Landsbanki Freezing Order 2008

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Sir Alan Beith: The Minister must realise the Kafkaesque situation in which his description leaves both Houses of Parliament. When the legislation was considered, people pressed for more time to discuss important powers such as these, but they were told, “No, no, these are terrorist measures and we have to get the legislation through quickly.” That was not true at the time, and the Minister is now paying the price.
Ian Pearson: I give way to the right hon. and learned Member for Rushcliffe.
Mr. Clarke: Is it fair to say from the Minister’s reply that he thinks that this is normal, that it is going to be normal in future and that it is satisfactory to rush an anti-terrorist Bill through the House of Commons with a title sufficiently long to tidy up all kinds of other laws to protect British creditors from a bank collapse and other similar situations? That is the firmest rejection yet of my noble Friend Lord Newton’s recommendation, of which we were reminded. An amendment was moved on the subject in the Lords—somebody in another place spotted that the powers were rather wide—but it was defeated simply by citing the long title of the Bill. Does the Minister not accept that all the debates in the House of Commons, such as they were, were about terrorism and the need to freeze terrorist assets? Even in the House of Lords, it was said that times of war would justify using the powers.
There was no intimation when the 2001 Act was rushed through that it might be used in the case of the insolvency of a foreign bank and British creditors being at risk, important though that situation is. I was hoping that instead of saying that such use of the powers is normal and therefore might happen again, there might be some indication that it would not happen again and that the situation would be looked at separately and be properly considered in the proper context.
Ian Pearson: I understand the point that the right hon. and learned Gentleman makes about the context to the legislation, but I repeat that it was necessary to use the powers in these circumstances. I do not think that this is the time or the place to make general statements of policy relating to the content of future Bills.
Mr. Hoban: The Banking Bill is an opportunity to put the powers on a proper footing and allow proper scrutiny by both Houses of Parliament. Does the Minister consider that that is the appropriate way to respond not only to concerns about the way in which the 2001 Act has been used but to the recommendations made by Lord Newton?
Ian Pearson: I rest on what I said previously, in that I think it right that we used the powers. It is clear from the long title of the Act that it covers areas other than terrorism. Of course, we will want to reflect in future on these matters, but I do not want to go any further now than I have already.
Hon. Members mentioned the Chancellor’s comments about not honouring obligations and acting illegally. Iceland is a signatory to the treaty of the European economic area and, as such, its financial institutions are able to passport into the UK in the same way that a European Community firm can. Iceland has obligations not to discriminate in favour of its own citizens and against the citizens of other states. The actions that the Icelandic Government, the Icelandic authorities and Landsbanki were proposing to take would have favoured Icelandic depositors to the detriment of UK depositors and, as a result, the UK economy. That is why we believe that we had to act as we did, and it is why, in response to the right hon. and learned Member for Rushcliffe, I would recommend to the Chancellor that he use similar emergency legislation if there were a similar emergency situation. We must ensure that we protect the position of UK creditors.
In reply to the first intervention by the hon. Member for Leominster—I shall respond to him more substantively later—about the possibility of people conducting criminal offences on the date of the order, I want to make it clear that anyone who acted before the order was made public has a complete defence under the order.
Mr. Clarke: I did not realise when I arrived that I would be in a jack-in-the-box mood, but the order raises some big issues. The Minister has explained how he justifies the statement that the Icelandic Government were acting illegally, and I accept that his explanation has some force. They probably were proposing in the legislation that they put before their Parliament to discriminate in favour of their nationals. Does he accept that the reaction to that must be proportionate? Normally, a member of the EEA that is accused of being in breach of its European obligations is taken to the European Court. That can be a long and tortuous process, and it can take some years.
This situation may have required a little more urgency, but can the Minister explain why it was thought to be proportionate to freeze all assets in this country? Having seen the transcripts, does he think that the comment that the Icelandic Government were refusing to honour their obligations was remotely justified? From the transcripts that we have seen, it is obvious that the Icelandic Ministers were embarrassed and were giving assurances that they would try to honour the obligations that the British Government were reminding them of.
Ian Pearson: The right hon. and learned Gentleman has asked me about proportionality. I believe that the measures we took were proportionate given the circumstances that we faced. More than most people, he will be aware of just how quickly cash and assets can be moved from one country to another. Simply to have said, “We need more time to think about it. We’ve seen the legislation going through the Icelandic Parliament and had conversations at a level that has given us serious doubts about the Icelandic Government’s intentions. We think that they want to favour their creditors above other foreign creditors,” and not to have acted immediately would have been irresponsible and not in the best interests of UK taxpayers. I appreciate the point about proportionality, but the financial flows that move around our world today take place at such a pace that I believe it entirely proportionate that we took the freezing action that we did.
John Mason (Glasgow, East) (SNP): On proportionality, I wonder whether we could have taken such action in relation to a larger country and a larger bank. This happened with Iceland—a relatively small country and a relatively small bank—but if we were to freeze the assets of a much larger bank from a much larger country, would that not have had negative repercussions world wide?
Ian Pearson: I will not be tempted into engaging in speculation on that. I think that we all agree that this situation is highly unusual. I have talked about the uncertainty and the situation in which it seemed that UK taxpayers would not be treated fairly and that our creditors would be disadvantaged. When faced with a situation such as that, any Government have a responsibility to act.
I also want to make some points about the preparedness of the Government to take action. The Financial Services Authority intensified its supervision of all retail deposit taking by Icelandic banks, including through increased contact with firms, more frequent visits and enhanced reporting requirements from the beginning of 2008, which was before Moodys downgraded Icelandic banks by two notches on 28 February, including Kaupthing and Landsbanki. As the economic situation deteriorated during the year, and particularly after September, the FSA worked increasingly intensively with the banks concerned. As hon. Members will be aware, the FSA monitors firms and that information is shared formally through meetings of the Tripartite Standing Committee. I can report that several conversations were held between the Chancellor and the Icelandic Prime Minister and the Chancellor and the Icelandic Foreign Minister to discuss the situation and to clarify the position for UK creditors. A UK delegation has visited Reykjavik twice to continue negotiations, and in parallel there have been discussions between the financial services compensation scheme and the Icelandic deposit guarantee scheme to agree payout arrangements for depositors in Icesave.
A number of right hon. and hon. Members have referred to the transcripts, so let me come on to that. It was asserted there were several conversations. In response to that, let me state that the Chancellor, having had several conversations, was not clear that the Icelandic authorities intended to honour their obligations. Ultimately, that is why we took the decisions that we did.
I strongly reject the suggestion that the Government rushed into action and botched the statutory instrument because we had to issue a number of licences. The 2001 Act anticipates a scheme where there will be a freezing order followed by licences. In fact, the licences provide a general scheme to allow business to continue, so long as the London branch does not repatriate funds back to its head office or elsewhere in its group.
The first licence dealt with the most immediate concerns about enabling the bank’s commercial finance activities to continue, and the second broadened the effect of the first to ensure that the needs and concerns of wider market participants were addressed. In both cases, that is subject to the overriding principle that the banks do not repatriate funds, which is a procedure envisaged in the 2001 Act.
Mr. Hoban: The procedure might have been envisaged in the 2001 Act, but the point is that the Government were not prepared for it. Had they been, they would have had the second licence in place on the day when the statutory instrument was published. That is the point about the lack of preparation. Had the Government thought properly about that, they would have been prepared for it by having both the order and the licence. The Minister talked about the FSA’s increased supervision and the fact that the Prime Minister and the Chancellor had conversations with their opposite numbers in the Icelandic Government, but he did not say what the Treasury did between the Chancellor’s first conversation with the Icelandic Trade Minister and 8 October. The Treasury, rather than the FSA, appears to have been caught napping on the job.
Ian Pearson: I do not accept that. We introduced the freezing order the day after the first licence, and I think that the second licence was issued four days later. It is right that those licences and guidance were issued, because in a fast-moving situation there is much uncertainty in the marketplace, and the Government have done all that we can to try to reduce that uncertainty.
My hon. Friend the Member for Brent, North raised a specific case, and I am happy to take that up and talk to him about it. As a general point, I want to stress to the Committee that the Government have spoken to all the major banks, which have confirmed that payments are flowing normally. The freezing order should not apply to normal commercial transactions between the UK and Ireland.
Bill Wiggin: Iceland.
Ian Pearson: Iceland. If hon. Members have cases in which they think that there is a problem, I would be more than happy if they came to us with specific details of the transaction so that we can pursue them with the bank concerned.
It was also suggested during the debate that the impact of the Government’s actions affected Kaupthing bank. The FSA made the judgment on 8 October that Kaupthing no longer met its threshold conditions for FSA authorisation due to lack of funding. That move had no bearing on the status of the parent company of Kaupthing bank, which is incorporated under Icelandic law. Of course, we are working closely with the Icelandic authorities and have made significant progress on many of the issues.
The situation with regard to the Isle of Man was also mentioned. Again, the problem there originated not in the UK but in the Icelandic banking system. Although we understand that many people have been affected by the failure of the Icelandic banks, oversight of Kaupthing’s Isle of Man subsidiary is the responsibility of the Isle of Man regulator. As the right hon. Member for Berwick-upon-Tweed has acknowledged, the UK represents the Crown dependencies in its negotiations with Iceland, in line with usual constitutional arrangements, but when it comes to depositor protection, the Isle of Man is a different tax jurisdiction with different regulatory authorities, so that is really a matter for them.
A number of hon. Members have asked when compensation for Icesave customers will be made. I can report to the Committee that on 24 October the financial services compensation scheme published some information about that on its website, and it might be helpful if I read into the record two short paragraphs. The first states:
“FSCS is putting in place a system that means retail depositors of the bank should be able to receive their savings through an electronic payment into their linked accounts. This will happen in stages. FSCS will write to retail depositors of the bank to detail how the process will work. FSCS will then contact customers again with instructions on how to complete a short electronic process to finish the transfer. The process will be phased to manage the flow of payments through the system and for security reasons.”
The second paragraph that I want to cite states:
“Icesave’s customers do not need to do anything at this stage. Their savings are safe. The correspondence they receive will tell them everything they need to know about how to access their savings, ISAs or term accounts.”
My understanding is that later this week, the financial services compensation scheme will provide further information setting out how retail depositors with Icesave will be compensated. The payout will be, as I mentioned, via linked accounts. It is important to recognise that there are about 200,000 depositors with about 300,000 accounts, so, for safety and security reasons, payments will be processed over the course of November. However, we expect all Icesave retail depositors to have been paid by the end of November. The right hon. and learned Member for Rushcliffe and others rightly raised that issue, and I hope that he feels reassured that we have given him some direct answers.
Mr. Hoban: I presume that when the Government unfreeze the assets of Landsbanki, the money will be transferred to the liquidator, so the Government will get back only a proportion of their £800 million exposure.
Ian Pearson: My understanding is that the Government will stand as a creditor, pari passu, with the financial services compensation scheme and other wholesale creditors, and will receive some money back in accordance with what can be achieved.
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Prepared 28 October 2008