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Session 2007 - 08 Publications on the internet General Committee Debates Banking |
Banking Bill |
The Committee consisted of the following Members:Alan
Sandall, Mick Hillyard, Committee
Clerks † attended the
Committee Public Bill CommitteeThursday 30 October 2008(Morning)[Mr. Jim Hood in the Chair]Banking BillClause 214Consolidated
fund 9
am
The
Exchequer Secretary to the Treasury (Angela Eagle): I beg
to move amendment No. 28, in clause 214, page 102, line 9, leave out
‘UK authorised institution’ and insert ‘bank or
other financial
institution’.
The
Chairman: With this it will be convenient to discuss
Government amendments Nos. 29 to 31 and Government new clause
3—“Financial
institution”.
Angela
Eagle: The purpose of the clause is to put the use of
public money in the proposed bank resolution or insolvency
arrangements, or in the provision of financial assistance to banks, on
a more regular footing. The Treasury has the power, as a matter of
common law, to make loans to any person or to give them financial
assistance in any form, but it has the money to make those loans or to
make good on any commitment it has given only if Parliament, rightly,
provides the money in estimates. The annual Appropriation Acts can give
full statutory cover for expenditure on estimates, but in line with the
Public Accounts Committee concordat of 1932, specific enabling
legislation is normally required to enable the finance for a new
service to be provided from public funds. That is what the clause
provides. Clause
215, which fits with this clause, enables the Treasury to draw money
from the national loans fund to make loans to financial institutions
where it needs to do so urgently to protect financial stability.
Financial crises can arise at any time and it might not be possible to
get an estimate approved quickly enough for the Treasury to make a loan
from voted money, most obviously during a recess when Parliament is not
sitting. As
originally drafted, clauses 214 and 215 provided for loans or financial
assistance to be given only to UK authorised institutions that have
permission to accept deposits, in other words UK deposit takers. It was
realised in the light of recent events, including those surrounding the
Icelandic banks, that such a limitation could make it more difficult to
protect the interests of UK consumers or safeguard the interests of UK
taxpayers where there is a failure of an overseas institution. The
amendments address that limitation which, as we all know, has been
shown to be actual rather than potential in the last few
days. Mr.
Brooks Newmark (Braintree) (Con): I am curious about what
the Minister is saying about the clause. Has there been any thinking as
to the spread over the cost of
Government capital when they make that sort of financial assistance? Is
there a fix in mind? Have there been discussions about it? Will it be
at the Government’s cost of capital—we are curious to
know what that is—or will it be at a very large spread, as we
have seen recently? The cost of capital loaning to the banks is
something like 10 or 12 per cent., which seems extraordinarily high,
given the Government’s cost of
capital.
Angela
Eagle: It would be an individual policy decision in a
certain circumstance. Each situation might be different. The proposal
is a much simpler thing. It gives cover for lending the money and puts
it on a proper footing. In other words, because of the 1932 PAC
concordat, where it looks as though money might need to be provided on
more than one occasion, specific legislative approval is needed for
that kind of process, rather than just using contingency funds. That is
all the clause does. It does not talk about what the cost of capital
would be. It would be wrong to think about putting any cost of capital
in primary legislation, for obvious reasons.
The clause
simply regularises, in accordance with the 1932 PAC concordat, as
Parliament expects that if such expenditure could occur in the future,
there should be specific legislative mention of it. This kind of clause
appears in all sorts of bits of legislation. It is not unusual. It
merely enables the potential use of money in that way to be regularised
by statute. It does not go into any kind of detail about circumstances
or what the cost of capital would be if such an issue were to
occur. Mr.
Mark Hoban (Fareham) (Con): May I ask the Minister about
subsection (3)? She referred to the limitations that have been
identified through events at Icelandic banks. Would the
Government’s action be outside the scope of the existing law if
subsection (3) were not
included?
Angela
Eagle: My understanding is that that is not the case, and
that there is existing cover using estimates, but contemplating such
expenditure to rescue banks in trouble has not previously occurred in
this way. So far, it has been covered by using the contingency funds
voted by parliamentary
estimates. The
combination of clauses 214 and 215 shifts the way in which we propose
to cover the situation in future. First, clause 214 regularises the
situation in terms of the PAC concordat by providing a particular
statutory undertaking rather than relying on contingency funding.
Secondly, clause 215 says that the best place from which to provide the
money is the national loans fund rather than the Contingencies Fund,
for reasons that we can go into when we discuss that clause. The
amendments widen the capacity for using that process to non-UK
deposit-taking banks, following the issue with the Icelandic banks.
That is all the clauses do. They do not go into great detail about
other
circumstances. There
is a common law power, which means that everything that has been done
to date is lawful, but because of the 1932 PAC concordat, the idea is
not to rely on common law powers for ever into the future if an issue
comes up that may result in such expenditure reoccurring. The PAC
concordat is that if something that had not existed or been
appreciated, but might require forward expenditure—the present
situation is
an example—the Government will take a specific power for those
circumstances, rather than simply relying on common law powers. That is
a bit of a techie point, but that is all it
is.
I know that
there are EU financial assistance rules, and I wonder how the new
legislation ties in with them, or whether it is even relevant to them.
Were they taken into account when drafting the
Bill?
Angela
Eagle: Obviously, a range of structures, national, EU and
international, come into play when unexpected global events occur that
affect entities with a global presence or with branches or part of the
entity elsewhere—for example, Landsbanki in the
UK—although they are regulated elsewhere. If the hon. Gentleman
is referring to state aid, he is right: the clause is compatible with
state aid. If he is referring to other EU rules, he will have to be
more
specific. We
do not believe that the clauses do anything to put us into conflict
with EU rules. The point is technical and narrow, and ensures that our
expenditure is properly and specifically accounted for, rather than
being subject to common law, which is what the then Government arranged
with the PAC in 1932.
Clause 214 is
not unique. Its provisions appear in other legislation where a possible
circumstance has been identified in which expenditure might have to be
made. In such a case, the usual rule is to make proper legislative
provision for it, which is what the clause does. It is nothing more or
less than
that. I
have introduced the amendment and we have talked a bit about the clause
as well, but I am happy to answer any further questions that hon.
Members may
have.
Mr.
Hoban: May I make a plea to the Minister? As hon. Members
will recollect from our proceedings on the Finance Bill, when
Government amendments were tabled, they were occasionally accompanied
by explanatory notes, which assisted Members from all parties who were
perhaps not privy to the thinking of Treasury officials. The Minister
has acknowledged the technical and, indeed, techie nature of the
measure, so is it possible to provide such notes for some of the
Government amendments?
I turn now to
the amendments and new clause 3. The original drafting made explicit
the group of institutions to which financial assistance could be
provided: UK authorised institutions and institutions that were deposit
takers. I understand the point the Minister made about non-UK
institutions, but I do not know the precise legal status of ING, to
which the retail deposits of, I think, Kaupthing and Heritable were
transferred. I had assumed that if ING Direct was an incorporated
limited company in the UK, it would have already have been picked up
under subsection (2)(b). However, if it was a branch of the Dutch
parent would it, on that basis, fall outside subsection (2)(b)? I would
be grateful for clarification about the contrast in status between
branches and UK subsidiaries of overseas
entities. I
could understand the position if the amendments were limited to
deleting “UK”; the Minister’s explanation would
stack up quite well and I would be happy to
move on. However, I am concerned that the way in which the amendments
have been drafted means that they go beyond banks. Amendment No. 28
refers to
“bank or other
financial
institution’. On
that basis, it could be an investment bank, which may not be a deposit
taker in the strict definition of subsection (2)(b) or it could be an
insurance company, an investment manager, an insurance broker or even
an independent financial adviser. I am not sure how widely
drawn
“bank or other
financial
institution” is
or why the Government believe it is necessary to have such a broad
definition in the Bill. The breadth of clause 214 is extended by new
clause 3, which gives the Treasury the power by order to
“provide that a
specified institution, or an institution of a specified class, is or is
not to be treated as a financial institution for the purposes of
section 214 or
215.” I
understand that would work on a case by case basis, so I am not sure
why the Government might want to decide, or have the power to decide,
to exclude a specific category of institutions from the definition
of
“bank or other
financial
institution”. It
would be helpful if the Minister could clarify that point because I am
not entirely sure whether the measure gives the Government much wider
powers to give assistance to financial institutions that are beyond the
scope of the Bill—for example, to an insurance
company.
Reports in
the papers during recent weeks have suggested that there is some
concern about the solvency of insurance companies. I do know whether
the powers are sufficiently broad to enable Government financial
assistance to be given to insurance companies, not withstanding the
narrow scope of the Bill. Will the Minister explain why the terms have
been drafted so widely and what the relevance of the power in new
clause 3 is? Will she confirm that the financial assistance will not be
used for any purpose beyond the limits set out in the
Bill? 9.15
am
Angela
Eagle: On the hon. Gentleman’s point about
explanatory notes for amendments, we are happy to try to provide them
if the Committee feels that they are of assistance. We will get on with
that for future aspects of the Bill, so I hope that is
helpful.
The hon.
Gentleman asked why there was such a broad definition in the Bill, and
why the original drafting had been expanded by the amendments. It is
partially because events have demonstrated that our original drafting
was too narrow for us to achieve the aim, for systemic reasons, of
stabilisation of particular institutions, which is what the Bill is
about. Simply, the Landsbanki events demonstrated that the provisions
as originally drafted were too narrow.
The hon.
Gentleman asked where the bank ING was incorporated. He was
right—it is incorporated in the Netherlands, so, but for the
amendments, it would fall outside the provisions of subsection (2). The
original drafting of the Bill would have made it harder for
us to handle the situation that occurred. To be clear, however,
we do not have any plans to provide financial assistance to
ING—just in case anyone gets the wrong idea about
that.
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