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Grand Committee

Volume 711: debated on Wednesday 24 June 2009

Grand Committee

Wednesday, 24 June 2009.

Arrangement of Business

Announcement

Before the Minister moves the first statutory instrument, I remind noble Lords that in the case of each statutory instrument the Motion before the Committee will be that the Committee do consider the statutory instrument in question. I make it clear that the Motion to approve the statutory instrument will be moved in the Chamber in the usual way. I also remind noble Lords that if there is a Division in the Chamber, we need to adjourn immediately for 10 minutes.

Scottish Parliamentary Pensions Act 2009 (Consequential Modifications) Order 2009

Considered in Grand Committee

Moved By

That the Grand Committee do report to the House that it has considered the Scottish Parliamentary Pensions Act 2009 (Consequential Modifications) Order 2009.

Relevant Document: 16th Report from the Joint Committee on Statutory Instruments.

If I may, I propose to provide your Lordships with a detailed explanation of the largely technical amendments which this order seeks to achieve.

I do not think that any speech of mine has ever been described as riveting, but I am certainly clear that not many speeches on pensions made by anyone in this world have been described as riveting, unless perhaps delivered to the Institute of Actuaries. Accordingly, I apologise in advance for the thousand or so words that I am going to deliver, and I hope only that I can deliver them all in the order in which they are on the paper and resist my normal temptation, which is to speak too quickly.

The order is made under Section 104 of the Scotland Act 1998, which allows for necessary or expedient changes to UK legislation in consequence of an Act of the Scottish Parliament. It is made in consequence of the Scottish Parliamentary Pensions Act 2009, which sets out updated arrangements for paying the pensions of Members of the Scottish Parliament and related officeholders. Those officeholders are the Presiding Officer and Deputy Presiding Officer of the Scottish Parliament and Scottish Ministers, including the First Minister and junior Scottish Ministers.

The purpose of the Scottish Parliamentary Pensions Act 2009 is to place the arrangements for paying the pensions of MSPs and related officeholders on to a more permanent statutory footing, largely replacing transitional arrangements made at the time of devolution. The Act sets out new rules for the Scottish parliamentary pension scheme that largely take account of developments in UK pensions, tax and equalities legislation.

The order makes minor amendments to ensure that from 1 September 2009, when the Scottish Parliamentary Pensions Act 2009 comes into full force, aspects of reserved pensions legislation continue to apply appropriately to the existing pension schemes for MSPs and related officeholders, further to changes brought about by the Act once this is fully commenced from 1 September this year.

Prior to the Scottish Parliamentary Pensions Act 2009, the pension schemes for MSPs and related officeholders were the subject of a transitional order—the Scotland Act 1998 (Transitory and Transitional Provisions) (Scottish Parliamentary Pension Scheme) Order—made under the Scotland Act 1998. It was always intended that the Scottish Parliament would legislate to put the pension schemes of MSPs and related officeholders on to a more permanent statutory footing. Section 81(3) of the Scotland Act 1998 envisages the Scottish Parliament legislating to replace the transitional arrangements made at the time of devolution. In addition, there have been a number of changes to UK legislation in the reserved areas of the regulation of occupational pensions, tax and equalities which necessitated amendment to the transitional order.

Although Section 81 of the Scotland Act 1998 permits the Scottish Parliament to make provision for the pensions of MSPs and related officeholders by resolution, an Act of the Scottish Parliament was needed in this case to bring about the necessary changes to the transitional order. The Scottish Parliamentary Pensions Act 2009 continues the Scottish parliamentary pension scheme, subject to new rules set out in Schedule 1 to that Act. These new rules contain provisions for both MSPs and officeholders. The separate unfunded scheme for First Ministers and Presiding Officers set out in the transitional order is continued but is closed to new members, who will be covered by the new rules of the Scottish parliamentary pension scheme.

The two amendments in the Section 104 order are of a technical nature. They are required to ensure that certain reserved regulatory controls continue to apply appropriately to the Scottish parliamentary pension scheme and the existing First Minister and Presiding Officer pension scheme, once the Scottish Parliamentary Pensions Act 2009 is fully in place. The first amendment is to Section 11(7) of the Pensions Act 1995 and ensures that the Pensions Regulator continues, in limited circumstances, to have the power to adapt, amend or repeal the legislation that contains the rules of the Scottish parliamentary pension scheme and the First Minister and the Presiding Officer pension scheme.

The second amendment is to Section 249A(3) of the Pensions Act 2004, which requires the trustees or managers of occupational pension schemes to establish and operate internal controls. Section 249A(3) sets out various types of schemes that are exempt from that obligation. That includes schemes which are established under an enactment and are guaranteed by a public authority, and the Scottish parliamentary pension scheme, as currently constituted, falls within this exemption. Further to the Scottish Parliamentary Pensions Act 2009, the Scottish parliamentary pension scheme will not be covered by that exemption as it will not be a scheme guaranteed by a public authority. Therefore an amendment adding the Scottish parliamentary pension scheme into the list of exempt schemes at Section 249A(3) is required. The First Minister and Presiding Officer pension scheme does not require an equivalent amendment, as it is a pay-as-you-go scheme and as such is already exempt under Section 249A(3)(b).

Noble Lords may also wish to note that, in addition to this order, it is proposed that two sets of regulations will be made by UK Ministers, further to the Scottish Parliamentary Pensions Act 2009. The Department for Work and Pensions is currently consulting on drafts of these regulations and will take forward the Occupational Pension Scheme (Scottish Parliamentary Pensions Act 2009) Regulations and the Occupational Pension Scheme (Public Service Pension Schemes) Regulations. The latter of these two sets of regulations will be made jointly by the Department for Work and Pensions and HM Treasury.

The Scottish Parliamentary Pensions Act 2009 was the product of a committee Bill brought forward by the Scottish Parliament. It is intended that the newly appointed fund trustees of the Scottish parliamentary contributory pension fund will issue guidance to the members of the Scottish parliamentary pension scheme on the new scheme rules, which are effective from 1 September 2009.

This order demonstrates the Government’s commitment to working with the Scottish Parliament to make the devolution settlement work. I hope noble Lords will agree that this order is a sensible use of the powers in the Scotland Act and that the practical result is something to be welcomed. I commend the order to the Committee.

I thank the Minister for doing such an exemplary job of taking us through the inner workings of the modification of this order. The routine being followed is an example of proper forethought by the parliamentary draftsmen of the Scotland Act in foreseeing areas where a split responsibility might cause problems. That is one reason why we have gone through this amazing jungle of sections that apply.

Did I understand the Minister to say that the present scheme under which the Presiding Officer and the First Minister receive their pensions is somehow being brought to a close, and that they will then be incorporated under the provisions that will be in place when this order is brought in? If that scheme is brought to a close, do we have any idea what the current liability is under it, or is it a continuing liability that will simply be built on by the new scheme when it comes in?

I am grateful to the Minister for giving us at least the title for the further two sets of proposed regulations. I do not know if anything more can be said to explain what they might contain—I took it from what he said that perhaps the Department for Work and Pensions is not quite sure what they will contain at the moment—but any indication about that might be useful, as well as about which procedure this is intended to follow. Schedule 7 to the Scotland Act has a wonderful array of procedures that can be followed when bringing in different parts of legislation under the devolution Act. Section 12(1) says that some can be passed under the authority of an Order in Council or on the authority of a Minister of the Crown. Is either of those options a path that the Government will be following on this measure?

These Benches also thank the Minister for introducing the order. I think it is the first time, either in Committee or in the House, that I have seen a bench of officials that is entirely female, which is very nice. I look forward to the day when we have not only a bench of officials that is entirely female but a female Minister as well.

We broadly support this measure. However, I heard the noble Lord say that there is a separate unfunded pension scheme for Scottish Ministers, which is indeed the case here down south in the United Kingdom. I am not as familiar as I should be with the scheme for MSPs. Is there a separate funded scheme and, if so, what is the contribution that their employers—the Scottish taxpayer—make to the Scottish parliamentary pension scheme as a percentage of Members’ salaries?

I thank noble Lords for their contributions. The only question I will not attempt to answer—it may have been an observation from the noble Lord—concerns the officials behind me. I think it comes fairly close to being sexist as a remark and is not one that I know my partner would appreciate, were it said about her. Comments about a Minister are matters of judgment and I am sure that in that sense he is perfectly correct.

I shall attempt to deal with the questions in the order that they were asked. Why is the existing First Minister pension scheme now being closed? The Scottish parliamentary pension scheme committee concluded that the existing First Minister and Presiding Officer pension schemes should be closed to future members and that future holders of these offices should be subject to the same pension arrangements as those applicable to Scottish Ministers. This is consistent with the pension arrangements for similar officeholders in the Welsh Assembly and recommendations by the SSRB in its triennial review of parliamentary pay and pensions published in January 2008. Under the 2009 Act, the new rules of the Scottish parliamentary pension scheme make specific provision for a category of officeholder members of the scheme. These officeholders include persons who in future will hold the offices of Presiding Officer, Deputy Presiding Officer, Scottish Minister and junior Scottish Minister.

Reference was made to the cost implications of the changes brought about by the Act. The Government Actuary’s Department has costed the revised parliamentary scheme in Scotland against the existing scheme. This review showed that the expected cost of the scheme under the new rules will not be materially different from that under the existing rules. The precise point of the question concerned the closure of the existing First Minister and Presiding Officer schemes to future officeholders. It is expected that this will result in a net saving in relation to the pension arrangements for these offices of about £850,000 every four years.

As regards what is meant by unfunded schemes, the existing scheme is non-contributory. Pension payments under that scheme are paid from the Scottish Consolidated Fund on a pay-as-you-go basis. That scheme will be closed to new entrants from 1 September, leaving only those pensions in payment, or those due to existing officeholders, to be met under the scheme. There is provision in the new pension scheme rules for the Scottish parliamentary pension scheme for future holders of the offices to be officeholder members in the scheme. As such, they will make contributions under the new scheme rules.

Reference was also made to taking forward the regulations. I suggest that will be done by the Department for Work and Pensions, although I cannot be precise about that. The point of the consultation is to find out the best way forward. Of the two sets one will be taken forward by the DWP and the other by the Treasury. They will make a number of consequential amendments to secondary legislation to ensure that the existing Scottish parliamentary pension scheme and First Minister and Presiding Officer pension schemes continue to be treated as public service pension schemes further to the changes to them brought about by the 2009 Act. It will be when those regulations are drawn up that the question of the parliamentary procedure to be adopted will be determined.

If the noble Lord seriously thinks that what I said was sexist, frankly that is just political correctness gone mad. It was a positive encouragement. I am bound to say, since he takes that ridiculous attitude, that the flow of paper coming from his officials showed quite clearly that they knew far more about what was going on than he did. Perhaps I am being unfair, but that is a ridiculous reaction and I hope that, on reflection, he withdraws it.

I do not expect the noble Lord necessarily to know now, but I ask him to undertake to write to me about what the employer—that is, the Scottish taxpayer—contribution is expected to be when the new scheme comes in. The cost of public sector pensions is a matter of great public interest and I hope that he will take his responses a bit more seriously and undertake to write to me with that information.

I thank the noble Lord. I am more than happy to withdraw any imputation in the light of his comments. The question of whether one is being polite across this or any other Chamber is in the eyes and ears of the beholder and observer. I will certainly take his point on board and will write to him in due course.

On the question of the winding up of the scheme for the First Minister and Presiding Officer, will the Scottish Executive have to hold funds against liability under that scheme separately from those of the ongoing scheme?

Motion agreed.

European Organization for Astronomical Research in the Southern Hemisphere (Immunities and Privileges) Order 2009

Considered in Grand Committee

Moved By

That the Grand Committee do report to the House that it has considered the European Organization for Astronomical Research in the Southern Hemisphere (Immunities and Privileges) Order 2009.

Relevant Document: 16th Report from the Joint Committee on Statutory Instruments.

The order was laid before the House on 1 June 2009, together with an Explanatory Memorandum, as required for all affirmative statutory instruments. The draft order will confer the legal capacities of a body corporate and privileges and immunities upon the European Organisation for Astronomical Research in the Southern Hemisphere, also known as the European Southern Observatory. The order also confers privileges and immunities on representatives of the states parties, the director-general and officials of the organisation.

These privileges and immunities are conferred in accordance with the agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the European Southern Observatory concerning the accession to the convention establishing a European Organisation for Astronomical Research in the Southern Hemisphere and related terms and conditions, which was signed on behalf of the United Kingdom on 21 May 2002. The ESO convention obliges the United Kingdom to abide by the terms of the instruments of the ESO, including its multilateral protocol on privileges and immunities. The order implements those obligations in UK law.

The ESO was created in 1962 and currently has 14 member states, the UK becoming a member in 2002. It is the pre-eminent intergovernmental science and technology organisation in ground-based astronomy. It carries out an ambitious programme focused on the design, construction and operation of powerful ground-based observing facilities for astronomy, to enable important scientific discoveries. The ESO employs about 700 staff members across the world. Its headquarters, comprising scientific, technical and admin divisions, are located in Garching, which is near Munich, in Germany; however, its observatories are located in Chile. The ESO operates three world-class observing sites in the Atacama desert region of Chile: La Silla, Paranal and Chajantor.

Through the ESO, the UK is playing a critical role. The UK’s industry and research community is delivering key elements of the global project through provision of novel construction materials and the construction and testing of receivers and support systems. The UK is playing a significant role in the ESO’s development of the European extremely large telescope—E-ELT—a proposed 42-metre-diameter facility planned to be operational by 2018. UK companies have worked on the design of the dome for this and the polishing of the mirror segments, while universities and research institutions are intimately involved in the design of potential instruments.

The ESO is funded through the contributions of member states—approximately €130 million, with the UK's contribution in 2008 about €24 million. In addition to access to the most advanced ground- based optical observatory in the world, UK membership of the ESO brings to the UK an industrial return which will form the basis for training a new generation of technologists in a wide range of disciplines contributing to the strength of the UK's research base. The industrial return amounted to €14 million in 2008, 25 per cent of all the contracts and second in scale only to Germany.

The order, and a similar order to be passed by the Scottish Parliament covering devolved issues, will allow the United Kingdom Government to comply with their international obligations in giving full effect to the protocol on privileges and immunities for the European Organisation for Astronomical Research in the Southern Hemisphere.

I am satisfied that the order is compatible with the European Convention of Human Rights. It is important and, I trust, non-controversial. I hope that it will receive the full support of the House.

I thank the Minister for explaining this order; it was covered in some detail in the other place. It puts into effect in this country an existing multilateral protocol on privileges and immunities agreed by the original parties to the European Organisation for Astronomical Research and signed in Paris in 1974. When the United Kingdom joined the organisation in 2002, it also became a signatory to that multilateral agreement, and this instrument is designed to give legal force to those obligations. The European Southern Observatory facility in the Atacama desert in Chile has, for instance, a new technology telescope that, using active optics, can compensate for atmospheric conditions. It also has a very large telescope—VLT—array consisting of four eight-metre telescopes. There are also plans to build a European extremely large telescope.

Those projects have pushed back the limit of observable space and have made notable discoveries, which include Gliese 581e—the lightest exoplanet yet found, just under twice the size of earth but more than 20 light years away—evidence of a black hole at the centre of our galaxy, and what is possibly the furthest galaxy ever seen. All that comes from facilities 2,400 metres up in the middle of the driest desert in the world, in northern Chile. If it sounds like a set from a James Bond film, that is because it was; in “Quantum of Solace”, the baddie, Dominic Greene, chose the ESO facility in Chile as his hideout.

The European Southern Observatory is a world-class asset from which British astronomy gains enormously, and which benefits Britain’s world-class scientists. As such, this statutory instrument is uncontroversial. However, as the measure constitutes an international treaty, I would like to ask some questions on some specifics. First, given that the headquarters are in Germany and the facilities in Chile, what practical effect—if any—will putting the instruments into UK law have on this country? Why is this order necessary? For instance, will anyone enter the UK using diplomatic immunity under this instrument? Will the organisation claim any exemptions from United Kingdom tax? Secondly, can the Minister assure me that the fall in sterling will not affect the UK Government’s funding of the project, and that there will be no knock-on effect on other projects funded by the Science and Technology Facilities Council? Thirdly, how many British staff will be working in Chile or Germany under diplomatic immunity? Lastly, given that this country signed the agreement in 2002, why are we dealing with it now?

I congratulate the noble Lord, Lord Brett, on his instant transformation from dealing with northern Britain to the southern hemisphere. We have no objection in principle to this order, but perhaps I may ask him—to be honest, as much for my information as for anything else—who are the members of the European Organisation for Astronomical Research, what is its budget, what currency is the budget fixed in and for how long, what proportion of it does Britain pay, and whether he will briefly explain the benefits of Britain’s membership.

I thank noble Lords for their broad support for the project and the questions that they have posed. Why is the order required? It is because the UK, in acceding to the convention established for this organisation, is to abide by the terms of the instruments of the ESO including the international protocols signed by the organisation with other member states. There are 14 member states: Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Italy, the Netherlands, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

On the noble Lord’s detailed questions on budgets, I have given the information for 2008 on the UK’s total spend. On the other, quite legitimate, points he raised, it will be easier for me to write to him, if that is satisfactory, and set out the answers in some detail.

I was asked what the status is of ESO officials and whether they are exempt from UK income tax. That is unlikely to be an issue, given that the ESO’s headquarters will not be in the United Kingdom. However, the order provides for exemptions which presumably apply also to citizens from overseas working in either Chile or Germany. I do not think that we have information on how many personnel there are, but we will seek the most up-to-date information and provide it.

How will the order affect the United Kingdom? It is unlikely to have many implications for the UK because the organisation’s headquarters are in Germany and it operates in the southern hemisphere. However, if the ESO were to hold a meeting in the UK, as it did in 2002, representatives of the states parties and officials of the organisation would enjoy the privileges and immunities entered into in our acceptance of this order.

I hope that that is sufficient to allow noble Lords to continue their support of this draft order and I will get back with the detailed answers that have been requested.

Motion agreed.

Dunfermline Building Society Compensation Scheme, Resolution Fund and Third Party Compensation Order 2009

Considered in Grand Committee

Moved By

That the Grand Committee do report to the House that it has considered the Dunfermline Building Society Compensation Scheme, Resolution Fund and Third Party Compensation Order 2009.

Relevant Document: 17th Report from the Joint Committee on Statutory Instruments.

I shall speak also to the Amendments to Law (Resolution of Dunfermline Building Society) (No. 2) Order 2009. Before discussing the draft compensation order, perhaps I may explain why the Treasury took the decision to withdraw the draft instrument laid before Parliament on 4 June and to re-lay it on 15 June. A very minor error was identified in paragraph 7(5) of Schedule 1 to the original draft order; the reference to “properly or reasonably” should have been to “properly and reasonably”. We did not consider that it was appropriate to correct this error using the correction slip process, so withdrew and replaced that draft order. I apologise to the Committee for that slip.

As noble Lords will be aware, the Dunfermline Building Society was resolved on 30 March by the Bank of England effecting a transfer of part of Dunfermline’s business to Nationwide, and part to a bridge bank. Dunfermline was then placed in special administration following an application to court.

Where the Bank of England exercises its property transfer powers, the Treasury is required under the Banking Act to put in place compensation arrangements. The draft order that we are debating today makes provision: for the compensation scheme, at Part 2, in relation to the transfer of business to Nationwide; for the resolution fund, at Part 4, which makes provision for entitlements to the proceeds of resolution arising from the disposal of the business of the bridge bank; and for the third-party compensation provisions, at Part 5, which provide for the mechanism for assessing any compensation payable to third parties affected by each transfer and establish the scheme for assessing any compensation payable under the “no creditor worse off” safeguard. I will briefly overview these components.

First, the draft order specifies that compensation payable to Dunfermline in respect of the transfer of the business to Nationwide should be nil. As the Committee will be aware, the basic principle under Article 1, Protocol 1, of the European Convention on Human Rights is that compensation for expropriations of property must normally bear a reasonable relation to the value of the property expropriated. The auction process conducted by the Bank during the weekend of 28 to 30 March effectively determined that the market value of the business was nil because the winning bidder did not pay any consideration. Therefore, the Treasury does not consider it appropriate to engage a valuer to assess the value of the business, and has exercised its discretion under Section 49(2)(a) of the Banking Act to specify in the order that the compensation payable is to be nil.

Secondly, the draft order makes provision for the arrangements for the resolution fund in relation to the transfer of business to the bridge bank. The fund is intended to act as a signal that the authorities do not intend to profit from the resolution.

Lastly, the third-party compensation scheme makes provision for an independent valuer to determine two things. The first thing to be determined is the amount of any compensation payable to any third party affected by an application of Section 38(6) of the Act—that is, the section that specifies that the property transfer instrument made by the Bank is to be disregarded in determining whether a default event provision applies and has the effect of turning off third parties’ contractual termination rights. The valuer will also assess whether there is a difference between the treatment that pre-transfer creditors of Dunfermline would have received had Dunfermline gone into insolvency immediately before the transfers, and the actual treatment of those creditors arising as a result of the transfers. This is the “no creditor worse off” safeguard, which makes provision for the valuer to assess whether it is necessary for the Treasury to pay any compensation in the event that pre-transfer creditors are left in a worse-off position as a result of the transfers.

I shall touch on the appointment process of the independent valuer. In January this year I made a commitment in Committee on the Banking Bill, which we will all recall vividly, about the extent to which the appointment of the valuer would be independent of Government. I said, as reported in Hansard:

“At every stage, the Government have been at pains to ensure that the Treasury is one stage away from decisions that relate crucially to the appointment, performance and remuneration of the independent valuer”.—[Official Report, 19/1/09; col. 1478.]

The draft order provides for the Treasury to set up an appointment panel to appoint the independent valuer. Unlike the appointment process for the valuers appointed to conduct functions under the Northern Rock and Bradford & Bingley compensation schemes, the panel will appoint the valuer rather than making a recommendation to the Treasury about the candidate to be appointed. We consider that this further enhances the already robust independence of the appointment processes that we have put in place in previous circumstances.

The second order, the Amendments to Law (Resolution of Dunfermline Building Society) (No. 2) Order, has been laid in draft under the powers in Section 75 of the Banking Act 2009, which enable the Treasury to make amendments to law so as to give effect to resolutions of failing banks.

As all Dunfermline’s member business was to be transferred to Nationwide, the Bank’s property transfer instrument was drafted so as to transfer all Dunfermline’s business to Nationwide with the exception of certain property, rights and liabilities specified in the instrument. In particular, Dunfermline’s £660 million commercial loan book was not to be included in the transfer to Nationwide.

However, due diligence undertaken in the weeks following the transfer demonstrated that the technical definitions adopted in the property transfer instrument led to a significant proportion of the commercial loan book being erroneously transferred to Nationwide, together with a small number of social housing loans. “Commercial loan” was defined in the transfer instrument as a loan to persons who were not eligible claimants under the Financial Services Compensation Scheme, as commercial entities would not normally be liable to compensation under the FSCS. “Commercial mortgage loan” was defined in similar terms. A small number of loans which were considered to form part of the social housing book were also transferred to Nationwide by the transfer instrument.

Further due diligence in the weeks following the transfer has identified, however, that a large number of the borrowers on the commercial loan book were in fact eligible claimants under the FSCS rules. That means that the effect of the instrument was to transfer these loans erroneously to Nationwide.

The order before the House today identifies each of the loans that is, and was always intended, to remain with Dunfermline by an individual identification number, listed in the schedule to the order. The order has retrospective effect to 8 am on Monday 30 March, the time when the transfer of Dunfermline’s assets was made, and essentially corrects the error in the transfer instrument as though it had never been made. The effect in law is as though the loans had never been transferred to Nationwide.

In assessing the options to address the mistake in the transfer instrument, the Bank of England, in consultation with the Treasury, has fully considered all possible commercial and contractual remedies that might have achieved the same effect as the draft order we are considering today. The Treasury is satisfied that use of this order and its retrospective effect is therefore necessary to ensure the completion of the Dunfermline resolution, and desirable so as to limit the call on public funds. Treasury and Bank of England officials have of course discussed the scope and content of the order with Nationwide and the administrators.

I merely add the obvious point that we considered at great length whether anything might prove to be retrospective in the Banking Act—I recall the intensity with which that aspect was scrutinised. Here, an error occurred, which is why we are involved in some retrospective activity. I commend the orders.

Until the Minister stood up, I had not realised that we were debating the two orders together, which is entirely my fault, because I can see that properly stated on the Order Paper, so I will be shuffling my papers between the two. If the Minister will permit me, I will start with the second of the orders, where the Minister looked, I think, duly embarrassed about using Section 75—not that the Minister should be embarrassed at what has happened, but I hope that there is a due degree of embarrassment at the Bank of England. When Parliament entrusted the property instrument power to the Bank of England under the Banking Act, that was done under the tacit assumption that the Bank of England would exercise the power competently. Clearly, it has not done so.

The various powers in the 2009 Act were not designed for frequent use—indeed, we hope that they will not be used frequently—but we are entitled to some assurance that lessons have been learnt from this occurrence. Has there been a proper formal post-mortem examination at the Bank of England with a view to identifying what went wrong and why? If this had been in a commercial document, it might not have been as easy to revise it as with the stroke of a pen on a statutory instrument.

The Minister referred to our lengthy discussions at various stages of the Banking Bill, and it is fair to say that he struggled to come up with any plausible way in which the Section 75 power would be used. Since then, we have had the No. 1 Dunfermline order, which made a whole raft of changes to law which some of us think could well have been made in the Bill, and had retrospection of the total amount of one hour and 45 minutes—hardly a substantive use.

This order is a more substantive use of the power, but it is for a rather less substantive reason: that is, it is to correct the shoddy draftsmanship of the Bank of England. I am not going to object to the order today, because it is clearly convenient to have the Section 75 power to use in these sorts of situations. However, if the Minister had stood at the Dispatch Box during the passage of the Banking Bill and said that he needed the Section 75 power to correct drafting errors made by the Bank of England when using its property instrument power, we might have invited him to make a more targeted power in the Bill—for example, to correct property transfer instruments—but it is more likely that we would have fallen about laughing at the Government thinking it necessary to have such a power in the Bill to cope with incompetence. As I say, however, we will not object to the order; we simply hope that the Government are not proud of it.

The more substantive of the two orders which the Minister introduced is the Dunfermline Building Society Compensation Scheme, Resolution Fund and Third Party Compensation Order 2009. It is really four orders in one, because it covers the compensation scheme, the resolution fund and the third-party compensation scheme, as well as the appointment of a valuer to carry out the valuation of the amount of recovery for the purposes of the Dunfermline contribution to costs order, which we debated in May.

In broad terms, the order is not controversial. Indeed, I might even say that it is potentially very interesting for Banking Act anoraks—those of us who survived the Banking Bill process—because it will set up the first of these compensation schemes, resolution funds and third-party compensation orders; so it is the first time that these powers will be road-tested. We will look very carefully at the progress of the use of the powers to see whether they stand up in the light of real facts and events.

I have a few questions for the Minister. First, will he update the Committee on what is happening to the Dunfermline Building Society? As I understand it, the social housing assets were initially transferred to a bridge bank, owned of course by the Bank of England, but last week the Nationwide, which of course was involved in the original transaction, also acquired those assets. Will the Minister say what the Nationwide paid for those assets relative to their face value? Does this transaction complete the work of the bridge bank that was set up as part of the Dunfermline rescue? Approximately how much—I do not expect him to have definitive figures—will be paid into the resolution fund? I think that that comes from the bridge bank.

Secondly, Dunfermline has been placed into administration. Does the Minister have any information on the progress of that administration, including the likely deficit to be borne by secured and unsecured creditors, including the pension fund? If he does not have the information, will he say how it can be obtained? I could not get any up-to-date information online, which is of considerable concern.

These questions are tangentially related to the work of the valuer appointed under Article 11 of the order, because the valuer will have to work out the “amount of the recovery” for the purposes of the contribution-to-costs order. I believe that the amount of the recovery is the amount that the valuer believes that the Financial Services Compensation Scheme would have got back from Dunfermline, had the FSCS paid out to depositors in the normal way under its rules and then recovered it. Will the Minister confirm that this will entitle—indeed, require—the valuer to assess the value of the business and assets of Dunfermline that would have been sold if Dunfermline had not been dealt with by the special resolution regime? The valuation is necessary irrespective of the fact that the Treasury has now determined the compensation available to Dunfermline as nil. That does not bind the valuer, who has to reach his own view on value. I ask the Minister to confirm that.

Will the Minister comment on the similarities to, or differences from, the calculations that the valuer will be required to make for the third-party compensation scheme? This concerns the amounts that would have been received by the creditors, but I assume that it involves some of the same underlying issues of how much the business was worth and therefore how much would have been paid out to the creditors had the business been dealt with in accordance with the assumptions that are specified.

In that connection I note that, in respect of the third-party compensation scheme, Part 3 of Schedule 2 has some detailed valuation principles about financial assistance and so on, which we have seen in other orders, and which have to guide the valuation. However, I could see no equivalent principles applying to the Article 11 valuation process—that is, the process that will apply under the contribution-to-costs order. Can the Minister explain this disparity of approaches by the same valuer to two different parts of the task that he will be carrying out, and comment on whether that might result in inconsistent valuations coming out of the process? Valuation principles are specified for one, although I do not believe that such principles have been specified for the other for the purposes of Article 11.

I have a couple of other detailed questions for the Minister. The first relates to the account holder for the resolution fund. Who is that likely to be? It is required by paragraph 1(2) of Schedule 1. Why does an independent person have to be appointed to hold the money? Why could the account at the Bank of England not simply be the Dunfermline resolution fund? Why does it have to be held in the name of an individual? What does that add?

My other, more detailed, question relates to paragraph 3 of Schedule 2, which says that third-party compensation is to be paid only if it is required to be paid in order to comply with the European Convention on Human Rights. What is this intended to do? In what circumstances would this proviso prevent compensation from otherwise being paid? Is this intended to restrict the operation of the rights to compensation triggered by Section 38(6) of the Banking Act? If so, why was this provision not included in the Bill? It seems quite a significant point to have been included in the order rather than the Bill. Also, has this point been consulted upon?

Apart from these points, we are content with the order.

I start with the Amendments to Law (Resolution of Dunfermline Building Society) (No. 2) Order 2009.

Well, this looks like a fair old cock-up, doesn’t it? I heard the Minister’s remarks about technical changes and technical mistakes, but if my advisers in a commercial transaction presented me with this and said I had to go back to whoever was signing it all off, I would be incandescent. What happened? What was going on? Who was acting in the Bank of England? Was it acting for itself? Were lawyers involved? These seem to be very basic things that you check. If there were outside lawyers, what was the firm? What were they paid? I hope that the bill has not been paid. If they were from inside, I hope that a few people have been sacked. These are simple basic things, and for the Minister—although it is obviously not his fault—to have to come here and produce pages and pages of numbers of loans is deeply embarrassing and does not meet the standard of professionalism that we expect from the Bank of England. Can the Minister please answer those questions? Taxpayers are not getting value for money when such obvious mistakes are being made.

I thought that I heard him say something along the lines that it was discovered that borrowers on the commercial loan book were eligible claimants under Financial Services Compensation Scheme rules. That mystified me. Can the Minister explain more? I do not understand how borrowers can make claims. Perhaps I am being stupid.

I turn to the second order. Perhaps I may ask one or two more general questions about what happened here and where we are. It has become clear that there is a poisonous pile of debt resulting from poor-quality loan decisions on commercial property by Dunfermline. It was clearly way out of its depth. There was horrific exposure to very dangerous sorts of property. For example, a large site in Bournemouth was not income-producing at all. Frankly, no experienced commercial lender should have been involved to anything like that extent—certainly not amateurs playing in a market that they did not understand, like the people in the Dunfermline Building Society.

What independent property valuations have been done? When were the last valuations of the properties securing these large loans? If there has not been a valuation recently—and we are in a depressed market, so it is easy to get the valuers to do a check valuation at low cost—will the Minister undertake that there will be up-to-date valuations of the properties so that we can see how far under water the loans are?

I have some scepticism about how much time and energy it will be worth investing in the valuation of any compensation payable, given what I believe to be the serious negative equity in which the loans are involved—rather as I felt about Northern Rock. But that is a separate case; I am making a specific request that the Government come clean about the current value of the properties on which these loans are secured.

I am sorry; I should have declared an interest. The Dunfermline Building Society was a tenant of a property I manage on behalf of a pension fund. I am waiting for the application to assign to the Nationwide, but it has not come through yet.

Deputy Chairman, it might be convenient for the Minister if I very briefly intervened to make a few remarks.

Thank you. It is the arthritis of old age. These are the problems that occur if you live long enough. I declare an interest in that many decades ago I was a Dunfermline Building Society manager. I do not intend to repeat the few remarks which I made in the Chamber pre the surveillance of the Statutory Instruments Committee. What I want to say, which follows on from the noble Baroness’s point, is that it is not very clear up there—I live in Scotland—just where we are going with the housing association loan book, which has apparently gone to the Nationwide. On the surface and in public terms, that is a somewhat grey area. If the Minister could be specific on that issue, it would be helpful not only to me and other Members present but to the wider public in Scotland, because the Scotsman newspaper, at least, has tended to publish detailed information.

I am grateful to all noble Lords. I offer my rather belated congratulations to the noble Baroness on her birthday yesterday. I had hoped she had had such an uproarious evening yesterday that she would be somewhat blighted today, but no such luck. She is on her usual form. I am therefore obliged to do my very best to answer the detailed questions that she and other noble Lords have asked. I shall examine the detailed questions in Hansard very carefully and if I have failed to answer them I shall write to the noble Lords concerned with fuller answers.

The noble Baroness asked significant questions and made the obvious comment that the fact that we are in this position indicates that a mistake has been made. That is certainly the case, but I recall some scepticism on the part of the opposition about the necessity of making provision in the Banking Bill, as it then was, to deal with the possibility of errors occurring. After all, we are all aware of the fact that this work is done in—

Will the Minister point me to the Hansard reference where he ever said that Section 75 was going to be used to rectify errors of this nature?

Section 75 was a very important provision in the Act. I hope that the noble Baroness will rightly identify that a mistake has been made, which we clearly need to take lessons from—I emphasise that point—and recognise the wisdom of the Act being presented in such a way that we are able to make up for weaknesses, particularly against a background where we all recognise that work is done under considerable pressure. We all know that things have to be done with such dramatic suddenness, given their impact on creditors and depositors of banks and building societies: hence the necessity for prompt action. I accept what the noble Baroness has indicated, which was reinforced by the noble Lord, Lord Oakeshott, that this error should not happen at all, and certainly not often. I reassure them that the Bank and the Treasury fully discussed the causes of the error before agreeing to lay this Section 75 order. As I indicated in my opening speech, other possible commercial solutions were canvassed but were decided against.

In any future resolutions the tripartite authorities will continue to work together to ensure that all possible risks to the progress of these transactions are managed as effectively as possible. However, none of us should underestimate the challenge this work presents when one is operating under such time constraints. Of course, I accept, and recognised in my opening comments, that there is justifiable criticism when things go wrong. However, we made provision for that in Section 75. I even said at the time that parties might all have intended to achieve a particular effect, and proceeded on the basis of that intention, but an examination of the instrument may reveal that the text itself was ambiguous or even wrong. In such cases it may be entirely appropriate to correct the drafting with retrospective effect to ensure that the parties who signed up to the resolution are indeed in the position—we all recognise that this is the important point—they intended to be in when they gave their agreement. We were wise enough to appreciate that when people are working under pressure, problems—it might even be a minute technical problem—may arise, and that therefore it was necessary to have a fallback position as far as the Act was concerned.

The noble Baroness is right that no Minister wants to be in this position so soon after the passing of the Act. It is important that the authorities can give assurances that lessons have been learnt, and I convey those assurances today.

I will come on to the points made by my noble friend Lord Kirkhill in a moment. I am all too well aware of the significance of the Dunfermline Building Society to Scotland, but I hope it will be accepted, in the terms that I have outlined, that it was necessary to take this action which was available under the Act. We hope that that action will not need to be repeated, but we are relieved that we have a framework and that the Act is constructed in such a way that we can address ourselves to problems that we become aware of subsequently.

The noble Baroness asked me a number of questions about the independence of the account. It needs to be held in the name of an independent person because both the Treasury and the Bank of England have some interest in the money, in so far as they are entitled to deduct costs. They are therefore a party to the position, so it is proper that it should be handled by an independent valuer rather than in the organisation.

The noble Baroness asked me about the proceeds from the sale of the social housing book. Consideration is to be paid by Nationwide on completion of the transaction, so it is, I am afraid, subject to commercial confidentiality at this stage. I do not ordinarily shy away from trying to answer her questions to me, but in this particular area I think she will accept my answer.

How is the sale of the bridge bank progressing? The Bank of England announced that it has selected the Nationwide Building Society as the third bidder for the social housing loans and related deposits from housing associations that are held by the bridge bank. This followed a competitive process that was conducted by the Bank of England in accordance with the code of practice issued by Her Majesty’s Treasury under the Banking Act 2009. That is the progress that is being made.

The noble Baroness asked me about valuation principles under Article 11. These are difficult areas for me to respond to immediately at this point. If she will forgive me, I will write to her on this point, not least because the degree of complexity that appears to have been identified in the notes passed to me are such that I do not trust myself to deliver them with the clarity and accuracy that she deserves.

What is happening to the Dunfermline Building Society? As my noble friend Lord Kirkhill indicated, he has a close interest in Scotland—

The Minister is moving on, but I am afraid that I did not hear him answer my questions, which were pretty simple, I thought. Was this matter handled entirely in-house? I am particularly interested in the legal advice and the legal process followed by the Bank of England legal team. If it was not, were outside lawyers involved? If so, who were they, and what fee did they get? We have had the horrific revelation today that the Treasury managed to pay £22 million to Slaughter and May last year for financial advice. Was it Slaughter and May? If it was, how much did it receive? If the Minister does not have those facts to hand, will he undertake to write to me urgently, please?

I do not have those facts to hand; part of the answer to that is that that is the responsibility of the Bank of England, but I will take steps to translate the noble Lord’s questions to the appropriate authority and seek to get an answer for him.

On Dunfermline, I have said that the Bank of England selected Nationwide building society as a preferred bidder for the social house loan. We cannot comment on the outcome of the sales process at this stage, as the commercial transaction is not complete as yet. The Bank of England will provide an update in due course: it is under an obligation to do so and will do so. The proceeds of the sale will of course be paid into the resolution fund by the Bank of England. It will be known as the Dunfermline resolution account. Any consideration received from the sale of the shares in the bridge bank, or any distributions made by the bridge bank, for example, following the sale of the business of the bridge bank or by a liquidator appointed to wind up the bridge bank, will be there. The ultimate beneficiary of the account is Dunfermline.

The Bank of England and the Treasury are entitled to be reimbursed—a point I made to the noble Baroness about their direct interest in the issue. The Treasury will need to decide whether any of those costs should in fact be recovered from the monies in the accounts. Before any costs may be recovered from the account, the cost will have to be certified by the independent valuer appointed by the Treasury to have been reasonably and properly incurred. That is the next stage.

On the question of the valuation of the commercial loan book, that will be a matter for the administrator who will be in receipt of the property should the order be passed here and in the other place. I will relay those questions to the administrator; it will be his task to respond to them. Following our exchanges, I will ensure that in due course he is made aware of them.

I was asked by the noble Baroness whether third-party compensation will be worked out on the “no creditor worse off” arrangements, how that will work and how the valuer will treat the business of Dunfermline. The valuer is required to apply the valuation principle in accordance with the Banking Act. Dunfermline entered into the insolvency procedure immediately before the time that the transfer instrument was made. This is a mandatory valuation principle that must be included in a third-party compensation order in accordance with the regulations.

The Government believe that that is the correct position as, in order to enter the special resolution regime, Dunfermline had to be failing to meet its threshold conditions. As such, a bank entering into the special resolution regime will have failed to be a going concern. As it would no longer be able to perform its regulated activities, the threshold conditions are no longer met. In this case, we have decided that it is appropriate that the independent valuer should determine which insolvency procedure Dunfermline would enter into, rather than specify the procedure in the order. The valuer will be able to assess for himself the treatment of any property of Dunfermline.

All in all, we believe that the “no creditor worse off” arrangements provide an entirely effective safeguard of creditor interests where the partial property transfer powers have been effected, as in this case. We believe that the provisions set out in Schedule 2 to the order will provide comfort—I know that my noble friend will appreciate this—to the creditors of Dunfermline and, more broadly, will provide an example of how the Government have met our promises about protecting the interests of creditors where the stabilisation tools are exercised. Accordingly, we reassure creditors, banks and building societies.

I cannot emphasise that point strongly enough; we discussed it at considerable length when we considered the Banking Act. We all know that the special resolution procedures and stabilisation tools exercised are difficult, are operated under intense pressure and are of the greatest importance in terms of fairness to creditors while, at the same time, preserving as far as possible the positions of the assets concerned.

I hope that the noble Baroness will feel that we have responded to that position effectively in the context of the legislation. I apologise if it looks a little as if I have gone over some old ground today, but the perspicacity of the noble Baroness and the noble Lord leading for the opposition parties during the Banking Bill meant that we looked at some of these issues with great intensity at that time, and although I thought there was a possibility of the special resolution procedures being applied, I did not for one moment imagine that we would be in this situation quite so soon.

I hope that the noble Baroness will accept that with regard to both the position that the Government adopted on to the passage of the legislation and the way that we have taken these decisions subsequently, allowing for our obvious embarrassment about the drafting mistake in one of the instruments, most of her anxieties have been allayed.

Before the Minister sits down, he made a handsome offer at the outset that Hansard would be carefully scrutinised and that those questions that were not answered would be answered separately in writing—copied, I hope, to the noble Lord, Lord Oakeshott. I think he will find that he did not answer a number of questions fully, but there is one that he did not answer at all: why there is a limitation that third-party compensation is paid only if it would have been paid under the European Convention on Human Rights. I did not hear him attempt to respond to that. Because I am being kind today, though, I am happy to have all other questions dealt with in correspondence.

As I am also being kind today, I remind the Minister that I said I was mystified by the business about borrowers on the commercial loan book being eligible claimants under FSCS rules. I invite him to write to me without my having to chase him on that point.

In the light of these questions, I shall learn to sit down more quickly. On the latter point, I will have to write to the noble Lord. On the initial point, though, the provision in paragraph 3 of Schedule 2 of the compensation order is intended to limit any compensation to be paid in respect of the turning off of termination rights, and it was included in both Northern Rock and Bradford & Bingley compensation scheme orders. We have therefore already addressed ourselves to these issues in previous orders, and I have nothing to add to that with regard to this one.

Motion agreed.

Amendments to Law (Resolution of Dunfermline Building Society) (No. 2) Order 2009

Considered in Grand Committee

Moved By

That the Grand Committee do report to the house that it has considered the Amendments to Law (Resolution of Dunfermline Building Society) (No. 2) Order 2009.

Relevant Document: 17th Report from the Joint Committee on Statutory Instruments.

Motion agreed.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2009

Considered in Grand Committee

Moved By

That the Grand Committee do report to the house that it has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2009.

Relevant Document: 17th Report from the Joint Committee on Statutory Instruments.

This order extends the scope of the Financial Services Authority regulation to include the sale and rent-back market. Regulation will bring important protection for consumers in this market, preventing exploitation of vulnerable homeowners and providing a means of redress for those who experience problems. Full regulation of this market will commence in June 2010, but this order introduced real protections for homeowners now by introducing an interim regulatory regime on 1 July this year.

The sale and rent-back market, sometimes referred to as the sale and lease-back market, offers homeowners the option of selling their properties at discounted rates in exchange for tenancy agreements. Sale and rent-back agreements effectively combine two transactions: first, individual homeowners sell their property at a discount and, secondly, they are offered an agreement to remain in the home as a tenant.

A range of stakeholders, including consumer groups and mortgage industry representatives, have raised concerns about the sale and rent-back market. The main concerns are, first, that these arrangements are often taken up by vulnerable homeowners facing repossession; secondly, that these homeowners may be entering sale and rent-back agreements mistakenly believing that these agreements offer secure tenure in the medium to long term; and, thirdly, that with increasing numbers of homeowners experiencing financial difficulty as a result of the global financial downturn, the scale of the problem is likely to increase.

I will come to the specifics of the order shortly, but it may be useful, given the context that those entering into sale and rent-back agreements are often homeowners facing repossession, if I first take a moment to set out the framework of support that the Government have put in place for homeowners during these difficult times. Statutory regulation of mortgages and credit provides homeowners with important protection and appropriate means of redress. In 2004 the Government extended the scope of FSA regulation to cover first-charge residential mortgages. The FSA’s regime requires lenders to treat their customers fairly and to treat repossession as a last resort. Regulation of other credit business is covered by consumer credit legislation administered by the Office of Fair Trading. The regime has been strengthened by the recent implementation of the Consumer Credit Act 2006.

Regulation of mortgages and credit is supported by the new mortgage pre-action protocol introduced in November last year. This set out clear guidance on what action the courts expect lenders to take before bringing a claim to the courts to help ensure that lenders have tried to discuss and agree alternative courses of action with the borrower.

The Government launched the homeowner mortgage support scheme on 21 April. This new scheme, together with changes to support for mortgage interest and the Government’s mortgage rescue scheme announced in the 2009 Budget, will help homeowners who experience a temporary income shock or lose employment, or are otherwise vulnerable, to remain in their homes. The Government have also taken action to help ensure that every household struggling with debts has access to free and impartial debt advice.

Against this backdrop of support for homeowners, the Government are proposing specific protections for those who may be considering a sale and rent-back agreement, which is the basis of this order. The action follows consideration of the sale and rent-back market by the Office of Fair Trading. In response to stakeholder concerns, in the Budget 2008 the Government asked the OFT to investigate the market and consider appropriate options to strengthen consumer protection. On 14 May last year the OFT announced that it would conduct a formal market study, working to a tight timetable in the light of concerns about this market.

The OFT published its report on 15 October. Its market study found that the potential for severe consumer detriment in connection with sale and rent-back agreements is unlikely to be addressed through the existing framework of consumer protection, other Government initiatives to help homeowners in difficulty under way at the time of reporting, or by industry self-regulation of the sale and rent-back market. The report recommended that the sale and rent-back market should be regulated by the FSA. At the 2008 Pre-Budget Report, the Government confirmed their intention to consult on this, including extending the scope of FSA regulation.

We published the consultation on 6 February. It sought views on three options: maintaining the existing framework, self regulation and FSA regulation. The consultation also invited views on the proposal for the FSA to put in place its regulatory regime via a two-stage approach. This would involve an interim regulatory regime which would take effect as soon as the statutory changes came into force and a full regulatory regime at a later date, following a full consultation and cost-benefit analysis by the FSA. Alongside the consultation, the FSA published a consultation on an interim regulatory regime so that it would be ready to introduce consumer protection swiftly, if asked. Both consultations closed on 1 May, and the Government published a summary of responses to their consultation on the second of this month. Alongside this, the Government laid before Parliament the order that we are looking at today.

Following consultation, the Government consider that extending the scope of FSA regulation to include sale and rent-back agreements is the most appropriate way of ensuring consumer protections in the sale and rent-back market. We consider that a two-stage approach to introducing regulation, including the use of an interim regime, represents an appropriate and proportionate way of balancing quick action to protect consumers with the rights of firms already conducting business in the market.

The order we are debating introduces regulation of sale and rent-back agreements by this two-stage process. Interim regulation will commence on 1 July this year. At the end of the summer, the FSA will consult on rules for its full regime, which will come into force in June next year. Under the interim regime, firms will need to meet FSA threshold conditions, including the requirement to have adequate resources and to be run by fit and proper people. Firms will also have to comply with the principles for businesses and meet a number of systems and controls and conduct of business rules. That is the second stage of the process. The first stage is for almost immediate implementation, provided that the Committee considers the order to be acceptable. I beg to move.

I thank the Minister for introducing the order, to which we will not object. The Government asked the OFT to look at the sale and rent-back market and have based their solution on the advice from the OFT. They have consulted, so they cannot be faulted on those grounds. However, I have to say that I have a tinge of regret that we are unleashing the full might of the FSA’s regulatory powers on a relatively new market, which is of indeterminate size but is certainly highly fragmented, and about which—as the OFT study revealed—we know relatively little. My concern is that the costs, which are estimated at £8,000 on a one-off basis and £20,000 per year thereafter, may well deter providers of sale and rent-back products.

The Treasury impact assessment is based on 1,000 providers and 5,000 transactions a year—that is, on average, five transactions per provider. If you have to recoup in year one both the set-up and the ongoing costs, you have to recoup more than £5,000 per transaction on average. We have to bear in mind that these transactions concern relatively small amounts and certainly involve homes lower down the valuation scale.

I do not doubt that there have been circumstances in which owners of property have entered into unwise transactions, possibly induced by purchasers to sign up to terms which were unduly favourable to the purchaser and unfair to the owner of the property. However, it is clear from the OFT report that sale and rent-back products can in fact be a suitable response for some people, especially those who are already over-borrowed but who place a high value on remaining in their own home. These are not people who would benefit from the mortgage protection schemes and the like to which the Minister referred. Their problems are too deep-seated to be dealt with by those sorts of protections.

The impact assessment has an impossibly wide range of costs and benefits of the regulatory solution in the order—between net costs of £953 million and benefits of £1,327 million. The Treasury is to be commended for its honesty in revealing the wide range of potential outcomes, but this underlines—for me, at least—the difficulties that we have in justifying a regulatory solution. I instinctively fight shy of a regulatory solution if another solution can be found. I accept, though, that on the basis of the work that is done by the Treasury, no satisfactory self-regulatory system seemed to be available. There is evidence that some consumers have been harmed by sale and rent-back products, but precious little evidence, anecdotal or otherwise, to weigh in the balance on the other side.

My final set of questions to the Minister concerns the future of regulation. We constantly add regulated activities to the FSA, but I do not think that we ever take them away. Will he say whether the Treasury and/or the FSA believes it appropriate to look at the regulated activities that are accreting in the FSA to see whether they continue to be justified over time?

More specifically, does either the Treasury or the FSA believe that it should review the power that has been added in the light of the difficult evidential base behind it and the understanding of what the consequences of regulation might be? Does the Treasury believe that a review would be appropriate after a number of years to see what the impact of this power has been on the availability of finance of different kinds to homeowners? There is a danger that well-intentioned regulation—this is clearly that—could actually kill the market for sale and rent-back entirely, and I am by no means convinced that that is the right outcome for all consumers.

We on these Benches not only do not object to this measure; we positively welcome it. We believe that there is increasing evidence that the sale and rent-back market is becoming a serious scandal. I accept the noble Baroness’s point that the evidence is not very clear—it is a fairly new market—but there is a great deal of evidence that unscrupulous operators are preying on very vulnerable people. In this case, the Government have taken the right decision, and the FSA now needs to step in and regulate this.

How will the safeguards and the protections for people work in practice? Compensation after the event is never as good as preventing a transaction that is not right and preventing a rip-off. Clearly, solicitors have to act on a transaction of this kind. Will the Minister—or, rather, the FSA through him—say whether solicitors have a duty of care to their client to warn them that the transaction into which they are going to enter could be illegal, if the order is passed, or certainly not in their best interest? Will the FSA take steps to ensure that solicitors are put on notice so that it is even a question of professional misconduct if they do not properly advise the client? This is a practical point, particularly as—as the noble Baroness said—we are probably talking about fairly low-value houses in many cases. We want to prevent the abuse, the scandal, from happening at the point of sale rather than having an involved compensation procedure afterwards.

In general, however, we think that regulation is necessary in this case.

I am grateful to both noble Lords for their support for the measure. I noted the noble Baroness’s reservations, and I recognise the figures. After all, they are government estimates of the costs. She is absolutely right that this is a question of balance between the cost to those who might provide these opportunities and the particular problem that has been recognised. That came through strongly in consultation, but it was also a reflection of the fact that anxieties have been expressed about this business from a number of quarters, particularly consumers’ associations, which highlighted difficulties in this area.

The noble Baroness is absolutely right that we have difficulties with estimating the nature of the business, because it is a recent development with quite quick growth. We cannot produce definitive positions on the size of the business nor directly how the business will react to the costs involved. The consultation gave clear indications as to what was involved. I certainly accept the point made by the noble Baroness about the FSA and regulated activities. I know that the FSA regularly reviews its regime; it is obliged to. The noble Baroness will appreciate that the FSA has been under considerable pressure of public scrutiny in recent months, not to say the past few years. Of course we expect the FSA to keep its regulation under review and to make sure that its actions are appropriate and proportionate. I can give assurances on that front, and that full consultation occurred before the orders were drafted.

There is the additional dimension of care. The issue is serious enough for us to want to act promptly—that is why we have the interim position—but we are all too well aware of the fact that the costs involved and the situation is such that before the full regulatory regime comes into place, a month should elapse for people to adjust to that market. The noble Baroness used a phrase that I would ordinarily have sought to use: it is a question of striking a balance between protecting the vulnerable consumer, of whom we have notice of sufficient numbers, and ensuring that provision is made to help homeowners—provided that consumers are fully aware of their rights. I entirely accept what the noble Lord, Lord Oakeshott, said: it is important that the best advice is available. We are talking about low-income families. I am in no doubt about the obligation on the solicitor; I have more doubts perhaps about the relationship between the solicitor and people who are probably carrying out the first or second transaction of their lives of such import. When one is dealing with a new concept, with the best consumer advice in the world, one is all too well aware that an awful lot of people remain in comparative ignorance of their rights.

I emphasise that none of us thinks that this strategy ought to obtain in very large numbers of cases. We can see the growth of the industry. With safeguards, it may be that it provides support and help to some, but we all know that sale and leaseback will not be appropriate in some cases. We know already of cases where complaints have been registered—and the complaints have been about the most fundamental thing: “We did not appreciate that we had lost the capacity to safeguard our home”. I cannot think of a more fundamental right than that. If the Consumers’ Association is telling us that cases are emerging where people are in that situation, it shows how seriously we must address safeguards for the consumer.

All the points that both noble Lords made about the legislation are important. It is important that the potential costs involved do not choke off supplies of what may be a service to the consumer. Awareness of rights and the ability to conduct transactions with professional advice need the greatest consideration. The FSA should not, because this may be a relatively small market at present, neglect its obligations to control this market; it must take those responsibilities seriously. As we all recognise, the FSA is carrying some most significant burdens and some others which affect a much smaller percentage of the population. I entirely accept that it must act in the most professional way with regard to its regulatory regime. It certainly needs to review those powers if its effectiveness is adversely affected by the amount of work that it has taken on. We all know the strengthening of the professionalism of the FSA that has gone on in recent months. We will need to ensure that that is properly supervised. I commend the order.

Motion agreed.

Committee adjourned at 5.21 pm.