The
Committee consisted of the following
Members:
Chairman:
Mr.
Eric
Martlew
Allen,
Mr. Graham
(Nottingham, North)
(Lab)
Betts,
Mr. Clive
(Sheffield, Attercliffe)
(Lab)
Blizzard,
Mr. Bob
(Waveney)
(Lab)
Browne,
Mr. Jeremy
(Taunton)
(LD)
Cable,
Dr. Vincent
(Twickenham)
(LD)
Clarke,
Mr. Charles
(Norwich, South)
(Lab)
Cox,
Mr. Geoffrey
(Torridge and West Devon)
(Con)
Eagle,
Angela
(Exchequer Secretary to the
Treasury)
Field,
Mr. Mark
(Cities of London and Westminster)
(Con)
Fraser,
Christopher
(South-West Norfolk)
(Con)
Henderson,
Mr. Doug
(Newcastle upon Tyne, North)
(Lab)
Hill,
Keith
(Streatham)
(Lab)
Hoban,
Mr. Mark
(Fareham)
(Con)
Naysmith,
Dr. Doug
(Bristol, North-West)
(Lab/Co-op)
Newmark,
Mr. Brooks
(Braintree)
(Con)
Smith,
Ms Angela C.
(Sheffield, Hillsborough)
(Lab)
Strang,
Dr. Gavin
(Edinburgh, East)
(Lab)
Glenn McKee, Committee
Clerk
attended the
Committee
The following also
attended, pursuant to Standing Order No.
118(2):
Atkinson,
Mr. Peter
(Hexham)
(Con)
Beith,
Mr. Alan
(Berwick-upon-Tweed)
(LD)
Third
Delegated Legislation
Committee
Tuesday 11
March
2008
[Mr.
Eric Martlew
in the
Chair]
Draft Northern Rock plc Compensation Scheme Order 2008
4.30
pm
Mr.
Mark Hoban (Fareham) (Con): On a point of order,
Mr. Martlew. I would be grateful for clarification on this
debate this afternoon and the proceedings on the Floor of the House
later on. The Committee has yet to report its view to the House, yet
there is a motion on the Order Paper for consideration, after the main
business, of the matters that we are debating this afternoon. That will
enable the House to express its own view on them. Is it not rather
presumptuous of the Government to have placed the motion on the Order
Paper for this evening when the Committee has yet to debate the merits
of the
order?
The
Chairman:
I do not think so. We will come to a decision
today, whatever it
is.
The
Exchequer Secretary to the Treasury (Angela Eagle):
I beg
to move,
That the
Committee has considered the draft Northern Rock plc Compensation
Scheme Order
2008.
May I say what
a pleasure it is to serve under your chairmanship, Mr.
Martlew?
Hon.
Members will be well aware of the background to the order. Events in
the American sub-prime mortgage market last summer led to Northern Rock
having severe problems in accessing the financing on which its business
model relied. Once the extent of the problems became clear, the
Government had two options: to let the bank go under, or to provide
support.
Letting
the bank go under would have risked instability spreading and serious
consequences for the UKs financial system and wider economy. It
was because of the risk to stability, rather than the risk to
shareholders, that the Government chose to save the bank by authorising
the Bank of England to provide special liquidity support, and by
putting in place guarantee arrangements for retail and wholesale
depositors.
As
the providers of support to Northern Rock, we then had to decide how to
help to resolve the situation while meeting the three clear principles
that the Chancellor has consistently set out: protecting the taxpayer,
protecting depositors and maintaining financial stability. I believe
hon. Members will agree that it was right to explore every option to
achieve
that.
Earlier
this year, two serious private sector proposals were made. They were
based on a refinancing of Northern Rock that would have involved a
Government-guaranteed bond issue. We considered the proposals in
detail, but, as we did, it became clear that both would have involved a
degree of risk for taxpayers and a significant implicit
subsidy from the Treasury. In the Governments judgment, a
subsidy on that scale would not have provided the best value for the
taxpayer, and, given that the private sector would have secured the
vast majority of value created over the period ahead, the arrangements
would have been a poor reflection of the balance of risk borne by the
two
sides.
Mr.
Mark Field (Cities of London and Westminster) (Con): I
apologise for interrupting the Minister in full flow. I entirely agree
about the balance between risk and reward. The deals on the table,
particularly the Virgin deal, in which, in effect, £200 million
was being put up for £50 billion worth of guarantees, clearly
were never runners, and I accept that. However, the Minister did not
elaborate on her initial statement. The one thing she did not discuss
was the potential in the short or medium term for the Government to
have been involved in Northern Rock going into administration. She
presented a dichotomyletting the thing go under or rescuing
itbut surely there was at least a prospect of allowing the
company to go into some sort of administration for a
period of
time.
The
Chairman:
Interventions should be
short.
Mr.
Field:
Thank you, Mr. Martlew. Perhaps the
Minister could discuss why that optionthat third waywas
not
taken.
Angela
Eagle:
I am anxious not to repeat the debates that we had
on the Floor of the House when what is now the Banking (Special
Provisions) Act 2008 was debated, but to try to stay within the
confines of the order, which is about valuation. I elaborated a bit on
the background because I think that it is important to explain why
there are certain provisions in the order which the valuer will be
asked to take into account. We could have interesting debates, but I am
not sure that it would be in order to go back over all the issues in
this debate on a compensation
order.
Mr.
Field:
The issue of administration is relevant, insofar as
Northern Rock could have continued as a going concern. There has never
been any request from the Bank of England to repay loans, for example,
or, in any sense, to withdraw any of the guarantees that were given
between September and the point of nationalisation. It is specifically
with that in mind that I ask why the option was not pursued. It clearly
must have a bearing on the question of
compensation.
Angela
Eagle:
The hon. Gentleman now seems to be arguing
that the bank was a going concern, whereas five seconds ago he was
arguing that it should have been in
administration.
Angela
Eagle:
Perhaps the hon. Gentleman can make his own speech
on the order when the time comes. I would like to be allowed to set out
its background, after which I shall happily answer his
questions.
Under
public ownership, the Government will secure any net proceeds from the
future sale of the business, in
return for bearing the risks during the current market instability. Last
month, the Government brought forward the Banking (Special Provisions)
Act 2008 and the Northern Rock plc Transfer Order 2008, under which
Northern Rock was brought into a period of temporary public ownership
on 22 February with shares transferred to the Treasury solicitor as
nominee for the Treasury. Hon. Members have had an opportunity on
several occasions to discuss the Governments decisions on
Northern Rock and will be able to debate the transfer order on the
Floor of the House.
The
compensation order before us is narrow and is made under section 5 of
last months Act. In the event of the Act being used to transfer
shares or to extinguish share options, section 5 requires the Treasury
to establish a scheme to determine the amount of any compensation
payable to shareholders or holders of share options. Hon. Members will
recognise the need for a fair and proper way of assessing the amount of
any compensation that should be paid under such circumstances. The
crucial point is that any compensation must be fair, which means that
it should be based on a realistic assessment of the shares
value without public
support.
Mr.
Peter Atkinson (Hexham) (Con): As the Minister knows,
those of us with seats in the north-east represent many with shares in
the company who are not typical shareholders. I have a letter from an
80-year-old woman who
writes:
My
late husband was a great believer in N R and always
said
that the
shares
were there to
help support the rest of my
life.
She and many
others are asking why, if the Government want a fair valuation, the
valuer is being told to assume that the company is unable to continue
as a going concern and is in administration, when clearly it is a going
concern and not in
administration.
Angela
Eagle:
I shall come on to that
later.
The
Act makes it clear, therefore, that in assessing the amount of any
compensation two assumptions must be made: first, that all financial
assistance provided by the Bank of England or the Treasury is
withdrawn; and, secondly, that no further public assistance, beyond
ordinary market assistance, from the Bank of England will be provided.
In addition, and as provided for by section 9 of the Act, the order
specifies that it should also be assumed that Northern Rock would be
unable to continue as a going concern and would be in
administration.
It
is clear that, were it not for the financial support from the
Government and the Bank of England, not only would Northern Rock have
been unable to continue as a going concern, but it would have been
placed in administration, at best. As has been shown by the extensive
research undertaken by Northern Rocks management, with the
support of the tripartite authorities, it was not possible to find a
private sector solution that met our three principles, particularly
that about protecting the taxpayer. If the financial assistance
provided by the Government and the Bank of England had been withdrawn,
it is clear that Northern Rock would have been unable to secure the
substantial amount of alternative funding that would have been
required.
As a result,
it is only fair to make the assumption, when determining the amount of
any compensation, not only that public support has been withdrawn, but
that without that support Northern Rock plc would not be a going concern
and would have been placed in
administration.
Mr.
Doug Henderson (Newcastle upon Tyne, North) (Lab):
Following on from the points raised by the hon. Member for Hexham
(Mr. Atkinson), I also have many constituents with a special
interest in the matter before us. I think that they understand that,
had the Government not taken action, things would have gone on as they
were and there would probably have been dramatic consequences. I am
often asked whether, given the criteria in paragraph 6(a) and (b), the
valuer will value the shares on the date on which they were brought
under public ownership, on the date on which the Government first
announced the scheme for depositors or on some other date. Will the
Minister explain how the valuer will cover those
issues?
Angela
Eagle:
My hon. Friend makes a perfectly reasonable point.
The order ensures that the assumptions I mentioned a moment ago will
have to be taken into account by the valuer. Clearly, that means that
the valuation will have to take place when the shares have been
transferred and using the assumptions that all public support has been
withdrawn, and that Northern Rock would not be a going concern and
would have been placed in administration. As well as those assumptions,
the order sets out that the amount of compensation payable will be
determined by an independent valuer appointed by the
Treasury.
Mr.
Alan Beith (Berwick-upon-Tweed) (LD): What does the
Minister say to those of my constituents who were shareholders and who
take the view that the recognised failure of the Financial Services
Authority to deal with the business model problems that the directors
were pursuing ought to be taken into account by the valuer? If he
cannot consider it, where can it be taken into
account?
Angela
Eagle:
He or she cannot take such issues into account
simply because the FSA does not run banks. The people who have
responsibility for running banks appropriately are those who are paid
to run and manage them. The FSA is the
regulator.
If
the Committee and the other place agree to the order, we will advertise
for expressions of interest in the position of independent valuer
shortly. The Treasury will make an appointment in consultation with the
Institute of Chartered Accountants in England and Wales. We will be
looking for someone who is independent of all interested parties, and
who has extensive company valuation skills and the ability to handle
the range of relevant stakeholders. When an independent valuer has been
appointed, they will need to appoint staff and decide what process
should be followed. They will then decide the amount of compensation
that is payable, based on the assumptions that I mentioned. When that
assessment has been made, anyone who has been affected may ask the
valuer to reconsider his or her determination, and a revised assessment
could then be made.
Mr.
Hoban:
How long will the Government and shareholders have
to object after the valuation has been
produced?
Angela
Eagle:
We are discussing appointing an
independent valuer, and I do not want to be too prescriptive ahead of
their selection. I do not want to tell them in advance how they should
run the operation, but it would have to be done expeditiously. There
would have to be a reasonable amount of time between the valuation and
the point at which a shareholder would have to appeal. It will also be
up to the valuer to ensure that all shareholders are aware of that
system. I do not intend today to second-guess a valuer who has not even
been appointed, except to make that general point. Anyone affected who
is dissatisfied with a revised assessment will be able to refer the
matter to the Financial Services and Markets Tribunal.
I hope that
I have explained clearly the background to the order and its purpose. I
repeat that it is right to establish a fair way of assessing the amount
of compensation payable to people who have lost their shares, or have
had their share options or other rights extinguished as a result of the
transfer. Any compensation must be fair and must not over-value
Northern Rock on the basis of public support. Without such support,
Northern Rock would not have been able to continue as a going concern,
and would be in administration. If it had not been for the
Governments support since September, that would have been the
case long ago. It would certainly have been the case when the transfer
was made. I therefore believe that the way forward proposed in the
order is the fairest. It is fair that the value of any compensation
should be determined by an independent valuer and not only on the
assumption that public support was no longer available. The order
allows for that to happen in a clear way and allows for review of the
valuers decision. I hope that the Committee will support the
order.
4.44
pm
Mr.
Hoban:
It is a pleasure to serve under
your chairmanship, Mr. Martlew. As the Minister said, the
order sets out the basis on which compensation will be paid to Northern
Rock shareholders. It flows from sections 5 and 9 of the Banking
(Special Provisions) Act 2008, which was passed by both Houses last
month.
As
we have heard from colleagues, hon. Members from all parties have
received e-mails about the measure from small shareholders. We can all
understand their frustration and anger. Many received their shares on
demutualisation and are clearly disappointed to see them lose so much
of their value. It is particularly hard for Northern Rock employees,
who are already uncertain about their future and whose shares have now
been devalued, and I sympathise with them. Fewer tears will be shed for
institutional investors, but I suspect that they will ultimately cause
the biggest headache for the
Government.
Mr.
Charles Clarke (Norwich, South) (Lab): Can the hon.
Gentleman clarify an issue about the two groups of shareholders? On one
hand, there are shareholders such as those mentioned by the hon. Member
for Hexham (Mr. Atkinson) and my hon. Friend the Member for
Newcastle upon Tyne, North, and we all feel great sympathy for them; on
the other hand, there are speculators who arrived at a particular time.
Does the hon. Gentleman accept that they will nevertheless have to be
treated the same?
Mr.
Hoban:
The right hon. Gentleman is absolutely right, and I
congratulate him on the speech that he made yesterday
in the debate on Northern Rock. He made a number of telling comments
about the process that has taken place during the past five months. He
is right that in theory, all shareholders will be treated equally, but
I shall come to my concerns that that might not be the case, due to
treaties that the Government have entered into. I shall elaborate on
that
later.
The
order makes three assumptions. The first, following section 5(4) of the
Act, is that the bank is deemed to have withdrawn financial support or
would not provide further assistance. Will the Minister explain why
that must be in the order, given that it is already in the Act and must
be factored into the valuation? The next two assumptions are that the
bank is not a going concern and that it is in administration. Again,
those assumptions are in the Act, in section 9(2). However, subsection
(2) has three assumptions: the two that I just mentioned, and a third
assumption that the bank is being wound up. What would the consequences
have been if that assumption had been included in the order, and why
was it
excluded?
Members
have mentioned that shareholders are asking why Northern Rock should
not be treated as a going concern. We know that its assets exceed its
liabilitiesat least, that is what the Chancellor has assured
the Housebut due to market conditions it is unable to repay its
debts as they fall due. However, that has been dealt with by the
provision of funding by the Bank of England and the Treasury. Small
shareholders are saying, Well, it must be a going concern.
Its still trading, selling mortgages and accepting retail
deposits. They are slightly perplexed that the facts do not
bear out the
assumption.
The
Governments argument is that Northern Rock is not a going
concern because section 5(4) of the Act says that it is not. The
subsection assumes, despite facts shown to the contrary, that support
either has been withdrawn or will not be provided. The Government and
the Act say that it should be deemed that the Bank of England has
withdrawn its facilities, but again, small shareholders will say that
it has not and that those facilities are still in place. Why should the
Government assume that that has happened? As far as small shareholders
are concerned, the facts of Northern Rock as they see them do not back
up the assumptions underpinning the order. They are right to be
confused about that. Clarity is
needed.
Angela
Eagle:
The hon. Gentleman is rightly putting a case for
small shareholders. Does he support that argument, or is he just
advocating for the worries of small
shareholders?
Mr.
Hoban:
It is important that the Committee take this
opportunity, the only one that we have, to scrutinise the order.
Representations have been made by small shareholders to virtually every
Member of the House, I expect. It is important that their concerns
should be articulated and that the Minister should respond. The Act
itself makes clear the basis on which the valuation should take
place.
Let
me turn to the other assumption. Northern Rock is a going concern in
the eyes of many shareholders, who will also say that it is not in
administration. In fact,
the Chancellor fought shy of the administration option for Northern
Rock, despite proposing it for future banking crises. Shareholders
might ask how it can be treated as if it is in administration. They
will perhaps also say that the Chancellor believes that Northern Rock
will be sold back to the private sector, and presumably thinks that
nationalisation is a more attractive option than administration.
Perhaps they will ask why it is right for shareholders to be bought out
at a knock-down rate, given that the Government expect a possible
windfall when the period of temporary ownership
ends.
Hon.
Members can see why small shareholders are concerned, because to their
minds the facts do not bear out the assumptions that are
made.
Mr.
Clarke:
I am sorry to press the point again. The hon.
Gentleman seems to be making the case on behalf of small shareholders,
which I understand because many people are in a terrible position as a
result of what happened. Will he make it clear whether he and his party
believe that small shareholders should be treated differently from the
large shareholders who came in at the time of difficulty in order to
make a profit? Does the hon. Gentlemans party believe that
there should, or could, be any difference in treatment of those two
types of
shareholders?
Mr.
Hoban:
I will clarify the position again for the sake of
the right hon. Gentleman; I thought that I did so adequately before,
but clearly I did not. We do not believe that different classes of
shareholders should be treated differently. However, I will suggest why
some investors might be protected in a different way from small
shareholders.
I
want to explore for a moment what the Government mean by
administration in this context. Schedule 16 to the
Enterprise Act 2002 contains three clear objectives of administration,
which are ranked in descending order:
first,
rescuing the
company as a going
concern;
secondly,
achieving a better result for
the companys creditors as a whole than would be likely if the
company were wound
up;
and
thirdly,
realising
property in order to make a distribution to one or more secured or
preferential
creditors.
The outcome
of the valuation would depend on which of the three objectives of
administration the valuer believed was appropriate to Northern Rock's
position. The valuation on the basis that the company could be rescued
as a going concern is different from one based on realising property to
make a pay-out to a secured
creditor.
Will
the Minister clarify the basis that the valuer should adopt when
looking at Northern Rock, assuming that it was in administration? The
Government believe that Northern Rock is capable of being rescued as a
going concernotherwise, perhaps they would not have
nationalised it. Indeed, our preferred optionrather like the
Chancellor's position on future banking crisesis for a form of
administration, the purpose being the first objective of trying to
rescue it as a going concern, rather than its being wound up. I suspect
that with hindsight, the shareholders might feel that they would have
got a rather better deal from that than from the
options discussed to date. Will the Minister confirm whether she would
be happy if Northern Rock were valued as if it were capable of being
rescued as a going concern, reflecting the Governments public
policy, or does she expect it to be valued as a fire
sale?
I
should like to discuss what might be distributed to the shareholders
and on what basis the compensation is to be decided. The Chancellor
said that Northern Rock has net assets and that in administration,
shareholders would receive any remaining assets after all creditors had
been paid. Does the Minister think it reasonable for shareholders to
expect to receive the net asset value on the date of transfer as a
minimum distribution? Perhaps she can help the Committee and
shareholders by saying when Northern Rock will actually publish its
results, so that shareholders can take a view about what that net asset
position might be at the end of
December.
Mr.
Henderson:
I am intrigued by the concept of net asset
value at the point of nationalisation. If there was a negative net
asset valuein other words, liabilitieswould the hon.
Gentleman believe that there should be no compensation payable
whatsoever?
Mr.
Hoban:
That is an interesting point but it is purely
hypothetical, because I understand from the reassurances given by the
Chancellor in the House that there are net assets and that there would
be net assets at the date of transfer. I do not think that anyone has
ever suggested that there are net liabilities in Northern Rock. If that
is the suggestion, it implies a cost to the taxpayer that has yet to be
disclosed to the House.
Mr.
Henderson:
My point is that unless there is an attempt to
measure the assets and liabilities, one does not know. The values could
change backwards or forwards, but were there to be a negative net asset
at that point, is the hon. Gentleman arguing that the shareholders
should receive nothing? If that were the case, would that be the
principle?
Mr.
Hoban:
It is an intriguing argument, and the answer
depends on the valuation basis adopted by the valuer whom the Treasury
appoints. If the assumption were that the organisation was not a going
concern and we went through the process of winding it up, the
shareholders would be entitled to nothing at the point when it was
wound up. If the assumption were that it was not a going concern and it
should be wound up, and there were a surplus, ordinarily, under those
procedures, the surplus assets would be distributed to shareholders. If
the argument were, however, that Northern Rock was still essentially a
going concern and could trade out of its current problems, compensation
would be calculated on a very different basis. That is why it is
important that the Government, for the purposes of clarity, explain to
the valuer and this Committee the basis that they think appropriate for
the valuer to use when examining Northern Rock as if it were in
administration.
Mr.
Henderson:
Does the hon. Gentleman accept that in
financial terms, there is a difference between a business having a
negative net asset and its still being a going concern? It could be a
going concern, because
the future would bring other things, but if it were put into
administration at a particular point in time and wound up, it might
have negative net assets at that time.
Mr.
Hoban:
I do not disagree with any of that. If a business
had negative net assets but was seen as a going concern in the future,
it would be valued on a different basis than if it had no future. The
valuer would determine the compensation on whichever basis was
appropriate. That is why I am very keen for the Minister to establish
the right basis for the valuer to adopt when looking at Northern Rock.
Will it be treated as if it were going to be wound up, or should it be
treated as a going concern? Clearly, the Government believe that it
should be a going concern, because they are betting taxpayers
money on its being so.
Angela
Eagle:
The assumptions that the hon. Gentleman asks me to
make clear are in the order, and I dealt with them in my opening
remarks: that all public support has been withdrawn, that Northern Rock
is not a going concern and that it is therefore in
administration.
Mr.
Hoban:
I accept that the Minister pointed out exactly that
basis, but if she looks at schedule 16 to the Enterprise Act 2002, she
will see that there are three different purposes for administration.
The first purpose is for the business to be rescued as a going concern,
so the Minister must give the valuer some clarity about the appropriate
basis for valuation on the assumption that Northern Rock is in
administration. Is she saying that the valuer should assume that
Northern Rock is being wound up in a fire sale? If that is what she
believes, I hope she will put it on the record today, because it would
give clarity
[Interruption.] I am not sure what the
Minister said from a sedentary position, but I will happily give
way.
The
Chairman:
No, it is all right. Carry
on.
Mr.
Hoban:
I am just keen to help the Committee and those who
might be interested in the proceedings by getting the Ministers
answer on the record, but perhaps she will return to the issue during
her winding-up speech.
In the
context of net assets, I want to address an issue about which there has
been considerable debate during the past few weeks: the position of
Granite. I shall not go into the detail of Granite, but it is important
to establish what is in Northern Rock and what the valuer seeks to
value. In Northern Rocks 2006 accounts, Granite was
consolidated into the companys results. The accounts
state:
The
Groups results include the results and assets and liabilities
of securitisation Special Purpose Entities (SPEs) on a
line by line basis. Securitised advances are subject to non-recourse
finance
arrangements.
Northern
Rock accounts include the gross assets, securitised in Granite, and
they also highlight the fact that the value of the loan notes issued is
exceeded by the securitised gross assets. That provides a buffer in the
event of a default within the pool of mortgages.
Can the
valuers assume that the excessthat buffershould be
treated as part of the assets of Northern Rock in determining the
value? Does the Minister believe that the Office for National
Statistics was right to say that because the risks and rewards of
Granite accrue to the company, it should therefore be assumed to be
part of Northern Rocks debts? Alternatively, does she support
the Chancellors view that Granite should be outside of Northern
Rock, and that it has not been nationalised? Again, for the purposes of
the valuation it is important to have clarity as to what the Government
believe is appropriate.
One issue
that has been raised is what has happened to Northern
Rock since the lender of last resort announcement was made in
September, and what impact that might have had on the value of the
business. Indeed, the Treasury Committees report said about the
handling of the four days between lender of last resort status being
granted and the guarantees being issued that
The
cumulative effect of these failures was to delay the guarantee until
the evening of the fourth day after the run started and thus to make
the run on the deposits of Northern Rock more prolonged, and more
damaging to the health of the company, than might otherwise have been
the case.
Is the valuer
allowed to consider such a factor? It would appear that the
Governments actions detracted from the companys value
rather than enhancing it.
I turn to
the issue raised earlier by the right hon. Member for Norwich,
Souththe treatment of various classes of shareholder. I agree
that in principle all shareholders should be treated alike. That is the
equitable solution. However, I note that section 9(7) of the 2008 Act
provides for different procedures to apply in different circumstances.
Will the Minister elaborate on how that applies in the case of Northern
Rock?
However, I
am sure that the Minister will be aware that the Government have
bilateral arrangements with a number of countries to protect investors
when assets are expropriated by foreign Governments. Clearly, that is
an important protection for investors operating in challenging markets.
However, I understand that those agreements are reciprocal.
They apply also when assets owned by foreign investors are
expropriated or nationalisedor taken into temporary
public ownershipby the UK Government. In those circumstances,
the compensation claims are not settled by the valuer, who is to be
appointed on the outcome of todays debate, but by international
arbitration.
For
instance, our agreement with Hong Kong
states:
Investors
of either Contracting
Party
that is,
either
country
shall
not be deprived of their investments...in the area of the Other
Contracting Party, except lawfully for a public
purpose
it
permits
nationalisation
...and
against compensation. Such compensation shall amount to the real value
of the investment immediately before the deprivation or before the
impending deprivation became public knowledge, whichever is the
earlier, shall include interest at a normal commercial rate until the
date of payment, shall be made without
delay.
If I were an
investor in Hong Kong and I owned shares in Northern Rock, I imagine
that I would be treated rather differently from a small shareholder
living in the constituencies of the hon. Member for Newcastle upon
Tyne, North, my hon. Friend the Member for Hexham (Mr.
Atkinson), the right hon. Member for Berwick-upon-Tweed (Mr.
Beith)or even in my constituency.
I am keen to
put to bed the issue raised by the right hon. Member for Norwich,
South. Will the Minister explain how it would apply in respect of
Northern Rock? Does the order before the Committee negate those
international agreements? If not, how many territories will be
affected? It would appear that shareholders based overseas have better
rights to compensation than those based here. That is the matter of the
different classes of shareholders to which I alluded in response to
interventions from the right hon. Member for Norwich,
South.
I
conclude with some detailed questions. I assume from the
Ministers response on the process of appointing the valuer that
the Government will be appointing an individual and not a firm. Under
paragraph 8, who will bear the cost of work that the valuer and his
staff do? Will it be the Treasury or the company, or will it be taken
out of the compensation payable to the
shareholders?
What
is the basis on which, under paragraph 12, shareholders or the
Government can challenge the assessment notice produced by the valuer?
I am surprised that in an area that is important for
shareholders certainty there is not more detail on how long
shareholders will have to respond to the assessment. That is a point on
which I intervened on the Minister earlier. I am slightly concerned
about how vague and woolly that part of the order
is.
On
paragraph 13, what actions can be taken by shareholders or the
Government to appeal against the decision taken by the tribunal? Can an
appeal be made to higher
courts?
On
one level, the order looks quite straightforward, but I am afraid that
nothing to do with Northern Rock is straightforward, as we have seen
over recent months. The compensation process will come up against the
resentment of shareholders, whether they be institutions or
individuals, as we have discovered from some of the e-mails and letters
that we have received. I suspect that the matter will be dragged
through the
courts.
The
Minister has an important responsibility this afternoon to explain
clearly and precisely to Northern Rocks shareholders why the
company should be valued on the basis that it is in administration and
not a going
concern.
Mr.
Clarke:
I want to make a different point from the earlier
one, which I think that the hon. Gentleman has addressed. On his
comments on the valuation assumptions in paragraph 6, does he
acknowledge on behalf of his party that if his approach were followed,
it might well lead to the public sector paying much higher compensation
bills than if the proposals in the order were followed? Does he
acknowledge that that could be the impact, and has he thought through
the effect of that on his partys overall public spending
considerations?
Mr.
Hoban:
The right hon. Gentleman makes a point. I raised
the issue of the basis of evaluation with the Minister for
clarification. I am sure that she is as mindful as we all are of the
public spending constraints under which the Government are operating,
and I am sure that the Government have chosen an aggressive and tight
wording for the valuation basis to reduce the impact on public
spending. However, it is important for
the Minister to make clear what sort of outcome the valuer can consider
when determining the value to be placed on Northern Rock within the
definition of administration. That is not a proposal; I merely want to
indicate the ambiguity that the order creates by mentioning
administration but not being much more specific about whether it should
be considered as a rescue of the company as a going concern or, as the
Chancellor has said, as a fire
sale.
Mr.
Clarke:
I understand that the hon. Gentleman is
speculating and inviting the Minister to respond to him. Do
the official Opposition not want to make a proposal
to change the wording in paragraph 6? Is that because he acknowledges
the reality of such a changethat it would have significant
potential public expenditure implications that he is not ready to take
on?
Mr.
Hoban:
The order cannot be amended anyway, so, even if I
had proposals, I would not actually be able to put them into practice.
The issue is slightly
hypothetical.
I
am here to act as a guardian of public spending by pointing out to the
Minister that perhaps the wording of the order commits a valuer to take
a rather liberal view on how public money should be spent. The problem,
I am afraidactually, I am rather gratefulis not mine.
It is the hon. Ladys and the Chancellors, and they have
to resolve the issue, not
us.
The
challenge that the Minister faces is that shareholders in Northern Rock
find it hard to reconcile the assumption that underpins the
orderthat Northern Rock is in administration and not a going
concernwith the fact that it is still trading. The Government
expect it to be privatised in the future, and, presumably, they expect
to make a profit on that privatisation. They need to explain more
clearly than the Minister has done so far how they reconcile that
contradiction, so that we can explain to our constituents the basis on
which the order is proceeding
today.
5.10
pm
Mr.
Jeremy Browne (Taunton) (LD): I am grateful to you,
Mr. Martlew, for calling me to participate in this important
discussion. It is worth noting at the outset that the sorry saga of
Northern Rock has many different and varied victims. First among those
is the taxpayer. Calculations vary, but a ready reckoner that many
accept is that the whole episode has so far cost each British taxpayer
something in the region of £3,000in effect, an
additional mortgage on top of the ones that many of us in Committee and
elsewhere are servicing
already.
The
employees of Northern Rock constitute a second group of victims.
Although the Government have not made it explicit, it is fair to assume
that down the track the number of employees will decrease. Of course,
those who work for the company will be anxious about their prospects.
The third group of victims consists of the Prime Minister and the
Chancellor of the Exchequer, who I think have been found wanting and
certainly indecisive by many observers throughout this
saga.
The
victims being discussed this afternoon are the shareholders of Northern
Rock who have been badly let down by the companys directors. I
was rather surprised
by the Ministers assertion that the Financial Services Authority
was an innocent bystander in this episode and did not bear direct
responsibility. Many regard it as culpable to some
extent.
Angela
Eagle:
The hon. Gentleman must not put words in my mouth.
In response to a question, I said that the FSA is not responsible for
driving Northern Rock into the situation that it got itself into with
its business model. Those who were in charge of running the bank are
responsible.
Mr.
Browne:
The Minister was quick to intervene before fully
absorbing the meaning of my words. I accepted that the directors were
directly responsible for the failure that has led to this discussion,
but clearly there was a regulatory failure as well. Most people would
accept that if we think that the regulatory regime was perfect in every
regard, we need to look again at the systems in place. This is a model
example of how the regulatory regime failed to protect shareholders,
employees, depositors, the wider economy of the north-east, the
Governments reputation and all of the other groups that I have
been
through.
As
we have discussed, there is widespread sympathy, particularly for some
of the smaller shareholdersI think that everybody in the
Committee accepts that point. The hon. Member for Hexham
(Mr. Atkinson) quoted from a letter that he received that
was entirely typical of the difficulties that some small
shareholdersin some cases, they are former employees or their
relativesare facing as a consequence of the difficulties that
Northern Rock has experienced. They perhaps felt that they were in a
position where they could rely, and have a degree of financial
dependency, on their shareholding in Northern Rock. Of course, that
security has now been taken away from them. I think that people make a
distinctionperhaps a moral, rather than legal
distinctionbetween the plight of people in the position that he
outlined and that of the more speculative, larger institutional
shareholders.
We must
remember, of course, that shareholding comes with no guarantee that
shares will always increase in value. It is worth considering the
housing market, which is another part of the economy in which people
seem to proceed on a similar basisthat house prices always go
up. Of course, shares and house prices, as with every other aspect of a
capitalist economy, are subject to downturns as well as upturns. We
cannot proceed on the basis that shareholding is always to the benefit
of the shareholder, but at the same time, any downsides are not the
responsibility of the shareholder either.
On the
consequential action that we must take, I do not mean to be excessively
critical, but I think that the Conservative party spokesperson sought
to give the impression that he was going into bat on behalf of the
shareholders without necessarily coming to a conclusion any more
beneficial to them than the one proposed by the Government. My view,
and that of many others, is that the bank could not have continued to
trade without immediate Government support and would have failed back
in August if it had not received that support. There would then have
been no possibility of any
shareholders receiving a return on their shares. Northern Rock did
continue to trade, but only because of the substantial support injected
into the company by the taxpayer at that
point.
Mr.
Hoban:
Does the hon. Gentleman not think that part of the
purpose of these proceedings is to scrutinise the Government, rather
than to simply roll over and have our tummies tickled? Does he not
agree that we are here to ask questions and get
answers?
Mr.
Browne:
I do think that the role of Opposition parties is
to scrutinise the Government. I will not go too far off the beaten
track, but, on that subject, my hon. Friend the Member for Twickenham
has further enhanced his reputation by suggesting, many months before
the Government decided on this course of action, a way in which the
Government could go some way towards salvaging their reputation. Such a
constructive line of criticism and advice has not been forthcoming from
the Conservative party.
I take the point made by the
hon. Member for Fareham. We are here to discuss the issues, probe the
Government, and to try to improve the suggestions and proposals that
they have made. However, we ought to avoid creating the impression for
people who read the text of our discussions that we are on their side
and are seeking to assist them more than the logical extension of the
policy that we are proposing. I suggest only that there is the
potential danger that some people who read the hon. Gentlemans
speech may conclude that he is arguing that taxpayers should, to a
large extent, fund shareholders in Northern Rock. As I understand it,
that is not the position of the Conservative
party.
Mr.
Hoban:
The hon. Gentleman should pay closer attention to
what is being said. In response to the intervention from the right hon.
Member for Norwich, South, I said that I wish to protect
taxpayers interests and to clarify the Governments
valuation assumptionsnot to propose valuation assumptions of my
own. I want to ensure that the taxpayer achieves the goal that I think
is right: for this debacle to cost as little as
possible.
Mr.
Browne:
I am grateful for that clarification; we are as
one on the subject. I am pleased that shareholders who choose to read
this debate will not be given the impression that anything else was the
case.
On
the situation that arose in late summer, the Government stepped in to
prevent damage to the banking system. They did so first by guaranteeing
depositors and then by becoming the lender of last resort, as the
company at that point could not access funding from the markets. It
could have been argued that shares in Northern Rock should have been
suspended some months previously. My belief and that of my party is
that it is appropriate for an independent valuer to determine what if
anyI stress if any compensation should be available to
shareholders. Such a determination can only be on the basis that
Northern Rock is a gone concern, rather than a going
concern.
The bank
effectively went bustnot because it was insolvent, but because
it could no longer trade without the intervention of the Government. It
was only because of the Government support provided to secure
the financial markets overall that it was able to continue trading. In
our view that should be excluded from any calculation of the residual
worth of the
business.
Mr.
Field:
For the sake of clarity, will the hon. Gentleman
say whether it is correct that the Liberal Democrats will not
be standing up for small shareholders, other than on the basis that the
bank was a gone concern from the end of August or the
beginning of SeptemberI am thinking particularly of those
marginal seats in the north-east that we will be fighting
for?
Mr.
Browne:
I am not entirely sure that I am grateful for that
intervention. I wish there were more marginal target seats for the
Liberal Democrats in the north-east, but we are making much progress. I
am next to my right hon. Friend the Member for Berwick-upon-Tweed
(Mr. Beith) who converted a marginal seat in the north-east
into a safe seat after winning it 35 years ago; he is an example to us
all.
We want to ensure
that as fair and reasonable a deal as possible is secured for
shareholders, but that has to be reconciled with the interests of the
taxpayers. In conclusion, the valuer has to make the decision. It might
be unwelcome news to some or all of the shareholders, but the
taxpayers interest has to be paramount, because Northern Rock
would not be a viable entity had the taxpayer not poured substantial
sums of money into the bank to keep it afloat. We have put that as a
primary consideration. However, shareholders wish to raise legitimate
concerns and interests, and I agree with the hon. Member for Fareham
that those concerns need to be taken into account by the valuer, the
Government and others. They have a legitimate case, which they are
already putting, but the bottom line is that the taxpayers
interest must come
first.
5.20
pm
Mr.
Field:
I want to associate myself with the comments of my
hon. Friend the Member for Fareham, who summed up the position well.
The Government have to make some difficult decisions; in political
terms, there is always the thought, There but for the grace of
God when this sort of problem arises on someone
elses watch. However, in relation to the order and the
explanatory memorandum, we need to know much more about the basis of
assumptions from which the valuer will make his valuation. To a large
extent, we seem to be giving a carte blanche.
There are issues to consider in
relation to the Enterprise Act 2002. I sat on the Standing Committee
for that Bill, and I remember that the Government made great play of
the fact that we were trying to introduce an insolvency regime similar
to chapter 11 in the United States, which allows companies to continue
trading as a going concern. My hon. Friend rightly pointed out that
administration is not the same as liquidation. There seems to be almost
a presumption that involving an administrator leaves a company one step
away from liquidation, if not actually at that point, but the state of
affairs is very different. I accept that we do not have chapter 11
powers here, and the
assumptions in section 5(4) of the Banking (Special Provisions) Act 2008
are clear and separate, but it is not clear which valuation, in
relation to administration, is relevant in this case.
My hon. Friend rightly said
that the order requires the valuer to assume that Northern Rock is
unable to continue as a going concern and is in administration. As I
tried to point out in an earlier intervention, neither of those
criteria apply in this case: Northern Rock was never in administration,
and it was regarded at all times as a going concern. I do not agree
with the observations of the hon. Member for Taunton about the
situation that has surrounded the company since September. There is no
doubt that the Bank of England, which is independent from the
Government, arranged for loans and guarantees, but it has never asked
for any repayment of those loans. Neither have any Treasury guarantees
been withdrawn.
Mr.
Beith:
Does the hon. Gentleman think that Northern Rock
could be regarded as a going concern if those guarantees were
withdrawn?
Mr.
Field:
That is open to much speculation, but I suspect
not. The hon. Member for Newcastle upon Tyne, North made some
interesting observations on whether there are ongoing net liabilities
or assets. Obviously, the trigger date for when the valuation shall be
deemed to have taken effect has already gone, but there can be little
doubt, I hope, that there are net assetsotherwise, the Treasury
will have been very guilty of misleading Parliament regarding the
valuation of Northern Rocks assets and liabilities. However,
the ongoing debate that would have taken place had we gone down the
administration route would have ensured that the directors would turn
their minds regularlyprobably on a weekly basis in board
meetingsto whether they should continue to support
administration, rather than going down the liquidation route. They
would have been focused on whether the business should continue as a
going concern.
My hon.
Friend the Member for Fareham has said that we should not allow the
debate to be taken over by the range of different interest groups that
will, no doubt, be very vocal in coming months. You will be aware,
Mr. Martlew, that I am very much of that view. Those with
the deepest pockets, in particular, might even go to court to try to
protect their position as shareholders, especially. I believe that all
shareholders should be treated alike. My hon. Friend rightly expressed
concern that, given the international treaties to which we have signed
up, there is a risk that certain international
shareholdersobviously, we do not know the entire extent of the
shareholding of Northern Rockmay be able to argue a different
deal. The issue is whether a deal acceptable to international
shareholders should apply to all shareholders. That would have
substantial financial implications, as the right hon. Member for
Norwich, South pointed out.
I am concerned that we are
effectively giving a go-ahead today. I appreciate that we need to move
on the issue, but we are giving the go-ahead in the form of an order
containing a range of assumptions whose implications we are not fully
aware of. It would be
useful for the Minister to give us more of an idea of precisely what
assumptions the valuer will put in place, given what other hon. Members
have
said.
5.26
pm
Mr.
Beith:
Although I am grateful for the opportunity to
mention the situation as it affects some of my constituents, I shall
start by referring to the intervention made earlier by the hon. Member
for Cities of London and Westminster, who introduced what I thought was
an inappropriately partisan note into the proceedings by suggesting
that any turn of phrase used here is somehow of great importance in
fighting elections in the regions. It is relevant to point out that,
although there are many small shareholders in my constituency, there
are even more taxpayers, many of whom pay quite a lot of tax on
relatively small incomes. The impact on them of the Government
expenditure generated by the measures will be
significant.
Mr.
Field:
The right hon. Gentleman might not like my taking a
partisan view, but the Northern Rock issue is far closer to the hearts
of shareholders than to those of taxpayers at large. That is why
politicians of all parties may be tempted to make common ground with
shareholders for the purpose of electioneering in the north-east and
perhaps
elsewhere.
Mr.
Beith:
Not in my part of the world, where Northern Rock is
a matter of concern to absolutely everybody. It is striking how
dramatically and vividly it has impinged on the lives not just of
shareholders, depositors and mortgage holders but of people throughout
the region, for reasons that I shall mention in a moment.
There are
many small shareholders in my constituency, and some of them are
surprisingly stoical. Many of them got their shares at de-mutualisation
because they were members, happily so, of Northern Rock as depositors,
borrowers or, in many cases, both. I am surprised how many of them have
said to me, Well, Mr. Beith, we got them for
nothing, so we cant really complain. That is an
impressively philosophical view of it, but a lot of people who got
shares free after de-mutualisation bought more shares, because they saw
the companys apparent success and were confident. It was a
northern business, headquartered in the north, that had given a great
deal to the north, both directly through sponsorship and indirectly
through the Northern Rock Foundation.
There was a remarkable sense of
ownership right across the region. Indeed, I think that that has made
it difficult for shareholders and others there to accept the amount of
responsibility that must be assigned to the directors of the company,
who were primarily responsible for the appalling situation in which the
company found itself. Several of them were recognised and respected
figures in the economic and community life of the north-east, yet they
somehow failed in their duty to shareholders and the region by allowing
the pursuit of a model that must have been realised by anyone who saw
it at the time to be highly dangerous, with a great capacity for
disaster. I have said elsewhere
that if one drives around a blind bend at 80 mph and crashes into a
broken-down bus, it is no use saying that the police should have
prevented it and that the broken-down bus should not have been there.
That is essentially what happened. There was no adequate risk
assessment, so the primary responsibility for what has happened to
shareholders lies with the directors of the
company.
Inevitably,
the small shareholders still ask, What about the Financial
Services Authority, and why isnt that relevant to the
calculations that the valuer must make? They have seen the
widely publicised Treasury Select Committee report about the
FSAs failure, and indeed that of the Bank of England and the
Government themselves, to deal with the dangers posed by that
extraordinarily high-risk business model. It was dangerous to the
banking system of the country. Here, the small shareholders
interests happen to be coterminous with those of taxpayers as a whole.
The collapse of the whole banking system was against the
taxpayers interests, therefore the Government took action to
give loans and guarantees to Northern Rock. However, the fact that the
company got into that situation was against the shareholders
interests. The failure of the FSA, although it was not acting on behalf
of the shareholdersit was supposed to be acting on behalf of
taxpayers as a wholealso had a direct effect on the small
shareholders. That is why small shareholders say that that ought to be
one of the factors that the valuer could take into account. I hope that
the Minister will give her view of why that should not be
so.
Perhaps
the small shareholders and their organisations will move on from this
point and say that they ought to seek redress through the courts for
the failures and the liability arising thereby. As a former Equitable
Life policyholder, I have to say that the Equitable Life experience was
not encouraging in this respect. However, those shareholders may feel
that it is necessary and appropriate to take action. Small shareholders
observe failure by the directors, which is the primary failure, and
failure by those who were responsible for regulating the
systemnot particularly in their interests, but in the interests
of the community as a whole. The same failure that hit the community as
a whole and is now costing the taxpayer so much money also directly
affected the
shareholders.
Small
shareholders are looking for answers from Ministers as to why the order
is cast in this particular form, which is why I pose that question
again
now.
5.31
pm
Mr.
Atkinson:
There is not much to add, but I want to
reinforce a point. I am not here to represent any form of
shareholder.
The
difference between Northern Rock and a normal company in trouble is
that there are tens of thousands of small shareholders for whom we feel
particularly sorry. Many of those shareholders are in the north of
England, in the constituencies of my hon. Friends and other Members.
Northern Rock was formed from two well-established building societies
in the region, and people placed their trust in it. When it was
demutualised and people got some shares, many rightly thought that if
they wanted a blue-chip, safe home for money, the Northern Rock was the
place to go. These are sophisticated investors.
Today, we are asking the
Government to give those people the answer to the question that they
are asking. All that I and my hon. Friends came here for was to
discover a bit more about what is behind the order and to hear answers
to questions that have been asked time and again about why these
assumptions are being given to the valuer. I am not optimistic about
our getting a great deal more clarity from the
Minister.
I have been
in the house long enough to know that Treasury Ministers sometimes have
to be deliberately obscure. I appreciate that there are battalions of
lawyers standing in the background, sharpening their pencils and ready
to go, but as my hon. Friend the Member for Fareham said, there many
questions to be asked, including about the different classification of
shareholders, on top of those about the valuers assumptions.
The relationship between any future value of small shareholders
shares and the assets in Granite, for example, is an issue that they do
not understand. Such issues are totally obscure to
them.
In
the letters that I write in reply to those who have written to me about
this Committee, I will have difficulty explaining what is motivating
the Government and what is behind some elements of the order. Unless
the Minister is going to be frank nowI suspect that she is
notwe will perhaps have to wait, at least until the order goes
to the other place, to get an answer to some of these rather complex
questions.
5.34
pm
Mr.
Henderson:
Following on from what the hon. Gentleman said,
I want to reinforce a point. I have received a lot of letters and
e-mails on this matter. The Committee will understand that the head
office of Northern Rock is in my constituency. There is a pretty good
spread of shareholders throughout the whole of the north-east, and
beyond it in the rest of the
country.
Shareholders
have asked me various questions. If the shares were valued last
January, the share price would be about £12, but if they were
valued in June it would be around £10 or £11. If the
shares had been valued the night before it broke publicly that there
was a problem in the bank, what would the value have been then?
Different people tell me different things about the value at that
point.
Shareholders
have also asked me whether the valuer will value the shares according
to an average over the last six months, which has sometimes been done
under nationalisation compensation arrangementsalthough not
usually in this circumstances such as thisor whether the valuer
will say, I have to work out the theoretical drop in price of
the shares from the night before the public announcement in September
to the day of the announcement. I have to make a judgment as to what
happened next. The judgment can be madethe facts are
thereuntil the point at which the shares are suspended, and
then there is a
problem.
The
question is how the share price would have reacted that next
morningback in Septemberhad the Government announcement
not been made. Had the announcement been made that the Government were
not backing this, and that there was a real problemif it had
hit the bus, as in the tale told by the right hon. Member for
Berwick-upon-Tweed (Mr. Beith)what would have been
the value of the shares?
The Government rescued the bank,
and I think that all Government Members welcomed that. My constituents,
the trade unionists and Northern Rock itself very much welcomed that.
They did not support premature nationalisation because they were not
sure of the consequences and they were worried about that, but they did
support intervention by the Government. Those people are now asking
what criteria are used to value the sharesto value the
businessbetween that day in September and 22 February, when I
think nationalisation took place. There are no easy answers to that
question. Estimates will inevitably be made of the net asset value. I
do not think that there is an answer to that question, either. I know
that, as a Labour member of the Committee, I am not meant to declare
that I have friends in the City, but I do have some friends there and I
have asked them for their estimate on the question of assets against
liabilities. One receives interesting theoretical
responses.
The valuer
does not have an easy task. I do not see how the valuer can easily
reach a determination, because the only way in which one knows whether
there is a positive or a negative net asset value is if one attempts to
terminate the business, and is either selling it or it is in
liquidation. I do not have an answer to the question and I do see how
the Minister can, either. Perhaps she has, but it is a very difficult
issue for the valuer to determine. I suspect that we will still be
discussing the issue after the valuer has had a stab at it and perhaps,
as the order allows, a further stab and, as the order also allows,
after an appeal on the second stab. We may want to consider that
further in different forums in the House, and we will clearly be under
scrutiny by the shareholders with, as the hon. Member for Hexham
(Mr. Atkinson) said, the sharpened pencils of the solicitors
and counsel behind
them.
5.38
pm
Angela
Eagle:
I will attempt, inasmuch as it is possible to do
so, to deal with the questions that have been raised thus far in our
debate. A number of hon. Members spoke about the assumptions that the
order specifies must be made when determining the amount of any
compensation that would be payable. As I said at the start, any
compensation must be based on a realistic assessment of the
shares value without public support. That is simply because
taxpayers should not be expected to pay compensation for value that
would not have existed without their support. It is clear that without
public support, Northern Rock would not have been able to continue as a
going concern and would, at best, have been placed into administration.
I believe that the assumptions in the order, which are essentially
those, are fair.
The
hon. Member for Fareham asked a series of questions. First, he asked
about the consequence of assuming that Northern Rock would be wound up
and why that was not assumed. The assumptions set out in the order are
appropriate for this casethe complex case of Northern Rock, in
which there is a range of assets and liabilities. The Banking (Special
Provisions) Act 2008 is a general Act, as is the Insolvency Act 1986,
so the assumptions must cover all insolvency issues that may arise in
all cases. The two assumptions that we want the valuer to take into
account are those in the order, which seem perfectly reasonable and
fair to me.
Mr.
Hoban:
Is the Minister therefore saying that it is
inappropriate for Northern Rock to be valued as if it were going to be
wound upa fire sale?
Angela
Eagle:
It is for the valuer to value Northern Rock shares
with the assumptions that I have set out more than once in the
debatenot that it is particularly going to be wound
up.
The hon.
Gentleman and other Opposition Members talked about the seeming oddness
of how one reconciles the argument that Northern Rock cannot continue
as a going concern and will be in administration, with the argument
that it is in public hands, is solvent and has a good mortgage book.
First, the point about Northern Rock being in administration is that
there are assumptions about what would have happened had the public
financial support been withdrawn and not been available in the future.
Secondly, the assumption concerning withdrawal and non-availability of
financial assistance is about Northern Rocks cash flow. Owing
to its business model, it would not have had sufficient cash flow to
pay its debts as they fell due in the absence of continued public
support. Those debts would have included repaying its depositors as
well as the Bank of Englands lending.
The important distinction that
has not been appreciated in todays debate is between cash-flow
insolvency or the inability to pay debts as they fall duethe
banks business models problem with what happened in the
credit marketsand balance-sheet insolvency, whereby liabilities
exceed assets. The bank had a problem with cash-flow insolvency, but
that does not exist now because it has been taken into temporary public
ownership. That is the distinction about which hon. Members have been
confused, and that is how it is possible to say that the valuer must
make their decision assuming that all public support is withdrawn. For
the reason that I mentioned earlier, it is not appropriate that
shareholders should be compensated and that part of the value ascribed
to their shares should come from the fact that the taxpayer has
supported the bank. That would not be in the best interest of
taxpayers.
Clearly,
therefore, if the Bank of Englands support had been withdrawn,
Northern Rock would at least be in administration due to cash-flow
insolvency, which is why the order is very careful to specify that
point. That is the starting point from which the valuer, if both Houses
approve the order, will begin to do their
work.
Mr.
Hoban:
The Minister referred to the Enterprise Act 2002,
but does she appreciate that there is a distinction between
administration and being wound up? The distinction is important in
influencing the valuation. Why was winding up not the assumption, as
opposed to administration?
Angela
Eagle:
Looking at the banks situation, the
decision was made that it would at least be in administration. That is
the assumption in the order before us. Only so much future-gazing can
be done, and I assert that the assumptions in todays
compensation order are fair, given the situation that the bank was in.
Mr.
Field:
I appreciate that this is a somewhat tortuous
process, but the reality is that there have been only two certainties
about the share price that are relevant to the debate: first, the
moment when the
shares were suspended last autumn; secondly, assuming the thing goes
bust, the value is therefore nil. The concern of many
shareholdersit is right that we at least express such concerns
in Committeeis that the Government are going through this
tortuous process in order to minimise the amount of money that they pay
out. The underlying assumption of many groups deeply concerned about
the situation is that the process is designed to result in as low a
valuation as possible. That is why we are trying to clarify as
precisely as possible the broad base of assumptions that the valuer
will use when creating a
valuation.
Angela
Eagle:
That is why the assumptions that we require the
valuer to make are in the order for us to debate. Given the situation
that the bank was in, the assumptions are fair. I hope that the
Committee accepts that it would be unfair to attempt to value shares by
taking into account taxpayers support. I assume that all
Members support the view set out in the Banking (Special Provisions)
Act 2008, which is that in this instance, the value ascribed to the
bank by the fact of public and Bank of England support must be
withdrawn in order to produce a fair valuation. The aim of this
compensation order, and of the assumptions in the primary legislation
that has brought us to this Committee, is not to minimise the value of
the shares, but to get an accurate and fair valuation for shareholders
under the circumstances that would have pertained had taxpayers
support not been given. I am sorry if that is a tortuous explanation,
but I am trying to put it as firmly as I can. I believe that our
approach represents a fair way in which to deal with such difficult
circumstances.
The
hon. Member for Fareham asked when Northern Rock will publish its
accounts. They will be published later this month. He also asked who
will pay for the costs of the valuation process. The Treasury will pay
those
costs.
Angela
Eagle:
The taxpayer and the Treasury will pay the cost of
the valuation processyou and everybody in this
room.
The hon.
Gentleman also asked about the basis on which the Treasury could
challenge any assessment that the valuer comes to. He rightly pointed
out that under the order, shareholders and Her Majestys
Treasury, both being potentially affected by an assessment, will have
the same opportunity to seek a reassessment or referral to the
Financial Services and Markets Tribunal if they believe that an
assessment or reassessment that they have asked for is
wrong.
Mr.
Hoban:
Will the Minister address my question about
investors resident overseas taking advantage of bilateral agreements
that work on a different basis when calculating compensation for shares
expropriated by the
Government?
Angela
Eagle:
The hon. Gentleman is right to point out the
existence of bilateral investment treaties, but the process set out in
the order for the assessment of any compensation payable to
shareholders by an independent valuer will apply equally to all,
irrespective of their location or nationality. I hope that that is a
reasonable enough answer for him.
The hon. Member for Taunton made
some telling points about the position of the Conservative party. As
usual, I agree with him. It is very hard to discern the approach of
Conservative Front Benchers. It is probably shifting by the minute and
will probably change as we walk out of the
Committee.
Mr.
Hoban:
I was explicit in my view about reducing the cost
to the taxpayer of this whole debacle. If the Minister refers to
Hansard for the debate on the Banking (Special Provisions) Bill,
she will see that my hon. Friend the Member for Tatton (Mr.
Osborne) concurs with the basis of the valuation offered and agrees
with the Chancellor that the value that people are likely to receive
will, sadly, be very
small.
Angela
Eagle:
I am glad that the hon. Gentleman has finally come
clean. It had to be dragged out of him by a new tripartite authority.
Through the goading of the hon. Member for Taunton, my right hon.
Friend the Member for Norwich, South and myself, we have finally got
the hon. Member for Fareham to put on the record the view of
Conservative Front Benchers on this issue. I hope that every
shareholder, large or small, will read the debate and note that
point.
The hon. Member
for Taunton talked about the bank as a gone concern. I
suppose that that is similar to my phrase and to the one that appears
in the statutory instrumentthat it is not a going
concern. The valuer will have to do his or her job on the basis
that, had Bank of England support been withdrawn, the bank would be in
administration and would not be a going concern. I concur with the hon.
Gentleman that the right balance should be achieved between the
interests of tax payers and shareholders. The valuer will be under no
illusions about what the Government wish him or her to base their
decision on once the order has passed through the House.
The hon. Member for Cities of
London and Westminster asked what actions may be taken after the
tribunal. He may be right that there will be those who are dissatisfied
with the process. We can only guess what might happen, but it is
important to set out that the Government are determined to make this
process as fair and open as possible to ensure that shareholders get
the fair and appropriate value for shares that have been extinguished
by the temporary nationalisation of Northern Rock. The answer to his
question is that there is no further process in the order for the
review of an assessment. If it is upheld by the tribunal, any further
challenge would need to be made by going to the High Court. A court can
quash a tribunals decision only if it considers that the
tribunal has misdirected itself in
law.
A question was
asked about the basis for a challenge of an assessment notice and how
long the shareholders would have to go through that process. Clearly,
that is a matter for the valuer to determine in relation to the
reassessment of any decision. The Financial Services and Markets
Tribunal has its own rules of procedure for referrals to it. It is
important that the valuer let shareholders who are affected know what
those processes and time limits are. I am sure that they will be
available in a reasonable way, so that the process can be followed
appropriately.
We have
had an important debate about an important order that affects 200,000
shareholders both large and small in the aftermath of the temporary
nationalisation of Northern Rock. Now that we have had the chance to
consider these important issues, I hope that the Committee will support
the
order.
Question
put and agreed
to.
Resolved,
That
the Committee has considered the draft Northern Rock plc Compensation
Scheme Order
2008.
Committee
rose at six minutes to Six
oclock.