Banking (Special Provisions) Bill - continued          House of Commons

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Clause 12: Consequential and supplementary provision

46.      Under this clause, the Treasury may, by order, make supplementary, incidental, consequential or transitional provisions for the purposes of the Bill, or in consequence of any provision made by or under it (subsection (1)).

47.     In particular this power may be exercised to disapply any statutory provision or rule of law, to modify any statutory provision, or to dissolve any body in relation to which an order has been made under clause 3 or 6 (subsections (2) and (3)(c)).

48.     It may also be used to impose a moratorium on the commencement or continuation of any legal process, such as proceedings for the winding-up of an institution which is the subject of an order under clause 3 or 6 (subsection (3)(a)). Exceptions may be made to such a moratorium for specific instruments or transactions, or where the leave of the court, or the consent of the Treasury or the Bank of England, is obtained (subsection (3)(b)).

49.     This power may also be exercised to exempt directors of any relevant deposit-taker, or of any of its group undertakings, from liability in connection with acts or omissions in relation to the deposit-taker, or group undertaking, which are taken or omitted to be taken in their capacity as a director (subsection (3)(d)).

50.     Any order under this clause may make provision for the payment of compensation to persons affected by it (subsection (3)(e)).

Clause 13: Orders and regulations: general

51.     This clause confers general powers for orders and regulations under the Bill to include supplemental, incidental, consequential or transitional provisions, and provides that they are subject to the negative resolution procedure.

Clause 14: Orders and regulations: retrospective provisions

52.     Orders made under clauses 3, 4, 6 and 12 of the Bill may provide for any provision to have retrospective effect from a specified time on the date of a statement by the Treasury of their intention to make such an order in relation to a deposit-taker, or on the date on which any transfer was made under a previous relevant order. The order may also nullify the effect of transactions or events that took place after that time.

53.     It might be necessary to make retrospective provision in a case where a transfer order had been made under clause 3 and then a subsequent order under that clause made supplementary provision in connection with the transfer under the previous order. It might be desirable for the supplementary provisions to have effect as from the date of the transfer.

54.     The power under paragraph 4 of Schedule 1 to nullify the effect of instruments might be used retrospectively where, for example, announcement of the intention to use the power triggered rights to terminate loans to a deposit-taker or other relevant contracts.

55.     Tax provisions made under clause 10 may have retrospective effect to a time three months before Royal Assent. This would enable any such provisions to be backdated to a reasonable time before Royal Assent, to deal with the tax consequences of any transactions taking place in that period.

Clause 15: Interpretation

56.     This clause defines certain terms used in the Bill.

57.     "Financial assistance" includes assistance provided by way of loan, guarantee or indemnity, and also assistance provided by way of a transaction involving the sale and repurchase of securities. This kind of transaction is a form of lending between institutions.

58.     "Securities" includes a range of instruments in addition to shares. These are mainly debt instruments and instruments which form part of an institution's "own funds" for regulatory capital purposes (subsections (1) and (2)). Deposit-takers are required to hold a certain amount of this type of capital, for prudential supervision purposes, to ensure their solvency. In certain circumstances it may be appropriate to acquire these types of instrument by means of a transfer under clause 3 or 6.

59.     Subsection (4) is designed to ensure that, if an order is made under clause 3 or 6 in relation to an institution, the powers in the Bill can be exercised in relation to that institution even if it is no longer an authorised deposit-taker.

60.     Subsection (5) provides that a group or subsidiary undertaking of a deposit-taker includes any undertaking which was a group or subsidiary undertaking of that deposit-taker immediately before an order was made under clause 3 or 6 in relation to that deposit-taker.

61.     Subsection (6) defines a company wholly owned by the Bank of England or the Treasury for the purposes of the Bill. Such a company is either one of which the Bank, or a nominee of the Treasury, is the sole member, or a wholly-owned subsidiary of such a company.

Clause 16: Financial Provision

62.     This clause provides for any expenditure incurred by the Treasury in the following connections to be paid from money provided by Parliament:

  • in connection with the provision of financial assistance to any body in relation to which a clause 3 or 6 order is made, or to any person to whom a transfer is made;

  • in connection with the giving of an indemnity to the directors of a body in relation to which a clause 3 or 6 order is made, to the directors of any body to which a transfer is made, or to the directors of a group undertaking of such a body;

  • in connection with the giving of an indemnity to the Bank of England in relation to any lending or other financial assistance to such a body;

  • in connection with the giving of an indemnity to a valuer appointed under clause 9; or

  • otherwise incurred by virtue of the Bill.

63.     Subsection (3) provides that it is immaterial whether the indemnity or arrangements mentioned in subsection (1) were given or put in place before or after the passing of the Act.

64.     In line with accepted practice set out in Managing Public Money 3, a Department which takes on contingent liabilities should report these to Parliament at the earliest opportunity and should consider backing such liabilities with statutory cover. This is because Parliament has the same interest in any expenditure which arises because of a contingent liability as in any other form of expenditure.

3 See Annex 2.5 of Managing Public Money, published on the Treasury's website

65.     The Treasury announced on 20th September 2007 that it would put in place guarantee arrangements for existing deposits in Northern Rock plc. The Treasury made a further announcement on 11th October, explaining that it would extend the guarantee arrangements announced on 20th September. It also announced that it had agreed to indemnify the Bank of England in respect of facilities advanced by the Bank of England and any other liabilities that might arise from the Bank of England's role in the extended guarantee arrangements and additional facilities. On 18th December the Treasury announced that the guarantee arrangements were to be extended to a number of unsubordinated wholesale obligations. The full text of all these announcements can be found on the Treasury website.

66.     Parliament has been kept informed about these announcements. The contingent liabilities described in these announcements have not crystallised.

67.     The Treasury may also wish to provide financial assistance while a deposit-taker in public ownership in a variety of ways including - but not limited to - providing grants, loans or guarantees to the company, indemnifying directors, or giving a capital injection.

68.     This clause provides the necessary statutory cover for the existing and possible future financial assistance provided to Northern Rock plc. It would also cover financial assistance provided to any other authorised UK deposit-taker affected by the Act.

Financial Effects

69.     No direct financial effects are expected to result from the passing of the Bill. However, if the powers under clauses 3 or 6 are exercised, provision will need to be made for compensation, the appointment of a valuer and the expenses of the tribunal. The costs of each will depend on the circumstances of the transfer, and will be dealt with in the explanatory memorandum for the relevant order.

Public Service Manpower

70.     There are no current plans to increase public sector manpower in connection with this Bill.

Regulatory Impact Assessment

71.     A Regulatory Impact Assessment has been prepared for this Bill and will be published on the Treasury's website Copies will be made available in the Vote Office.

European Convention on Human Rights

72.     Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement about the compatibility of the provisions of the Bill with the Convention rights.

73.     The Chancellor of the Exchequer has made the following statement:

"In my view the provisions of the Banking (Special Provisions) Bill are compatible with the Convention rights."

74.     The Bill raises issues under Article 1 of the First Protocol (right to peaceful enjoyment of possessions) and Article 6 (right to fair hearing). The Bill is compatible with these rights for the reasons summarised below.

Article 1 of the First Protocol

75.     The right set out in Article 1 of the First Protocol ("A1P1") is not an absolute right but a qualified one. The right to peaceful enjoyment of one's possessions may only lawfully be interfered with if the deprivation is justified in the public interest and subject to the conditions provided for by the law and by the general principles of international law.

76.     Clauses 3 and 6 provide for the transfer of property and other rights without the consent of their owners. The rights of the holders of property are possessions for the purposes of A1P1. The compulsory transfer of property to another person is a deprivation of possessions for the purposes of the second sentence in A1P1. An exercise of this power is therefore an interference with the right of individuals or other legal persons to peaceful enjoyment of their possessions which requires justification and may require compensation to be paid to such persons.

77.     The deprivation of possessions is a significant interference with property rights against which the public interest must be balanced. In the context of A1P1 the European Court of Human Rights (ECtHR) has found that Contracting States have a wide margin of appreciation in deciding what is in the public interest. It is primarily for the state to identify the objective of a deprivation and determine whether it is in the public interest.

78.     The Chancellor of the Exchequer considers that the two purposes in clause 2(2) provide the fundamental public interest rationale either for taking a deposit-taker into public ownership or for transferring or all or part of its business to a private sector body. Both purposes are species of the public interest which may justify an interference with the rights protected by A1P1. In both cases the powers are only exercisable where maintaining the stability of the UK's financial system is, or has been, a factor. Therefore the powers can only apply in particular economic circumstances and where the position of a particular deposit-taker is or has been sufficiently material to the stability of the UK's financial system that the Treasury consider that there would be a serious threat to its stability if the order were not made, or where the Treasury have provided financial assistance to it for the purpose of maintaining that stability.

79.     Proportionality is reflected in the purposes of the Bill for the exercise of the first use of the power in clause 3 or 6 in relation to a deposit-taker. The circumstances which must exist before the transfer powers may be exercised must be very serious to require a step to be taken for the purpose of maintaining the stability of the financial system. Protection of the stability of the UK financial system is one of the most important public policy objectives of the Treasury, of the Bank of England and the Financial Services Authority. The taking of powers to transfer a deposit-taker's securities or assets ensures that it (or all or part of its business) can be acquired and controlled where other options are either unavailable or give rise to worse overall outcomes for the financial system, consumers or public finances.

80.     The Bill provides the option of a transfer to public and private sector transferees and the option of a transfer of a deposit-taker's business through a transfer of its securities under clause 3, or a transfer of all or some of its assets under clause 6. Proportionality is also addressed in the Bill in what property or other rights may be transferred. Banks issue a wide range of securities and other forms of regulatory capital to which varying degrees of control over the deposit-taker attach. Clause 3, and the definition of securities in particular, provides the flexibility to transfer only the securities issued by the deposit-taker considered necessary to achieve the object of the transfer in the circumstances of each case. Clause 6 similarly provides the flexibility to transfer only specific assets of a deposit-taker. Article 14 of the Convention (freedom from discrimination), read with A1P1, may, in principle, be engaged in the exercise of these powers.

81.     The second sentence of A1P1 also refers to the necessity for the deprivation to be "subject to the conditions provided for .. by the general principles of international law". The ECtHR has held that this concept is not applicable to the question of a Contracting State depriving its own citizens of property. The Chancellor takes the view that the reasons for a transfer of securities or assets, the method adopted and the compensation arrangements do not discriminate on the basis of nationality and would, in any case, satisfy any such conditions.

82.     The Bill requires the Treasury to make an order under clause 5 or 7 that sets out a scheme for the determination by an independent valuer of the amount of any compensation or consideration payable to the former holders of the securities or assets transferred under clauses 3 or 6 or whose rights have been extinguished under clause 4. The order must be made within 3 months of making a transfer order. The Bill sets out in clauses 5(4) and 7(3) the fundamental principle for the assessment of compensation payable to persons whose A1P1 right have been interfered with. The Chancellor takes the view that the mandatory assumption is justified on the grounds that it is reasonable in all the circumstances and in the wider public interest where significant amounts of support from public finances have been provided to a deposit-taker and public resources are also used to pay compensation. The Chancellor believes that in some circumstances it will be justified and proportionate to apply one or more of the discretionary assumptions in clause 9(2) of the Bill. This would not cause the holders of securities in it to bear an excessive or disproportionate burden because they would be in that situation but for the provision of public financial support.

Article 6

83.     Subject to the application of the mandatory and optional assumptions referred to above, clause 9(1) of the Bill permits compensation orders to set out the manner in which compensation or consideration (as the case may be) is to be assessed. This includes provision as to methods of calculation, valuation dates and matters to be taken into and left out of account. The exercise of the powers in clause 9 in individual cases must observe Convention rights.

84.     The resolution of disputes about the determination of the amount of compensation payable by the Treasury under clause 5 or 7, or for the amount of consideration or compensation payable by a private sector body to whom a transfer is made, engages Article 6 of the ECHR.

85.     Clause 9 of the Bill provides that the Treasury may, by order, appoint an independent valuer to assess the amount of compensation or consideration and make provision for the procedural rules to be followed for assessing any compensation, including provision enabling the independent valuer to make such rules. The valuer appointed by the Treasury will be an independent person, whose decisions are subject to subsequent control by an independent judicial body.

86.     Clause 9 also gives the Treasury the power to make provision enabling people to apply for decisions relating to the assessment for any compensation or consideration to be reviewed by the Financial Services and Markets Tribunal or a tribunal appointed by the Treasury. If a party is not satisfied with the decision of the tribunal they will have the option of a further appeal to the higher courts.

87.     The appointment of an independent valuer, whose decisions will be reviewable by an independent tribunal and further reviewable by the higher courts, will provide the procedural safeguards required by Article 6.


88.     The Bill will come into force on the day on which it is passed (clause 17(2)).

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Prepared: 19 February 2008