Considered in Grand Committee
Partial property transfers are an essential part of the authorities’ toolkit for resolving failing institutions under the Banking Act 2009. The Government recognise that unless effective safeguards are in place, partial property transfers have the potential to affect the contractual interests of counterparties and creditors of UK banks, with the possibility of negative consequences for the market generally. To this end, when the Banking Act was passed in February 2009, the Government put in place safeguards to protect contracts relevant for regulatory capital purposes from disruption that might arise as a result of the possibility of partial property transfers.
Noble Lords may recall that during the debate on the safeguard orders I committed that the Government would continue to review the need for amendments to the safeguards order to further enhance legal certainty, given the comments of market stakeholders. Following the constructive input of the Banking Liaison Panel and in particular its subgroup on safeguards, the amendments that we are debating build on the protections already in place and in the Government’s opinion help to ensure legal certainty for the parties involved in a partial transfer.
In its advice to the Treasury, the BLP’s safeguard subgroup made five recommendations which the Government have studied carefully. On four of these we have been able to respond positively, and the results are reflected in the amendments in front of the Committee. I should like to explain why we have not taken on board the fifth recommendation.
Noble Lords may recall that the Government have exempted FSCS-protected deposits from the protection of set-off and netting arrangements. This particular carve-out from the set-off and netting safeguard allows the authorities to transfer, for example, the retail deposit book of a failing institution to a solvent new institution in a short timeframe, which is important to allow the authorities to provide continuity of service and protect public confidence. Small companies are included in the definition of FSCS-protected deposits and therefore are not afforded the protection for their set-off and netting arrangements.
The fifth recommendation was to extend set-off and netting protection to small companies that are part of larger groups. The BLP subgroup on safeguards discussed and proposed a way for this to be done, through providing for protection where banks had placed an identifier on set-off and netting arrangements with small companies that are part of larger groups. If such identifiers existed, the authorities would have to protect these arrangements. However, the authorities were not confident that an amendment to the safeguard order along these lines would be workable and, further, market participants themselves were not completely confident that such identifiers could be delivered.
Sitting suspended for a Division in the House.
The Government have therefore proposed that the BLP should continue to work on this matter over the next year, with the aim of treating small companies that are part of large groups in the safeguards order in a manner that will address industry concerns while ensuring that the authorities can resolve a failing bank or building society effectively. The Government will continue to discuss with the panel how we can progress this issue.
I turn to the substantive provisions of the order. The amendments ensure that, in establishing which transactions fall under the protection of the safeguards order, the order covers to the full the range of transaction types that can be or are typically included in set-off or netting arrangements. This was a concern following the laying of the safeguards order, and I told the House on 16 March that the BLP would be looking at the definition of relevant financial instruments in the order. This amendment is the result of that consultation.
As we are all aware, this is a complex and evolving field. We are confident, though, that the definition of “relevant financial instrument” proposed in these amendments is comprehensive and future-proofed as far as possible. Our feedback from industry is that it is content with the new drafting.
The amendments also clarify the legal intention that the inclusion of any excluded right or liability under a set-off and netting arrangement does not exclude the entire arrangement from protection under the safeguards order. This is the so-called “bad apple” problem arising from the presence of the word “solely” in the original order. Ministers have given assurances that the term “relates solely to” is intended to prevent market participants wrapping up service contracts with financial contracts, thereby gaining the protection of the order for their service contracts. However, there is a difference in legal interpretation over the effect of this drafting, and some industry participants took quite a different view of the effect: that the inclusion of any excluded right or liability under a set-off and netting arrangement excludes the entire arrangement from the order’s protection.
It was never the Government’s policy intention that the presence of excluded rights or liabilities under a wider set-off and netting arrangement should render that entire arrangement unprotected by the order. I make it clear that, in the Government’s view, the drafting of the safeguards order did not have this legal effect. However, as there are differing legal views on this, the Government have responded to the concerns and removed “solely”. Our feedback from industry is that it is happy with the result.
There is also an amendment in respect of Section 34(7) of the Banking Act 2009, which deals with trusts. That section provides that where a property transfer instrument makes provision about property held on trust, it may also make provision about the terms on which the property is to be held and how any powers, provisions or liabilities are to be exercised after the transfer. The purpose of the section is to ensure that a transfer of property is able to provide certainty of outcome and speed of execution in relation to property held on trust by or for a banking institution, in spite of any restrictions that might otherwise exist.
The panel was concerned that trust arrangements for any bond held by a failing bank or building society could, on the face of the legislation, be modified or terminated irrespective of the consequences for the transaction, bond holders or any other interested parties. The amendment makes clear that a partial property transfer can remove or alter the terms of a trust only to the extent necessary or expedient to transfer the legal or beneficial interest or any powers, rights or obligations of the banking institution in the trust property to the transferee. It cannot remove or alter the terms of the trust for any other purpose.
The authorities can, of course, make different provision for different cases and circumstances. The new drafting does not prevent the authorities making different provision for different trusts. However, the authorities cannot remove or alter the terms of a trust to cherry-pick parts of the banking institution’s legal or beneficial interest or powers, rights or obligations, and the new drafting does not give rise to doubt about this point.
Finally, the order excludes from set-off and netting protection all publicly tradable securities that are not referred to or described in a netting or set-off arrangement, while retaining the protection for securities that parties expressly rely on for netting purposes or are referred to or described in such an arrangement. This benefits all parties involved in a partial transfer. The authorities will be able to transfer the securities all parties believe should be transferred without the risk of inadvertently breaching the safeguards in so doing.
These amendments meet the vast majority of the market’s concerns, and demonstrate that the Government are committed to working with the industry to ensure that the regime is as effective as possible. I would like to put on record the Government’s thanks to the Banking Liaison Panel, and in particular the panel’s subgroup on safeguards, for their very hard work and thorough advice. I hope that noble Lords will agree with this order, and I beg to move.
I thank the Minister for introducing the order, which we are happy to support. In large measure it responds to the points that I made during the debate on the initial partial property transfer order back in March, following briefing from the BBA, LIBA and ISDA. In March, the Minister committed to bringing forward an amending order, if that proved desirable, before the Summer Recess on the basis of the work to be carried out by the Banking Liaison Panel. I congratulate the Minister on achieving that.
When we debated the Banking Act 2009 orders in March, I raised the point that the consultation, while greatly enhanced by the effective working of the Banking Liaison Panel, had effectively disappeared behind closed doors. The Explanatory Memorandum to the order states at paragraph 8.1:
“The Treasury has sought formal advice from the BLP subgroup. The advice will be published on the Treasury’s website in due course”.
That made me think that the terms of that advice would not be available to your Lordships’ House in considering this order. I was pleasantly surprised to find that the advice was on the website when I researched it at the weekend, but that raised further issues. I am not sure exactly on which day the draft order was laid before the House, but it appears in the House of Lords Minute on 11 June. The advice from the liaison panel subgroup, however, is dated 17 June. This suggests that the Treasury had no intention of taking formal advice from the subgroup. Will the Minister say how we can be confident that the processes are robust and not simply window dressing to allow the Treasury to carry on doing what it wants to do?
The Explanatory Notes also give the impression that the only issue between the subgroup and the Treasury is that of the small companies that are a part of larger groups that have set-off or netting arrangements. The Minister addressed that, but in fact the formal advice shows that the subgroup offered drafts of alterations to the original partial property safeguards order that were not adopted by the Treasury. This applies in particular to the widening of the definitions of transactions included in netting and set-off arrangements.
Neither the Treasury in the Explanatory Memorandum nor the Minister today has explained how the Treasury’s own drafting, which is very much less extensive than the drafting proposed by the subgroup, meets all the issues which the subgroup identified as giving rise to concerns. Will the Minister put on record why the Treasury rejected the subgroup’s advice so that we can be clear about what happened?
The biggest difference—the Minister has referred to this—between the subgroup and the Treasury is the issue of small companies, as I have mentioned. The Minister said that it was the subgroup’s fifth recommendation. In fact, it is its first recommendation. Indeed, the subgroup devotes nearly half its formal advice to the issue of small companies. Paragraph 17 of the advice states:
“The BLP subgroup believes that the case for excluding from the carve-out small companies that are part of a larger group is compelling. Extending protection to the small companies in question would reflect the commercial decisions taken by the companies themselves in the best interests of their company. We do not think that extending the protection to these small companies would weaken the attainment of any SRR objective”.
That view is diametrically opposed to that of the Treasury, which has simply given its version of the practical difficulties that were rejected by the subgroup in its formal advice. Furthermore, the subgroup raised several other issues around small companies, such as the position of special purpose vehicles, which the Treasury, and indeed the Minister, seems to have ignored completely.
I note that the Treasury will ask the BLP to continue to consider this point but, given that the subgroup’s view in its formal advice is unequivocal, how does the Minister see this proceeding? Is there a timetable for this, or is the long grass about to sprout up around it?
I also note that the Treasury’s website still has no documentation in the form of minutes or anything else about the work of the Banking Liaison Panel itself. Those of us of a cynical disposition are well aware that bringing critics within the tent is a sure way of neutralising them. The Government refused to impose a requirement on the panel to publish its minutes, but we were given various assurances that something would be available. Either the panel is doing nothing, which I doubt, or it is conspiring with the Treasury to keep Parliament and the public unaware of its deliberations. Can the Minister say whether there is any genuine desire to achieve transparency in the work of the Banking Liaison Panel?
The issues that are covered by this extremely arcane statutory instrument were among the most vigorously debated and contested when the Banking Bill was going through Parliament. The question of set-off and netting at one point was of huge concern to the banking industry but, during the passage of the Bill and subsequently, the work of the Banking Liaison Panel has largely resolved those differences.
As the Minister has said, this instrument takes forward the work that was covered by the earlier instrument in March and deals with many of the outstanding points. To the extent that there is a remaining issue around small companies, I, at least, am reassured by what the Minister said about the ongoing work of the panel in trying to resolve that issue.
Although I have some sympathy with the noble Baroness, and naturally share some of her cynicism about the attitude of the Treasury towards openness, the Banking Liaison Panel process has been remarkably effective in dealing with intricate issues which I suspect very few officials—and certainly very few politicians, whether in government or opposition—understood at the start of the process. We therefore support the order and hope that the panel will continue its work to resolve the one outstanding issue that has been raised today.
Perhaps I may make a brief intervention as a Member of the Merits Committee. I reinforce what my noble friend Lady Noakes said on the matter of the advice being published on the Treasury’s website. On the morning of the meeting, if I remember right—it might have been the day before—we asked whether we would be able to see this advice on the website because it did not look as though we would. In fact, we were not, although it did come on the day that the Merits Committee met.
The Treasury assumes—one understands why—a level of understanding among the people who look at statutory instruments in the Merits Committee that they may not always have. You could argue that from time to time the Treasury takes advantage of the fact that the chances are that the members of the committee are not as sophisticated as it is itself and minimises the explanation it gives us, rather than thinking of how to make it clear to the average Member of the House of Lords.
I open by noting that the partial property transfers are an essential part of the authority’s toolkit for resolving failing institutions, and it is important for legal certainty and market confidence that the safeguard order provides adequate protection to the use of these powers.
The noble Baroness asked about timing, as did the noble Viscount, Lord Eccles. The Government have been consulting with the BLP on an ongoing basis since the first meeting shortly after the Act received Royal Assent. I agree with the noble Lord, Lord Newby, that the BLP has made significant progress in resolving what we all recognise to be technically complex and challenging issues. The panel’s advice to the Treasury is the formal output of that consultation.
The Government’s decisions were made on the basis of that advice and they have taken on the overwhelming majority of the panel’s recommendations in the amendments that have been tabled. The order was laid as soon as the substantive policy discussions with the BLP were completed. This was necessary to allow Parliament time to debate and agree the order before the Summer Recess in line with the BLP’s wishes and ministerial commitments. The advice itself was published shortly afterwards and is now of course available on the Treasury website.
I note the comments of the noble Viscount, Lord Eccles, about the explanations that are given in the papers that go to the Merits Committee. I shall communicate those comments to my colleagues in the Treasury who are responsible for these matters and ask them to bear in mind the need to recognise that, in preparing papers which of necessity deal with highly complex issues, we should make every effort to provide an enlightening context and explanation.
A question was raised by the noble Baroness about special purpose vehicles. The issue of whether SPVs should receive special protection is important. As the panel notes in its advice, it seems counterintuitive that SPVs should be treated as small companies for the purpose of the safeguards order. However, this is a practical question of whether it is possible to identify SPVs quickly enough in the timeframe of a resolution, which will usually of necessity take place over a very short period—frequently over a weekend. We are taking this work forward in the context of the small companies carve-out and we will no doubt hear more about that in due course.
The panel meets quarterly and the minutes will be approved at the next BLP meeting, at which point they will be published. There is a genuine desire on our part that there should be transparency about the process of the work of the BLP. Certainly there is no ground for suggesting that the BLP either is doing nothing, as it has evidently done a great deal, or is somehow conspiring with the Government, save that it is conspiring with the Government to ensure that we have the best possible arrangements in place to deal with the type of situation that this legislation is designed to handle.
The Treasury has not rejected the subgroup advice in respect of the small companies carve-out. It is completely appropriate for Treasury legal advisers to draft the order as necessary. BLP members include trade body representatives and commercial lawyers, who have brought a considerable expertise in a number of areas, but legislative drafting is not something that we look to the BLP to do. The key point is that the Treasury’s drafting has the desired effect and reflects the substance of the panel’s requested changes to the definition of “relevant financial instrument”.
Perhaps I may reply also to the noble Viscount. I am sorry that the BLP was only received on the day of the Merits Committee meeting. I can understand how frustrating that would have been for the committee. I will make every effort—inasmuch as it is within my power—to invite colleagues to arrange things in a better way in the future. I commend this order to the Committee.