Landsbanki Freezing Order 2008

[back to previous text]

Bill Wiggin: My hon. Friend has made an important point, and I congratulate him on his speech. One issue that is terribly important here is that anyone who did that unwittingly committed a criminal offence and can be prosecuted, thus opening up a whole can of worms about the quality of the settlement of the deal—whether the deal was profitable. Does my hon. Friend think that the Government have handled the issue in the most appropriate way, considering how complicated some of the instruments are?
Mr. Hoban: My hon. Friend has made an important point. I do not think that the Government have handled the issue correctly. The terminology and the breadth of the order took it far beyond the Government’s original intention. That was either deliberate or a fault of ignorance—not knowing that Landsbanki did more than offer Icesave accounts to retail customers. The Government need to explain why the order was drafted so broadly.
There are three points that emerge from how the statutory instrument affects wholesale markets. First, because the Government rushed out a badly drafted order, which was not well communicated to the markets as a whole, financial institutions were not able to protect themselves against Landsbanki’s default. Secondly, English law is relied upon in financial transactions because it creates legal certainty on close-out and termination of agreements. The confusion in the meaning of the order and the licences undermines that certainty. Thirdly, the cack-handed way in which the order and the licences were drafted undermines confidence in the Treasury, because it betrays a lack of understanding of how wholesale financial markets work. Certainly, people looking at the Banking Bill will be concerned about how the order was drafted and how the Government have had to row back from its contents.
The drafting also betrays a lack of preparation on the part of the Treasury. The transcript that was published last week suggests that the Icelandic authorities had been flagging up for some time the problem with their banking system. It is also apparent from the transcript that the problem was discussed by the Icelandic Trade Minister and the UK Chancellor earlier this year. It is not clear what action the Government took in response, or how well prepared they were for the crisis. The former Economic Secretary, the hon. Member for Burnley (Kitty Ussher), was pressed on the issue in July by my hon. Friend the Member for Altrincham and Sale, West (Mr. Brady), when she appeared before the Treasury Committee:
“So if the domestic guarantee failed then that first €20,000...might not be paid in full, and it would just be the top-up that would be honoured by the UK guarantee?”
The Minister said:
“I do not want to be pressed too far on this so as not to unduly alarm anybody...I simply do not know how it would work in practice”.
That is indicative of the lack of preparation by the Treasury at that time for the potential collapse of the Icelandic banks. It does not seem from that exchange that any such work had been done up to that point. Between the Chancellor’s discussions with the Icelandic Trade Minister in September and 8 October, what work had the Treasury done to prepare the ground? The order before us suggests that not much work had been done, and that was to the detriment of the financial services markets as a whole.
The Minister’s remarks did not touch upon the risk to taxpayers. If the Government had not frozen the assets of Landsbanki, they would have faced a shortfall between the guarantees that they had issued to Icesave customers and the distribution that they would have received from a liquidator winding up Landsbanki. Now that the assets have been frozen, will the Minister explain what will happen next? The retail depositors will receive the amount of money that they put on deposit with Icesave, but, presumably, the Landsbanki money that the Government have frozen is legally the money of old Landsbanki, which is in administration. When the Government unfreeze the cash that Landsbanki has in the UK, will that money be demanded by the liquidator and set off against the liabilities of Landsbanki as a whole? If those liabilities exceed the assets of Landsbanki, there will be a shortfall. Can the Minister confirm that in that case the taxpayer will have to bear the balance, over and above the money that the FSCS will bear? What assessment have the Government made of that? The exposure for the taxpayer is in the distribution from Landsbanki’s administrators, once the money has been unfrozen in the UK, being less than the amount paid to depositors. Therefore, the taxpayer would pick up the Bill.
As I said earlier, the decision to protect savers was right, but there are questions about whether the Government were properly prepared. Had they properly thought through the impact of the freezing order on business and the other solvent Icelandic banks? Finally, what cost to the taxpayer will arise from the measure?
4.53 pm
Mr. Colin Breed (South-East Cornwall) (LD): It is a pleasure to serve under your chairmanship, Mr. Weir, on an important measure. It has already been demonstrated that there is considerable concern about how the Government are using the legislation. When we looked at it in 2001, probably none of us ever imagined it would be used for such purposes. It is important for the Government to recognise that they have to make a real case. I shall ask a few basic questions, alongside those of the hon. Member for Fareham.
The events leading up to this are important. I would like to know precisely when—the date—the Government first became aware of the potential problems at Landsbanki. The principle concerns the detriment to the UK economy. Will the Minister tell the Committee what the exact nature and extent of that detriment is, so that we can determine if there is the significance indicated? Where does he believe the frozen funds are being held? What are the estimated total of those funds at present? What is the liability of the Government in guaranteeing all the deposits? The hon. Member for Fareham has discussed Iceland and the compensation scheme each covering so much. Have the Government estimated the amount of liability falling to them under the scheme?
Can the Minister tell us whether any operations were allowed to continue at Landsbanki after 8 October through exemptions provided by the Government? If they provided exemptions, could he tell us what they were? Finally, could he tell us whether Landsbanki has been allowed to transfer any assets whatsoever out of the UK jurisdiction through an exemption since 8 October?
4.55 pm
Mr. Clarke: I begin by making it clear that I welcome what the Government are doing to protect the British investors in Icesave, and, on behalf of my worried constituents, I thank the Minister for putting the measures into effect. I hope that he will give details of when my constituents are likely to recover their savings.
I hope that that support will not be cited in the Minister’s final reply as an excuse for not answering any of my questions, because I actually think that the Government’s handling of the Icelandic bank crisis has been deplorable and extremely clumsy. May I also say—I hope that this will not be thrown back at me—that an all-party approach is being adopted to all these matters? I spoke on Second Reading of the Banking Bill, which the Minister is taking through the House, and certainly did not vote against it. It is getting all-party support. There is a full measure of all-party support for what is necessary to protect the British financial system and individual savers, but that does not mean that the Government can cite it as an answer to every criticism hurled at them.
I have a strong suspicion that in the case of the Icelandic banks the Government were feeling sensitive about the justifiable complaints that they had been dithering and finding decisions difficult. The Prime Minister and the Chancellor therefore decided that they would demonstrate the smack of firm government by taking some precipitate actions and saying some rather inflammatory things at the expense of a nation of 300,000 inhabitants that was in serious financial trouble. I am not impressed by that, and, as this is the only chance for parliamentary scrutiny of these measures, we are entitled to some clear replies.
Finally, by way of preamble, I conceded to the Minister on Second Reading of the Banking Bill that I understand the difficulties of a Minister newly appointed after a reshuffle who is plunged into new responsibilities and finds that he has to handle some extremely complex and controversial legislation. On the other hand, he is a capable Minister, an intelligent man and, no doubt, a quick learner. This order should have been an occasion for specific briefing to him on the questions that will, inevitably, arise in the context of the Landsbanki affair, so I hope that we will get definite replies. I will try to make my questions as clear as possible so that further briefing can be given to him and he can give definite answers.
My first question is on the use of the Anti-terrorism, Crime and Security Act 2001, which was rushed through the House of Commons in an atmosphere of great concern after the terrorist incidents of that year. There has been more legislation since, and I have occasionally thought that, as long as this Government are in power, we will have a Bill every time we have a bomb, because legislation must be produced to show that the Government are taking determined action to protect the public.
We now discover that powers were taken in the 2001 Act on a far wider scale than was contemplated by most people debating it in the House or by most people observing it from outside. We should have some answers—probably an apology—from the Government. They found some overriding national interest that made it necessary to use anti-terrorism legislation of that kind, but that should be followed up by an undertaking that such measures will, on all future occasions, be put in specific relevant legislation—in this case, for the financial services industry. We cannot have anti-terrorism legislation being used seven years later in such a tremendous hurry that the terms of an order were not even available to the public until some hours after it had come into force.
Obviously, in the circumstances, no terrorist threat of any kind was posed by the commercial organisation or the friendly Government of the country in which it is based. Therefore, I would like some statement of policy as to whether that will be done again in the future.
Barry Gardiner (Brent, North) (Lab): Will the right hon. and learned Gentleman elaborate? He commenced his remarks by saying that he broadly supports the Government’s action and then said that the purpose for which the legislation was eventually applied had not been anticipated when it was passed. That is a fair point. However, does the right hon. and learned Gentleman not consider that those UK creditors who would potentially have been disadvantaged by the repatriation of funds to Iceland might have been extremely critical of the Government had they not used any and every means—whatever legislation was available—to secure financial security in this country? And would Opposition Members not have criticised the Government for leaving their constituents exposed in that way?
Mr. Clarke: When the 2001 Act was drafted, somebody obviously thought that there appeared to be a gap in the law for providing the Government with powers that they could use quickly enough to seize financial assets. Obviously, that could be very important if some organisation in this country were channelling money abroad for terrorist purposes. However, once the policy problem was identified in 2001, the question should have been put before the House in the next available legislative vehicle—a finance Bill or some other suitable Bill—where it could be debated properly in context. It was wrong to take the opportunity in legislation that was being rushed through the House to draw up a wide-ranging provision. I suspect that somebody thought, “You never know, this might be useful generally on future occasions.”
This is not a minor point—it keeps coming up in this House in respect of terrorism legislation—and it is not the first time that I have expressed such doubts. Many Members on both sides have expressed doubts about extraordinary legal powers being taken in the name of protecting us from terrorism which then turn out to be useful for other purposes. We will have lots of criminal law, lots of powers to stop and search and lots of powers to survey people put into terrorism legislation if Governments are allowed to use the opportunity of a terrorist outrage to draw up wide-ranging, over-excited legislation.
Sir Alan Beith: The right hon. and learned Gentleman is right in saying that the legislation was rushed through the House. That led to the inclusion in the 2001 Act of a review process led by Lord Newton of Braintree which recommended precisely that powers which might not be used against terrorism should be mainstreamed in other legislation. That proposal was rejected by the then Home Secretary, the right hon. Member for Sheffield, Brightside (Mr. Blunkett).
Mr. Clarke: I am grateful to the right hon. Gentleman for reminding me of that. We should press the Minister today and on every other occasion to reverse the then Home Secretary’s rejection of the proposal. This is a clear illustration of a misuse of power, and I hope that the Minister will give a clear statement of Government policy in answer to my question.
Barry Gardiner: The right hon. and learned Gentleman properly sought to ensure that the Minister did not evade his questions, and I simply ask him to focus on and respond to the ones that I posed to him. UK creditors who would otherwise have suffered disadvantage were protected, and they would have justly criticised the Government had the Government not exercised the full powers available to them to provide such protection. He has made a valid point about the nature of the Second Reading debate on the 2001 Act, but those elements were for discussion then. With respect, we are talking about the application of these orders now, and he must address the points that I have made.
Mr. Clarke: The hon. Gentleman is right. My constituents would have criticised the Government if they had discovered that the Government had legal powers that they had not used, if—we do not know this yet—it turns out that the freezing orders were an essential part of securing resources to pay them out. I accept that.
Therefore, a satisfactory answer to my question to the Minister would be, “On this occasion, to protect the investors, we had to use these powers, because they are the only ones we have. But in future, we will accept Lord Newton’s recommendation and not have this general legislation.” One might even hope that they would apologise for the fact that we still have the 2001 powers to use on this occasion.
That brings me to my second point. The use of emergency legislation was based on the Chancellor of the Exchequer’s explanation of the position of the Icelandic Government, which my hon. Friends have already raised. The Minister, whom I have already praised, must have been briefed on this obvious question before he came here, but his answers in public have, so far, been extremely vague. I trust, therefore, that he will give us a blow-by-blow explanation of how the Chancellor of the Exchequer has the nerve to keep saying that he was correct when he said that he had had a refusal from the Icelandic Government to compensate British investors. The Prime Minister joined in. We were told that the Icelandic Government, a responsible NATO ally who are friendly towards this country, were refusing to honour their obligations to British citizens. They were behaving illegally by discriminating between their own and British nationals and the clunking fist of the Prime Minister was therefore going to be applied by seizing all Icelandic assets in this country.
It now seems that there is considerable doubt about whether that was an accurate description of the position of the Icelandic Government, who are vehemently protesting that that was not an accurate description of their position. They are not refusing to include British depositors inside their guarantee scheme. Not surprisingly, they have problems honouring guarantees. The Government of Ireland would probably find it impossible to honour the guarantee that they have given investors if all their banks went down; the Germans would find it impossible to guarantee the debts of Deutsche bank if it went down; and we would find it impossible to honour a full guarantee to the entire banking system of this country if it all went down. The International Monetary Fund would be faced with some very large problems. However, the Icelandic Government have gone to the IMF, and they have gone to other Nordic countries. They have been trying to honour their obligations in an attempt to rescue their financial system.
Can we have a clear explanation of what the Chancellor of the Exchequer was basing his remarks on? How does he justify his allegation that the Icelandic Government were refusing to honour their obligations to British investors? What did the Prime Minister mean, and what was he referring to, when he said that the Icelandic Government were behaving illegally? These are perfectly clear questions, and I look forward to the Minister’s reply.
My final point, which echoes that put by my hon. Friend the Member for Fareham, is that the happy outcome, on this occasion, appears to be that British depositors will indeed get their savings back in the not-too-distant future. Will the Minister take the opportunity to spell out clearly whether they can all expect their money by Christmas, and how the process will work? I have been telling my constituents that I think they will get an e-mail with happy news in the near future, and I hope the Minister will confirm that. If he can, and if he can answer my other questions too, I shall be grateful.
5.8 pm
Previous Contents Continue
House of Commons 
home page Parliament home page House of 
Lords home page search page enquiries ordering index

©Parliamentary copyright 2008
Prepared 28 October 2008