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26 Nov 2008 : Column 833

Ms Abbott: My hon. Friend the Minister says that he sees no reason why the conditionality that the Government have imposed on payments and bonuses should not be followed, but the conditionality imposed on lending money has blatantly not been followed. Why does he think that one set of conditions will work when another patently has not?

Ian Pearson: Directors of the recapitalised banks are very much in the public eye and will continue to be so for the foreseeable future. We have been very clear about the conditionality that we want on executive remuneration, and we will continue in that manner. We have powers to monitor the banks, and we have absolutely no reason to believe that they will not continue to take a fair and appropriate line on directors’ pay and executive bonuses. We certainly do not condone any reward for failure, and we expect the relevant bank’s board to support the removal of any directors for a failure to deliver against their agreed strategic objectives.

John McDonnell (Hayes and Harlington) (Lab): There is an element of incredulity about the Minister’s statement. Can we just be clear? The Government lent those banks—those finance houses—£37 billion. In return, we expected them to show some restraint on repossessions, yet Northern Rock is repossessing faster than any other financial institution. We expected them, as a result of the money, to be able to lend between themselves and stimulate the banking economy once again, yet they refuse to lend. What, therefore, gives the Minister any confidence in the idea that they will also restrain their pay? The FSA has significantly failed up until now, and the conditions have failed up until now.

Ian Pearson: I say clearly to my hon. Friend that we are continuing the dialogue with the banks in which we have taken investments through the capitalisation scheme—and the banks as a whole—about making lending available at competitive prices for new mortgages and small businesses. I am certainly aware of the public concern about this issue. The banks are as well, and we will continue to ensure that they fulfil the conditions that they have agreed to as part of the recapitalisation scheme. It is right and proper that we should do so.

Harry Cohen rose—

Ian Pearson: I shall give way, but I shall then make progress and move on to new clause 2.

Harry Cohen: I am grateful to the Minister for giving way. I heard what he said about the banks that are not in the rescue scheme. They include big players, which have given big bonuses to their people—and their people have made some big mistakes, causing crisis. What the Minister said sounded very thin. Basically, he said that we had to monitor the situation and that the issue was in the hands of the FSA, which has a record of being weak. Even the shareholders of banks such as Barclays are being treated badly, given the expensive deal with the Arabs, and those shareholders cannot make many inroads with the bank directors. Can the Minister not at least strengthen the shareholders, or do something else to bring these people to account?

Ian Pearson: Barclays, of course, is not one of the banks to have taken advantage of the recapitalisation scheme. However, as part of their agreements with the
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Government, the banks that have are subject to a series of conditions. We expect those conditions—whether on executive pay, mortgage lending or loans to small businesses—to be followed and implemented.

Sir Patrick Cormack (South Staffordshire) (Con): Will the Minister give way?

Ian Pearson: If the hon. Gentleman allows me, I shall make some progress. I want to move on to new clause 2, which has been tabled by my hon. Friends the Members for Stroud (Mr. Drew) and for West Bromwich, West (Mr. Bailey).

The circumstances in respect of the new clause include cases in which a building society has been or is subject to a transfer of securities or properties under the relevant sections of the Banking (Special Provisions) Act 2008, cases in which it is participating in the bank recapitalisation scheme announced by the Chancellor, and cases in which it is subject to the stabilisation options provided for in part 1 of the Bill.

First and foremost, I want to assure my hon. Friends that the Government value the contribution made by the mutual sector to financial services and that we are genuinely committed to preserving mutuality. We need to have other debates, so I hope that I can briefly convince my hon. Friends that the new clause is not needed. First, I stress that a bank’s conversion to mutual status, including the remutualisation of a former building society, is already possible under existing legislation. It could be achieved by the transfer of the property and liabilities of the bank to a building society—an existing one, or one newly created for the purpose. What happened with Bristol and West is an example of that procedure. It was a former building society that was sold to Britannia and thereby remutualised. Further regulations enabling the process in the particular circumstances to which the new clause refers are simply not necessary. The powers are already there. I hope that I have given my hon. Friends the reassurances that they seek.

Harry Cohen: I am not going to press my new clause to a Division. [Hon. Members: “Go on!”] I hear what the House is saying, but I must have regard to the time. I want to say to the Minister only that we are monitoring the situation; I certainly am. We, and the public, really expect the Government to be stronger in these matters and to say that a bonus culture has ended for these City slickers. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 3

Safeguards for partial property transfers

‘(1) The Treasury must prepare and publish an annual assessment of the efficacy of the safeguards relating to partial property transfers under Part 1 of this Act.

(2) In preparing each assessment the Treasury must consult the Banking Liaison Panel constituted under section 10.

(3) If an assessment indicates that the safeguards are inadequate the Treasury must make proposals for strengthening them.

(4) Each assessment published under this section must be laid before Parliament.

(5) A Minister of the Crown must make a motion in the House of Commons related to the assessment not more than three months after the assessment was laid before Parliament.’.— [Mr. Gauke.]

Brought up, and read the First time.

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Mr. David Gauke (South-West Hertfordshire) (Con): I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker: With this it will be convenient to discuss the following: new clause 4— Exemption of bank directors from liability

‘(1) The Treasury may by order exempt directors of a bank for which the stabilisation powers have been exercised, or of any group undertaking of any such bank, from liability in connection with acts and omissions in relation to the bank or undertaking.

(2) Any such order—

(a) shall be made by statutory instrument, and

(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.’.

New clause 5— Protection of bank customers

‘(1) The Treasury may by order amend Part 16 of the Financial Services and Markets Act 2000 for the purposes of protecting the position of customers of a bank for which the stabilisation powers have been exercised.

(2) Any such order—

(a) shall be made by statutory instrument, and

(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.’.

Amendment No. 3, page 36, line 5, leave out Clause 72.

Government amendment No. 38

Amendment No. 1, in clause 72, page 36, line 42, at end insert—

‘(9) No order under this section may amend this Act.’.

Amendment No. 2, page 36, line 42, at end insert—

‘(9) This section shall cease to have effect at the end of the period of two years beginning with the day on which this Act is passed.’.

Mr. Gauke: I draw the attention of the House to my entry in the Register of Members’ Interests.

7 pm

The amendments and new clauses relate to issues affecting the safeguard on partial property transfer, which applies in circumstances where some assets are transferred out of a bank with a view to a private sector purchase. There is no need for me to rehearse all the arguments that we discussed at some length in Committee; in summary, counterparties of an original bank may find themselves prejudiced when there is a transfer of some of the property of that bank, because they find that they are the counterparty of two different institutions, or possibly more, and are unable to net or set off contracts because those contracts are now with those different parties.

Even the potential of that situation creates significant problems because it may mean that legal opinions cannot be given as to the creditworthiness or security of a particular transaction. That could result in increased costs of capital for UK banks, higher regulatory capital requirements and ultimately an adverse effect for the competitiveness of UK banks. The matter has provoked considerable interest from outside bodies. To be fair, the Government recognise the issue, and have made some changes in draft legislation, particularly concerning the carve-out from potential partial transfer, and they have created a banking liaison panel, which we welcome.

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Safeguards will be placed in secondary legislation, but concerns remain. We are not in a position to assess the strength of the safeguards fully because that secondary legislation has not reached its final form. It would be helpful to hear some reassurance from the Economic Secretary that that secondary legislation will be in effect at the time when the Bill comes into effect. It is essential that all the safeguards are contained in secondary legislation, rather than in the code of practice. Legal opinions can be given only on secondary legislation; a code of practice will not be sufficient for lawyers in such circumstances.

This is an important and ongoing matter, and the Government’s position is moving constantly, which is perhaps understandable, but this means that the House is not in a position to make a full assessment of the efficacy of the safeguards, and consequently, in new clause 3, we propose an annual assessment and an opportunity for Parliament to debate the matter further so that the Treasury can provide reassurance that the safeguards are adequate.

Briefly, I shall outline some of the other amendments and new clauses. We are concerned about what is now clause 72—it was clause 65 in Committee—because it gives the Government the ability to change the law by order. There are constitutional issues involved; it is a Henry VIII clause, which amendment No. 3 would delete altogether. In Committee, the Economic Secretary outlined particular areas where he considered it necessary to have powers to amend the law, two of which concerned related directorships and shadow directorships. We attempt to address those points in new clause 4, and we seek to address the financial ombudsman scheme in new clause 5. If the Economic Secretary were inclined to accept those clauses, we would argue that it would be unnecessary to have clause 72, unless he has some other examples.

One point on which there has been genuine progress is our concern that clause 65, as it then was, could be used to amend protections in the Bill. I tabled an amendment to change that, and now the Government have done so as well—Government amendment No. 38. We welcome it, and we accept its wording.

Amendment No. 2 would make clause 72 a sunset clause. We are not convinced that clause 72 is necessary. Unless the Government have strong reasons for it to remain, it would be helpful if it were removed, which should deal with any transitional provisions.

I am keeping my remarks as brief as possible in order to allow the Minister to respond fully. In conclusion, we welcome the progress that we have seen, but we consider it vital for UK banks that we have adequate safeguards in partial property transfers and that we do not allow clause 72 to undermine those safeguards in any respect. We await the Minister’s comments with interest.

Ian Pearson: The hon. Member for South-West Hertfordshire (Mr. Gauke) seeks in new clause 3 to impose a requirement on the Treasury to publish an annual assessment of the efficacy of the partial transfer safeguards.

As the hon. Gentleman will be aware, we need to get the safeguards right, and I am absolutely committed to that. That is why I decided to establish an expert liaison group. Indeed, the stakeholder feedback that the Government have already received led us to introduce an amendment to the Bill to formalise the status of the
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group in primary legislation, as set out in clause 10. That move has been widely supported by the industry and, to be fair, by Opposition Members. When we are talking about such legislation at the level of technical detail that we often are, it is right to work with the experts and in effect co-produce the secondary legislation, in addition to keeping such matters under review.

In putting the group on a statutory footing, it is implicit that the Government will have regard to its recommendations. Clause 10 therefore provides a mechanism for us to receive regular and expert feedback, to which we will pay due consideration. The Government consider it desirable to retain the flexibility to adjust and refine the safeguards in the light of experience. That is particularly important in the context of the set-off and netting safeguard, for instance, because those arrangements have proven to be a highly innovative field. Changes to the safeguard may be necessary to ensure not only that it continues to protect what it is intended to protect, but that innovations do not undermine the policy aims that the special resolution regime is intended to serve.

I agree with the spirit of the new clause that the hon. Gentleman has tabled, in the sense that reviewing safeguards is important. However, that is best done through the mechanisms that I have outlined and which we are already putting in place, in particular the expert liaison group, rather than the approach that he suggests in new clause 3. If he reflects on that, I hope that he will decide not to press the new clause to a vote.

As right hon. and hon. Members are aware, banks comprise complex, multi-jurisdictional corporate entities. Set against that background, many of the provisions of the special resolution regime interact with and sit alongside financial services, banking, company and insolvency law. It is therefore clear that the legislative environment is both complex and varied—I think that the hon. Member for South-West Hertfordshire can see where I am going with this.

There will inevitably be some degree of conflict between the public interest objectives of resolving a bank in severe financial difficulties and the provisions of legislation that are designed to work in relation to a normally functioning business. When hon. Members reflect on that for a moment, I hope that they will see that it is surely right. It is one thing to have legislation that applies to normally functioning businesses, but with a bank or building society failure, quite different and difficult circumstances arise. For that reason, we believe it is crucial to take a power to amend the provisions of primary and secondary legislation and common law, but to do so in a narrow way, which I will go on to explain in more detail.

In the absence of such a power as provided for in clause 72, or clause 65 as it was in Committee, there is a real and significant risk that the authorities will not be able fully to effect a transfer, which could impact on the effectiveness of the powers in the Bill. That could lead to serious and adverse implications for the public interest through risks to financial stability, to the protection of depositors and to public funds. It could also impact on the likelihood of achieving a private sector solution.

The purpose of the power is to provide the Treasury with the means to modify legislation to enable the powers of the special resolution regime to be used more effectively. This is set out in clause 72(1), which we
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debated at some length in Committee. I want to make it very clear that this is not a general power to amend legislation; it is targeted and limited. In particular, the power may be used only to facilitate the use of one of the stabilisation options, so the scope is severely constrained to amending legislation that affects the resolution of banks that are under the special resolution regime.

I emphasised in Committee that the power would not be used to modify the Bill—a concern expressed by a number of hon. Members who contributed to the debate at the time. I highlighted the fact that the Treasury would not use clause 72 to amend the legislative safeguards either in the Bill or in secondary legislation made under it. It would be inappropriate to use the clause to amend the safeguards that we are putting in place. The Government have no intention to use the power in that way, which I want to make absolutely clear.

I committed to discussing issues relating to legal certainty and the expert liaison group. I can inform the House that I will write to the group and undertake specific consultation on this very matter. In light of the ongoing consultation with stakeholders, the Government consider it appropriate to make it clear that the powers in clause 72 cannot be used to amend the Bill’s provisions; we want to reflect the concerns expressed in Committee. This extends to primary legislation and any secondary legislation made under it—so, for example, in relation to the netting safeguard, which is one of the key safeguards of particular interest to stakeholders, both the enabling power and the statutory instrument made may not be amended by the power. I hope that that addresses stakeholders’ main concern about the power conferred in clause 72. We have directly responded to the concern and remain committed to working with the industry on issues relating to legal certainty. I believe that when it comes to transactions, it is vital for the industry to be able to have clean legal opinions. We will continue to work with the industry, but we believe that the provisions are appropriate, so we can give the industry the assurances it requires.

In amendment No. 2, the hon. Member for South-West Hertfordshire proposes that a sunset provision be added to clause 72. This would provide the Treasury with the power to change the law for two years, but it would then lapse. I do not believe that the amendment would be in the public interest, so let me explain why. We cannot be sure that the hindrances and difficulties faced by the authorities in resolving any bank failures in the next two years will be the same as in a future period. It is possible, for example, that the nature of the banks being resolved will be different in subsequent years, with the result that different pieces of legislation need to be modified so that a successful resolution can be effected. In our view, therefore, a sunset provision is not appropriate because of the need to ensure that the legislation is future-proof as banks and financial markets develop over time.

7.15 pm

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