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Landsbanki Freezing Order 2008



The Committee consisted of the following Members:

Chairman: Mr. Mike Weir
Armstrong, Hilary (North-West Durham) (Lab)
Barlow, Ms Celia (Hove) (Lab)
Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)
Breed, Mr. Colin (South-East Cornwall) (LD)
Clarke, Mr. Kenneth (Rushcliffe) (Con)
Gardiner, Barry (Brent, North) (Lab)
Hain, Mr. Peter (Neath) (Lab)
Heppell, Mr. John (Nottingham, East) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
Hogg, Mr. Douglas (Sleaford and North Hykeham) (Con)
Kawczynski, Daniel (Shrewsbury and Atcham) (Con)
Mason, John (Glasgow, East) (SNP)
Newmark, Mr. Brooks (Braintree) (Con)
Pearson, Ian (Economic Secretary to the Treasury)
Prosser, Gwyn (Dover) (Lab)
Stoate, Dr. Howard (Dartford) (Lab)
Richard Ward, Committee Clerk
† attended the Committee
The following also attended, pursuant to Standing Order No. 118:
Wiggin, Bill (Leominster) (Con)
Beith, Sir Alan (Berwick-upon-Tweed) (LD)

Second Delegated Legislation Committee

Monday 27 October 2008

[Mr. Mike Weir in the Chair]

Landsbanki Freezing Order 2008

4.30 pm
The Economic Secretary to the Treasury (Ian Pearson): I beg to move,
That the Committee has considered the Landsbanki Freezing Order 2008 (S.I. 2008, No. 2668).
The Chairman: With this it will be convenient to consider the Landsbanki Freezing (Amendment) Order 2008.
Ian Pearson: It is a pleasure to serve under your chairmanship, Mr. Weir.
Over recent months the Icelandic economy has experienced increasing difficulties. On 29 September, the Icelandic Government acquired a 75 per cent. stake in Glitnir, nationalising Iceland’s third largest bank. On 7 October 2008, the Icelandic Government passed emergency legislation in an attempt to stabilise the financial system in Iceland. The new powers are wide-ranging and had immediate effect. The Icelandic authorities were able to take various steps, including appointing receivers to take control of the bank Landsbanki Island and deal with its assets. Various statements were made by the Icelandic Prime Minister that Icelandic depositors would be protected, meaning that UK creditors’ rights could have been prejudiced compared with those of others.
Despite repeated efforts to seek reassurance, the UK Government were unable to gain clarification from Iceland on the position of UK creditors in the administration of Landsbanki. In the light of those circumstances, the Landsbanki Freezing Order 2008 was made on 8 October. That was because the Icelandic Government, their authorities and Landsbanki appeared to be on the brink of action that would be to the detriment of the UK economy, including detrimental treatment of UK depositors and consequential burdens on the banking sector. At a time when consumer confidence was low, it was necessary to take action to help safeguard the position of UK customers and prevent any economic damage to the UK. It was also necessary to take such action to stem the risk of any contagion in the financial sector as a result of Landsbanki’s financial difficulties. The order has ensured that assets that belong to Landsbanki controlled through its London branch remain in the UK until the freeze is lifted.
During this time, the Government have been working with the Icelandic authorities to ensure that depositors and creditors are treated fairly. On 13 October, the Bank of England provided a short-term loan of up to £100 million for the London branch of Landsbanki. That loan will help to ensure an orderly wind-up for Landsbanki that will maximise the returns to UK creditors.
The freezing order was made under a power contained in the Anti-terrorism, Crime and Security Act 2001. This Act includes a broad range of provisions and is not only about countering terrorism. The power enables the Treasury to make a freezing order where the Treasury reasonably believes that action to the detriment of the UK economy or part of it has been or is likely to be taken by a foreign Government or resident of a foreign country or territory. The UK’s action was not taken on the basis of the anti-terrorism provisions in the Act. This action was deemed necessary because the Icelandic Government were unable to clarify the position of UK creditors in the administration process and there was therefore a threat to UK economic interests. Their actions also appeared to be in breach of Iceland’s obligations under the European economic area treaty, and we therefore also alerted the European Commission to our decisions and concerns.
Sir Alan Beith (Berwick-upon-Tweed) (LD): I apologise to the Minister if I missed his first sentence. Does he recall that the review of the 2001 legislation said that the inclusion of many of those measures in anti-terrorist legislation was not a good thing and that they should be mainstream and separate? The failure to do that has led to a situation where the Icelandic Government believe that they are being treated as terrorists, which would not have happened if the separation of the terrorism and non-terrorism provisions had been carried out.
Ian Pearson: I note what the right hon. Gentleman has said. We have been at pains throughout this process to make it absolutely clear that the UK action was taken not on the basis of the anti-terrorism provisions but for the reasons that I have outlined.
Mr. Kenneth Clarke (Rushcliffe) (Con): With great respect, that has not been made clear throughout, although the Government may have been trying to do so. The plain impression was created for the general public and the Iceland Government that anti-terrorism legislation was being used for a totally unsuitable purpose. Can I take it that he accepts that using anti-terrorism legislation for a purpose of this kind would be an abuse? Does he accept that in future the Government should not include provisions in anti-terrorism legislation which are likely to be applied in anything other than situations where we are dealing with threatened terrorism?
Ian Pearson: The right hon. and learned Gentleman will undoubtedly elaborate on the points that he has just made in his speech. I refer him to the voluntary memorandum to the Joint Committee on Statutory Instruments in respect of the freezing order, where we made our position very clear. I will happily come back to him on this matter later in the debate.
Mr. Clarke: When being asked questions, it is no good the Minister telling me that I will have the opportunity to repeat them later. The questions are perfectly straightforward. Are the Government prepared to give an undertaking that they will never again include in anti-terrorism legislation provisions which might be used in totally different circumstances?
Ian Pearson: It is my understanding that that is not unusual, and that the 2001 Act contained powers outwith anti-terrorism legislation. I understand the point made by the right hon. and learned Gentleman and the right hon. Member for Berwick-upon-Tweed.
On the 9 October, the administrators of Landsbanki transferred its domestic assets to a new entity, New Landsbanki. The London branch of Landsbanki Island was left in old Landsbanki. This action appeared to support the previous concerns about Iceland intending to favour its own creditors. The UK Government fully understand the exceptionally difficult challenges faced by the Icelandic Government and the pressure that they are under. We want to work co-operatively and constructively with the Icelandic authorities, particularly to ensure that depositors and all creditors are protected and treated fairly. The Government are aiming to secure a mechanism whereby the Icelandic Government can honour their obligations to UK depositors and ensure the fair treatment of UK creditors.
Daniel Kawczynski (Shrewsbury and Atcham) (Con): I am pleased to hear the Minister say that his Government want to work constructively with Iceland. However, some of the language that has been used by the Prime Minister, and others, has done great damage to our relations with Iceland. Will the Minister take this opportunity to apologise for some of the language used by the Prime Minister, and for the damage that it has caused to British-Icelandic relations?
Ian Pearson: No, I am certainly not going to apologise for the language that the Prime Minister has used. The hon. Gentleman is mistaken. I thought that he would want to protect the interests of UK creditors, which is exactly what the Government are trying to do with this order. Once we are satisfied that the necessary mechanisms have been put in place and that action to the detriment of the UK economy will not proceed, it is our intention to lift the freeze. However, we think it right to have this debate today and to continue to implement the freezing order while the situation is so uncertain.
Bill Wiggin (Leominster) (Con): I am grateful to the Minister for giving way; he has been very generous in giving way during the debate. If what he said in his concluding sentence is right, does he feel that the risk to British business and the economy has been made worse by the 2001 Act because of the timing? Furthermore, does he think that any person who acted between 10 minutes past 10 and 4 o’clock, when the order became public knowledge, acted in a criminal way and is open to prosecution in the longer term?
Ian Pearson: In putting this order forward, we have not done anything that puts UK creditors at a disadvantage. Deciding to freeze assets in the way in which we did transparently ring-fences them and maintains them in the United Kingdom. It is right that we should do that as part of protecting our citizens. We have a duty to protect our citizens, which is why we introduced the order and are debating it today. I hope to catch your eye at a later point, Mr. Weir, to reply to the debate and to the comments that hon. and right hon. Members will undoubtedly make.
4.39 pm
Mr. Mark Hoban (Fareham) (Con): It is a pleasure to serve under your chairmanship this afternoon, Mr. Weir. We welcome the opportunity to debate the order. I shall make it clear from the outset that it was right for the Government to take action to protect the interests of Icesave’s depositors and also the retail deposit interests of people who invested or saved with Kaupthing and Heritable bank.
There are questions arising from this exercise, to which we need clear answers from the Minister. How prepared were the Government for the collapse of the Icelandic banking sector? What was the impact of the freezing order on the financial services sector as a whole? What is the potential exposure of the taxpayer? The Minister did not touch on those issues in his remarks.
I think that people were surprised that the Government chose to respond to the threat to the stability of the UK financial system by using provisions in the Anti-terrorism, Crime and Security Act 2001, which was introduced in the aftermath of 9/11. At the time, it was assumed that the Government would use the provisions when the economic security of the country was under threat from a terrorist organisation or a rogue state, not from a friendly power. The right hon. Member for Berwick-upon-Tweed highlighted concerns about whether the powers should be in the 2001 Act. What other legal options did the Government look at before deciding to go down that route, and were other options available?
I want to pick up on the separation of powers. The Banking Bill is in Committee. Has the Minister considered whether the powers should more rightly be placed in that Bill rather than in an anti-terrorism Act, if they are going to be used to freeze the assets of bank branches in the UK?
The Minister talked about uncertainty about how the Icelandic Government would treat UK Landsbanki creditors, but the Chancellor of the Exchequer gave no sign whatever that there was any uncertainty. On the radio on 8 October, he said:
“The Icelandic Government, believe it or not, have told me yesterday they have no intention of honouring their obligations”.
Yet the transcript of the conversation between the Chancellor and the Icelandic Finance Minister gave a very strong signal that the Icelandic Government were committed to meeting their obligations as an EEA country to pay £16,462 to each depositor, assuming that they had deposited up to that amount:
“We have the insurance fund according to the directive and how that works is explained in this letter to the UK and the pledge of support from the Government to the fund.”
The Chancellor pushed him and said:
“So the entitlements the people have, which I think is about £16,000, they will be paid that?”
The Finance Minister replied:
“I hope that will be the case. I cannot state that or guarantee that now but we are certainly working to solve this issue.”
The Chancellor converted a very clear statement of willingness on the part of the Icelandic Finance Ministry to meet its EEA treaty obligations into:
“The Icelandic Government...have told me...they have no intention of honouring their obligations”.
There is an inconsistency between the transcript of the conversation on 7 October and the Chancellor’s statement on the radio on 8 October. People want to find out how the Minister explains that inconsistency.
On a broader point, there is concern that the Government’s actions in freezing Landsbanki’s funds triggered a run on Kaupthing, which led to its collapse and nationalisation. Did the Government understand the threat that their actions posed to Kaupthing and that British citizens who had their money in Kaupthing in the Isle of Man and Guernsey, either directly or indirectly through a self-invested personal pension, would not benefit from the guarantees given in the UK? Did the Government properly think through how freezing Landsbanki’s assets in the UK would impact on solvent Icelandic banks elsewhere? The way in which the Government dealt with Landsbanki led to the problems with Kaupthing.
My hon. Friend the Member for Leominster was right in saying that the order, which the Government laid on 8 October came into force at 10 minutes past 10 on that morning, but the wording was only made available to the markets at 4 o’clock that day. That caused a great deal of concern in the markets because the terms of the order were so widely drafted. In effect, that very general order froze all the money with Landsbanki, not only its funds, but a wide range of products in the financial markets, such as derivatives, debts and rights of set-off. As well as freezing the accounts to protect Icesave depositors, it also affected Landsbanki’s business in the wholesale markets.
As a consequence, wholesale customers could not use their funds at Landsbanki to settle trades with third parties, leading to them either defaulting or buying currency to cover their positions, which imposed additional costs on those businesses. Customers of Landsbanki could not transfer their money to solvent Icelandic banks, and financial institutions using International Swaps and Derivatives Association master agreements could not issue termination notices, which would have allowed their positions to be closed and netted off.
 
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Prepared 28 October 2008