Landsbanki Freezing Order 2008

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Daniel Kawczynski: I want to make a couple of brief points. I agree with the Minister that the Government have a duty to protect British citizens’ deposits. I do not think that anybody would contradict that important statement. The Minister is correct in his assessment that the Government had to do everything possible to protect those deposits. My problem is the way in which that was handled, which concerns the human side and the diplomacy—or lack of it—that occurred.
I saw the Prime Minister on Sky News, making some extraordinarily aggressive statements about Iceland and the conduct of its Government. I found his statements absolutely breathtaking and bizarre in international diplomacy. Also, as my hon. Friends have said, the legislation that was used to freeze these assets come from an Act designed for counter-terrorism. The Icelandic people and their Government were particularly affronted and upset that such a blunt mechanism should be used against them, a key NATO ally and a strategic friend of the UK; it was highly insulting. I watched the BBC news a day or so after the Prime Minister’s statement, when people on the streets of Reykjavik were asked about their attitude to the conduct of the Prime Minister and this Government. They were scathing and very upset about the words that were used against their country, and the Icelandic Prime Minister was also furious at their treatment. This will do more damage to Anglo-Icelandic relations than the Cod war. I wonder whether the Prime Minister would have used that sort of language if it had been a problem with a Chinese or an American bank—of course he would not have done so. This is a weak Prime Minister, a novice in foreign affairs, who is deliberately being a bully because he knows that Iceland is a small country of only 300,000 people. He would not dare to use that type of language towards a larger nation. What concerns me—as someone who feels passionately about our standing in the world—is what will happen now with regard to Iceland being drawn into the Russian sphere of influence due to the conduct of the Prime Minister.
I conclude by saying that our ambassador in Reykjavik does a tremendous job. I would like the Minister to reconfirm at the end of his speech that this Government greatly value our relationship with Iceland and will try to treat the Icelandic Government and people in a more appropriate way in future.
5.12 pm
Sir Alan Beith: As a non-member of the Committee, I am grateful that the procedures of the House and your kindness allow me to say a few words about the situation, Mr. Weir. On the basis of my current knowledge, I think that the Government were, in the circumstances in which they found themselves, almost certainly justified in taking rapid action to preclude a flight of funds out of Landsbanki in the UK. I might turn out to be wrong but it seems a judgment one could well understand at the time, particularly bearing in mind the uncertainty at that point about UK depositors. It was not well handled, because not only were these particular powers used but the language surrounding their use further confirmed the feeling in Iceland that its people were being treated as terrorists. On the Treasury website, which has not gone unnoticed in Iceland, the orders regarding Landsbanki form a sandwich around the financial sanctions notification on 16 October for al-Qaeda and the Taliban. In that context, Ministers must understand how infuriating it was, not just to the Government of Iceland but also to its people.
The background to this, as I indicated in an intervention, is the way in which the 2001 Act was rushed through Parliament on the basis that these were vital anti-terrorist powers that could not wait a moment. It was in the middle of the night in the House of Lords that it was eventually conceded that a review would have to take place. I was one of the Privy Councillors who was engaged in that review in which we made a clear recommendation that it was unsatisfactory that powers likely to be used for non-terrorism purposes were contained in anti-terrorism legislation. That has been obvious to a lot of people since someone was thrown out of the Labour party conference on the basis of the same powers. The lesson should have been learned by now.
The effect of this in Iceland’s case is best summed up in a letter that the Icelandic Foreign Minister sent to Members, in which she said:
“I cannot but also mention the devastation that the choice of wording by senior ministers in the British government has caused each and every Icelandic business trying to carry on with trusted business relationships often spanning decades...Icelanders as a nation have been tarred with the same brush [as terrorists] and are suffering real abuse in some cases.”
She went on to argue that the threat posed to Iceland, on which it is seeking understanding, has been described by economists as comparable to the reparations in the treaty of Versailles. That is a wholly different justification, I may say, because the Icelandic Government is significantly at fault over the handling of its banking system over a number of years, which will be discussed later. There is no doubt that this whole matter has been handled very badly. In particular, the order affects 10,000 people in this country who work for Icelandic companies. Some of those companies got into immediate difficulties, because it was not fully understood that their normal, current account banking—paying for goods and services between Britain and Iceland—was not supposed to be affected by the order in the first place. That was not clear, and apparently many difficulties arose as a result. There will be a wider impact on the normally extremely good business relations between Britain and Iceland.
Another point concerns the risk of an impact of all of this, and how it has been handled, on the even more complicated, tripartite negotiation—although that is too polite a word for it, and at the moment it is, rather, a war of words—between the Governments of the UK, Iceland and the Isle of Man about the Kaupthing, Singer and Friedlander accounts of UK citizens in the Isle of Man part of the KSF bank. Concluding those discussions satisfactorily clearly depends on a great deal of agreement between the British, Icelandic and Isle of Man Governments. The British Government formally represents the Isle of Man Government in the discussions—that is their role, foreign relations being a matter for the British Government rather than the Isle of Man Government. In terms of financial responsibilities, the British Government’s view is that primary responsibility rests with Iceland and with the Isle of Man for its own, limited, depositors’ protection scheme. The resources are not in place in either the Isle of Man or Iceland to resolve that particular problem. I am extremely worried that the handling of the Landsbanki case will impact adversely on those discussions. I hope to have some assurance on that point, too.
5.16 pm
Barry Gardiner: Since this is my first non-intervention, I must say how pleased I am to be serving under your chairmanship, Mr. Weir.
I had not intended to contribute to this afternoon’s debate, but a few short remarks may be appropriate in the light of what has gone on and of my experience with constituents and those who have contacted me about the situation. The key element, which has been acknowledged in Committee, albeit sometimes begrudgingly, is that time was of the essence in protecting UK creditors. Given that, those UK creditors accept that the Government should have taken not one jot longer in drafting the order—the Opposition have suggested that a lot more time should have been spent getting the order absolutely and carefully exact. In such circumstances, those creditors would have expected the Government do what they did, which was to act decisively in a situation where time was of paramount importance to protect them and their livelihoods.
Mr. Hoban: The hon. Gentleman would have a valid point, if the Chancellor and the Icelandic Trade Minister had not discussed the problems facing the Icelandic banking system some time earlier. I would have expected, as would the hon. Gentleman, the Government to have responded to that and to have had the right legislation drafted and ready for such an eventuality.
Barry Gardiner: I want to come on to the conversations between the UK and the Icelandic Ministers, because it appears that those generated differential understandings. Will the Minister clarify that situation? The material distinction to be gleaned from the contemporaneous account—the transcript—is not, as has been suggested by Conservative Members, that the Icelandic Government did not have the ability to guarantee all the creditors. That was not the issue, as I read the transcript. The issue was that the Icelandic Government refused to guarantee the same equitable treatment to UK creditors as it was prepared to give to Icelandic ones. It seems to me that that is what the transcript shows, so that is quite properly something for the UK Government to take action on, to condemn and to move decisively to avert. The hon. Member for Fareham may say that that is a misunderstanding of the transcript, but it is certainly my reading of its plain words.
Will the Minister consider in his response the situation of Mr. Sanjay Vekaria’s company, Per-Scent? He contacted me because his business has been suffering as a result of how the assets were frozen. He has already given back to the bank £3.5 million of credit that had been extended to him, but he now finds that other banks in the UK, including Barclays with whom he has a 20-year banking history, refuse to accept guarantees for the rest of his £8 million extended credit facility. The Government have to look carefully at the implications of the freezing order and at how other banks are taking advantage of British companies that have strong trading records but no ability to guarantee payments. In some instances, personal guarantees are being given for the outstanding funds. The Government have stipulated that banks should not put in place onerous lending facilities, and that they should extend credit on the same terms as in 2007. However, the Government need to take a stronger line against domestic banks that are taking advantage of companies that have fallen foul of the freezing of the assets.
5.21 pm
Bill Wiggin: The order gives the Treasury discretionary power to grant licences that permit certain activities proscribed by the order. It is not possible to know what private licences or guidance the Treasury has given in response to the many requests from the market, since the order came into force at 10.10 am on Wednesday 8 October. However, on 9 October with effect from 2.30 pm, the Treasury issued a general activities licence L1 made under the order, permitting those who were aware that the licence existed to exercise termination rights and rights of set-off, thereby allowing the market to terminate its swaps, repo and derivatives transactions—but not to settle any trades with Landsbanki—and to make payments to Landsbanki's branch in the UK.
On 17 October, the Treasury issued a public and non-legal clarification stating, among other things, that British citizens working for non-UK companies outside the UK would not be committing an offence under the order if the person performing that activity was from a non-UK company. It also stated that accounts with Landsbanki were not frozen funds in so far as the customer’s account was a debt owed to it by the bank. However, neither of those points is distinguishable from the original wording of the order or the subsequent licences. In particular, it is not possible to find any basis in the language of the order to conclude that moneys that are held by Landsbanki in a customer account are not frozen funds, owned, held or controlled by Landsbanki. Given that the apparent purpose of the order is to prevent assets flowing from Landsbanki in Iceland, the Treasury’s rationale for that approach to bank accounts is bizarre.
So what harm has been done? At the critical moment when citizens and financial institutions in the UK were rushing to do everything that they could to protect their businesses and customers against the consequences of Landsbanki's default, the Treasury, without adequate warning or any effort to alert the market, rushed through poorly thought-out legislation that brought to a halt the ordinary process by which financial institutions in the UK protect themselves against defaulting and insolvent counterparts. The result has been to expose financial institutions operating from within the UK to defaults and losses that were not suffered by market participants operating from centres outside the UK.
The worldwide swaps, currency, repo and derivatives markets are based on contracts governed by English law—a feature regarded as essential because, in comparison with other laws, English law is credited with ensuring a certainty of outcome for the parties to complex financial agreements. By undermining the basic operation of the termination and close-out provisions of those agreements, the Treasury has inflicted a huge uncertainty on those market participants who sought to enforce their rights in ignorance of the existence of the order or in confusion as to its meaning, because Landsbanki and other counterparties can now freely question the legality and enforceability of their actions as a matter of English contract law, which can only benefit the legal profession.
The order was made pursuant to the discretionary powers granted to the Treasury under the Anti-terrorism, Crime and Security Act 2001. At a minimum, the arbitrary use of those powers to such ill effect is deeply regrettable for London’s role as a financial centre and a poor advertisement for doing business in the UK. By interfering with the standard termination and close-out mechanisms of the swaps, currency, repo and derivatives markets, the Treasury has acted in a way that indicates a terrifying ignorance of how financial markets operate. The subsequent licences and clarifications issued by the Treasury have failed to communicate to the market any clarity of purpose in the Treasury’s actions and have compounded the impression of a basic lack of understanding and a muddle among those responsible for implementing the measures.
5.27 pm
Ian Pearson: It is entirely right and proper that we thoroughly examine the Landsbanki Freezing Order 2008. I understand and appreciate the general support for the order and for the Government’s reasons for its introduction. Some points have been raised directly in the debate, and I will respond to them as fully as I can.
Let me address the legislative basis for the decisions that we have taken, which was the point raised by a number of hon. and right hon. Gentlemen. I have three points that I would like to make in response. First, despite its short title, the 2001 Act deals with not only terrorism but a variety of matters. The long title makes it clear that asset freezing is under a separate heading to terrorism. It is not unusual for a Bill to include more than one measure, and the powers could be used in a terrorist situation. Secondly, the 2001 Act supersedes laws from 1964 to do with general emergency powers, not specifically terrorist powers. Thirdly, in the House of Lords, an Opposition amendment was tabled that would have expressly limited the powers to a terrorist context. It was rejected on the basis that the power was not limited to terrorism—it also extends to wartime and other emergencies. Those are three reasons why we believe that it is right to take the action that we have.
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Prepared 28 October 2008