Monday, 16 March 2009.
Arrangement of Business
Before the Minister moves the first statutory instrument, may I remind noble Lords that, in each case, the Motion before the Committee will be that the Committee do consider the statutory instrument in question? I should make it clear that the Motion to approve the statutory instrument will be moved in the Chamber in the usual way.
Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) Regulations 2009
Considered in Grand Committee
That the Grand Committee do report to the House that has considered the Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) Regulations 2009
Relevant Document: 8th Report from the Joint Committee on Statutory Instruments.
Noble Lords will recall that partial property transfers attracted significant interest in debates during the passage of the Banking Act. These statutory instruments provide legislative safeguards for creditors and counterparties of UK banks by directly responding to concerns that partial property transfers made under the Banking Act 2009 could negatively affect their rights and interests.
Although the debate should not be difficult, it is unlikely to involve simply going through the motions. Overall, the policy issues involved are complicated. Noble Lords will recall that there was close consultation with stakeholders in connection with the Banking Act 2009. I believe that these regulations provide strong legislative safeguards for creditors and counterparties of UK banks in the event of a partial transfer. They address the concerns put to the authorities that partial property transfers could negatively affect creditors’ and counterparties’ rights and interests. If counterparties and creditors of UK banks do not have legal certainty as to how partial property transfers may affect their contractual interests and their position as creditors of a failed bank, negative market consequences are likely. The contractual interests that could be affected include risk reduction arrangements, such as set-off and netting arrangements, and financial collateral arrangements. The possible negative market consequences of a lack of legal certainty in this area could include higher regulatory capital requirements and cost of funding for UK banks.
As stated in the consultation stages for the SRR and during the parliamentary stages of the Act, the Treasury's aim in providing these legislative safeguards has always been to avoid damaging negative financial market consequences as a result of taking partial property transfer powers. I believe that this aim will be delivered by these instruments, which provide legal certainty to the market and an assurance that the Government would have to have regard to leaving creditors no worse off after a partial property transfer.
As well as running a full public consultation process, with the publishing of a dedicated consultation document on 6 November 2008, the Treasury has worked extensively with industry stakeholders, particularly with the expert liaison group, presently being replaced by the statutory Banking Liaison Panel, to reach an outcome acceptable to both the market and the authorities. As the Committee may be aware, during this process, the Government listened to the concerns raised by noble Lords and others and moved their policy significantly towards providing the market with greater legal certainty.
I now turn to the safeguards order in more detail. The safeguards order is made under Sections 47 and 48 of the Act. In summary, it provides legislative protection against possible disruption under a partial property transfer for important risk management arrangements and other financial arrangements in use in the markets today. These arrangements include set-off and netting arrangements, financial collateral arrangements and structured finance arrangements.
The Committee will be aware that the Government have provided broad protection for set-off and netting. The order provides that property included under a counterparty’s set-off and netting arrangement with a bank may not be split up under a partial transfer. The possibility of damaging cherry-picking of a counterparty's relationship with a failing bank is therefore avoided, and the ability to obtain clean legal opinions in relation to the effectiveness of set-off and netting should not be compromised.
However, to allow the authorities necessary flexibility to carry out partial transfers in the interests of financial stability and depositor protection, the order features a number of carve-outs from the protection provided. The most notable of these is property belonging to a Financial Services Compensation Scheme eligible person, which is not covered by the set-off and netting safeguard. This particular carve out from the set-off and netting safeguard will allow the authorities to transfer, for example, the retail deposit book of a failing institution to a solvent new company in a short time-frame, which is important to allow the authorities to provide continuity of service, which was an interest of a number of noble Lords who spoke in the debates during the passage of the Bill, and to protect public confidence.
I now turn to an important point on the practical effect of the order. Property that is not covered by the set-off and netting safeguard under the order is referred to as “excluded rights” or “excluded liabilities”. Under the order, the authorities may choose to, for example, transfer only the excluded rights and liabilities and leave the remaining rights and liabilities in place in the original entity, regardless of any wider set-off and netting arrangement that the authorities would otherwise have needed to have kept whole. However, it is not the Government's policy intention that the presence of excluded rights or liabilities under a wider set-off and netting arrangement should render that entire arrangement unprotected by the order. I would like to make it clear that, in the Government's view, the drafting of the safeguards order does not yield this legal effect.
I am aware that some market participants are concerned that the scope of the safeguards order is not wide enough, in particular with regard to the protections provided for set-off and netting. I understand that these concerns are primarily related to technical drafting, rather than the property that the order clearly excludes as a result of government policy, and that there are varied legal interpretations on whether some relevant financial contracts have been excluded. Let me say that the Government remain committed to a safeguard regime that is as effective as possible and appreciate these potential concerns.
Indeed, the Government have already been clear that the safeguards will be subject to review and, as noble Lords will remember, the Banking Act provides for a Banking Liaison Panel of financial services representatives to keep the ongoing effect of the existence of the special resolution regime under review. As part of the Government's existing commitment to work in partnership with the industry in this area via the panel, I can announce that one of the first orders of business for the panel will be to review the safeguards order. If changes to the order are necessary and are compatible with the authorities' flexibility, the Government will make such changes before the Summer Recess. I hope this will reassure stakeholders on this point.
However, I should make clear that while an initial review this summer is appropriate, and while the panel will advise the Government on possible changes needed in the future, perhaps sparked by market innovation, it is not the Government's intention continually to change the safeguards order. Any perception that the order is subject to constant change could itself damage the certainty the order intends to bring to the market. Taking a little more time to review the order should allow a less hurried process for the Government and industry stakeholders definitively to iron out any the outstanding concerns in the medium term.
I now turn to the next safeguard featured in the order. This safeguard protects financial collateral and other secured arrangements to which a bank is party. In short, it provides that where either party has a security interest over an asset held by its counterparty, related to a liability owed by that counterparty, the asset may not be split up from the liability under a partial transfer. In this way, counterparties can continue to be confident that they will be able to have recourse to security they have taken.
There is also a safeguard for financial arrangements broadly covered by the term “structured finance”. These arrangements are referred to as “capital markets arrangements” and refer to, for example, covered bonds and securitised vehicles. The safeguard provides that partial property transfers may not interfere in the operation of such arrangements to which a bank is party by transferring some, but not all of the relevant property, rights or liabilities.
Noble Lords may recall from the later stages of the debates on the Act that we discussed issues related to events of default and financial contracts. The statutory instrument provides certainty for counterparties that a partial property transfer will not prevent them from calling events of default in relation to specified financial instruments, or set-off, netting or title transfer financial collateral arrangements. The measure also protects the operations of important central market counterparties, such as clearers and settlement houses from possible disruption under a partial property transfer. For example, clearing house default rules, which are given legal force by Part VII of the Companies Act, are given explicit protection.
I now turn to third party compensation arrangements regulations, which are made under Section 60 of the Act. Their purpose is to ensure that, following a partial transfer, no creditor will be worse off than he would have been had the whole bank been put into an insolvency procedure. In summary, the regulations provide that, where certain stabilisation options have been exercised under Part 1 of the Banking Act the,
“compensation scheme order or a resolution fund order”—
“include a third party compensation order”.
This compensation order must or may include certain provisions: for example, it must provide for the appointment of an independent valuer; and it must provide for the valuer to assess the treatment that the creditors of the failing bank that was subject to a partial transfer, would have received had the whole failing bank been put into insolvency. The order must also provide for the valuer to assess the treatment which such creditors have received, are receiving or are likely to receive if no compensation or further compensation is paid. If the independent valuer determines that a creditor in such a situation has been made worse off than he would have been had the bank entered insolvency, he must consider the compensation to be paid to that creditor. In assessing the amount of any compensation the valuer would be obliged to follow the principles specified in the regulations. These include the principle that no financial assistance would have been provided to the bank by the Bank of England or the Treasury after the relevant time specified in the regulations.
I remind noble Lords of the important protections that these statutory instruments provide to the market. I believe that this legislation, formed in intensive consultation with the industry, meets the vast majority of the market’s concerns. The Government are committed to working with the industry to ensure that the regime is as effective as possible. I thank various stakeholders for their hard work on this subject up to this point.
I commend the draft regulations and order to the Committee.
I thank the Minister for introducing the statutory instruments, which were not unexpected given the discussions that took place during the passage of the Banking Act earlier this year. We recognise that these initial statutory instruments dealing with partial transfers needed to be in place for the commencement of the Banking Act and have no problem with the fact that the Treasury has used the procedure laid out in Section 259 to lay the statutory instruments subject to later affirmative approval.
While the statutory instruments were published in draft in November, we are aware that there have been debates on the substance of them right up to almost the last minute before they were laid—the Minister referred to that in part. It would have been a miracle had the Treasury’s legal team got the statutory instruments 100 per cent right first time. I shall refer to the specific points that have been made to us later on so that at least they are clearly on the record.
From the perspective of the financial services industry, the use of the expert liaison group was regarded as a very constructive and good way of dealing with the detailed concerns about the secondary legislation, even though not all of those concerns have in practice been addressed. I hope that the Treasury will continue to work with the Banking Liaison Panel in a similarly constructive way to resolve any remaining issues. The work of implementing the Bill cannot be regarded as being at an end when these statutory instruments are approved.
While it is clear that consultation has worked well for the industry, I should like to raise it from a different perspective: that of Parliament. The Merits of Statutory Instruments Committee of your Lordships' House raised in its eighth report the fact that the documentation for the statutory instruments includes relatively little about the consultation with stakeholders. It noted that it is seeking further information on that from the Treasury. The Minister did not refer to it in his opening remarks. Can he update the Committee on how the Government intend to respond to that request?
Processes such as the expert liaison group and the Banking Liaison Panel serve a good purpose of bringing the market experts into the same room as the Treasury, the Bank of England and the Financial Services Authority, which should enhance the quality of the secondary legislation that is developed. However, at the same time, there is a danger that the process of consultation becomes virtually secret. For example, I know that the Treasury had a large number of consultation responses to the November consultation document, to which the Minister referred. Those responses are available on the Treasury website, but the Treasury has given little or no direct public response to the matters raised in them. For example, the documentation accompanying the impact assessment for the partial transfer safeguards order deals with consultation over the whole period since the first proposals were put into the public domain more than a year ago and with the changes over that period. However, that obscures the fact that there were a number of consultation responses to the very specific draft statutory instruments contained in the November proposals. There was no focus on the changes, if any, that were made following the November document.
Parliament has to approve these statutory instruments, for which the affirmative procedure is mandated. Parliament may also debate instruments which are made under the negative procedure. The information that is normally available to Parliament is a consultation, the responses to it and the Government’s responses to it. But when there is an inner circle of consultees, such as the expert liaison group, considerably less information is available to Parliament, which is what the Merits Committee was reflecting in its request for further information on consultation.
We discussed during the passage of the Banking Bill what degree of transparency should be attached to the processes of the Banking Liaison Panel, and the Government resisted any formal reporting requirements in respect of it such as the release of minutes. While I had some sympathy for that position at the time, when faced with statutory instruments such as those that we are considering today, the process of consultation has become almost invisible to those of us not involved in the detail. Perhaps the Minister could comment on how the processes of consultation could be made more transparent for Parliament when we consider any later instruments under the Banking Act, which I am sure will be intermediated through the Banking Liaison Panel.
I also ask the Minister to set out whether and to what extent the Government intend transparency of the workings of the Banking Liaison Panel to be implemented notwithstanding the lack of a formal requirement, as set out in the Banking Act.
Moving from process to the substance of the statutory instruments, I have received no specific comments on the Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) Regulations 2009, which the Minister referred to by their nickname of the “no creditor worse off” regulations. It is perhaps unsurprising that we received no comments on this statutory instrument, because our clear legal advice was that the “no creditor worse off” arrangements added nothing to legal certainty. They are nice to have, but not essential to the working of financial markets, so we must simply hope that if they ever have to be used—we hope they do not—the regulations are robust.
However, we received briefing from the British Bankers’ Association, the London Investment Banking Association and the International Swaps and Derivatives Association on the restriction of the partial property transfers safeguards order. This is what the Minister referred to in his introductory remarks. As I said earlier, I shall set out those concerns for the record. Those who have briefed us believe that they raise significant issues.
The first concern is the approach to safeguards for netting arrangements, and whether the definition of “excluded rights” in Article 1 is correct. I am told that there are two issues here. First, the definition of “financial instruments” cross-refers, in effect, to MFID, which will exclude a number of instruments and contracts that are commonly subject to netting arrangements. These include spot and forward foreign exchange contracts, physically settled commodities derivatives, and spot and forward bullion transactions as well as derivatives on newer asset classes such as longevity and mortality. Quite a number of areas appear not to be covered by the current reference.
Secondly, the definition of “excluded rights” is in terms of contracts entered into otherwise than in the course of an activity that relates solely to relevant financial instruments. The fear is that many contracts will become excluded rights just because they could include non-relevant financial instruments issues. I am told that this could be a problem, even if all the transactions under a master netting agreement are protected, but used to hedge a non-protected transaction such as a loan.
The Minister implied that the Treasury was aware of the technical issues; I am sure that it is fully aware. The Minister said that this would be on the first agenda of the Banking Liaison Panel, and that if any changes were necessary, they would be brought in before the Summer Recess. That is welcome up to a point, but I am also told that, as we speak, legal opinions on existing arrangements are being drawn up. If clean legal opinions cannot be given on existing arrangements, that could cause significant problems for those with material amounts of such contracts. In addition to causing specific difficulties for particular institutions, it could also put a further dent in the attractiveness of the UK and English law as the home for many of these financial instruments. I am sure that the Minister agrees that that would be undesirable given the pre-eminence of our financial services industry.
The second issue raised with us concerns the inclusion of small companies, which are protected by the Financial Services Compensation Scheme. The Minister also referred to this. A consequence appears to be that the FSA is saying that it is required by the EU capital requirements directive to treat balances with these customers on a gross basis. This obviously increases the regulated capital required to be held and the cost of capital that banks incur and—other things being equal—would lead to higher costs of borrowing for the small businesses within the retail deposits carve-out. I am sure that the Minister would not regard that as desirable either, especially in today’s economic environment.
The Minister will recall that we debated the problem of regulatory capital during the passage of the Bill. The November consultation document, at paragraph 2.16, said in terms that,
“the Government’s clear intention is to protect contracts relevant for regulatory capital purposes from the threat of disruption under a partial transfer”.
We urged the Government to place that clear commitment on the face of the Bill, but they declined to do so. We now appear to be facing an issue where regulatory capital will indeed be affected by the threat of a partial transfer. I am told that discussions are continuing with the FSA on this point and I do not know whether the Minister can update the Committee on that, but I understand that even if the regulatory capital issue is resolved, the same issue can also affect clean legal opinions where a group of companies contains one or more small companies, which most groups do.
I have a further point to put to the Minister on a more general level about future statutory instruments under the Banking Act. The Treasury was asked by the Merits Committee about the breach of the 21-day rule in relation to statutory instruments made under the 2009 Act and the Banking (Special Provisions) Act 2008. I have no problems with the responses that the Treasury gave in respect of the specifics, but when dealing with the issue of further statutory instruments made under the 2009 Act, the Treasury's memorandum submitted to the Merits Committee said at paragraph 27 that the Treasury's intention is to observe the 21 day rule,
“where this is necessary and appropriate”.
That is completely the wrong approach. The Treasury should observe the 21-day rule unless it can establish that it is necessary and appropriate to ignore it. Will the Minister confirm that the Treasury will regard the 21-day rule as of the utmost importance unless it is necessary genuinely to breach it?
I conclude with foreign property. The responses to the November consultation have one consistent theme—that foreign property is a problem. I note that the compensation arrangements do not cover the purported transfer of foreign property which is not effective due to foreign law, and the partial property safeguards order singles out ineffective foreign property transfers as not breaching the order. We discussed in Committee the broad area of who bears the risk of ineffective property transfers and I understand that the Government want to leave the risk wholly in the market. I will content myself today with one prediction, which is that foreign property will cause some real problems in respect of partial transfers whether in this country or—perhaps more likely due to regulatory action—in other countries, where the uncertainties regarding foreign property may lead to regulatory capital inefficiencies. I do not know whether those problems will in turn have an effect on our financial services market, but I hope that the Minister will confirm that the Banking Liaison Panel and indeed the Treasury will keep this firmly under review.
I, too, am grateful to the Minister for setting out the background and content of these regulations so fully. As the noble Baroness said, the concerns fall into two parts. The first relates to the consultation procedure and the second to the substance.
As far as the consultation procedure is concerned, there is no doubt that the expert liaison group played an important and positive role as the Banking Bill was going through the House. The regulations that we see today are the fruits of its work. Equally, the Banking Liaison Panel should carry forward at least the spirit of that work. The noble Baroness talked about the fear of the process becoming secret. One has to strike a balance—which she discussed. We want the process to be transparent but should avoid everyone spending their time reporting on what they are doing rather than doing it. In terms of good process, the process that led to the regulations that amended the Lloyds market had a lot to recommend it in the way in which it was reported to Parliament. We had a set of statutory instruments with a document attached—which was rather fuller than the documentation we have had today—that set out the representations that had been made and, as the noble Baroness suggested, the Government’s response to them. Therefore, at the time the statutory instruments came forward, we had a narrative of all the issues that had been raised, where there were still outstanding difficulties and why the Government had not felt able to accept proposals that had been made. That was a very satisfactory way of proceeding and is probably more satisfactory than having endless minutes, although, if one wants, one can have them as well.
The noble Baroness set out the concerns expressed by the BBA and others on the substance of the regulations. As the process moves on, the concerns become more technical and narrower. When we started, we were both being lobbied by the banking industry on the basis that unless the Bill changed quite significantly, it would be the end of banking as we know it in London. Although there is still a faint echo of that in the representations, great progress has been made. I was always slightly sceptical, given everything else that is going on in world financial markets, that London’s position would be undermined to the extent that was suggested if this legislative framework was not absolutely right at first blush. It is important that further discussions go ahead between now and the summer so that any outstanding concerns can be addressed as far as possible. However, I would be slightly surprised if, at the end of the process, there was not at least one eminent lawyer who disagreed with the consensus. My experience, not least in listening to eminent lawyers in your Lordships' House, is that getting consensus on many of these technical matters is absolutely impossible and, beyond a certain point, not worth seeking.
Finally, I echo the point made by the noble Baroness about the 21-day rule. It is difficult to see many circumstances in which the 21-day rule should not be followed. The terminology used by the Treasury is typical Treasury-speak; namely, “Oh, I suppose we might do this if we’ve got no option”, rather than, “We will do it, unless there is a real emergency”.
I thank noble Lords for their inputs on this subject. The noble Baroness, Lady Noakes, made the powerful point that the work of Banking Liaison Panel does not cease with the approval of these statutory instruments but is part of a continuing dialogue and role. The innovation and creativity of financial markets will almost certainly mean that we regularly have to revisit this and achieve clarity in our own minds that the existing provisions are appropriate to cope with new instruments as they emerge.
The noble Baroness also raised wider issues relating to consultation. I have considerable sympathy with her comments. A good consultation process is a dialogue. It is one in which people who take the trouble to respond are entitled to a considered and reasoned response. There are perhaps some pointers here that we should bear in mind in further consultations. The submissions we receive are posted on the Treasury website, which helps enhance debate and discussion, but it is a somewhat incomplete meal because it does not explain the responses, save in statements made to this House and in the other place during the evolution of legislation and instruments.
The noble Baroness raised questions also in connection with process in respect of the publication of the minutes of the Banking Liaison Panel. The Government are not opposed to their publication; indeed, we would be very happy to have them published if that was the wish of the Banking Liaison Panel. The first thing to do is to ensure that the panel is content that that is a way of working which will not inhibit it fulfilling the role that we expect from it. The forerunner, the expert liaison group, was happy with summary minutes being published; I hope that the Banking Liaison Panel may be drawn towards a similar conclusion, but we should leave it to it to establish its own views on that.
I have already referred to the issue relating to formal responses to the consultation process. I have added in that respect that I can commit that the published minutes of the BLP should be accompanied by a narrative on the Government’s response to consultation responses. I hope that that will take us a further, significant step forward in achieving an open dialogue and debate. The noble Baroness made another important point about the need to ensure that the Act and these statutory instruments are consistent with promoting the UK as a good place in which to conduct the business of banking. One of the ways that we shall do that is by showing clearly the way in which we arrive at public policy decisions.
The Government responded to the Merits Committee’s eighth report and its request for more information on the consultation process. Our response appeared in the Merits Committee’s 10th report and I direct noble Lords to it. I am also inclined to agree with the noble Baroness and the noble Lord, Lord Newby, about the form of words used in respect of the 21-day rule, which we should always endeavour to respect. Rather than say that we shall comply where necessary and appropriate, I would prefer to reverse that and say that we shall comply unless there are circumstances in which we judge that to be unnecessary or inappropriate. In such circumstances, we would explain why we had reached that conclusion.
The noble Baroness, Lady Noakes, raised a point in respect of smaller companies. In making the order, the Government needed to strike a balance between ensuring that they can deliver vital continuity of service, about which the noble Baroness was particularly concerned when we debated the Bill, and liquidity for small businesses in the event that their bank fails and suitable protection for the more advanced risk mitigation techniques that may exist between larger firms and their banks. For this reason, the Government believe that a carve-out from the netting protection for all FSCS-eligible depositors, including small companies, is appropriate to allow the authorities effectively to provide continuity of service for those depositors.
However, we are aware that certain stakeholders believe that the combination of this carve-out and the FSA’s interpretation of the relevant European rules could lead to firms requiring more regulatory capital. We are investigating this concern and are aware that there will be a meeting between the FSA and the banks on this topic soon. Irrespective of the FSA’s position, I note that how banks meet increased regulatory capital costs is a commercial decision for them. The Government will be watching developments in this area carefully. I have already indicated that the Banking Liaison Panel will review the order now that it has been made. This issue will be picked up as part of that review.
The noble Baroness raised a point about foreign property and made a forecast, which we shall watch with interest. Foreign property is not carved out of the safeguard. We think that the likelihood of foreign banks withdrawing from lending to UK banks due to formulation of the safeguard is very small. We have formulated the safeguards to ensure that the UK authorities have the necessary flexibility to make partial transfers of failing banks in the interests of financial stability, reducing risk for the UK taxpayer. The Government take this position for the following reason: foreign property is not carved out of the set-off and netting safeguard. The order simply states that if property that UK authorities attempt to transfer is not transferred due to the failure of a foreign court to recognise the transfer, this failure does not constitute a breach of the order by virtue of not all the relevant property rights or liabilities being transferred.
Foreign counterparties are likely to want to be transferred and ought to be able to take action before their local courts to get a transfer recognised. Counterparties could write into their contracts the need for a foreign bank to recognise a transfer under the SRR. A partial transfer under the SRR is almost certainly a reorganisation measure under the Credit Institutions Winding-Up Directive. As such, EEA states are required to recognise the transfer.
The noble Baroness asked, too, about the scope of the safeguards order and whether it was wide enough for relevant financial instruments. As I indicated in my opening remarks, we are aware of concerns in this area that some stakeholders hold. It is our understanding that these concerns are primarily related to technical drafting and that there are varied legal interpretations on whether some relevant financial contracts have been excluded. I should note that in drafting we amended the order to address the core concern in relation to relevant financial instruments—the need for the order to cover loans. As I mentioned earlier, as part of the Government’s existing commitment to working in partnership with the industry, the Banking Liaison Panel will review the safeguards order. If changes to the order are desirable, the Government will make such changes before the Summer Recess; we certainly recognise the need to do that as quickly as we can, subject to doing a good piece of work, because we understand that opinions will be developed on the basis of these statutory instruments.
The noble Baroness reminded us that when this Act was first discussed, many forecast that the roof would come tumbling in on our heads. A considerable degree of credit for the fact that it has not is due to this Chamber and the debates that took place over a number of days, when we progressively improved the quality of the Bill that had been presented to Parliament. A great deal of credit is also due to the expert liaison group for the work that it has done, which I am sure that the Banking Liaison Panel will continue to do in what I think we all acknowledge is an extraordinarily tricky but very important area for an important part of our financial economy.
I hope that these comments go some way to assuaging noble Lords’ concerns. I reiterate that the legislation was formed in close consultation with the industry and it was necessary to make it in time for the commencement of the Act. As I have indicated, it will be subject to further review this summer in close consultation with the industry, under the auspices of the new Banking Liaison Panel.
Banking Act 2009 (Restriction of Partial Property Transfers) Order 2009
Considered in Grand Committee
Banking Act 2009 (Bank Administration) (Modification for Application to Banks in Temporary Public Ownership) Regulations 2009
Considered in Grand Committee
That the Grand Committee do report to the House that has considered the Banking Act 2009 (Bank Administration) (Modification for Application to Banks in Temporary Public Ownership) Regulations 2009
Relevant Document: 8th Report from the Joint Committee on Statutory Instruments.
I cannot say that this is a terribly exciting statutory instrument but I will seek to bring it to life as best I can. In moving this Motion, I shall speak to two other statutory instruments: the Banking Act 2009 (Bank Administration) (Modification for Application to Multiple Transfers) Regulations 2009 and the Banking Act 2009 (Parts 2 and 3 Consequential Amendments) Order 2009.
The two sets of regulations apply the bank administration procedure that is set out in Part 3 of the Banking Act 2009 to various scenarios. Although we have recently debated this Act, let me set out a brief background to the bank administration procedure to provide the context to the first two regulations.
The bank administration procedure supports the use of the property transfer resolution tools under the new special resolution regime. This procedure may be required in the event of a partial transfer of a bank’s business to a new publicly owned company, such as a bridge bank, or to a private-sector purchaser. Where a partial transfer takes place, the “residual bank”, which is the part left behind, may be insolvent and, crucially, some essential services and facilities that are required by the transferee to conduct any business transferred to it may be non-transferable.
In such circumstances, in order to ensure the business transferred from the bank can continue to be operated effectively, under the provisions of Part 3 of the Act, the Bank of England may make an application to the court for a bank administration order.
Under a normal administration, the administrator would have no obligation to provide support facilities to a commercial purchaser or bridge bank and would be required to take actions in the best interests of creditors. This could include taking immediate steps to wind up the affairs of the company, selling its assets and distributing the proceeds to creditors. Such action could threaten the successful resolution of a failing bank through a partial transfer since it may render a bridge bank unworkable or deter any private-sector purchaser from making an acquisition. Private-sector purchasers are likely to have a low appetite for risk and, if they are not sufficiently assured that services will continue to be provided to the transferred business, they may refuse to take part in the transaction.
Clearly, the bank administration procedure places a duty on the court-appointed bank administrator of an insolvent residual bank to provide essential services and facilities to the transferee. To this end, the bank administrator will have unique statutory objectives: first, to provide support to a commercial purchaser or bridge bank and, secondly, to rescue the residual bank as a going concern or wind up its affairs in the best interests of creditors.
Once it is no longer necessary for the residual bank to continue to provide support services, the procedure would continue in a similar way to an ordinary administration. The procedure is largely based on existing insolvency provisions, specifically the procedure of administration as set out in Schedule B1 to the Insolvency Act 1986. To keep down costs, maximise returns to creditors and protect the interests of creditors by providing for a full range of outcomes, some of the existing powers of a liquidator have been built in to the procedure.
The Banking Act 2009 (Bank Administration) (Modification for Application to Banks in Temporary Public Ownership) Regulations apply the bank administration procedure to situations when a bank or bank holding company has been taken into temporary public ownership and then later the Treasury transfers some of the business of a bank in temporary public ownership to another person such as a private sector purchaser. In such circumstances the Government believe that it is appropriate for the Treasury to apply to the court for a bank administration order. This will be done where, in the opinion of the Treasury, the bank from which the business has been transferred is, or is likely to become, unable to pay its debts, and the residual company is required to provide services or facilities to the transferee.
The Banking Act 2009 (Bank Administration) (Modification for Application to Multiple Transfers) Regulations modify the provisions of Part 3 of the Act to apply in circumstances where the Bank of England or the Treasury transfers the property, rights and liabilities of a bank to more than one transferee. This ensures that the provisions made for bank administration accommodate effectively situations where multiple property transfers are made in respect of the business of a bank. An example could be a transfer of a failing bank’s business to different private sector purchasers, all of whom require the use of some of the services or facilities of the residual bank.
The general process of bank administration set out in Part 3 of the Act will work in the same way in relation to multiple transfers as it does where a transfer is effected by a single property transfer instrument. However, these regulations make necessary modifications primarily to the bank administrator’s objectives and the duration of the objectives, so that it is clear that the bank administrator is under a duty to ensure the provision of services and facilities from the residual bank to each of the transferees. Both these statutory instruments support the Government’s policy of having a flexible special resolution regime in place to deal effectively with the varying circumstances in which intervention might be required to resolve a failing bank.
Finally, the Banking Act 2009 (Part 2 and 3 Consequential Amendments) Order 2009 makes consequential amendments to existing legislation. Part 2 of that order is drafted to ensure that references within certain pieces of legislation to the insolvency of companies also refer, where applicable, to the new insolvency procedures created by the Banking Act. The bank administration procedures that I described earlier and the bank insolvency procedure—the modified insolvency procedure under Part 2 of the Act—are designed to facilitate the FSCS making a fast payout to depositors in the event of a bank’s insolvency. The schedule to the order contains a list of enactments so modified.
Part 3 of the order provides that, as a consequence of bank insolvency or bank administration, certain pieces of primary legislation are to be read with specific modifications. For example, the order modifies the Companies Act 2006 to allow disclosure of information by or to the authorities under Parts 2 and 3 of the Banking Act to be treated in the same way as disclosure in an insolvency to the authorities under the Financial Services and Markets Act 2000 or the Insolvency Act 1986. This part also sets up textual amendments to statutory instruments to provide for bank insolvency and bank administration to be included alongside the references to general insolvency proceedings within these instruments.
The bank administration and bank insolvency procedures have been consulted upon and were broadly supported by stakeholders. The regulations before us adapt the bank administration procedure to support the different resolution options provided for in the Act. The order makes consequential amendments to other legislation to ensure that, as is supported by stakeholders, the new bank insolvency and bank administration procedures apply to relevant legislation in a similar way to normal insolvency and administration procedures. I commend the draft orders to the Committee.
I thank the Minister for introducing these orders. He will be relieved to hear that I have only one point to raise on them because they are really much too technical for me. It takes us back to a point I raised on the earlier group of orders; namely, consultation. My point was there were draft statutory instruments available for the November consultation, but the process of consultation stopped being visible to Parliament. Very little consultation has been carried out on these orders. For the order relating to consequential amendments, the only consultation was within government and, as far as I can tell, there has been no consultation on the other two orders. The orders are highly technical, and it may well be that only insolvency experts and, possibly, the BBA would have had something to say on them, but it is the hallmark of good government to consult on draft instruments, especially when they are technical, even if the full three months that we normally expect for consultation could not have been met. So far as these orders are concerned, it is water under the bridge, and I am not going to object to them on the grounds of lack of consultation. However, I hope that the Minister will commit the Treasury to a more normal process for any further orders that are issued under the Banking Act or, indeed, more generally so that, even if they are highly technical orders of which few would understand the detail, the normal process of exposure to obtain the views of stakeholders is followed.
In introducing this short debate, the Minister said that these are not very exciting orders but he would do his best to breathe life into them. I am sure he has done his best, but it is a tough job being a Minister at times. These are very technical orders, and we have no objection to them.
I thank the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, for their comments. I referred earlier to consultation. I remain strongly of the view that good legislation and effective orders are more likely to arise as a consequence of an open consultation in which thinking is exposed to challenge and those responsible for drafting are informed by a wider community of experts. That is particularly the case in orders of the sort we are looking at today, relating to what we all recognise are extraordinarily complex and technical matters. In parenthesis, one might say that perhaps bankers should give some thought to whether complexity is something to be eschewed in future in the interest of going back to something simpler and more straightforward. However, for the time being, we need to ensure that the orders we have in place are consistent with the needs of the sophisticated banking market. I shall seek to ensure that, in developing future orders, we will be alert to the benefits of consultation and will seek out consultees rather than simply waiting for them to come to us; although in the same way that I, quite extraordinarily, failed to achieve an animated debate about something as interesting as these orders, it may be a Herculean challenge to get more than the usual suspects to express views on orders of this sort. However, it is incumbent upon government, and to government’s benefit, to encourage wide consultation. In developing orders, we will benefit from the advice that we receive.
Banking Act 2009 (Bank Administration) (Modification for Application to Multiple Transfers) Regulations 2009
Considered in Grand Committee
That the Grand Committee do report to the House that has considered the Banking Act 2009 (Bank Administration) (Modification for Application to Multiple Transfers) Regulations 2009
Relevant Document: 8th Report from the Joint Committee on Statutory Instruments
Banking Act 2009 (Parts 2 and 3 Consequential Amendments) Order 2009
Considered in Grand Committee
Bradford and Bingley plc Compensation Scheme (Amendment) Order 2009
Considered in Grand Committee
I beg to move the Motion standing in my name on the Order Paper. I will also speak to the Northern Rock plc Compensation Scheme (Amendment) Order as the two draft orders are related.
In February 2008, when it became apparent that it would be impossible to achieve a private-sector sale of Northern Rock that would adequately protect taxpayers’ and consumers’ interests, the Government transferred into temporary public ownership all shares in Northern Rock. This transfer was effected using the powers conferred on the Treasury under Section 3 of the Banking (Special Provisions) Act 2008.
Section 5 of that Act specifies that, where an order is made under Section 3, the Treasury must make an order providing for a scheme for determining the amount of any compensation payable to former shareholders of Northern Rock and other specified persons. In accordance with this requirement, the Treasury made the Northern Rock plc Compensation Scheme Order on 12 March 2008. The order makes provision for the appointment of an independent valuer to determine the compensation, if any, payable to the former shareholders of Northern Rock and other persons specified in Part 2 of the Schedule to that order. Following a competitive process, the Treasury announced in September 2008 that an independent valuer had been appointed to undertake the valuation exercise.
In order to ensure that the valuer is able to do his work efficiently, it is essential that he has the powers necessary to conduct his valuation work. The Treasury made clear in its brief to applicants that it would consider any requests by the valuer for powers additional to those set out in the compensation scheme order, which the valuer considers are necessary for the effective conduct of the valuation exercise.
The independent valuer has requested from the Treasury powers to obtain from third parties information reasonably required for the purpose of assessing the amount of any compensation payable. Having considered that request, the Treasury laid in Parliament the Northern Rock plc Compensation Scheme (Amendment) Order 2009, which confers powers on the valuer to apply to the court for an order compelling the production of information by third parties.
The court process will enable any persons from whom the information is sought, or to whom the information relates, to make representations to the court as to why the information is not reasonably necessary for the purposes of the valuation exercise. The order makes provision specifying the circumstances in which a person may not be required to provide information—for example, information in respect of which a claim to legal professional privilege could be maintained in legal proceedings. The order also makes it clear that the independent valuer may share information with his staff and advisers, and disclose information if necessary for the purposes of exercising the functions of his office. Information must not be shared more widely without the consent of the persons from whom the valuer obtained the information and to whom the information relates. The valuer must have regard to the need to exclude from disclosure, so far as practicable, certain classes of information, such as commercially sensitive information. The order also specifies that a person who provides information to the valuer for the purposes of the assessment of the amount of any compensation payable is not, by that reason, liable in any proceedings relating to a breach of confidence.
As the Committee will be aware, the Treasury has recently commenced the process for the appointment of a valuer to undertake the valuation exercise in accordance with the Bradford & Bingley Compensation Scheme Order 2008, which was made last December. Under that scheme, the valuer must assess any compensation payable to the former shareholders of Bradford and Bingley plc and other specified persons who suffered interferences in their property rights arising as a result of the provisions of the Bradford & Bingley Transfer of Securities and Property etc. Order 2008
The Treasury considers it appropriate that the person appointed as the valuer should have the same powers as the Northern Rock valuer. Therefore, the same powers for information gathering and sharing are conferred on that valuer and are set out in the Bradford & Bingley plc Compensation (Amendment) Order 2009. In addition, it is important to note that Article 3 of the order amends paragraph 5 of the Bradford & Bingley Compensation Scheme Order to make it clear that the independent valuer must assess any compensation payable to any subordinated debt holders who suffer compensatable interferences in their property rights arising from the amendments to Article 6 of the Bradford & Bingley plc Transfer Order, specified in the Bradford & Bingley plc Transfer of Securities and Property etc. (Amendment) Order 2009.
I hope that the Committee will agree that it is necessary to confer these information-gathering powers on the independent valuers for Northern Rock and Bradford & Bingley in order to ensure that they can conduct the valuation process effectively and that the valuers may reach their determinations without unnecessary delay. I commend both instruments to the Committee.
I thank the Minister for introducing these two orders, which are of course not unexpected, given the insertion of Section 237 into the Banking Act during its passage through this House.
I have been uncomfortable about Sections 55 and 237 of the Act, and these orders leave me no more comfortable about the valuers being given the power to compel the provision of information. With regard to procedure, the valuer has to apply to the court to get the information, which seems sensible, but the order says nothing about procedure. For example, does the valuer have to notify the person whom he wishes to compel about the application? How much notice must he give? What rights do the persons who could be affected but who are not the ones who are compelled to give the information have? The Minister implied that such rights exist but there is nothing in the order setting that out.
When considering Section 237 during the passage of the Bill, we were told that the Northern Rock valuer wanted to obtain information from the auditors and from potential commercial purchasers for Northern Rock, but in the event they were not permitted to proceed with the acquisition of Northern Rock. I assume, therefore, that those persons declined to give that information voluntarily. Thus a Banking Act valuer would be in a position to obtain information which, in the ordinary course of events in the commercial world, he would probably not be able to obtain. I believe that that places an onus on the Government to ensure that the persons who can be coerced into giving information are fairly treated.
Section 55(3) allows the Treasury to make provision about procedure but this order has not done so. Can the Minister explain why? My concerns are increased when we get to the information disclosure elements of the order. Proposed new Section 9C seems to give good protection in the form of consent for persons who are forced to hand over information to the valuer or who are affected by the information, but that is considerably watered down by proposed new Section 9D and, in particular, proposed new subsections (3) and (4). Will the Minister explain in what circumstances the valuer might need to disclose information he has obtained for the purposes of his office, as referred to in proposed new subsection (3), against the wishes of the person forced to give the information?
In connection with proposed new subsection (4), will the Minister explain why the rider “so far as practicable” is attached to the valuer having regard to the need not to disclose commercial or private information? Surely, there should be an absolute requirement to respect commercially confidential information and, perhaps even more importantly, private confidential information.
Can the Minister explain what remedies are available to deal with the improper disclosure of information by a valuer? That is disclosure by the valuer of information that is obtained by virtue of the powers that are given to him, but which are not within the specific terms of the order. Can the valuer be liable in damages if information is disclosed without consent or one of the protections offered by the order?
In addition, Section 55 allows the Treasury to create a criminal offence in connection with an order, but it has chosen not to do so. Criminal offences are not unusual protections against the abuse of information powers. That is particularly important because once information has been disclosed, it cannot be put back into the private domain. Proper sanctions are extremely important. Perhaps the Minister can explain why the Treasury has not used its power to create an additional protection for those who might be forced to disclose information.
The Minister would not expect to get through a debate on either Northern Rock or Bradford & Bingley without some more general questions. Of course, the possibilities are endless, but I shall confine myself to business plans. We have still not seen a business plan for Bradford & Bingley, notwithstanding that its mortgage book has been nationalised for nearly six months. How difficult is it to prepare a business plan for a rump organisation? Can the Minister at last be precise about when we can see its business plan? Taxpayers have a right to know what is being done with their money.
Turning to Northern Rock, a business plan was prepared last year, although only the briefest of outlines was put into the public domain. In January, the Government announced a U-turn and said that Northern Rock would tear up that business plan and start lending again. However, two months on we have seen no revised business plan even though Northern Rock itself has said that it will involve capital and legal restructuring. I remind the Minister that taxpayers’ money is bankrolling this organisation.
Lastly in this context, will the Minister say who is setting the agenda for these organisations? Is it the Treasury or UKFI? Whoever it is seems not to understand the meaning of speed or accountability. We need to be clear about who is to blame.
As the Minister said, these are not surprising statutory instruments; we have expected them for some time. I start where the noble Baroness just finished in terms of speed. In respect of Northern Rock, the whole process of the evaluation of Northern Rock’s assets has happened at a snail's pace. As the Minister pointed out, the order allowing a valuer to be appointed was made on 12 March. Six months later, a valuer was appointed. In my view, that was a completely unacceptable delay. How difficult can it be to appoint a valuer of a bank that is bust?
Secondly, why have we had a six-month gap between the valuer being appointed and this order coming forward? More important, in respect of Northern Rock, is why such an order should be necessary at all. What kind of body is refusing to divulge information to the valuer that could have a serious influence on the valuation of Northern Rock? To a non-technical person, the conditions that were placed on the valuer would seem by definition to mean that Northern Rock had no residual value at the point at which it was nationalised. It would be extremely helpful to know what class of person is refusing to co-operate with the valuer in this respect, because it is shameful behaviour.
The noble Baroness talked about the need to be concerned about people who are coerced into giving information in respect of both these orders. It is not a question of being coerced into giving information. Anyone who has information that is relevant to the process should, as a matter of public duty, be willing to give it. If he has to be dragged to court in order to give it, he should not feel that he is being coerced. Rather, he should not be allowed to act as an obstacle to the pursuit of the public good.
The noble Baroness rightly talked about the delay in seeing a business plan for Bradford & Bingley. She will recall that when Northern Rock was being nationalised, we were promised a strategy document by the Government within days of the Bill being passed which never appeared, despite assurances on the Floor of the House that we would see it within a day or two. I am slightly jaundiced about the Government making available business plans in respect of these two bodies. I revert to this: I accept that Bradford & Bingley is a more complicated case, but is the Minister able to tell us why on earth anybody needs to have this procedure applied to him given the situation in which Northern Rock finds itself? Who is obstructing the valuer in trying to get the information which he feels he properly needs?
The noble Baroness, Lady Noakes, asked about the procedure for applying for information. The valuer would of course notify any third party of information required by the valuer for the purposes of the evaluation exercise.
We anticipate that he would notify them at the same time as the court procedure is commenced. If the third party refuses to comply with the request, the valuer may apply to the court at the same time and the third party would be put on notice. The court may also invite any party to make representations. Therefore, the third party’s interests are properly protected.
The noble Baroness raised a number of questions about why we did not specify protections in the order and a remedy for inappropriate disclosures. On the question of protections, I should like to write to the noble Baroness and the noble Lord in explanation as to why in this case such protections were not included. As for the remedy for inappropriate disclosure, if the valuer discloses confidential or private information not in accordance with the provisions of the order, it is possible that a person may bring a claim for breach of confidence.
Questions were also raised by the noble Baroness and the noble Lord on the business plans for Northern Rock and Bradford & Bingley, whose business plan will be finalised by 29 March 2009. A high-level business plan will be published very shortly thereafter. I cannot give precise dates as this is a matter for Bradford & Bingley’s board. The Northern Rock business plan will be published shortly following the Chancellor’s decision to split Northern Rock into two banks, one to enable £14 billion of new mortgages to be granted over the next two years.
Questions were raised by both the noble Baroness and the noble Lord about the people from whom information was being sought by the independent valuer, who has made representations to the Treasury seeking powers to obtain information. Given that this is an independent valuation process, it is right that the Government provide these powers. I am not in a position to comment on who, if anyone, has refused to give information as this is an independent valuation process. The process of valuation is complex but very sensitive, and it is important that the independent valuer has all necessary powers to complete a valuation which is independent, thorough and beyond reasonable challenge. It is in those circumstances that we seek the authorities embodied in these instruments.
Will the Minister return to the issue of not commenting on from whom information is not obtained? When he introduced the orders, he said that they would make an order if the valuer made a reasonable case for the information to be obtained. Is the Minister saying that the Government will not share with Parliament what that reasonable case is based on? Once an order is granted, presumably this could end up in court and it would be plain and evident in any event. I referred in my own remarks to the auditors and to one or more potential purchasers of Northern Rock, on which I understood—though from memory, so I cannot quote chapter and verse—that the Minister informed the House during the passage of the Banking Bill. I am just a little concerned about what this secrecy is all about, because it is not enough for the valuer to say, “I want to get information at will”. The Government rightly referred to the fact that that request had to be reasonable. Therefore, they should be prepared to share with the House the nature of that request made to them.
I believe that the identity of those from whom the valuer sought information would become a matter of knowledge when the valuer sought the necessary court order, if required, to secure the information. However, I am not in a position to give details of the people from whom the Northern Rock valuer is currently seeking information because I have not been given them, nor would it be right for me as a Minister to seek that information in any way that might seek to interfere with the work of the independent valuer.
I am sorry, but we have to probe this a little further. The procedure is that the Government decide to confer the powers on the valuer. It has to decide that on the basis that the Minister explained from his own speaking notes, which was that a reasonable request had been made. The valuer does not just come up to the Treasury and say, “I want to go to the court to get whatever information I want, so give me a broad power”; it must make a case. If the Minister is saying that they are handing out those powers willy-nilly, Parliament should be much more concerned about the way in which they are being used. We had assumed from the Minister’s remarks that the Government were satisfied that it was appropriate to give the valuer this power because of the circumstances of the case. The Minister is now saying that it is not appropriate for the Minister to know—but it is of course appropriate for the Minister to know. I request that the Minister reconsider that position.
We have been informed that certain parties have declined to provide information to the independent valuer. I am not in a position to identify those parties. Should the valuer continue to seek information from them, and it is not forthcoming, the valuer may apply to the court, which will then assess whether the information should be provided. That is a very careful process, in which the court exercises the ultimate judgment as to whether the valuer has made a case that the information is necessary to the valuation process, and in which parties’ rights are appropriately and sensibly protected while facilitating the completion of a professional and independent valuation.
Motion agreed to.
Northern Rock plc Compensation Scheme (Amendment) Order 2009
Considered in Grand Committee
Official Statistics Order 2009
Considered in Grand Committee
All members of the Committee will be aware of the important work being done by the UK Statistics Authority. The body was created by this Government last year with a statutory responsibility to promote and safeguard the production and publication of official statistics.
Two of its main functions are to monitor and report on official statistics, wherever they are produced in the UK, and independently to assess the quality of a core set of key official statistics for formal approval as national statistics.
The order before us today relates to the definition of official statistics; that is, the set of statistics that the authority must monitor and report on. Under the Statistics and Registration Service Act 2007, which created the authority, all statistics produced by the Office for National Statistics, government departments, the devolved Administrations and other Crown bodies, are automatically deemed to be official statistics. This means that numerous bodies are automatically under the oversight of the statistics authority and must follow its code of practice. For example, the Insolvency Service, the Child Maintenance and Enforcement Commission and the DVLA are Crown bodies, and are thus official statistics producers.
However, the Act also allows us to add further statistics by order, so that we can cover bodies that do not fall within this core definition but which clearly produce statistics that we feel it is important for the public to have trust in. Such bodies that do not fall within the core definition but which should produce official statistics include the Training and Development Agency for Schools and the Independent Police Complaints Commission. If a body is included in this order, the public can be assured that the statistics authority can monitor and comment on its statistical work. It also makes it possible for a statistic to be nominated for formal assessment as a national statistic, assuring the public that it has been produced in a way that is fully code compliant.
During debates on a similar order last year—the first such order—the Government accepted that they would need to return to the House of Lords with a new list of bodies. The priority last time was to make sure that all producers of national statistics were covered, but other bodies were included with different departments applying different criteria for nominating bodies for inclusion. We have this year made the criteria clearer and the result, with which I hope the Committee will agree, is a more coherent list. The bodies in the list are producers of significant, national-level statistics which the Government feel are important that the public should trust.
In the Act, the Government are required to consult the statistics authority before laying the order. Officials from the Cabinet Office have worked closely with the authority while drafting this order. The authority has had several opportunities to comment on the drafts. After the formal consultation required by the Act, the authority has said that it is content with the order before us today. We expect to update this list once a year. It is an advantage of the flexible definition in the Act that we can respond to changing needs and refine the list in this way, subject to parliamentary scrutiny.
In summary then, the order extends the number of bodies which are subject to the UK Statistics Authority’s oversight. These bodies will have to work to the new code of practice for official statistics, and their statistics will have the potential to be nominated for formal assessment by the authority to be national statistics. It is a vital part of the Government’s statistical reform programme, allowing greater independent monitoring and assessment of official statistics in order to enhance public trust in statistics. I commend the order to the Committee.
The Minister may or may not be aware that, last year, with the support of the noble Lord, Lord Turnbull, I submitted a paper to the Liaison Committee of the House in which we recommended that the accountability of what was then called the Statistics Board, but which is now the UK Statistics Authority, should be to a Joint Committee of both Houses. I am happy to say that the Liaison Committee accepted that proposal unanimously, and that the former Leader of the House, the noble Baroness, Lady Ashton, wrote to her opposite number in the other place, Harriet Harman, and asked that this should be drawn to the attention of another place with a view to its agreeing to set up a Joint Committee.
I am perfectly certain that the noble Lord, Lord Brett, had nothing whatever to do with this, but the fact is that, after three months, we had no reply at all from another place. In the event, the noble Baroness, Lady Ashton, had to tell me—as she said, “with some regret”; and, of course, the Liaison Committee’s report had been approved unanimously by this House—that the Leader of the House in another place had refused to accept the recommendation of this House.
Therefore, the position now is that the UK Statistics Authority is accountable only to a Select Committee in another place and not to this House. Happily, there are opportunities, and this is one of them, for Members of this House to exercise a form of parliamentary accountability that should, to some extent, make up for the lack of the proper, formal accountability that we should have had. I make no secret of the fact—and I am sure that the noble Lord’s advisers will confirm it—that from the very beginning of the procedures on what became the Statistics and Registration Service Act 2007, I argued that there should be a Joint Committee of both Houses. At every stage of the Bill, I had the same argument. In the end, that was accepted by the Liaison Committee and this House. However, because the other place did not agree—the right honourable Harriet Harman refused to accept that proposition—the noble Lord, Lord Brett, finds himself, through no fault of his own, in the unfortunate position of being subjected to a form of accountability for statistics. This is the only opportunity we have to raise this, apart from going in for a ballot and having a separate debate on a separate question.
The noble Lord produced a perfectly sound argument about why the order is necessary. That is to say, some 54 new bodies whose official statistics are going to be subject to control, review and monitoring by the UK Statistics Authority need to be added. If that authority agrees that the statistics produced by all these bodies comply with the code—and I shall have a word to say about that in a moment—they may be classified not just as official statistics but as national statistics.
What is the purpose of this? The noble Lord very properly said that the purpose is to give assurance to the public that the figures that they are being issued with by these various bodies, including government departments and Ministers, can be trusted. He used the word “trust” twice, and he used the phrase, which is exactly what the Minister said in the other place,
“assuring the public that it has been produced in a way that is fully code compliant”.—[Official Report, Commons, Third Delegated Legislation Committee, 2/3/09; col. 3.]
If the noble Lord looks at his notes, he will see that he said exactly those words.
What is the example that is being set to these 54 bodies to produce statistics in a way that complies with the code? Perhaps we should first look at the code. It has a foreword by the chairman of the authority, Sir Michael Scholar, that sets out a code of practice for official statistics. It is divided into a number of principles. Principle 1 is meeting user needs, Principle 2 is impartiality and objectivity and Principle 3 is integrity. It states:
“At all stages in the production, management and dissemination of official statistics, the public interest should prevail over organisational, political or personal interests”.
That is so obviously right. Indeed, we argued throughout the passage of the Statistics and Registration Service Bill that these were the kind of principles that the Government were seeking to establish in order, as they put it, to build trust or, as we said, restore public trust, in statistics.
What has happened since then? First, an OECD survey showed that, out of the 27 countries in the European Economic Community, this country ranks 27 on the question of public trust in statistics. The EU average for trust is 46 per cent and not trusting is 45 per cent—the balance is “don’t know”. In this country, only one-third of those polled trusted official statistics, and nearly 60 per cent did not trust them. This country ranks 27th out of 27 in the crediting of official statistics. If that is going to be corrected then, at every level, the Government as well as the 54 new bodies being added by this order must comply with the principles of the code of practice. Under Principle 3 about integrity, there is a whole lot of things; I shall not bother to read them all out, because they are all perfectly clear.
What is the most recent example that we have had of a Government issuing statistics in a way that they ought not to have? I put it neutrally. Noble Lords will remember that No. 10 and the Home Office issued press releases apparently quoting statistics about knife crime and admissions to accident and emergency units as a result of knife crime which totally failed to comply with anything in the code of practice. Worse than that, not only did they not comply but a whole series of e-mails have been published by the Select Committee in another place—which has not yet issued its report; I am very much looking forward to that—that passed between No. 10, the Department of Health and the National Statistician on whether those statistics should have been published in that form. At every single level of officialdom, it was said firmly that those statistics should not be published as they had not been checked or verified, had not been subject to any of the normal rules of the dates and time of release of statistics and that it would be an outrage if they were published. The fact of the matter is that that counted for nothing. The demand that the knife crime statistics should be published came from the Prime Minister. There is a minute from 10 December that says:
“Here is the statement that the PM would like us to publish tomorrow as part of the knife crime announcement”.
Then come the details of the statistics that he wanted. There was a very firm view by officials directed to No.10, expressed in another e-mail of 10 December, saying:
“I’ve spoken to a number of people here, including the Head of Profession at the NHS IC and our view is that these provisional data are NOT released.
Our reasons are:
1) As explained already these are provisional data for 2007/08 and 2008/09 and therefore they are potentially inaccurate and may possibly give the wrong impression”.
The second reason is perhaps less creditable. It says:
“2) If we allowed these data to be published, we open ourselves up to provide these provisional data to others who may ask for data which shows different trends”.
That is to say, somebody might ask for data that might show the whole thing up in a much less favourable light. That is the way that this Government now think, apparently.
However, that had no effect. A later e-mail, after a number of futile telephone calls, stated, “I have also been informed that Number 10 are adamant about the need to publish this statistic. As a result, I have been informed that they are likely to publish the data irrespective of the concerns raised”. The representations went right to the top. They went to the Permanent Secretary at Number 10, Jeremy Haywood. The National Statistician, Karen Dunnell, “has spoken to Jeremy this morning about the inclusion of certain unpublished statistics in a statement the PM may be making.” It was all for no purpose at all. Number 10 went right ahead and published the statistics. Why did it do that? It turned out that Mr Brown, the Prime Minister, had an appointment to meet a number of parents of the victims of knife crime that day, and he wanted to have the statistics published to show that everything was getting much better. That is why.
What sort of example does that set to the 54 bodies listed in this schedule? How will that restore public trust in statistics? What sort of temptation may some of these bodies be under to say, “Well if it’s all right for the Prime Minister, it’s all right for us”? We had an apology from Jeremy Haywood who said that perhaps they did not pay enough attention to the views of the professional statisticians. What he meant was that the Prime Minister did not pay enough attention to the views of the professional statisticians. He summed it all up in the word “we”. There was a brief apology on the Floor of the House from the Home Secretary, who said that perhaps some of the statistics should not have been published and that she was sorry. Both apologies were totally inadequate for what was a major breach not only of the code, but of all possible principles that should apply to the issue of statistics.
The Minister has commended this order to the Committee on the grounds that it greatly extends the list of bodies whose statistics the public will be invited to trust. But 27th out of 27? We can only go up. The history of this Government’s misuse of statistics has been utterly deplorable. Ministers must recognise that if they are going to achieve their objective of restoring public trust in statistics, the kind of example set by the Prime Minister last December has simply got to stop.
When it issues its report, I would expect the Select Committee in another place to use more politic language than I have used, but for those of us who took part from the very beginning in the proceedings on the statistics Bill, it is nothing short of disgraceful that here we are, more than two years later, still facing such misbehaviour by Ministers, despite the best advice that they could get from the people who really ought to know, which sets a perfectly deplorable example.
I have now got that off my chest. I hope that the Minister will himself add to the apology given by his colleagues. If he does not like listening to Back-Bench Peers expressing these views, he has a perfectly good remedy. He can go straight to Harriet Harman and tell her that there should be a Joint Committee of both Houses. Then these matters would be dealt with there and not, as they are this afternoon, on the Floor of this Grand Committee.
It is always a pleasure to hear the noble Lord, Lord Jenkin, speak on statistics. We debated these issues during the passage of the Bill and in subsequent debates on the establishment of a Joint Select Committee, when he said that there was a unanimous view in your Lordships’ House that this would be desirable, but the Commons rejected it out of hand.
As the Minister said, the purpose of this exercise is to improve trust in official statistics. If it is the case that 33 per cent of people now trust official statistics, unless I am very much mistaken, that is a significant improvement from the position when the Bill was going through. If my memory serves me correctly I think that only 17 per cent of people trusted statistics. I had a question for the Minister on the extent to which either the Statistics Board or the Government have a regular series of opinion surveys on trust in official statistics. We are at a low level—27th out of 27—when one recalls that Bulgarians, Romanians, Latvians and many others have far greater trust in their statistics than we have in ours. That is dismal, but it would be useful to know whether or not there is a trend in a positive direction.
The noble Lord, Lord Jenkin, referred to knife crime. I am tempted to ask whether he is surprised. The track record of the Prime Minister as Chancellor in this regard was lamentable. He will know better than anybody that the Government, having set their face towards reforming how official statistics and national statistics are managed, then produced a weak Bill that had to be almost completely rewritten by your Lordships’ House to make it stronger. In the end the Government had to capitulate. The Bill was weak because the Government did not want a strong one. There is no effective sanction in cases when the Government misbehave. The Bill allows national statistics to be downgraded to official statistics. When it was going through, Ministers explained that the prospect of having statistics downgraded so appalled Permanent Secretaries and senior officials that there would be no question of misusing information. The sanction would bring such public obloquy that they would bend over backwards to avoid it. The truth is that politicians still override that kind of consideration for the short-term consideration described by the noble Lord, Lord Jenkin. There is no effective sanction against Ministers who misuse statistics in this way.
I read the Explanatory Notes with great interest. Noble Lords will know that we on these Benches have argued that there should be no difference between national and official statistics; all official statistics should be national statistics. For noble Lords who wonder why we take that view I commend them to the simple sentence in paragraph 4 of the Explanatory Notes, which states:
“This was because, once the Act came into force on 1 April 2008, a National statistic had to be an official statistic”.
It is perhaps appropriate that the Act came into force on April Fool’s Day because that statement is complete gobbledegook.
In practice that means that the bodies specified in the order will be expected to follow the code as best as they can. That is pathetic. The principles set out by the noble Lord, Lord Jenkin, about the kind of practices that should be followed in producing statistics would strike the ordinary person as being so blindingly obvious that anybody producing statistics, whether covered by the order or already covered, should be following the code. What is so difficult about that? What circumstances can there be in which the bodies covered by this order would find it impossible to follow the code? If all bodies are being told is that we would quite like them to follow the code as best they can, it is a very weak injunction.
When we discussed the list last year, there was some discussion about where the Bank of England sat in respect of statistics. I believe that it is the case that the Bank of England is not covered by the legislation and that the Statistics Board and the National Statistician does not have oversight of statistics provided by the Bank of England. At that time, there was some discussion about why that might be the case, and I am spurred to raise the question again when I see that the Financial Services Authority is now covered by the schedule and the order. The Office for National Statistics has oversight over two legs of the tripartite authorities involved in statistics—namely, the Treasury and the FSA—but does not have oversight over the Bank of England. Do the Government have any plans to rectify that omission?
I thank the noble Lord, Lord Jenkin, for his remarks, with which I want to associate myself. As a new boy in this place, hearing distinguished Members holding the Government to account over the quality of statistics is very impressive and serious. The charge that was made was extremely serious, and I hope that the Minister will respond to it in his comments and that the Government will adhere to it in going forward.
I make a couple of pleas in considering these orders. The order comes up, we are presented with a list of 54 deemed persons whom we are told are relevant, then we are told in the Explanatory Note on the back that,
“28 are new, and 10 are omitted”,
from the last list. It would probably be helpful for debate if we could see asterisked or sorted in some way which ones are new and which have been dropped from the previous list. The accompanying Explanatory Memorandum gives one example of the ones that have been dropped—the Royal Air Force Museum—and, of course, nobody is going to pick on that. However, I am always slightly suspicious about 10 being omitted from the order last year when only one example is given. It would be helpful to see that information.
I am very struck by, and associate myself with, the remarks made about Bank of England. In the midst of an economic crisis, when the centre of the debate is on the state of public finance, it would seem absolutely appropriate that the Bank of England should be included in that schedule along with many other bodies that are directly associated with that effort. The whole statistical process has resonance; it is not just a debating point about the use or misuse of statistics. These statistics drive the allocation of scarce resources by the Government, so if they do not have veracity and cannot be trusted, we may be wasting money and spending it in the wrong place as well as understating the need in certain other areas. That is something else that I urge the Minister to give care to.
On the guidance that is followed, we are told that we can have confidence in these statistics. However, as has been said, the guidance goes only as far as saying that those bodies specified in the order will be expected to follow the code—that all sounds good—as best they can. Is not being able to do so as best as they can an admissible excuse in this regard?
I am also very interested in the fact that if the statistics comply with the code the board will approve them as national statistics. It would be useful to have a statistic about how many of those statistics have not received such approval and how many have been turned down. To see that level of detail would be useful. That speaks to the point of my noble friend Lord Jenkin, who said that, had there been extra scrutiny in this place and a Joint Committee, that is exactly the type of information which could come before it and help our debate.
The horrendous case mentioned was the misuse of the knife crime statistics. The head of the UK Statistics Authority described the release of the figures as “premature, irregular and selective”. He revealed that statisticians behind the data had tried to prevent the Government publishing the information—again as evidenced by my noble friend Lord Jenkin—and said that the data in their current form were “corrosive of public trust”. That is a bold statement by the person now in charge of the accuracy of our statistics. I ask the Minister to reflect on that, certainly given that it has been raised on a couple of occasions, and hope that we might get a response.
Paragraph 8.2 of the Explanatory Notes, under the heading “Consultation outcome”, states:
“Bodies that have been included in the order have been consulted … those bodies that were in the first order were consulted last year … This has generally been done by the statistical Head of Profession in each Government department contacting those bodies which are sponsored by that department”.
Again, that is the type of information—that is, the extent and nature of the consultation, and the feedback from it—that would be extremely helpful in discussing this order. It is clear that the objective of the statistics order is to build trust in national statistics. We have heard it argued how those statistics have been misused in the past in a grossly irresponsible way and how there is a need for greater scrutiny. When this order was discussed in another place, it took 11 minutes. The fact that we are up to 34 minutes and counting speaks of the importance that we at this end attach to these matters, and I look forward to hearing the Minister’s response.
I rise with some trepidation following the battering that I have received from the noble Lord, Lord Jenkin. I do so also partly protected by my ignorance of the discussions to which he referred in terms of the Joint Committee. However, some of the answers to the questions that he posed are in the questions that he raised.
We are not proud of our position within the OECD in terms of trustworthiness of statistics, but, as the noble Lord, Lord Newby, said, there has been an improvement of some 15 per cent in public perception and trust since this Act came in, which means that we have started to turn the situation around, although there is a lot more to be done. That is why the list has been refined; that is why the code, to which I shall come in a minute, is so important. It is also why the Government have taken more action than any other to ensure the independence of statistics. We have created an independent authority, reporting directly to Parliament—not, I agree, necessarily in the way that the noble Lord wishes—to oversee and assess the production of official statistics. Our setting that authority on a statutory footing built on the framework for national statistics as set in 2000. We are therefore building the statute on what we already had as a practical operation. We have reduced pre-release access to official statistics from five days to 24 hours, and have limited the number of statistics to which it applies and the number of people who get it. We have also taken Ministers out of the governance of the ONS.
I turn to the laboured point on knife crime statistics, which caused such a furore last December. I offer it as proof that the system works, because it led to a furore and the admission that those statistics had been produced and released prematurely. It led to the Home Secretary apologising to the House of Commons. Most importantly, it led to action to put in place measures to ensure that those errors would not be repeated.
How can the Minister possibly argue that the system was working as it should have when the Prime Minister overruled all his officials, including the National Statistician, and insisted upon publishing statistics that he had been firmly told that he ought not to? We had debate after debate on the Floor of the House, in Committee and on Report on the whole question of the misuse of statistics. Here we have had, in the past two or three months, a classic example of Ministers not learning anything about this at all. It is not working properly.
I am afraid that the noble Lord misunderstands me. I am not suggesting that the system was working properly on that date. I am saying that it that caused a furore, and caused Parliament and Ministers to respond. It caused an apology to be received by the House of Commons. That shows that attention is paid to the issue. In that sense, it is working—not that this error was in any way permissible. I was starting to outline how we are trying to ensure that it is not repeated. I know that confession is good for the soul, and that the Opposition are demanding apologies. An apology has been made on this, and I have nothing to add to that.
Of course, in Gus O’Donnell’s and Kevin Brennan’s letters, they said what happened and there had been an apology. It is more important in many ways that we ensure that we take forward action to ensure that it cannot be repeated. On the actors’ role on that occasion and why the National Statistician’s intervention did not prevent the statistics being produced, she phoned No. 10 at 8 am but the press release had been released the previous evening on the basis of a midnight embargo. In that sense, preventing the release of the statistics was not practical.
However, that is history and we know the problems that it caused. Since then, the Government have ensured that the action taken cannot be repeated. They have produced and circulated to all appropriate persons in Whitehall a memorandum on exactly how statistics are to be treated in future to ensure that it does not happen again. Michael Scholar was invited, and spoke, to the Permanent Secretaries’ conference to ensure that it does not happen again. There was a lesson to be learnt, which I believe has been learnt.
A number of other points were made that I will try and respond to, but I—
That would not be possible for anyone to say. However, the roles of the statisticians, the private offices, official departments, officials and Ministers are now absolutely clear. That has been circulated to all and sundry to ensure that no one is unaware, that the situation does not repeat itself and that everyone understands their role precisely.
The noble Lord is asking rhetorical questions. This is the circulation of a document to civil servants, from the head of the Civil Service to the appropriate Permanent Secretaries in departments. We are seeking to ensure that officials and special advisers know their role, so there is no question of the political overriding the integrity elements in the code to which the noble Lord has referred.
It is not a rhetorical point. The point was made by my noble friend to say that the Prime Minister specifically said on 10 December that he required this information to be released. In his defence, the Minister has cited the fact that the Home Secretary apologised. It is entirely reasonable to ask why, given that it was actually the Prime Minister, the Prime Minister should not apologise specifically for that.
I am not saying that that is entirely reasonable. What is entirely reasonable is to await the publication of the Select Committee report to see the views of those who examined this in another place. No doubt it will be debated and that will be an appropriate place to debate this issue. What we are seeking to debate here is the operation of the code for the future. I seek to reassure the Committee that we have taken action to prevent this kind of error taking place again. I was going to move on to deal with some of the other points, starting with the premise that—
The noble Lord is a very old and wise former secretary to a department. He knows precisely that I am not suggesting that. I am suggesting solely that he has raised evidence about a Select Committee report in another place which is dealing with the problem. I am suggesting that we await that report. The Ministers concerned are Ministers in another place. That is the appropriate course of action.
I now turn to some of the points raised. If I do not do justice to them, I am more than happy to reply in writing because all three noble Lords made points in their contributions. I start with the points about the Bank of England, which is not included. The authority and the bank have been in regular contact with each other through 2008. They have agreed not to include the bank in the 2009 order. That is with the consent of the Cabinet Office and the Treasury. The bank has its own code of practice for statistics, which works well for its specific and important role. It passes a lot of data to the ONS and any resulting statistics, including parts of the national accounts and much of the Financial Statistics publication, are national statistics and so are fully compliant with the authority’s code.
The point of greater interest is why we are not including the bank at the present time. Those discussions are continuing. The bank sometimes collects data which it decides not to publish even without announcing that it will not publish them. That would go against the code as it stands—in this case, on the protocol on release practices. As I said, the bank and the authority are working closely to see how best to use the code in a specific area of monetary and financial statistics in a way that does not hinder the bank's ability to perform its duties effectively. That is the current position in respect of the Bank of England.
The other points raised included a sensible point from the noble Lord, Lord Bates, about having a clearer understanding of which bodies were new and which had been dropped. Those dropped from the first order tended to be dropped because they were not producing national statistics or continuing to exist beyond 2009. They include the British Hallmarking Council, the Fleet Air Arm Museum, the Hearing Aid Council, the National Army Museum, the Royal Air Force Museum, the Royal Marines Museum, the Royal Naval Museum and the Royal Navy Submarine Museum. That is because they are not producing significant national-level statistics. Also excluded are the Commission for Healthcare Audit and Inspection, the Commission for Social Care Inspection, the Commission for the New Towns, the Housing Corporation and the Urban Regeneration Agency. That is because, as the Committee will have spotted, they are due for abolition on or before 1 April 2009. The first two bodies in the list will be replaced by the Care Quality Commission and the second two as a result of the Housing and Regeneration Act 2008. None of the statistics has been lost, but will be picked up in respect of the replacement bodies. I hope that that assists with that particular question.
The noble Lord, Lord Newby, asked whether there were surveys. The ONS produces a regular annual survey, which is how it hopes to glean the increasing confidence that it expects to get from the improved performance, notwithstanding the highly rehearsed question about the statistics produced and released prematurely in December.
I will write to the noble Lord, Lord Bates, to answer his question about statistics and the consultation about statistics. That covers most of the points raised by noble Lords. I will examine Hansard tomorrow, and if there are any points that I have not covered, I will write to noble Lords. With that, I beg to move.
Committee adjourned at 5.54 pm.