Banking Bill

---

The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, † Mr. Jim Hood, Mr. Eric Illsley

† Barlow, Ms Celia (Hove) (Lab)

† Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)

† Bone, Mr. Peter (Wellingborough) (Con)

Breed, Mr. Colin (South-East Cornwall) (LD)

Eagle, Angela (Exchequer Secretary to the Treasury)

Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)

† Gauke, Mr. David (South-West Hertfordshire) (Con)

† Hoban, Mr. Mark (Fareham) (Con)

Hosie, Stewart (Dundee, East) (SNP)

† Keeble, Ms Sally (Northampton, North) (Lab)

† Newmark, Mr. Brooks (Braintree) (Con)

Pearson, Ian (Economic Secretary to the Treasury)

† Pugh, Dr. John (Southport) (LD)

† Robertson, John (Glasgow, North-West) (Lab)

Smith, Geraldine (Morecambe and Lunesdale) (Lab)

† Todd, Mr. Mark (South Derbyshire) (Lab)

† Viggers, Sir Peter (Gosport) (Con)

Wilson, Phil (Sedgefield) (Lab)

Alan Sandall, Mick Hillyard, Committee Clerks

† attended the Committee

Witnesses

Angela Knight, Chief Executive, British Bankers Association

Adrian Coles, Director General, Building Societies Association

Jonathan Taylor, Director General, London Investment Banking Association

Stephen Haddrill, Director General, Association of British Insurers

Guy Sears, Director, Wholesale, Investment Management Association

Teresa Perchard, Director of Policy, Citizens Advice

Doug Taylor, Personal Finance Campaign Manager, Which?

Column number: 37

Public Bill Committee

Tuesday 21 October 2008

(Afternoon)

[Mr. Jim Hood in the Chair]

Banking Bill

Written evidence to be reported to the House

BAN 01 Investment Management Association

BAN 02 Bank of England

4.40 pm

The Chairman: Good afternoon. Welcome to the Committee. I am sure, Angela, that your two colleagues will not mind me paying you a particular welcome. It does not seem as though you have been away, but it is a fair time. Welcome. We will open our session with a question from Mark Hoban.

Q 107107Mr. Mark Hoban (Fareham) (Con): This question is for both Mrs. Knight and Mr. Taylor. Quite a lot of concerns have been expressed about the proposed changes to creditors’ rights, particularly in the context of the partial transfer of banks. Have your concerns been satisfactorily addressed in the Bill?

Angela Knight: No. I am sorry, but I do not think that they have. There has been some movement towards recognising some of the issues, but in clauses 42 and 43 we get close to the nub of the problem. Consequent upon those clauses, all the legal netting agreements that banks have are not necessarily going to be honoured. That is the important thing. A range of netting agreements is referred to, but there are more out there. Unless there is a proper agreement that legally binding netting contracts can stand, the concerns remain that effectively contracts will be qualified. You will not then be able to net off. There will not be the certainty of it. In normal business times that means that you will not be able to net off for the purposes of capital. While the degree to which that affects banks will depend upon what business they are doing, about 70 to 80 per cent. of the relevant business is affected. It is a big effect. Even if we get it right in clauses 42 and 43, clause 65 as it stands makes it possible to change everything retrospectively anyway. So those two clauses and clause 65 need to be addressed; otherwise a permanent prejudice will be left.

Jonathan Taylor: I very much agree with Angela’s general remarks on that. This is a point that has been raised a lot in our various representations. The Government are clearly trying to move in our direction because they recognise that the issue is a real one. The problem is that, as Angela says, unless legal firms are able to provide a so-called clean, unqualified legal opinion on these detailed netting arrangements, whenever the netting arrangement arises, it will cause a problem for the firms in relation to their regulators. Under the capital requirements directive, the firms will need to show their regulators a clean legal opinion to enable them to net the provisions

Column number: 38

for their capital purposes. There is a real problem there. That is why it is vital that the problem is addressed properly in the secondary legislation, which we have not yet seen.

Q 108Mr. Hoban: This morning, the Minister said that the draft code of practice would be produced next Thursday, and that the principles for the secondary legislation would be ready in time for the debate on clauses 42 and 43. What principles would you like to see in that secondary legislation to address the concerns of your members?

Angela Knight: Our view is that if you have a netting contract that is legal—that would stand a legal test—that needs to be recognised and excluded so that, in effect, that remains unchanged and creditor rights are preserved. I am very glad to hear that we will be able to see the secondary legislation and the code fairly soon, because it is essential that one sees both secondary and primary legislation together. This is a holistic issue that needs to be looked at. Certainly, all the lawyers whom we have consulted, who have no doubt been in touch with various members of this Committee, have raised both the holistic point and the essential need to ensure that we do not inadvertently interfere with creditors’ rights and end up with a situation in which there is no clean legal opinion, because the consequences thereof would be pretty big. Regarding clause 65, we need to get netting and netting arrangements properly recognised in the clause as being disapplied from the Henry VIII provisions that it contains.

Q 109Mr. Hoban: May I go further? On the cost of capital, you have both referred to the impact that it could have through the capital requirements directive. I am intrigued to understand how you think that will work its way through, and what the impact might be. I have spoken to one international bank, which said that if the right safeguards were not in place, it would lead to a situation in which you were counting assets and liabilities on a gross basis, not a net basis. His argument was that that would make London a pretty unattractive place to do business. Do you share that view?

Jonathan Taylor: Yes, that is exactly right. The way in which it would work is that unless you can net off your position for credit risk purposes, your regulator will make you account, on a gross basis, for your capital, against the credit risk, which you take on by being the counterparty of a firm that is based here. That would greatly increase your capital requirement. The result, I am sure, would be that there would be a great deal less business.

Angela Knight: For the purposes of comparison, although there are intervention regimes in a lot of countries, some of which are also being reviewed, there is no intervention regime that we have yet found that would result in the circumstances that could apply if this legislation went through as it stands. That is to say, other people’s intervention regimes do not interfere with creditors’ rights, and netting agreements are preserved so that there is not the problem of not being able to net off your capital. Certainly, we have been told by a number of our members that if they could not net off, they would no longer be able to do that business here in the UK, so we would see a commensurate loss of a significant amount of business out of London.

Column number: 39

Q 110Sir Peter Viggers (Gosport) (Con): Clause 157 imposes an obligation on the Financial Services Compensation Scheme to contribute to the costs of resolution under the special resolution regime. Would you like to comment on that?

Angela Knight: We do not think that this clause should be there at all, I am afraid, the reason being that the special resolution regime should be paid for by the bank that has got into difficulty. When companies up and down the country get into difficulty, the costs of resolving that problem are paid by that company. We are saying that the compensation scheme is there for depositors—or individuals, because it is broader than just deposit protection—and that to broaden it in this way represents a potentially disproportionate burden. Secondly, the responsibilities for resolution should fall on the failing institutions anyway. Thirdly, the clause could be read as a compensation scheme picking up some of the creditor costs of the failing institutions other than those of just the depositors. It is in all ways wrong: to us, it does not seem to work in principle—the principle should be that the resolution is paid for by the entity that got into difficulty—or in the content.

Adrian Coles: May I add to that on behalf of the building societies? Small and medium-sized building societies are particularly resentful of this, because the chances of one of them entering the special resolution regime are extremely low, and yet clearly the Bill states that they would have to pay those costs through the FSCS. On this matter, therefore, there is particular resentment among those institutions.

Q 111Sir Peter Viggers: As drafted, how much ability would you and your respective bodies have to influence the quantum of the costing?

Angela Knight: If a clause of this type must remain, it must be absolutely clear that the compensation scheme kicks in on the SRR only when all other avenues for paying for the resolution have been exhausted. Then, if it must kick in, we must define those costs quite narrowly, because otherwise, in effect, we would be leaving an open door for industry to pay for almost everything regarding a failure, whereas the first responsibility for preventing the failure of an institution is with its management. One must work one’s way down a series of questions: “Who does what?”, “Whose are the responsibilities?”, “Who pays what?” and so on. If there must be a last resort, there must be a last resort, although we would argue that that is not right. But if it is necessary, it must happen only if the assets of that institution cannot pay for the costs of the SRR. If an ordinary company is wound up, the liquidator gets paid. It seems to us, therefore, that we have rather moved away from some of the accepted common principles in this area.

Q 112Dr. John Pugh (Southport) (LD): Deposit protection varies slightly; in the past few months the goalposts have been moving all the time. In your view, what is the appropriate level of compensation for deposit protection?

Adrian Coles: We supported the increase in deposit protection from £35,000 to £50,000, which covers 97 per cent. of building society depositors. Building societies believe that that is an appropriate level. To go to an

Column number: 40

unlimited level of protection would be extremely expensive and open up significant contingent liabilities on behalf of those institutions contributing to the deposit protection scheme. To insure the deposits of 97 per cent. of depositors seems appropriate to us.

Q 113Dr. Pugh: You have answered on behalf of the building societies. The point has been made that deposit protection at the moment covers only your net deposit—not the gross deposit. In other words, the gross figure is different precisely because you have a huge loan with a building society as well, so you do not get the level of deposit protection that you might think that you will get. Are you happy with that principle?

Adrian Coles: There is a difference between banks and building societies. In the banking sector—my colleagues will correct me if I am wrong—there is an automatic netting off of the position. As far as we can tell—this is a complex legal area—in building societies it depends on the terms and conditions of the individual savings and mortgage accounts of the individual building society. So the position is not straightforward in the case of building societies.

Q 114Dr. Pugh: Would you welcome uniformity?

Adrian Coles: It would probably be helpful for depositors to know precisely what the position is without having to take legal advice, but I am not certain that it would be helpful to impose uniformity through this legislation.

Q 115Dr. Pugh: To what extent can banks and building societies quickly identify the extent of deposit insurances by individuals given the different brands, multiple accounts and so on? How long would they need to complete an assessment?

Adrian Coles: That would vary hugely between different sizes and types of institutions. For a simple one-brand building society, with perhaps 10,000, 20,000 or 50,000 accounts, that could be a fairly straightforward exercise. My colleagues may be able to comment on how simple it might be for a much larger institution with many millions of accounts.

---

Prepared 22 October 2008