Banking Bill

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Mr. Hoban: I take on board the Minister’s comment about ING, but we could have dealt with that issue by just removing—well, not just removing; that makes it sound far too simple—the provision that relates to UK authorised financial institutions and using a broader definition of authorised financial institutions. The measure before us, however, would go further than even deposit takers.
Angela Eagle: Yes, the definition of financial institutions is broad; it could include banks, building societies, holding companies, investment firms and investment banks; but, given the complex nature of relationships in particular examples, flexibility is needed so that powers exist to react appropriately if a circumstance involves different forms of arrangements that fall outside the original, narrow drafting of the Bill. That is why we have tabled the amendments. We have to be flexible. If, for reasons of stabilisation, there were a need to direct assistance, the amendments would mean that we had the power to direct it where it was needed.
Mr. Hoban: Am I right, therefore, in assuming that if it was decided, for whatever reasons, that Standard Life, which has a banking subsidiary and is owned by an insurance company, were to acquire the deposits of another licensed deposit taker, the amendments would enable assistance to be given to the parent company; whereas, under the previous rules, we would not have been able to assist the parent company but could have assisted the banking subsidiary?
Angela Eagle: I do not want to get into using particular examples or names, for rather obvious reasons. We are not talking about existing institutions that are in difficulty, so I do not want to use the hon. Gentleman’s phraseology with respect to particular institutions. However, he is right in essence: the provision is about the flexibility to deal with a circumstance that may present itself in a particular instance where there are different arrangements. We do not want to predict them in advance, but we want to have the power to direct assistance and not allow too narrow a definition of “financial institution”. It would defeat the overall object of the Bill, which is, in certain difficult instances, that assistance be directed where it solves the problem—that, I suppose, is the simplest way of putting it—and the amendments would do so. The power could not be used to bring things that are clearly not financial institutions within the scope of the clause, so we will not be rescuing plumbing companies. The difficulty, however, is that there is no clarity about what a financial institution is, and of course what one is may change or evolve. For example, we have recently seen the emergence of those who issue e-money. Such evolution of financial arrangements will continue.
The amendment will give us the scope to direct financial assistance where it is needed to solve a problem. We are not specifying particular problems. Systemic problems may emerge that have not been anticipated and do not fall within the narrower wording in the clause. The amendment will give us the flexibility to direct assistance where it is most needed. Otherwise, we may suddenly find that the arrangements that have evolved do not fit the powers.
Angela Eagle: The idea is to have a broad power that is future-proof in its scope of financial institutions, not to spread the powers beyond that. However, the measures must cope with the innovation that we see happening all the time, which is often technology-assisted. That underpins the amendments. I give the assurance that this is not a power to go off into other areas of the economy or to deal with different types of companies. It is trying to capture where this issue may focus if there is a rearrangement or evolution of financial systems. That is often accompanied by technological innovation, which introduces things like e-money. That would not have been picked up by the original drafting of the Bill, but it may need to be if we are talking about systemic risk and the ability to move in and protect depositors.
Mr. Hoban: The Minister is tempting me down a route by talking about e-money—I quite regret having mentioned it. Are e-money systems such as PayPal covered by the banking industry’s responsibilities for payment systems under part 5? I am not sure where such systems fit within the regulatory framework.
Angela Eagle: I think the answer is that e-money is regulated by the FSA regulatory framework. That may change in the future; the idea of regulatory frameworks is that they can evolve if the things that they are regulating evolve. Part of the difficulty is that we are trying to pass legislation that is to some extent future-proofed to deal with a fast-moving and innovative part of the global economy. That is why the proposals will broaden the scope of “financial institution”. I do not want to give examples because such things may not exist yet. The structure of companies that may have to be dealt with in a future credit shock may not yet exist, but we want to give enough scope under these powers for the Treasury and the authorities to deal appropriately with a future systemic problem.
In response to the hon. Gentleman’s specific question, I shall have to write to him with details because he has been so innovative that we do not quite know the answer, but I am happy to let him have an answer in writing, if he is concerned.
Mr. Hoban: Can the Minister confirm for the sake of clarity that, notwithstanding the broadening of the scope in respect of institutions that can receive financial assistance, they can only receive it under the Bill in connection with parts 1 to 3 and that it will not go wider than the terms of the Bill?
Angela Eagle: That is a reasonable question. Under the powers in the Bill, assistance can be provided other than in connection with a special resolution regime for reasons of economic and systemic stability. One of the most obvious examples of that is the guarantee the Chancellor gave to depositors with Landsbanki, which is not in the special resolution regime. However, some of those powers are required in future to ensure that Landsbanki depositors can be covered, so it is not only about matters within the scope of parts 1 to 3.
Mr. Hoban: I am now pleased that I asked the question, because the Minister’s answer goes further than the clause suggests. Clause 214(1)(a) says
“for any purpose in connection with Parts 1 to 3 of this Act”.
Parts 1 to 3 deal with the special resolution regime, stabilisation powers, bank administration and bank insolvency, but I do not think that the guarantee given to depositors with Landsbanki and the other Icelandic banks is covered by subsection (1)(a).
Angela Eagle: That is true, but clause 214(1)(b) goes beyond the special resolution regime, as the hon. Gentleman will see if he looks at it. It refers to
“a UK authorised institution (other than in respect of loans made in accordance with section 215)”.
Subsection (1)(b) takes the powers slightly wider than the hon. Gentleman suggested. However, that is for the general good, for protecting depositors and thereby for safeguarding financial stability—that is the connection—but not only, necessarily, within the insolvency situation of particular banks.
Mr. Hoban: I am grateful to the Minister for drawing my attention to subsection (1)(b). I am not trying to be difficult, but paragraph (b) would be fine if the definition was related to licensed or authorised deposit takers. However, the change in the definition of “a UK authorised institution” to include a bank or other financial institution gives the Government powers to give any financial institution money, not necessarily in connection with parts 1 to 3. That makes the scope wider than I had anticipated, given the nature of the Bill. I am not sure what safeguards there are to prevent a Government from using the provision to give financial assistance to any financial institution. There is no natural or obvious limit in the clause, given the breadth of definition that we are now introducing in the Bill.
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Angela Eagle: I do not think that the hon. Gentleman is trying to be difficult. He is right to probe the issues. He asks why the definition is wider than the scope of parts 1 to 3 of the Bill. I ask him to bear in mind what we are trying to do with the Bill, which is to have a system that can be preventive—that allows earlier intervention to prevent more of a systemic breakdown, if that is appropriate—rather than having to wait until a bank has entered the special resolution regime, for example. It may not always be appropriate to wait until something has collapsed to provide financial assistance; it may be appropriate to offer assistance at an earlier stage of the process to ensure that we prevent damage that might happen if we are prevented by law from intervening earlier.
For instance, it might be appropriate to offer assistance to prevent a company from entering the special resolution regime, or to support a bank to stabilise it. The guarantee offered to depositors in certain institutions and the recapitalisation scheme itself are recent examples of action that stabilises before a collapse can happen. Therefore, we think that it would be wrong to wait until the bank entered the special resolution regime to be able to provide assistance to it, and that is for preventive reasons.
I do not think that any Government would want to go around injecting capital into banks for charitable purposes. It is done to prevent a systemic collapse and there are safeguards against the improper giving of money to financial institutions.
The measure is an enabling power. It does not mean that it will be appropriate to give assistance to financial institutions willy-nilly, or just because we wake up one morning and decide that it might be a good idea. It has to be for the reasons that we have all discussed during our debates on the Bill and indeed during the passage of the Banking (Special Provisions) Act 2008.
We also have to put it on the record that we need to ensure that we get value for money for the money that we give, so the clause is about ensuring that regular parliamentary powers apply to money that is given, rather than using common law, and the powers go wider than perhaps the hon. Gentleman had thought and also perhaps wider than our original drafting, simply because of the fact that lessons have been learned recently. The clause is about acting in a timely fashion to prevent a worse situation happening, which can sometimes mean acting proactively before a crisis erupts in its full form.
Having given those reassurances, I hope that the hon. Gentleman will be happy with the amendments.
Mr. Hoban: Actually, I think I can help the Minister. I appreciate the point that she is making about wanting to ensure that we can give financial support before the special resolution regime is invoked or before insolvency or administration. That is entirely reasonable.
I just wondered whether in subsection (1)(b) the financial assistance could be restricted to deposit-taking institutions, so that the paragraph would read, “in respect of, or in connection with giving, financial assistance to or in respect of a bank or other deposit-taking institution”. I want to get round the issue about when it is a UK branch or a UK-incorporated company. So, effectively one can give financial assistance in respect of a deposit-taker in the UK, but that financial assistance can be provided to a bank or other financial institution. So we are trying to restrict the circumstances in which the money can be given but broaden the people who the money can be given to.
Angela Eagle: Why would the hon. Gentleman want to limit assistance in that way when doing so would mean that the powers of intervention might not be able to cope with a particular instance? We obviously cannot anticipate when assistance will need to be given to protect UK depositors—Landsbanki is an obvious example.
Mr. Mark Todd (South Derbyshire) (Lab): I appreciate my hon. Friend’s willingness to take examples and apply them. If a major insurance institution that provides important support to deposit takers found itself in difficulty—we can recognise straight away one such institution across the pond that was the focus of Government intervention—would not some flexibility to respond to another financial institution that is not a deposit taker but is intimately connected with the support of deposit taking be an important requirement in the Bill?
Angela Eagle: My hon. Friend, as he often does, has got straight to the point. I apologise if I have been waffling around it. The hon. Member for Fareham asked whether we should limit those powers to deposit-taking institutions, but recent experience shows that other types of institution can also get into difficulties. My hon. Friend is right in the sense that AIG, the largest insurer in the world, had to be bailed out—we can use that example because the Fed did it. It is especially appropriately in the current climate that we take powers that enable us to provide assistance to other institutions.
I would like to reassure the hon. Gentleman that we have no immediate plans to provide money to insurers or investment companies, but we think it prudent in the current circumstances to take powers that are wide enough to cope with any systemic situation that might occur, rather than narrowing them. I emphasise that that is in the context not only of the Bill, but of the need for proper value for money through appropriate Government expenditure. No Government want to have to put money into a private sector company, but some are so important to the economy and the world financial system that, if needs be, they must be supported. The hon. Gentleman is trying to narrow those powers and limit their potential use, even though we hope that they will not have to be used often, if ever again. He is wrong to think that narrowing them in the current circumstances, considering the interconnectedness of the financial systems, is the right thing to do at this time.
Mr. Hoban: I appreciate the Minister’s comments. Importantly, the debate has established that the Government are looking for powers to give financial assistance to any class of financial institution that could pose a threat to financial stability. I might not quite have understood the Minister’s opening remarks, but that is quite an important power, and that needs to be acknowledged when looking at the matter.
In essence, that power will give the Government the opportunity to provide financial assistance to any financial institution, regardless of whether it is an authorised deposit taker or is helping to stabilise an authorised deposit taker. It could be used to provide financial assistance to a company such as AIG, if we had such a company in the UK. It could be used to provide financial support to an AIG-type institution, even if it is not a deposit taker. It is just now that I have got to that point. The breadth of the power that the Government are seeking goes way beyond the original wording of the Bill.
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