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For depositors, I believe that the best solution in principle is the ability to go to another bank the next day to withdraw funds. If we want to protect depositors, we should make it clear that the best way of doing that is by providing that continuity of service—the Minister’s first point when he moved the Government amendments. The sub-optimal solution, but it may be a necessary solution, is payment through the FSCS. As demonstrated with the Icelandic banks when deposits were moved to ING Direct, that was a much better process. It was preferable to dependence on the FSCS for people in Icesave, parts of Kaupthing Singer & Friedlander and Heritable or others that ING Direct did not wish to acquire. We need to signal that, wherever possible, a straight transfer to another bank is the preferred solution. That will give customers the most satisfaction and the most confidence in the banking system. It also somewhat removes the need for a pre-funded scheme, but that is a debate and vote for later. There are many ways to approach the issue.
New clause 10 deals with the publicity that should be given when the stabilisation powers have been exercised. One challenge that arises from the Bill is that it will give the authorities some quite significant powers, but there is a lack of transparency about how they will be used. The code of practice gives some guidance about their use, but in reality, the proof of the pudding will be in the eating. Only when we have seen the powers exercised will we know the constraints within which the authorities are working or the relevant thought processes. People will learn from those precedents how the powers will be used in future.
New clause 10 has various elements. The FSA needs to show how it believes that the threshold conditions have been breached, which will then trigger the stabilisation powers, and it will then be for the Treasury and the Bank of England to explain why they used those particular powers in the way that they did. We debated publication in Committee. I am mindful of the risk that confidential information is relevant, which might in itself pose a threat to financial stability. It is important that information released initially should not be prejudicial to financial stability, but it can be published at a later stage. It is important that the audit trail is made available. The process of publication is dealt with in the code of
practice, but the code is non-binding and does not have legal status. It is an important issue, so ensuring that there is proper disclosure of how and why the powers have been used should be built directly into the Bill.
Amendment No. 74 relates to one of the issues on which we have engaged in a certain amount of debate: how the interests of creditors will be taken into account. The Bill contains some safeguards. The Minister said earlier that no creditor would be worse off, although compensation would depend on the way in which the powers had been exercised. Despite that, however, there are still concerns about the impact of the powers on the rights of creditors, and about how the Government will look at those rights when considering which powers to exercise. It would be helpful if the code of practice included a requirement for the issue to be properly discussed. In Committee we tried to amend the objectives to take account of the rights of creditors, but I think that there is a different way of trying to ensure that that happens.
Amendment No. 9 and the amendments that follow it relate to the exercise of the threshold conditions. In Committee, we debated the threshold conditions set out in FSMA. They are fairly broad, and not very tightly focused. In amendment No. 8, I suggest that we focus particularly on the part of FSMA that relates to adequate resources, because that is the issue that seems to have aroused the most concern in the context of Bradford & Bingley and the Icelandic banks. We need to know exactly what the FSA is looking at. Amendment No. 9 is complementary to amendment No. 8: it asks the FSA to publish guidance on what it would consider to be a breach of threshold conditions.
I am aware that we are not discussing a straightforward quantitative exercise. There will not be red lights for various ratios; there will be a combination of qualitative and quantitative assessment. However, I feel that we need some guidance from the FSA, and that it should be contained in the code of practice, which is the text from which people will work when examining the way in which the powers in the Bill will be used and what the constraints are. I am keen to ensure that the guidance covers the exercise of those threshold powers.
In Committee, we debated the process whereby the FSA would consider whether the Treasury conditions had been breached, following which the Treasury and the Bank of England would have to consider how to use their stabilisation powers under clauses 8 and 9. There appears to be a slight disconnect in the Bill: there is no guarantee that identification of a breach of threshold conditions by the FSA would lead to the exercising of the stabilisation powers of either the Treasury or the Bank. It is plain to me that the process is ongoing and not linear. Amendment No. 12 makes it clear that before exercising its trigger powers, the FSA must have confirmed, in consultation with the Bank and the Treasury, that action will be taken to rescue a failing bank.
Ian Pearson: In new clause 8, the hon. Member for Fareham (Mr. Hoban) seeks to establish a statutory basis for the order in which the authorities must consider the stabilisation options of the special resolution regime. The Government consider it appropriate for a range of options to be available for the resolution of the problems of failing banks. Banks may fail for a number of reasons in many different circumstances, and the optimal solution may be different in each case.
Of course, resolution by way of the transfer of a failing bank to a private sector purchaser will generally be the authorities’ favoured option, but I have emphasised during our debates that the choice of stabilisation option will be determined by an assessment of the special resolution objectives. We do not agree with the principle of ordering the stabilisation options. Forcing the order to be followed under primary legislation could delay or harm the chances of a successful resolution, and could constrain the flexibility with which the SRR tools can be applied in accordance with the individual demands of particular circumstances.
The Government have already made it clear that temporary public ownership is an option of last resort. That is demonstrated by the test for intervention in clause 9, which we discussed extensively in Committee, so it is unnecessary to describe this further in the Bill. I also remind the hon. Member for Fareham that the draft code of practice makes provision on how the authorities will select which tool to use, so I hope that this provides a clear indication of how the authorities will consider the relative merits of each stabilisation option.
On new clause 9, I do not agree that the Financial Services Compensation Scheme should have control over the onwards management of a bank once the stabilisation powers have been exercised. First, once the bank or banking business has been transferred, it will be controlled by another party. Secondly, it would be inconsistent for the FSCS to decide how depositors should be protected in such circumstances, as that would impact on how the bank or banking business should be controlled. The FSCS has an operational role in paying out compensation, but it is not a strategic decision maker in the context of the SRR. I also do not agree with the prioritisation of the objective to protect depositors—objective 3—to the exclusion of the other objectives in this proposed new clause. Objective 3 must be considered alongside these objectives, but not to the exclusion of them.
Mr. Hoban: Who will decide how to deal with the depositors in a failed bank? In the Bradford & Bingley case, it was decided that the best solution was to transfer them across to Banco Santander/Abbey. In the Icelandic banks situation, some depositors were transferred across to ING Direct, and others were effectively left with the FSCS. Part of the point of the amendment was to flush out who took responsibility for taking those decisions.
Ian Pearson: We explained at length in Committee how the system works in terms of the responsibilities of the authorities in the tripartite arrangement. The FSA takes lead responsibility in determining whether the threshold conditions have been met, and the Bank of England is the lead authority in determining which of the stabilisation options should be pursued. We believe that this is a clear mechanism, and that it is right that the Bank of England should have the lead responsibility in this area. In such circumstances, the tripartite authorities will work together extremely closely, and the Bank of England will consult the FSA and the Treasury on the exercise of the stabilisation options.
Mr. Hoban: To be absolutely clear, is the Minister saying that the Bank of England takes the lead in deciding whether the account should be transferred to another bank or should be subject to the FSCS compensation arrangements?
Ian Pearson: Certainly that is my understanding of how the arrangement would work in normal circumstances, and if there is any further clarification to be made, I will be happy to give it.
I would like to reassure the hon. Gentleman that the FSCS will be party to decisions over the choice of SRR tools. For example, the code of practice states that the likely speed of payout regarding eligible depositors should be a factor in determining which SRR tool should be used. This will, of course, be based on the view of the FSCS. The section in the draft code of practice on the roles of the authorities also includes text on the FSCS role within the SRR. I hope that that provides reassurance.
New clause 10 would require the Treasury to provide Parliament with a report containing details of the exercise of stabilisation powers under part 1 of the Bill. I do not believe that a general clause requiring a report to Parliament on the exercise of the powers is necessary. In each of the recent resolutions, the Chancellor has made a statement on the exercise of such powers and there has been sufficient debate on that. Of course, Parliament can call a debate on any resolution at any time it wishes. Should the Treasury exercise a stabilisation power in transferring a bank into temporary public ownership, the Bill requires that decision to be made through an order laid before Parliament. Where the Bank of England takes the lead in exercising stabilisation powers through a transfer instrument, rather than a transfer order, the Bill requires it to publicise that.
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Furthermore, following any exercise of the stabilisation options, the draft code of practice, to which the authorities must have regard, states that the authorities must make public statements explaining how they have acted with regard to the special resolution regime objectives and how they have balanced the objectives against each other. There is sufficient information about, and openness in, how the Government are proceeding on these matters.
Amendment No. 74 would allow the code of practice to specify how the interests of creditors will be taken into account in the use of the stabilisation powers, the bank insolvency procedure and the bank administration procedure, but it is inappropriate. Objective 5 is declaratory of our obligations to ensure that any interference with property rights, including those of the failing bank and its creditors, must be both in the public interest and proportionate. The code of practice elaborates on the meaning of this effect of this objective. A number of specific features of the SRR spell out in primary legislation the protection that should be afforded to non-depositor creditors during the use of the stabilisation powers, such as the partial transfer safeguards, as set out in clause 48, and the compensation provisions in clauses 59 and 60—we are all familiar with those. I believe the provisions in the Bill and the sections in the code in respect of how objective 5 will be met already meet the intention behind the amendment.
Amendment No. 9 appears to be intended to require that the code include provision on how the FSA will determine whether the threshold conditions are met, and again I do not agree with the intention behind it. The threshold conditions are regulatory conditions under the Financial Services and Markets Act 2000. Further guidance on what is necessary to comply with the
conditions is set out in the FSA handbook. I think it is right that the FSA handbook, rather than the code, provides further guidance on this matter, as it is ultimately a regulatory decision.
Amendment No. 8 follows on from the Committee’s debate on which of the threshold conditions the FSA will consider in making its determination on whether the general conditions in clause 7 have been met. My understanding of the purpose of the amendment is that it is not only to seek further clarification, but to limit the FSA’s judgment as to whether a bank is failing to being a judgment only on whether it has adequate resources. I accept that this is the most relevant of the threshold conditions that appear in the FSA handbook, but I do not believe that clause 7 should be limited in such a way. However a bank fails or becomes likely to fail, the objectives of protecting confidence in the banking system, protecting financial stability and protecting depositors will remain equally important. For example, the authorities may need to take actions under the SRR following the discovery of a fraud or a sudden crisis of confidence in the suitability of a bank’s management. Although many serious problems that could lead to a bank failure will correlate with difficulties in its having adequate resources, I am not convinced that all the problems will.
The threshold conditions are the tests governing whether the FSA will allow a bank to operate as a deposit taker, and therefore it is right that these conditions are used in the Banking Bill as the gateway measure between regulation intervention and the use of the SRR tools.
Mr. Hoban: The Minister cites fraud as an example of an area where the threshold conditions could be breached and the FSA could intervene. The threshold conditions are designed to determine whether businesses should become regulated. If he is trying to broaden out the basis on which the FSA should intervene beyond the threshold conditions in the legislation, the Government need to be much clearer about that than they are being in the Bill’s drafting. Is he making an argument that the potential triggers could go beyond the conditions that a bank has to satisfy to be regulated?
Ian Pearson: We have always been clear, throughout the various stages of the Bill, about what the threshold conditions are. The problem that I have with the hon. Gentleman’s amendment is that limiting the definition to “adequate resources” is too narrow and does not take other circumstances into account. That is why I shall invite hon. Members to oppose the amendment.
We had a debate in Committee about the FSA handbook. The hon. Member for Fareham rightly pointed out some of the areas of that handbook that, in his view, would need amending. As I said in Committee, the FSA is considering whether to update the handbook, and in particular the section on threshold conditions, to clarify how its judgment of clause 7 will be met. I believe that the handbook is the right place to set out which of the threshold conditions the FSA will pay particular attention to when making its judgment.
Amendment No. 12 would require the FSA to consult the Bank of England or the Treasury to ensure that they can use a stabilisation power under the Bill before it confirms that the general conditions are met and that those powers can therefore be used. In our view, there is
already sufficient provision in the Bill to ensure full consultation between the authorities about each of the key decisions before and during the SRR, including about whether the general conditions under clause 7 are met. Clause 7(5) in particular requires the FSA to consult the Bank of England and the Treasury. It seems unnecessary to impose an additional requirement to consult the Bank and Treasury on that specific issue through the amendment.
Amendments Nos. 10 and 11 propose that the primary objective of a bridge bank should be set out in the Bill. The primary objective that the hon. Gentleman cites is taken from the draft code of practice published by the Treasury earlier this month. I welcome his support for the text, but I am afraid that I cannot agree with the amendment.
The special resolution objectives, as provided for by clause 4, are the primary guide for how the authorities should act when using the tools and powers of the SRR. These special resolution objectives are set out in primary legislation and that is right because they are intended to cover the entirety of part 1 of the Bill. The bridge bank objective, on the other hand, relates to just one particular stabilisation option. I do not think it is appropriate to place a specific bridge bank objective on a similar statutory standing to the special resolution objectives, because that does not provide a clear sense of purpose. For example, it would not be clear whether the bridge bank objectives were intended to be subservient to the special resolution objectives.
Finally, clause 4 provides that the authorities should have regard to the code. In addition, the draft code provides that once actions have been taken under the SRR the authorities should make public statements explaining how they have acted. The statements will make it clear how the special resolution objectives have been balanced against each other and on what basis decisions regarding the use of stabilisation options have been made. I hope that my speech adequately addresses the various amendments tabled by the hon. Gentleman, and as I have given him some assurances on the public record I hope that he will not press them to a Division.
Clause read a Second time, and added to the Bill.
‘(1) In this section “onward transfer” means a transfer (whether or not under a power in this Part) of securities issued by a bank where—
(a) securities issued by the bank were earlier transferred by share transfer order under section 13(2), or
(b) the bank was the transferee under a property transfer instrument under section 12(2).
(2) The continuity authority may—
(a) provide for an obligation under section 64 to apply in respect of the bank after the onward transfer;
(b) extend section 65 so as to permit action to be taken under section 65(2) to enable the bank to operate effectively after the onward transfer.
(3) In this section “continuity authority” has the same meaning as in sections 64 and 65.
(4) Subsection (2) may be relied on to impose obligations on—
(b) anything which is or was a group undertaking (within the meaning of section 1161(5) of the Companies Act 2006) of the bank,
(c) anything which is or was a group undertaking of the residual bank (in a case to which subsection (1)(b) applies), or
(5) Subsection (2) may be used to impose obligations—
(a) in addition to obligations under or by virtue of section 64 or 65, 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 64(3) to (7) and 65(3) and (4) apply to an obligation as applied under subsection (2) with any 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, read the First and Second time, and added to the Bill.
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