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Ian Pearson: I entirely agree with the intention to protect the use of FSCS funds, and that intention is behind some of the amendments tabled by the hon. Member for Fareham (Mr. Hoban). I hope that my comments today have been helpful for those who observe these things closely.
We have included a number of safeguards over the use of such moneys, including, as I have mentioned, a cap and the independent verification of any resolution costs. However, the hon. Gentlemans amendments are not the right way to proceed to protect the use of such funds. I sense that he does not want to push this group of amendments to a Division, although, as he said earlier, he may want to push the principle of excluding from the Bill a power to establish pre-funding. That would be a serious mistake, but if he wants to vote on it, so be it.
Clause read a Second time, and added to the Bill.
(a) onward transfer means a transfer of property, rights or liabilities (whether or not under a power in this Part) from
(i) a person who is a transferee under a property transfer instrument under section 12(2) (an original transferee), or
(ii) a bank, securities issued by which were earlier transferred by a share transfer order under section 13(2), and
(b) the person to whom the onward transfer is made is referred to as an onward transferee.
(2) The continuity authority may
(a) provide for an obligation under section 62 to apply in respect of an onward transferee;
(b) extend section 63 so as to permit action to be taken under section 63(2) for the purpose of enabling an onward transferee to operate transferred business, or part of it, effectively.
(3) The continuity authority means
(a) the Bank of England, where subsection (1)(a)(i) applies, and
(b) the Treasury, where subsection (1)(a)(ii) applies.
(4) Subsection (2) may be relied on to impose obligations on
(a) an original transferee (where the original transfer was a property transfer),
(b) a residual bank within the meaning of section 62 (where the original transfer was a property transfer),
(c) the bank (where the original transfer was a share transfer),
(d) anything which is or was a group undertaking (within the meaning of section 1161(5) of the Companies Act 2006) of anything within paragraphs (a) to (c), or
(5) Subsection (2) may be used to impose obligations
(a) in addition to obligations under or by virtue of section 62 or 63, or
(b) replacing obligations under or by virtue of either of those sections to a specified extent.
(6) A power under subsection (2) is exerciseable by giving a notice to each person
(a) on whom a continuity obligation is to be imposed under the power, or
(b) who is expected to benefit from a continuity obligation under the power.
(7) Sections 62(3) to (7) and 63(3) and (4) apply to an obligation as applied under subsection (2)
(a) construing transferred business as the business transferred by means of the onward transfer, and
(b) with any other necessary modification.
(8) The Bank of England may act under or by virtue of subsection (2) only with the consent of the Treasury.. [Ian Pearson.]
Brought up, and read the First time.
Ian Pearson: I beg to move, That the clause be read a Second time.
Madam Deputy Speaker: With this it will be convenient to discuss the following: Government new clause 13 Special resolution regime: Continuity obligations: onward share transfers.
New clause 8 Order of consideration of stabilisation options
The stabilisation options in sections 11, 12, and 13 must be considered in the order set out above..
New clause 9 Financial Services Compensation Scheme
(1) The scheme manager must decide, once a stabilisation power has been exercised, how to achieve Objective 3 of the special resolution regime through
(a) the transfer of a relevant account to another financial institution, or
(b) making a payment to relevant depositors.
(2) Subsection (1)(a) takes precedence over subsection (1)(b).
(3) Prior to making its decision the scheme manager must consult
New clause 10 Report on exercise of stabilisation powers
(1) On the exercise of stabilisation powers, the Treasury must lay before Parliament a report setting out
(a) the reason for the exercise by the FSA of its powers under section 7, and
(b) how the Treasury of the Bank of England then exercised their stabilisation powers to achieve the special resolution regime objectives.
(2) Where the Treasury believes the disclosure of certain information in the report in subsection (1) would adversely affect achieving the special resolution regime objectives, that information may be withheld from publication for up to six months from the date on which the stabilisation powers were exercised, but must be published at the expiration of that period..
No. 74, in clause 5, page 3, line 34, at end insert
(aa) how the interests of creditors will be taken into account in the use of the options set out in subsection (1),.
No. 9, page 4, line 3, at end insert , and
(g) on the criteria by which the FSA will judge breach of threshold conditions..
No. 8, in clause 7, page 4, line 27, leave out from conditions to end of line 28 and insert
(within the meaning of paragraph 4 of Schedule 6 to the Financial Services and Markets Act 2000 (threshold conditions: adequate resources))..
No. 12, page 4, line 32, at end insert
(3A) Condition 3 is that the FSA has consulted
(a) the Bank of England to ensure that it will be able to exercise a stabilisation power under section 8, or
(b) the Treasury to ensure that it will be able to exercise its powers under section 9..
No. 10, in clause 12, page 6, line 36, leave out paragraph (a).
No. 11, page 7, line 15, at end insert
(6) The primary objective of a bridge bank shall be to facilitate the sale of a bank - in whole or in part - to one or more private sector purchasers, but if that is not feasible the bridge bank must be either
(a) wound up in a manner that meets the special resolution regime objectives and is in the interests of the remaining creditors, or
(b) taken into temporary public ownership..
Government amendments Nos. 27 to 37.
Ian Pearson: As with the previous group, I should like to begin my remarks by addressing the Government new clauses and amendments. I shall speak at a later date about the other amendments moved in the names of members of the Opposition.
I noted in Committee that the Government would introduce technical amendments to the continuity obligations provisions. A general continuity obligation arises automatically following a transfer, by the operation of law under the provisions of clauses 62 and 64. The intention is that that general obligation would be replaced with a special obligation as soon as the authorities
could determine the specific and precise nature of the required service or facility. For example, in the case of a property transfer, the special obligation power gives the authorities powers to create, modify or cancel contracts between a transferee and the group companies of a residual bank and the residual bank itselfbut only in relation to services and facilities required to operate the banking business effectively.
New clauses 12 and 13 allow the continuity obligations, both general and specific, to be extended following an onward transfer. The clauses aim to provide the maximum level of flexibility so that, for example, a continuity obligation may be owed to both an initial transferee and an onward transferee. That may be necessary if only part of a bank is sold in an onward transfer. Of course, the requirement for a reasonable consideration to be paid for services still stands.
Government amendment No. 37 is consequential to new clauses 12 and 13. Amendments Nos. 27 to 36 do three things. First, they clarify that continuity obligations apply in the case of multiple initial transferees. For example, if part of a bank is sold to a private sector purchaser and the remainder is transferred to a bridge bank, former group companies may need to provide services to both transferees. Secondly, the amendments make a minor technical correction to ensure that continuity obligations can apply to group undertakings other than companies. That is a technical point, as the legal definitions of the terms undertaking and company differ slightly. Finally, they require Treasury consent for the Bank of England to exercise the power to modify the general continuity obligation under clause 64 for a share transfer to a commercial purchaser. That was an unintended omission, and the amendment brings clause 64 into line with all the other continuity obligation provisions.
I want to say a short word about an announcement made in the pre-Budget report in relation to groups, as I signalled in Committee. The Government intend to introduce amendments in another place to increase the Bills effectiveness in allowing the authorities to deal with risks to financial stability. The Government propose to extend the Treasurys power to take a failing bank into temporary public ownershipwhere it would be in the interests of financial stability or the protection of public fundsto include banking group holding companies. That power would be used in cases where the resolution of a deposit taker in isolation would not be sufficient to prevent a serious risk to financial stability, public funds or both. Stakeholders understand that it is important that the authorities are in a position to resolve banking groups, be they large or small, and we will be working with them as we develop the necessary changes to the Bill.
I have spoken to the Government new clauses and amendments, and I will seek to catch your eye later, Mr. Deputy Speaker, to respond to amendments in the names of other hon. Members. I will give them the opportunity to speak to them first before passing my comments on them.
I shall deal first with the new clauses and amendments proposed by the Economic Secretary. He is right to identify the importance of the continuity of services and facilities in the Bill, which goes back to comments made on the last group of amendments that one of the ways in which we can best achieve financial
stability is through that continuity of service. If we can make sure that that happens, it will give consumers far greater protection than almost anything else we can do. The fact that they are aware that their bank is open for business the next day, even if it is rebranded, renamed or whatever, will provide more reassurance than payments made through a deposit guarantee scheme. We will return to that point later in this group of amendments.
It is important for the Economic Secretary to deal with the following point. I do not know whether it should be covered in the code of practice or in a debate on this matter in the other place, but I assumed that the services that the Economic Secretary referred to when talking about continuity included things such as IT contracts, provision of equipment, payroll, facilities management for branches of banks and so on. The sort of things that make a branch of a bank function do not concern the transfer of the building but the services that go on there. It is important that those who supply such services to banks understand that they could be required to do so, and if they do not understand that, they need to, because it will make the regime work in practice.
The Economic Secretary also talked about the amendments that will be introduced in the other place dealing with holding companies, and I understand that discussions have started with stakeholders on those. We would want to look carefully at how the detail works, because in some cases the holding companies are not just of banks, but of other financial institutions. We need to understand how that process works. The Bill is primarily about banks rather than the broader financial services sector.
Turning to the new clauses and amendments in my name, I shall speak to new clause 8 and amendments Nos. 10 and 11 together. Three stabilisation options are set out in clauses 11, 12 and 13. They are private sector purchase, a bridge bank and public ownership. The challenge for people in considering those options is that the first and the third, as set out in clauses 11 and 13, are familiar concepts. As a consequence of what has happened in the past 18 months, we know what temporary public ownership is, and we know what happens when there is a private sector sale. The new facility or provision is the bridge bank. I felt that it was important, through amendment No. 11, to include in the Bill what the objective of the bridge bank was, moving it up from the code of practice. It should be clear what we seek to achieve by invoking that stabilisation option.
It is important that the Bill makes it clear that there is an order of precedence or priority. When the authorities look at how to rescue a failing institution, their first reaction, as it was with Northern Rock last year, is to find a private sector solution. A private sector solution is much cleaner than the second and third options and will largely keep creditor rights in place, with fewer issues arising to do with competition, arms length management and so on. Although a private sector solution is a much cleaner outcome, it may not always be the best outcome, which is why it is right that other options should be in place. However, we know from the debate in Committee on partial transfers that bridge banks can disrupt the usual rights of creditors, which is not the case for the private sector solution. Furthermore, competition and management issues arise when banks are subject to either a bridge bank or temporary public ownership.
We debated in Committee, on the one hand, how a bridge bank could be managed to maintain the value of its franchise and improve its value to a private sector purchaserthat is one of the objectives of a bridge bankand, on the other hand, ensuring that constraints are in place to prevent its form of ownership at that point from being a competitive advantage against other banks. The Minister said in Committee that he would expect a bridge bank to be able to take on new business, but that it would not be intended to
compete aggressively in the marketplace. [ Official Report, Banking Public Bill Committee, 6 November 2008; c. 368.]
A private sector solution makes it much easier to avoid that conflict. That is why we would prefer, as it were, an order of precedence in the Bill.
Stewart Hosie (Dundee, East) (SNP): I understand why the hon. Gentleman wants an order of precedence. On balance I am broadly supportive, but I have a question. If the situation is critical and speed is of the essence to prevent an institution from causing a systemic failure, is it absolutely necessary or even desirable to lay out the order of precedence in the way that he describes, especially given how long the discussions with various private sector bidders for Northern Rock took? Should the order of precedence not be implicit rather than explicit, thus allowing the Government to move immediately to the second or third option, thereby treating them as the first option, if that is necessary under the circumstances?
Mr. Hoban: The hon. Gentleman makes a valid point. The search for a potential private sector solution to Northern Rock was a long and drawn-out process, and the Government reached their conclusions on the success of that. I am not saying that rescuing a failed bank means hawking it round the market in its entirety, in the way that Northern Rock perhaps was, because that could be detrimental to any solution. I am just saying that we should ask whether there is a private sector solution, rather than instinctively saying, Lets bung it in a bridge bank, or, Lets put it into temporary public ownership.
We are trying to ensure that the private sector solution is there in the authorities thought processes when they look at a failed institution, given that it is potentially the best solution. If that was not feasible in the time scale, it would be right to look at other options. When the Executive took over Bradford & Bingley, they thought that it was possible to transfer the business bit very quickly, through a private sector solution, and we are now left with a so-called bad bank and its mortgage loan book.
Mr. Breed: I broadly support the hon. Gentlemans view, but I have some reservations about the timing. However, we are not precluding a private sale if an institution has gone into a bridge bank or even if it has come under temporary ownership. If at a slightly later stage somebody comes out of the woodwork with a private sector solution, they will not be precluded from taking it forward. In other words, going through the other two processes does not mean that we have dismissed the first.
That is absolutely right. It might be possible to hold a bank in its entirety in the bridge bank mechanism, with a view to managing it to be sold as a whole bank. There is no sense that considering one
option excludes another. I will not ask to put our amendments to the vote; rather, they are intended to probe the Governments thought processes and clarify how they would address the various solutions, given the complexities that are attached to the bridge bank and temporary public ownership.
New clause 9 deals with an issue that we touched on earlierhow to protect depositors in the event of a bank failure. There are gaps in the Bill. First, it is not clear who decides whether payment should be made to consumers or the account should be transferred, as in the case of the Bradford & Bingley, into another bank. New clause 9 was tabled to probe that issue. I have suggested that the FSCS, having consulted the other authorities, should make that decision. I am not sure that the Bill as drafted tells us who should make that decision or what the decision-making process should be. The new clause helps to flush out that issue.
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