That the order laid before the House on 30 March be approved.

Relevant Documents: 12th Report from the Joint Committee on Statutory Instruments and 14th Report from the Merits Committee.

My Lords, in moving that the House approves the first of these statutory instruments, I will also speak to the second.

The purpose of these statutory instruments is to implement provisions in the Banking Act 2009 relating to building societies and the financial services compensation scheme. They were made on 29 March to facilitate the actions taken by the Treasury and the Bank of England with regard to resolution of the Dunfermline Building Society on 30 March 2009. These instruments are being debated under the “made affirmative” procedure in accordance with the Banking Act. As the relevant powers in that Act are being exercised for the first time, and given that the circumstances surrounding the resolution of the Dunfermline did not allow for sufficient time to lay a draft of these instruments in advance, I should say that I am content that the use of this procedure is appropriate in this case.

Both instruments were made on 29 March to ensure that appropriate action could be taken under the Banking Act as part of the resolution of the Dunfermline Building Society. However, they are standing instruments—they are not specific to Dunfermline and, subject to their approval by this House, will remain in force until they are revoked or changed. We will be consulting on these instruments before the Summer Recess and, if appropriate, will bring forward amending instruments at the end of the year, which will also tidy up minor drafting errors. Any amending instrument will be subject to the full draft affirmative procedure.

Members in the other place have asked why we did not lay specific orders to cover Dunfermline at this stage, and standing orders later. If we had done this, any future use of these powers prior to introduction of the standing orders would need to be approved by the House by affirmative resolution. Given the extremely short period for taking action in such cases, this would severely limit our ability to use these powers in this period, limiting our capacity to protect depositors, consumers and public funds if such protection was required. I am confident that this procedure allows the maximum possible opportunity for consultation on these standing orders without limiting the Treasury’s powers to act in the interim if necessary.

The order is made under powers in Sections 130 and 158 of the Banking Act to apply Parts 2 and 3 to building societies. It ensures that the bank insolvency and bank administration procedures are available in relation to building societies. These procedures are an essential part of the special resolution regime toolkit established by the Banking Act. As applied to building societies, these procedures are termed “building society insolvency” and “building society special administration”.

The first procedure is building society insolvency. Under Part 2 of the Banking Act, as applied by this order, the FSA or the Bank of England may apply to the court to put a failing institution into building society insolvency on one of a number of grounds. The second procedure is building society special administration, which was used in the Dunfermline case. Under the Banking Act, the Bank of England has powers to transfer a failing building society to a private sector purchaser or to a bridge bank. What is left of that society may then, on application to the court by the Bank of England, be put into building society special administration. The special administrator has two objectives. The first is to supply services on behalf of the residual society to the private sector purchaser or bridge bank so that it may operate effectively. The second is normal administration—that is to rescue the society as a going concern or to achieve a better result for the society’s creditors and members than would be achieved if it were just wound up. This measure was considered by the Joint Committee on Statutory Instruments in its meeting on 29 April. Counsel to the committee identified a number of minor drafting defects in this and the Amendments to Law (Resolution of Dunfermline Building Society) Order, to which we will turn. The Treasury has agreed to correct those defects, if necessary with an amending order, when an appropriate opportunity arises.

I turn now to the Financial Services and Markets Act 2000 (Contribution to Costs of Special Resolution Regime) Regulations, which were made under new powers in the 2000 Act inserted by Section 171 of the Banking Act 2009. Allowing the Financial Services Compensation Scheme to contribute to the costs of resolving a failing bank has always been a key feature of the special resolution regime. The SRR provides the authorities with new tools to facilitate dealing with banks or building societies that get into financial difficulties. The Government believe as a point of principle that the financial services sector, through the FSCS, should contribute to the costs of the SRR.

In the case of Dunfermline, the FSCS will make a payment on a net basis at the end of resolution, so it has had to pay no money up front. This is different, therefore, from the situation of Bradford & Bingley, Heritable and Kaupthing Singer & Friedlander, where the FSCS made up-front contributions to the costs of transferring deposits that it had to fund with loans from the Bank of England and which have been refinanced by the Treasury. I hope that noble Lords will agree to both these instruments.

My Lords, I thank the Minister for introducing these statutory instruments, and I apologise in advance for my intervention being somewhat longer than the Minister’s introduction. When I looked at these instruments in detail in preparation for the debate, I realised that they raised rather a lot of issues. I shall be dealing with issues of both process and substance.

I shall start with a point that is common to both the order and the regulations. They have been laid under Section 259(4) of the Banking Act 2009, which as the Minister has explained, allows the first orders to be made as made affirmatives if the Treasury is satisfied that it is necessary to make the order without laying a draft for approval. It is the Treasury’s use of this procedure that I wish to explore.

We fully understood that when the 2000 Act was considered, some orders would need to be made very quickly after Royal Assent, so that there was a complete body of law available for use and to ensure that there was no uncertainty, which could have been damaging to the market. When the first orders were debated on 16 March we accepted that the made affirmative procedure was necessary.

I was never clear on why the Treasury was allowed to keep the made affirmative procedure open once the urgency of the initial orders had passed. Both statutory instruments that we are debating cover generic issues that the Treasury should have got on with as soon as the Act was passed. I can see that the Treasury needed to customise the special resolution regime for the Dunfermline Building Society to deal with the issues that arose, and that if it wanted the Financial Services Compensation Scheme to absorb some of the costs, it needed to amend the FSCS. But I do not see why we should let the Treasury sit on its hands, wait for an emergency to come along and then use the made affirmative procedure as if that were the most natural thing in the world.

Alternatively, if the Treasury wants to use the made affirmative procedure after the first opportunities have passed, the orders should be restricted to the Dunfermline Building Society or sunsetted. It would have been perfectly obvious that both these instruments would be needed even if they were not necessary literally on day one, as some of the others were. The right course would have been for the Treasury to have issued draft orders and consulted on them with a view to bringing them before Parliament in the customary way. The Treasury has had since Royal Assent in early February to work on this. It had at least seven weeks before the end of March in which at least some consultation could have taken place if it had been bothered.

I do not believe that Parliament gave the Treasury the power in Section 259 to use the made affirmative procedure as an optional alternative to using the proper processes of consultation and laying in draft. The Treasury has merely said in its documentation that it is “necessary” for it to have acted in that way, but it was necessary only because it had not commenced the normal course for making orders under the Act.

It is particularly telling that paragraph 3.6 of the Explanatory Memorandum to the insolvency and special administration order notes that the order includes more than is necessary to deal with the Dunfermline Building Society solely to use the draft affirmative procedure because a later order would not be able to take advantage of that power. The Minister repeated that a few moments ago. The Treasury intends to milk the Section 259 power for all it is worth, regardless of necessity. I do not believe that Parliament intended to give the Treasury that kind of power.

Will the Minister now say how many more opportunities the Treasury will have to play fast and loose with the normal parliamentary procedure for statutory instruments? Taking the orders that we debated in March and the statutory instruments that are now before us, how many further first-use opportunities will the Treasury have left? Does it intend to use the made affirmative procedure for those orders or will it allow the normal processes to go forward?

With these orders and regulations, the Treasury has invented a new approach to consultation, namely consultation in arrear, coupled with a vague promise to amend the orders at a later stage if it considers it necessary. In the case of the FSCS order, the Explanatory Notes say that a permanent replacement for the order will be consulted upon before the Summer Recess. In each case, of course, the Treasury will hold the whip hand: it has got its orders through by these made affirmatives, and will change them only if it suits, whatever emerges from consultation.

When we consider the first batch of orders under the Banking Act 2009, there had been consultation on earlier drafts, which does not apply here. Despite considerable work within the expert liaison group, there remained a number of issues outstanding. Will the Minister update the House on the resolution to those matters we discussed in March? The Minister told us that they would be considered by the Banking Liaison Panel, and that the Government stood ready to alter the orders if necessary. Has there been a resolution to the issues that I raised in relation to the partial property transfer safeguards order? Those concerned the definition of excluded rights, and also transactions with small companies. I am looking here for evidence that the Treasury is prepared to amend these made affirmatives, because there are many who suspect that they will just ignore problems that are raised.

Will the Minister also say what will happen in terms of consultation on both these instruments? How will it be conducted and how long will the consultation last? I am sure that the Banking Liaison Panel will be used, but will the consultation go any wider than that? Importantly, will Parliament be informed about the consultation and its outcome? When we debated the Banking Act 2009 orders in March, I raised this with the Minister and he undertook to look again at how consultation would be shared with Parliament.

This may in turn depend on the transparency of the Banking Liaison Panel’s proceedings, which I raised in March and during the passage of the 2009 Act. I asked the Minister to update the House on that. He will recall that it was not even clear in March whether the minutes of the Banking Liaison Panel would be released. Given that building societies generally are a relatively small part of the totality of the issues addressed by the Banking Act, is the Banking Liaison Panel the appropriate forum for dealing with the relevant technicalities so far as they relate to building societies?

I now turn to some substantive issues in relation to these instruments, starting with the building societies insolvency order. The Merits Committee of your Lordships’ House queried with the Treasury the amendments made by paragraphs (9) to (11) of Part 2 of Schedule 1 to the order. These deal with who may make an insolvency order under Section 95 of the 2009 Act. For banks, the Government may make an order, but this is disapplied for building societies. The Treasury explained this in terms of the FSA being the registrar instead of the Government, which applies for companies, but that seems to me a difference without a distinction. Can the Minister explain why, given the evident fact that the Treasury was in the driving seat over the Dunfermline Building Society, the powers to initiate the insolvency process within the special resolution regime is restricted to the FSA or the bank? It seems to me no more than a convenient fiction, possibly to make it clear that no blame can be laid at the Treasury’s door.

My second point in relation to the building societies order relates to the status of building society members, where they may receive a distribution but are not able to vote. This is explained in the Treasury’s response to the Merits Committee in rather obscure terms. It is acknowledged that shareholding members have an interest that is equivalent to debt, but the difficulties of working out how they should vote seems to be the justification for their disfranchisement. I put it to the Minister that this is not a sound approach to making law. Can he say how many and what value is attributed to any Dunfermline members remaining after the partial property transfer? Or to put it another way, who, precisely, has been disfranchised by this order?

Turning to the FSCS order, the Minister has promised consultation before the Summer Recess. This indicates that the Government are not overconfident that they have got it right. I would like the Minister to say a little about how he expects this to proceed, and whether there has been any consultation thus far on the detail with, in particular, the banking industry. The Minister will, of course, be aware that the policy did not receive the support of the banking community when it was introduced in the 2009 Act and, therefore, some significant issues may well need to be discussed.

I have three areas on which to question the Minister. The first concerns the definitions set out in Regulation 2. In many cases, they refer to documents issued by the FSA, such as the COMP source book. These definitions are qualified by the phrase,

“as amended from time to time”.

That is basically okay, provided it is clear what document is referenced at any point in time. There is no other reference that I could see to ensure that, if a source book or other document is changed, the version that is relevant is the one that was applicable at the time the relevant event occurred. We clearly do not want the FSA’s rule book to be capable of being applied retrospectively—at least, I hope we can agree on that. I hope that the Minister will explain how these references are supposed to be applied.

Secondly, I spent a long time trying to work out the difference between amount A and amount B, the scheme’s liability and the amount of the recovery, all of which terms are used in the regulations. In another place, the Minister said that amount A was about £1.6 billion, which was the amount provided to Nationwide as part of the deal. I am not sure that that is correct; it seems to ignore any other costs which will accrue to the Treasury, which, in this instance, appear to include interest costs. Will the Minister say precisely what amount the Treasury has specified provisionally as amount A under Regulation 4? This is what the Treasury is required to do, and I assume that it has done it.

The Minister in another place said that the FSCS has not yet informed the Treasury of amount B. I am puzzled by that. Can the Minister explain why that has not happened? Does the FSCS not have the relevant information and, if not, why not? What is the problem?

Under paragraph (5) of Regulation 6, the scheme’s liability is to be “further reduced” by, inter alia, the amount of the recovery set out in the independent valuer’s determination under Regulation 8. The amount is reduced to amount B, if that is less than amount A. Why is this described as a further reduction? If there has not been a reduction from amount B to amount A, can anything else be described as a “further reduction”? I did not understand how these calculations were expected to fit together.

Clearly, the independent valuer’s opinion of the amount of recovery will depend on whether the valuer calculates the amount of recovery under Regulation 8 in a way which reflects the deal the Treasury actually made to transfer the protected deposits and anything else. If the valuer considers that the Treasury should have got a higher amount for good will or the branch network or whatever when transferring the deposits, that will reduce what it can get back.

My honourable friend Mr Mark Hoban asked the Minister in another place how much Nationwide paid for the ability to acquire the Dunfermline business, but I could not find an answer from the Minister yesterday. Will the Minister give that information today?

Obviously, much more rests on the credibility of the independent valuer, who must reach an independent view of value and not merely endorse the Treasury’s weekend deal-making skills. All eyes will be on him. Can the Minister say any more about the independent valuer? When will one be appointed; what skills sets will be required; and what appointment process will be followed?

My third question on the FSCS order relates to the independent verification process set out in paragraph (7) of Regulation 5. In Regulation 8 there is a reference to an independent valuer—that is, the qualities of the valuer are crucial. However, when we get to verification, the Treasury can appoint any person, whether or not he is independent. The process of verification is described as independent but not the person. That would leave open the possibility of using an insider on the pretext that he would carry out an independent process. The FSA used exactly that fiction for the only published report to date on its conduct in relation to Northern Rock, where its internal auditor was used for a so-called independent review. We do not think that that amounts to sufficient independence for the verification process. Will the Minister explain further?

As I said at the outset, I apologise for the length of my intervention but I felt that these issues needed to be covered fully.

My Lords, I am grateful to the Minister for setting out the purposes behind the order and regulations, together with their content. When we passed the Banking Act, we did not envisage that its first use would be for a building society, and we probably did not envisage that it would have to be used quite so quickly.

I note that the noble Baroness is very concerned that we have generic provisions in front of us, rather than ones that relate specifically to the Dunfermline Building Society. However, it seems to me, particularly as the consultation that has been discussed does not finish until July, that we may well need these powers again before July. If, replacing these two orders, we had specific powers just for the Dunfermline Building Society and then another building society got into difficulties, which is by no means impossible, we would be back to square one, before the consultation was finished, debating almost identical orders. I am not sure that that would make a whole amount of sense, and I understand why the Government have proceeded in the way that they have. It would obviously have been better if the Treasury had consulted in advance, but I cannot whip myself up into a lather of indignation in this case because I think that there is general support within the financial sector, not least within the building society sector, that the Government’s action in respect of Dunfermline Building Society definitely made the best of a bad job. So far as I am aware, no one has come up with a better set of proposals for dealing with that immediate crisis. Indeed, I had a discussion with the Building Societies Association only today and that is very much its view. It made no criticism of either the substance of the way in which the Dunfermline Building Society transfer took place nor, as far as I could ascertain, the instrument before us tonight.

Partly guided by that, I do not intend to subject the Minister to quite such a vigorous viva as that from the noble Baroness. However, I have one or two questions. The first relates to the consultation and ongoing application of the special resolution regime to building societies. The Treasury memo which accompanies the Merits of Statutory Instruments Committee report referred to the fact that the Banking Liaison Panel was going to advise on the application of the special resolution regime to building societies. Given that building societies are very much a world of their own, can the Minister say to what extent they are represented on the panel? Unless they have pretty strong representation, the panel is not an ideal vehicle for undertaking that kind of consideration in matters relating to building societies.

I have a couple of questions about costs. The first relates to the extent to which the Financial Services Compensation Scheme is funded by the building society sector. As the Minister will know, and as I think we discussed during the passage of the Banking Bill, there is a sense of injustice among building societies about the amount—which is not based on risk—that they have to pay into the Financial Services Compensation Scheme. It seems rather extravagant that Nationwide has had to pay as much as £235 million into the scheme. That is a substantial figure for a building society, even of that size.

As the Minister will know, building societies have suggested that contributions to the scheme should be based on risk, as happens with the pension protection scheme. Do the Government have a view on whether that might be a better way forward? One problem that the building society sector faces is that, whenever the societies’ affairs are discussed in your Lordships’ House, we hear warm words from the Government about what a terrific lot they are, but the truth is that they are not prospering as well as they might at the moment for a number of reasons, a contributory factor being the amount that they have to put into the scheme.

As we are talking about who will meet the costs, I have a final question on that subject. One cost involved in any procedure such as that undertaken with the Dunfermline Building Society is that advisers tend to be used by government to help with the process. In some cases, the costs that have at least been reported as being paid by the Government to advisers from the financial services sector and to lawyers appear little short of extortionate. What assurances can the Minister give us that the Government are getting good value for money from their professional advisers, who clearly at a time of stress themselves see the Government as a good cash cow when it comes to this kind of business? To a limited extent at least, I think that it undermines the good will towards some of the activity that the Government undertake in this area, and it certainly suggests that the City, in its various guises, has yet to come to terms with the fact that we live in a rather different world compared with a year ago.

My Lords, unashamedly using the order, I want to say a few words at this stage about the Dunfermline Building Society. I declare an interest in that for a number of years I was its Aberdeen manager 30-odd years ago. The Dunfermline Building Society is not, and was not, Scotland’s oldest building society. That privilege endures to the Scottish Building Society. Nevertheless, the society formed in 1869 with a branch network which spread to the Orkney Islands. It was led by successive chief executives of the stature of the late Robert Stoddart and Mr Walter Hutchison.

In those days, and until recent management became apparent, the Dunfermline traditionally borrowed short, lent long, and held the capital ratio as it should be, with liquidity clearly established. It was prudent in matters of lending but also careful in matters of offer of investment. It was, therefore, traditionally a building society. It seems to me, now as an outsider looking in, that the recent management was squeezed by the Royal Bank of Scotland and the Bank of Scotland lending vigorously and competing for investment in a very aggressive manner, prompting the idea that you must keep up with the financial Joneses. So it wandered into the field of commercial lending with the result that we now all know.

These few remarks were merely an act of self-indulgence by an elderly peer, who has been around here for about four decades, but who felt that the Dunfermline Building Society’s name might at least get into Hansard in a Scottish vein.

My Lords, I am grateful to those who have contributed to this debate. I will start with my noble friend Lord Kirkhill because it is important to realise that we are talking not about abstract concepts, statute and legal complexities, but about a real society with a long, proud history and a strong membership in Scotland, which has played an important role in the Scottish economy. I sincerely hope that it will continue to do so as part of the stronger Nationwide and as a consequence of the ultimate resolution of the social housing business.

It is attractive to believe that the behaviour of the Dunfermline Building Society was a consequence of increased competitive intensity from the Royal Bank of Scotland and HBOS. I am not entirely persuaded that that is the case. I certainly do not think it excuses the failures of the society. Quite simply, the society decided two or three years ago to increase its scale by acquiring books of mortgages from investment banks and others which had warehoused such mortgages, and, at what turned out to be rather a poor time in the cycle, to increase its exposure to commercial property development and lending. As a consequence, it began to suffer problems in terms of its capacity to comply with its threshold conditions. These problems were exacerbated by some rather disappointing experiences, to put it mildly, in connection with a major information technology programme, which did not deliver the results that the board had anticipated. It would be nice to say that this was due to the external pressure of competition, but the ultimate resolution of how to address that competition lay in the hands of the board and management of the Dunfermline Building Society. The noble Lord, Lord Kirkhill, was right, however, to indulge us with his observations in respect of the Dunfermline, given his particular closeness to that society over such a long time.

I will endeavour to answer the many questions asked by the noble Baroness, Lady Noakes, who has excelled her reputation for the detail of her questioning. If I fail to answer them all, I will, as always, write to her, or she will jump up and remind me that I have missed some. First, we need to remind ourselves that this society found itself in very tricky situations, as the noble Lord, Lord Newby, said, when we passed the Banking Act 2009. I doubt if any of us expected that it would require action quite as quickly as this, or that it would be the first building society in the queue. It is good that we had that legislation in place, and it is important to remember that we can continue to say that no retail depositor with an FSA-regulated entity has suffered a loss as a result of the difficulties the banking industry is facing. That is one of the reasons we are seeing a distinct recovery in confidence in the industry.

The noble Baroness asked about the use of the 28-day affirmative procedure. Why were orders not made earlier and why was the consultation not started earlier? The Treasury’s intention was to consult fully on these orders. However, this order was prepared to be used, if needed, on a contingency basis, and it speaks well of the Treasury that it prepares on such a basis. We had to deal with insolvency and special administration in respect of an institution which found itself in considerable difficulty, as a result of which these instruments were made. HMT can use the 28-day procedure once for each power and this is, therefore, the only opportunity to use it. I can assure the noble Baroness that, from my perspective, there is no question of officials or Ministers sitting on their hands or playing fast and loose. There is every intention to have an open and transparent consultation, carried out in accordance with best practice. The assurance I have already given to the House—that we will come back with the consequences of that consultation—is not a vague promise to revisit the issue but rather a clear statement that it will be the intention to inform Members of the House of the process and outcome of the consultation. If the consultation is open and transparent, it should be apparent to noble Lords that there is no sleight of hand involved, and that it is an exercise that is carried out with appropriate sincerity of intention.

My Lords, I apologise to the Minister for intervening. My question was not on getting access to what changes were made to the rulebooks; it was in relation to the definitions in the order which refer to a source book or other FSA documents, which could be changed from time to time. I was saying that the order does not seem to make it clear what version applies at the time of a relevant event. I am not concerned about accessing the FSA’s rulebook; I know how to do that. It is a question of which version is relevant.

My Lords, I shall now with some excitement pick up my briefing note to find whether I have an answer to the question that the noble Baroness has asked, or whether it is one where I shall beg her indulgence and say it is a matter of detail and ensure that the information is shared with her—which is the answer that I am now confirming that I have given.

The noble Baroness asked also about amount A. HMT specified the exact amount paid to Nationwide, which is about £1.6 billion—there is some rounding to it, but it is the figure that we have always declared. She also asked about the FSCS order and whether there has been consultation. There has not been consultation so far, but a public consultation exercise will commence before the Summer Recess.

The noble Baroness also asked questions relating to amount B. The FSCS is calculating amount B, the compensation that it would otherwise have paid depositors. I have already said that HMT has notified the FSCS of amount A. HMT will appoint an independent valuer to estimate the recoveries that the FSCS would otherwise have made from winding up. Amount B, reduced by recoveries, FSCS compensation actually paid to depositors, if any, and FSCS contributions to compensation paid to owners of transferable property, third parties et cetera, gives rise to the FSCS’s total liability, otherwise known as the cap. The total liability is then audited and HMT sends a final notification to FSCS. If amount B is lower than amount A, amount B equals the FSCS’s total liability, and payment at the end is made by the FSCS in respect of the total liability.

It is worth reminding noble Lords that the amount paid by the Treasury to the Nationwide in respect of the actions taken by the Nationwide to take responsibility for Dunfermline’s retail deposit liabilities represented the gap between the assets and the liabilities that were transferred to the Nationwide. That gap will be filled by the proceeds from the administration and disposals and any residual claim that might be made on the FSCS.

The noble Baroness asked why amount B was reduced by compensation actually paid out to eligible claimants. This would happen theoretically in two circumstances. The first would be if the loss that the FSCS was asked to contribute to was not in respect of all the failed banking institution’s depositors and some depositors made claims against the FSCS under the normal procedure. The second circumstance would be if the banking institution in resolution had to put into the bank or building society insolvency procedure and depositors paid out through this. This provision ensures that the FSCS would not have to pay out twice in respect of a single banking institution.

The noble Baroness, Lady Noakes, asked whether the verification process would be independent. Independent verification simply means auditing the numbers. I probably should not say “simply” to preface “auditing”, given the noble Baroness’s professional standing as an accountant. Perish the thought that I was suggesting that auditing was a simple box-ticking exercise; of course, it is not. However, we will appoint independent auditors to do this work.