Q
142Sir
Peter Viggers: Are there areas in the Bill that you think
require further work? Are you content with the shape of the Bill as it
is emerging?
Stephen
Haddrill: One thing that we do not have is the code
of conduct. We certainly want to see that and look at it before fully
answering that question. We would like to see an objective to maximise
the enterprise value while it remains in the SRR, so that the way that
it is managed during that time does not fritter away the existing value
in the business. We would like the hierarchy of creditor interest to be
respected, so that when compensation is paid the bondholders have the
opportunity to get some
compensation. We
are also concerned to see as much certainty injected into the Bill as
possible. Clause 65, which was mentioned in the previous sitting,
creates the opportunity for the Government to completely rewrite the
SRR regime. That seems to go much too far in terms of creating
uncertainty for the
future.
Q
143Dr.
Pugh: Can I ask a supplementary question? I read your
lucid, clear submission carefully. It contains a suggestion that the
first port of call might be a shareholders’ meeting to see if
they can divvy up a bit more cash or replace the management, or
whatever. Given the speed with which events have been moving in
financial markets recently, do you now acknowledge that that is a
fairly unrealistic, not a real world,
scenario? Stephen
Haddrill: No, I do not acknowledge that. I think that
the institutional shareholders are capable of taking a rapid view,
because after all if you hold 3, 4, 5 or 6 per cent. of a
major institution, which some of the big institutional shareholders do,
you know quite a lot about that institution. You saw three of
those—Legal & General, Prudential and Standard
Life—coming together to put more capital into Bradford &
Bingley, although, in the event, of course, it was insufficient. That
was done alongside some capital injection by the banks and it might
have been sufficient; it was not, but it might have been. I think that
such an opportunity should be
provided.
Q
144Dr.
Pugh: So it is a real-world scenario when you have a
company that is failing but it has a few big institutional investors
who can get together and sort it out quickly, but not
otherwise. Stephen
Haddrill: I am not saying that they will be
successful in all cases, but it is worth trying, if only because, if
their money can go in, that is taxpayers’ money that will not be
called
upon.
Q
145Mr.
David Gauke (South-West Hertfordshire) (Con):
Mr. Haddrill, you have been in a minority in advocating that
the special resolution regime should be administered by the FSA, rather
than the Bank of England. Can you expand on why you think that should
be
so? Stephen
Haddrill: Initially, we took that view because we
felt that, apart from the responsibility of the bank directors
themselves, the responsibility for ensuring that a bank was not going
into failure was the FSA’s. We were concerned that the FSA would
be reluctant to hand over that responsibility to another institution,
and that if a special resolution regime or another mechanism were
needed, the FSA should be free within its own house to take that view,
and then to deal with the consequences of it—the consequences
partly having been driven by its own actions in the run-up to
that—so
that responsibility and power were kept in the same place throughout the
process. The Government have clearly taken a different view, but we do
not feel strongly enough about it to continue to argue the
point.
Q
146Mr.
Gauke: How do you respond to the view that since 1997, the
Bank of England has been more distant from the banking sector as a
whole, and that has been an adverse
development? Stephen
Haddrill: I think that the Bank brings a great deal
to such issues, because it is in the market. It trades on its own
account, which gives it a perspective. In retrospect, I believe that it
is right that the Bank should be brought much more firmly into the
system and given a strong financial stability role within the new
tripartite
proposals. We
have reservations about the financial stability committee being a sort
of subsidiary of the court, because we are not convinced that the court
is at the operational heart of the bank. It should be a very senior
committee at the top of the Bank and able to take effective decisions.
We have not seen the court operating in that
way.
Q
147Mr.
Hoban: May I ask both the IMA and the ABI what are the
consequences, from your members’ perspective, of the abridgement
of property rights that the Bill sets out, and the way in which it can
disturb the normal ranking of creditors in the event of the SRR being
triggered? Guy
Sears: We have called for the introduction of the
SRR, and we have resisted getting rid of partial transfers. They are a
necessary power, as is the power to interfere with property rights if
required. For example, the Icelandic banks and Bradford & Bingley
used partial transfers to move £22.2 billion of retail deposits,
and that seems to have been an effective use. We have some
concern—like the ABI, we are waiting for the secondary
legislation to come out and the banking liaison group to
work—about what they mean in the other areas, and what will
actually happen to the cost of capital. At the moment, there is a range
of concerns, such as worry that security will be taken away and you
will be left only with liabilities, which is almost certainly unlawful
under European directives, but there may be instances—we had
change of bond terms in Bradford & Bingley—when, if it is
not predictable and if we do not understand how the tripartite
authorities will use the powers, people will price conservatively, so
the cost of capital will go up. If you know which way a bond may be
affected by collapse, at least that can be priced in slightly more
efficiently. Again, to echo Stephen’s comments, we await sight
of the code and the secondary legislation, which will be critical to
the
Bill.
Q
148Mr.
Hoban: Would you outline for us what the changes were to
Bradford & Bingley’s bond terms, so that we can understand
the sort of changes that could
happen? Guy
Sears: Yes. It may have been slightly less
controversial, although some of my firms would not agree with me. The
provision in the transfer order was, from memory, that for the
subordinated loans, dated and undated, the bondholders were not allowed
to treat the non-payment of principal as an event of default.
Essentially, from the Treasury’s point of view, it wanted to
ensure that subordinated creditors could not hold the new transferor,
or the old Bradford & Bingley—it still exists in
wind-down—to ransom by saying that the transfer had triggered an
event of default and that, therefore, they were entitled to full
payment now rather than over
time.
Q
149Mr.
Hoban: Did your members who objected to that object in
principle or to the fact that they had lost that
right? Guy
Sears: A lot of it is that it is almost chance at the
moment whether you are a holder at the minute that such things occur.
There is no predictability. Over time, we will start to learn how
Government will use these measures, and you will therefore know, if you
have a subordinated bond, that the terms can be changed. If we are to
have those powers, it would be useful to see in the code when that will
happen and what might be the circumstances. In other words, perhaps it
would say, “We will only ever change these provisions in so far
as it is necessary to ensure a transfer across, and the provisions we
would change are the following, and you would be entitled to
compensation,” which the Bill does provide. That would start to
give certainty to the market, but at the moment, I think—and
certainly last week—Bradford and Bingley bonds are trading at
almost
nothing.
Q
150Mr.
Hoban: Almost at nothing?
Guy
Sears: Yes. I think that there is a little bit of
payment for the interest that has accrued.
Q
151Mr.
Hoban: What does that tell us about people’s views
about those bonds being
repaid? Guy
Sears: Well, certainly, in the pricing last week,
when my firms wrote in, they did not expect to be
repaid.
Q
152Mr.
Hoban: Yet bondholders would expect those bonds to be paid
in full.
Guy
Sears: Yes, but so much of this is about confidence.
What we are trying to do is engender confidence in the financial
system, and we therefore need to protect depositors, but that comes at
a cost. The important thing, we would say—certainly for
Stephen’s members, as our major institutional investors in this
country, and my firms as the asset managers—is that of course
depositors should be protected, but that there is a cost. Pension
schemes and the savers of this country are invested in those banks. You
cannot have things without cost, and there will be cost. If bond terms
are changed and if equity raising is more expensive, that will impact
on the pension schemes and other savings vehicles, and that still comes
back to taxpayers. The question, therefore, is this: what do we need to
do sufficiently to get confidence in depositors, not because depositors
are always meritorious, as such, but because we need to secure
financial stability? That is not to be against depositors; it is to say
that with our other hats on, as the taxpayers, savers and pensioners of
this country, they are impacted by the transfer and the loss of value
that occurs from
that.
Q
153Mr.
Hoban: Do you think that the Bill reflects that tension
appropriately?
Guy
Sears: We have done a lot of work, before and during
the summer, and the Government have done a lot of work to listen to the
whole industry about concerns. There are a couple of points to repeat,
one of which Stephen has made. There are fire sale concerns—in
other words, let us just get rid of the deposit book as quickly as
possible to whoever will take it without regard to the value that
remains and the damage of that. Fire sale concerns are addressed by
some of the provisions on maximising value, but, again, this is about
confidence. Do we have confidence in the authorities to do that well
enough? There is a concern at the moment regarding those fire sale
concerns. There
is also a need for various other safeguards to do with knowing
precisely which netting agreements, if any, are going to be affected.
That is why, as you might know, we have proposed what has now been
announced as the banking liaison group. My suggestion was that, not
only would the technicians in the industry work on the secondary
legislation, but that we would need to keep it up to date, because it
would be very easy to pass the Bill and the secondary legislation and
think that we had got it fixed. I assure you of one thing: the markets
will exploit any fissure and they will innovate. We therefore need to
keep things under review. That is our hope from the banking liaison
group.
Q
154Mr.
Hoban: Mr. Haddrill, you have described the
authorities’ consultation process as paying
“only perfunctory
and box-ticking reference to the need to avoid interfering with
property rights in contravention of the Human Rights Act
1998.” Is
the Bill any
better? Stephen
Haddrill: I do not think that the Bill does enough on
protecting property rights, for some of the reasons that I
mentioned earlier. The reference to the Human Rights Act is all very
well, but gaining the confidence of the institutional shareholders
requires rather more specific protection of what they can reasonably
ask for. Some of the things that we have just mentioned are relevant,
in terms of maintaining value where possible, not transferring assets
through a partial transfer and eradicating the rights and values of
bondholders. All those things need to be sorted out, but we do not yet
know exactly how that will be
done.
Q
155Sir
Peter Viggers: A comment was made about the financial
stability committee. I heard some implied criticisms, or at least a
lack of total enthusiasm. What more would you wish to see of the
committee that would enable you to feel much more enthusiastic and
confident about
it? Stephen
Haddrill: It is an extremely important part of the
architecture, and we are glad that it is being established, but it
needs to be as important a body within the Bank as the Monetary Policy
Committee. However, it does not appear to us that it is being
established in that way. It looks to have been established as a
sub-committee of the court, and I do not really understand why that
should be
case.
Q
156Sir
Peter Viggers: And it is, as it were, influential, rather
than a decision
maker? Stephen
Haddrill: Yes. I am a bit reluctant to say exactly
how it should be reformed, and it is something that Parliament needs to
debate—how do we lift the
level of the committee so that it has real, solid
influence and the capacity to influence not just the Bank, but the
Treasury?
Q
157Sir
Peter Viggers: Did you read the recommendations of the
Treasury Committee, which were similar but different? Do you have any
view on
that? Stephen
Haddrill: I did at the time, but I am afraid that I
cannot comment on that
now.
Q
158Sir
Peter Viggers: Mr. Sears, do you have any
thoughts on the
FSC? Guy
Sears: No not particularly, Sir
Peter. We place more emphasis on the fact that the Bank’s role,
as proposed under the SRR, and ability to exercise the powers, would
mean that it would have to resource up and have the people and skills
there to fulfil that. Whatever role it did have, therefore, the FSC
would have much more weight than you might expect even
now.
Q
159Mr.
Bone: Mr. Sears, I want to return to your
remarks about Bradford & Bingley towards which the Government took
an approach different from that taken towards the other banks.
Basically, the good bits were got rid of and sent to Santander, and the
bondholders were left with a huge loss. Under normal circumstances,
would the bondholders have ranked above or level with the deposit
takers? Guy
Sears: I think that there is a mix, but that some
would have come after the creditors, who of course were the depositors
and who rank with other creditors. In terms of the good and bad bits,
it is a bit more that if you move a deposit book, as they did, of
£14 billion, or £17 billion with the top-up, and move
with it the same value of assets—in other words, if it is one
for one—how the rump ends up depends on whether it was solvent
on an asset and liability basis. If, of course, it was not solvent on
that basis, you will necessarily worsen the position, because those
people have got pound for pound. But that is the world that we are in
at the moment. We need to ensure and secure financial stability. Some
say, “Should depositors have precedence?” My view is that
the Government have sought to preserve creditor rights, through
compensation for those who are worse off by reason of the
transfer—there are safeguards in the Bill for that—but
they have in practice ensured depositor precedence. I think that that
is quite neat, although it is expensive and tricky to work out the
impacts on the Bank. We still have much work to do on
that—Stephen mentioned the secondary legislation. However, it is
a way of securing precedence, at a time of crisis, while ensuring that
they rank equally at the moment of a going
concern.
| 
