Banking Bill

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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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Prepared 22 October 2008