The
Chairman: Before the first question, I remind Members that
the questions should be limited to matters in the scope of the Bill. To
assist me and the Committee, both questions and answers should be brief
and succinct—then we shall get more questions and
answers.
Q
1Mr.
Hoban: How did the Minister seek to reassure stakeholders
in the Bill? How have issues around creditor rights and so on been
dealt with, given the pressure to ensure that the Bill is passed
quickly but also that legitimate concerns are being answered? How has
the Minister sought to reassure interest
groups? Ian
Pearson: I want to make two points in response, the
first on consultation generally and the second specifically on creditor
rights. As I indicated, there has been extensive public consultation:
three rounds of formal public consultation, a number of stakeholder
workshops and meetings in February, July and August 2008 and the
publication of draft clauses for the most complex part of the
Bill—the special resolution regime. During those consultations,
we had more than 200 responses from a mixture of stakeholders,
including banks, building societies, insurers and bodies representing
citizens, consumers, workers, businesses, legal insurance professionals
and credit unions. I believe that the Bill has been consulted on
extensively.
With
particular reference to creditors—the hon. Member for Fareham
talked about them—we have paid very close attention to
stakeholder feedback from the latest round of consultation. For
instance, in response to that feedback we have created in the Bill a
framework for a range of creditor safeguards to protect set-off and
netting arrangements and to protect creditors in the event of a partial
transfer. We will continue to engage extensively with stakeholders over
the coming
months. I
recognise that creditor rights is a very important issue, and that is
one of the reasons why I announced on 9 October the establishment of a
new expert liaison group to help to prepare the secondary legislation
for the special resolution regime. The Committee will be aware that a
number of the key elements of the safeguards will come in under
secondary legislation. The expert liaison group will be formed from
representatives of the banking sector, legal experts and members of the
authorities, and I have written to industry experts inviting them to
participate in the group. As I have said previously, I hope that we can
work effectively together to co-produce the secondary legislation that
will be required to ensure that we get it
right.
Q
2Mr.
Hoban: When will we see the draft code of practice and the
draft
regulations? Ian
Pearson: We hope to publish the draft code of
practice next Thursday, which should be in time for consideration in
this Committee the following week. As I have previously indicated, I
hope that we will be able to provide the detail in terms of the
principles that will guide the secondary legislation, but I do not
think that we will be at the stage with the expert liaison group of
having written that legislation. That would be premature, but we will
intend to make available all the key policy questions and principles
behind the
legislation.
Q
3Mr.
Hoban: How will you ensure that those principles are made
available before the Committee gets to the relevant stage of the Bill?
It is important that there is proper parliamentary scrutiny in this
place as well as in the other place, and the earlier we have sight of
those principles the better informed the scrutiny
process. Ian
Pearson: I will endeavour to get the
code published in draft and available by next Thursday, and we will do
our best to provide the principles sufficiently in advance of
discussing the clauses to which the secondary legislation will relate.
I want to emphasise that we see the expert liaison group as playing an
important role in helping us to define the secondary legislation, but
that that legislation will come before the House in due course and be
scrutinised in the usual thorough
way.
Q
4Mr.
Hoban: If the Bill had been on the statute book earlier,
how would the Government’s response to the banking crisis of the
past few months have been
different? Ian
Pearson: The Chancellor has made it clear that the
Government and the authorities need to act generally across the system,
as well as having the tools to be able to intervene appropriately in
individual cases in order to preserve the financial stability of the
system. It is
clear that we have been operating under the Act that we passed in
February of this year, but a lot of the actions that have taken place
have been in the spirit of this Banking
Bill. The
Bill provides both general and specific measures to enhance the
resilience of the UK financial system for the future, including powers
through the special resolution regime for the UK authorities to take
decisive action where individual banks are at serious risk of failing.
We have seen how that has happened. The Bill will provide a wide range
of permanent measures to strengthen the UK framework for financial
stability and for depositor protection. That is why it is important to
have the Bill on the statute book by the time the Banking (Special
Provisions) Act 2008
expires.
Q
5Mr.
Hoban: So you believe that the Bill provides a framework
in which the actions that you took over recent months would
fit. Ian
Pearson: Certainly, the actions taken over previous
months would be compatible with the framework that we have. It is a
permanent framework which improves and safeguards creditor
rights.
Q
6Mr.
Hoban: Clause 4 sets out the five objectives. Can the
Minister rank them in order of priority,
please? Ian
Pearson: I do not intend to do that. The five
statutory objectives set out in the legislation explain the purpose of
the regime. The SRR provides five tools as well, which can be used by
the authorities. The objectives provide guidance for the authorities,
Parliament and market participants, on how the special resolution
regime powers will be used. By putting the powers on the face of the
Bill we have ensured that Parliament can hold the authorities to
account if they believe that any action has, or has not, been taken in
accordance with the statutory objectives. You have to see the
objectives as a whole rather than say that one has more importance than
the other. They are all important.
Mr.
Hoban: Why is maximising the amount available for
distribution to creditors not an objective of the Bill in this
regime? Ian
Pearson: The objectives are obviously high level and
concerned with ensuring the stability of the financial system and the
ability to take action. I would not want anything to be said that would
detract from the importance of maximising the amount available to
creditors in the event of default . But there are wider objectives, in
terms of stability of the financial system.
Q
7Sir
Peter Viggers (Gosport) (Con): The Bill introduces a
concept of a bridge bank as a kind of intermediary. What is the
advantage of having such a bridge bank over ordinary
nationalisation? Ian
Pearson: We believe that it is potentially an
important additional tool. The special resolution regime gives a number
of different options. There is the option of transfer through private
sector purchase, the option of the bridge bank, and the option of
temporary public ownership. We think that there are instances where it
might not be possible to transfer assets and property to private sector
purchasing, but it might be possible to make a transfer to a bridge
bank on a temporary basis, which could then be moved into the private
sector at a
subsequent date. We think that it gives flexibility to be able to act in
the best interests of financial stability to deal with a situation
where there is a failing bank or building
society.
Q
8Sir
Peter Viggers: The nearest analogue to the present
situation is Lloyd’s of London in the 1990s, where toxic assets
were reinsured in a kind of spiral, so that nobody quite knew the value
of the assets. What Lloyd’s did was to identify and isolate the
toxic assets. Did you think of using such a model?
Ian
Pearson: As I understand it, in many ways, what is
proposed in this legislation could allow that to happen. It is
certainly possible under this legislation to transfer some assets to a
bridge bank or through private sector purchase and to retain assets
that might be regarded as toxic in a residual company, which would then
be subject to the bank insolvency procedure in the legislation. I do
not know whether you would like to add anything to that,
Emil.
Emil
Levendoğlu: Just to say that in cases where assets
and liabilities had been left behind in the residual company, it would
be the bank administration in part 3 rather than the insolvency
procedure in part 2. The Minister is absolutely right to point out that
the partial transfer possibility allows for a split between good and
bad assets.
Q
9Sir
Peter Viggers: The Bill seeks to reduce the impact on
depositors of a bank entering insolvency. Does that mean that the
interests of other creditors will be
disadvantaged? Ian
Pearson: No, it does not. The Bill does not introduce
depositor preference and the statutory order of priority of creditors
remains unchanged. Any payments to depositors will be made by the
Financial Services Compensation Scheme rather than from the assets of
the failed
bank.
Q
10Mr.
David Gauke (South-West Hertfordshire) (Con): May I ask
about the bank administration procedure under the Bill? Why is it
necessary, and what is wrong with the existing
arrangements? Ian
Pearson: We certainly believe that it is necessary,
and part of this answer goes to the last but one question about a
bridge bank. We see bank administration procedure as being used when
the stabilisation option being used is that of a partial transfer
generally to a bridge bank. After the partial transfer, the residual
bank is likely to be insolvent, and the bank administration procedure
is designed specifically to deal with the insolvent residual bank. It
will allow the insolvent residual bank to continue providing essential
services to the transferee. The administrator will have statutory
objectives to ensure the supply of essential services and facilities to
the private sector purchaser or to the bridge bank, and to rescue the
residual bank as a going concern or to wind up its affairs. It should
be seen as something that will operate at the same time as a partial
transfer either to a bridge bank or until a private sector purchase
takes
place.
Q
11Mr.
Gauke: Would the use of the administration procedure as
you describe it mean that jobs would be lost in the residual bank?
Would the administration procedure mean a running down of the residual
bank?
Ian
Pearson: It is not right to speculate in the
circumstances. In essence, we intend the bank administration procedure
to be used whenever an insolvent residual bank results from partial
transfer. In many ways, the regime adopted will be very similar to the
normal insolvency
regime.
Q
12Mr.
Gauke: So you would not describe administration as a fire
sale of
assets? Ian
Pearson: It is not right to say how the administrator
would want to pursue its duties. The administrator would certainly have
objectives for ensuring the supply of essential services and either
rescue it as an ongoing concern or wind up its affairs. It would
normally want to do that in the best possible way. If it can rescue the
bank, it will want to do that and, if it is to wind up its affairs, it
will want to do that in a responsible and appropriate
manner.
Q
13Mr.
Gauke: If you had had the powers at the time of
Northern Rock, is it conceivable that you would have tried to address
Northern Rock in the way that you have described and use the
administration procedures?
Ian
Pearson: We made the judgments about Northern Rock at
the time and, without getting into party politics, they were not
necessarily supported by all political parties. We believed it right
that Northern Rock should enter into temporary public ownership. We
thought that that decision was in the best interests of all concerned,
and we remain of that view. As you will be aware, Northern Rock has
paid back more than half of the funding provided to it already and we
look to it to continue to do well in the
future.
Q
14Mr.
Gauke: The administration method that you describe sounds
similar to what has been done with Bradford & Bingley. Will you say
whether that is a fair characterisation so we can understand that, in
practice, the Bradford & Bingley model is similar to the
administration procedure set out in the Bill? Why did you adopt that
approach then, but not with Northern
Rock? Ian
Pearson: The Bradford & Bingley approach is
consistent with the approach in the legislation. It is not for me to
speculate about Bradford & Bingley, or to explain it. I am here to
explain the Bill and what it will
do.
Mr.
Gauke: It is just that it is helpful for us to understand
what it will look like in practice. You would not disagree with the
Bradford & Bingley model, with a partial transfer to Abbey of the
deposit
holding? Ian
Pearson: I would certainly say that the approach
adopted in the Bradford & Bingley case is completely consistent
with the legislation.
Q
15Dr.
Pugh: It is almost impossible these days not to panic the
City. How will you square the circle between having arrangements that
are completely transparent, and not causing undue panic as a result of
a firm’s involvement in the special resolution regime? Are you
giving serious thought to how news of the special resolution regime
will be communicated, both internally and
externally?
Ian
Pearson: As I said earlier, we are currently at the
stage where we believe we have got the general principles of the Bill
and the detail of the special resolution regime right, but a lot of the
operation of the special resolution regime will depend on secondary
legislation. We have been clear in the consultation documents to date
about the general principles of the SRR. We have noted
stakeholders’ concerns about it, and that is one of the reasons
why we set up the expert liaison group, so there is a great commitment
there to working in partnership with those who have interests in the
legislation. We want to be as open and transparent as possible, which
is one of the reasons why, during the Committee stage next Thursday, we
will
publish—
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