposition from the Back Benches of the Labour Party, the Cross Benches and the Liberal Democrat Party. The Front Benches of the Conservative Party and the Liberal Democrat Party were silent on the matter, which is, according to taste, welcome, disgraceful or sinister.

I am content not to press the amendments tabled in my name and those of other noble Lords in the hope that the Government will, at Commons consideration of Lords amendments, consider adjusting Amendment 22, so that the Treasury can make orders with retrospective effect only if it considers that doing so is exceptionally in the public interest. In deference to the noble Lord, Lord Williams of Elvel, whose expertise on Third Reading procedure is not exceeded by anybody and who has a batting average in first-class cricket of more than 25, I shall not move the amendment.

Amendment 20 not moved.

Amendment 21 not moved.

Amendments 22 to 24

Moved by

22: Clause 75, page 39, line 44, at end insert “(but in relying on this subsection the Treasury shall have regard to the fact that it is in the public interest to avoid retrospective legislation).”

23: Clause 75, page 40, line 3, leave out second “or”

24: Clause 75, page 40, line 4, at end insert—

“, or(c) amend any provision of an instrument or order made in the exercise of a stabilisation power.”

Amendments 22 to 24 agreed.

Clause 103: General powers, duties and effect

Amendment 25

Moved by

25: Clause 103, page 60, line 38, in column 3 insert—

“Anything done by the bank in connection with the exercise of a stabilisation power under Part 1 of this Act is not a gratuitous alienation for the purpose of section 242 or any other rule of law.”

My Lords, government Amendments 25 and 26 are technical provisions that make modifications to the way in which Sections 242 and 243 of the Insolvency Act 1986 are applied to the bank insolvency procedure. These provisions, which deal with gratuitous alienations and unfair preferences, apply only to Scottish insolvencies and are similar in effect to Sections 238 and 239 of the Insolvency Act 1986, which deal with transactions at an undervalue and preferences with respect to insolvencies in England and Wales.

Under the amendments, Sections 238 and 239 of the 1986 Act are applied to the bank insolvency procedure, with modifications, so that anything that has been done by a bank in connection with the exercise of a stabilisation power under Part 1 of the Bill cannot be challenged as a transaction at an undervalue or a preference. Sections 242 and 243 are currently applied to the bank insolvency procedure without modification and the amendments are therefore needed to ensure that these provisions are applied in a similar way to their counterparts in England and Wales.

The words,

“or any other rule of law”,

are included in the modifications because, in Scotland, common law can also be used to challenge a transfer or transaction considered to be a gratuitous alienation or unfair preference. The need for these modifications to ensure a consistent approach has recently been brought to our attention by the Law Society of Scotland, to which the Government are grateful. I beg to move.

Amendment 25 agreed.

Amendment 26 agreed.

Clause 230: Transparency: financial assistance

Amendment 27

Moved by

27: Clause 230, page 116, line 33, leave out “227” and insert “229”

My Lords, I can be brief on this amendment. Just before I moved my amendment on Report to insert Clause 230 into the Bill, my noble friend Lord Eccles pointed out a typing error in relation to the clause reference in subsection (1)(b) of the new clause. The Minister will recall that the House voted in favour of my amendment. I had hoped that behind-the-scenes processes would correct this before the Bill was reprinted, but that did not happen. The advice of the Public Bill Office was that it would be safer if I tabled this amendment to make it absolutely clear that the House, in approving my amendment, intended to refer to Clause 229, not Clause 227, in paragraph (b). I am sure that the House will not want to confuse the other place when the Bill is sent there later today. I beg to move.

Amendment 27 agreed.

Clause 232: Definition

Amendment 28

Moved by

28: Clause 232, page 117, 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, I will also speak to Amendments 29 and 31 and comment on the opposition amendment. All the amendments in the group relate to the powers in the Bill to make investment banks insolvency regulations.

The Delegated Powers Committee expressed extreme concern about the scope of these powers. I am pleased to see the noble Lord, Lord Goodhart, in his place, not that I ever doubted that he would be there. His committee expressed concern about the scope of the powers proposed in the clauses relating to investment banks. The committee recommended that the power, and any regulations made under it, should be sunsetted after two years. The amendment of the noble Baroness is along these lines.

We discussed these concerns with the noble Baroness, Lady Noakes, and indicated to her that it has not been possible to devise a suitable response to the Delegated Powers Committee’s sunset recommendations that would not have what we regard as undesirable effects in market impact and policy. The Government, as indicated in earlier debates, are firm on this matter. The noble Baroness indicated that she understood some of the Government’s great reluctance, because normally the Government are concerned to respond positively to the committee’s proposals. She even hinted that she would consider withdrawing her amendment, subject to the Government making a strong case and committing to holding a fully independent review within two years of any regulations being made under the power. She also suggested that the Government’s case would be considerably more robust if they were able to place stakeholders’ concerns with the sunset provisions on the record.

The London Investment Banking Association wrote to our officials in appropriate terms on 6 February. Accordingly, we are eager to emphasise the remarks made in Committee, with regard to the difficulties surrounding the administration of Lehman Brothers Europe. In particular, the Government are concerned that the clients of Lehman Brothers have had difficulties in securing an expeditious return on their assets, following the failure of that firm. That is no small matter. Where clients are unable to access assets that they believe they rightfully own, this has the gravest implications for market confidence and the effectiveness of the legal arrangements, including those relating to insolvency, which support the UK system.

The House will be aware that a major source of the UK’s competitive advantage in this area is the certainty that we provide by the relevant legal regimes that we have. Ineffective operation of insolvency arrangements in relation to investment banks and client assets could have obvious financial stability implications. If it impacts on the ability of clients to meet their own obligations to third parties, this may have particular relevance in the case of the hypothecated assets where recovery may be very difficult and challenging.

It is no exaggeration to say that a single failure could then lead to further failures unless issues surrounding asset recovery can be addressed with expedition. The Government need to take action over these concerns. I was grateful that the amendments which gave rise to these provisions were accepted in Committee. The sheer complexity of the challenges that have emerged since the failure of Lehman Brothers and its UK subsidiary defy simple solutions to this issue. The House will understand that the application of insolvency procedures to an investment bank, or any other large complex financial institution, is complicated and challenging. To consider ways of revising such procedures is even more so. For this reason, the Government have sought the advice of an expert panel with regard to the concrete steps that need to be taken to address these challenges. The panel, the establishment of which was announced in the Pre-Budget Report, is to consider how regulations may best be made which enable the unencumbered return of client assets without creating substantive externalities or negative consequences. The provisions of Clauses 232 to 235 provide the Treasury with the powers necessary to make any changes that may be required as a result of this review. They are necessarily broad for the simple reason that it would be impossible for the Government to prejudge the conclusions of the expert panel, particularly in a complex case.

It may reassure the House if I clarify a few points regarding the powers that the Government are taking in these clauses. The powers are precautionary in so far as they will not be used without a clearly identified need to do so, and, notwithstanding the concern which noble Lords articulated in previous discussions on the Bill about their scope, they will be targeted if deployed.

However, the breadth of the powers that the Government are taking has of course attracted the attention of the Delegated Powers Committee, chaired by the noble Lord, Lord Goodhart. It would have been far preferable if I had been able to come to the House with more detailed proposals, as I am sure the noble Lord, Lord Goodhart, will soon emphasise in debate on the matter, and I agree with many of the committee’s concerns about the wide scope of this provision.

I should have preferred to have been in a position to present for scrutiny to this House a detailed set of legislative provisions, rather than simply the powers outlined in the clauses. However, I have not been able to do so, and the noble Baroness, Lady Noakes, has tabled an amendment which seeks to implement the recommendation of the Delegated Powers Committee. She has proposed a sunset clause which provides that any regulations will cease to have effect after two years. I welcome the amendment because it gives me the chance to explain the Government’s purpose.

As I indicated, we respect the work of the Delegated Powers Committee and we have great difficulty when we are not in accord with it. However, a sunset clause would simply not work; worse, it might do even greater damage than if the Government took no action at all. The inclusion of a sunset clause of the sort proposed would have major policy implications, all of them totally undesirable. It would create legal uncertainty as to the type of insolvency procedure which would be applied to any client asset. If Firm A were to commit assets to Firm B under the new regulations, it would know that the regulations would expire in the very near future. It would therefore have no knowledge of the insolvency procedure that would be applied in future should the firm holding its assets fall into insolvency.

Firms would find it unacceptable to face that kind of major uncertainty over what would happen to their assets in the event of a default. They would have no way of accurately gauging their counterparty risk, and their potential exposure would most likely be a multiple of their equity capital. The House will recognise that this could result in a substantial increase in the cost of funding as firms’ creditworthiness declined as a result of the ambiguity that would arise. These cost and risk implications would almost certainly prove unacceptable to the great majority of financial firms for as long as other jurisdictions offered any form of legal certainty with regard to the recovery of assets.

Those are not just the views of the Government. We recently received a letter from the London Investment Banking Association, which indicated that there are grave concerns in the City with regard to this amendment. I start by pointing out that it was in response to concerns expressed by LIBA that the Government inserted the sunset provision in Clause 235(4), which provides for the lapse of the enabling powers if they have not been used after two years.

Perhaps I may quote from the letter that we received from the London Investment Banking Association:

“One of the points that we stressed at the outset was that a sunset clause should be included in the order-making power so as to make clear that the power would lapse if, in the event, it was determined that investment bank insolvency regulations were not needed. Our reason for this was that our Members considered it to be essential not to give the impression to counterparties that the UK framework is now in a permanent state of transition”.

We have addressed this concern with the provisions in Clause 235(4). However, LIBA goes on to note in respect of the noble Baroness’s amendment:

“Our concern about proposed paragraph (4A)—which would appear to require that any insolvency regulations made would automatically lapse (except in the case where they applied to an ongoing insolvency)—is that it would have the same result that we were trying to avoid. And since, under Clause 235(4), a sunset clause has been included requiring the 233 powers to lapse if they have not been exercised, we can see no advantage in including the paragraph that the amendment would introduce”.

Even if all these problems could somehow be avoided, the proposed sunset amendment could still cause harm. I have grave concerns about the effect on international perceptions of the predictability and dependability of UK law, which is one of the City of London’s key advantages, and the reputation of the UK as a financial services centre. That could lead to substantial damage to the City in a period when it is already facing serious challenges. I do not need to spell out the dangers for the UK economy more widely.

Even if these broad economic costs were acceptable, we should have regard to the potential implications for firms, including those that these provisions are intended to benefit. If we adopted a sunset clause as proposed, firms would be required to adapt to a new regime when the regulations laid under this Bill came into force and again when they are sunsetted, when firms would be required to adapt to whatever replaced them. This would increase the adaptation costs for investment firms. The Government’s objections to a sunset clause would, unfortunately, apply regardless of the time period attached to it, since the issue of legal uncertainty would continue to apply irrespective of the time horizon. Any proposals for a five-year, or even a 10-year, sunset clause would therefore also be subject to the grave difficulties I have described.

I say with regret that the Government feel strongly that the proposed sunset provision cannot be accepted. However, the Government are nevertheless committed to addressing the concerns of the Delegated Powers Committee and of the House. First, we are making changes to the scope of the provisions, as laid out in Amendments 28 and 29. The amendments are designed to reduce the extent of the order-making power provided for in Clauses 232 to 235. They limit the power in such a way that the Treasury may bring only institutions that already hold Financial Services and Markets Act Part IV permissions into the scope of any new insolvency regime. Noble Lords will be aware that firms to which the Financial Services Authority has granted FSMA Part IV permission are all authorised financial firms. In Committee, the noble Baroness, Lady Noakes, expressed particular concern about the breadth of the definition of investment banks included in the Government’s original provision on this point. This amendment seeks to address her concerns directly. As a result of the amendment, there is no possibility of the Government applying the regulations more widely than is necessary with regard to non-financial business, for example.

Secondly, in lieu of a sunset provision, we have also tabled amendments to ensure that this House and the other place shall have the opportunity to consider expert views on any regulations the Treasury may lay under these powers. I think it only right and proper that the Government take all possible steps to ensure appropriate scrutiny of these provisions. Therefore, Amendment 31 requires that within two years of the Treasury making any investment bank insolvency regulations, the Government must establish an independent review of any regulations that have been made. This review shall be independent, expert, and impartial. The review will consider whether the regulations have been effective in identifying, protecting and facilitating the return of client assets. It will look at whether, in drafting the regulations, the Treasury has paid due attention to protecting creditors’ rights and ensuring legal certainty for all relevant stakeholders: creditors, clients, administrators and the investment banks themselves. That is critically important, and we will ensure that the impact on the firms and persons who may be affected by the regulations is subject to full consideration.

The review will also consider how effective the regulation has been in minimising any disruption of business and the markets and maintaining the UK as a global centre for financial services. The review will produce a report which must be laid before this House and the other place, and noble Lords and Members of the other place can then determine whether they want to deliberate on its findings. The review may also consider whether it is appropriate for the regulations to stand or whether the Government should return to Parliament with necessary primary legislation. The reviewer, in his or her consideration of those matters, may feel it helpful to engage with noble Lords or Members of the other place, as well as insolvency experts and other market practitioners.

I hope that the establishment of that review will go some way to addressing the concerns identified by the Delegated Powers and Regulatory Reform Committee and of this House in earlier discussion of the Bill. In the current circumstances, I hope that the House can appreciate why the Government are unable on this occasion to proceed along the lines suggested by the committee and in the amendment tabled by the noble Baroness. I hope that the new provisions that the Government have proposed will alleviate the concerns raised; that I have justified the reasons for the Government's action; that the noble Baroness will feel able in due course to withdraw her amendment; and that the House will feel able to support the government amendments.

My Lords, as the Minister explained, I tabled Amendment 30 in this group, which would implement the clear recommendation of the Delegated Powers and Regulatory Reform Committee. It stated that it would not normally have accepted such a power being put in legislation but that, exceptionally, if the House were convinced that such a power was necessary, it should be accompanied by full sunsetting: that is, of both the regulation-making power and the regulations themselves. That is what my Amendment 30 would do.

We must remember that this is highly complex law dealing with important issues of rights in insolvency. I am sure that the general feeling of the House is that the right way to scrutinise that is through primary legislation, because it is only through primary legislation that we have the opportunity to scrutinise on a line-by-line basis. As the Minister is aware, secondary legislation is fundamentally non-amendable.

Nevertheless, we have listened carefully to the arguments that the Government have made, and to the arguments that the London Investment Banking Association relayed to me in its letter of 6 February. I have taken the liberty of sharing that letter with the noble Lord, Lord Goodhart, because I was aware of his concern about the issue. I must say that I think that the difficulties about the uncertainty that would have been introduced have been overstated, and that it would have been possible within a two-year period to have had both a statutory instrument for the short-term and at the same time to have tracked legislation, subject to proper scrutiny, for the long-term.

However, in accepting the government amendments and welcoming the review—I genuinely welcome that review—I just remark that it places a great onus on the Government to carry out the most detailed consultation and to exercise their rights to propose such legislation very wisely. I think that it is unprecedented to produce such significant legislation by statutory instrument. The onus will clearly be on the Government to be careful in how they use the powers which the House has granted them without any complications of sunsetting. Once they have exercised their powers the review will be especially welcome, especially given the way that it is phrased.

On balance, and with a somewhat heavy heart, we are prepared to accept the government amendments and I will not be moving Amendment 30.

My Lords, perhaps I may start with a very small point. The name of the company to which the Minister referred is not Layman Brothers but Lehman Brothers. I am in a position to know that because I am a member of the Lehman family. I have not declared an interest because my family ceased to have any involvement in Lehman Brothers some 25 or 30 years ago.

I can move on now to the serious business. It is a matter for the Delegated Powers Committee to advise your Lordships’ House on matters such as the question whether certain material should be on the face of the Bill rather than in the form of regulations. The Government are proposing here a potentially fundamental change in the law of insolvency as it relates to investment banks, and investment banks are a very important feature of our financial system. We could end up with investment banks being subject solely to regulations made by the Government—with parliamentary involvement, in the form of affirmative resolutions, but with no chance to amend them or seriously to debate them—while the whole of the rest of the economy will be subject to the very detailed provisions of the Insolvency Act.

The changes that the Government could make are, therefore, potentially fundamental; and not only are they fundamental, they are of a totally uncertain kind. I repeat the quote from “King Lear” which I gave at Report stage. The Government’s position is much the same as his when he said:

“I shall do such things … what they are yet I know not, but they shall be the terrors of the earth”.

It would certainly be normal practice to put legislation of this kind, in relation to investment banks, on to the face of the Bill. We accepted in Committee that there was a possibility that when a Government were in a position to decide what they wanted to do, they should be able to do it very quickly. We therefore accepted that there could well be a necessity for regulations to take effect quickly. But we saw no reason why this should be anything other than a temporary arrangement, and we considered that the regulations should be replaced as soon as possible by primary legislation which could, of course, be in exactly the same form as the regulations.

There would be no question of any additional uncertainty arising from this. Indeed, the uncertainty would be weakened rather than strengthened because the potential existence of a sunset clause would not affect any bank that became insolvent before the sunset clause came into effect. That is our view; we did not quite understand why such provision should be necessary. As it is, there will be a great deal of uncertainty anyway over the two-year stretch. The Government will be at liberty at any time to change the regulations with the benefit of an affirmative resolution. That would be substantially easier than changing primary legislation and the Government could—probably would and should—urgently introduce the necessary regulations and then follow them with primary legislation which would put the regulations on to the face of a statute. We believe that that would strengthen the certainty of the matter rather than weaken it, and that it would have been a much more effective way of dealing with this than what the Government now propose.

Therefore, in the circumstances, the committee had total agreement on the point. I still believe that it would have been more appropriate to accept what the noble Baroness, Lady Noakes, proposed: a totally unconditional sunset clause which came into effect in two years, but not requiring it to be left until the end of that two-year period; and either in the mean time or at the end of that period for the Government then to bring forward primary legislation that could have had a proper debate and would have ended up with the rules governing investment being in primary legislation in the same way as all other insolvencies are in legislation. That would have been better.

I am not in a position to move any amendments but I want to say, as I still believe, that it would have been better had the Government accepted the recommendations of the Delegated Powers Committee.

My Lords, I am grateful to both noble Lords for their responses, which reflect the seriousness of this issue. As I have indicated to the noble Lord, Lord Goodhart, the Government do not lightly pursue a course that they know is not in accord with the committee’s recommendations. He will, however, appreciate from the amendments that we have tabled that we have taken on board the thrust of the argument that underlay the recommendations his committee made. We have not followed them in quite the terms that he would have wished, but we clearly expect the review to produce an analysis of how these regulations are working. If the review says that the issue is significant enough for primary legislation, the Government will have to respond accordingly.

As I indicated in my opening remarks, we all appreciate the complexity of these issues—they are so complex for me that I cannot even pronounce “Lehman” accurately. I never suffer from the mispronunciation of my surname but I spend my life correcting its misspelling, so we all live with these difficulties. I apologise to the noble Lord if I got the name wrong. Far greater difficulties awaited me when I examined these issues at all stages of the Bill and at this point. I hope he will accept that in the Government’s approach to these matters we are all too aware of the anxieties that he has expressed and those of his committee, but we are also well aware of the significance of this for the banking community—for investment banks in particular, but for the City of London as a whole and its financial role.

Amendment 28 agreed to.

Amendment 29

Moved by

29: Clause 232, page 117, line 31, leave out “or (b)” and insert “, (aa) or (b)”

Amendment 29 agreed.

Clause 235: Regulations: procedure

Amendment 30 not moved.

Amendment 31

Moved by

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


(1) The Treasury shall arrange for a review of the effect of any investment bank insolvency regulations.

(2) The review must be completed during the period of 2 years beginning with the date on which the regulations come into force.

(3) The Treasury shall appoint one or more persons to conduct the review; and a person appointed must have expertise in connection with the law of insolvency or financial services.

(4) The review must consider, in particular—

(a) how far the regulations are achieving the objectives specified in section 233(3), and(b) whether the regulations should continue to have effect.(5) The review must result in a report to the Treasury.

(6) The Treasury shall lay a copy of the report before Parliament.

(7) If a review recommends further reviews—

(a) the Treasury may arrange for the further reviews, and(b) subsections (3) to (6) (and this subsection) shall apply to them.”

Amendment 31 agreed.

Bill passed and returned to the Commons with amendments.